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47–174 2009

PAYMENTS TO CERTAIN MEDICARE 

FEE-FOR-SERVICE PROVIDERS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON HEALTH 

OF THE

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 
ii 

COMMITTEE ON WAYS AND MEANS 

CHARLES B. RANGEL, New York, Chairman 

FORTNEY PETE STARK, California 

SANDER M. LEVIN, Michigan 

JIM MCDERMOTT, Washington 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

MICHAEL R. MCNULTY, New York 

JOHN S. TANNER, Tennessee 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

EARL POMEROY, North Dakota 

STEPHANIE TUBBS JONES, Ohio 

MIKE THOMPSON, California 

JOHN B. LARSON, Connecticut 

RAHM EMANUEL, Illinois 

EARL BLUMENAUER, Oregon 

RON KIND, Wisconsin 

BILL PASCRELL, JR., New Jersey 

SHELLEY BERKLEY, Nevada 

JOSEPH CROWLEY, New York 

CHRIS VAN HOLLEN, Maryland 

KENDRICK MEEK, Florida 

ALLYSON Y. SCHWARTZ, Pennsylvania 

ARTUR DAVIS, Alabama 

JIM MCCRERY, Louisiana 

WALLY HERGER, California 

DAVE CAMP, Michigan 

JIM RAMSTAD, Minnesota 

SAM JOHNSON, Texas 

PHIL ENGLISH, Pennsylvania 

JERRY WELLER, Illinois 

KENNY HULSHOF, Missouri 

RON LEWIS, Kentucky 

KEVIN BRADY, Texas 

THOMAS M. REYNOLDS, New York 

PAUL RYAN, Wisconsin 

ERIC CANTOR, Virginia 

JOHN LINDER, Georgia 

DEVIN NUNES, California 

PAT TIBERI, Ohio 

JON PORTER, Nevada 

JANICE MAYS, Chief Counsel and Staff Director 

BRETT LOPER, Minority Staff Director 

SUBCOMMITTEE ON HEALTH 

FORTNEY PETE STARK, California, Chairman 

LLOYD DOGGETT, Texas 

MIKE THOMPSON, California 

RAHM EMANUEL, Illinois 

XAVIER BECERRA, California 

EARL POMEROY, North Dakota 

STEPHANIE TUBBS JONES, Ohio 

RON KIND, Wisconsin 

DAVE CAMP, Michigan 

SAM JOHNSON, Texas 

JIM RAMSTAD, Minnesota 

PHIL ENGLISH, Pennsylvania 

KENNY HULSHOF, Missouri 

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. 

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C O N T E N T S 

Page 

Advisory of May 15, 2007, announcing the hearing ............................................. 2 

WITNESS 

Herb Kuhn, Acting Deputy Administrator, Centers for Medicare and Medicaid 

Services ................................................................................................................. 6 

Mark Miller, Ph.D, Executive Director, Medicare Payment Advisory Commission ........................................................................................................................ 21

Charles N. Kahn III, President, Federation of American Hospitals ................... 59 

Rich Umbdenstock, President and CEO, American Hospital Association .......... 77 

Bruce Yarwood, President, American Health Care Association .......................... 90 

Stanley Brezenoff, on behalf of the American Association of Medical Colleges, 

and the Greater New York Hospital Association .............................................. 96 

Christine Chesny, on behalf of National Association for Home Care and 

Hospice and the Michigan Home Health Association ....................................... 117 

Mary Beth Walsh, M.D., on behalf of American Medical Rehabilitation Providers Association ................................................................................................. 125 

SUBMISSIONS FOR THE RECORD 

American Association of Homes and Services for the Aging, statement ............. 144 

Keith G. Myers, statement ...................................................................................... 148 

Visiting Nurse Associations of America, Boston, MA, statement ........................ 157 

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PAYMENTS TO CERTAIN MEDICARE 

FEE-FOR-SERVICE PROVIDERS 

TUESDAY, MAY 15, 2007 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON WAYS AND MEANS, 

SUBCOMMITTEE ON HEALTH, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 2:05 p.m., in Room 

1102, Longworth House Office Building, the Honorable Fortney 

Pete Stark (Chairman of the Subcommittee) presiding. 

[The advisory announcing the hearing follows:] 

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ADVISORY 

FROM THE COMMITTEE ON WAYS AND MEANS 

SUBCOMMITTEE ON HEALTH 

FOR IMMEDIATE RELEASE CONTACT: (202) 225–1721 

May 15, 2007 

HL–11 

Chairman Stark Announces a Hearing on 

Payments to Certain Medicare 

Fee-for-Service Providers 

House Ways and Means Health Subcommittee Chairman Pete Stark (D–CA) announced today that the Subcommittee on Health will hold a hearing on payments 

to hospitals, home health agencies, and skilled nursing facilities. The hearing will 

take place at 2:00 p.m. on Tuesday, May 15, 2007, in Room 1100, Longworth 

House Office Building. 

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

hearing will be from the invited witness only. However, any individual or organization not scheduled for an oral appearance may submit a written statement for consideration by the Committee and for inclusion in the printed record of the hearing. 

BACKGROUND: 

The vast majority of Medicare beneficiaries—nearly 82 percent in 2007—receive 

care within the traditional fee-for-service (FFS) program, rather than in a private 

plan under Medicare Advantage. Payments under FFS are projected to constitute 

71 percent of overall Medicare benefits spending in 2007. Payments to FFS providers are typically based on a prospective payment system or a fee schedule. The 

goal of various Medicare FFS payment systems is to cover the costs that reasonably 

efficient providers would incur in furnishing high quality care. 

In announcing this hearing, Chairman Stark said: ‘‘It has been far too long 

since our Committee has taken a thoughtful look at the payment systems 

for fee-for-service providers. Let’s not forget that the vast majority of Medicare beneficiaries and payments are under the fee-for-service system. As 

stewards of the Medicare program, we must take seriously our oversight 

responsibilities to ensure that Medicare pays efficiently and appropriately 

for quality care.’’ 

FOCUS OF THE HEARING: 

The hearing will focus on issues related to payment accuracy and legislative and 

regulatory payment refinements for the Medicare inpatient hospital prospective payment system, outpatient hospital prospective payment system, home health, longterm care hospital, inpatient rehabilitation facility, and skilled nursing facility payment systems. 

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: 

Please Note: Any person(s) and/or organization(s) wishing to submit for the hearing record must follow the appropriate link on the hearing page of the Committee 

website and complete the informational forms. From the Committee homepage, 

http://waysandmeans.house.gov, select ‘‘110th Congress’’ from the menu entitled, 

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‘‘Committee Hearings’’ (http://waysandmeans.house.gov/Hearings.asp?congress=18). 

Select the hearing for which you would like to submit, and click on the link entitled, 

‘‘Click here to provide a submission for the record.’’ Once you have followed the online instructions, completing all informational forms and clicking ‘‘submit’’ on the 

final page, an email will be sent to the address which you supply confirming your 

interest in providing a submission for the record. You MUST REPLY to the email 

and ATTACH your submission as a Word or WordPerfect document, in compliance 

with the formatting requirements listed below, by close of business Tuesday, May 

29, 2007. Finally, please note that due to the change in House mail policy, the U.S. 

Capitol Police will refuse sealed-package deliveries to all House Office Buildings. 

For questions, or if you encounter technical problems, please call (202) 225–1721. 

FORMATTING REQUIREMENTS: 

The Committee relies on electronic submissions for printing the official hearing 

record. As always, submissions will be included in the record according to the discretion of the Committee. The Committee will not alter the content of your submission, 

but we reserve the right to format it according to our guidelines. Any submission 

provided to the Committee by a witness, any supplementary materials submitted for 

the printed record, and any written comments in response to a request for written 

comments must conform to the guidelines listed below. Any submission or supplementary item not in compliance with these guidelines will not be printed, but will 

be maintained in the Committee files for review and use by the Committee. 

1. All submissions and supplementary materials must be provided in Word or WordPerfect 

format and MUST NOT exceed a total of 10 pages, including attachments. Witnesses and submitters are advised that the Committee relies 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. All submissions must include a list of all clients, persons, and/or organizations on whose 

behalf the witness appears. A supplemental sheet must accompany each submission listing the 

name, company, address, and telephone and fax numbers of each witness. 

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 

Chairman STARK. If you could, just take a seat. I’m pleased to 

announce Herb Kuhn and Mark Miller are here. 

Herb Kuhn is the acting deputy administrator of the Centers for 

Medicare and Medicaid Services. During his tenure he has been a 

key leader in the movement to transform CMS from a passive player of health services to an active purchaser of quality health care. 

He is a nationally recognized expert on value-based purchasing and 

payment policy. 

Mark Miller is the executive director of the Medicare Payment 

Advisory Commission, a nonpartisan Federal agency that advises 

the U.S. Congress on Medicare payment, quality and access issues. 

With more than 19 years of health policy experience, Dr. Miller has 

held several important policy, research and management positions 

in health care. Dr. Miller served as assistant director of health and 

human resources of the Congressional Budget Office. Prior to CBO, 

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Dr. Miller was the deputy director of health plans at the Centers 

for Medicare and Medicaid Service, formerly the Health Care Financing Administration. Before CMS, Dr. Miller was the Health Financing Branch Chief at the Office of Management and Budget, 

prior to joining OMB. Dr. Miller was a senior research associate at 

the Urban Institute. 

This program is to ensure that Medicare is an efficient purchaser 

of care in both the traditional fee-for-service program and in the 

Medicare Advantage program. 

As I’ve said repeatedly, this year no program or payment system, 

no matter how big or small, should not be reviewed. Everything is 

on the table in terms of refinement, oversight and adjustment. 

Medicare inpatient hospital services are the largest portion of our 

spending, $106 billion in ’06, and CMS has recently proposed a regulation that would move forward on MedPAC’s recommendation to 

modify payments based on severity. 

I look forward to hearing the details of CMS’s proposal and the 

hospital industry’s reaction. While adjustments to DRGs along 

these lines are overdue, I understand that other parts of that regulation may be problematic for some providers. We’ll return to that 

issue in a minute. 

In ’06 Medicare spent $43 billion on care provided by post-acute 

providers. That included skilled nursing facilities, home health 

agencies, inpatient rehab facilities, long-term care hospitals. These 

providers are important in ensuring the health of our seniors and 

people with disabilities, however the question we have to constantly ask is whether we’re providing the right care to the right 

beneficiary in the right setting at the right price. 

There is a dramatic variation in the costs of care, often with little 

or no evidence that outcomes are better in more costly settings. 

The guiding tenet for Medicare should be that the site of care not 

be dictated by financial incentives but rather by what’s best for the 

patient. The further challenge for Medicare is that the four postacute settings, skilled nursing, home health agencies, inpatient 

rehab facilities and long-term care hospitals, act as individual compartments or silos and don’t function as part of an integrated system. 

MedPAC and others have highlighted the need for a post-acute 

assessment tool that guides placement decisions based on the resource needs of the patient regardless of the setting. I hope CMS 

is making progress in developing a congressionally mandated demonstration project on this issue and that we hear more about that 

today. 

CMS has put forth proposals or is implementing various regulations that attempt to better align payment incentives and ensure 

payment accuracy. I look forward to hearing CMS testimony on 

these regulations, however we are hearing from the industry that 

many of these regulations, particularly the inpatient hospital regulations, are nothing but backdoor attempts to circumvent Congress 

and cut spending. 

I’m loath to intervene in the nuts and bolts of regulations. I usually think that level of detail is best left to the experts like Mr. 

Kuhn. I recognize that the program needs to make changes to respond to provider behavior. However a lot of fair questions could 

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be asked about how this behavior was estimated in reaction to the 

inpatient hospital regulation and the magnitude of payment reductions caused by the adjustment. 

Lastly, it boggles my mind that the hospital and post-acute care 

providers would stand by silently while we continue to overpay 

Medicare Advantage plans. We learned from the CMS chief actuary 

a few weeks ago that overpayments to Medicare advantage plans 

shorten the life of the Part A trust fund by 2 years. That’s 2 years 

off of the life of this trust fund where we get the money to pay the 

inpatient hospital services and most post-acute care. 

Now the program is not in crisis. We have always done what we 

needed in the past to protect Medicare, and I hope we’ll continue 

to do that. That’s one of the reasons we’re having today’s hearings. 

It’s important to note that these overpayments directly and negatively affect Medicare’s financial outlook. Last I looked it’s not as 

if the plans are treating the hospitals, skilled nursing facilities, or 

home health agencies very well. In fact, I gather payments from 

the plans often fall short of Medicare’s payment rate under fee-forservice. 

I hope that the providers who are here today recognize this tension and will work with us to protect Medicare and ensure its continued strength. 

Do you think you can add to that or top it, Mr. Camp? 

Mr. CAMP. I think I can, actually. Thank you, Mr. Chairman. 

Thank you all for coming. 

As the Committee seeks to improve the Medicare system we need 

to examine how the program pays for both hospital and post-acute 

treatments. Medicare currently allows its beneficiaries, as the 

Chairman mentioned, to receive care in four different post-acute 

settings, long-term acute hospitals, inpatient rehabilitation facilities, skilled nursing facilities and in the patient’s home. 

Medicare payments are seemingly based more on the sign on the 

front of the facility than on the care provided. These differences in 

payments have a real impact on Medicare’s costs. According to 

MedPAC a hip or knee replacement patient currently costs Medicare $3,400 more in an inpatient rehab facility than at a skilled 

nursing facility. 

The lack of quality and outcome data make it impossible to compare the two settings. Frankly we don’t know whether patients are 

being treated in the most appropriate setting. The separate payment systems and different assessment tools have resulted in a 

fragmented post-acute care system and, as the Chairman said, silos 

of care, potentially resulting in patients receiving treatment at 

higher intensity than necessary, driving up the cost of the program 

to taxpayers. 

In the Deficit Reduction Act, Congress instructed CMS to develop 

a demonstration program that would use a common patient assessment tool to better compare the different post-acute care sites. I 

look forward to hearing what progress has been made in implementing this important project. 

I’d also like to say that I’m deeply concerned about CMS’s continued expansion of the 25 percent rule to freestanding and grandfathered LTCHs. In 2004, I wrote CMS saying this policy was misguided. I believe then, as I do now, that MedPAC’s call for patient 

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admission criteria is the way to go. Admission should be based on 

clinical criteria not arbitrary quotas. Simple statistics are denying 

beneficiaries care at the appropriate facilities, adding unnecessary 

hurtles to getting care they deserve. 

We will hear about a proposal to modify Medicare payments to 

hospitals. Recently CMS proposed to make significant refinements 

to the payment system for inpatient services, which would adjust 

payments to account for sicker, more expensive patients. I’ve already heard concerns about how CMS has attempted to anticipate 

changes in hospitals’ coding practices under the rule, and I look 

forward to examining how to best ensure payment accuracy without limiting beneficiary access to important patient services. 

I thank the Chairman for this hearing, and I yield back the balance of my time. 

Chairman STARK. Thank you, and now let’s hear from our first 

panel. 

Mr. Kuhn, would you like to lead off and enlighten us in any 

manner you’re comfortable? 

STATEMENT OF HERB KUHN, 

ACTING DEPUTY ADMINISTRATOR, 

CENTERS FOR MEDICARE AND MEDICAID SERVICES 

Mr. KUHN. Chairman Stark, Mr. Camp, distinguished Members 

of the Subcommittee, thank you for inviting me here today to discuss Medicare’s reimbursement systems and payment updates for 

acute and post-acute care providers. 

The Centers for Medicare and Medicaid Services looks forward to 

working with Congress in the coming year to further reform Medicare’s fee-for-service payment systems and to make strides toward 

our shared goal of delivering the highest quality of care to people 

with Medicare. 

As the Administration’s fiscal year 2008 budget proposals and recent rule-making demonstrate, CMS is committed to ensuring that 

Medicare providers are paid appropriately and accurately for services furnished to beneficiaries. 

In turn, beneficiaries are entitled to and deserving of access to 

high quality care in the most appropriate setting. We firmly believe 

that the continued improvement and refinement of Medicare’s payment systems with the aim of making the delivery of quality care 

more efficient will bring us closer to achieving these interrelated 

goals. 

The proposed rule to update hospital inpatient reimbursement in 

the coming fiscal year is estimated to increase payments to more 

than 3,500 acute care hospitals by $3.3 billion. CMS is embarking 

on a third year of refinements to inpatient prospective payment 

system based on recommendations from the Medicare Payment Advisory Commission. We propose to adopt a severity diagnosis related group system to better recognize severity of illness and the 

cost of treating Medicare patients. 

But increasing the number of DRGs from 538 to 745 we will improve the accuracy of Medicare payments. This follows 2 years of 

incremental severity adjustments and last year’s movement from 

charge-based to cost-based weights. Consistent with the law, the 

severity adjustments would be implemented in a budget neutral 

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manner, neither increasing nor decreasing overall Medicare spending. This step was taken to account for improvements in hospital 

coding. 

That hospitals would code more accurately under such circumstances is a sound and legitimate response supported by research dating back more than $20. Appropriately however, payments would increase for hospitals serving more severely ill patients and decrease for those serving patients who are less severely 

ill. 

This year’s inpatient hospital rule aims to improve the reliability 

and quality of care by continuing to expand the number of publicly 

reported quality measures. Also for the first time, CMS is recognizing hospital-acquired conditions and will ensure that Medicare 

no longer pays hospitals for the additional costs of cases with these 

conditions. 

CMS has also issued proposed rules for skilled nursing facilities, 

home health agencies, and inpatient rehabilitation facilities. The 

SNF proposal provides a 3.3 percent update and seeks comment on 

the forecast error adjustment. IRFs are also given a 3.3 percent update, and the proposal seeks comment on whether some or all of 

the existing co-morbidities should be included and calculated in 

compliance with the 75 percent rule, which aims to promote access 

to care for beneficiaries who require specialized and intensive rehabilitation care furnished in rehabilitation facilities. 

The proposed rule for home health features the first major set of 

refinements since the advent of its prospective payment system in 

2000. Research conducted by Medicare contractor APT Associates 

identifies two significant areas for payment requirement, therapy 

thresholds and case mix changes. This research was vetted thoroughly with the stakeholder community in 2005 and 2006. 

Finally, CMS has issued the final long-term care hospital rule, 

which continues the agency’s efforts to ensure Medicare is paying 

appropriately for medically complex patients. The rule advanced 

recommendations to short stay outlier policy and modified the 25 

percent rule to include freestanding facilities. 

In addition, it identified next steps CMS will pursue in working 

with the industry to develop patient and facility criteria for 

LTCHs. This effort stems from a MedPAC recommendation and 

subsequent research CMS conducted with it’s contractor RTI. 

Mr. Chairman, CMS is firmly committed to implementing rational and responsible policies to ensure that Medicare remains fiscally 

sustainable. The actions we take now would directly impact our 

ability to preserve the promise of healthcare coverage for America’s 

seniors, people with disabilities and low-income, vulnerable populations. 

We look forward to working with Congress in the coming year to 

reform Medicare’s fee-for-service payment systems, in particular 

those that impact the providers we are discussing today. 

I would be happy to answer any questions the Committee might 

have. 

[The prepared statement of Mr. Kuhn follows:] 

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f 

Chairman STARK. Thank you. 

Mark? 

STATEMENT OF MARK MILLER, EXECUTIVE DIRECTOR, 

MEDICARE PAYMENT AND ADVISORY COMMISSION 

Mr. MILLER. Chairman Stark, Ranking Member Camp, distinguished Subcommittee Members, as you know, MedPAC is a congressional support agency created to advise Congress on Medicare 

policy. As you know, we have 17 commissioners from diverse backgrounds that review the work produced by the staff and shape the 

advice that we forward to the Congress. 

As we consider our policy advice to Congress we keep a couple 

of principles in mind, assuring that beneficiaries have access to 

quality care, assuring that taxpayer dollars are spent wisely and 

then designing payment systems for providers that assure this access but also assure that care is provided efficiently. In this instance efficiently means not just lower spending if that’s appropriate but also higher quality at the same level of spending. 

There are other considerations that I know are on the mind of 

commissioners. First there is a long run sustainability problem for 

Medicare. Medicare is growing faster than the budget, the economy 

and beneficiary incomes. But these spending increases have not 

been consistently accompanied by improvements either in coordination or the quality of care. 

We believe attention is needed to improve payment and delivery 

system incentives as part of the solution to correcting Medicare’s 

long run sustainability issues. 

Second, Medicare policies must evolve to be more sensitive to the 

performance of providers. That is, we should pay more to providers 

who use resources wisely and provide high quality care, we should 

pay less to those who do not. 

Third, that as a payer Medicare must maintain physical pressure 

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gaged in spending carefully and improving the quality of care that 

they provide. 

The testimony I submitted discusses policies related to fee-forservice hospitals and to post-acute care. I will just note a few ideas 

and then take other questions for more details. MedPAC has previously made recommendations to establish a budget neutral payfor-performance system for hospitals and home health agencies. We 

have also called for refinements to the hospital underlying payment 

system for hospitals, skilled nursing facilities and home health 

agencies. 

Regarding payment policy, as mandated by law each year we are 

asked to make recommendations on payment updates to Congress. 

We consider several factors, supply of providers, access to service, 

how much Medicare pays relative to providers’ costs. 

With respect to hospitals the commission finds that most measures of financial performance are positive. For example, access is 

good, service volume is increasing and spending on capital is at an 

all time high. However there is some bad news. Medicare margins, 

the amount Medicare pays above cost, are negative and falling. 

Part of the reason that these margins are low is because hospitals have had high rates of cost growth. We think that part of 

the reason they have had high rates of cost growth is that private 

payers have not put significant fiscal pressure on hospitals to contain their costs. We find, for example, that hospitals that have consistently poor Medicare performance are also hospitals that are 

paid well above their costs by private payers and hence have higher costs per case and higher growth in cost per case. 

So, taking this evidence into account the commission tried to 

strike a balance between these various indicators and the need to 

maintain fiscal pressure. We have recommended a full market basket increase for hospitals but implemented concurrently with a 

budget neutral pay-for-performance system for hospitals. The payfor-performance policy would redistribute dollars among hospitals 

so that the net payment to high quality hospitals would be greater 

than a market basket alone and the net payment to low quality 

hospitals would be less than the increase for a market basket 

alone. In other words, we do not believe that all hospitals are entitled to a net increase in payments equal to the full market basket. 

In a previous report on specialty hospitals, the commission made 

a series of recommendations to improve the underlying hospital 

payment system by refining the payments to remove distortions 

that make some services systematically more profitable than others 

and to better account for differences in patient severity. 

Regarding post-acute care services, home health SNF, long-term 

care hospitals and inpatient rehab, generally the picture is positive. 

There’s an adequate supply of providers. Beneficiary access is good. 

Volume of services is generally increasing and through 2005 Medicare payment exceeded cost by a wide margin. 

However, looking forward to 2007, some circumstances have 

changed. For inpatient rehab facilities and long-term care hospitals, changes in the regulatory environment will bring payments 

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tient rehab facilities and a zero percent update for long-term care 

hospitals. 

Regarding long-term care hospitals, a few years ago MedPAC 

made recommendations to implement patient and facility criteria 

that would better target services to Medicare beneficiaries. Finally, 

projecting forward for home health and skilled nursing facilities, 

we continue to see that Medicare payments far exceed costs and 

have recommended zero updates in these areas. 

I look forward to your questions. 

[The prepared statement of Mr. Miller follows:] 

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f 

Chairman STARK. Thank you. Thank you both. 

Mr. Kuhn, CMS has proposed to extend the 25 percent rule for 

long-term care hospitals to ‘‘free standing’’ long-term care facilities. 

Have you seen evidence that acute care hospitals and free standing 

long-term care hospitals are developing transfer relationships that 

are financially beneficial to both entities? 

Mr. KUHN. The issue of patient swapping has been a very big 

concern at the agency for the last couple of years as we’ve looked 

at this issue, and we do see a strong relationship between the primary referring hospital and ultimately the long-term care hospital 

and we see this in a couple of areas. One is in terms of the number 

of actual patients coming from the acute care hospital, the referring hospital, to the LTCH. But where we also see it is in outlier 

payments. 

We see almost a 50 percent drop off in outlier payments for those 

facilities that have an LTCH or a relationship with an LTCH 

versus others. So I think it really raises the question with us as 

the agency—are we transferring patients while they’re still in active treatment in an acute care hospital, and are we seeing shifting 

between hospitals in order to generate a second payment. 

So we thought, based on the information we had, that moving 

the 25 percent threshold to freestanding facilities was appropriate. 

Now it is different than what we proposed. It’s a 3 year phase in 

instead of all in the first year but we thought that was appropriate 

policy decision. 

Chairman STARK. Long-term care patient and facility criteria 

may not diminish the need for the 25 percent rule, but will the— 

why don’t you think it will not diminish the need for the 25 percent 

rule? 

Mr. KUHN. Well, I don’t want to prejudge the outcome in terms 

of what kinds of characteristics we can come up with, both facility 

as well as patient. One of the reasons we did, based on the comments we received, to do a 3 year phase in was to try to give us 

more time to look at the work that our contractor RTIs developed 

so we can try to synch those up at the end of the day. 

So, we want to move forward with the patient characteristics, the 

facility characteristics research, hopefully move to an assessment 

instrument, see if we can move forward in that direction. I think, 

at the end of the day is—then we can look, is the 25 percent 

threshold still appropriate or does the patient characteristics take 

over and would help us better manage utilization? 

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47174A.029
40 

Chairman STARK. You have—you’re proceeding to implement a 

75 percent inpatient rehab facility rule. Do you have any evidence 

on how that will affect patient access to care? 

Mr. KUHN. The information we’ve looked at so far doesn’t seem 

to be impactful in terms of patient access. Yes, the number of admissions in rehab facilities are down, and of course they would be. 

But really this is about value. This is not about volume as we move 

forward. The intent is really to remove the risk of Medicare overpaying for treatment for patients in these facilities. So yes, the 

numbers are down. But what we’re seeing correspondingly is that 

skilled nursing facilities, home health agencies are picking up these 

patients in the right settings. 

So, the biggest area where we had questions, that is, lower extremities or joint replacements are moving out of IRFs into other 

areas where they can be treated just as appropriately by the lower 

costs. But other patients—for maybe stroke, brain injury, nervous 

system problems are moving more aggressively into the rehab systems. So, this is a policy seemingly to have its impact in an appropriate way. 

Chairman STARK. Thank you. 

Mark, I know that you please all of the hospitals when you suggested a full update and got everybody all excited, but I gather in 

your testimony you’re suggesting that—I’m not sure you gave us 

the list of who should get an update and who shouldn’t. I’m waiting 

for you to hand me that list of the 6,000 hospitals. You had a rate 

of A, B, C, D, so none of the ones that get a cut are in California, 

I presume. 

Mr. MILLER. Obviously. 

Chairman STARK. Or New York or Michigan or Texas. But at 

any rate, is it fair to say that you recommend an update for hospitals but that there should be some differentiation to the extent 

we can determine that among more efficient hospitals and less efficient hospitals? 

Mr. MILLER. I think that’s a fair characterization of the commission’s position. There’s a lot of discussion around this, and you 

saw a lot of positive indicators, but the Medicare margins and the 

trends in those were disturbing commissioners. But at the same 

time there was a real concern that just sort of a blanket, across the 

board update for all hospitals was not a good use of either policy 

design or the resources that Medicare has. So, I think your characterization is correct. 

Chairman STARK. You also recommended a 1 percent update for 

inpatient rehab facilities for ’08. You base that on a conservative 

assumption about how they’d respond to the 75 percent rule. If 

they are nimble and able to restructure costs, how high might their 

margins go? 

Mr. MILLER. I just want to be clear that we’re in the world of 

estimation here. But what we estimated on different sets of assumptions was as high as five-and-a-half percent. 

Chairman STARK. Under that scenario would an update that is 

lower than your recommendation be justified? 

Mr. MILLER. I can only speculate about what the commission 

would have concluded, and my sense is, given where things were 

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41 

in the inpatient rehab facility, they would have gone with a zero 

update in that circumstance. But that’s my guess. 

Chairman STARK. I think we’ll hear from witnesses later that 

the inpatient rehab facilities may have to turn away patients because of the 75 percent rule and that we’re seeing a decline in admissions. Should the IRFs be turning away patients? Does the drop 

in admissions mean there’s an access problem? 

Mr. MILLER. We looked at this just like Herb did as well. We 

decidedly see a reduction in admissions, just as Herb said. We decidedly see increases in areas like skilled nursing facilities and 

home health. I would characterize the commission’s view of the 75 

percent rule as a fairly blunt instrument, and our concerns about 

the 75 percent rule were to be that it needs to be dynamic, revisited, in order to be sure that it evolves with the change in care and 

that the process that they use to define diagnoses that are allowed 

should be transparent to the industry, to the patients, to clinicians. 

So, we don’t see—we did not conclude that there was an access 

problem or an issue that would warrant change at this point. We 

made the recommendation that we made for the 1 percent sort of 

evaluating the entire array of evidence. 

Chairman STARK. Thank you. 

Mr. Camp, would you like to go next? 

Mr. CAMP. Thank you, Mr. Chairman. I think I just would like 

to go back to the long-term acute care hospital issue for just a second. You know, as in many areas across the country there may be 

only one or two acute care hospitals. There’s been a lot of mergers 

in the medical sector. How do you propose, how does CMS propose 

to address an area with fewer local hospitals and will hospitals, 

LTCHs, located in those areas be exempt from the 25 percent rule? 

Mr. KUHN. We did a couple things in the rule to try to help deal 

with that issue. Obviously the 25 percent rule is there for hospitals, but in two instances, if they’re located in the rural area the 

threshold is 50 percent or if they happen to be a dominant facility 

in the area it can go up to 50 percent as well. The second part is 

that if a patient from an acute care facility has already triggered 

an outlier payment that doesn’t count against the 50 percent 

threshold, or if they’re receiving patients from someone’s home or 

a skilled nursing facility or something like that. So, we think those 

changes provide the flexibility—enough flexibility in those areas. 

Mr. CAMP. You often don’t have hospitals. You have hospital 

systems. Are hospitals within the hospital system treated as distinct hospitals or because they have the same parent are they all 

part of the same hospital? 

Mr. KUHN. My recollection, it’s treated as a system for that 

process, but I could double check. I believe if I’m incorrect we could 

get back to you in writing on that one. 

Mr. CAMP. I also want to just also touch on the CMS 2.4 percent 

reduction for hospitals. I guess what MedPAC giveth CMS taketh 

away. I realize there are significant changes being made to the 

DRG system, taking into account patient severity. How did CMS 

come up with this 2.4 percent reduction in payment for coding and 

can you explain how CMS proposes to implement that? 

Mr. KUHN. Sure. First of all, it really is not a reduction. It’s a 

budget-neutral adjustment. The issue, if you really look at this 

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42 

year’s rule, hospital payments are going up by an excess of $3 billion. It’s a 3.3 percent market basket update. 

What we’ve done in this proposed rule is the third year in terms 

of adjustments on severity, and we’re increasing the number of 

DRGs from approximately 538 to 745. When you do that, hospitals—and as I said in my opening statement, will code more accurately. As a result of that, you want to keep it budget neutral 

throughout the system. You don’t want to spend more money by 

virtue of these additional DRGs, you want to spend the same 

amount of money, so you need to make a budget neutral adjustment. 

This is supported by over 20 years of research and experience in 

this area. When the PPS system for hospitals was first implemented in 1983 there was a behavioral adjustment put in place. In 

a retrospective manner it looked like the agency undershot and 

hospitals coded more aggressively than we originally thought. 

If you look at long-term care hospitals, psychiatric facilities, 

rehab facilities, all those were also put in prospective adjustments 

for behavioral changes. At least for long-term care hospitals and 

rehab facilities, the evidence shows that we undershot and we’ve 

had to go back and make retrospective changes. 

So, this is standard behavior in prospective payment systems and 

what we do. Where we got the numbers that we put in place were 

based on experience that we saw with the state of Maryland. Maryland operates under a waiver and they put in place the APRs, the 

all-payer refined DRGs, a few years ago, and we saw very aggressive coding changes as a result and in direct reaction to these new 

DRGs that were put in place. 

So based on the best information we had for Maryland our actuaries made these recommendations. But again, it’s a proposed rule 

and we hope to get comments from the stakeholder community on 

it. 

Mr. CAMP. I’m sure you’ll be receiving many of those. Just one 

last question, Mr. Kuhn. Regarding home health, obviously the 

Deficit Reduction Act tied home health payments to the reporting 

of quality measures and if you reported quality you received a 

higher payment, but CMS also required that home health agencies 

submit OASIS data in order to receive that higher update. 

Obviously this is something they were required to do anyway. I 

am encouraged that CMS is proposing to capture two additional 

measures relating to wound care next year, but does CMS really 

feel that it’s getting enough useful information out of the OASIS 

data? Since payment is tied to the reporting of quality data, does 

it make sense to require agencies to submit something that they 

aren’t required to submit as a condition of participation in the 

Medicare program? 

Mr. KUHN. It’s a very good question, and you’re right. We have 

10 data elements we’re using this year and we plan to go to 12 for 

next year. We do need more major development in the home health 

area. The time being from when the legislation was passed to the 

implementation of this was very short and so we had to kind of go 

with what we had, but there is a duplication between what’s reported on OASIS and what’s reported for the quality indicators. 

But major development is underway and we hope in future years 

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43 

we can get a more expanded list and achieve the objective you all 

wanted in the legislation that’s better quality information that both 

patients and providers can use and that ultimately may be tied to 

payment someday in the future. 

Mr. CAMP. All right. Thank you. Thank you both for your testimony. I see my time has expired. Thank you, Mr. Chairman. 

Chairman STARK. Mr. Doggett, would you like to inquire? 

Mr. DOGGETT. Thank you, Mr. Chairman, and thank you gentlemen for your testimony. Mr. Kuhn if I could first address your 

attention to the monetary cap on therapy services under Part B in 

skilled nursing homes. As you know, we have the exceptions process. It’s set to expire at the end of the year. What will happen to 

people who have life threatening conditions if they bump up 

against that cap and we don’t extend the exceptions process? 

Mr. KUHN. If the exceptions process is not extended for this 

year it could create some real issues in terms of people as you indicated, bumped up against the cap. So I think this is something 

that’s real ripe for us as the agency to engage with all of you to 

think about what should be the future policy. Should it be an extension of the cap or is there another way that we can structure 

this payment system to help in that effort? 

Last year we took possession of three reports we got from contractors in terms of therapy adjustments we could make, adjustments in the payment system. We posted all those to our website 

and we put it out for everybody to see. Then beginning this year 

we started calling in the stakeholder community to talk to them 

about those reports and what we could do together with them to 

come up with some ideas in order to engage you and others about 

the right way to go. 

So, I guess the question is, is there enough time yet this year to 

still develop some proposals that we could do something different 

than the current exception process or do we need to extent the exception process, or the third option is to let the caps go into place 

as they were first put in place as part of the BBA. All those are 

options and we’d like to talk with you and others in Congress more 

about that. 

Mr. DOGGETT. Well, if we let the caps go into place there will 

be some pretty severe impacts on individuals with disabling conditions, especially in rural areas, won’t there? 

Mr. KUHN. I have no doubt that we would see some information. 

One of the things that maybe we—could be helpful to you and others is to understand kind of the time frame at which people start 

to hit the caps because people with real chronic issues might start 

hitting those caps by, say, the end of February of next year. Some 

it might be, you know, in the summer. We don’t yet know. 

So, I think some better data mining on our part could help you 

all in terms of that decision-making process. 

Chairman STARK. Since we’re almost to the midpoint of this 

year, do you have a proposal to advance at this point as an alternative to the exceptions approach? 

Mr. KUHN. Nothing specific yet other than what we have in 

those contract reports and our discussions with the stakeholder 

community. But again, I think this is something that we all could 

work together on and talk further about. 

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Mr. DOGGETT. Of course it unfortunately is true, is it not, that 

the Administration did not put in any money in its budget for correcting the therapy caps under any proposal? 

Mr. KUHN. There was no recommendation in this year’s President’s Budget, that’s correct. 

Mr. DOGGETT. As far as this year’s President’s Budget is concerned as well, do you agree with the chief actuary of Medicare 

who has estimated that overpayments, as the Chairman said in his 

opening statement to Medicare Advantage shortened the solvency 

of the Part A trust fund by 2 years? 

Mr. KUHN. I guess the way I would characterize it, not as an 

overpayment but the opportunity to pay for additional benefits for 

those in Medicare Advantage. I would not dispute the information 

provided by Rick Foster that if you change the payment rates or 

rate reductions in Medicare Advantage it could extend the trust 

fund for an additional 2 years. However, the provisions put in the 

President’s Budget for changes in Medicare policy would extend the 

trust fund for an additional 4 years. 

Mr. DOGGETT. Well, some of those are fairly—have fairly onerous consequences of doing that. You indicate that the President put 

in no money to help my constituent who has a head injury or lung 

disease and bumps up against the exceptions under Part B in a 

skilled nursing home, and yet, as I understand his budget he rules 

off limits taking even a dime from Medicare Advantage. 

Mr. KUHN. That’s correct. There are no recommendations for 

changes in Medicare Advantage payments in the President’s Budget. 

Mr. DOGGETT. Is that still the Administration’s position that 

we are to look at Medicare and the many conflicting concerns and 

interests that we have but we’re to do all of it without taking a 

dime from the Medicare Advantage program? 

Mr. KUHN. Again, there’s no recommendations in the President’s on Medicare Advantage. But having said that we are continuing to look at the Medicare Advantage program and changes 

are in the offing. 

This year because we are making changes in fee-for-service, that 

also impacts Medicare Advantage. So this year’s proposal dealt 

with issues such as the frailty adjustment, to make sure that those 

adjustments were made accordingly, fee for service normalization 

and ESRD changes. So, there are changes that are ongoing with 

the payment system on Medicare Advantage as part of the regular 

regulatory process. 

Mr. DOGGETT. Finally with regard to long-term care facilities, 

you’ve had a couple of questions on this. As Dr. Miller pointed out, 

MedPAC made recommendations back in 2004, almost 3 years ago, 

to have you set up a facility and patient criteria system. When will 

we get it? 

Mr. KUHN. That’s a very good point. Basically MedPAC did 

make that recommendation and acting upon that we engaged the 

contractor RTI to give us a report on this. That report was made 

available late last year. Already we have convened one technical 

expert panel with the industry to help us kind of look at the report, 

come up with a set of recommendations. 

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45 

Very soon we ought to be convening a second technical expert 

panel to help us move forward on that, and then the really hard 

work begins in terms of the development of assessment instruments. I would hope within the next couple years we could be at 

a better place here but probably not before then. 

Mr. DOGGETT. You think a couple of years before a new regulation is in place? 

Mr. KUHN. A couple of years before we would have some good, 

solid recommendations on a new kind of classification system for 

LTCH. 

Mr. DOGGETT. A couple of years before you make the recommendation, not before it becomes effective? 

Mr. KUHN. That’s right, a couple years before we’d have a final 

recommendation. 

Mr. DOGGETT. As far as where you are now, you said you 

brought in some experts. Has MedPAC, Dr. Miller had a chance to 

see and comment on the alternatives that you’re looking at? 

Mr. KUHN. They will be engaged in that process as we go forward, yes, sir. 

Mr. DOGGETT. But they have not thus far? Are you members 

of the—— 

Mr. KUHN [continuing]. I can’t remember if they were on the 

technical expert panel or not. 

Mr. MILLER. I believe that we were briefed on the directions 

that they were going in, yes. 

Mr. DOGGETT. We would certainly need your further input on 

that. It’s been a very long process. 

Mr. MILLER. The only thing I would point out is that there’s actually two different pieces of legislation floating around from the 

two different associations in long-term care hospitals, which take 

pieces of our criteria and build them into legislation. I would also 

suggest that we start looking at that and think of one piece of legislation that encompasses all of the criteria and use that as a place 

to start our discussions. 

Mr. DOGGETT. I’ll just follow up on that. Is there one of those 

approaches that you find preferable to the other? 

Mr. MILLER. No, what the industry did is they sort of selected 

pieces of our criteria and kind of pulled them apart and put them 

in two different bills. We think there needs to be both patient and 

facility criteria, and we have our list, and we think that the legislation needs to include all of it. 

Mr. DOGGETT. Do we need to move forward in passing that legislation rather than waiting for another couple of years for them 

to come out with a recommendation? 

Mr. MILLER. I mean I think ultimately—and actually I’m not 

sure of this. I think ultimately there may need to be some legislation in order for the industry to—or for the agency to go forward, 

although I’m not sure of that. 

Mr. DOGGETT. What’s your view on that, Mr. Kuhn? 

Mr. KUHN. We haven’t taken an official position on any of the 

legislation that’s out there. It does, for example, exclude psychiatric 

and rehabilitation cases from going into LTCHs, but on the rest of 

the area, really getting the good, scientific basis in terms of how 

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46 

ferred from an acute care hospital to an LTCH. I just don’t know 

if we’re there yet on the body of evidence. 

So, legislation could get us part way there. I just don’t know if 

it would get us all the way there yet. 

Chairman STARK. Mr. Johnson, would you like to inquire? 

Mr. JOHNSON. Thank you, Mr. Chairman. You know, I liked 

the question Mr. Doggett asked about how you’re developing a patient assessment tool. I don’t think you really answered the question, when’s it going to happen. You’re telling us maybe one, maybe 

2 years. 

Mr. KUHN. It’s probably still a lot of research and a lot of development needs to go on, Mr. Johnson, and we’re probably 2 years 

out from the final effort in this area. 

Mr. JOHNSON. Well, that brings me to another question. It 

seems silly to me that we’re using outdated data. I’ve been after 

you guys about that before. But in home health care I think you 

went from ’97 to ’04, but ’04 is still 3 years old. You know, we send 

patients to doctors, and I think doctors are more reliable on making decisions about where a patient ought to go or how long he 

ought to stay. Their information is current. I mean it’s of the 

minute. So, why can’t we get that kind of information and use it 

in our assessments? 

Mr. KUHN. I agree having the best information available for 

payment systems is absolutely key. Part of it is that the hospitals 

and other providers that provide us their information provide a report at the end of the year. It needs to be audited. Then if there’s 

any disputes in it they need to go through that process. So, the 

whole back end process of auditing, making sure it’s accurate takes 

time to play that out. If there’s ways that we could accelerate that 

and use better, more current information we would certainly like 

to find a way, but at least at the time being it looks like it’s about 

as fast as we can move on the data for payment systems. 

Having said that, in terms of clinical information, now that we’re 

moving for paper reporting and some of those issues the data is 

turning around a lot quicker. So we’re doing better on that and we 

seem to be able to move that one because you don’t have to go 

through the extensive financial audits. So, on that side of the ledger I think we’re going to have a better picture in the future. 

Mr. JOHNSON. Would it help if hospitals got everything on computer and talked to each other? 

Mr. KUHN. Most of it is electronic now, and our cost reports are 

standardized. They seem to be able to get the information in accurately and appropriately, but additional standardization in a number of areas probably would help as well. 

Mr. JOHNSON. You indicate, I believe, you announce that free 

standing, long-term health care would be subject to the 25 percent 

rule. Yet, in areas across our country communities have only one 

or two acute care hospitals. How is the CMS proposing to address 

areas with three or fewer hospitals, and will long-term care in 

these areas be exempted? 

Mr. KUHN. What we’re trying to do in that area is a couple of 

different thresholds. One is to make sure for the rural long-term 

care hospitals, they’re set at a 50 percent threshold, so they’re not 

held to the 25 percent threshold. Then also those areas like you derfrederick on PROD1PC65 with HEARING

47 

scribed where there’s kind of a dominant player in the area, and 

say there’s two institutions, one could be at the 50 percent threshold, the other could be, say, at a 40 percent. So, we think between 

the combination of both the dominant and the rural kind of set 

asides, I think it works in those areas and I think it makes a better 

policy. 

Obviously this is something we want to monitor as we do implementation. We’re going to do a 3-year phase in. The idea of a 3- 

year phase in was to deal with the first question you asked to 

make sure that you kind of synch this up at the end of the day 

with a better classification system so that it will be one for active 

monitoring for all of us. 

Mr. JOHNSON. Mr. Chairman, I don’t have any further questions. Thank you. 

Chairman STARK. Thank you. Mr. Thompson. 

Mr. THOMPSON. Thank you, Mr. Chairman. Mr. Kuhn, in regard to the proposed rule, the IPPS rule, as I understand it, the 

adoption of the cost-based weights might result in an increase to 

rural facilities but that the shift to the severity-based DRG will 

certainly result in a decrease. I believe your staff has conceded that 

this proposal will bring about a net decrease in reimbursements to 

rural hospitals. I’m interested to know if you have any way to 

quantify the severity of the cut that the rural hospitals will experience. Has there been given any thought to providing some sort of 

carve out for the rurals or hold harmless for the rurals? 

Mr. KUHN. What you’re describing, you described it accurately. 

What happened was is when we did the cost-based weights last 

year that really did send payments away from surgical procedures 

more to medical procedures. Real hospitals, by kind of a generalization tent to treat more medical cases than surgical cases, so they 

were the beneficiary of the changes made last year as part of the 

process. 

But last year when we laid out the proposal and as we talked 

about the proposal this year, when you go to severity adjustments 

it tends to have the reverse effect. Urban hospitals tend to see sicker patients and probably ought to be awarded accordingly as a result of the—— 

Mr. THOMPSON. I’m pretty familiar with the reasoning. I’m just 

wondering, have you been able to quantify what the hit is going to 

be to rural? 

Mr. KUHN [continuing]. I think the ultimate impact for rural 

hospitals over is a minus 1.5, maybe a minus 2 percent overall, a 

general characterization of rural hospitals. 

Mr. THOMPSON. So, have you thought about doing a hold harmless or provide some sort of—I don’t think anybody in this room 

thinks that rural hospitals are fat and sassy. They’re experiencing 

the same problems and maybe greater problems in other areas. It 

seems to me that this proposal would make things even more difficult for people who live in rural areas to get the type of medical 

care they need. 

Mr. KUHN. Now I think that’s a fair point. That’s not a specific 

proposal we made and we put forward. Having said that, what we 

could do is receive comments on it for people to give us comments 

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48 

in terms of ways that we could look at that. So, we’re certainly 

open to hear any comments people might make. 

Mr. THOMPSON. Is it appropriate for me to ask you to give us 

some information on that or give us some thoughts? 

Mr. KUHN. We would be happy to come and talk to you and 

your staff at a later time about that if that would be helpful, happy 

to. 

Mr. THOMPSON. Thank you. My next question is regarding the 

recovery audit contractors that are used. I understand that these 

contractors are able to retain a pretty hefty percentage of recovered 

payments. Some of my hospitals tell me that there’s one particular 

state contractor, PRG Schultz working in California, that they’re 

denying reimbursements for almost all joint replacements, and 

these are ones that are done in IRFs. My question is if they go 

through the appeal process and they’re found to—and that reduction is overridden, will that money be reclaimed from the contractors? 

Mr. KUHN. Yes. We have these RACs, the recovery audit contractors, that are operating right now in three states, California, 

New York and Florida. You’re right, the one in California has been 

active in looking at payment options in terms of rehab facilities. 

Right now they are looking at single joint replacement issues, 

things like that. 

We’ve talked extensively to California Hospital Association. I 

think you and others have directed them to us to talk about this 

issue. Right now, from understanding it’s that if the hospitals have 

appealed the determinations by the RACs none of them have been 

upheld in appeal—or they’ve all been upheld, none have been overturned. However if they are overturned of course, the dollars do 

flow back to the hospital. 

Mr. THOMPSON. It would come back from the contractor? 

Mr. KUHN. That’s my understanding, yes. If I’m incorrect, we 

can correct that for you for the record, but that’s my understanding. 

Mr. THOMPSON. Thank you. One final question. That’s the cuts 

to capital payments, and some hospitals—and I hate to continue to 

be parochial about this, but California hospitals have put a lot of 

money in regard to safety issues, specifically seismic safety. My understanding is that this particular proposal would come down pretty hard on the efforts in California to protect patients from troubles 

that would come about if there were seismic incidents that would 

affect these hospitals. 

Mr. KUHN. I am aware of the seismic issues California hospitals 

have, and I think that would be a good thing for us to get a comment from the hospitals of California and others as we think about 

it. 

The other thing to point out about the capital recommendations 

we make in the proposed rule, and going back to your concerns 

about rural issues is that for the recommendations the only 

changes we made or the only recommendations we’re making impact urban hospitals. For rural hospitals we say leave them alone 

on capital, give them the full update in that regard. So, it really— 

the differentiation is between urban and rural. 

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Mr. THOMPSON. Well, urban and rural differences notwithstanding, California hospitals, the money that they need to retrofit 

their hospitals is more than the equity in all the hospitals in California combined. So, it’s a huge issue, and I know it’s a state mandate to require the seismic retrofit, but I don’t think anybody at the 

Federal level is interested in putting patients in an unsafe situation. 

Thank you. 

Chairman STARK. Mr. Ramstad, I’m—we’re crowding toward the 

end of the vote here. I would hope that we could ask you both to 

stay as we’ve got five votes. It will take us the better part of a 

half—45 minutes, but if it’s possible we’d sure appreciate either or 

both of you staying. 

Mr. Ramstad. 

Mr. RAMSTAD. Thank you, Mr. Chairman. I’ll be as succinct as 

possible. I thank you, Dr. Miller and Mr. Kuhn, for being here, and 

I appreciate certainly the fiscal challenges that Medicare is facing. 

I agree that changes obviously need to be made. One of the concerns I hear time and time again is that we can’t cut Medicare because Medicare payments compensate for low Medicaid reimbursements. Isn’t it true that cross subsidization is a big deal, a major 

issue, especially for providers like long-term care facilities that 

typically see a large number of Medicaid patients, caseloads are 

dominated by Medicaid patients? I want to know, number one, how 

major is the cross subsidization issue and number two whether 

CMS is working with the states and providers to develop a system 

where Medicare pays for Medicare services and Medicaid pays for 

Medicaid services. That seems to make only good sense. 

Mr. KUHN. That’s a fair question. I think the most recent data 

I’ve seen on this and probably Mark Miller has probably better information than me right now, is that at least for a typical longterm care hospital, about 10 percent of their patient load is Medicare Part A stays, but it represents about 20 percent of their revenues. So I think it makes the point you were talking about right 

there, there is a lot of cross subsidization going on there. 

Medicare itself works a lot with states in terms of their state 

plans to make sure that they’re appropriate and adequate in terms 

of their payment systems. But again, states have a great deal of 

leeway in terms of their ability and their determinations in terms 

of setting rates under the Medicaid program. But that happens not 

only with long-term care providers but other providers in the Medicaid program as well. 

Mr. MILLER. We’ve addressed this issue a couple of times. This 

comes up all the time, as you might imagine, and our concerns here 

are that first of all, using a small block of dollars to subsidize the 

larger block, the targeting is wrong. Facilities that have more 

Medicare would get more payments. Then finally you’d basically be 

inviting the states to step back in their responsibilities and so we 

think that this is really a problem. 

Mr. RAMSTAD. Thank you. 

Chairman STARK. Thank you [continuing]. We’ll recess subject 

to the call of the Chair. 

[Recess.] 

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Chairman STARK. I thank the witnesses and our guests for their 

patience. Mr. Hulshof will inquire. 

Mr. HULSHOF. Thank you, Mr. Chairman. I ask permission. I’ve 

got an extended written statement. May I include it as part of the 

record? 

Chairman STARK. Without objection. 

Mr. HULSHOF. Thank you, sir. 

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Mr. HULSHOF. I, too, want to thank both you gentleman for 

sticking around. Mr. Chairman, this past Saturday, I was the commencement speaker at the University of Missouri School of Health 

Professions. This was the new group going into physical and occupational therapy, speech pathologists, and the theme of my remarks was what were you thinking? It actually was quite inspiring, Mr. Kuhn. I see you smiling at me. But it was—I got their attention when we went into it. 

What I want to do is, is I want to talk a little bit about and follow up on what each of you has said regarding the 85 percent rule. 

You know, one of my biggest concerns, and Dr. Miller, you said, 

and I absolutely agree, we need a dynamic way of looking at reimbursements. I think the goal that we share that you have as well 

is an integrated post-acute care system. 

But I’ve got to tell you that one of my concerns about the 75 percent rule is the seemingly arbitrary effect it has on patients, specifically those not within the 13 diagnostic categories that count toward the 75 percent rule, including cardiac, pulmonary, cancer 

pain, joint replacement. So then patients that fall outside those 13 

qualifying conditions are often denied access at an inpatient facility. Access is most restrictive for patients whose needs benefit from 

these newer rehab specialties, especially pulmonary and cardiac 

and cancer. 

I don’t know if either of you have seen the Moran report that 

came out earlier this month. It basically says if you look at the 

drop in—as far as discharges from March 31st of 2004 compared 

to March 31st of 2007, so a three-year period of time, we have seen 

a nearly 80,000 reduction in discharges. That’s a 23.5-percent decline. Now, Mr. Kuhn, you said, and I’m not—this is not an indictment of what you said, but you said this is the intended impact. 

I mean, the whole idea of providing this integrated care. 

Yet I’ve got to tell you that, you know, 2 years ago, you may recall, Mr. Kuhn, you and I, we had a similar discussion, and you 

mentioned that, well, there was a high water mark because there 

was a spike in admissions because we had suspended the old 75 

percent rule. But I’ve got to tell you, looking back over the last couple of years, you know, this is a fairly harsh picture. Dr. Miller 

called it a blunt instrument, and I couldn’t agree more. 

So if we have achieved the intention—I mean, if the intent has 

now been realized, why don’t we stop where we are? Mr. Tanner 

and I, and I know he wasn’t able to return, but we have a bill. H.R. 

1459, that basically recognizes that we’ve achieved those admission 

goals we had hoped for in drafting the 75 percent rule, and we 

maintain the 60 percent threshold from here on out. You know, 

we’re not repealing it. We’re just—we’re standing pat with that. I 

would hope—I’m not going to ask you to comment on the bill specifically. 

But let me ask you, Mr. Kuhn, 2 years ago when we discussed 

the 75 percent rule, a lot of your prepared testimony back then focused on the need for research. You said research was an important next step. Since then, what research has CMS done or what 

has CMS looked at to more appropriately identify the types of clinical or functional or medical characteristics that could be used to 

refine the 75 percent rule if we keep it in place? 

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Mr. KUHN. I would agree with you, Mr. Hulshof, that indeed, research is the way we need to go in this area. A couple of things 

that we’ve done in this area, first, right after we came out with the 

final rule back in 2004, we worked with the National Institutes of 

Health to convene a panel to help us talk about a research agenda 

and what would be the right way to go. 

As a result of that, we had an information notice to investigators 

that was posted last year by NIH in collaboration with us that 

talked really about the need for a research agenda for rehabilitative care, and the fact that how we can increase the base of knowledge of information that’s out there, and how CMS could work with 

researchers to help them design their studies, how we could find 

ways through our clinical research policy to make sure that Medicare would pay for the patients in these studies, all the things that 

we could do to the maximum extent possible. 

To be quite candid, we haven’t seen anything come forward yet 

as a result of that. We’ve had some general inquiries but no specific 

proposals yet on that agenda. But we want to continue in that 

area. 

Having said that, NIH convened another panel just a month ago 

to talk further about a research agenda which we participated in 

and encouraged as part of that process. Also, we’ve had some good 

outreach with the industry themselves, with specific rehabilitative 

hospitals and others who are trying to conduct some research. So, 

we’re probably not as far along as we would probably like to be, 

but we are making progress in that area. 

Mr. HULSHOF. I appreciate it. As my final comment, Mr. Chairman, thank you. I won’t ask you a question, Mr. Kuhn, but I’m concerned about CMS’ proposal not to allow co-morbidity cases to be 

calculated. It’s been counted for the past 3 years. Starting next 

year, it won’t. If you don’t mind, I’ll submit a question to you and 

we can chat about this further. 

Mr. KUHN. We’d be happy to chat with you further about that, 

and we hope to get comments during the comment period on that 

specific issue. So, that would be helpful to hear more from you 

about that. 

Mr. HULSHOF. Thank you. Thank you, Mr. Chairman. 

Mr. MILLER. Could I add one thing to this? 

Mr. HULSHOF. Please. 

Mr. MILLER. You know, when the rule initially came out a few 

years back, and this I think just illustrates how difficult the problem is, we got a group of clinicians together and sort of talked 

about the implications in it. There was a lot of comments that you 

might imagine along the lines that you were saying. But there was 

also a clinician who said, actually—and we were talking about hip 

and knee replacement, that type of thing. There was also a clinician who said I don’t use the facilities at all. I have a protocol 

where I send my patients through exercise, get them ready for the 

operation and then use strictly outpatient therapy and home 

health—or home setting in order to get them rehabbed. 

I think that points to the need that Herb is pointing out, and I 

think you’re pointing out, that we just lack a lot of clinical information about what is needed for one situation versus another, and 

rehab is really a complicated area. Something that the commission 

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is going to call for in its June report—we’ve talked about it public, 

but it will be out next month—is to develop comparative effectiveness information to try and address this as well as other types of 

issues where you get these complications. 

Chairman STARK. Thank you. Mr. Pomeroy, would you like to 

inquire? 

Mr. POMEROY. Mr. Chairman, the line of inquiry I have has 

largely been covered earlier, but I’ve got a couple of things to say 

about it. This involves the LTCH limitation. Mr. Kuhn, I would 

just say how disappointed I am representing two LTCHs in North 

Dakota. Each would have had substantial trouble with the initial 

25 percent proposal, and even 50 percent in rural areas from one 

referring source. 

Just the dynamics of health care in rural areas render this very 

crude cost containment instrument somewhat inequitable in its application. I mean, we have dominant medical facilities that have relationships with these LTCH’s for ventilator weaning, for wound 

closure. In light of the nature of utilization patterns, you’re going 

to have these major hospitals being a major referral source. 

So, to have all this time go by and not really get to the crux of 

the issue, which is an evaluation of the particular patient, the severity of health conditions that they’re dealing with, the kind of 

care required for that patient, seems to me that you spend an 

awful lot of time going nowhere on getting an appropriate handle 

on this, even though the MedPAC recommendation is now I think 

3 years in the state. 

I’d like you to clarify for me—you talked about it a bit with the 

earlier questions, but do you intend to come down on a patientbased criteria for the appropriateness of LTCH funding, and if so, 

when? 

Mr. KUHN. You’re right. It is our intent to move forward on a 

way to better classify not only the patients but the facilities as 

well, at least some recommendations for doing that. If you look at 

it right now, an LTCH, the only classification we have is that it’s 

an acute care hospital with an average length of stay of 25 days 

or more. So what MedPAC opined on back in 2004, what we’ve 

moved forward with a contractor to get a report, which is out there, 

and we’ve already convened one technical expert panel, is now to 

take that information and what can we use for classification for 

both patients as well as facilities. 

Our best guess right now in terms of a research agenda to continue that forward is probably a 2-year window still is the best we 

can think of now. Would we like to do it sooner and faster? You 

bet. But at least that’s kind of our current expectation of where we 

think the next steps are. 

Mr. POMEROY. Do you believe Congress then should hold in 

abeyance its own thoughts on this matter until this period has run 

its course, or move some of the legislation that’s been pending? 

Mr. KUHN. You know, that’s a tough question to answer, because I don’t want to prejudge the research in any way, shape or 

form, but, obviously, if Congress wants to move forward with its 

own agenda, you know, that’s certainly their prerogative. 

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ond one here very soon, hopefully will give us the information that 

we need to move forward on. 

So, you know, this is hard for me to say here, you know, trust 

us. But I’d like us to be able to see how much further we can get 

before Congress wants to legislate in this area and hold us accountable for taking the next proper steps to move forward on a—— 

Mr. POMEROY. What time does your rule—when does your rule 

take effect? 

Mr. KUHN [continuing]. It is effective July 1. The final was published about May 1, and it’s effective on July 1. What we have in 

that rule is kind of a 3-year transition on the 25 percent rule, and 

a chance for us to sync up the final classification somewhere, you 

know, in 2009, something like that. 

Mr. POMEROY. I’m sorry. I’m not quite sure I understood that 

part. 

Mr. KUHN. Yeah. What we did in the final rule, when we put 

the proposal out, we said we would do—our recommendation was 

to move to a 25 percent threshold immediately for free-standing 

LTCHs. But after the comment period and listening to the comments we received, we said let’s do it over a 3-year transition. So, 

it would be 75 percent beginning on July 1, then move to 50 percent, and then ultimately 25 percent in the third year. 

That bought us, you know, 3 years to kind of work on this classification system because the issue is, is the classification a more appropriate system, or is the 25 percent rule more appropriate? So 

that kind of brings them both together so we can evaluate which 

one works best—— 

Mr. POMEROY. I could almost tell you right now. What could be 

better than patient assessment? This involves reimbursing medical 

care delivered per patient. 

Mr. KUHN [continuing]. Right. 

Mr. POMEROY. How can you do better than per patient certification? 

Mr. KUHN. I agree patient assessment—perhaps Mark has some 

things to add about it, but, you know, the real crux of this issue, 

because these facilities are both acute care hospitals, one just has 

to have a longer length of stay, at what time do you stop active 

treatment in an acute care hospital and start treatment in an 

LTCH? How do you assess that? That’s a tough clinical question 

that people need to work on, that we all need to work on as we go 

forward. But Mark might have some ideas on that, too. 

Mr. MILLER. I mean, just—when we went through and did this 

analysis, and our analysis was based on data as well as going out 

and talking to clinicians that worked in the long-term care hospitals, we acknowledged at the end of our report that even with a 

revised classification system for long-term care hospitals, patient 

and facility, there are still seams between the inpatient PPS system and the long-term care hospital where, I mean, for example, 

you can literally take a patient out of one part of the hospital, 

move him to another, and move him into a different payment system. I know you know this. 

So we said that there would still be issues that have to be 

worked through to kind of make sure that these two payment systems are calibrated to work with each other. We still would like to 

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see the patient and facility criteria move along. But I’m not sure 

that it will come—and we think it will make the situation better. 

I’m not sure it will eliminate the issue entirely. 

Mr. POMEROY. I do, Mr. Chairman, and I know my time has 

expired—— 

Chairman STARK. Go ahead. 

Mr. POMEROY [continuing]. I think that they were—I like the 

changes to the rule better than I like the initial rule. I thought the 

initial rule was horrible. Now I think what they’re moving forward 

with is merely bad. 

[Laughter.] 

Mr. POMEROY. It could be better. I do think that at least Congress will have the chance to act before the—some of the outyears 

kick in. Thank you, Mr. Chairman. I yield back. 

Chairman STARK. Thank you both. Thank you for your patience 

as we went off and voted on some very seriously important legislation. We’ll, I’m sure, be talking with both of you again more as we 

proceed and try and find answers to these questions. 

We now have an exciting panel who have all come here today to 

volunteer to give back money to Medicare, because they all feel 

they’re being overpaid. 

[Laughter.] 

Chairman STARK. They’re here to support the Medicare Advantage program. I’m just so thrilled that the Federation of American 

Hospitals has sent Mr. Chip Kahn to counsel with us. The American Hospital Association has sent its President and CEO, Mr. 

Umbdenstock. The American Health Care Association sent its 

President, Bruce Yarwood. The American Association of Medical 

Colleges and the Greater New York Hospital Association has sent 

Mr. Stanley Brezenoff. The National Association for Home Care 

and Hospice and the Michigan Home Health Association has sent 

someone Mr. Camp would like to introduce. 

Mr. CAMP. Well, thank you, Mr. Chairman. I appreciate the opportunity to introduce Christine Chesny, President of the 

MidMichigan Visiting Nurses Association from my hometown of 

Midland, Michigan. I’ve known Chris for many years. We’ve visited 

over the years on home health issues, and particular on home 

health agencies in Michigan. She’s been an effective leader and advocate, and I welcome her to the Committee and look forward to 

her testimony today. I know it will be informative. 

Thank you very much, Mr. Chairman. I yield back. 

Chairman STARK. Thank you. Dr. Mary Beth on behalf of the 

American Medical Rehabilitation Providers Association is our 

cleanup batter today. 

Chip, lead off. 

STATEMENT OF CHARLES N. KAHN III, PRESIDENT, 

FEDERATION OF AMERICAN HOSPITALS 

Mr. KAHN. Thank you, Mr. Chairman and other Members of the 

Subcommittee. I appreciate the opportunity to appear here today to 

discuss Medicare policy on behalf of the Federation of American 

Hospitals, the nation’s investor-owned hospitals. 

While Medicare has successfully protected America’s seniors and 

disabled for many decades, the program frequently challenges the 

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hospitals that its beneficiaries depend on for care. I will cover 

today five of those challenges. 

First, CMS proposes a payment rule for FY08 that cuts Medicare payments by some $25 billion. This proposal comes as MedPAC estimates overall Medicare—hospital Medicare margins at negative 

4.5 percent for 2007, and so recommends a full market basket for 

hospitals for FY08. The CMS reg ignores the deteriorating Medicare hospital fiscal condition, and what is particularly frustrating 

is that the proposal is based on questionable analysis. 

Most of the cuts occur because CMS has decided to make the 

DRG system more sensitive to patient severity. CMS has paired 

the refinement with cuts in payments based on the assumption 

that hospitals will reap some kind of financial windfall from the effects of this policy change. Our analytical work has yet to reveal 

a credible basis for what amounts to an overall payment reduction 

of 4.8 percent over the next 2 years. 

Additionally, CMS proposes to cut hospital capital payments. The 

justification for these cuts are based on an analysis by CMS that 

covers 1996 to 2004. What hospitals experienced in 1996 is hardly 

relevant today, and in 2004, the Medicare hospital capital margins 

dropped to their lowest point, 5.1 percent, which is 34 percent 

below 2003, and extending that trendline further, capital margins 

today could easily be negative and are part of the negative bottom 

line on Medicare which is shown by MedPAC. Hospitals need relief 

from these CMS cuts. 

Second, these very cuts result from payment reforms that CMS 

would institute in response to problems identified with physicianowned specialty hospitals, while the Administration has failed to 

properly exercise its authority to apply the Stark rule in this regard. Yes, the CMS proposal will cut payments. But it will utterly 

fail to address the perverse economic fundamentals of self-referral 

and ownership on which the physician-owned pseudo hospitals operate. Payment changes will never resolve the conflict of interest 

inherent in this type of ownership and referral that is so disruptive 

in our health care system. 

CMS’s action fails to eliminate the incentive for facilities to increase utilization, to avoid Medicaid and uninsured patients, to divert to their own facilities well-insured and healthier private pay 

patients, to avoid emergency room and on-call obligations, or even 

to continue to engage in careful selection of Medicare patients. We 

strongly urge the Congress this year to permanently ban self-referral to these facilities. 

Third, public reporting of quality and performance metrics can 

lead both to improved care and better informed patient consumers. 

There is strong evidence that the reporting of the Hospital Quality 

Alliance, HQA, measures is making a difference. We recommend 

both reinforcing HQA’s contributions and putting in place a national quality improvement agenda through expanding the role of 

the National Quality Forum to serve as the priority setter for the 

advancement of clinical performance metrics and as metric overseer. 

Congressional support is essential here whether you proceed with 

pay-for-performance or continue the current course of measurement 

and transparency. 

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Fourth, while there is always a need for examination of the role 

of providers in the post-acute continuum, CMS has adopted arbitrary regulations in this area that we believe fail the patients. In 

one case, the 75 percent rule rehab hospitals, not yet fully implement, it has already exceeded estimate caseload declines and provided fiscal savings beyond that targeted by CMS. So, the Congress 

should act to sustain enforcement at 60 percent. 

As regards to long-term care acute hospitals, CMS has advanced 

punishing policies that will likely result in payments below cost 

and that establish unprecedented quotas on referral sources. Instead, CMS should develop facility and patient certification criteria, 

as MedPAC recommends, to ensure that only the most medically 

complex patients are treated in these hospitals. 

Finally, Mr. Chairman, we support the Subcommittee’s interest 

in reauthorizing the Child Health Insurance program and fixing 

Medicare physician payment. However, with your PAY–GO responsibilities, funding must be found for these reforms. As Rick Foster, 

the CMS actuary, has pointed out, Medicare Advantage policies 

currently weaken the hospital trust fund by an initial 2 years. We 

believe these policies warrant your reexamination. 

In this regard, we hope that you find funding that is fair to the 

Medicare beneficiaries and to those providing the medical care that 

beneficiaries depend on and are entitled to receive. 

Thank you, Mr. Chairman, and the Subcommittee. I’ll be happy 

to answer questions. 

[The prepared statement of Mr. Kahn follows:] 

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Chairman STARK. Thank you, Chip. 

Mr. Umbdenstock, would you like to inform and enlighten us in 

any way you’d care? 

STATEMENT OF RICHARD J. UMBDENSTOCK, 

PRESIDENT AND CHIEF EXECUTIVE OFFICER, 

AMERICAN HOSPITAL ASSOCIATION 

Mr. UMBDENSTOCK. Thank you, Mr. Chairman. It’s my pleasure to be here today on behalf of our 5,000, nearly 5,000 member 

hospitals. 

Mr. Chairman and Members of the Committee, the men and 

women of hospitals do great things in the face of very tough challenges. Demand is soaring, and the resources needed must keep up. 

My task today is to briefly explain how Congress can help hospitals 

face those challenges. 

First, we appreciate that Congress has rejected the more than 

$100 billion in cuts to Medicare and Medicaid that the Administration had proposed. Neither chamber’s budget resolution contains 

cuts to these programs, and 223 House Members and 43 senators 

signed letters specifically opposing such cuts. We urge Congress to 

continue to hold the line on cuts. 

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Mr. Chairman, we support your efforts to do away with the 45 

percent trigger, an arbitrary and misguided approach to dealing 

with the challenges facing Medicare. 

We urge you to follow the recommendations of MedPAC to grant 

a full update for inpatient and outpatient services. This is critical 

to ensuring that Medicare reimbursement keeps pace with inflation 

and to reversing the dramatic decline in hospitals’ Medicare margins. MedPAC projects Medicare margins to fall from negative 3.3 

percent in 2005 to negative 5.4 percent in 2007, a ten-year low. 

With 65 percent of hospitals being paid less than the cost of services provided to Medicare patients, a full update is not just warranted, but necessary. 

However, what is unwarranted and unnecessary is the CMS pro- posal to cut $25 billion in payments for the services that beneficiaries need. First, they cut $24 billion by asserting that hospitals 

might change coding practices as a result of the new severity-adjusted DRG system. The new DRGs are simply a refinement of a 

classification system that hospitals have been using for 23 years. 

As a result, there is unlikely to be any change in coding practices. Second, CMS proposes cutting capital payments by nearly $1 billion. Urban hospitals in particular would be deeply affected. CMS 

went well beyond its charge by recommending these two significant 

changes, and their action clearly exceeds Congressional intent. Two 

Members of the Committee, Representatives John Lewis and Jerry 

Weller, are circulating a letter among their colleagues calling on 

CMS to eliminate these provisions. We appreciate their efforts, and 

we urge Congress to do whatever is needed to block these provisions. 

Regarding inpatient rehabilitation facilities, the 75 percent rule 

is making it difficult for patients to get the care they need. A study 

recently found that nearly 88,000 patients were unable to receive 

care in rehabilitation hospitals during the first 2 years of the 75 

percent rule phase-in, an assessment that far exceeds CMS’ original estimate of 7,000 patients. We therefore oppose moving to the 

65 percent threshold in July. 

We are equally concerned that many Medicare fiscal intermediaries have further restricted the number of patients who can 

be treated by these hospitals by issuing local coverage determinations based on unreasonable definitions of medical necessity. The 

AHA supports ensuring that all fiscal intermediaries use the national guidelines currently in place for medical necessity. Passage 

of H.R. 1459 would accomplish this goal. 

Regarding limited service hospitals, we strongly urge Congress to 

enact a permanent ban on physician self-referrals to limited service 

hospitals, with limited exceptions for existing facilities that meet 

strict investment and disclosure rules. When decisions are made 

with the doctor-owner’s bottom line in mind, it’s not in the patient’s 

best interest. So, self-referral should be banned. 

Rural hospitals provide essential health care services that 9 million Medicare beneficiaries need. Yet Medicare margins are the 

lowest for rural hospitals. The AHA supports H.R. 1177, which 

would extend permanently the outpatient PPS hold harmless provision for sole community hospitals, along with a number of other 

rural initiatives outlined in our written statement. 

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The AHA is strongly opposed to a provision in the Administra- tion’s FY08 budget that recommends a nearly $5 billion reduction 

over the next 5 years in payments to hospitals for graduate medical 

education. The Medicare Advantage plans, however, would continue to receive fundings for GME costs. We ask that the Subcommittee protect the payments to teaching hospitals, and we suggest that a source of legitimate savings in the Medicare program 

would be GME payments to Medicare Advantage plans that are not 

reaching the teach organizations. 

In addition, some Medicare Advantage plans are not reimbursing 

critical access hospitals at 101 percent of their cost as traditional 

Medicare does. H.R. 2159 would correct this inequity. 

Mr. Chairman, hospitals face significant challenges as they strive 

to provide the best care possible to Medicare patients. You have 

our pledge to help the Medicare Program accomplish its important 

goal. 

Thank you. 

[The prepared statement of Mr. Umbdenstock follows:] 

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Chairman STARK. Thank you. Mr. Yarwood, would you like to 

proceed? 

Mr. YARWOOD. Sure. Do you want me to just go off message, 

or do you want me to read this to you? 

[Laughter.] 

Chairman STARK. Whatever you want to do. I was just wondering if we changed the Stark laws to the Camp laws whether the 

Administration might be more apt to enforce them. 

Mr. CAMP. I wouldn’t count on it. 

Mr. YARWOOD. Well, the staff behind me is—they have over— 

under 30 seconds of how long it will take me to go off message. So, 

I’ll try my best. 

STATEMENT OF BRUCE YARWOOD, PRESIDENT AND CHIEF EXECUTIVE OFFICER, AMERICAN HEALTH CARE ASSOCIATION/ 

NATIONAL CENTER FOR ASSISTED LIVING 

Mr. YARWOOD. Most of what I’ve had to say has been gone over 

and somewhat repetitive, but let me start. As you know, I am honored to be here and don’t do this very often, so, thank you. But I’m 

on here on behalf of—we have 11,000 member facilities and nearly 

2 million employees that work for us, significant impact on what 

we do. 

The nursing home of 30 years ago primarily cared for chronically 

ill residents with long lengths of stay. Today, nursing homes are 

developing to meet specific needs of today’s aging American. We’re 

seeing developments in services for more clinically complex patients with increased level of short-term rehabilitative care and 

services, an average length of stay of 25 days. 

During this time, I’ve also seen a positive shift in which quality 

improvement programs are focused on delivering the highest quality patient care. You can recall 7 years ago, we had more than 

2,000 long-term care facilities in bankruptcy, primarily as the result of an altered payment system that we had a hard time adapting to. These bankruptcies really threatened our ability to take 

care of folks. But progress has been achieved due to the fact that 

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tributing to the rising care quality and the standards of America’s 

nursing homes. 

To continue the positive trends and make necessary investments 

to prepare for this aging population, the long-term care profession 

requires continued financial stability. The yo-yo effect hurts us a 

lot. The link between stable funding and quality has been noted 

time and time again. 

I might just add that recently we had—we rolled out something 

called My Innerview, and what it showed is that in a survey of 

nearly 100,000 nursing home patients and their families, the vast 

majority, more than four out of five, are highly satisfied with the 

care provided in our nursing homes. Only 3 percent rated the satisfaction level as poor. 

As has been said more than once today, at present, there’s an excessively fragmented, irrational health services payment structure. 

When it comes to post-acute, now we have it backward. Our postacute payment structure is tied to the setting in which patients are 

placed, not to the patients and the services required. 

For certain diagnostic conditions, the inpatient rehab facility and 

long-term care hospital payments can be much higher than the 

SNF payments. Some of this is clearly due to the variations in the 

severity of illness. Yet because there are no common patient assessment tools or outcome measures across all settings, it is not possible to determine whether patients are being treated in the most 

appropriate setting, and whether resources are being allocated sufficiently and appropriately. 

Until a uniform system is finalized and applied, health care professionals must do a better job placing acute, post-acute patients in 

the most appropriate care settings. We support the use of hospital 

discharge planning as the starting point to standardize the postacute assessment tools. 

Mr. Chairman, at a time when the Administration and Congress 

are considering budget cuts in many essential health care programs, our first priority must be to ensure that we spend the existing resources wisely, as you well know. We are severely concerned 

about the potentiality of the cuts since we have been working real 

hard to balance out and stop the yo-yo effect. We have the lowest 

overall operating margins of all major health care providers, and 

we are operating in an environment of drastic cost increases in 

terms of the key building blocks of labor, energy, liability and technology. 

You heard the question someone asked before, is it appropriate 

that Medicare subsidize Medicaid? Until we start sorting out that 

whole thing, we have no choice. Mark Miller was correct. We do 

make a sizable profit, but that goes to subsidize the Medicaid program, which we’re underfunded about 13 percent across the country. 

There are also ways to achieve the budgetary savings. A lot has 

been said about the 85 percent rule, and I won’t dwell on it. All 

I can say is that our cost per day averages about $500 compared 

to $800, $1,000, or whatever. So, we’re seeing—we see no diminution of care. Quite the contrary. We see the same at a much lower 

cost. 

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Secondly, what we—someone also talked about the therapy cap 

problem. We would suggest that—we’re going through and doing 

our studies now. We would suggest that we’ll have a system to 

offer to you in September or October, so we would also with CMS 

to move this therapy cap problem down the line. It is irresponsible 

to have a $1,780 cap for someone that needs incredible rehab therapy. So, we think that we can move in that way. 

Third, we think that there are savings that should be incurred 

under what we call the 3-day hospital stay. It was a neck in the 

funnel effect a long, long time ago. We think that it’s way past— 

outlived its usefulness. In fact, what we see is a discriminatory 

practice with the Medicare Advantage plans, because they have no 

3-day stay. We do. They do not. 

So as we move forward in taking a look at the Advantage plans 

as has been the focus, we find there are a lot of activities that we 

need to pass on to you and follow up with, both in terms of how 

we contract, how they’re operated under, and the different circumstances in which those Advantage plans are working with us. 

So, as I said, a lot of this has been said already today, and I’ll 

try to stay on message and finish up by saying thank you very 

much. 

[The prepared statement of Mr. Yarwood follows:] 

Prepared Statement of Bruce Yarwood, President, 

American Health Care Association 

Thank you, Mr. Chairman, and this Committee, for providing the long term care 

community such a timely and valuable opportunity to discuss the long term care 

profession’s ongoing commitment to providing quality long term care and services, 

and your efforts, specifically, to foster a constructive, cooperative environment in 

which we can continue to work successfully together on behalf of our nation’s most 

vulnerable population of seniors and disabled citizens. 

I am Bruce Yarwood, President and CEO of the American Health Care Association, the nation’s largest long term care advocacy organization. I am honored to be 

here today to speak on behalf of our nearly 11,000 member facilities nationwide, and 

the nearly 2 million caring employees who provide critical care and services to 1.5 

million frail, elderly and disabled every day. 

My 30 years in long term care provide me a unique perspective on the state of 

the profession, and how to best meet the needs of our patients and residents in the 

years to come. Over the course of those 30 years, I have been the operator of facilities in northern California; served as a public servant running California’s Medicaid 

program, MediCal; served as President of the California Association of Health Facilities; and have had the pleasure of working with several of you on this committee 

here in Washington during my more than 18-year tenure with AHCA. 

I have witnessed first-hand and been a part of many significant changes in the 

long term care profession since I began my career. The nursing home of the early 

1970s and through the ’80s and ’90s primarily cared for chronically ill residents for 

long lengths of stay ranging from many months to several years. 

Our 21st century nursing homes are developing to meet the specific needs of today’s aging American, where choice and the need for specialized services are more 

defined. We’re seeing developments in both brick and mortar and care services to 

provide an increased level of short-term rehabilitative care and services to a more 

clinically-complex patient—for an average of 25 days for the Medicare patient. During this time, I have also witnessed a positive shift in which care quality improvement programs—collaborative, successful and ongoing efforts between providers and 

Government—are focused upon delivering the highest quality patient-centered care 

available. 

In the context of today’s discussion, I would like to preface my comments and observations by stating that the long term care profession has made tremendous 

strides to improve the quality of care and the quality of life of the nearly three million Americans who require critical skilled nursing care and services every year. At 

no time in the long term care profession’s recent history has the commitment to 

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quality been greater, and I am proud to sit before you today on our profession’s behalf. 

Progress has been achieved due to the fact the entire long term care stakeholder 

community—providers, regulators, lawmakers and consumers—has established a 

more productive ‘culture of cooperation’—which is undoubtedly contributing to the 

rising care quality standards in America’s nursing homes. It is this spirit of a private/public partnership with a collective mission for quality care where we have 

been able to move the needle on quality. 

We must be aggressive in addressing the many quality challenges remaining—and 

objective in our assessment as to how best to move forward. There’s far more to do, 

that’s for certain, but we are extremely confident we are heading in the right direction. As we proceed, we must all ensure the entire stakeholder community is prepared to meet the growing complex care needs of the baby-boom retirees—who will 

inundate our long term care system in the years ahead. 

Economic Stability—The Foundation of Quality Care 

In order to continue these positive trends and make the necessary investments 

to prepare for this aging population our shared success, the long term care profession requires a platform of continued financial stability—and will be the primary 

determinant to meeting our collective quality improvement goals and objectives. 

That link between stable funding and quality has been noted time and again— 

by former Secretary of Health & Human Services Tommy Thompson, former Administrator of the Centers for Medicare and Medicaid Services (CMS), Dr. Mark McClellan, and most recently CMS Acting Administrator Leslie Norwalk, whose article for 

this month’s edition of Provider magazine states, 

‘‘Nursing home providers have been on the leading edge of this quality movement. Long before hospitals, doctors, home health providers, pharmacies, dialysis 

facilities and others came to the table, the nursing home industry was out front 

with Quality First—a volunteer effort to elevate quality and accountability. . . . 

Advancing Excellence in America’s Nursing Homes launched last September . . . 

builds on the 2001 Quality First campaign and stresses the essential connection 

between quality, adequate payment for services and financial stability.’’ 

As Ms. Norwalk pointed out, Quality First was the first nationwide, publicly articulated pledge by a community of health care providers to voluntarily establish 

and meet quality improvement targets. The hallmark of our effort has been raising 

the standards of accountability—and consumers, taxpayers, and lawmakers have 

every reason to expect Government resources to be utilized in a manner that supports the provision of high quality long term care for every American. We are proud 

of our progress thus far—and remain committed to sustained improvement for the 

future. 

This increased focus on resident-centered care, actual care outcomes, increased 

transparency and public disclosure, enhanced stakeholder collaboration and the dissemination of best practices models of care delivery is paying off. 

Key quality indicators tracked by the joint federal-provider Nursing Home Quality 

Initiative (NHQI) have improved since we stood with HHS and CMS officials to 

launch this pioneering program five years ago. Since that time, we have experienced 

improved pain management, reduced use of restraints, decreased number of patients 

with depression, and improvements in physical conditions such as incidents of pressure ulcers. 

In addition, Mr. Chairman, satisfaction of patients and family members is a critical measure of quality. Just last week, My Innerview, Inc. released the second annual report based on an independent survey of nursing home patients and their 

families. The report, 2006 National Survey of Resident and Family Satisfaction in 

Nursing Facilities, indicates that a vast majority (82%) of consumers nationwide are 

very satisfied with the care provided at our nation’s nursing homes—and would rate 

the care as either excellent or good. 

We have been able to achieve these positive advances due to our collective commitment to quality—and the Government’s recognition of how critical economic stability is for our sector has enabled us to continue these trends. 

Annual cost of living increases are integral to maintaining economic stability, and 

essential to the continued provision of quality care. Skilled nursing facilities have 

the lowest overall operating margins of all major health care providers, and we are 

operating in an environment of dramatic cost increases in terms of the key building 

blocks of labor, energy, liability and technology. 

The Administration’s recent budget proposal to freeze the SNF market basket update in the coming fiscal year, create a prescriptive annual decrease of the market 

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fringes on Congress’s authority to determine funding levels for the Medicare program, but would also siphon off more than $10 billion in funds over the next five 

years—the very funds utilized to sustain our quality improvement efforts. 

Further, Mr. Chairman, to continue focusing solely upon Medicare margins in the 

nursing home sector does a disservice to those frail, elderly and vulnerable individuals who receive care and services in those facilities. Nearly 70 percent of our nation’s nursing home patients rely on Medicaid to fund the ‘around-the-clock’ long 

term care and services required, a program that pays, on average, less than $6 an 

hour for critical around-the-clock care and services. 

But Congress cannot accurately assess the long term care marketplace and patients’ growing needs without considering the rampant Medicaid underfunding crisis. America’s nursing homes lose an average of approximately $13 per Medicaid patient per day. This annual $4.5 billion loss translated into a negative Medicaid operating margin of 7.06% in 2006—an unfortunate situation that is expected to continue throughout 2007. 

Cost-Efficient, Clinically-Appropriate Post Acute Care 

In regard to the so-called Medicare ‘‘75% Rule,’’ Mr. Chairman, we state our unequivocal support for your recent efforts to continue moving towards full implementation. It is the right policy at the right time, being implemented for all of the right 

reasons. Skilled nursing facilities (SNFs) are clinically appropriate, cost-effective settings 

providing the highest quality care and rehabilitative services. It is essential to note 

that since implementation of the 75% Rule was re-initiated in 2004, no Medicare 

beneficiary has been denied access to care—and the Federal Government has saved 

hundreds of millions in taxpayer dollars. 

Recently-introduced legislation to suspend implementation of the 75% Rule is contrary to the interests not only for patients, but also to U.S. taxpayers—who deserve 

to see Medicare resources spent in the most efficient, cost-effective manner possible. 

Suspending implementation also runs contrary to the recent changes in the SNF patient classification system (RUGs 53), which provides incentives for SNFs to more 

accurately assess, and provide quality care to the patients requiring higher intensity 

rehabilitation services—at significantly lower cost (more than $500 per day) than 

those same patients who receive care in inpatient rehabilitation facilities. 

The Rule differentiates the truly high acuity patients who need the most intensive 

rehabilitation services provided in a hospital setting from those who could be cared 

for in other settings, like SNFs, at the same high level and quality—and at a significantly lower cost to the Medicare program. With these policies in place, it is illogical 

in the context of both care quality and fiscal prudence for either Congress or the 

Administration to take action which delays full implementation of the 75% Rule. 

Therapy Caps—Cost Containment Not in the Interest of Patient Rehabilitation 

After a Medicare beneficiary has exhausted their 100-day Part A coverage for rehabilitation and post acute care services, they may require additional clinically necessary therapy services—including physical or occupational therapies or speech, language pathology—which is covered by a Part B benefit. 

Unfortunately, current policy places arbitrary limits—or a cap—on the amount of the vital therapy services that are covered under Part B—an annual cap of $1,780. 

Practically since the inception of the cap, Congress has seen the error in this policy 

and for the past two years has directed CMS to develop an exceptions process for 

patients requiring rehabilitation in excess of the cap. Though this exceptions process 

is in place, it is not intended to be a long term solution to this illogical payment 

ceiling. 

In order to move away from an arbitrary ‘‘therapy cap’’ scenario, we have proposed and are working with Congress and the Administration to develop a permanent, condition-based payment system for Part B covered therapy services. Such a 

system should be crafted to ensure appropriate rehabilitation services are available 

to the frail and elderly receiving care in our nation’s nursing facilities when they 

are required. 

We encourage Congress to require CMS to engage in a condition-based therapy 

reimbursement pilot program for one full year, and then fully implement a similar 

system nationwide while maintaining the current exceptions process to protect 

Medicare beneficiaries. 

Moving to a Diagnostic-Based Post Acute Payment System 

At present, there is an excessively fragmented and irrational health care services 

payment structure. When it comes to post acute care, for example, we now have it 

backwards: our post-acute payment structure is tied to the institutional setting in 

which patients are placed—not to the patient and the services required. 

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CMS requires different patient assessment instruments for three of the four postacute care provider categories, and requires each provider to be certified under separate criteria. CMS ensures patient safety and quality in each of these settings 

through vastly different regulatory structures. In addition, the physical settings in 

which patients receive care greatly differ—ranging from a patient’s home to a nursing home to a hospital. 

Most post-acute care providers, physicians and others involved in patient care believe in a hierarchy of acuity among the different settings, and assume patients with 

the highest acuity clinical needs will receive care in the highest acuity setting. Research as well as provider experience shows that different post-acute care settings 

sometimes serve similar patients. This overlap in patient populations can occur for 

legitimate non-clinical reasons or clinical reasons that are not measurable by research. Regardless, the overlap is sometimes inappropriate, and results in Medicare 

overpayment. 

For certain diagnostic conditions, inpatient rehabilitation facility (IRF) and long 

term care hospital (LTCH) reimbursements are much higher than SNF payments. 

Some of this is clearly due to variations in severity of illness. Yet, because there 

are no common patient assessment tools or outcome measures across all settings, 

it is not possible to ascertain whether patients are being treated in the most appropriate setting—and whether resources are being allocated efficiently and appropriately. 

AHCA strongly supported language in the Deficit Reduction Act of 2005 (DRA) 

that served as a first step in reforming the post-acute care payment system. As is 

currently being developed, we believe it is essential for CMS to develop a patient 

centered uniform screening and assessment tool for post acute care patients, and a 

uniform integrated payment system based on this comprehensive assessment tool focused not on the site where services are provided but, rather, on the needs of the 

patient. 

But until CMS can finalize and apply a uniform system, it can do a better job 

of placing post acute patients in the most appropriate care settings. For example, 

AHCA supports the use of hospital discharge planning as a starting point to standardize post acute assessment tools. 

For patients with prior hospital stays, CMS should continue to apply hospital discharge planning that is already required by law and regulations. AHCA also supports continued Quality Improvement Organization (QIO) review of the appropriateness of patient placement. 

Conclusion 

Mr. Chairman, at a time when the Administration and Congress are considering 

budget cuts in many essential health care programs, the first priority must be to 

ensure we spend existing resources wisely and efficiently—and in a manner that 

best serves our seniors, our taxpayers and our citizens at large. 

With the imminent wave of long term care patients before us, I reiterate that we 

must work together cooperatively to establish a health care system—particularly for 

post acute and long term care—which is patient centered, not site-centered. 

For the reasons I have outlined, Mr. Chairman, it is imperative for Congress to 

take action to address the many existing payment and regulatory inconsistencies for 

skilled nursing facilities to ensure that we are able to effectively meet the needs of 

our aging population and continue the positive quality trends we are seeing. The 

Long Term Care Quality and Modernization Act of 2006 (HR 6199), which was introduced in the 109th Congress, represents an important step toward establishing and 

nurturing a culture of cooperation—a legislative step we enthusiastically embrace 

and endorse. This legislation would encourage investment in capital improvements 

and health information technology, support the sustainability of a stable and welltrained workforce, require joint training and education of surveyors and providers, 

and implement facility-based training for new surveyors. 

The bill would also enhance the role of nurse practitioners in the nation’s nursing 

homes and amend current law to allow nursing facilities to resume their nurse aide 

training program when deficiencies that resulted in the prohibition of the training 

have been corrected, and compliance has been demonstrated. 

On the front lines of care, Mr. Chairman, these proposals are significant, and they 

merit strong support. 

And from the standpoint of common sense, what is best for our patients and, indeed, what is ultimately best for the future of our nation’s health care policy, these 

proposals should be implemented as quickly as possible. 

Each of us here today seeks precisely the same objective—which is to improve the 

quality of care received by every long term care patient in America, and to do so 

in a manner that helps us best measure both progress as well as shortcomings. 

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As I have noted, Mr. Chairman, improving care quality is a continuous, dynamic, 

ongoing enterprise. While we are enormously proud and pleased by our care quality 

successes, we acknowledge there is far more to accomplish. And from our profession’s standpoint, there has never been a broader recognition of the importance of 

quality, or a broader commitment to ensure it continues to improve by working together. 

Thank You. 

f 

Chairman STARK. Thank you. 

Mr. BREZENOFF? 

STATEMENT OF STANLEY BREZENOFF, PRESIDENT AND 

CHIEF EXECUTIVE OFFICER, CONTINUUM HEALTH PARTNERS 

Mr. BREZENOFF. Thank you, Mr. Chairman, other distinguished Members of the Committee. I thank you for the opportunity to testify before you today. I am the president of Continuum 

Health Partners, a major health care network in New York City 

that includes four distinguished teaching hospitals; Beth Israel 

Medical Center, St. Luke’s and Roosevelt, Long Island College Hospital and the New York Eye and Ear Infirmary. 

These hospitals are safety net hospitals, and they are distinguished in part by the extraordinary degree to which they provide 

care to New York’s poor, uninsured and the elderly. Of Continuum’s 123,000 inpatient discharges in 2006, nearly 65 percent were 

Medicare or Medicaid. Our emergency room visits, over a quarter 

of a million were more than 45 percent Medicare and Medicaid. Of 

our more than 600,000 clinic visits, over 80 percent were insured 

by Medicare and Medicaid. 

We also have a total of 80 residency programs, and in 2006, 

trained and educated over 1,000 interns and residents. So, today 

I’m pleased to testify on behalf of both the Association of American 

Medical Colleges, which represents all 125 accredited medical 

schools and nearly 400 major teaching hospitals and health systems throughout the United States and the Greater New York Hospital Association, which represents nearly 300 hospitals and continuing care facilities in New York, New Jersey, Connecticut, and 

Rhode Island, including many academic medical centers. 

Continuum is also a member of the American Hospital Association, and I want to strongly endorse the testimony delivered on 

their behalf earlier. 

I don’t have to tell you, teaching hospitals have a unique role in 

our nation’s health care system. In addition to providing basic, primary health care services to their communities and Medicare beneficiaries, teaching hospitals have the additional societal responsibilities of providing education for all types of health care professionals, an environment in which clinical research can flourish, and 

highly specialized tertiary patient care and cardiac care as well as 

transplant services. 

Because of this, teaching hospitals care for the nation’s sickest 

patients with the most complicated conditions. Teaching hospitals 

also provide almost half of all inpatient care, and provide a huge 

amount of care for the poor and the uninsured. Indeed, in many 

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nities where individual practitioners who accept Medicaid or provide care for the uninsured are few. 

One of our essential missions, to teach the next generation of 

physicians, has never been more important. The Census Bureau 

has pointed out that the elderly, the number of elderly will double 

by 2030, and with this will come a sizable increase in demand for 

health care services. According to data from the National Ambulatory Medical Care Survey, patients aged 65 and older typically average six to seven physician visits a year. 

If the annual number of physician visits continue at this rate, 

the U.S. population will make 53 percent more trips to the doctor 

in 2020 than in 2000, which means that we will need to produce 

many more physicians per year than we are producing now. This 

has enormous implications for health care policy, given the length 

of time it takes to train physicians, 2020 is virtually now, and we 

need to take action immediately. 

Unfortunately, at a time when the missions of our teaching hospitals have never been more important, many of them are struggling financially. The 2004 aggregate operating margin for all 

major teaching hospitals was negative 8.3 percent, with the typical 

major teaching hospital having a negative 5 percent operating margin. This is why Federal payment policies affecting our nation’s 

teaching hospitals are so important. 

As you know, Medicare has two special payments for teaching 

hospitals, IME and Direct Graduate Medical Education payments. 

The IME medical payment accounts fully for the fact that teaching 

hospitals must treat more severely ill patients than other hospitals, 

and DGME are designed to make sure that Medicare pays its share 

of costs. 

Unfortunately, the President’s proposals, both statutory and regulatory, put our nation’s teaching hospitals at risk. As the AHA 

has testified, the President’s budget would cut $101 billion from 

the Medicare and Medicaid programs over 5 years. I want to talk 

about two proposals that solely impact teaching hospitals—the 

elimination of the Medicare indirect medical education programs, 

payments associated with treating Medicare managed care or Medicare Advantage beneficiaries, and the complete elimination of Medicaid funding for GME. 

First, in regard to Medicare Advantage, the argument seems to 

be that in teaching hospitals, we are getting paid twice. It’s an absolute falsehood. We barely get paid once. The truth of the matter 

is that it is the Medicare Advantage programs that have been insulated from declines in funding with the addition of the 2 percent 

adjustment that they were able to get. That funding is what ought 

to be looked at if in fact there is an issue of too much funding going 

in the direction of IME. 

As I noted, our hospitals are operating on negative margins. To 

remove that and to protect the Medicare Advantage programs 

would be to turn logic on its head. 

Thank you. 

[The prepared statement of Mr. Brezenoff follows:] 

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f 

Chairman STARK. Ms. Chesny? 

STATEMENT OF CHRISTINE CHESNY, NATIONAL ASSOCIATION 

FOR HOME CARE AND HOSPICE AND MICHIGAN HOME 

HEALTH ASSOCIATION 

Ms. CHESNY. Thank you, Mr. Chairman, Ranking Member 

Camp and Subcommittee Members for inviting me to present testimony on issues related to payment accuracy and legislative and 

regulatory payment refinements for the Medicare Home Health 

Prospective Payment System. 

My name is Christine Chesny. I am president of the Michigan 

Visiting Nurse Association, a not-for-profit provider of home health, 

hospice, home medical equipment, palliative care and private duty 

nursing services to 11 rural counties in the heart of Michigan. I am 

the past president of the Michigan Home Health Association and 

a finance Committee Member of the National Association for Home 

Care and Hospice. 

The Prospective Payment System for Medicare Home Health is 

based on the right principles as it facilitates outcomes-oriented patient care planning that is focused on rehabilitation and self care. 

However the current Medicare Home Health Prospective Payment 

System has been found to be seriously flawed. 

MedPAC states the system fails to fairly set rates in relation to 

the level of care in over 75% of the case categories, yet Medicare’s 

recently proposed changes to PPS incorporate a presumption of— 

that we believe to be completely unfounded. 

NAHC has strongly supported CMS efforts to restructure the system and to replace a poorly functioning case mix adjustment model. 

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However the CMS proposal assumes all increases in average case 

mix weight are entirely due to provider gains. To assume that any 

change is attributed to gaining assumes that nurses throughout the 

country are deliberately falsifying patient assessments to garner 

higher payments for their agencies. 

Given our agency’s experience, I believe the increase reflects the 

changing demographic of our patient population. First and foremost, they are older and more frail. In our agency in 2001, 24.9 

percent of our patients were over age 80. In the most recently completed fiscal year that percentage has risen to 34. 

In general the type of patient referred to us is more—requires 

more intense service and has increased significantly due in large 

part to hospital DRG policy changes leading to decreased length of 

stay and from changes in inpatient rehab facility reimbursement 

that have appropriately scared more but sicker patients into home 

health services. 

This brings me to my second point. Home health is local and in 

our service area that means rural. The loss of the rural add on and 

the changes in wage index has significantly impacted rural agencies throughout the country. In our agency the ramification of rural 

add on loss and wage index changes total over $1.2 million on a 

$9 million budget. We have had to pull out of several counties. 

To my knowledge, no home health provider in these counties is 

able to provide the full compliment of Medicare home health services. Staff shortages are common in many agencies across the nation. We have been recruiting for a full time physical therapist for 

over 900 days. 

MedPAC’s financial analysis of Medicare home health agencies 

alleging a 16 percent margin is unreliable. It excludes the 21 percent of agencies that are part of a hospital or skilled nursing facility. When all agencies’ margins are included and given equal 

weight the true average margin is 3.12 percent. 

About one-third of home health agencies have Medicare margins 

at or below zero. Our overall margin is 4.9 percent but drops to 2.8 

when United Way, grant and other charitable funds are removed. 

We have benefited from the generosity of local foundations and the 

receipt of two USDA grants. These grants allowed us to acquire 

over 150 tele-health units and other patient care technology. 

The USDA grants, which require an agency match, total over 

$600,000. Even using technology to improve our productivity, our 

mileage expense is just under a half a million dollars this fiscal 

year but down $200,000 before technology. Yet technology such as 

tele-health is not included in the allowable costs on the Medicare 

cost report, nor does the tele-health monitoring event count as a 

home health visit. 

As part of the proposed rule to refine the home health prospective payment system CMS added cuts in the base payment rate. 

This would come on top of the President’s Budget proposal to eliminate the inflation adjustment. Over the past 10 years, the Medicare 

home health benefit has been cut nearly every year. Once comprising 8.7 percent of Medicare spending, today it is 3.2 percent 

and it’s projected to drop to 2.6 by 2015. 

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Given our growing population of elderly and disabled, cuts to the 

home health benefit will only prove to be penny wise and pound 

foolish. 

In conclusion, Mr. Chairman and Ranking Member Camp, we respectfully request that the Subcommittee request CMS to suspend 

its plan to cut home health payment rates based on unfounded allegations of case mix creep, not reduce the annual inflation update, 

expand access to technology and tele-health, reinstate the rural add 

on. 

NAHC and MHHA look forward to working with the Subcommittee to address the home health payment adequacy issues as 

outlined in this testimony. This concludes my formal remarks and 

I’ll be happy to accept any questions. 

[The prepared statement of Ms. Chesny follows:] 

Prepared Statement of Christine Chesny, on behalf of National Association 

for Home Care and Hospice and the Michigan Home Health Association 

Thank you, Mr. Chairman, Ranking Member Camp, and Subcommittee Members, 

for inviting me to present testimony on issues related to payment accuracy and legislative and regulatory payment refinements for the Medicare home health prospective payment system. My name is Christine Chesny. I am President of MidMichigan 

Visiting Nurse Association (VNA), a not-for-profit affiliate of MidMichigan Health, 

the largest health care system in north-central Michigan. MidMichigan Visiting 

Nurse Association provides home health, hospice, home medical equipment, palliative care and private duty nursing services to eleven rural counties in the heart of 

Michigan. As a part of the MidMichigan Health family of services, we support a continuum of care that includes: 4 acute care hospitals with 481 beds, a critical access 

hospital, a 200 bed skilled nursing facility and 40 assisted living beds, an urgent 

care center with mobile diagnostics, such as PET scanning, and over 300 physicians 

and mid-level providers on staff. I am also the immediate Past President of the 

Board of Directors of the Michigan Home Health Association (MHHA), and a finance 

committee member of the National Association for Home Care and Hospice (NAHC). 

NAHC is the largest home health trade association in the nation. Among our 

members are all types and sizes of Medicare-participating care providers, including 

nonprofit agencies such as the VNAs, for-profit chains, public and hospital-based 

agencies and free-standing agencies. 

Earlier this year, the Medicare Payment Advisory Commission (MedPAC) recommended that Congress eliminate the home health market basket update for calendar year 2008. Relying in part on MedPAC’s recommendation the President’s fiscal year 2008 budget proposes a reduction of nearly $10 billion in home health 

spending by imposing a five-year freeze in home health payments (2008 through 

2012), and permanent market basket reductions annually thereafter of .65 percent. 

Additionally, the Administration also plans to reduce home health payments 

through regulatory changes by nearly $7 billion over the same five years. Home 

care, with its annual Medicare expenditures of only $13 billion, cannot sustain such 

draconian cuts without the loss of access to care throughout the country. 

Preservation of the Medicare Home Health Market Basket Inflation Update is Needed to Protect and Preserve Care for Medicare Beneficiaries 

MedPAC’s rationale for freezing home health payments fails to address the true 

financial status of home health agencies. The recommendation is based on an incomplete analysis of Medicare cost report data that excludes a significant segment of 

home health agencies, ignores essential home care service costs, and relies on a 

methodology that treats home health services as if it were provided by one agency 

in just one geographic area. If enacted the MedPAC recommendation will severely 

compromise continued access to care. 

In specific response to the recommendation, we note the following: 

• The current Medicare home health prospective payment system (HHPPS) has 

been found to be seriously flawed and extremely ineffective at predicting the 

costs of care delivery. As a result, care for some types of patients can be reimbursed at significantly higher rates than agencies’ costs while Medicare reimbursement for other patients is woefully inadequate. MedPAC has found that 

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egories to fairly set rates in relation to the level of care. Payment is either 

significantly lower or greater than justified for the level of care. These and 

other findings have led Medicare to undertake a wholesale revision of HHPPS 

that is scheduled to take effect on January 1, 2008. • The considerable shortcomings in the HHPPS are further illustrated by a dramatic range in profits and losses among home health agencies (HHAs). About 

31% of all HHAs experienced financial losses under Medicare in 2002; that 

figure increased to 33% in 2004. A five-year freeze would increase the number 

of agencies with Medicare margins of zero or below to around 60%. These figures actually understate losses because Medicare cost report data excludes 

the costs of numerous items that are legitimate care expenses, such as telehealth services and respiratory therapy. • MedPAC’s financial analysis of Medicare home health agencies, alleging a 

16% margin, is unreliable. First, it does not include any consideration of the 

1,723 agencies (21%) that are part of a hospital or skilled nursing facility. In 

some states, hospital-based HHAs make up the majority of the providers (MT 

63.2%; ND 65.4%; SD 60.5%; OR 58.3%). These HHAs have an average Medicare profit margin of negative 5.3%. Second, the MedPAC analysis uses a 

weighted average, combining all HHAs into a single unit, rather than recognizing the individual existence and local nature of each provider. When all 

agencies’ margins are included and given equal weight, the true average margin is 3.12%. MedPAC fails to evaluate the impact on care access that occurs 

with the current wide ranging financial outcomes of HHAs. Instead, it sees 

a single national profit margin as representative of over 8,000 very diverse 

HHAs. 

Our overall profit in home health at MidMichigan Visiting Nurse Association is 

just under 5%. This number drops to below 3 percent when United Way, grant and 

other charitable funds are removed. We consider ourselves fortunate. Let me explain. As a non-profit free standing agency we receive charitable donations to support under and uninsured patient care including Medicaid. We also benefited from 

the generosity of local foundations as our agency first implemented laptop computers for clinicians in 1998. Since that time we have been even more fortunate to 

receive two USDA grants. These grants allowed us to acquire over 150 telehealth 

units, pulse based oxygen concentration meters, blood clotting time meters, and 

more computers for both branch offices and clinical staff. The USDA grants, which 

require an agency match total over $600,000. No small investment for any home 

health agency. 

The use of technology has enabled our agency to more efficiently and effectively 

care for our patients while maintaining high quality outcomes. For other agencies 

unable to make this capital intensive investment, the economies are lost and their 

costs continue to rise. Even using technology to improve our productivity, our average miles per visit is 22 which translates into an expense of just under a half million dollars this fiscal year. Yet, CMS does not recognize telehomecare technology 

equipment and patient service costs as reimbursable by the Medicare program. 

This brings me to my second point. Home health care services are local. And in 

our service area that means rural. The loss of the rural add-on and the changes in 

wage index have had significant impact on our agency and other rural agencies in 

Michigan and throughout the country. The wage index calculation is fundamentally 

flawed as rural hospitals are continuously reclassified to CBSAs eliminating their 

costs from the rural calculation. In our agency, the ramifications of the loss of the 

home health rural add-on and wage index change total over $1.2 million on a $9 

million budget. We have had to make difficult decisions regarding our service area. 

We eliminated our two most northern counties 3 years ago. We also eliminated the 

majority of another county whose population is only 17,000 residents and are contemplating reducing the service area in the northern most reaches of two other 

counties. The void will not be easily filled. To my knowledge, no one in these areas 

is able to consistently offer the entire Medicare covered services in the home health 

benefit. Our agency is unable to afford the price that physical therapists demand 

for work in these areas. We have been persistently recruiting for a full time physical 

therapist for over 900 days. 

• With the existing HHPPS, an agency’s mix of patients (case-mix) can result 

in significant profits or losses unrelated to efficiency or effectiveness of care. 

Losses exist for agencies of all sizes and in all geographic locations that are 

a result of the flawed HHPPS. These agencies are essential care providers in 

their communities. An across-the-board cut or freeze would do tremendous financial damage to those agencies that are at break-even or losing money on 

Medicare. 

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• Home health agencies are already in financial jeopardy as a result of Medicaid cuts and inadequate Medicare Advantage and private payment rates. 

Ongoing study of home health cost reports by the National Association for 

Home Care & Hospice indicates that the overall financial strength of Medicare home health agencies is weak, and expected to diminish further. In 2002, 

the average all-payor profit margin for freestanding HHAs was 2.53%. A more 

recent cost report data analysis indicates that the average all-payor profit 

margin for 2004 dropped to 1.55%. 

• Current reimbursement levels have failed to adequately cover the rising costs 

of providing care, which include: increasing costs for labor, transportation, 

workers’ compensation, health insurance premiums, compliance with the 

Health Insurance Portability and Accountability Act and other regulatory requirements, technology enhancements including telehealth, emergency and 

bioterrorism preparedness, and systems changes to adapt to the HHPPS. 

• A loss of the market basket inflation update could leave home health providers no alternative but to cut down on the number of visits per episode or 

avoid certain high-cost patients altogether, which could have potential adverse consequences on care access and patients’ clinical outcomes. It would be 

difficult for HHAs to continue to lower visit frequency without compromising 

quality of care. Outcome Concept Systems, a national home health 

benchmarking firm, has found, in general, that reductions in average visits 

below 20 visits per episode (the current average is around 18) result in lower 

outcome scores. 

• Medicare home health services reduce Medicare expenditures for hospital 

care, inpatient rehabilitation facility (IRF) services, and skilled nursing facility (SNF) care. For example, a study by MedPAC shows that the cost of care 

for hip replacement patients discharged to home is $3500 lower than care provided in a SNF and $8000 less than care provided in an IRF, with better patient outcomes. 

• Home health agencies have already experienced a disproportionate amount of 

cuts in reimbursement as a result of the Balanced Budget Act of 1997 (BBA). 

For example, under the BBA, Congress expected to reduce Medicare home 

health care outlays in FY 2006 from a projected $40.4 billion to $33.1 billion. 

The Congressional Budget Office (CBO) now estimates that home health outlays for FY 2006 were $13.1 billion. This reduction is far in excess of the reduction originally envisioned by Congress, and already has had a profound 

impact on beneficiary access to care and HHA financial viability. Home health 

care as a share of Medicare spending has dropped from 8.7 percent in 1997 

to 3.2 percent today. By 2015 it is projected to drop to 2.6 percent of total 

Medicare spending. 

• Over the past 10 years, the Medicare home health benefit has been cut nearly 

every year, placing serious financial strains on HHAs: 

FY 1998–1999 Home health interim payment system (IPS) was implemented. 

During two years under IPS Medicare spending for home health 

care dropped from $17.5 billion to $9.7 billion and the number of 

Medicare beneficiaries receiving home health services dropped 

by 1 million. Over 3,000 home health agencies closed their doors. 

FY 2000 Home health care’s inflation update was cut by 1.1%. 

FY 2002 Home health care’s inflation update was cut by 1.1%. 

FY 2003 Total home health care expenditures were cut by 5% off previous 

year’s rates. 

CY 2004 

(3/4 of year) 

Home health care’s inflation update was cut by 0.8%. 

CY 2005 Home health care’s inflation update was cut by 0.8%. 

CY 2006 Home health care’s inflation update of 3.3% was eliminated. 

CMS’ Proposed Revisions for the Home Health Prospective Payment System 

As discussed earlier, all indications are that Medicare’s current payment system 

for home health is flawed, and that, rather than across-the-board cuts that will 

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harm those agencies that can least afford it, a redistribution of payments through 

refinements in the home health prospective payment system is the appropriate 

course of action. Medicare recently proposed major changes in the payment system 

to institute a more balanced reimbursement method to take effect in 2008. NAHC 

has strongly supported CMS efforts to restructure the system and to replace a poorly functioning case mix adjustment model that determines the payment rates for 80 

different patient categories. However, as part of the proposed rule, Medicare added 

the administrative cuts proposed by the President in his 2008 budget, thereby jeopardizing the intended benefits of the reforms. 

The intended purpose of the payment system changes was to refine the case mix 

adjustment so that the payments would be more fairly distributed. Instead, CMS 

put forward a blatant effort to extract over $7 billion from the system. Specifically 

the proposal would cut payment rates by 2.75% for each of the next three years (beginning in 2008). This cut will spell disaster for access to services. 

The proposal indicates that the cuts are intended to eliminate the effect of increases in patient coding that does not reflect changes in the patients’ characteristics. CMS assumes that, because the average case mix weight of home health patients has risen since the first year of the PPS (from approximately 1.135 to 1.233), 

every single point of that increase has been due to provider ‘‘gaming’’ of the system, 

or deliberately establishing a higher case mix weight to secure higher reimbursement under Medicare. CMS refuses to acknowledge that the patients under the care 

of home health agencies have dramatically changed since the inception of PPS in 

October 2000. Instead, CMS concludes that there has been absolutely no change at 

all. 

I think that it is important for those of you unfamiliar with the payment system 

to understand what this assumption of gaming means. Home health patients are not 

simply taken onto service and ‘‘assigned’’ a case-mix weight by the home health 

agency. Instead, a physician orders specific care based on the patient’s condition and 

neee0257ice ah agenyr accpnts n patient for servict, a rgiastesednourse er thrapias -
123 

ceiving the supportive personal care of home health aides for an extended period of time, physical and occupational therapy have taken on a greater role, 

leading to improvements in function and self-sufficiency. The average length 

of stay in home health services has dropped to less than 90 days from a prePPS average of over 150 days. Correspondingly, therapy visits have increased by over 25% to an average of five in a 60-day episode. This change 

was part of the congressional purpose behind the mandate to create the PPS. 

That change has benefited the patients and Medicare in that home health 

expenditures remain far below 1997 levels of $17 billion. 

2. Patients are discharged into home health services from inpatient hospitals 

earlier than ever before. This is evidenced by the institution of the hospital 

transfer DRG policy. Under that policy hospital payments have been reduced 

in multiple DRGs because the transfer of patients from hospitals into home 

health has reduced the inpatient length of stay. Those discharges have led 

to the admission of patients into home health with higher acuity levels than 

ever before. 

3. The alteration of coverage and payment standards at Inpatient Rehabilitation Facilities (IRF) and Long Term Care Hospitals (LTCH) has increased 

the number of rehabilitation patients in home health as well as their level 

of service needs. For example, the phasing in of the 75% rule for IRFs has 

steered more patients with higher needs for therapy appropriately into home 

health services. 

CMS has failed to utilize a sound methodology to determine the extent to which 

the increase in case mix weight is due to changes in patients or changes in coding. 

In its published analysis, for example, CMS admits that more patients are admitted 

into home health care from Skilled Nursing Facilities (SNF). This is a factor that 

the CMS scoring system considers as a strong indication of patients with greater 

care needs, yet CMS ignores this fact in reaching its conclusion that all the increase 

in case mix weight is ‘‘coding creep.’’ 

More alarming is the fact that CMS considers the increase in therapy services to 

be unrelated to any change in the nature of patients served. Effectively, this conclusion means that CMS considers the therapy visits to be unnecessary all across the 

country without ever reviewing actual patient care records. This conclusion flies in 

the face of the significant rehabilitative gains of the home health patients and the 

numerous structural changes in other care settings that impact on the patient population served by home health agencies. 

Instead, the primary justification that CMS offers for its conclusion is that home 

health agencies have received policy clarifications and training on how to complete 

the patient assessment forms. That justification is a strong indication that CMS is 

desperately grabbing onto anything available to explain its action. 

In 1997 with the Balanced Budget Act, Congress set in motion a revolution in the 

Medicare home health benefit. With changes to both the payment system and the 

scope of the benefit coverage, Congress shifted home health services into a rehabilitative oriented benefit with strong controls on expenditures. Those goals have been 

accomplished yet CMS, through its unfounded and unprecedented conclusion that 

patients have not changed since 2000, now seeks to undermine this remarkable 

Congressional success by instituting an 8.7% cut in payment rates through 2.75% 

reductions in each of the next three years. That proposal can only serve to derail 

the gains over the last seven years. I urge Congress to intervene and stop CMS before damage is done to Medicare beneficiaries. 

CMS Should Not Undermine Its Worthwhile Effort To Refine the Home Health Prospective Payment System By Making Rate Cuts 

In its proposal to reform and refine the Medicare home health PPS, CMS offers 

many improvements that will likely redistribute payments in an improved manner. 

NAHC and MHHA have long supported efforts to correct weaknesses in the PPS 

model. However, the additional proposal by CMS to reduce the base payment rate 

to account for increases in the average case mix weight will jeopardize the effectiveness of the proposed corrections. The indications of that threat are: 

1. The ‘‘case mix creep’’ adjustment is applied to all home health agencies 

whether they engaged in abusive coding or not. In fact, any offending agencies are better positioned to absorb the impact of the cut than those agencies 

that did everything above board. This approach makes the many pay for the 

sins of the few (if any exist). 

2. The increase in case mix weight is primarily due to an increase in therapy 

services to patients. To the extent that the current system encourages inappropriate increases in those services, the CMS reform proposal institutes a 

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corrective course. Under the current system, higher payments occur whenever patients receive 10 or more therapy visits in a 60 day episode. The proposal replaces the 10 visit threshold with a system that changes payment 

rates at 6, 14, and 20 visits, with additional incremental changes between 

those points. This modification is intended to align payment more closely to 

patient needs. However, combining this change with the coding adjustment 

reduction is in effect a ‘‘double dipping’’ in that payment rates for patients 

with 10 or fewer therapy visits are greatly reduced through both the cut and 

the payment system reform. 

3. The case mix weight adjustment is not the only step taken by CMS to reduce 

agency payment rates. To achieve budget neutrality with the system reforms 

CMS institutes an additional adjustment to the case mix weights. This adjustment reduces payments by approximately 4% based on an apparent assumption that providers of services will modify their care behavior to increase Medicare expenditures. The CMS proposal is devoid of transparency 

in that there is no explanation as to how this adjustment is calculated. 

4. The true impact of the PPS reforms will not be known until some time after 

their implementation. The 8.7% payment rate reduction over three years 

through the case mix weight adjustment seriously complicates any ability to 

determine whether care and access change that may occur is due to weakness in the new payment model or errors in calculating the case mix weight 

adjustment. With the serious errors that we believe exist in that adjustment, 

the goals of the reform will not be realized. 

The combination of these factors serves to destabilize the home health benefit at 

a time when it is intended to achieve greater accuracy in payment rates. In the 

midst of this chaos are the Medicare beneficiaries and the uncertain future for access to care in their homes. 

Conclusion 

Home health services are part of the solution to growing health care expenditures 

in Medicare. Increasingly, home health services are a less costly alternative to inpatient services and institutional care. Home care also has a long history of exceptional care quality. Invariably, our patients express high marks for home care services. Now is the time to support and expand access to home health services under 

Medicare and all federal health programs to address a growing population of elderly 

and disabled. Cuts to the home health benefit will only serve to prove that it is 

‘‘penny wise and pound foolish.’’ We need to look no further than to the increased 

expenditures for Inpatient Rehabilitation Facilities, Long Term Care Hospitals, and 

Skilled Nursing Facilities following on the heels of the massive home health services 

cuts in the Balanced Budget Act. 

We respectfully recommend that the Committee: 

1. Request that CMS suspend its plan to cut home health payment rates based 

on unfounded allegations of unwarranted increases in patient case mix 

weights as set out in its April 26, 2007 proposed rule. 

2. Withhold any reductions in the annual inflation update for home health until 

the impact of the implementation of the prospective payment system in 2008. 

This step is particularly essential with the pending $7 billion in cuts in the 

CMS regulatory proposal. 

3. Expand access to technology and telehealth services in home health services 

through grants, loans, and elimination of restrictions on the use of telehealth 

within the Medicare benefit. 

4. Reinstate the rural add-on to preserve services in our nation’s rural communities. 

NAHC and MHHA look forward to working with the Subcommittee to address the 

home health payment adequacy issues as outlined in this testimony. This concludes 

my formal remarks. I would be happy to answer any questions from the Subcommittee members. 

f 

Chairman STARK. Thank you very much. 

Dr. Walsh, would you like to enlighten us, please? 

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STATEMENT OF MARY BETH WALSH, M.D., AMERICAN 

MEDICAL REHABILITATION PROVIDERS ASSOCIATION 

Dr. WALSH. Thank you, Chairman Stark, Ranking Member 

Camp and Members of the Subcommittee. I appreciate the opportunity to testify today on behalf of the American Medical Rehabilitation Providers Association, representing more than half of the 

some 38,000 inpatient rehabilitation beds in the United States. 

Could I ask that my written testimony be made part of the 

record in light of members’ time? 

We are sensitive to the difficult budget pressures and choices facing this Committee and this Congress under the Pay-Go budget 

rule, but we have to urge you to use this constraint to balance provider payment needs more fairly, much of which you’ve heard 

through this whole panel today. 

Medical rehabilitation is that piece of medicine that is dedicated 

to providing patients everything they need to recover from debilitating illness and injury to achieve maximal functional independence and hopefully return to home and community living. 

The existence of this critical sector of health care is threatened 

by some current in-process Medicare policies just at the time, as 

you have heard, we are all Baby Boomers aging up, and our 

wounded soldiers are returning home and moving out of acute care 

into our fragmented post-acute care world. 

I should introduce myself. I am a rheumatologist, which is an internist specializing in the care of arthritis and other rheumatic diseases. I also direct Burke Rehabilitation Hospital, which is a 150 

bed, freestanding rehabilitation hospital in New York, a Cornell 

University academic affiliate since the 1930s, and I’ve been trying 

to do this since 1979. 

We are testifying today seeking legislative relief to address the 

two critically important issues impacting this field. The first is the 

75 percent rule and the second is the unprecedented increase in 

claims denials experienced by providers across the country of rehabilitation services. 

First let me hit the 75 percent rule. When CMS revised it in 

2004 it failed to use that opportunity to update these criteria in accordance with the 25 to 30 years of medical practice. Patients with 

certain cardiac disease, with crippling pulmonary disease, with 

cancers, with organ transplants living in ways that were not imagined 30 years ago have come in need of this level of service in order 

to walk out of the hospital. So, the rule does not represent these 

changes. 

You have heard from several of the earlier panel that there is no 

access problem. Well, from where I sit there is an access problem. 

Let me describe to you a 72-year-old gentleman with a lymphoma 

who 25 years ago in this rule there was no treatment for so he certainly would not have survived. After a long and arduous course in 

an acute care hospital, on and off a ventilator with various chemotherapy and lung surgery he did survive. 

He is not one of the diagnostic criteria that one could count, so 

if he presents to our hospital for an absolutely medically necessary 

level of care, first we have to decide are we close to the percent 

rule. If it’s early in the year we can take him because hopefully 

we’re not. If we’ve been careless and we’re a little over it, we will 

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have to deny him access in order to continue to provide care to any 

patients. This is an access problem. 

CMS has underestimated the impact. In the final rule it estimated a .1 percent drop in the number of patients treated. 

MedPAC noted that in the first year that was 9 percent. MedPAC 

anticipates that rehab hospital patients will drop an additional 20 

percent as we move to the 65 percent rule, and you have heard 

that this is some 80,000 plus patients. 

The financial impact of the rule has also considerably exceeded the estimates. In the first year alone it was approximately $343 

million not the much lower estimate. 

I think the critical question here, separate from numbers and 

dollars, is so what, which lets me talk for a second about the quality of care provided in inpatient rehab hospitals and units. There 

is a longstanding tradition in this field to measure our individual 

patient outcomes, how long are they in the hospital, do they go 

home walking or in need still of my distinguished colleague’s home 

care services or are they independent enough to go to an outpatient 

program? How many days did that take? How many of them got 

sick enough to go back to an acute care hospital? These are reported. These are measured. These are quality measures that matter to a patient. It’s their quality outcome, not the state of other 

things. 

There is a growing body of published research that indicates that 

in non-hospital based settings, although the per day cost may and 

is lower, the length of stay may be approximately twice, the number of patients needing rehospitalization because they’re not in a 

hospital with 24-hour nurses in physicians there may well be about 

twice. This all costs money as well as poor patient outcome and 

suffering. 

MedPAC, in its 2007 report to Congress, noted that there was a 

decline in one of these areas, the skilled nursing facility 30-day 

community discharge had declined consistent with what I indicated. I would ask that before an entire infrastructure and this 

field of medicine is dismantled completely the government should 

be required to demonstrate that its policy changes are indeed in 

the best interests of the patients that we serve. 

Because my time, I see, has run out I will just in two sentences 

tell you that the second area is the fiscal intermediary denial made 

under local coverage decisions, which I think some of you are 

aware of in your own districts. These denials do not reference or 

improperly apply the more than 20 year rules of coverage, so we 

are asking you to codify in statute the coverage rules contained in 

ruling 85 to bring some uniformity across the country to this field. 

So, in summary, I testified because we are urging you to support 

the enactment of H.R. 1459. The field is prepared to work with 

Congress, with CMS, with all of our other sectors of the acute and 

post-acute care world to define an appropriate continuum of care 

that should be used to guide patient placement and Medicare coverage decisions, which will eventually reduce the true cost to the 

Medicare Program by providing the right care in the right place. 

Thank you for your patience as I went over, and I’d be happy to 

answer any questions. 

[The prepared statement of Dr. Walsh follows:] 

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Prepared Statement of Mary Beth Walsh, M.D., on behalf of American 

Medical Rehabilitation Providers Association 

Chairman Stark, Ranking Member Camp, and Members of the Subcommittee on 

Health, I appreciate the opportunity to testify on behalf of the American Medical 

Rehabilitation Providers Association (AMRPA) concerning payment systems for feefor-service providers. The American Medical Rehabilitation Providers Association 

(AMRPA) is the leading national trade association representing over 550 freestanding rehabilitation hospitals, rehabilitation units of acute care general hospitals, and numerous outpatient rehabilitation services providers. Our members 

serve over 450,000 Medicare and non-Medicare patients per year, and most, if not 

all, of our members are Medicare providers. They also represent over half of the 

38,388 inpatient rehabilitation hospital and unit beds in the country. 

Let me say at the outset, AMRPA is sensitive to the extremely difficult budget 

pressures and choices facing this Committee and this Congress under the ‘‘pay-go’’ 

budget rules, but we urge you to use this constraint to balance provider payment 

needs more fairly. For example, the financial benefits provided to Medicare Advantage plans have come at the expense of other providers and deplete the Part A 

Medicare Trust Fund; these inequities should be addressed as the Medicare Payment Advisory Commission (MedPAC) suggests, and as the Committee, assesses 

how to proceed. However, it is our hope that the challenges of this cost-containment 

environment will recognize the vital role that rehabilitation hospitals and units play 

in providing care and services aimed at placing patients back into their homes and 

communities where they can resume their independence. 

Mr. Chairman, AMRPA testifies before you today seeking legislative relief that 

would address two critically important issues that are adversely impacting inpatient 

rehabilitation providers and patients who need their services: (1) the 75% Rule; and 

(2) an increasingly aggressive pattern of medical necessity-based denials against 

claims filed by inpatient rehabilitation hospitals and units, the frequency of which 

is unprecedented in comparison to any other Medicare Part A provider segment. 

AMRPA is vitally concerned about both of these issues, as they are increasingly 

eroding access to high-quality rehabilitation care for those who need it. 

With respect to the 75% Rule, we recognize the propensity of this Committee to 

defer to the Centers for Medicaid and Medicare Services (CMS) in the regulatory 

rulemaking arena. It is critically important to note, though, that the 75% Rule is 

no longer a regulation falling solely within the jurisdiction of CMS. As part of the 

deficit reduction legislation enacted into law early last year, Congress asserted jurisdiction over the 75% Rule and temporarily maintained it as its current level, 60%, 

for an additional year. Unless Congress takes timely action this year, the Rule will 

remain on its current trajectory toward escalating to the 65% and then 75% threshold levels. Even if CMS wanted to alter the 75% Rule threshold percentages on their 

own, the agency could not do so given the statutory framework. 

The situation I present to you today is perhaps most analogous to the overreaching that occurred after implementation of the Balanced Budget Act of 1997. 

In that instance, the Department and Congressional Budget Office (CBO) grossly 

miscalculated and underestimated the savings that would be achieved by the adoption of certain agency cuts. In the case of the inpatient rehabilitation hospital and 

unit (IRH/U) 75% Rule, here too the Department substantially underestimated the 

adverse Medicare beneficiary impact and the cost savings impact of its rulemaking. 

The 75% Rule threatens seniors by denying them access to the vital inpatient medical rehabilitation services provided by IRH/Us. Even in its most recent rulemaking 

promulgated just a few weeks ago, the Department continues to publish inaccurate 

data that significantly underestimates the beneficiary access implications and financial impact under the Rule. 

Rehabilitation providers are dedicated to helping Medicare and Medicaid beneficiaries recover from debilitating conditions through medical rehabilitation. We are 

all aware that post-acute care will become more and more important as the population ages. As we prolong life, previously fatal diseases have become chronic conditions, and people want the opportunity to regain function and live in their homes 

and communities as independently as possible. At the same time, it is hard to ignore 

that our aging population, as well as our disabled veterans returning from combat, 

keenly need—and will continue to need indefinitely—access to high-quality medical 

rehabilitation care. The very existence of the critical inpatient rehabilitation sector 

of the health care arena is threatened by these Medicare policies which are the 

focus of my testimony today. 

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Impact of the 75% Rule 

To participate in Medicare under the prospective payment system for inpatient rehabilitation facilities (IRFs), inpatient rehabilitation hospitals and units must satisfy the 75% Rule, in addition to other criteria. The Rule requires that a certain percentage of IRF patients fall within 13 diagnostic categories. Patients outside the 13 

qualifying conditions are often denied IRH/U access. 

Background on the 75% Rule 

In 1983, when Congress passed the law mandating the use of diagnosis-related 

groups (DRGs) as the basis for payment of acute care hospitals, it excluded certain 

types of hospitals from that payment system, including rehabilitation hospitals and 

rehabilitation units of general acute care hospitals. However, the Secretary of the 

Department of Health and Human Services had to define these facilities in order 

to distinguish them from acute care hospitals and thereby exclude them from the 

DRG payment system. The Secretary published seven exclusion criteria that IRFs 

must meet in order to be paid separately. One of these criteria for provider participation in the Medicare program is known as the ‘‘75 Percent Rule’’ because it requires that 75% of Medicare and non-Medicare patients fall within a list of 10 conditions: stroke, spinal cord injury, brain injury, neurological disorders, burns, amputation, fracture of the femur, polyarthritis, major multiple trauma, and congenital deformity. 

When CMS revised the 75% Rule in 2004, it redefined the list of 10 conditions 

in a way that excluded many cases long considered to fall within the 75% Rule. 

Herein lies the major compliance and enforcement problem, as CMS started counting and defining cases differently. In addition to a substantial narrowing of the universe of cases that could be deemed compliant with the Rule, other important diagnoses—such as cardiac, pulmonary, cancer, and transplant—were not added. There 

has been little discussion of the medical and/or scientific bases for the Rule’s inclusion or exclusion of various clinical conditions or medical diagnoses. Furthermore, 

the revised 75% Rule allows certain patients who meet the definition of a ‘‘comorbidity’’ to be included in the compliance threshold. Yet when the Rule is fully implemented those same patients will no longer comply—a policy approach which is logically and medically inconsistent and is not supported by any medical or clinicallybased evidence or data. The revised 75% Rule simply does not represent any 

changes in medical science or practice and their connections to the advancements 

made in the field of physical medicine and rehabilitation over the past quarter-century. It also does not recognize the decreased mortality rates for certain health care 

conditions and how those cases can be improved by intensive rehabilitative care. 

Impact of the 75% Rule 

CMS’ policy and savings objectives clearly have been achieved and continue to be 

achieved. The 75% Rule impact on patient access has been significant, even after 

implementation at only the 60% compliance threshold. Access is most restrictive for 

patients whose medical rehabilitation care benefits from newer rehabilitation specialties such as cardiac, pulmonary, pain, and cancer care. As a result, the number 

of Medicare cases treated in IRFs declined by 88,000 patients during the first two 

years of 75% Rule phase-in, some rehabilitation hospitals and units have closed, and 

many providers have significantly reduced beds, services, and staff. All of this confuses patients, physicians, and general acute-care hospitals. It also forces rehabilitation hospitals and units into an arbitrary, quota-based lottery system for their services, depending on whether they are ‘‘meeting their number’’—meaning the same patient could be admitted at the beginning of the month but not admitted toward the 

end of the month, regardless of physician judgment and medical necessity. 

CMS Underestimated the Impact of the 75% Rule in Terms of the Patients 

Who Are Prevented from Accessing Care in Inpatient Rehabilitation Hospitals and Units 

Due to the revisions made to the 75% Rule, a large number of patients with medical conditions and diagnoses that previously satisfied the Rule are unable to access 

the care and services of inpatient rehabilitation hospitals and units. Multiple reports have shown that patient volume has fallen at a rate much greater than anticipated by CMS when adopting the 75% Rule. In the Final Rule of May 7, 2004, CMS 

indicated that it anticipated a 0.1% drop in the number of patients treated in IRFs 

during the first full year of implementation of the Rule. This number has been 

shown through multiple analyses to be grossly understated in terms of the devastating impact implementation of the Rule has had on inpatient rehabilitation hospitals and units. There has been a dramatic drop in total volume, by specific types 

of cases, as well as a number of unintended consequences of the Rule. 

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In 2006 and 2007, the Medicare Payment Advisory Commission (MedPAC) examined the payment adequacy of the IRF PPS. In both years, MedPAC examined closely the impact of the 75% Rule on the margins and operation of IRFs. It noted in 

2006 that the volume of patients dropped by 9% from 2004 to 2005 due to implementation of the Rule. In its 2007 report, MedPAC anticipates that patient volume 

in IRFs will drop an additional 20% as facilities come into compliance with the 65% 

compliance threshold slated to take effect on July 1, 2007. The Commission also 

noted in its March 2007 report that only 449,321 cases were treated in IRFs in 

2005, compared to 496,695 cases treated in 2004. 

The inpatient medical rehabilitation field has independently analyzed the total 

volume drops since the inception of the Rule and also found that the total impact 

well exceeds the original estimates. Using data supplied by the field, the Moran 

Company has analyzed the impact of the 75% Rule and tracked the decline in caseload on a quarterly basis. The data reviewed originated from two large industry 

data bases, representing 75% of all Medicare IRF discharges. The Moran Company 

report through the second quarter of 2006 notes that the total Medicare case load 

declined by 88,053 cases over the first two program years of the Rule. It also notes 

that for program year 2006, the Medicare case load was down 12.4% from Program 

Year 2005 and 18.4% from Program Year 2004. 

In a separate analysis, AMRPA/eRehabData noted a decrease in Medicare patients for the first year of 34,624 and of non Medicare patients of 5,970 compared 

to the year before the implementation of the Rule and a decrease of over 85,282 

Medicare patients and 9,428 non-Medicare patients in the second year of the Rule 

compared to the year before implementation of the Rule. In the third year of the 

Rule, which is almost completed, AMRPA anticipates that even though the threshold has been held at 60% for a second year, the number of people denied care will 

increase to 118,281 Medicare patients in anticipation of moving to the 65% level as 

compared to the level of cases in the year prior to the Rule’s implementation. 

Unless legislative relief is provided, Congress should expect even more caseload 

decline as implementation of the 75% Rule continues. eRehabData estimates that 

once the compliance threshold moves to 65%, the number of Medicare patients not 

served will increase to 138,344 compared to the year before the Rule was implemented. This represents a decrease in volume of 29.57%, which supports MedPAC’s 

estimates. 

The Rule’s Intended and Unintended Consequences on Patient Access 

As noted above, the medical rehabilitation field has also found that certain types 

of cases are no longer receiving care in inpatient rehabilitation hospitals and units. 

The Moran Company has been tracking the change in the types of cases denied care. 

In its Q1 2007 report ‘‘Utilization Trends in Inpatient Rehabilitation: Update 

Through Q1:2007,’’ it notes that the ‘‘five categories with the largest declines account for nearly 90% of the total decline in caseload in the first quarter of 2007, 

relative to the first quarter of 2004.’’ These five categories are as follows: (1) replacement of lower extremity joints, (2) miscellaneous cases which includes all cancer 

cases, (3) cardiac, (4) pulmonary, and (5) other orthopedic cases. Of great interest, 

however, is that since the second quarter of 2006, there has been a decrease in the 

number of stroke cases served. 

AMRPA has tracked the changes in the volume of cases by type. We note also 

that the changes from the first quarter of 2004 to the first quarter of 2007 show 

that the largest drops are in the categories of osteoarthritis (¥79.32%), pulmonary 

(¥57.68%), amputation, other (¥58.49%), pain (¥50.82%), replacement of lower extremity joint (¥49.51%), and rheumatoid, other arthritis (¥49.66%). As with the 

Moran data, there is also a drop, albeit smaller, in treatment of stroke patients. Additional AMRPA analysis of Impairment Group Codes (IGCs) found a number of additional changes in access which are quite disturbing. Stroke cases, brain injuries, 

cerebral palsy, burns, specific types of paraplegia and quadriplegia, and other complex cases are being treated less and less frequently in the inpatient rehabilitation 

setting. 

Where patients who are denied admission to inpatient rehabilitation hospitals and 

units go to receive services is not clear. Of greater concern are the outcomes of their 

care in terms of the key hallmarks of rehabilitation. These include length of stay, 

mortality, infection, complication rates (e.g. DVT, pneumonia, other), readmission to 

acute care, and primary motor and cognitive function. 

Of grave concern is the decline in both the number of traditional comprehensive 

medical rehabilitation cases and the number of patients with newer conditions that 

benefit from medical rehabilitative care. CMS’s changes in 2004 essentially eliminated most arthritis and single joint replacements from being served in IRH/Us. 

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ments in mortality and longevity, turning serious cardiac, respiratory and especially 

cancer diagnoses into conditions to be managed (frequently after surgery), not death 

sentences. Even before the IRF PPS was enacted, the medical rehabilitation field 

saw an increase in cardiac, pulmonary and cancer patients. Cardiac cases increased 

from 2.47% of cases in 1994 to 5.71% of cases in 2002; pulmonary from 1.98% is 

1994 to 2.71% in 2002 and the miscellaneous category, which includes cancers and 

other serious pulmonary cases, from 5.43% in 1994 to 11.21 % in 2002. We believe 

this growth reflects underlying improvements in medical science, decreases in mortality, and therefore increased need and benefit from medical rehabilitation. 

By 2006, cardiac cases had dropped to 4.17%, pulmonary to 1.53% and miscellaneous to 9.44% of the total cases. These cases are complex, resource-intensive cases 

and reflect the underlying shift in successful acute medical treatment and the then 

subsequent need for intensive hospital rehabilitation services. We do not believe 

that this effect was necessarily intended and that it may be of concern to hospital 

providers, patients with these conditions, their families, advocates on their behalf, 

and policy makers. 

CMS Significantly Underestimated the Rule’s Financial Impact 

AMRPA has also tracked the financial impact of the Rule and again, it considerably exceeds CMS’ original estimates. According to CMS’ 2006 data, total Medicare 

spending amounted to $408 billion dollars, of which $6 billion is attributable to inpatient rehabilitation hospital services; therefore, inpatient rehabilitation spending 

represents only 1.5% total Medicare spending. CMS estimated that the total savings 

for IRF payments in the first year would be $5.4 million. When CMS accounted for 

care in other settings it estimated total net savings of $2.4 million. Using the 

eRehabData database, we estimate that the drop in payments to IRFs in the first year of the Rule for Medicare patients alone was approximately $343 million and 

for non-Medicare patients a decrease of $59.2 million as compared with payments 

in the year prior to implementation of the Rule. In the upcoming fourth year of the 

Rule when the compliance threshold moves to 65%, we project that the drop in 

Medicare payments alone to IRFs will be $1.372 billion as compared to the year 

prior to the Rule; at 75% it will be $1.8 billion compared to payments in the year 

prior to the Rule’s implementation. Given the size of this sector, this staggering decrease results in disproportionate financial consequences. 

Congress and the agency must appreciate and recognize that the continued drops 

in patients, the increases in costs that cannot be otherwise covered by payments and 

the overall drop in payments cannot be sustained by the IRH/U field for an indefinite period. The Government has vastly underestimated the impact of this Rule at 

every turn—drop in total volume, impact on unintended populations, failure to recognize the growing types of patients that clearly need inpatient hospital and unit 

rehabilitation services and financial devastation by several orders of magnitude, unless the true intent of the Rule is to eliminate the inpatient rehabilitation hospitals 

and units as providers under Medicare. 

CMS Should Retain Comorbidities for Purposes of the Exclusion Criteria in 

order to Ensure Access for Patients who Need Specialized Care 

AMRPA urges enactment of the statutory protection provided by the legislative 

provision in the Tanner-Lowey-Hulshof-LoBiondo bill which provides for permanent 

retention of the use of comorbidities. AMRPA believes that the use of the 

comorbidities that meet the definition outlined in 412 C.F.R. 412.23(b)(2) and as 

listed in Appendix A of Transmittal 938 should be retained indefinitely or permanently for determining compliance with the threshold percentage. Comorbidity considerations represent a significant component of patient access to medically necessary inpatient rehabilitation. Simply shifting percentages does not change the 

clinical characteristics of the patients being admitted to an IRH/U overnight. There 

are patients who have a comorbidity that falls into one of the 13 conditions and 

have a significant decline in their functional ability. These are usually severely compromised patients for whom appropriate treatment is not available in other settings. 

They have significant functional involvement by definition due to the comorbidity 

or other complication and generally constitute both medically and functionally complex patients. CMS estimates that 7% of cases come from comorbidities—so moving 

to a full threshold of 75% is actually moving to 82%. 

CMS Should Modernize Inpatient Rehabilitation Criteria, Per Clear Congressional Instruction 

The failure to modernize the 75% Rule in any meaningful way since 1985, in combination with the agency’s regulatory and compliance activities, have resulted in 

policies which are dismantling the infrastructure of inpatient rehabilitative medicine in the United States today. What is astonishing is that the agency’s policies 

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are completely without explicit Congressional authorization. In fact, Congress has 

repeatedly expressed contrary intent. Initially, Congress conveyed its opinion 

through letters to the Secretary signed by more than half of the House of Representatives and 82 Senators—to reverse the regulatory course and halt further implementation of the Rule until the issue could be studied and a different regulatory 

course pursued. The Department disregarded no less than three formal Congressional requests to halt implementation of the 75% Rule. In a year when there was 

no appropriate moving authorizing Committee legislation, the Appropriations Committees of both the House and Senate included Conference Committee report language directing the agency to develop an alternative to the 75% Rule and enlist the 

assistance of an independent expert panel convened under the auspices of the Institute of Medicine (see H.R. Rep. No. 108–401). Congress clearly recognized that statutory intervention was required and therefore in 2005, imposed a freeze on the compliance threshold at 60 percent. Quite candidly, we perceive most Members of Congress would have gone further than the one-year fix provided at that time. The statutory language provided then now compels additional Congressional action in 2007. 

It is time to put the 75% Rule controversy behind us. 

Codification of Medical Necessity Standard is Essential to Protect Patients 

and Provide Stability 

In addition to the 75% Rule, inpatient rehabilitation hospitals and units have endured an unprecedented level of medical necessity denials over the past two years. 

Numerous CMS contractors have denied coverage for services provided in inpatient 

rehabilitation hospitals and units to thousands of patients. These denials are frequently based on local coverage determinations (LCDs) or case-by-case rationales 

that fail to reference or properly apply the binding rules for coverage that have existed for the past 22 years. 

In order to address this problem, AMRPA supports codification of HCFA Ruling 

85–2 in the Medicare statute, as called for in H.R. 1459. This ruling, which CMS 

issued in 1985, sets clear, clinically-based rules for inpatient rehabilitation coverage 

which have been used by HCFA and CMS over more than two decades to determine 

what constitutes medically necessary inpatient rehabilitative care. Because of the 

wording which gives primary deference to physician judgment, we believe this ruling is just as effective today as it was 22 years ago at establishing medical necessity 

for inpatient rehabilitation services. HCFA Ruling 85–2 established two basic requirements that must be met for inpatient hospital stays for rehabilitation care to 

be covered: 

1. The services must be reasonable and necessary (in terms of efficacy, duration, frequency, and amount) for the treatment of the patient’s condition; and 

2. It must be reasonable and necessary to furnish the care on an inpatient hospital basis, rather than in a less intensive facility, such as a skilled nursing 

facility (SNF), or on an outpatient basis. 

The Ruling then sets forth eight criteria, which, if satisfied, demonstrate that 

both of these two requirements for inpatient rehabilitation are satisfied. These eight 

criteria stipulate that the patient must require: 

1. Close medical supervision by a physician with specialized training or experience in rehabilitation; 

2. Twenty-four hour rehabilitation nursing; 

3. A relatively intense level of rehabilitation services; 

4. A multi-disciplinary team approach to delivery of the program; 

5. A coordinated program of care; 

6. A significant practical improvement must be likely; 

7. The rehabilitation goals must be realistic; and 

8. The length of the rehabilitation program must be reasonable. 

Over the past several years, Fiscal Intermediaries have issued a number of very 

restrictive local coverage determinations, also known as ‘‘LCDs,’’ that deviate from 

HCFA Ruling 85–2 in significant and troubling ways. For instance, these LCDs 

sometimes require as a precondition to inpatient rehabilitation coverage that beneficiaries prove that their care could not be furnished in a skilled nursing facility— 

which is an impossible burden, requiring a detailed knowledge of the level of care 

provided across the SNF industry, which often varies considerably. Moreover, this 

is a completely subjective determination. Other LCDs create ‘‘rules of thumb’’ precluding coverage for certain patients, such as those who undergo joint replacements, 

with little or no regard to the individual beneficiary’s comorbid conditions or medical 

history. We believe that these LCDs impermissibly supersede the patient-centered, 

clinically-based criteria of Ruling 85–2. 

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Fiscal intermediaries have used these LCDs to deny retrospectively thousands of 

claims, both through prepayment reviews and through post-payment audits. Even 

in the absence of LCDs, intermediaries are denying claims on questionable grounds 

similar to the LCDs just mentioned. Other Medicare contractors, such as Program 

Safeguard Contractors, are similarly denying claims across the board in a wholesale 

fashion. 

These denials place a significant burden upon the rehabilitation hospitals and 

units affected, both in terms of the funds withheld and in the administrative burden 

of appealing the denials. AMRPA members have appealed many, if not all, of their 

denied cases. Our members tell us that they are winning the vast majority of their 

appeals in hearings before administrative law judges (ALJs). These ALJs, unlike 

earlier levels of review, are not contractors of CMS. The ALJs, therefore, function 

to provide independent third-party review. The high level of reversals of these claim 

denials demonstrates that Medicare reviewers are not adhering to the binding rules 

of coverage in Ruling 85–2. Providers and patients need the statutory protection 

from Congress for the current medical necessity standard. 

This is why we urge Congress to codify in statute the coverage rules contained 

in Ruling 85–2 and make clear that LCDs are not to deviate from this federal standard. Ruling 85–2 sets straightforward, clinically-based criteria for evaluating medical necessity. It effectively safeguards the Medicare Trust Fund while also ensuring 

that Medicare beneficiaries receive the appropriate level of rehabilitation care to 

which they are entitled. 

Recovery Audit Contractors are Compounding the Instability in the Field 

AMRPA is also deeply concerned about how the Recovery Audit Contractor (RAC) 

process is unfairly amplifying the same misguided critical review and denials based 

on medical necessity with devastating consequences for the viability of providers in 

the states where RAC activity is occurring. Authorized as a demonstration project 

by the Medicare Modernization Act of 2003, RACs have been established in California, New York, and Florida, but will soon be expanded nationwide. RACs are 

charged with recovering overpayments and are paid a percentage of every dollar 

that they recover. The RAC demonstration is the first time the Medicare program 

has ever paid a contractor on a contingency basis for overpayment work or claims 

review. We believe that this payment scheme creates perverse incentives to deny as 

many claims as possible and place the burden on providers to appeal these denials. 

AMRPA strongly supports efforts by CMS to identify and eliminate fraudulent 

and/or erroneous Medicare payments to maintain the integrity of the Medicare program. However, the RAC program appears to be more focused on collecting money 

regardless of the impact the audit activity has on hospitals and patients. The financial incentives in place for contractors have resulted in aggressive and inappropriate 

audit activity. Recovery audit contractors may retain a significant percentage of recovered payment, and contractors may be able to retain recovered payments even 

when CMS overturns the auditor’s coverage decision. In addition, the appeals process is complicated and fraught with inherent barriers that deter providers from 

seeking appeals to RAC determinations. AMRPA thinks that the combination of financial incentives for contractors and perhaps insufficient oversight by CMS of RAC 

activities is wreaking havoc, adding instability to the field, and may be resulting 

in misapplication of Medicare policy. 

A prime example of this problem can be seen in the State of California. The RAC 

in California, PRG–Schultz, has focused much of its energy on inpatient rehabilitation hospitals and units. AMRPA has heard reports from some providers that PRG– 

Schultz has denied virtually every claim it has reviewed. Single hospitals have had 

over 300 claims denied worth several million dollars. The denial letters that they 

receive from PRG–Schultz are usually form letters that repeat stock phrases that 

purport to explain the denials. It is clear, however, from the volume of denials, the 

time spent reviewing each case, and the pro forma nature of the explanations that 

this RAC is not conducting a meaningful medical review and applying the coverage 

criteria of Ruling 85–2. According to the California Hospital Association, these audits have resulted in significant financial hardship throughout the state’s hospital 

system and may threaten access to rehabilitation services in California. 

Quality of Care in Inpatient Rehabilitation Hospitals and Units 

Inpatient rehabilitation hospitals and units provide high quality care to patients 

suffering from newer rehabilitation conditions, such as cardiac, cancer, transplants, 

pulmonary, and pain, as well as joint replacement patients who would also benefit 

from medical advancements. However, AMRPA remains concerned that patients are 

being turned away from quality inpatient rehabilitation care to settings less-suited 

to treat intense rehab needs. While there is a long-standing tradition in the rehab 

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field to measure quality and outcomes of individual patients, programs, and facilities, comparable efforts do not exist in SNFs, the setting in which most patients 

turned away from IRH/Us ultimately find treatment. In fact, as MedPAC and GAO 

have underscored to Congress, there are no systems in place in SNFs, Acute Care 

Hospitals, Home Health Agencies, or Long Term Acute Care Hospitals to determine 

rehabilitation necessity, program activity, patient benefits or need, or outcomes. Interestingly, while 78% of SNF admissions in the RUG system receive ‘‘rehabilitation,’’ current SNF data collection does not include appropriate rehab or other outcome data. The SNF field has no way to collect such information, so we do not know 

what percentage of these patients ever become independent at home, at what cost, 

and over what period of time. 

Notably, concern about the comparability of care in other health care settings has 

been articulated by not only rehabilitation providers, but also MedPAC and CMS. 

In its March 2007 Report to Congress, MedPAC noted that there was a decline in 

the quality of care for SNFs. At its April meeting, MedPAC further examined the 

issue of quality of care in SNFs. Dr. Andrew Kramer presented his study which examined the changes in factors associated with SNF rates of discharge to the community and rehospitalization between 2000 and 2004. He found that the rate of discharge to community is dropping and that rehospitalization rates are up, both of 

which he suggests reflect declining quality of care in SNFs. CMS is currently seeking to explore development of measures and systems for SNFs and all post-acute 

care, but it will take years to complete and make this new approach functional. 

However, despite the absence of measures, goals, standards for SNFs and LTCHs 

similar to IRF standards, and without a clinical evidence basis for action, CMS has 

doggedly moved forward with regulation and policy changes that have forced thousands of your constituents away from receiving their medically necessary care in a 

rehabilitation hospital or unit, and instead channeled them to SNFs and other settings. 

What is perhaps most startling is the agency’s dogged pursuit of the 75 percent 

policy absent any clinical data or outcomes analysis on the quality of care received, 

the overall costs to the health care system (including costs of rehospitalization, 

longer lengths of stay in other settings), and the impact on patient lives. The Department has no way of knowing what harm to patients has occurred since there 

is no evidence being accumulated. 

An expanded national research effort is of paramount importance. AMRPA has 

been concerned since the inception of the 75% Rule that patients would not receive 

the same quality of care they receive in an inpatient rehabilitation hospital or unit. 

Therefore, in the past year, the field created the ARA Research Institute and has 

privately sponsored more than $2 million of research in an effort to understand and 

improve the quality of care, outcomes, and cost-effectiveness of the rehabilitation 

hospital compared to other settings, and to develop proper medical necessity standards. The newly formed ARA Research Institute has funded eight studies to date 

and, under sponsorship of other leading national associations, held a ‘‘State of the 

Science Symposium’’ in February 2007 to discuss the work in progress. We have 

shared abstracts with CMS, requested its comments and encouraged CMS to attend 

the Symposium. 

My own hospital has participated in research to compare care between IRFs and 

SNFs. A study conducted at Burke Rehabilitation Hospital analyzed whether outcomes differed between patients with single knee or hip joint replacement surgery 

undergoing rehabilitation in an inpatient rehabilitation facility compared to a 

skilled nursing facility. Patients, matched for age, gender, operative diagnosis and 

admission ambulation function (FIM), who received rehabilitation in the IRH/U had, 

on average, a shorter length of stay and superior functional outcomes. The study 

is being repeated to include hip fracture patients as well, and to match for comorbidity, and measure actual dollars expended. The preliminary outcomes data shows 

that the clinical outcomes in subsequent study are similar to the results previously 

published. Patients treated in the rehabilitation hospital were less likely to require 

re-hospitalization, have shorter lengths of stay, and were more likely to be discharged home. 

In the absence of governmental funding, the industry has taken steps to engage 

in the necessary research and modernize criteria for treatment. AMRPA and other 

leading organizations have produced an alternative model for defining medical rehabilitation hospitals and units, to demonstrate that the 75% Rule is not necessary 

to properly distinguish between rehabilitation and acute care hospitals. The American Academy of Physical Medicine & Rehabilitation (AAPM&R) has offered an approach that is perceived to be a better way of sorting patients into the proper setting. The field is convinced that it can work together with CMS and that patientcentered criteria for site of care can be developed. 

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Every day, AMRPA member hospitals hear clinical stories of frustrated and upset 

Medicare beneficiaries who are unable to receive the care they need and want because of these rules, and from angry physicians who cannot send their patients to 

the program they believe to be the best and most appropriate. SNFs play an important role in our health care system, but they are not a substitute for rehabilitation 

hospitals and units. Stated most simply, there is no evidence to support the Government and SNF industry’s contention that care in other settings is of the same quality and less costly. Studies are now showing that the opposite is true. In general, 

for otherwise similar patients, those who are cared for in a rehabilitation hospital 

or unit make twice the progress, in less time compared to SNFs. Furthermore, given 

the increased length of stay in SNFs over IRH/Us, arguably Medicare payments to 

SNFs and IRFs are likely to be comparable, thereby bringing into questions CMS’ 

claims of cost savings. 

The Executive Branch to date has provided no evidence that its policy initiatives 

in this arena are clinically or evidence-based. Before an entire infrastructure and 

this field of medicine is dismantled completely, the Government should be required 

to demonstrate that its policy changes are in the best interests of (or at least will 

not harm) Medicare beneficiaries. In this instance, private sector patients are 

harmed as well in terms of access to medically necessary services. Moreover, the ultimate costs to the health care system are completely unclear. Aside from quality 

of life considerations, under the mantle of cost-savings, the agency policies may well 

result in higher long-term Government spending as patients receive care in other 

venues. 

AMRPA Recommendations 

Mr. Chairman, I testify here today because the 60% compliance threshold legislative relief Congress provided (in Section 5005 of the DRA) expires for cost-reporting 

periods beginning on or after July 1, 2007. Recognizing the statutory problem in 

front of this Committee, Representatives John Tanner (D–TN), Nita Lowey (D–NY), 

Kenny Hulshof (R–MO), and Frank LoBiondo (R–NJ) introduced legislation that 

would freeze implementation of the 75% Rule as an immediate and short term fix 

to the current crisis. The Preserving Patient Access to Inpatient Rehabilitation Hospitals Act (H.R. 1459) presents a reasonable and balanced approach—the legislation 

extends the 60% compliance threshold, continues the use of comorbidities, and codifies current medical necessity standards established by HCFA Ruling 85–2. The 

Tanner-Hulshof bill, although relatively recently introduced, already has more than 

150 cosponsors. Members of Congress have become keenly aware of the adverse consequences to date emanating from the 75% Rule. We urge this Committee to address 

this problem and provide time sensitive legislative relief in the first moving Medicare legislative vehicle considered by this Committee. AMRPA strongly urges Congress to enact the provisions in H.R. 1459 as soon as possible this year to halt the 

continued hemorrhaging of this sector. 

Unlike the recommendations seen for SNFs and LTCHs, MedPAC recommended 

a positive 1% update in the market basket for inpatient rehabilitation hospitals and 

units for FY 2008. The IRH/U field cannot absorb additional resource cuts that 

would further heighten volatility and threaten access to care as IRH/U beds, units, 

and hospitals. We urge Congress to support a positive market basket update for inpatient rehabilitation hospitals and units in FY 2008. 

Finally, the field is prepared to work collaboratively with Congress, CMS, and the 

other sectors of the post-acute care world to define together an appropriate continuum of care, the distinctions among the various segments of the provider community, the criteria that should be used to guide patient placement and Medicare coverage decisions. The field also supports the need for research to be conducted and 

supported to create evidence that should be used to guide public policy. 

We know Congress and this Committee face difficult payment system decisions. 

We seek favorable consideration by your Committee, and we pledge to work with 

you and your staff, and CMS. AMRPA and its members are convinced that if we 

work together, we can shape a rational and better health care delivery system that 

improves outcomes, increases access, more accurately places patients in appropriate 

settings, and reduces the true costs to the Medicare program and beneficiaries alike. 

We appreciate the opportunity to appear today, and I would be pleased to respond 

to any questions. 

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Chairman STARK. I want to thank the entire panel. I just very 

quickly—we as a Committee I suppose could do nothing, and then 

the doctors would take that 10 percent dip in their fees and the 

three of us wouldn’t be able to get medical care any place in the 

United States that we would feel comfortable asking for it. 

On the other hand, we can begin to follow a variety of recommendations and cuts across the board. To the extent that that’s 

all we can do, I think sometimes we fail to provide it. It’s not easy 

to write legislation that applies equally in Louisiana, Michigan, 

California and North Dakota for example. There are different 

needs, different practice patterns, different requirements. 

To the extent that you all representing your various groups can 

help us determine how we sort the wheat from the chaff, Bruce, 

you indicated that there are some units that do better than others. 

Teaching hospitals have a particular need. Rural hospitals in many 

cases have a need. 

Not all long-term care facilities, Ms. Chesny, have negative margins. Some in the old days maybe had a 16 percent margin. That’s 

different from somebody who has a zero to negative margin. 

But you have to help us determine how best we can write legislation that does sort this because if we try to be as fair as we can— 

people are talking about—I don’t know who keeps leaking this, I 

suspect it’s Dave, that I am bound and determined to cut $50 billion or save $50 billion so we can fund SCHIP. Well, probably if 

we fund SCHIP the majority of that goes back to providers, more 

children’s hospitals, more pediatricians. This is kind of a zero sum 

gain, and it is not easy for us. 

Now to your credit and the credit of the American Medical Association, the California Medical Association, almost all of the providers have come to us, I don’t know whether Mr. Camp has had 

the same experience, and said they recognize that this is not going 

to be a year of huge financial increase. As a matter of fact, some 

are predicting that they may not get every nickel that either the 

president’s budget or MedPAC recommended. 

I don’t quite know how we’re going to adjust to that to get a vote 

that will get us through the House and the Senate and get the 

President to sign. But without your help we’ll make a mess of it 

because we could be pushed as one particular group of providers 

is suggesting they don’t want to be in the room. 

Well, without being able to determine who’s better and who’s 

worse, who’s more deserving and less deserving, the only alterative 

left to us is across the board cuts. I don’t like those. I don’t think 

they—we’re apt to harm people that ought not to be harmed and 

not help the people who need help. 

So, that’s a long-winded way of saying you all could be helpful 

to us. You don’t have to endorse cuts but you could help us learn 

how to determine what the priorities ought to be as between the 

competing interests in your own group, whether it’s rural long-term 

care providers or home health or whether it’s inner city home 

health. There’s a difference I think in the costs and the problems 

faced. 

So, I’m asking you for more than just the excellent testimony 

you’ve given us today but to help us and help our staff as you used 

to help Chip figure out we can make these decisions and balance 

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the interests of the providers, the beneficiaries and the taxpayers. 

My measure is usually when everybody on the Committee is scowling we’ve got the right mix and that’s when we ought to drop it 

down a little. If anybody is smiling, they’re taking home something 

that the rest of us don’t know about. 

Let me just ask you to run down the line here and ask if each 

of you care to or have experience with Medicare Advantage and 

how the Medicare Advantage payments compare to payments 

under traditional fee-for-service programs, and do you have any 

problems with beneficiary access or any other problems with Medicare Advantage that we might look for. If you don’t, don’t bother. 

Chip. 

Mr. KAHN. Though the Medicare Advantage payments are lower 

than Medicare payments I think the issues with Medicare Advantage though go to the question of fairness and equality between 

beneficiaries. I think we have the situation today where we want 

to have—I think we want to have as a country a Medicare Program 

that gives people the options to have the kind of coverage they had 

when we were privately employed or before they retired, but I 

think we have to examine how much that option is worth in terms 

of equality between Medicare beneficiaries. 

Chairman STARK. Mr. Umbdenstock. 

Mr. UMBDENSTOCK. Mr. Chairman, we hear from our members in three areas around Medicare Advantage. Number one, in 

the private fee-for-service plans there’s a lot of confusion as to 

what’s covered, what’s not covered, what benefits the members 

have, and they often show up at our front door or ER not aware 

of that and we only find out—and they find out later. 

Another area of significant concern that we hear a lot about is 

from our rural members where the Medicare Advantage Plans are 

not paying the critical access hospitals the way the traditional plan 

is and that causes significant challenges for our members. 

The third, your comment about where to maybe look for opportunities for savings has already been brought up in my comments 

and in Stan’s around the issue of the payments to indirect, on indirect medical education. To those plans we think there’s a legitimate 

place to look there as well. 

Chairman STARK. Bruce. 

Mr. YARWOOD. We’re finding a very confusing pattern out there 

about long-term care because it’s not the thing that people look at 

in terms of the advantage. The confusion first goes to a state like 

Arizona that has almost all HMO care. 

What we saw in Arizona was the diminution in terms of bids of 

about 30 to 40 percent in a period of four or 5 years. Then you get 

into the question—and I’ll just continue using examples—then you 

get into the question of the number of plans there with the different benefit structures, with the different payment structures and 

the different billings process that makes it extremely confusing patient to patient to patient. 

We have one person that is an employee of the association that 

spends half her time trying to work with her member associations, 

with member facilities, going through and just working the billing 

process. 

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The second thing we find is that when you go into an area that 

may have excess capacity—I’ll use the Bay Area, Kaiser, and if 

they go into a facility in Hayward that has six or seven beds open 

all of a sudden they’re going to contract to put people into those 

beds at probably $50 to $100 less than the basic fee-for-service 

rate. 

Why? Because you’re making—if you compare it to nothing, 

you’re getting something. Now the question then is can you get the 

staff to take care of that in the way necessary for those folks. 

The third thing that I indicated in the testimony that we think 

is pretty unfair is the fact they have no 3-day hospital stay rule. 

People could go back and forth between facility and the hospital on 

a 1-day pattern or if you have a dual diagnosis where someone had 

a hip fracture, it was there for a while, they’ve used up their hundred days, they have diabetes and they have to get—again for the 

next—second hundred days, they have to go back to the hospital 

for 3 days, which is stupid, just stupid. 

So, we find those kind of patterns, and as we start looking into 

it more and more and more we think that there will probably be 

some recommendations coming from us as to how to improve the 

system with us. 

Chairman STARK. Thank you. Mr. Brezenoff? 

Mr. BREZENOFF. I strongly endorse and support the comments 

that have just been made. I would only add that it is clear that we 

get less money from the Medicare Advantage plans than we do for 

fee-for-service. The obvious question is what’s happening for that 

richer premium that the Medicare Advantage organizations are 

getting. Do we see it in the improved care or improved access? 

The best case answer is we don’t know and the worse case answer is that it’s reflected more in the bottom lines of these organizations. In New York state it is very clear to us that the Advantage 

plans have much fatter bottom lines disproportionally because of 

what they get from the Medicare Advantage premiums, and it’s not 

translated into reimbursement for hard pressed teaching hospitals, 

and it is not clear that it’s turned into improved access or benefits 

for the covered lives. 

Chairman STARK. Ms. Chesny. 

Ms. CHESNY. Our experiences at the home health benefit end 

are Medicare Advantage is not the same benefits as a Medicare feefor-service patient has. It’s administered under the Medicare Advantage plan as a per visit benefit instead of a per episode benefit. 

Therefore the utilization responsibility often falls either to the 

managed care organization on each separate encounter under home 

health or what happens is the patient is subjected to copayments 

that can be as high as 50 percent for an out of network provider, 

and they ration their own care. 

So, it’s a complement of the benefit being changed—we also see 

prior authorization being a significant impact on medical necessity. 

The doctor is taken out of the picture. The nurse and the physical 

therapist’s judgment is taken out of the picture. It’s really administered by the dollars in the managed care organization. So, we see 

a significantly different Medicare benefit under Medicare Advantage. 

Chairman STARK. Dr. Walsh. 

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Dr. WALSH. I think it’s all been said. First, I don’t have any aggregate data here to speak for the entire organization, but speaking 

for my hospital it is a very different benefit. 

Patients when they sign up have the notion—and I don’t know 

if it’s misrepresentation or not but they have the same Medicare 

benefits, so that after an acute care stay for an accident that they 

didn’t plan and therefore had not anticipated, if they are told that 

we don’t cover inpatient rehab for, in this case it was pulmonary 

rehab, and I was surprised that their case manager knew that because I didn’t think it was pulmonary rehab; they had no intrinsic 

lung disease; they had a lot of medical things and couldn’t get out 

of bed. That was a surprise. 

So, I think in terms of the confusion for the beneficiary about 

what their benefit now is—is terribly important. Secondly I think 

that the plan’s attempt to negotiate a rate that wouldn’t meet the 

costs is going to create other access problems. 

Chairman STARK. Thank you all. Mr. Camp. 

Mr. CAMP. Well, thank you, Mr. Chairman. Mr. Umbdenstock, 

I know some of your members have Medicare Advantage plans. Is 

there a value in those plans with coordinating care and other benefits that come under Medicare Advantage. 

Mr. UMBDENSTOCK. Pardon me, Mr. Camp. I think the key 

question is what is the benefit of the extra payment that goes to 

the plans and how is it being used. If it’s being used to highly coordinate care to the benefit of the patient for a true clinical integration of services and at the same time achieving financial results, 

that’s a very good thing for everybody in terms of stretching those 

dollars. 

So, I think the question that we’d all want to explore is exactly 

what models work best, what are the best practices in care coordination and how can we see that all the plans employ those for 

everybody’s benefit. 

Mr. CAMP. Thank you very much. Ms. Chesny, why are the margins for home health services different in freestanding home health 

agencies than hospital or skilled nursing facility-based agencies? I 

know you mentioned that MedPAC’s financial analysis was at best 

incomplete because of the difference there. Can you talk about that 

a little bit? 

*Ms. Chesney. I believe that home health agencies that are affiliated with hospitals and skilled nursing facilities tend to take care 

of patients that are higher in costs, more resource intensive and 

carry just an overall cost burden. They tend to be located in more 

geographically disbursed areas, and therefore their cost structure 

is much higher. 

Our own agency, we’ve tried to be as efficient as we possibly can 

and we still look at a 2.8 percent margin in home health and that’s 

an improvement for us. We were below zero 3 years ago, prior to 

tele-health implementation. 

Mr. CAMP. I know you and I have obviously worked together on 

the tele-health issue. I know for example in rural home health 

agencies the transportation costs can be significant, particularly 

covering an area as large as 11 counties in the state of Michigan 

and other areas. Can you talk about that a little bit and how that 

may have changed in recent weeks? 

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Ms. CHESNY. I can tell you that we reimburse the IRS allowable 

mileage to our staff. It’s a quality of life issue for our staff. We ask 

them to drive numerous miles on a daily basis. We average 22 

miles per patient visit, and that is after we’ve improved our productivity with the augmentation of tele-health and technology for 

our staff. We used to be close to 30 miles a visit for most of our 

patient care. 

So at 48-and-a-half cents IRS and then we now have gas that’s sitting at $4 a gallon. I don’t think that allowable is going to quite 

sit at the same place and so our costs will only rise again. 

Mr. CAMP. All right, thank you. 

Mr. Kahn, many providers in the LTCH community have called 

for an implementation of a criteria-based assessment. I don’t know 

if you were here for the testimony previously, there was some discussion of that then. Can you talk about what kind of patient is 

best served by an LTCH and how that might differ from the care 

offered in an inpatient rehab hospital or a skilled nursing facility? 

Mr. KAHN. Most of the patients in long-term care hospitals are 

on ventilators. I’ve been to a number of these institutions and the 

LTCHs have the kind of staff, the kind of knowledge about these 

patients, particularly if they’re going to be on ventilators for a 

lengthy period of time that well serves the very complex cases, particularly as I said, those cases that will be on ventilators for a long 

period of time. 

So, we feel there is a difference between the level of care there 

and other institutions. It warrants better criteria. It warrants the 

kind of system that the legislation that’s been proposed envisions 

and the kind of arbitrariness of the CMS policy is not the kind of 

backstop you need in terms of moving this type of benefit to a point 

where we get the right patient to the right place. 

I think the 25 percent rule is really wrongheaded as a way to get 

us there. 

Mr. CAMP. Ms. Chesny, there was a discussion about case mix 

creep and you said that obviously some of the patients are on average older now than they used to be, but isn’t it also correct that 

your pattern of care is physician ordered? 

Ms. CHESNY. Yes, all of our services are required to be ordered 

by a physician. What we’ve seen, not only is it that our patients 

are older and more frail. As the payment changes have gone in 

place, for instance the inpatient rehab facilities, our orthopedic patients volume has increased significantly. There is a higher case 

mix weight with that. We went from having orthopedic being like 

the best, highest volume patient we have to now they’re in a close 

contest for the second place. Right now, this year it’s third place. 

Cardiac patients, cancer patients and orthopedic patients are the 

patients we’re seeing most in home health. Those are all very sick 

patients that we’re caring for, so it’s a different population. 

As we were preparing the testimony, I have to tell you, I said to 

the National Association for Home Care staff, this system was designed in the ’90s and the patient we are seeing today is not your 

father’s Oldsmobile. It’s a different patient that we are seeing from 

1997 when the Prospective Payment System was designed. It is, I 

believe, a much sicker patient who requires a much more intense 

service, and the system isn’t being abused. 

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We averaged 52 days to 45 days for the average patient on our 

Medicare home health episode. We’re not seeing them for extended 

periods of time. We’re teaching them to take care of themselves and 

we’re rehabilitating them so that they can become as productive as 

they possibly can in their activities of daily living. 

Mr. CAMP. Thank you very much, Mr. Chairman. Thank you all 

for your testimony. It was very helpful and I sure appreciate it. 

Thank you. 

Chairman STARK. Again, I would invite all of you to elaborate 

some more to help us in the next month, 6 weeks, 2 months as we 

have to see if we can cobble together some legislation that will deal 

with all of these issues. It’s going to be a busy summer for us. We 

appreciate your help. 

I do appreciate you taking the time and the patience again of 

waiting for us. I’m sorry that we ran so late this afternoon, but 

thank you all very much. 

Hearing is adjourned. 

[Whereupon, at 4:54 p.m., the hearing was adjourned.] 

[The submissions for the record follows:] 

f 

Statement of American Association of Homes and Services for the Aging 

The American Association of Homes and Services for the Aging (AAHSA) appreciates this opportunity to submit a statement for the record of the House Ways and 

Means Health Subcommittee’s hearing on Medicare payments to health care providers, including nursing homes and home health agencies. 

AAHSA members serve over one million people every day through mission-driven, 

not-for-profit organizations. Seventy percent of our members are faith-based. Our 

members offer the continuum of aging services: home and community based programs, adult day programs, continuing care retirement communities, nursing 

homes, assisted living, and senior housing. AAHSA’s vision is for all Americans to 

receive the care they need, when they need it, in a place they call home. 

President Bush’s budget proposal for fiscal year 2008 called for a freeze on Medicare reimbursement to nursing homes and home health care providers. We urge the 

subcommittee to reject this proposal, which would penalize the very health care providers who are making the greatest effort to ensure high quality care for frail older 

people. 

CMS itself has projected that the cost of the items and services that skilled nursing facilities and home health agencies must buy will increase by 3.3% and 2.9% 

respectively over the next year. Since long-term care is a labor-intensive service, 

failure to provide the payment update CMS has proposed will have severe implications for providers’ ability to recruit and retain the staff essential to meeting Medicare beneficiaries’ needs. 

Skilled nursing facilities—the not-for-profit difference 

Approximately 70 percent of payments nursing homes receive come from the 

Medicare and Medicaid programs. Very few nursing home residents currently have 

private insurance to cover the cost of their care. This heavy reliance on these two 

programs makes their payment policies even more critical to nursing facility operations than they are for health care providers that have more varied sources of payment. 

The average non-profit home cares for about 10–20 Medicare patients each day. The proposed cuts translate into the loss of $100,000–$200,000 annually for the average home and much more for those that specialize in Medicare’s high need patients. There just are not sufficient ‘‘excess’’ dollars in the system to make up these 

losses. Forcing nursing homes to ‘‘economize’’ even further on nursing staff and 

wages—inevitable with cuts of this magnitude since nursing is 40% of total costs— 

would be bad for Medicare and bad for patients. 

Adequate Medicare reimbursement makes a major difference to nursing homes’ 

ability to recruit and retain staff, the single greatest determinant of the quality of 

care facilities are able to provide. According to reports the Medicare Payment Advirfrederick on PROD1PC65 with HEARING

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sory Commission has submitted to Congress for the last two years, not-for-profit 

nursing facilities spend substantially more on nursing staff than for-profits and 

therefore have low to zero profit margins on the Medicare payments they receive. 

For 2005, MedPAC found that for-profit nursing facilities achieved margins of fifteen percent on the Medicare payments they received, while not-for-profits’ margins 

were below five percent. 

Denial of a payment update to facilities that already are struggling to break even 

on the services they provide to Medicare beneficiaries would run directly counter to 

the many initiatives we are pursuing to raise nursing home quality. Facilities that 

are achieving high margins through skimpier staffing would be hurt far less by the 

denial of a payment update than facilities that have committed maximum resources 

to providing quality care to frail older people. 

Furthermore, the proposal to deny nursing facilities a payment update is a false 

economy. A ten year study, conducted by HHS at the request of Congress, on nurse 

staffing in nursing homes found that homes with less than optimal nurse staffing 

had significantly more avoidable hospitalizations than those with appropriate nurse 

staffing (USDHHS. Report to Congress: The Appropriateness of Minimum Nurse 

Staffing in Nursing Homes, 2002). The fewer the nurses, the higher the rates of 

avoidable hospitalizations. Every avoidable hospitalization costs Medicare an average of $7,600. An increase of just 13 avoidable hospitalizations per skilled nursing 

facility would wipe out the $1.5 billion in Medicare ‘‘savings’’ from cutting SNF 

rates. 

Because payment policies are so critically tied to adequate staffing, we recommend that the subcommittee adopt a proposal that was introduced in the last 

Congress by Rep. Marcy Kaptur to require nursing facilities to make itemized reports to the Centers for Medicare and Medicaid Services (CMS) of the amounts they 

spend annually on staffing. This requirement, contained in H.R. 1166, would be a 

promising first step toward better aligning the Medicare program’s payment incentives with the quality of care provided in nursing facilities. 

Medicare’s Perverse Payment Incentives for Skilled Nursing Care 

The subcommittee also needs to revisit the deeply flawed final rule CMS issued 

in 2005 to ‘‘refine’’ the skilled nursing facility prospective payment system. The system is based on Resource Utilization Groups (RUGs) that still do not accurately determine acuity of need and responsibly calculate the cost. This is particularly true 

for medically complex patients who generally require not only extensive nursing 

care but also significant amounts of medications, supplies, tests, respiratory care, 

and other so-called ‘‘non-therapy ancillaries.’’ Medicare reimburses skilled nursing 

facilities for many very expensive patients at considerably lower rates than Medicare pays for patients whose care costs much less. The Inspector General, MedPAC, 

and the GAO have all reported on these inaccuracies. 

Specifically, the revised RUG system poses the following problems for nursing 

homes and their residents: 

Quality of care 

• The system creates strong financial incentives for nursing facilities to find 

patients who qualify for the nine new RUG groups created by the 2005 rule. 

• To qualify for the nine new (higher) payment groups, patients must be assigned to intensive physical therapy and to ‘‘Extensive Services.’’ The ‘‘Extensive Services’’ designation requires that the patient have an activities of 

daily living score greater than 7 and have had intravenous medications, 

ventilator or respirator care, a tracheotomy or suctioning within the last 

fourteen days, or intravenous feeding within the last seven days, even if 

these treatments were given during hospital stays. 

• There is intense financial pressure on facilities to ‘‘find’’ such patients, because otherwise facilities may have substantial financial losses in their 

Medicare reimbursement. 

• The availability of patients qualifying for the new RUG categories depends 

heavily on local hospital practices, particularly as to how frequently intravenous medication (rather than oral) is ordered. Hospitals seeking to find 

a skilled nursing facility for patients who are being discharged will soon 

learn that Medicare payment rules favor patients who had an IV in the 

hospital. Practice patterns are likely to shift in ways that have more to do 

with perverse payments than with good clinical care. 

There is no evidence that revised system improves payment accuracy; in fact, 

accuracy may actually be reduced. 

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• CMS cited only one piece of scientific evidence in the final rule in an attempt to justify the nine new RUGs and the contention that the new system is more accurate, as Congress required. But this bit of ‘‘evidence’’ is not 

relevant to the changes CMS actually made in the payment system and is 

the result of researchers studying a completely different issue. • Increased payments are not targeted to medically complex patients who do 

not receive rehabilitation, even though their care can be very costly, with 

heavy use of non-therapy ancillaries. • Also, non-therapy ancillary costs continue to be paid as if they correlated 

with nursing costs, which research has repeatedly shown is not the case. 

CMS itself noted that the new payment system would not account accurately for non-therapy ancillary costs, and that the addition of nine new 

RUG categories didn’t solve this discrepancy. CMS attempted to solve the 

problem by applying the same small increase in the nursing index across 

all RUG groups, about three percent of total revenues. But because the payment system doesn’t accurately cover non-therapy ancillaries or correlate to 

the nursing index, the payment system still does not accurately correlate 

costs of care with payment rates. • CMS used tiny samples of patients who classify into the new RUG groups 

in doing its data analysis. For three of the new RUG groups, payments for 

millions of Medicare days are being set based on what happened to fewer 

than ten patients in a small number of facilities nine to twelve years ago. 

Among other problems, this use of small samples risks destroying the accuracy of the current payment system’s correlation of payment rates to nursing and therapy staff times. • In doing its data analysis, CMS mixed apples and oranges, using some 

numbers from Abt Associates and other numbers from the Urban Institute. 

Each of these studies used different databases, different analytical techniques, and likely different trim points. 

Congress should require CMS to go back to the drawing board on the skilled nursing facility prospective payment system to ensure that it more accurately reflects 

the true costs of caring for frail elders. 

Home Health Care 

An estimated 83% of older Americans who have long-term care needs live in noninstitutional, community-based settings. Medicare covers the skilled nursing care, 

home health aide service, physical therapy, speech-language therapy and occupational therapy in the home after a hospital stay. These services are critical for the 

patient to remain independent at home. Home health agencies reduce the risk of 

a re-admission into the hospital, as well as nursing home placement. 

In addition to ensuring that home health agencies receive the payment update 

that CMS has proposed for next year, we urge Congress to review the plans to overhaul the home health prospective payment system. Home health agencies provided 

quality services despite many years with no payment updates until 2006. In 2008 

most agencies would experience a 2.75% reduction annually over three years in the 

Medicare base payment rate under the revised payment system. Twenty percent of 

all home health agencies already are operating in the red. This reduction in reimbursement rates could reduce the availability of vital home health services for seniors and the disabled. 

Home health care providers need sufficient funding to recruit and retain quality 

staff, invest in telehealth technology and meet escalating transportation costs. 

Eliminating the 5% rural add-on has already had a negative impact on rural home 

health agencies. These agencies are estimated to experience a decrease in their average case mix from 1.583 to 1.1417. Twenty-three percent of older Americans live 

in rural areas, and we need to have these services available for them. CMS also predicts that home health agencies in the South would experience a 1.84% decrease in 

2008 under the new payment system. CMS is proposing a $2,300.60 national average base rate for 2008, down from this year’s $2,355.96 for 2007 episodes. But even 

after a 2.9% inflation update worth more than $400 million in 2008, these changes 

would add up to $7 billion in lost Medicare revenues over five years. 

We appreciate that the proposal would allow severity-adjusted amounts of up to $367 per episode for non-routine medical supplies, add nearly 60% of the Lower Utilization Payment Adjustment (LUPA) episodes to cover admission costs and eliminate the episode payment adjustment for a significant change in condition (SCIC) 

and for prior hospital stays. We also appreciate the guidance offered by CMS in 

changing to the new and more complicated case mix process. 

State Medicaid programs are struggling to meet the increasing demand for home 

health services for older adults and the disabled. The budget proposes legislative 

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changes in Medicaid that would reduce Federal Medicaid funding by $25.7 billion 

over the next five years, of which $20.9 billion would be achieved by shifting costs 

to the states. The cost shifts include a reduction of the Federal matching rates for 

all administrative activities and for targeted case management services. Medicaid 

and Medicare cuts in home health services are reducing our ability to meet the goals 

of the New Freedom Initiative, the Money Follows the Person programs from the 

Deficit Reduction Act, as well as the vision of the future of aging in America that 

was announced at the White House Conference on Aging in 2005. We look forward 

to working with your committee and CMS to assure that older Americans and people with disabilities can obtain quality home health services, so they can remain 

healthy and independent in their own homes. 

Medicare Therapy Caps 

One Medicare payment policy that must be addressed this year is the annual cap 

on coverage of outpatient physical, occupational and speech therapy. These caps are 

enormously counterproductive to quality care and efforts to keep Medicare beneficiaries living as independently as possible. 

Therapy needs have increased as the population ages and people live longer. Limiting the therapy that one can receive in a particular year often hinders an individual’s ability to regain physical strength and daily living skills that are required to 

live independently. In addition, an individual may exhaust his or her permitted 

therapy early in the year and have a new need for therapy later in the year—as 

a result of a new medical setback (surgery, injury from a fall, heart attack, etc.) 

In the ten years since the therapy caps were enacted under the Balanced Budget 

Act of 1997, Congress has allowed them to be fully effective for only a few months. 

Congress itself has recognized the danger of limiting essential therapies for beneficiaries with serious injuries and health conditions. While the Congressional Budget 

Office scores repeal of the therapy caps as being costly to the Medicare program, 

this analysis does not take into account the hidden costs that may result from limiting essential therapy services. If a Medicare beneficiary fails to regain full functioning and suffers a serious fall or otherwise comes to need higher levels of care, 

the potential cost to the Medicare program could well exceed whatever savings are 

achieved through the therapy caps. 

We recognize the need to ensure that therapy services, like other forms of health 

care, are only covered by Medicare to the extent that they are medically necessary. 

CMS for several years has pursued a Medicare integrity initiative under which 

waste, fraud and abuse in the Medicare program have been successfully prosecuted 

and inappropriate payments recovered. According to CMS, this initiative has resulted in the recovery of many billions of dollars over the years in which it has been 

in effect. Applied to therapy services, the integrity initiative should be more than 

sufficient to detect, prosecute and prevent any improper use of the benefit. 

We therefore urge Congress to enact the Medicare Access to Rehabilitation Services Act of 2007, H.R. 748, which would repeal the Medicare outpatient rehabilitation therapy caps. This legislation would ensure that beneficiaries are able to obtain 

therapy services for which they have a medical need in the setting that is most appropriate for them. 

Need to examine entire long-term care funding system 

We recognize that today’s hearing concerns the appropriateness of Medicare reimbursement to health care providers, and that a different House committee has jurisdiction over the Medicaid program. However, in the real world of long-term care, 

the payment policies of both programs are crucial to facilities and agencies that 

serve vulnerable elders. For the immediate future, we urge this subcommittee to act 

on the proposal contained in Rep. Kaptur’s bill from the last Congress that would 

require CMS to analyze and report to Congress on all of the issues affecting nursing 

facility costs and funding, including the adequacy of Medicaid funding now and in 

the future to pay for the quality of care mandated by state and Federal law and 

regulation. In the longer term, Congress must reevaluate how to pay for long-term 

care services. AAHSA has developed a financing plan this is both socially and fiscally responsible, and we would be happy to work with the committee on this issue. 

Conclusion 

The denial of a payment update to skilled nursing facilities and home health care 

providers would impose a severe hardship, especially in the not-for-profit sector, 

making it extremely difficult for facilities to meet the costs of staffing and other elements of high-quality care. Data from CMS and MedPAC themselves indicate the 

need for a payment update in the next fiscal year, and Congress must allow the update for which current law provides. 

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Striving to provide the highest quality of care, not-for-profit nursing facilities and 

home care agencies are spending every dollar of reimbursement they receive from 

Medicare on staffing and other essential components of quality. The denial of a payment update would be a heavy blow to these providers, their staff, and the vulnerable old people they serve. 

Instead of taking the easy route of across-the-board payment cuts, we urge your 

committee to thoughtfully evaluate the skilled nursing and home health payment 

systems and redirect their incentives toward encouraging continuous improvement 

in the quality of care Medicare beneficiaries receive. We look forward to working 

with the committee in this effort. 

f 

Statement of Keith G. Myers 

The LHC Group appreciates the opportunity to provide testimony on behalf of its 

patients and caregivers concerning payment systems for fee-for-service providers. 

The LHC Group is a provider of post-acute health care services primarily in rural 

markets in the southern United States. We provide home-based services through our 

home nursing agencies and hospices and facility-based services through our longterm acute care hospitals and rehabilitation facilities. These services are provided 

by a trained staff of over 3600 nurses, physicians, therapists, and aides throughout 

our locations in Texas, Louisiana, Mississippi, Arkansas, Alabama, West Virginia, 

Kentucky, Florida, Tennessee, and Georgia. We share Medicare’s mission of providing care in the least restrictive, most cost-effective, and most appropriate environment possible. 

The ability to have home health in rural areas provides Mother the luxury 

to stay at her home and get excellent care. Home health has made her life 

easier. It has been beneficial to me and her family. We know she is in good 

hands. They are all so caring and they are always available. For a person 

Mother’s age, staying in her familiar surroundings helps her mentally, physically and spiritually. If these services are cut, or the reimbursement is not 

adequate for services to continue to assist in providing the nurses to care for 

Mother, she would have to go to a nursing home. I know she would not last 

two weeks. It is cheaper for us to have her at home than in a facility. I feel 

the secret to longevity is the ability to receive home care.—M.W., Mississippi 

I. OVERVIEW 

Each day, home health agencies that provide essential clinical and supportive care 

services to Medicare beneficiaries in America’s rural areas stretch limited resources 

far and wide to meet the unique needs of the patients they serve. Historically, Congress and the Centers for Medicare and Medicaid Services (CMS) have asked rural 

home health agencies to do more with less, a demand the rural home health provider community has largely met. Today, providers who serve rural beneficiaries 

continue to face new challenges that that they cannot meet alone. They need help 

from Congress. 

In April, CMS issued a proposed rule detailing a far-reaching restructuring of the 

Medicare home health prospective payment system. If finalized in its current form, 

the rule will threaten the ability of rural home health agencies—already faced with 

higher costs and lower reimbursements than urban agencies—to continue to provide 

services to rural residents. 

Historically, Congress sought to mitigate both the financial pressures on rural 

home health agencies and the related access barriers encountered by rural residents 

through the creation of a special payment adjustment, or ‘‘add-on,’’ to the prospective payment system’s base payment rates. Congress authorized the payment adjustment for home health services delivered in rural areas during most of the period 

from April 2001 through December 2006, and the add-on greatly assisted providers’ 

ability to meet rural resource needs that are different, and more costly, than those 

in urban areas. However, the rural add-on expired on December 31, 2006 and has 

not yet been reauthorized. 

In this testimony, we illustrate the urgent need for reauthorization of the rural 

add-on. We detail the economic and clinical access challenges that the proposed rule 

imposes on health care in rural America, highlighting the adverse impact of the proposed rule on rural beneficiaries and the home health agencies that serve them. We 

also discuss the policy rationale behind the rural add-on as well as its bipartisan 

history, and we conclude with a call for Congress to reauthorize the rural add-on 

and make it permanent. 

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II. RESTATING THE CASE FOR THE RURAL ADD-ON 

A primary reason that rural home health agencies require the rural add-on payment is to help cover their operating costs, which are higher on average than urban 

agencies’ costs. These higher costs result from a combination of factors, including 

the increased acuity of patients in rural agencies as well as other built-in additional 

costs of providing home health services in a rural setting—costs that urban providers do not carry. 

A. More Complex Conditions 

The service mix for home health beneficiaries in rural areas is considerably different than that in urban areas. Hospital care in rural areas tends to be focused 

on short-term, acute primary care with limited access to tertiary care centers and 

the specialty services they provide. Post-acute care providers in rural areas tend to 

treat a higher proportion of chronically ill patients than their urban counterparts. 

This basic difference in patient mix results in part from the different relative balances of provider types in rural and urban areas, and in part from the fact that 

rural Americans tend to be disproportionately older and have more chronic health 

problems than urban Americans. 

Providing care to these elderly patients with multiple health conditions can be 

more time-intensive than serving other patients. This is illustrated by one home 

health nurse’s discussion of treatment for an elderly patient with multiple comorbidities who lives with his elderly wife, who also faces several health conditions: 

Home health nurses are required weekly to assess and literally be the ‘‘eyes’’ 

for the physician and, hence, to [implement] a rapidly changing treatment 

plan for his multiple diagnoses. To transport the patient is an extremely taxing and un-safe situation. The patient and his wife have no means for transportation, no local caregivers, and no economic resources. The physician 

agrees that the most vital part for safety of this patient and his wife is totally dependent on the assistance of the home health nurses.—Anonymous, 

Louisiana 

Beyond age and chronic illness, another reason for increased acuity among rural 

agencies’ patients is the homebound status of many of these rural patients. Rural 

home health agencies frequently function as the primary caregivers for homebound 

beneficiaries, who have minimal access to transportation. This situation results in 

higher costs per patient and per visit, since homebound patients require more resources than patients who have access to other providers. One home health nurse 

encountered this situation when treating an elderly patient who lives alone and who 

was admitted to home care following a month-long hospitalization for a serious and 

extended illness. In this nurse’s words: 

The patient requires daily dressing changes, which she was unable to perform herself. She has no local family members but relies on neighbors and 

friends for transportation to receive medical care. However, many of her 

rural neighbors are also senior citizens and are limited in their ability to 

assist her. In the patient’s eyes, her situation ‘‘would [have been] devastating 

had it not been for home care services.’’— A.S., Alabama 

Another home health nurse discovered the increased resource needs of homebound, high acuity patients when caring for a man with multiple chronic illnesses 

who had recently had a new tracheostomy and feeding tube put in place. This nurse 

described the homebound man’s situation as follows: 

The wife, who has dementia, is unable to provide or participate in the care 

of her husband. This patient requires daily visits from the home health 

nurse. In addition to daily visits made by the skilled nurse, their case manager consistently receives phone calls to coordinate care. The closest caregiver is the patient’s granddaughter who has to travel a 100-mile round trip 

to their home. The couple has no means of transportation, and it is very taxing and risky for the patient to leave his home. The home health nurse is 

the primary caregiver to this couple. If this patient did not receive home 

health services he would have no access to health care and would have to 

be institutionalized to receive care.—Anonymous, Louisiana 

As the examples above demonstrate, elderly rural beneficiaries often face multiple 

health conditions that require near-constant care that their families are unable to 

provide. In addition, these patients are frequently unable to leave their homes to 

receive care either because they lack transportation or because their health conditions make transportation unsafe. 

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Many rural agencies also report an increase in more complex patients because of 

recent CMS restrictions on admissions to other post-acute care providers. In particular, the recent tightening of admission criteria for inpatient rehabilitation facilities and inpatient long-term acute care hospitals has resulted in more patients receiving treatment in the home setting. 

These facts in combination result in a higher acuity patient mix for rural than 

for urban home health agencies, and treating these patients, in turn, requires more 

costly resources in terms of staffing, medications, and other treatments. While these 

patients desperately need care, the many financial strains on rural agencies may 

ultimately force some agencies to turn away these resource-needy homebound beneficiaries because of resource limitations. 

B. Special Structural Challenges 

As demonstrated above, rural home health agencies experience some additional 

costs because of their patient mix, which itself is a result of the structure of the 

broader health care marketplace and of regional behavior trends in rural areas. 

Other additional costs of rural home health agencies depend less on the particular 

service requirements of the agencies’ patient populations and more on the structural 

issues raised by the provision of home health services in rural areas. These structural considerations, in combination with more complex patient conditions, further 

demonstrate the need for the rural add-on. 

1. Greater Driving Distances 

Home health agencies in particular experience significantly higher costs in providing care to rural beneficiaries because the services are provided in the patients’ 

homes and not in an institutional setting. Rural beneficiaries are scattered throughout rural areas and not congregated in cities like their urban counterparts. This results in increased personnel costs and decreased efficiency due to the longer drive 

times to reach rural residents. Compounding these extra costs are the increases in 

fuel prices and the additional visits necessary to ensure that rural patients without 

access to phone service comply with medication adjustments (which can be frequent 

for some high-acuity patients). 

Although caregivers try to conserve costs by planning efficient driving routes, patient care needs often force them to change their plans. These obstacles to efficiency 

are detailed in one home health nurse’s description of an ordinary day in rural home 

health service: 

Due to multiple circumstances such as the high price of gas, and the distance from patient to patient, I have to strategically plan my geographical 

route for the day, to ensure proper patient care and timing of my visits. Unfortunately, there are multiple times where this plan does not unfold as 

planned. Numerous times I receive calls from my office, which changes my 

routine. There are patients that must be seen ASAP to avoid possible emergency room/hospital admission. When this does happen, I am forced to drive 

great distances, sometimes just to see a single patient. Once I get there, I 

have to take into consideration the multiple variables that I will be faced 

with to complete this extra visit. These include performing the initial assessment on the patient; after this assessment, my work has just begun. I am 

responsible for notifying the doctor of any changes in the patient’s condition. 

At this point, I am responsible for implementing and executing any new orders from the doctor, which may include, but are not limited to, contacting 

the pharmacy for any medication changes, setting up lab work, x-rays, or 

any additional test. Any changes to the plan of care at this point must be 

reiterated through teaching to the patient/caregiver along with possible 

transportation issues. At times, this can be a daunting task due to the lack 

of appropriate resources in rural communities, along with the knowledge 

deficits of various patients and caregivers.—Anonymous, Louisiana 

Other home health nurses have overcome unique obstacles to reach rural patients. 

One such nurse writes that she has ‘‘waded creeks, climbed over broken porches, and 

battled many a dog. Many of our aides have had to go to a well or a branch [office] 

to draw water and then heat it on the stove (or a hot plate) before they are able to 

bathe their patients.’’—M.A., Kentucky. Another nurse recalls ‘‘[being] attacked while 

riding on a rural road because [the driver] knew I was a nurse and was going to 

try to rob me,’’ ‘‘having to run from dogs,’’ and ‘‘driv[ing] on gravel roads and 

get[ting] stuck in the mud due to bad roads.’’—C.J., Mississippi. Yet another nurse 

often visited a patient who lived in a rural area across a river that, because it was 

unpredictably passable by vehicle, had to be reached ‘‘by a swinging bridge that 

spanned the river. After reaching the end [of the bridge], the nurse would then have 

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1 National Association for Home Care & Hospice (NAHC), ‘‘Maintain the Add-on for Home 

Health Services in Rural Areas’’ (hereinafter ‘‘Maintain the Add-on’’) (2004); NAHC, ‘‘Preserve 

Access to Rural Home Health Services’’ (hereinafter ‘‘Preserve Access’’) (April 2007), available 

at http://www.congressweb.com/nahc/docfiles/RuralTalkPts07.pdf. 

to walk on a narrow footpath that followed the riverbank, through the woods to the 

patient’s home, toting supplies and equipment.’’—R.B., Arkansas 

2. Smaller Agency Size 

Rural agencies are often smaller than agencies in urban areas. Simple economics 

dictates that small agencies will have higher costs relative to larger organizations. 

Smaller agencies have fewer patients and fewer visits over which all the agencies’ 

fixed costs of service provision—including costs of meeting regulatory requirements—can be spread. This results in higher overall costs per patient, per visit. 

Smaller agencies also are more likely than larger agencies to be faced with a homogeneous case mix, as they will have lower patient volumes than their larger urban 

counterparts. In such a situation, there will not always be enough even slightly profitable cases to counterbalance the high-cost, resource-demanding cases. 

This problem is exacerbated by the fact (noted above) that rural agencies already 

serve a higher acuity patient population. Although the Medicare reimbursement system attempts to account for these high-cost patients through additional outlier payments, these payments are too low to cover agencies’ actual service costs. 

3. Scarcity of Skilled Professionals 

Many home health agencies have difficulty getting certain health care professionals to service beneficiaries in rural areas. Some rural agencies have reported 

frequent use of nurses instead of therapists to provide rehabilitative services because of a lack of therapists willing and able to provide services in rural areas.1 Unfortunately, when an agency substitutes skilled nursing restorative services for rehabilitative therapy services, it does not qualify for the higher therapy rates allowed 

under the home health prospective payment system. 

III. DOING MORE WITH LESS IN RURAL AMERICA 

To address these challenges, some home health agencies in rural areas have developed alternative operating models to reduce costs. They have been forced to do 

more with less. 

Many agencies serving remote rural areas have established branch offices, or 

‘‘drop sites,’’ to minimize personnel drive times and to provide a local repository for 

supplies and records. While these types of remote locations do increase personnel 

efficiencies, any savings are often offset by increases in agency overhead costs for 

rent, utilities, and other expenses associated with operating a remote office. And, 

as noted above, these increased overhead costs are spread over a smaller number 

of patients, which intensifies the impact on the agency’s finances. 

Other agencies have sought to maximize personnel productivity by compensating 

their clinical staff on a per visit basis instead of a monthly or hourly basis. This 

method of compensation causes clinical staff to travel more efficiently between patient visits. While compensating on a per visit basis may help minimize the costs 

of providing care to home health providers, the caregivers themselves must incur 

the added cost of travel. As one caregiver noted, ‘‘when it takes an hour or more to 

just drive from one patient to another, my productivity is obviously limited. Add to 

that the wear and tear on my car and you see that I get less in my paycheck than 

my urban counterpart.’’—A.C., Florida. Per visit compensation, then, places agencies 

at a competitive disadvantage, often resulting in retention problems. 

To address the scarcity of skilled professionals, most home health agencies are 

forced to compensate these professionals at higher rates than their urban or hospital-based counterparts. While this issue affects almost every professional discipline, the most commonly affected professionals are physical therapists, speech 

therapists, and medical social workers. The Medicare program fails to recognize this 

incremental increase in the program’s area wage adjustments, yet the increase remains a significant extra cost of providing home health services to rural beneficiaries that urban providers do not bear. Additional discussion of regional wage 

discrimination follows below. 

IV. INACCURACY OF WAGE-BASED REIMBURSEMENTS 

In addition to facing higher costs than urban agencies, rural home health agencies 

receive Medicare reimbursements that do not adequately account for their labor 

costs, a problem the proposed rule exacerbates. 

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2 71 Fed. Reg. 65884, 65936 (November 9, 2006). 3 In 2004, CMS rebased and revised the home health market basket, resulting in a labor-related share of 76.775 percent and a non-labor portion of 23.225 percent. 69 Fed. Reg. 62126 (October 22, 2004). To calculate the reimbursement due a provider for an episode of care, the national 60-day episode rate is multiplied by the beneficiary’s applicable case mix weight. The result is then divided into a labor and non-labor portion. The labor portion is multiplied by the 

applicable wage index based on the residence of the beneficiary. The total reimbursement due 

the provider for the episode is the sum of the wage-adjusted labor portion and the non-labor 

portion of the case-mixed 60-day episode amount. 

A. Lower Reimbursement for Rural than for Urban Agencies 

Inaccuracies in wage index values are the core cause of reimbursement distress 

for rural home health agencies, yet there are few opportunities for correction. 

Medicare rural wage indices are uniformly lower than urban wage indices, a reality that results in substantially lower Medicare reimbursement to rural home 

health agencies for the same services, provided to the same type of beneficiaries, as 

compared to urban agencies. The national average Medicare wage index is set at 

1.0. Addendum B of the final rule for the home health agency prospective payment 

system for calendar year 2007 shows rural wage indexes ranging from 0.7215 to 

1.1709 for the 50 states with an average rural wage index of 0.8445 and a median 

of 0.8588.2 Only seven states have a wage index over 1.0 (Alaska, California, Connecticut, Hawaii, Massachusetts, New Hampshire and Washington).3

Because Medicare reimbursement is based largely on CMS’ estimation of differences in wages among geographic areas, the accuracy of reimbursement depends 

on the accuracy of CMS’ calculations of wage rates. As mentioned above, rural agencies are often compelled to pay the same wages as urban agencies for therapists, 

whose services are required for the agencies not only to provide top-quality patient 

care, but also to qualify for certain higher Medicare reimbursements (i.e. for therapy 

visits). In addition, nursing shortages exist nationwide, which can force rural agencies to pay nurses wages on par with urban agencies to attract staff. CMS’ failure 

to take into account this equivalence in wages between rural and urban home 

health agencies results in inappropriately low wage indices for rural agencies, for 

which there is no remedy other than the rural add-on. 

B. No Access to Reclassification Relief or to Special Rural Payment Policies 

In the hospital setting, a rural hospital with disproportionately high labor costs 

can apply for reclassification of its wage index. Such a hospital could, thus, be paid 

at the same wage index-based rate as an urban hospital that had the same wage 

rates. Home health agencies, however, are not eligible for reclassification. Moreover, 

the inequity is increased in rural areas in which a hospital can qualify as a critical 

access hospital or sole community provider—and receive higher reimbursements— 

while a rural home health agency in the same community has no access to these 

additional payments. 

Rural home health agencies also lack access to other payment sources created by 

Congress to address the numerous challenges facing health care providers and 

Medicare beneficiaries in rural areas. For example, the Rural Hospital Flexibility 

Program re-established cost-based reimbursement for critical access hospitals. Small 

rural hospitals are still held harmless from the effects of the hospital outpatient prospective payment system. Physicians practicing in rural health professional shortage 

areas qualify for a 10 percent Medicare payment bonus. Rural health clinics and 

federally qualified health centers receive reasonable cost-based reimbursement for 

providing service to Medicare beneficiaries. None of these cost-management tools are 

available to home health agencies serving rural beneficiaries. Thus, home health 

agencies lack resources to correct the low wage indices assigned to them by CMS, 

which does not accurately recognize rural agencies’ high labor costs. 

C. Detrimental Effects of the Wage Differential 

The dramatic reimbursement effect of rural wage indices is evidenced by the financial situation in rural North Carolina, which represents the median rural wage 

index: 

National 60-day Episode Amount: $2,300 

Labor-Related Share: $1,766 [0.76775 * $2300] 

Wage Index: 0.8588 [rural North Carolina] 

Wage-Adjusted Labor Portion: $1,517 [0.8588 * $1766] 

Non-Labor Share: $534 [.023225 * $2300] 

Total Reimbursement: $2,051 [$1,517 + $534] 

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4Fazzi Associates, ‘‘BestWorks Report’’ (2005, 2006). 

5 J.P. Sutton, ‘‘Patterns of Post-acute Utilization in Rural and Urban Communities: Home 

Health, Skilled Nursing, and Inpatient Medical Rehabilitation,’’ NORC Walsh Center for Rural 

Health Analysis (March 2005), available at http://www.norc.org/NR/rdonlyres/3329577F-87E4- 

4C4A-BEBE-1D6E66B7C4DD/0/WalshCtr2005_PAcuteU.pdf. 6 J.P. Sutton, ‘‘Home Health Payment Reform: Trends in the Supply of Rural Agencies and 

Availability of Home-Based Skilled Services,’’ NORC Walsh Center for Rural Health Analysis 

(March 2005), available at www.norc.org/NR/rdonlyres/51442860-0B0F-4F45-A76B0C3B093FBCFD/0/WalshCtr2005_NORCMarchCX2.pdf. 

This rural payment ($2,051) stands in contrast to the full payment of $2,300, 

which would be available if the wage adjustment were equal to 1.0—a difference of 

10.83 percent, or $249, for the episode ($4.15 per day). 

The range of the rural wage indices for the 48 states subject to a rural wage adjustment for this same example is as low as $1,808 in South Dakota and as high 

as $2,602 in Connecticut, as illustrated by the following calculations: 

South Dakota Connecticut 

National 60-day Episode Amount: $2,300 $2,300 

Labor-Related Share: $1,766 $1,766 

Wage Index: 0.7215 1.1709 

Wage-Adjusted Labor Portion: $1,274 $1,517 

Non-Labor Share: $534 $534 

Total Reimbursement: $1,808 $2,602 

This represents a $794 difference for the same services, provided to patients with 

the same conditions who reside in rural areas, and provided by Medicare-certified 

home health agencies with the same case mix. The only difference in the two scenarios is the geographic location of the patient’s residence. 

D. Additional Concerns with the Wage Index System 

Setting aside the concern about inaccuracies in wage index calculations, the home 

health provider community has long opposed CMS’ use of the hospital wage index 

to establish home health wages. Differences in the personnel pool and costs between 

hospitals and home health agencies make use of the hospital index inappropriate 

in the home health setting, where the institutional efficiencies used by hospitals to 

spread costs are not available. Statewide rural wage indices do not accurately represent local labor markets because geographically disparate hospitals are treated together without regard to their true labor costs. 

For rural home health agencies, inaccuracies in wage index values are made 

worse by differences in payer mix between the urban and rural settings. Because 

of the substantially higher proportion of poor and elderly individuals in rural areas, 

rural health care providers are primarily dependent on Medicare and Medicaid reimbursement. The financial stability of Medicare- and Medicaid-dependent rural 

agencies is essential in ensuring access to care for low-income beneficiaries in particular, as national benchmarking data indicate that rural home health agencies 

provide twice the amount of indigent care as urban home health agencies.4

V. RURAL BENEFICIARIES’ RELIANCE ON HOME HEALTH AGENCIES 

In the midst of increased costs and reduced reimbursements, rural home health 

agencies often find themselves as the primary providers of post-acute care services 

for rural Medicare beneficiaries. Research has shown that rural Medicare beneficiaries are less likely than urban beneficiaries to use institutional post-acute services, including skilled nursing facilities and inpatient rehabilitation facilities 5—a 

trend attributable to patient preferences and to a lack of specialized post-acute care 

providers in rural areas. Additionally, it is recognized that rural beneficiaries do not 

receive the same level of physical and occupational therapy services as urban residents.6

Based on a recent study of the CMS Home Health Compare data, researchers determined that there are only minor differences in the quality of care provided by 

home health agencies in urban and rural areas. Functional improvement scores varied by less than 2 percent, and no statistically significant differences in adverse outcomes are apparent. This is a particularly good indication of the effectiveness of 

rural home health agencies in providing care to rural beneficiaries in light of the 

challenges explained above. 

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7 72 Fed. Reg. 25356 (May 4, 2007). 8 Id. at 25456–25457. 

The effectiveness of rural home health care, in spite of the numerous obstacles 

to service provision, is further attested to by Dr. Gary Wiltz, a board certified internist and CEO/Medical Director of the Teche Action Clinic in rural Louisiana. Dr. 

Wiltz writes: 

Caring for patients in a rural community presents many challenges, chief among 

which are lack of transportation, high poverty, low educational attainment and 

lack of resources available in an urban setting. The patients served by our community health center are truly the sickest of the sick. They suffer from debilitating chronic diseases and co-morbidities impairing functional status. Many of 

our elderly patients cannot independently obtain health care without assistance. 

Utilization of home health services results in improved health care outcomes for 

our patients. Length of hospital stays are decreased when we can provide inhome services, the emergency room visits are decreased when a Plan of Care can 

be implemented in the home which monitors the patients’ health status preventing exacerbations requiring medical intervention, nursing home placement is 

prolonged or prevented, and overall better disease management especially as it 

relates to diabetes, hypertension, and heart disease (congestive heart failure). 

Rural beneficiaries’ comments about their home health providers also reveal a 

high degree of satisfaction with—and a strong dependence on—this type of care. As 

rural beneficiaries’ primary providers, home health nurses spend extra time completing assessments, answering patients’ questions about their treatments and conditions, and forming relationships with patients. These patients and their families 

often thank their home care providers for being, among other things, ‘‘very thorough,’’ ‘‘[available to] help no matter the time,’’ ‘‘very helpful, courteous, and dependable,’’ ‘‘prompt,’’ ‘‘willing to find out answers for difficult questions,’’ and ‘‘comforting.’’—Louisiana. Beneficiaries and their families rely on their home health 

nurses to meet not only their physical needs, but also their emotional, social, and 

often spiritual needs, frequently coming to view their home health nurses as ‘‘part 

of the family.’’—A.J., Mississippi 

However, positive trends like this cannot continue if the current proposed rule, 

discussed in more detail below, is fully implemented. 

VI. THE PROBLEM: THE PROPOSED RULE AND ITS IMPACTS 

A. Basics 

The proposed rule includes sweeping structural and functional changes to the 

home health prospective payment system, including: 

• A 2008 base payment rate of $2,300 per episode with a negative adjustment 

for provider coding behavior of 2.75 percent each year for the next 3 years; 

• The introduction of 153 home health resource group models based on 4 equations; 

• New limitations on rehabilitation therapy access, including a three-threshold 

model using payment increase trigger points of 6, 14, and 20 visits; and 

• Continued application of the pre-floor, pre-reclassified hospital wage index for 

wage-indexing home health payments, and an increase in the labor-related 

share of the base payment from 76.775 percent to 77.082 percent.7

B. A Disproportionate Impact on Rural Providers 

CMS’ analysis of the impact of the changes to the home health prospective payment system indicates an overall negative change for rural home health agencies 

of 0.5 percent and a positive change for urban home health agencies of 1.26 percent. 

However, CMS data also indicate that the impact on rural proprietary freestanding 

agencies will be, approximately, a 4.87 percent reduction in reimbursement to these 

rural agencies as opposed to a negative 1.64 percent impact for their urban counterparts.8

Rural providers and industry consultants are still evaluating the effect of the proposed changes on rural providers, but several preliminary reviews of the impact of 

the proposed rule using 2006 data indicate that the actual impact of the proposed 

rule on home health reimbursement will be substantially more significant than 

what is stated by CMS in its regulatory flexibility analysis. Rural wage indices used 

by CMS are significantly lower than those applied to urban providers, so the actual 

losses experienced by rural providers will be still greater. Nonetheless, these initial 

results indicate that rural home health agencies will experience substantially greater losses than the 0.5 percent estimated by CMS in the proposed rule. 

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9Glenn Hackbarth, ‘‘Hearing on Rural Health Care in Medicare,’’ Hearing before the Subcommittee on Health of the House Committee on Ways and Means (June 12, 2001), available at http://waysandmeans.house.gov/legacy.asp?file=legacy/health/107cong/6-12-01/6-12hack.htm. 

10 ‘‘Collins & Feingold Lead Effort for Affordable and Comprehensive Home Health Care: 57 

Senators Support Elimination of Co-Payments and Changes for Rural Equity’’ (September 30, 

2003), available at http://collins.senate.gov/public/continue.cfm?FuseAction=PressRoom.Press 

Releases&ContentRecord_id=4F3AED3F-802A-23AD-4F7B-A7E4DF562251&CFID=33919502& 

CFTOKEN=13706486. See also Medicare Modernization and Prescription Drug Act of 2002, H. 

Rep. No. 107–539(I) (2002). 11 ‘‘Senators Collins and Feingold Introduce Rural Home Health Legislation’’ (February 7, 

2005), available at http://collins.senate.gov/public/continue.cfm?FuseAction=PressRoom.Press 

Releases&ContentRecord_id=4F3AC8DE-802A-23AD-4F14-4E1C0663C092&CFID=33919502& 

CFTOKEN=13706486. 12Letter from Sen. Olympia J. Snowe and Sen. Susan Collins to Sen. Charles Grassley and 

Sen. Max Baucus (December 15, 2005), available at http://collins.senate.gov/public/ 

continue.cfm?FuseAction=PressRoom.PressReleases&ContentRecord_id=B092F310-802A-23AD4581-699286022FDC&CFID=33919502&CFTOKEN=13706486. 

Additional analyses of the data and the effects of the proposed rule are ongoing. 

But the clearly disproportionate impact on rural providers—an impact exceeding 

CMS’ own estimates—makes it imperative that rural agencies obtain immediate 

help with covering their costs. Reauthorizing the rural add-on is the single most effective means of doing so. 

VII. THE SOLUTION—REAUTHORIZATION OF THE RURAL ADD-ON 

A. Background 

Congress has historically used the rural add-on policy as a means to level the reimbursement playing field for home health agencies that treat rural beneficiaries. 

Three times in recent history, through the authorization and reauthorizations of the 

rural add-on, Congress has taken affirmative steps to ensure that strong, high-quality home health care providers are available to serve rural beneficiaries: 

• Congress enacted a 10 percent add-on for rural home health between April 

1, 2001 and March 31, 2003 as part of the Benefits Improvement and Protection Act of 2000 (BIPA). 

• The BIPA 10 percent add-on lapsed for twelve months, but Congress enacted 

a 5 percent add-on for one year between April 2004 and March 2005 in the 

Medicare Prescription Drug, Improvement, and Modernization Act of 2003 

(MMA). 

• In February 2006, Congress extended the add-on for an additional year in the 

Deficit Reduction Act of 2005 (DRA). 

The add-on lapsed in 2007, yet the policy rationale for it has not. 

B. Legislative History Reflective of Congress’ Longtime Concerns 

Since 2001, Congress has been sensitive to the challenges rural home health care 

providers face. The hearing records of Congressional committees are replete with 

studies and detailed discussions of discrepancies between urban and rural home 

health costs, net reimbursement values, and differences in clinical care—none of 

which have changed materially since the add-on was first authorized in 2001. The 

Medicare Payment Advisory Commission (MedPAC) also supported the add-on, indicating that rural agencies’ travel costs are higher than urban agencies’ costs and 

that rural agencies face a cost disadvantage because they have a low volume of services and cannot spread fixed costs over a large number of episodes.9

C. Bipartisan Support 

The rural add-on has garnered strong bipartisan support throughout its authorization and reauthorizations. In 2003, 57 Senators, led by Senators Susan Collins 

(R–ME) and Russ Feingold (D–WI), sent a letter to Congressional authorizers and 

party leaders promoting the add-on to ensure rural access.10 In 2005, Senators Collins and Feingold introduced legislation to extend the additional payment for home 

health services in rural areas. The Senators continued to identify as much as a 12 

to 15 percent difference in costs to rural home health providers ‘‘because of the extra 

travel time required to cover long distances between patients, higher transportation 

expenses, and other factors,’’ and they recognized that without the add-on, ‘‘agencies 

may be forced to make decisions to simply not accept rural patients with greater 

care needs.’’ 11 Senators Collins and Olympia Snowe (R–ME) provided additional 

data in support of the add-on in a letter to the Senate Finance Committee later that 

year.12

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13MedPAC, ‘‘Report to Congress’’ (March 2007), 194, 195. 14 Id. 15Fazzi Associates, ‘‘BestWorks Report’’ (2005, 2006). 16 NAHC, ‘‘Maintain the Add-on,’’ supra note 1; NAHC, ‘‘Preserve Access,’’ supra note 1. 17MedPAC, ‘‘Report to Congress’’ (March 2007), 190. 

VIII. CALL TO ACTION: REAUTHORIZATION OF THE RURAL ADD-ON IN 

2008 

Rural home health agencies stand in a precarious financial situation. With several 

sources of extra costs—including increased patient acuity and structural issues associated with rural home health care—and inadequate Medicare reimbursements, 

rural home health agencies will not be able to continue current service levels without assistance from Congress. 

Over the years, rural home health agencies’ margins have regularly fallen below 

urban agencies’ margins. A recent MedPAC analysis of 2005 cost report data indicates that freestanding rural agencies face margins that are, on average, 2.8 percent 

lower than urban agencies’ margins.13 Moreover, approximately 20 percent of all 

home health agencies had negative margins in 2005, and about 60 percent of hospital-based and 20 percent of freestanding home health agencies lose money providing care to Medicare beneficiaries.14 While it should be noted that national average margins can be misleading because of the wide variation in home health agency 

margins, rural home health agencies have the lowest margins in every study reviewed. 

National benchmarking data from the Fazzi Associates indicate that home health 

agencies have a one percent profit margin overall, when all payers and service lines 

offered by agencies are considered. The benchmark data indicate that urban home 

health agencies have Medicare profit margins of 11.6 percent and that rural agencies average Medicare margins of 10.5 percent. However, rural agencies had been 

receiving the 5 percent rural add-on payment during the review period, so the real 

Medicare margin for rural home health agencies was 5.5 percent, or about one-half 

of the margins of urban agencies.15

Unsurprisingly, removal of the rural add-on would significantly affect rural home 

health agencies’ margins and corresponding ability to serve rural beneficiaries. Between April 1, 2003 and March 31, 2004—the period during which the rural addon was not in effect—several service areas were reduced and some agencies were 

forced to turn away resource-intensive patients.16 Moreover, just before the most recent expiration of the rural add-on in December 2006, a higher percentage of rural 

than urban states reported service by only one home health agency or by no home 

health agencies at all.17 Rural access thus remains a serious problem that will only 

be worsened if Congress fails to reauthorize the rural add-on. 

IX. REINSTATE AND MAKE PERMANENT THE 10 PERCENT ADD-ON 

Because ensuring beneficiary access to medically necessary care is one of the 

Medicare program’s central purposes, the threat to rural beneficiary access to home 

health services should be a primary concern as Congress evaluates the health care 

system this year in light of CMS’ proposed changes. The advent of the substantial 

structural and functional changes in the Medicare prospective payment system for 

home health agencies as proposed by CMS makes it imperative that Congress act 

quickly to reinstate and make permanent a 10 percent rural add-on to avoid additional problems with access to care by rural beneficiaries. 

Importantly, policy support for the rural add-on at its inception in 2001 and during subsequent reauthorizations remains in force today. Concerns about the effects 

of inadequate reimbursements on rural access and on small businesses, as well as 

proper recognition of the high costs of rural home health agencies and the relative 

efficiencies of home health care compared to institutional settings, all demand reauthorization of the rural add-on. 

The rural home health care provider community has demonstrated remarkable resiliency in adapting to continuing changes in reimbursement over time, but this 

trend cannot last indefinitely. Essential support in the form of a reauthorized and 

permanent add-on for rural home health care providers is urgently needed. 

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Without the help of home health, I would be in a nursing home. I have received excellent service that has allowed me to stay in my home, so that I 

may have the quality of life that is satisfying to me. The thought of losing 

this service is frightening and would be devastating to me. I plead with you 

not to cut these services. Please reconsider any changes that limit funding 

and availability of home care services.— 

f 

N.E., Arkansas 

Statement of Visiting Nurse Associations of America, 

Boston, Massachusetts 

Mr. Chairman and Members of the Subcommittee, thank you for the opportunity 

to present written testimony for the Subcommittee’s hearing on ‘‘Payments to Certain Medicare Fee-for-Service Providers.’’ As President and Chief Executive Officer 

of the Visiting Nurse Associations of America (VNAA), the national membership association for non-profit and community-based Visiting Nurse Agencies (VNAs), I 

speak on behalf of our voluntary Board of Directors and the association’s membership. 

At the outset, I would like to commend you and Subcommittee Members for your 

leadership in engaging the health care provider community in reforming Medicare 

fee-for-service policies with the goal of ensuring that Medicare pays efficiently and 

appropriately for quality care. We agree with you that Medicare payment policies 

should be revisited frequently to not only protect the solvency of the Medicare Trust 

Fund and ensure high quality care for beneficiaries, but also because health care 

and demographics in the United States are evolving daily. The rapid rate at which 

American citizens are currently accessing Medicare-covered services will only increase as the baby boom generation approaches retirement. VNAA believes that it 

is essential for national health care policies to reflect this change in demographics 

by supporting the most efficient and cost-effective forms of health care delivery, including innovative technologies that support consumer choice of care and independent living. 

In this testimony, VNAA would like to address three different areas of Medicare 

home health payment policy that we believe will help the Subcommittee identify reforms to ensure that Medicare pays efficiently and appropriately for quality care to 

beneficiaries. These areas include: 1) CMS’s newly proposed rule for PPS refinements; 2) MedPAC’s analysis involving costs and reimbursement for Medicare-covered services; and 3) Preparing for the future by cost-effectively meetings the health 

care needs of a rapidly aging society. 

Briefly, I will make the case in my testimony that: 1) VNAs’ mission to serve as 

the safety net for the most sick and vulnerable homebound seniors and those with 

disabilities is currently at risk and would be seriously jeopardized by the Administration’s proposed cuts to Medicare home health reimbursement; 2) CMS’s policies 

to account for the true cost of providing home health care in 2007 is outdated and 

therefore MedPAC’s analysis of the adequacy of Medicare home health reimbursement is not based on complete and current cost data; and 3) Home health care has 

the ability to provide significant savings to the Medicare program if Federal congressional and regulatory policies recognize its cost-efficiency when compared to the 

costs associated with treating like medical conditions in institutional settings. 

About Visiting Nurse Agencies 

For over 120 years, VNAs have shared several common goals, including: 1) to provide the highest quality health care to the sickest and the poorest who otherwise 

would not have access to the health care they need; 2) to help people with chronic 

illnesses and disabilities to stay within the comfort of their homes by maintaining 

their health, strength and independence; and 3) to form local partnerships within 

individual communities to improve the overall public health of those communities. 

Today, approximately 400 VNAs provide care to nearly four million individuals 

each year. While continuing to embrace and fulfill their original common goals, 

VNAs have evolved to provide the types of highly skilled nursing care that only 20 

years ago were rarely provided outside a hospital, such as peritoneal dialysis and 

intravenous chemotherapy. The tens of thousands of clinicians employed by VNAs 

are passionate about improving the quality of life of all of their patients, including 

some of the nation’s sickest and poorest individuals. Their expertise is in geriatric 

care, public health measures such as mass-immunization, infusion therapy, pain 

management, ventilator care, hospice care, and chronic care management for those 

with diabetes, congestive heart disease, AIDS, chronic obstructive pulmonary care 

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and cancer. These basic medical services are supplemented by support services that 

enable individuals to remain in their homes and communities, including adult day 

care, Meals on Wheels, personal care services, caregiver education, telehealth monitoring, and nutrition management. 

Medicare Home Health Prospective Payment System Refinement and Rate Update for 

Calendar Year 2008 

The Subcommittee’s hearing is particularly timely on the issue of provider payments given the recent publication of several proposed regulations on such payments by the Centers for Medicare and Medicaid Services (CMS). On May 4, the 

‘‘Medicare Home Health Prospective Payment System Refinement and Rate Update 

for Calendar Year 2008 Proposed Rule’’ was published in the Federal Register, 42 

CFR Part 484. This proposed rule includes the most significant refinements to the 

Medicare home health prospective payment system since its implementation in October 2000. 

Very generally, it appears that the proposed redistribution of case-mix weights by 

case-mix categories has incorporated many of VNAA’s suggestions to re-balance the 

system to more fairly reflect costs by case-mix category. However, we are only in 

the early stages of our analysis and cannot at this point offer definitive recommendations to the Subcommittee regarding this redistribution of payments. We 

believe that several of the other proposed changes are positive, including the replacement of the ‘‘10-therapy visit’’ threshold with three threshold benchmarks, the 

increase from 80 to 153 home health resource groups, the elimination of both the 

‘‘MO175’’ OASIS variable and the ‘‘Significant Change in Condition (SCIC) Adjustment,’’ and the recognition that secondary diagnoses provide a more accurate picture 

of patient condition. 

VNAA is disheartened, though, that CMS inserted a budget-driven, across-theboard 2.75% payment reduction in each of 2008, 2009, and 2010 in order to address 

what it believes is a provider-driven effort to increase the average case-mix weight. 

CMS’s estimate of the increased case-mix weight between 2000 and 2003 assumes 

that home health agencies in general had deliberatively ‘‘upcoded’’ the medical and 

functional status of their patients to achieve higher reimbursement. The estimate 

dismisses the very real possibility that the demographics of the home health population had changed in the first three years of PPS. 

In our experience, the home health profession was generally so confused by the 

complete overhaul of patient assessment and reimbursement in October 2000 and 

into the first few years of PPS that ‘‘upcoding’’ would have been highly unlikely. In 

addition, VNAA has asked CMS for a better understanding of its rationale for why 

it now assumes that an increase in diagnostic coding following the publication of 

CMS coding instructions is inappropriate ‘‘upcoding’’ when before CMS had said 

that this particular increase in diagnostic ‘‘upcoding’’ was a result of nurses’ better 

understanding of diagnostic coding due to the instructions put out by CMS. 

For these reasons, VNAA believes that CMS’s proposed 2.75% cut in payments in 

2008–2010 is based on unreliable assumptions at best about the increase in casemix weight from 2000 to 2003. The harsh reality is that VNAs in 2004 (year of most 

recently available data) had an average total operating margin of negative 2.3% accounting for all payer sources. Charity contributions to VNAs brought that average 

up to 3%. Since that time, costs have only increased—not decreased—because of the 

stiff competition for clinicians, gas price increases, and purchase of telehealth systems to better manage patient caseloads by thinly stretched clinical staffs. 

Last year, the Moran Company produced data for VNAA that demonstrated that 

66% of VNA providers have total operating margins of less than 5% and that 39% 

of VNA providers have negative total operating margins. If CMS includes the combined 8.25% cut in its final rule for PPS refinement, the vast majority of VNAs 

would be in serious financial jeopardy. The real tragedy though would be the impact 

that any VNA closures would have on Medicare beneficiaries’ access to a safety net 

home health provider in their community. Following the implementation of the 

BBA’97 and the devastating Interim Payment System (IPS), 26 VNAs were forced 

to close their doors. We are concerned what any repetition of the past would have 

on communities nationwide. 

MedPAC’s Analysis of Medicare Home Health Reimbursement 

The Administration’s proposed rule comes on the heels of an equally troubling set 

of conclusions and recommendations by the Medicare Payment Advisory Commission (MedPAC) regarding home health payments. In its most recent analysis, 

MedPAC once again concluded that home health agencies’ average costs for home 

health services to Medicare beneficiaries are less than average payments, and thererfrederick on PROD1PC65 with HEARING

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fore the annual inflation updates for calendar years 2003–2008 for such services 

have been viewed as unwarranted. 

We believe that MedPAC’s annual analyses have been grossly misleading to the 

Congress for the following reasons: 

1) The analyses have not included data from 1,723 home health agencies, or 

21% of total home health agencies, that are ‘‘provider-based.’’ Therefore, all 

costs and payments to hospital-based and skilled nursing facility-based home 

health agencies have been excluded from MedPAC’s annual home health 

margin analysis. Exclusion of these agencies has clearly skewed the average 

home health margin upward. According to the National Association for Home 

Care, the average Medicare profit margin of the provider-based agencies in 

2004 was less than negative 5.3%. In some states, particularly rural states, 

provider-based agencies represent the vast majority of existing home health 

providers and exclusion of those providers’ data does not provide a meaningful assessment of beneficiaries’ access to home health care. 

2) The methodology that MedPAC uses to assess home health agencies’ margins 

is outdated, largely because CMS’s policies for what costs are considered ‘‘allowable’’ or ‘‘not-allowable’’ are significantly outdated. MedPAC can only include in its margin analysis the costs that CMS considers ‘‘allowable’’ costs. 

Yet, the scope of primary ‘‘allowable costs’’ has not been revisited for 10 

years. For example, many if not most home health agencies have invested 

substantial resources in telehealth monitoring to more closely monitor patients at home. The national nursing shortage has made such investments 

a necessity because telehealth monitors can assist a slim clinical staff in 

monitoring patients’ vital signs and any changes in medical conditions that 

they may consider alarming. 

Telehealth monitors assist nurses in determining which nursing visits are immediately necessary according to the incoming patient data, versus those visits that 

can be scheduled the following day(s). Telehealth does not replace nursing visits but 

assists nurses in their management of their patient caseloads, which has been vital 

in compensating for an average 10% nursing staff vacancy rate during the past few 

years according to VNAA member surveys. 

Data from our agencies demonstrate that early intervention by the clinicians in 

response to such incoming telehealth data has reduced costly and unnecessary hospitalizations. Yet despite telehealth’s clinical value and cost-effectiveness, CMS does 

not consider telehealth monitoring costs ‘‘allowable’’ for cost reporting purposes because it has concluded that telehealth monitors cannot be considered a replacement 

for nursing visits. And, because laws that govern home health payments are structured to account only for direct visit costs, telehealth costs therefore cannot be captured, thereby artificially inflating actual home health agency Medicare margins. 

Even with the flaws in the CMS and MedPAC approaches to assessing margins, 

they concede that a significant proportion of agencies face reimbursement challenges 

that in our view contribute to access problems for Medicare beneficiaries. According 

to MedPAC, 20% of home health agencies had negative Medicare margins in 2004 

(most recent data available) and at least 20% of Medicare beneficiaries had a problem accessing home health care that year. 

With such substantial evidence of financial strains on the home care system, 

VNAs do not think it is wise for the Administration to propose payment cuts or for 

Congress to freeze home health providers’ 2008 update when beneficiaries’ access to 

care is at risk. 

Preparing for the Future by Cost-Effectively Meeting the Health Care Needs of a Rapidly Aging Society 

VNAA strongly believes that home- and community-based care must be at the 

center of our health care delivery system to address the inevitable rise in Medicare 

costs due to the rapid aging of the American population. HHS Secretary Michael 

Leavitt underscored the cost-effectiveness of such care during his speech to the February 2005 World Health Congress. ‘‘Providing the care that lets people live at home 

if they want is less expensive than providing nursing home care. It frees up resources that can help other people. And obviously, many people are happier living 

at home,’’ stated Secretary Leavitt. 

As the following CMS data illustrate, home health care has the potential to be 

a huge cost saver to Medicare, Medicaid and private insurance. 

160 

Setting Classification Length of 

Stay Payment (2003 rates) 

Inpatient Rehabilitation 

Facility (IRF) 

Case-mix group 804 

(lower extremity joint 

replacement with some 

functional capabilities) 

14 days $10,828.60 

The existence of staphylococcus aureus septicemia, a comorbid condition (ICD–9-CM code 

038.11), would place 

this patient into the 

tier 2 payment category. 

Skilled Nursing Facility 

(SNF) 

Either the very high 

(RVB) or ultra high 

(RUB) rehabilitation 

group 

14 days $4,446.82 for RVB and 

$6,352.60 for RUB 

Long Term Care Hospital 

(LTCH) 

Patient group 238 14 days $17,671.22 

Home Health High/High/Moderate 

Group 

60-day 

episode 

of care 

$5,165.26 

Source: Statement by CMS, 6/6/2005, Ways and Means Health Subcommittee 

To further bolster the notion that home care is a cost effective alternative to institutional care, a June 2005 RAND study, titled ‘‘Comparison of Medicare Spending 

and Outcomes for Beneficiaries with Lower Extremity Joint Replacements,’’ detailed 

costs and outcomes for hip and knee replacement patients in different post-acute 

care settings. The report found that total post—acute care payments for inpatient 

rehabilitation facility (IRF) and skilled nursing facility [SNF] ‘‘were $8,023 and 

$3,578 respectively higher than Medicare payments for patients who were discharged home.’’ 

According to RAND, ‘‘In general, the results from that model show that in terms 

of Part A [Medicare] costs, episodes in an IRF or SNF are much more costly for 

Medicare than for episodes of care among patients going home.’’ (06/2005 MedPAC 

Report to Congress) 

The broader medical research community has also documented the cost-effectiveness of home health care. A study published in the December 2005 issue of the Annals of Internal Medicine demonstrated significant savings when patients with similar conditions were treated in their homes instead of hospitals. The average cost of 

treating patients at home was $5,801 compared to an average cost of treating patients in the hospital of $7,480. 

In conclusion, the demand for home health care will continue to grow as both a 

consumer preference during retirement years and as a result of greater recognition 

of the cost-savings it produces for payers and consumers. The kinds of highly skilled 

services that VNAs and other home health agencies provide have enabled millions 

of Americans to avoid hospital and nursing home stays. By preventing such institutional care, VNAA believes that home health care is a solution to curbing the persistent and continuous rise in national health care costs. 

Mr. Chairman and Subcommittee Members, VNAA respectfully urges you to ensure that Medicare beneficiaries continue to have access to home health care by supporting full market basket inflation adjustments in 2008 and in subsequent years 

as provided under current law and by urging CMS to exclude its proposal to reduce 

Medicare home health payments by 2.75% in each of 2008, 2009, and 2010. 

Thank you again for providing this opportunity to share our concerns and recommendations. 

Æ 

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