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49–474 2009

REFORMING MEDICARE’S 

PHYSICIAN PAYMENT SYSTEM 

HEARING 

BEFORE THE

SUBCOMMITTEE ON HEALTH 

OF THE

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

SEPTEMBER 11, 2008 

Serial No. 110–96 

Printed for the use of the Committee on Ways and Means 

( 

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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 

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 

JON TRAUB, 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 

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 

WITNESSES 

Bruce C. Vladeck, Ph.D., Senior Health Policy Advisor and Executive Director 

of Health Sciences Advisory Services, Ernst & Young, LLP, New York, 

New York .............................................................................................................. 7 

Gail Wilensky, Ph.D., Senior Fellow, Project Hope, Bethesda, Maryland .......... 20 

Nancy H. Nielsen, M.D., Ph.D., President, American Medical Association, 

Chicago, Illinois .................................................................................................... 26 

Donald M. Crane, President and Chief Executive Officer, California Association of Physician Groups, Los Angeles, California ............................................ 39 

SUBMISSIONS FOR THE RECORD 

American Academy of Family Physicians, Statement .......................................... 60 

Charles Mayer, Letter ............................................................................................. 63 

Richard W. Whitten, Letter .................................................................................... 64 

The Honorable Ron Kind, Statement ..................................................................... 65 

The National Business Group on Health, Statement ........................................... 66 

W. Randolph Chitwood, Jr., Letter ........................................................................ 69 

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REFORMING MEDICARE’S 

PHYSICIAN PAYMENT SYSTEM 

THURSDAY, SEPTEMBER 11, 2008 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON WAYS AND MEANS, 

SUBCOMMITTEE ON HEALTH, 

Washington, DC. 

The Subcommittee met, pursuant to call, at 10:10 a.m., in room 

1100, 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 

CONTACT: (202) 225–3943 

FOR IMMEDIATE RELEASE 

September 04, 2008 

HL–29 

Hearing on Reforming 

Medicare’s Physician Payment System 

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

Medicare’s physician payment system. The hearing will take place at 10:00 a.m. 

on Thursday, September 11, 2008, in the main committee hearing room, 

1100 Longworth House Office Building. 

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

hearing will be from invited witnesses 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: 

Medicare pays physicians and other practitioners on a fee for service basis using 

an administered price system. The fee schedule, which was established by the Omnibus Budget Reconciliation Act of 1989, sets prices for almost 7,000 discrete services using a methodology that places a value on each service relative to every other 

service. In determining the relative value for each service, three overall factors are 

considered: physician work, practice expense, and malpractice expense. 

Since 1997, annual updates to payment rates for services furnished under Medicare’s physician fee schedule have been determined by a formula known as the Sustainable Growth Rate (SGR). The formula sets target amounts for overall spending 

under the fee schedule, and the growth in target amounts is tied to growth in gross 

domestic product. If Medicare expenditures for these services exceed the target, 

Medicare payment rates are reduced. If Medicare expenditures for these services are 

less than the target, payment rates are increased. 

Because the volume of services paid for under the fee schedule has consistently 

grown at a rate higher than GDP, as well as other factors, the SGR formula has 

called for reductions to payment rates for much of this decade. Since 2003, legislation has effectively overridden payment cuts called for by the SGR. Most recently, 

the Medicare Improvements for Patients and Providers Act (MIPPA) contained a 

provision to delay rate cuts that were being called for by the SGR formula for 2008 

and 2009. However, unless further legislative action is taken, Medicare’s payment 

rates will fall by more than 20 percent in January 2010. 

In announcing the hearing Chairman Stark said, ‘‘The SGR formula is clearly 

broken and needs to be fixed. But the problem is bigger than the SGR 

alone. The current payment system rewards physicians who increase the 

number or intensity of the services that they provide, irrespective of what 

is needed. This drives up spending. Unfortunately, spending growth has 

not been matched by an equivalent improvement in outcomes. Our recently 

enacted legislation provides a window of opportunity to look at how physician payment rates are updated. We need to use this time to examine payWWOODS2 on PRODPC68 with HEARING

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ment system reforms that encourage better care coordination, higher quality care, and more efficient use of resources. This hearing will be an important step in that process.’’ 

FOCUS OF THE HEARING: 

This hearing will focus on Medicare’s reimbursement policy for physician services. 

It will address ways of reforming the current fee schedule so that physicians are 

encouraged to furnish the appropriate amount of care while also improving the quality of care. Particular attention will be paid to reforms that Congress can and 

should consider prior to January 2010. 

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, 

‘‘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.’’ Follow the online instructions, 

completing all informational forms and clicking ‘‘submit’’. Attach your submission 

as a Word or WordPerfect document, in compliance with the formatting requirements listed below, by close of business Thursday, September 25, 2008. 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, 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. 

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Chairman STARK. Good morning. This morning the Health Subcommittee will commence a hearing in the hopes that we can be 

enlightened on a system for reimbursing physicians in the Medicare Program. 

Back in 1997 we created a formula called the sustainable growth 

rate, and whoever came up with that name—I know who came up 

with the idea—but that had an ironic sense of humor, because 

there is not much that is very sustainable about it. The formula 

called for cuts in Medicare fees every year since 2002. And each 

year we have intervened to prevent the cuts. And if we fail to act, 

next year the rates are scheduled to go down, the payment rates 

are scheduled to go down 20 percent. And I don’t know of anyone 

who seriously advocates letting this cut take effect, but if we don’t 

the budgetary cost is about 10 billion and if we repeal the whole 

thing the budgetary costs can get up into 100 billion and more. 

This Committee and subsequently the House made the first real 

attempt this year to reform the SGR, and the CHAMP Act contained provisions that addressed some of the underlying problems 

and attempted to put the system on a path toward sustainability, 

but it was never considered in the other body. So we had just another short-term fix, we got an 18-month patch. And kicking the 

problem down the road I can tell you began when the Republicans 

were in control, but I have to acknowledge that we didn’t do anything but continue the practice in the recently enacted Medicare 

bill, and I strongly suggest that we don’t follow this practice anymore. And I am committed to using the time prior to 2010 to address the problems posed by the SGR. And I have no plan in mind, 

and quite frankly none has been offered. Many of our advisers, people we have worked with in the past, have come up with long lists 

of options, but nobody has been willing to say, start, go this way. 

And I’m waiting for Mr. Camp to do that, but we don’t seem to be 

able to get there. 

And so it is in that spirit that I am hoping, I know all of you, 

all the witnesses this morning have ideas about what we should do 

and shouldn’t do. 

I want to interject a prejudice here just so the witnesses and my 

colleagues understand at least where I am coming from now, and 

I would be willing to have people explain to me otherwise. I think 

it has been somewhat disingenuous on the part of the physicians 

to cry poverty based on what I call piecework rates. There is a 

major difference between the price per procedure and the gross income that is earned in any period, month or year. And I rather suspect that there are a large number of physicians making way north 

of a half million dollars a year whose income increased, even would 

have increased even with a 10 percent in a per fee; they would just 

quit taking Wednesday afternoons off and do a few more procedures. I suspect that is mostly in the higher priced procedural 

areas. Certainly I don’t think it is as much in the primary care 

area. But the physician community is very close with that information. I have yet to see any sanitized tax returns comparing previous 

years for a few years to see how broke, how many Porsche dealers 

come in and tell me that they are having to repossess a lot of cars 

because the docs can’t keep up their payments. I have heard all 

kinds of threats that oh, we are not going to deal with Medicare 

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patients anymore. I don’t believe that for a minute. As I have often 

said, I have got three kids, all of whom have threatened when they 

don’t get their second dessert to hold their breath, turn blue and 

die. And the last time I looked, they were still kicking. 

So there is that concern, and that is not to say that I don’t think 

we need some major changes. But I do think that as we think 

about reimbursing physicians we also have to think about the taxpayers and the survival of the Medicare system for those of us who 

want the Medicare system to survive. So that is kind of underlying 

some of my concerns. And I’d love to have anybody straighten me 

out on that, as I am sure Mr. Camp will in the opening remarks 

he has. 

Mr. CAMP. Well, thank you, Mr. Chairman. And I want to thank 

you for having this hearing and I also want to thank our distinguished panel for being here today. 

You know, I would like to just note that the importance of the 

doctor-patient relationship is critical, and there is nobody on this 

dais who thinks that physician payments should be cut by 20 percent in 2010. And the cuts called for by the SGR would undermine 

the foundation of the Medicare Program and the important doctorpatient relationship I referred to. There are a number of policy options open to us that I look forward to hearing about today. 

I hope this hearing is an honest attempt to develop a long-term 

solution to the problem with Medicare physician payments. As I 

noted before, doctors serving Medicare patients are headed for a 

cliff of 20 payment reductions, and while that cliff has been pushed 

off for a few months, we did so by permanently cutting coverage 

care for some seniors. And I think kicking more than 2 million seniors out of their Medicare health plan permanently should not be 

viewed as an acceptable way to avert a cut in 18 months. The fact 

that these reductions and cuts were made to seniors should embarrass this committee and this Congress. There is another way. 

I was disappointed that there wasn’t any consideration of the 

Senate’s compromise Medicare bill that was being discussed earlier 

in the summer. But to be fair, both parties are guilty of taking the 

short-term route on SGR. Since 2003 Congress passed six laws providing short-term Band-Aids that prevent physician payment cut 

rates called for by the SGR and many times making the following 

year’s problems even worse, as was done in this last and sixth 

time. 

We spent billions of dollars, billions in taxpayer dollars that have 

only magnified longer term problems. It is a bad habit that we 

have to kick once and for all. I am confident we don’t need another 

5 years to find a real solution to this problem. But as to the shortcomings of the SGR system, there are many, and I will simply say 

that the current system can tell us the total number of procedures 

performed, the tests administered and images taken have all increased. But it cannot tell us some of the information Mr. Stark referred to or whether beneficiaries have actually received better 

care. And we need a better system that rewards physicians who 

provide comprehensive, efficient and high quality care. And we will 

hear testimony today about how some physician practices have improved quality, provided more comprehensive care and reduced 

costs when placed under an alternative payment system. 

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When health care dollars are deployed in a rational way, it optimizes the whole delivery system, and we can then incentivize prevention, early assessment and disease management rather than 

only paying physicians to treat beneficiaries once they become sick. 

So I look forward to working with the chairman of this Subcommittee to reform physician payments so that physicians are 

paid fairly and appropriately and that seniors also receive the high 

quality care that they deserve. And I thank the chairman again for 

holding this hearing and yield back my time. 

Chairman STARK. If I could respond for all of the Members of 

the Committee, the Ranking Member, myself, I think in the periods 

that he mentioned over the last 5 or 6 years, these fixes that were 

put into the bills which we may have voted for or against were 

done without the input of any Member of this Subcommittee, in a 

room that we never understood where, by people with whom we 

had little contact. And that will be a different procedure at least 

with this Committee and thus far for what little legislation we 

have has been somewhat different, that there has been more conversation among Members of the Subcommittee than we did previously. I am not saying we came up with anything better, but I 

just think that it is something to understand that we have a lot 

of learning to do with how this process went along. 

With that, I would like to introduce our panel. Dr. Bruce 

Vladeck, who is the Senior Health Policy Advisor and Executive Director of Health Sciences Advisory Services of Ernst & Young of 

New York, formerly Director of—what was it—HCFA or CMS when 

you were there? 

Mr. VLADECK. It was HCFA. 

Chairman STARK. HCFA, all right. 

Dr. Gail Wilensky, who is aSenior Fellow at Project Hope in Bethesda, who was also Director of HCFA, with whom this Committee 

has written a great deal of legislation in the past, including—did 

we do catastrophic with you? 

Ms. WILENSKY. That was right before I came. 

Chairman STARK. Okay. 

Dr. Nielsen, who is the President of the American Medical Association. And if her attendance record gets better they tell me they 

will let her become chairman of the board and make somebody else 

be president next year from Chicago. 

Mr. Donald Crane, who is the President and CEO of the California Association of Physician Groups in Los Angeles. 

If you all would like to enlighten us in the order that I called 

your names, please proceed. 

Mr. VLADECK. Thank you very much. 

Chairman STARK. I should say one other thing. We are going to 

try to cram your testimony into 5 minutes to review what you 

have. We all have written copies of it, and then we will have a 

chance for the other Members to inquire during questions here. 

Also we are faced with about an 11:30 possibility of a recess, and 

it will be up to the Members then if we want to continue through 

or we might have to ask you to stay for a while. And I want you 

to go ahead, but if we do recess, we will try and encourage you to 

stick around so that we can reconvene and finish the hearing. 

Bruce, go ahead. 

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STATEMENT OF BRUCE VLADECK, PH.D., SENIOR HEALTH 

POLICY ADVISOR AND EXECUTIVE DIRECTOR OF HEALTH 

SCIENCES ADVISORY SERVICES, ERNST & YOUNG, LLP 

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

Camp, Members of the Subcommittee. It is always a pleasure to be 

back here and to continue this conversation, the last stage in which 

we personally—it was about 18 months ago on very much the same 

subject. In the interest of time, and you do have my statement, let 

me just say one sort of general thing and then talk about some specific ideas and issues. 

I don’t think it is necessary to spend any amount of time on all 

the things wrong with the current system. In thinking about what 

to do about it, I would only emphasize the importance of being very 

careful not to overestimate the ability to change the way in which 

health care is delivered by tinkering with reimbursement systems. 

I think there are some things you can accomplish. You can move 

a lot of money around, but the difficulty of changing phenomena as 

complex and as multi-dimensional as the way in which physicians 

practice medicine—there is no better example for that difficulty 

than the existing Medicare physician payment system, which was 

launched 15 years ago with great hopes and expectations of accomplishing exactly the opposite of what it appears to have accomplished in a variety of ways. 

So I think it is very important there be substantial changes in 

the way physician practices are organized and conducted in the 

United States, but it is not clear to me that you can do all the 

things you want to do by changing payment mechanisms. The best 

you may be able to hope for in changing payment mechanisms is 

to get the payment fairer and more equitable, get the signals going 

in the right direction, address some of the very serious income distribution problems we have in physician practice at the moment, 

and sort of do no harm in terms of other kinds of reforms in physician payment. 

In that regard I have four very specific recommendations I would 

be so bold as to make to the Subcommittee for its consideration, 

and then a couple of additional observations. 

First, for whatever reasons, the way in which the updating and 

evolution of the Medicare fee schedule has occurred, and the way 

in which it interacts with the SGR, has led to a gradual relative 

devaluation of primary care services relative to specialty services. 

Over time it would be desirable if we know how to fix that process. 

In the short run, everyone agrees on the effects and the impacts: 

that is it is harder and harder for physicians to make a living providing primary care services to Medicare beneficiaries at the same 

time that the fee schedule is probably encouraging the excessive 

proliferation of certain high technology diagnostic and procedural 

services. I don’t think we have to be shy or sort of disingenuous 

about intervening in what appears to be an arbitrary way, because 

there are so many other forms of arbitrariness built into the system. And if everyone agrees, as I think—except for some of some 

of the specialty societies—everybody does, that we are now overpaying specialists and underpaying primary care physicians, I 

think it is perfectly appropriate for the Congress to say: let’s shift 

some of that by changing some of the weights through legislative 

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action or authorizing the Secretary to make certain kinds of 

changes. 

I think, ironically, you might even save some money in the process because in fact if we are able to keep more primary care physicians participating actively in the Medicare Program, all the theory 

suggests that their patients will use fewer expensive services and 

there should be some savings to the program. 

In addition, I would very much support a form of a recommendation recently made by MedPAC, which is that Medicare recognize 

through data and technology it already has which physicians are 

really serving as primary care physicians to Medicare beneficiaries, 

that is not a questions of specialty labeling. It is a question of actually looking at the claims and seeing who is doing it, and there 

should be some additional adjustment for them. I think we are all 

concerned about the ability of primary care physicians and primary 

care practices to afford the infrastructure in terms of IT and in 

terms of support staff and so forth necessary to take advantage of 

the potential benefits of primary care. I think an adjustment to— 

again necessarily arbitrary because there is no data on either side 

of the issue—to the practice expense component of the fee schedule 

for those doctors who meet some objective criterion of being primary care physicians would begin to address that. 

Third, I think this Subcommittee and the House did something 

very sensible last year in the CHAMP Act relative to its changes 

and modifications to the SGR formula, both by going back to the 

pre-1993 practice of having different update factors for different 

kinds of services or different allowable growth rates for different 

kinds of services, and by excluding some of the culprits driving the 

formula in the wrong direction in terms of incident to services, 

drugs, and laboratory, and so forth. 

Again it is not a perfect system, it is not an ideal system, but 

starting from where you start, with what we know, I think it would 

be a major improvement. 

And finally, there are a number of people who know more about 

this than I do, whose views I respect, who think you will never fix 

this system as long as you are stuck with the existing evaluation 

and management coding and the CPT system. And it may well be 

there are a lot of people who believe that there are underlying 

flaws in the entire coding process and coding system that we will 

never escape unless we look at seriously modifying or replacing it. 

With all the other studies going on of aspects of fee schedule, I 

would urge that attention be paid to that as well. 

I will make two more points. All of these recommendations of 

mine assume at least for some period of time the maintenance of 

a fee-for-service payment system for most physicians services under 

Medicare. And I know that is sort of a minority view in health policy circles in Washington and elsewhere, but I would suggest that 

fee-for-service is a hearty beast in part because, as the chairman 

suggested in his opening remarks, nobody has really come up with 

a totally convincing satisfactory alternative to replace it with. I 

think most of the countries that do much better than we do of balancing primary care with specialty services still use a fee-for-service for paying the majority of physician services. There may be special add-ons or other adjustments for primary care physicians, but 

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the British model of paying a purely capitated rate for primary 

care is still the minority in national health systems. 

Similarly, one of the things that has occurred in the last 15 years 

in the private health care market, even for plans that receive 

capitated payments for Medicare or other payors, have largely 

moved away from capitation in their payments to physicians, back 

to fee-for-service for a variety of reasons. So I wouldn’t be so quick 

to assume if we did away with fee-for-service based payments, we 

would solve all our problems, until somebody had something absolutely better. 

Finally, I couldn’t agree more with some of the other testimony 

you are going to hear today and some of the other comments that 

if we lived in a world in which most physician services were provided through large multi-specialty group practices, we would be 

better off in a lot of ways. We have known for 20 years that those 

practices provide higher quality care at lower costs, often with 

higher patient satisfaction than atomized solo practice fee for service. 

[The statement of Mr. Vladeck follows:] 

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Chairman STARK. Let’s let Gail have a chance for now. We will 

come back to you. 

Ms. WILENSKY. Thank you, Mr. Chairman. 

Chairman STARK. Is your mike on? Pull it closer to you. 

Ms. WILENSKY. Now it is, thank you. 

STATEMENT OF GAIL WILENSKY, PH.D., SENIOR FELLOW, 

PROJECT HOPE 

Ms. WILENSKY. Thank you, Mr. Chairman and Members of the 

subcommittee. Thank you for inviting me here to testify on strategies to reform the way the Medicare pays physicians. 

As you mentioned, I was a HCFA Administrator. I wasn’t sure 

I should remind you I was actually the HCFA Administrator on 

duty when the RBRVS was implemented in January of 1992. I had 

spent the previous 2 years struggling with how that was going to 

happen. And subsequent to being at HCFA I have tried to help you 

with these issues in my roles as Chair of the Physician Payment 

Review Commission in the mid-nineties and then 4 years of 

chairing the Medicare Payment Advisory Commission. So while 

these are not new issues, they are very difficult ones. 

I would like to remind you of the general movement in Medicare 

because I believe that Bruce has raised what I see as fundamental 

choice that you the Congress has to make with regard to where you 

want to go in terms of physician reimbursement reform. In general 

Medicare has moved increasingly toward the use of bundled payments such as DRGs, or APCs as a reimbursement strategy except 

for the way in which it reimburses physicians where Medicare uses 

a very disaggregated fee schedule paying for about 7,000 separate 

discrete services under the RBRVS. 

The RBRVS was implemented to have a fee schedule that was 

more resource based and focused on relative values. But it basically 

is structured similarly to what existed before, many disaggregated 

discrete services. Because of correct concern about the potential for 

increased spending with such a disaggregated fee schedule, the 

spending limits, first the volume performance standard and then 

replaced by the sustainable growth rate, were introduced. This was 

a legitimate concern, based on the experiences of the 1980s where 

Part B spending increased faster than other parts of Medicare. 

The problem, as I see it, with the SGR is that while it can in 

principle, if used, control total spending, behavior occurs at the 

level of individual physician or the physician’s practice. And here 

the incentives are at best unhelpful, I would say as an economist 

actually perverse. The problem is that nothing the individual physician does can affect the overall SGR behavior, while at the same 

time physician fees are affected by what physicians do collectively, 

but this isn’t where behavior occurs. 

Conservatively practicing physicians continue with very low fees, 

aggressively practicing physicians make up for low fees by the volume mix of services that are provided, and therefore their incomes 

may indeed not decline. That is a very unfair system. Several 

short-term patches are possible. Physicians, I agree with Bruce and 

the comments of the committee, appears to be undervalued by any 

measure you might look at. The recommendation made by MedPAC 

that you use a budget neutral modifier for primary care physicians 

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targeting those individuals who are primarily providing primary 

care services is a reasonable first step. I also support the notion of 

a demo for a medical home. Medical home could be an important 

part of a longer term fix. We need to understand how it would 

work. 

I very much support more aggressive reviews of physician claims 

for outliers that was allowed under the MIPPA legislation that was 

just passed, as I understand the legislation. I think it has to be 

done with care, and use clear processes, so that there is not a generalized chilling effect inappropriately for physicians, but I think it 

in principle is a very important step and I support it. 

I regard the use of multiple SGRs, as was included in the 

CHAMP legislation, as a move in a better direction compared to 

where we are now, and I also think that separate SGRs for multispecialty group practices is a good idea. I am indeed one of the 

many health policy people who believe moving in that direction, toward more use of multi-specialty group practices, would solve many 

of our current problems. 

But ultimately the Congress has to decide what direction it 

wants to go in the future. If you want to stay with the current 

disaggregated fee schedule, then I believe you need to think about 

an SGR that operates at the level of the individual physician or the 

physician’s practice. That is where the behavior occurs. That is the 

only way to have a system that is not unfair. We are not talking 

millions, we are talking maybe a couple hundred thousand SGR 

rates. I don’t think that is undoable in this present day and age. 

Or there is another option, which I actually prefer because I 

think it would be better in terms of encouraging quality as well as 

restraining spending, and that is to begin moving toward more aggregated bundles of payments. 

I would propose that CMS be ready to start July of 2010 making 

single payments for the most important chronic diseases that our 

Medicare beneficiary population presents to physicians, either singly or in terms of multiple chronic diseases and, similarly, to make 

a single payment for the highest cost highest volume DRGs, that 

covers all the physician services provided during a particular DRG 

like heart valve replacement or heart bypass procedures, and that 

this become the strategy move going forward. 

CMS and Congress will need to engage some serious work done 

regarding the redesign of a payment system, and in my testimony—I hope you do not regard it as presumptuous—I have laid 

out a calendar of events that if you choose to move in this direction, CMS could use developing an RFP, with two parts, initially 

to go out in 2009, getting some ideas laid out about the direction 

that a new physician payment system would take, with a second 

and more specific contract being let within a year, a final report 

due no later than June 30th of 2011 and an implementation start 

date of January 1st, 2013. I think this is as fast as you can realistically move to a different reimbursement system. 

As someone who was there when the Congress passed a half developed RBRVS in November of 1989 and then directed HCFA to 

implement it January 1st, 1992, this schedule I am suggesting is 

not inconsistent with what has been done in the past. It will require additional support for the agency. But first, the Congress 

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needs to decide do you want to stay with a disaggregated fee schedule, in which case I urge you to think about individualized SGRs, 

or do you want to move toward more bundled payments, as you directed the agency to do in all other majors areas of Medicare, and 

you need to start directing the agency to do that, ready to start at 

the beginning of the following presidential term. 

Thank you. 

[The statement of Ms. Wilensky follows:] 

Statement of Gail Wilensky, Ph.D., Senior Fellow, 

Project Hope, Bethesda, Maryland 

Mr. Chairman and members of the subcommittee: thank you for inviting me here 

today to testify on strategies to reform the way Medicare pays physicians. I am currently a senior fellow at Project HOPE, an international health education foundation. I have previously been the Administrator of the Health Care Financing Administration, now known as the Center for Medicare and Medicaid Services and also 

the chair of the Physician Payment Review Commission and the Medicare Payment 

Advisory Commission. I am here today to discuss reimbursement strategies that 

could encourage physicians to provide the appropriate quantity of services as well 

as improve the quality of the services provided. My views reflect my background as 

an economist and also the experiences gained in the various positions I have previously held. This testimony reflects my personal views and should not be regarded 

as reflecting the views of Project HOPE. 

My testimony reviews the ways in which Medicare has reimbursed physicians 

over its history, why it adopted the SGR as an expenditure limit on Part B spending, the fundamental challenges posed by the use of a RBRVS reimbursement schedule combined with SGR and alternative strategies to consider in its place. 

Medicare’s History Reimbursing Physicians 

Medicare originally based its reimbursement to physicians on historic charges as 

it did for all of its reimbursements. In 1984, around the time that Medicare moved 

away from a charge-based per diem rate for hospitals, Medicare introduced the use 

of the Medicare Economic Index (MEI) to update payments to physicians. This 

began what has been an increasingly divergent way of reimbursing physicians under 

Medicare compared to the ways Medicare reimburses other providers. This divergence has profoundly effected the pressures being generated by the SGR and the 

increasing frustrations that the current system of reimbursing physicians seems to 

cause almost everyone—members of Congress, congressional staff, policy analysts, 

and most of the physician community. 

The history of most of Medicare reimbursement has been to move to increasingly 

bundled services for purposes of payment. The adoption of a prospective payment 

system for in-patient hospital care in 1983 was the beginning of that process but 

it has now been extended to capital payments for inpatient care, outpatient hospital 

care, renal care, home care and nursing homes. The ultimate in bundled services 

is a single capitated payment that covers all Medicare services. 

These bundled payment systems continue to use administered pricing to set the 

reimbursement which means they also require a methodology to update the payment. The bundled systems generally use a ‘‘bottoms-up’’ approach for their updates. 

Estimates are made for the components in the bundle that are believed to be associated with increasing costs. The inflation measure that results is usually in the form 

of an industry-specific input-price index called a ‘‘market-basket’’. In many cases, a 

downward adjustment is also made for a presumed increase in productivity. 

Potential volume increases for services that are paid as part of a bundle have 

been regarded as less likely and thus less problematic than those associated with 

payments for unbundled services. There still are concerns and some prohibitions 

have been introduced to limit their likelihood, such as the 30 day prohibition on a 

hospital readmission for the same diagnosis. 

The history of physician payments under Medicare is different. There was a period in the 1980’s when physician DRG’s (Diagnostic Related Group) were under 

some consideration but there has not been a serious move towards bundled payments for physicians—at least not one that is known to me. There are, of course, 

some bundled payments that are traditional in reimbursing physicians: surgeons receive a fixed payment that covers the pre-operative care, surgery and post-operative 

care, at least the care provided for a specified period of time and obstetricians (obviously not a Medicare matter) receive a single payment for prenatal, post-natal and 

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delivery. In general, however, physicians are paid for discrete services using a 

disaggregated fee schedule with approximately 7000 billing codes. Because the concerns about potential volume increases are much greater for a payment schedule 

that is as disaggregated and discrete as the Medicare physician fee schedule, the 

updates to the fee schedule has followed a ‘‘top-down’’ strategy—initially tied to the 

MEI and now the Sustainable Growth Rate (SGR). 

The big change for physician payment, comparable to the introduction of DRG’s 

for hospitals in 1983, occurred in 1989 when the fee schedule, which had been based 

on historical charges, was replaced with a resource-based relative value scale 

(RBRVS) combined with a spending limit—initially the Volume Performance Standard which was superseded in 1997 by the SGR. The period prior to 1989 had made 

it clear that using a disaggregated fee schedule without a spending limit leads to 

increased rates spending on physician services in excess of other parts of Medicare. 

Frustration with reliance on historical charges which was perceived as under-valuing primary care and over-paying for procedures led to the adoption of the RBRVS. 

Under the RBRVS, relative values for each service are set by considering physician 

work effort, physician practice expense and malpractice liability. But while the 

RBRVS sets the relative prices, it is the SGR, through its impact on the conversion 

factor that converts relative weights to absolute dollars that sets the absolute reimbursement rates. 

Problems with the SGR 

A lot of the focus for reforming physician payment under Medicare has been on 

fixing the SGR. The reason is clear. It is the requirements of the SGR to keep the 

growth in spending on Part B services tied to the growth in the economy that has 

caused the downward pressure on physician fees for most of the decade. This happens whenever growth in the economy slows and/or increases in the volume and mix 

of services provided under part B increases. For much of this decade, both have 

been occurring. Any excess growth in Part B spending relative to the level suggested 

by the SGR is supposed to lead to compensating downward changes in physician 

fees. These scheduled reductions would have meant annual reductions in fees for 

about 5% for most years since 2002. In reality, however, except for 2002, all of the 

scheduled reductions have been mitigated by acts of Congress because of concerns 

that repeated reductions in fees would severely diminish access to physician services. Instead, fees either have been held constant or been increased by 1%–1.5%, 

much lower than the rate of inflation but much greater than the reduction that had 

been scheduled to occur. Legislating these annual patches has provided short term 

fixes but has also produced a very big hole for Congress to fill when it wants to 

move to another system of reimbursement. 

The use of an SGR tied to the economy forces one share of Medicare to maintain 

a rigid relationship to the economy that does not apply to other parts of Medicare. 

As a result, one of the options that MedPAC has proposed is using expenditure targets like the SGR across all parts of Medicare, as preferable to only using a spending target for physician spending. While freezing the relative shares of Medicare 

spending that exist at a particular time would lessen some of the pressures produced by the SGR on physicians, there is no assurance that the relative shares of 

spending on Medicare that exist at a particular moment in time represent the best 

distribution of spending in Medicare as of that time—and certainly no assurance 

that they represent the most appropriate shares of spending on Medicare for the future. Expenditure targets across all of Medicare could keep Medicare spending within specified growth rates—something it has had difficulty doing throughout most of 

this decade—especially if the targets were actually enforced. But as the use of the 

SGR for physician fees has amply demonstrated, expenditure targets, per se, do 

nothing to improve quality, ensure clinical appropriateness or accomplish any of the 

other goals that have been set for Medicare—and they are usually not implemented 

anyway. 

The most fundamental problem with the SGR is that the fulfillment of its objectives are inconsistent with the incentives it produces—which can and frequently 

does result in a very perverse dynamic. The objective of the SGR is to control total 

spending by physicians, which it will do if it is implemented. The problem is that 

it neither affects nor is driven by the volume and intensity of spending of any individual physician. In fact, there is concern that the SGR expenditure targets provide 

individual physicians with even greater incentives to increase the volume and intensity of services they provide because physicians know that nothing they do as individuals can affect overall physician spending and as a result, their fees and also 

that they will be affected by whatever other physicians do, irrespective of their own 

behavior. 

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Short Term ‘‘Patches’’ 

There are a variety of changes that can be made in terms of how the SGR is defined and also strategies that would directly improve the valuation of primary care. 

These changes would better target fee increases or declines to areas that are considered over-valued or undervalued under the current system or could target areas of 

spending that have been or are at least thought to be particularly egregious. 

By a variety of measures—including waits and difficulties in getting appointments 

with new primary care physicians, numbers of unfilled residencies, etc. it is easy 

to conclude that despite the intent of the RBRVS to recalibrate payments between 

primary care oriented services and procedure based services, primary care remains 

under-valued in the RBRVS. MedPAC recommended in their June 2008 report a fee 

schedule adjustment for primary care that would raise payments for selected primary care services. They have suggested using a modifier for billing codes for primary care services provided by practitioners who focus on primary care. The modifier would provide a mechanism to target increases in payment for selected services 

to practitioners who primarily provide primary care services and doing so on a budget-neutral basis so as to not increase total physician spending. It should be noted 

that this would change the orientation of the RBRVS from a fee schedule which was 

meant to reflect the differences in resource costs to one that directly promotes primary care but since the latter seemed to be an underlying rationale behind the 

adoption of the RBRVS in the first place, it seems a reasonable way to accomplish 

a goal that has clearly not been met to date. This could be considered for a mid 

year 2009 start. 

The ‘‘medical home’’ demonstration, which MedPAC also recommended, seems like 

a good way to encourage more coordinated care in a world where most beneficiaries 

still receive care in a fragmented fee for service setting and could become an important element in improving the care of individuals with chronic disease. The medical 

home program pays a monthly payment to qualified medical practices that agree to 

coordinate the patient’s care across various setting and providers. If combined with 

changes in the fee schedule, the medical home concept could become an important 

part of a longer term ‘‘fix’’. 

Other short term patches have focused on the use of multiple SGR’s rather than 

the single SGR which is currently in use. This seems somewhat of a ‘‘back to the 

future’’ proposal since when the RBRVS was first implemented, it was with three 

separate spending targets: for primary care, for surgery and for other services. 

Among the reasons that this strategy was abandoned was the concern that these 

differential updates were distorting the relative values in the RBRVS. 

There have been several versions of separate SGR’s that have been recommended. 

Kaiser Permanente’s Jay Crossen, executive director of the Permanente foundation, 

and others have suggested that groups that are more accountable as systems, such 

as multispecialty group practices, could be allowed to have their own spending targets in order to reward and incent their membership and make participation in 

multispecialty practices more attractive to the physician population. Another somewhat differentiated system of SGR’s was included in the Children’s Health and 

Medicare Protection Act (CHAMP) passed in the summer of 2007 which not only distinguished between various types of service categories but also allowed the spending 

target for primary care and preventive services to be substantially greater than the 

spending target increases for the other categories of service. Like the use of three 

separate targets, this strategy would also push the RBRVS away from its relative 

value origins. It is an improvement over the current system but does not respond 

to the fundamental problems embedded in the current system of physician reimbursement. 

A different way to improve the equity associated with an SGR type of mechanism 

and also to potentially reduce some of the downward pressure on fees caused by inappropriate increases in spending would be to have CMS or its contractors more aggressively review billing and medical records of physicians who are clear ‘‘outliers’’ 

in terms of their prescribing or use of medical procedures and ancillary services. It 

appears that the MIPPA legislation passed in July permits this type of behavior. 

Past periods when the Department of Justice or HHS Inspector General’s office have 

made Medicare fraud priority activities have indicated a substantial potential to reduce spending but it can have a real ‘‘chilling’’ effect on providers who are not engaging in inappropriate behavior but who are uncertain of the rules. This appears 

to have been at least part of the reason that Medicare spending slowed so dramatically in 1998/99. However, if done with appropriate guidance from medical reviewers 

and following clear protocols, these types of reviews could reduce inappropriate 

spending and thus reduce the pressure for future fee reductions and I would strongly support such a move. 

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Next Steps 

The Congress is under enormous pressure to decide how it wants to reform physician payment. The short-term patch passed during the summer has physician fees 

dropping off the proverbial cliff on January 2010. There are only a limited number 

of changes that can occur between now and then—most of them in the nature of 

the short term fixes discussed above. There are, however, some more significant 

changes that could occur over the next four years, which I have outlined below. 

The most important next step is for there to be agreement on the basic direction 

of a future reimbursement system for physicians. As I have testified before, I believe 

that developing a more aggregative payment strategy for physicians is the key to 

resolving both the frustrations and the perverse incentives associated with the current fee schedule. While some have argued for simply removing the spending target, 

only doing this would open the program to unsustainable spending increases and 

would not promote the development of improved quality or accountability. The only 

way to continue with a disaggregated fee schedule without the perverse incentives 

in the current system is to develop an SGR or spending target at the individual 

practice level. Some type of risk adjustment would probably be necessary for small 

practices or for practices that had a small Medicare population. 

While a spending target at the practice level could effectively impact physician 

spending levels, the continued use of a disaggregated fee schedule is not as an effective way to encourage and reward physicians who provide high quality, efficiently 

produced care as moving to a more aggregative way of paying for physician services. 

The question is how to begin moving in that direction quickly while laying the 

groundwork for a new physician payment system to be developed no later than the 

end of the next Presidential term. 

In the near term, payments could be developed that would cover all services provided by a physician to a particular patient during a discrete period of time—presumably a one year period—for the care of a chronic disease. It may be desirable 

to establish bundled payments for multiple chronic diseases that have high co-morbidity rates such as congestive heart failure and diabetes or COPD although not 

necessarily on an immediate basis. These payments could include only the physician 

services but preferably would also include all ancillary services provided by the physician as part of the treatment of the chronic disease. In addition, bundled payments 

should be developed for high cost/high volume DRGS to include at the minimum the 

reimbursement for all physician services associated with the provision of care during the hospital stay. Consideration should also be given to including the cost of the 

hospital stay as well. CMS needs to be ready to implement these first set of changes 

no later than July 1, 2010. Group practices could be allowed to opt out and use their 

own negotiated SGR’s. 

In part of moving to a more aggregated payment system, CMS needs to have developed a two-part RFP that would result in strategies for a more fulsome redesign 

of an aggregated physician payment system, ready for release in the first quarter 

of 2009 and awarded before the end of the fiscal year. A selection of one or two of 

these proposals should be selected for further development, with a final report due 

no later than June 30, 2011. Implementation of the new system could be set for Jan. 

1, 2013. I don’t think a new system could be implemented faster than this and these 

dates assume agreement on the direction that the new payment system should take. 

This timing in generally consistent with the timetable that was used for the RBRVS 

where a partially completed RBRVS was passed into law in Nov. 1989 with an implementation date of Jan 1, 1992. The cost of developing the payment system and 

implementing it in a timely way will need to be recognized in future CMS budgets. 

Conclusion 

Medicare has increasingly moved towards the use of bundled payments—such as 

DRG’s or APC’s as a reimbursement strategy, except in the way it pays for physician services. For physician services, Medicare introduced the use of the MEI as an 

updating mechanism in the 1980’s but has never moved away from a disaggregated 

fee schedule that pays for about 7000 discrete services. The RBRVS was implemented in 1992 to provide a fee schedule that was more resourced-based and focused on relative values but was structurally similar to what had been in use previously. Because of concerns about spending growth with such a disaggregated fee 

schedule, an expenditure target was also introduced, now known as the SGR. 

The problem with the SGR is that while it can control (in principle) total spending, behavior occurs at the level of the individual physician or the physician’s practice and here the incentives are at best unhelpful, if not actually perverse. The problem is that nothing the individual physician does affects the SGR; while at the same 

time physician fees are affected by what physicians do collectively—but this is not 

where decisions about behavior occur. 

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Several short-term patches are possible. Primary care, which continues to appear 

under-valued, could be helped by a (budget neutral) fee schedule adjustment as suggested by MedPAC although this would change the function of the RBRVS away 

from a resource-based system. Information about how and how well a ‘‘medical 

home’’ functions could be important part of a longer term fix and should be pursued 

now in demo form. More aggressive reviews of physician claims by ‘‘outliers’’ could 

(and should) also be pursued as the MIPPA legislation has authorized. Multiple 

SGR’s such as were included in the CHAMP legislation could also be used as a 

strategy to target updates in a somewhat more directed way but only represent at 

best a short-term move in a ‘‘better direction’’. Separate SGR’s could also be negotiated for multi-specialty group practices. Ultimately, however, the Congress has to 

decide on the future direction of physician reimbursement and it better do so in a 

hurry. 

If the Congress wishes to remain with the current type of disaggregated fee schedule that allows for the billing of thousands of services, it should consider the concept 

of an SGR that operates at the individual physician/practice group level. This would 

not only be a fairer system but could affect behavior at the level where behavior 

occurs. The other option is to begin the process of paying physicians for more aggregated 

bundles of services. Payments could be developed by CMS to begin by July 1, 2010 

to cover all of the services provided for the most important chronic diseases, singly 

or for multiple diseases, provided to a patient over the course of a year. Similarly, 

single payments for a subset of high cost/high volume DRG’s covering all of the physician services to a patient during their hospital stay could also be developed. While 

these inter-rim steps are occurring, CMS needs to be developing a two-part RFP to 

have produced a redesigned aggregative physician payment system. The initial contract needs to be let early in 2009, with a final report due no later than June 30, 

2011 and an implementation start date of Jan. 1, 2013. This is a very aggressive 

schedule for the agency and it would need resources to support these efforts. The 

Congress has been digging an ever-increasing hole for most of this decade. It has 

got to start getting itself out and it had better do so fast. 

f 

Chairman STARK. Thank you, very much. Dr. Nielsen. 

STATEMENT OF NANCY H. NIELSEN, M.D., PH.D., PRESIDENT, 

AMERICAN MEDICAL ASSOCIATION 

Dr. NIELSEN. Good morning, Mr. Chairman. I am Nancy 

Nielsen, President of the American Medical Association and an internist from Buffalo. And I drive a previously owned Jeep. 

We thank you very much both you, Mr. Chairman and Ranking 

Member Camp, for your help and your leadership in trying to make 

sure that the next few months are spent constructively with something that will replace what is clearly a flawed physician payment 

system. You all know the flaws, and so I am not even going to 

point that out. 

We are facing a projected shortage of 85,000 physicians by 2020 

and, as has also been in the news recently and alluded to by virtually everyone who has spoken, the big problems are not only— 

are primarily in primary care and we are very, very concerned 

about that. But there are some other shortages with surgeons with 

oncologists and geriatricians. So we are facing this, and the cliff 

about which we are going to go over unless something productive 

is done of a 20 percent or more cut is not going to help at all. 

We are also on the brink of transformation of health care with 

information technology, and the problem there is the investment 

that is necessary, not only the interoperability. But you know all 

of that, so I won’t go into that. 

It is really important that we try to figure out what we are going 

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tem that allows physicians to focus on what they want to do which 

is to take care of patients. We very much appreciate the help of 

Congress in buying us a little time so that instead of coming to 

Washington and fighting over stopping going off a precipice that 

nobody wants us to go over, we now have the opportunity to work 

together to try to achieve some real change. 

The first thing that we would ask is to ask the Congress to 

rebase the projections for Medicare. The forecast baselines change 

every time Congress passes a bill to prevent the immediately pending cuts. With every single necessary congressional intervention, by 

the way for which we are eternally grateful, the chasm gets deeper. 

And everybody knows that that is not something that can be allowed. So we urge this Subcommittee to consider establishing a 

new baseline that erases the SGR deficit, reset the baseline to reflect actual spending which acknowledges reality and would establish a rational basis for designing a new system in which we would 

have appropriate incentives for quality of care, utilization and efficiency. 

Even with rebasing the AMA understands that the need exists 

to ensure that physician services are both appropriate and properly 

valued. The RUC is reviewing potentially misvalued services and 

exploring opportunities to bundle services that are currently offered 

together most of the time. The RUC has also developed relative 

values for care coordination services outside of the face-to-face encounter, but CMS has not adopted those values. 

We support confidential feedback to physicians, both on quality 

measures and on resource utilization. We also support funding for 

comparative effectiveness research so that physicians can make 

better choices for their patients and patients can make better 

choices for their own health care. We are working with State and 

specialty organizations to analyze the specific reform proposals that 

are out in the marketplace such as the medical home, quality incentives, bundling episodes of care, and one I haven’t heard here, 

accountable health organization. 

We look forward to sharing with the Committee more specific 

comments as our efforts proceed. It is important that we get widespread physician input and consensus because these reforms may 

have significant advantages and disadvantages. Some involve complex factors such as risk adjustment that might have unintended 

consequences for patients and physicians. 

As we move forward we look forward to working with the Subcommittee and with Congress and with many others who have a 

large stake in the success of a strong and sustainable Medicare. 

Challenges abound. It may be that because the issues involving 

certain communities are diverse that a multi-pronged, multi-faceted approach may be necessary and it may not be one size fits all. 

On the other hand, we look forward to working with you to fulfill 

the promise of Medicare for our seniors. 

Thank you very much. 

[The statement of Dr. Nielsen follows:] 

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Chairman STARK. Thank you, Dr. Nielsen. 

Mr. CRANE. 

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STATEMENT OF DONALD M. CRANE, PRESIDENT AND CEO, 

CALIFORNIA ASSOCIATION OF PHYSICIAN GROUPS 

Mr. CRANE. Thank you, Mr. Chair, Ranking Member Camp, and 

thank you, Members of the Committee. I am Don Crane. I am the 

President and CEO of CAPG, California Association of Physician 

Groups. We thank you for this opportunity to address this very important issue that is so near and dear to our hearts, which is physician payment reform. 

I represent a professional association located in California, confined to California, that is comprised of about 150 multi-specialty 

medical groups that employ or contract with about 59,000 physicians, well over half the practicing physicians in the State of California, that provide services to approximately 12 million patients in 

coordinated care, or managed care as it is also known, plus another 

approximate 5 million patients in fee-for-service models, original 

Medicare and PPO. 

So we straddle both of the payment systems that predominate in 

California, capitation and fee-for-service. And so we see these two 

systems, we live them day in and day out. We see their impact on 

behavior. We know how they affect performance, and we think we 

have a unique perspective on this issue of payment reform as a result. 

To go to the bottom line really of my comments to the Committee, we think the prepaid capitated coordinated care systems 

produce a much more efficient system and ultimately result in 

more affordable care which is what we are all going to need to 

achieve if we are going to succeed going forward. And the reasons 

for that are many, we have heard some of them discussed today, 

so I will be brief in summary in outlining a few of them. They really all relate to financial incentives and the way humans, which are 

really economic creatures, respond to financial incentives. 

Capitation incents frugality. That is its chief virtue. We see it 

manifest itself in many ways. Perhaps most importantly the emphasis on prevention. When a physician group and a physician is 

able to prevent the onset or the worsening of a disease they save 

money downstream and that is in their interest, and so there an 

enormous premium and emphasis paid on prevention, early intervention, early assessment. All good for the quality, all good for the 

patients, and all resulting in more affordable care. 

It also incents coordination and the development of systems, systems of all kinds, personnel systems, technology systems, and systems are more efficient than nonsystems. 

It also provides the capital that fee-for-service does not for the 

acquisition of infrastructure, and maybe the most important of 

which these days is IT. That is why you see in California, California leading the rest of the Nation, in the implementation and 

adoption of electronic medical records. Forty of my members, large 

members, will be fully implementing their electronic medical 

records within a short year and a half from now, bringing digitized 

medical records for the benefit of their patients to about 10 million 

Californians. This is way out in front of the rest of the Nation, and 

the ultimate reason is prepaid capitation. 

We also have in California a very robust pay for performance 

program that involves 35,000 physicians, all the health plans. It is 

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a collaborative that is the darling really of pay for performance systems across the United States and it exists principally because of 

the virtues of prepaid capitation. 

On the other side of the ledger and by stark contrast there is the 

fee for service system. We see that as well because we sometimes 

receive capitation, we sometimes receive fee-for-service payments. 

In turn, we pay capitation and we also pay fee-for-service and so 

we see both systems. 

In a word, as we have heard repeatedly today, a fee-for-service 

payment methodology induces churning. We facetiously refer to it 

in California as fee for volume, because it is well-known to maximize one’s income you need to produce more units of service. The 

more you do, the more you get paid. That is the incentive. And so 

it produces the overuse we see, the duplication of procedures and 

services. It creates a fragmented, non-network of physicians operating in a million different little silos in a disconnected way. Episodic care, not what we want. 

A couple of quick proof points that I think bear mentioning here. 

If you look at the cost of health care in California versus other 

States in the rest of the Nation, California is very much less expensive. Just a short couple years ago I was able to crow that we had 

the lowest commercial premiums in the United States. This is 

HMO and PPO included together. That has changed, but we are 

still down in the bottom four or five. Much, much less expensive, 

for example, than New York. And the reason is managed care, prepaid capitation. It produces a more affordable product. Looking 

even within our borders and in my own business, I as an employer 

pay for benefits for my employees. The commercial HMO product 

is anywhere between 15 and 30 percent less expensive than a comparably comprehensive full PPO product. So it is less expensive, 

which is a critically important fact we will need to pay attention 

to going forward. 

So in conclusion, again more affordable and really higher quality 

care, and that is really the essence of the paper we have submitted 

before you, and that is triply so in connection with chronic disease 

management where the coordination of multiple providers operating out of a single medical record, single medical chart is critical 

here, and that is what we find in our system. It produces better 

access frankly. My members are leaders among urgent care, same 

day access. All these systems are developed and it really emanates 

from prepaid capitation. 

And I will finally conclude by saying it is really fairly popular. 

The HMO product in California is rather durable. It is here, we 

hope it is here to say. We think it ought to be migrated across the 

rest of the Nation. 

So I thank you for the opportunity to address this. I would be 

happy to answer any of your questions. 

[The statement of Mr. Crane follows:] 

Statement of Donald M. Crane, President and Chief Executive Officer, 

California Association of Physician Groups, Los Angeles, California 

Good morning. My name is Don Crane, and I am the President and Chief Executive Officer of the California Association of Physician Groups (CAPG). On behalf of 

CAPG, its 150 member groups, the 59,000 physicians who practice in those groups, 

and the 12 million patients, I would like to thank Chairman Stark and Ranking 

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Member Camp for inviting us to participate in this important hearing on Reforming 

Medicare’s Physician Payment System. 

The medical groups and physicians of CAPG are working on many of the same 

issues that you are grappling with here on Capitol Hill—how best to provide high 

quality health care, improve efficiency of the care model, ensure that the system can 

adjust to complex problems with innovative solutions, reduce health care costs, and 

improve the quality of life for our patients. 

On the issue of Reforming Medicare’s Physician Payment System, CAPG offers a 

unique perspective. For more than 25 years, California physicians have been able 

to care for their senior patients through both a Medicare managed care model and 

through the traditional Medicare fee-for-service system. In fact, more than 50 percent of Californians receive their health care through some form of capitated payment model. Our history and experience with both forms of payment has given us 

a unique perspective of their various strengths and weakness. 

CAPG finds that a organized health care delivery, through a capitated payment 

model, provides greater incentives for high quality, efficient, and cost effective 

health care. Organized Delivery functions according to the following management 

principals—the same type of principals which make any business successful: 

• Strategic Resource Allocation: Ensures that capital is invested in areas that 

reduce the cost of care (i.e. urgent care centers developed to reduce hospital 

cost) 

• Staff Recruitment: Workforces are developed to ensure that patients receive 

the highest quality, most cost efficient form of care. 

• Data Driven: By measuring activities and outcomes, we can identify ways to 

systematically improve our care. 

• Optimizing the Whole: Focus on managing the totality of the health care dollar, not just maximize an individual part (i.e. one type of service). 

• Leverage Technology: Develop information systems in a group or organized 

setting to coordinate care, capture relevant system data and provide for documented outcomes. 

• Leverage Volume: Maximize purchasing power for everything from supplies to 

specialty services. 

An organized delivery model is built on a culture of conservatism. It encourages 

provides to work within a budget, identify those employees and services that improve quality of care, and invest in systems and infrastructure to reduce costs and 

improve efficiency. Conversely, a fee-for-service system incentivizes episodic, acute 

care. Under this system, providers seek to maximize their units of service, leading 

to even more prescriptions, treatments, and procedures. This creates a health care 

‘‘churn’’ that emphasizes volume over efficiency, overuse over prevention. And it is 

clear, in this case, that more health care does not equal better quality health care. 

As Congress considers reforms to the physician payment system, we encourage 

you to consider reimbursement methodologies that will help sustain the Medicare 

program. These policies must use economic incentives to ensure that physicians and 

other health care providers adopt practices that ensure quality and efficiency—essentially, using payment methodologies to modify physician behavior. 

To demonstrate the benefits of this approach, we draw from a study we did last 

year, entitled ‘‘From the Point of Care.’’ This report highlighted the perspective of 

CAPG members—those physicians on the front lines in America’s health care system—and their experience with capitated payment systems. 

In summary, CAPG physicians found that they are able to provide better health 

care to their patients who are in organized delivery plans than those in traditional 

Medicare. This report was the first of its kind, in that it discussed value not just 

in economic terms, but in human terms. CAPG’s members were able to assess these 

payment systems on other key characteristics, including quality, efficiency, flexibility, and modernization. Against this backdrop, CAPG members found that 

capitated payment systems produce significant benefits for its enrollees, especially 

in the area of care coordination, pay for performance, adoption of health information 

technology, and evidence based medicine. 

Chronic Care Coordination 

According to a recent study by the Commonwealth Fund, an estimated 20 percent 

of Medicare beneficiaries have five or more chronic conditions. These beneficiaries 

are treated by an average of 14 different physicians, leading to medical costs that 

equate to two-thirds of the Federal program’s spending. It is the experience of 

CAPG physicians that the traditional fee-for-service model is ill equipped to manage 

seniors with multiple chronic conditions. 

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For many chronic illnesses such as diabetes, arthritis, congestive heart failure, hypertension and others, there are a range of proven interventions and therapies. 

These therapies can minimize, delay, or entirely prevent a range of secondary complications, resulting in improved comfort, productivity and quality of life for the beneficiary while reducing the cost of avoidable crisis intervention. Unfortunately, the 

current reimbursement structure cannot respond to the treatment needs of chronically ill patients. Multiple studies have pointed out that many patients in traditional Medicare receive chronic care oversight in a sporadic and incomplete fashion. 

Organized delivery systems have embraced a chronic care model that employs a 

fundamental redesign of the care delivery system. This model requires computerized, centralized registries that allow providers to know which patients have certain 

diagnoses, when their services are due, their lab results and personal measures, and 

when those results indicate the need for intervention. These care management services are only possible in the context of an organized delivery system and are virtually non-existent in traditional Medicare. 

Pay for Performance (P4P) 

California medical groups have led the nation in the development of clinical performance measurement programs and economic incentives which reward high-performing providers. Under the auspices of the Integrated Healthcare Association, 

these efforts have set the foundation for California’s annual Pay for Performance 

(‘‘P4P’’) bonus payment system. These bonuses have created economic incentives 

which have resulted in health care improvement strategies being implemented 

across the entire state. 

Our P4P program has been closely studied by the Centers for Medicare and Medicaid Services to determine which components can be exported to geographic areas 

where traditional Medicare payment methodologies predominate. Two characteristics seem essential to a successful P4P program: 1) medical groups need to be effectively integrated with their local provider community and 2) population-wide care 

improvement is the criterion for a financial reward. 

The benefits of California’s P4P program are demonstrable in under capitated 

payment systems, resulting in a new culture of measurement, public reporting, annually improving quality, an objective assessment of efficiency, and better personal 

experiences and clinical outcomes for patients. There is no comparable P4P program 

in traditional Medicare, and given the importance of organized systems of care and 

populations based measures, P4P in traditional Medicare is likely to be unsuccessful 

in stimulating meaningful changes in practice patterns. 

The Use of Health Information Technologies to Improve and Manage Care 

California’s organized systems of care are widening the application of electronic 

health registries, which help with the management of chronic illnesses, particularly 

those requiring cyclical oversight. They are also used to assure routine screening 

and preventive services such as mammography, cervical cancer screening, colorectal 

cancer and screening for other treatable illnesses. 

Furthermore, California’s medical groups are deploying electronic health records 

(EHR) well ahead of the national trend. The use of EHRs in seniors has resulted 

in: 

• Physicians managing multiple simultaneous conditions with complete access to 

clinical information necessary for the best medical decision; • Electronic prescribing and subsequent tracking to assure accuracy, continuity 

and safety, • Coordination of care among multiple providers with instantaneous sharing of 

information to support clinical decision making to avoid redundancy, missed opportunities, and mistakes; and Providing patients with portable access to critical medical records when away from home. 

Capitated payment systems greatly contribute to the development and adoption 

of Health IT. The use of EHRs, electronic registries, electronic prescribing and other 

Health IT is not nearly as prevalent in traditional Medicare. 

Evidence Based Medicine 

Providing evidenced based medicine is another area where capitated payment systems have been able to make significant progress. California physician groups have 

worked to avoid inappropriate utilization by focusing on scientifically justifiable clinical decisions. 

Physicians who are part of physician groups routinely submit clinical rationale 

and justification for procedures, especially those with ‘‘gray areas,’’ clinical controversy, or complex choices. This exercise does not replace a physician’s clinical 

judgment nor is it an excuse to thwart necessary care, but rather a quest to deliver 

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the right care, at the right time, at the right place. Objective, scientific, and ethical 

oversight is the cornerstone of the efficient use of finite resources in a costly environment. 

I think we can all agree that our health care system should promote prevention, 

chronic care management, and avoidance of unnecessary and unjustifiable health 

care. Organized delivery plans have made considerable progress on these, and other 

fronts. 

Summary and Closing 

For more than two decades, CAPG’s members, their physicians and their patients 

have directly experienced the clinical and administrative successes of capitated payment systems. As Congress considers ways to reform the Medicare provider payment system, we encourage you to consider expanding this approach, and providing 

incentives for higher quality, more efficient health care delivery. We look forward 

to working with you on this effort. 

f 

Chairman STARK. Thank you very much. Mr. Crane, approximately what percentage of your members are in staff model programs as opposed to other types of group practice? 

Mr. CRANE. It is approximately 50/50, maybe 45/55. 

Chairman STARK. What other staff model groups besides Kaiser? 

Mr. CRANE. There’s the two Permanentes that belong to CAPG 

and they are huge. Then there is probably 40 percent of my members which are medical groups with employment relationship with 

their physicians. And then I am guessing approximately 60 percent 

of my members are IPAs, independent medical. 

Chairman STARK. Okay. If we went to capitation as you suggest, why do we need insurers in the middle anymore, why don’t 

we just capitate directly to the groups? 

Mr. CRANE. Good question. Of course there are those who advocate that. In California our system works well in a delegated model 

with the insurance companies handling the—— 

Chairman STARK. No, it doesn’t. The insurance companies in 

California rip us off and charge more than they do in, say, Minneapolis for less good care. So that doesn’t wash. California is the 

most expensive, but we don’t produce anything to brag about in 

terms of results. 

Mr. CRANE. Agreed. They are overpaid and I would agree with 

you there, but they are performing some important functions that 

need to be performed. There is the marketing, advertising, sale, 

brokerage, there is the delivery of the insurance that they do. I 

won’t defend them. I am saying that that model is working moderately well in California frankly. 

Chairman STARK. Okay. You do support and you mentioned 

that you have 40 member groups who are moving toward information technology. Will each of those 40 groups be able to talk to each 

other and swap sanitized records and combine them all for purposes of research or will they be independent reports records that 

will not be shared? 

Mr. CRANE. Unfortunately the latter. Indeed they are silos as 

well, and until we have a Calrio utility across California we won’t 

achieve that important goal. 

Chairman STARK. Would you support some kind of payment incentive to get physicians and other providers into an information 

technology system that would be interoperable and in a sanitized 

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way aggregate all of the medical records so that they could be used 

by people with a need to know for research? 

Mr. CRANE. Absolutely, yes. 

Chairman STARK. Okay, thank you. 

Dr. Nielsen, there is, as I alluded to talking with Mr. Crane, a 

huge regional variation and I am stealing some of Mr. Ramstad’s 

thunder here, but the evidence seems to suggest that there is a correlation between the number of specialists in an area and the 

amount of care provided by those specialists, but the quality and 

outcome don’t indicate that people living in those areas receive any 

better care. What do we do with the regional variations? Mr. 

Ramstad would like me to raise Minneapolis to the Los AngelesSan Francisco levels and I am suggesting to him no, that I want 

Minneapolis to lead the charge and we will lower California to the 

Minneapolis rates. When the spread gets such that you can get on 

Northwest Airlines and go to Minneapolis and get the same treatment for the same money, I think that is where we cross the divide. How do we deal with this? 

Dr. NIELSEN. You are absolutely right. We have been very concerned about the information we have received and those regional 

variations need to be studied, and if there are aberrations they 

need to be corrected. 

Part of our approach to that has been to develop performance 

measures so that the consortium with the help of virtually all the 

specialties have looked at what is the best thing to provide to a patient, not more, not less, the right service at the right time. And 

we also need comparative effectiveness trials to help us decide 

what is the best approach. But you are right and physicians can 

no longer claim that this is because of variation in patient mix. It 

really is not. 

Chairman STARK. I thank you. I wholeheartedly agree, and I 

hope I will come back if I get a second round and talk to you about 

medical homes and how we might use that, as I think Dr. Wilensky 

has suggested, to encourage more activity in the primary care area. 

I will interject, we have talked in this Committee, we have come 

close on the comparative effectiveness scale. Gail can remember 

when Bill Gradison and I talked about outcomes research before we 

really thought we had the ability for broad information technology 

aggregation of medical records. I don’t see how until we have a 

completely interoperable system bowing to the privacy needs to 

keep it out of the hands of unscrupulous drug companies and 

things like that, but—and then once we have comparative effectiveness we can at least deal with your members, we could deal—you 

know, should you use Lipitor or Zocor? How do you know? I think 

those are things we can prove with some effectiveness and then 

move to fit that into a reimbursement program. I don’t think until 

we get to all of that that all of your 40 members can talk to each 

other, Mr. Crane, and we can decide how a primary care physician 

can reasonably, at a reasonable cost manage 500 or a 1,000 patients in a practice as a medical home. I don’t know. 

Gail, your theme is with everyone else’s greater reliance on primary care. And as I recall, that was the intent. 

Ms. WILENSKY. Yes. 

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Chairman STARK. Originally, when—I think it was another gentleman from the Twin Cities, a distinguished former Senator and 

I who worked, and we thought we had the system locked up. Gail 

even signed up to it. Where did we go wrong? 

Ms. WILENSKY. There were several problems that arose. One 

had to do with the use of separate volume performance standards 

which at the start changed some of the relative value weights. Part 

of it has been in the mix of services that people use. And I think 

the system has not been sufficiently robust to be able—because of 

the attempt to keep things budget neutral—to reward the primary 

care physicians’ activities. 

A lot of it relates back to the use of a disaggregated fee schedule 

where some of the activities that a primary care physician wants 

to provide, such as education to his patients, as well as a lab test 

or a visit, is not able to be handled well when you have billing at 

a very discrete level. And it is why, either through the use of a 

medical home or some other way of combining payments for taking 

care of a diabetic or someone with congestive heart failure, it would 

allow that physician to receive a fairer payment and be able to 

make decisions within that payment as to how best to treat the patient. 

Every indication we have in terms of residencies filled, in terms 

of difficulties, for people who don’t have ongoing primary care physicians to get an appointment with a new primary care physician, 

includes a shortage of primary care physicians. And we need to at 

least make it possible for people who finish school to be able to 

practice primary care. 

Congressman Becerra and I have had discussions for I think at 

least a decade about using selected loan forgiveness as a way to encourage people who want to practice primary care. I have a daughter-in-law who finished a OB residency last year and is discovering 

the difficulties of trying to pay back 4 years of medical school and 

a year of an MPH while practicing primary care. In addition there 

are a lot of concerns about malpractice. So this would help, but it 

won’t solve the whole problem. 

Chairman STARK. Just for a moment I want to—who brought up 

the accountable care organization. I am going to defer that if Mr. 

Pomeroy is here, or when he comes out, we will talk about that 

later. But remind me, if you will. 

And Bruce, you suggested short-term steps to change the E&M 

codes. If we do it a budget neutral way, then we have to take it 

out of the hides of the proceduralists, right? How would this effect 

physician spending? Do you want to elaborate? 

Mr. VLADECK. Well, again I would only suggest that, if everyone is right and what appears to be true sort of cross-sectionally 

actually works in real life over time, then raising the relative price 

for primary care services and increasing the volume of primary 

care services provided to Medicare beneficiaries should reduce the 

utilization of at least primary care referred specialty services and 

create some offsetting savings which would permit, under the current or modified SGR, some greater increase in the conversion factor than you would otherwise be able to afford. 

Chairman STARK. Thank you. 

Mr. Camp, would you like to inquire? 

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Mr. CAMP. Thank you, Mr. Chairman. 

Mr. Crane, right now Medicare has this somewhat fragmented 

fee for service system and yet we have this wave of baby boomers 

that are retiring and will put a great deal of demand on the system. Do you believe that that system is capable of absorbing this 

influx? 

Mr. CRANE. I do not. 

Mr. CAMP. And what changes do we need, for example, like a 

coordinated care system to protect Medicare so that we can ensure 

that it is there for our seniors? 

Mr. CRANE. Some of those that had been mentioned today, bundled payments and a greater emphasis on primary care of course 

would be included in the mix, but the chief argument I would 

make, I recognize it is controversial, was that we have a platform 

now in Medicare Advantage that can be built upon and improved 

that serves very, very well the seniors certainly in California and 

can be expanded and should be expanded, providing the really excellent medical home to them now. It is a model that is working 

well. So expand it is what I would say. 

Mr. CAMP. How would a capitated system help control costs and 

physician spending in Medicare compared to the current fee-forservice? 

Mr. CRANE. Well, capitated groups have to operate within the 

budget they are allotted, via the capitation. And so by reasonably 

setting that capitation you are going to be able to incent the frugality that I mentioned earlier, far more so than you will in an unbridled fee-for-service system. So where cost is a big consideration 

you need to the kind of payment methodology that moderates cost 

and yet preserves quality. We have that. That is what I would recommend. 

Mr. CAMP. Thank you. 

Dr. Wilensky, the prospective payment system for inpatient hospital care began in 1983, and after moving from a cost-based system to a bundled, capitated payment system, the length of hospital 

stays has declined 32 percent from 1990 to 2001. And do you believe a bundled payment in the physician arena could result in 

similar efficiency improvements, obviously saving Medicare significant money while still ensuring quality care? 

Ms. WILENSKY. It would move in that direction. I don’t have a 

prediction as to how much. I believe there is a reason the Congress 

has directed the agency to use bundled payments for home care, 

the episode payment and for skilled nursing facilities for inpatient 

and for outpatient hospital care, and it needs further consideration 

in the area of physician reimbursement. 

Mr. CAMP. And Dr. Nielsen, I mentioned the millions of baby 

boomers that are about to enroll in Medicare. If significant changes 

are not made to the SGR, will physicians have to consider whether 

they will take new patients? 

Dr. NIELSEN. There is no question. And I must say that I disagree with your chairman about this not being a very real consideration. You heard that. It was not empty rhetoric in early July. It 

was very serious. People are really having trouble, particularly 

those in primary care but some in other specialties as well. So I 

think that we do have to fix this. 

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If I may, can I just add one thing because, I must say, I never 

heard, when I heard Mr. Crane make a comment, I have never ever 

heard anybody equate Medicare Advantage with the medical home. 

And I have to tell you that one stretches my very credibility. I hope 

that I misunderstood what he said. But there is no relationship between a Medicare Advantage plan, some of which do very good 

things, and the medical home. The medical home is very different 

and is a home with a physician or other health care providers—— 

Mr. CAMP. I understand that. 

Mr. Crane, do you want to comment? I think you were referring 

to the wellness and coordination of care. 

Mr. CRANE. That I am. 

Mr. CAMP. That is what I understood you to say. 

Mr. CRANE. Certainly, I am not referring to health plans. What 

I am referring to is what he have in our multi specialty medical 

groups in California that are presently medical homes both in the 

commercial model and, yes, in the senior model as well where you 

have essentially a primary care system that involves coordination 

and a concierge for patients to help navigate through the labyrinth 

of specialty care hospitals, prehospitalization, post hospitalization. 

We have primary care directed groups that provide that medical 

home across the spectrum of products, and that is the point I was 

trying to make. 

Mr. CAMP. Getting back to my point, Dr. Nielsen, you mentioned 

that the concern about physicians taking on new Medicare patients. If the Medicare eligibility age were dropped to 55 years old, 

would the current problem with Medicare physician payments be 

made worse or better? 

Dr. NIELSEN. The problem now is reimbursement in many specialties, keeping up with practice costs. And it is very well known 

that private plans tie their fee schedules, one way or another, to 

Medicare. So, frankly, the reality is if what is happening now in 

Medicare and Medicare anticipated to go broke in a few years, if 

you expand the eligibility, it will worsen the problem earlier. So I 

think it is important that we get to a better solution. 

Mr. CAMP. Thank you very much. 

Thank you, Mr. Chairman. 

Chairman STARK. Thank you. 

Mr. Thompson would you like to inquire. 

Mr. THOMPSON. Thank you, Mr. Chairman thanks to all the 

witnesses for being here today. Dr. Nielsen I agree with you on the 

issue of providers and what kind of predicament many of them 

would find themselves in if we allowed these cuts to continue. I 

represent a rural district, a lot of solo practitioners, a lot of small 

group practices. All of these folks are feeling the strain right now 

without the cuts. So if there were, I think it would be devastating. 

In your written testimony, you talked about accurate risk adjustments and how we don’t want to discourage docs from taking the 

tough cases, and applying that to the area that I represent, as I 

just described. How do we accurately measure that risk so that we 

don’t provide more disincentive for people to practice in rural 

areas? 

Dr. NIELSEN. Let me give you an example that I am very familiar with. I am in Buffalo. In Buffalo, we have had experience with 

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capitated pre-paid reimbursement, and the private plans have done 

away from that model. But there was a single per-member permonth assignment of a fee to a physician. Just as there are problems—— 

Mr. THOMPSON. A fee from whom, to the physician? 

Dr. NIELSEN. From the health plan would pay the physician a 

fee for a person, per member, per month. The problem was there 

was no distinction between a healthy 19-year old and a 92-year old, 

and there is a very big difference. And what one has to be careful 

about and the reason we need to very quickly test some of these 

models that have been mentioned is we have to see what the unintended consequences were in that, in the circumstance that I gave 

you, the obvious thing they did wrong was not to just risk adjust. 

There should have been a higher payment for the 92-year old than 

the19-year old. That is my point. 

Mr. THOMPSON. Anyone else on that issue? 

Dr. Vladeck, you had mentioned that we should look at some foreign models and learn from them. What sort of things are they 

doing in other countries that we should be doing? Or what are the 

lessons learned looking at those foreign models. 

Mr. VLADECK. I was suggesting I think that in much of the rest 

of the industrialized world, they have managed either through 

their payment systems or other mechanisms to have a better balance between primary care and specialty care. 

Mr. THOMPSON. Is there someone that is doing something that 

we are not? Or are we doing something that we shouldn’t be doing? 

Mr. VLADECK. Well, many of them are doing it, it is outside 

Medicare and indeed only loosely within the jurisdiction of this 

Committee. But many other relatively affluent nations are doing 

what we used to do in this country, which is taking some greater 

responsibility for medical manpower policy or personnel policy, 

both by more generous financing of medical education so that 

young physicians don’t have the kind of debt loads they have in the 

United States, which may limit their options, but also by intervening more aggressively in issues of availability of specialty slots 

for training and things of that sort. And we to a much more limited 

extent used to do a lot more of that in this country than we do now, 

and again, there was some reference made earlier by Dr. Wilensky 

to even the question of using targeted loan forgiveness, for example, for young physicians so that they can afford to practice in underserved areas or to provide primary care. We do a lot less of that 

as a matter of public policy right now than we did a decade ago, 

and I think as part of the strategy to improve the primary care specialty balance, we ought to look at reviving some of those things. 

Mr. THOMPSON. Is preventive health care practiced more diligently in other places than here? Someone had mentioned that. It 

seems to me we could make up a lot if we had better preventive 

care practice. Any comments on that? 

Mr. VLADECK. Let me just make one quick comment on that. 

It is true that primary care practitioners, particularly when you 

have explicit guidelines and explicit data and reporting systems to 

evaluate their compliance with the guidelines, whether you are 

paying more or not, will provide more preventive services or more 

clinically accepted preventive services than other physicians. But in 

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the context of incentives, I really want to just make an observation 

relative to one of the earlier comments. If you have an enrolled 

population that turns over at the rate of 20 or 25 percent a year, 

as is the norm in much of the private commercial insurance market, the economic incentive to provide preventive services is extremely attenuated. And we do better by expecting physicians to 

meet professional performance standards with or without financial 

incentives than we do by incenting plans to invest in patients who 

will be long gone when the benefits of prevention begin to be felt. 

Chairman STARK. Thank you. 

Mr. Johnson, would you like to inquire? 

Mr. JOHNSON. Thank you. 

Thank you, Mr. Chairman. 

I welcome you all. 

Gail, it is nice to see you again. We all know the current system 

of how we pay our doctors is unsustainable and docs in my district 

talk to me all the time about how frustrating it is to try to run a 

small business, which is what they do, when year after year their 

payment rates for Medicare are up in the air until the last minute. 

I am struck by the fact that so many ideas center on just trying 

to take the current process apart and make it better. 

However, I think one of the greatest problems is the current 

process. We can’t fix the problem by just tweaking it. We need a 

new process. I think we have got to think out of the box. And I 

don’t know what it actually costs for an office visit or an x-ray, and 

it is different all over the country. We don’t know because we have 

formulas, not market forces, setting the price. 

I would like to ask Ms. Wilensky and Mr. Crane to discuss ways 

that you think we can get bureaucrats and formulas out of the 

process and introduce real market forces in determining what physician services are worth. I mean, thinking out of the box, maybe 

rich guys like our chairman could opt out of Medicare for example, 

for life. And I know another guy in my district that would do that 

in a New York minute, and that is Ross Perot. He keeps asking me, 

why in the hell am I on Medicare? 

Well, I think we need to take lessons learned, maybe from a part 

D benefit and apply it to part B, but would you all discuss that? 

Gail, you want to start? 

Ms. WILENSKY. You raise some very large, very controversial 

issues. Let me try to respond to a couple of them. 

Going forward, the Congress at some period will need to look at 

the financial viability of the Medicare Program on a long-term 

basis. That did not happen when part D was passed into law, and 

we have added to the substantial unfunded liability of the program. 

As part of a long-term reconfiguration of Medicare, we may look 

at whether income relating the Part D program; the way we do 

part B, which the Congress passed in 2003, is an appropriate strategy. The age of retirement for a country that lives as long as people 

live here is another potential change. Of course, it depends on the 

kind of insurance that is available for the under-Medicare population as to how realistic that is. These are big issues. And I encourage the Congress to look at them. 

I am very worried about what is going to happen to physician 

participation and basic fairness under the program as it exists 

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right now. You are in a bind. Physicians charge Medicare using 

7,000 fees. They bill for very discrete services. The reimbursement 

for the individual services is not reasonable. And the reason I can 

say that without actually knowing very much specifically is fees 

have been essentially flat since 2002, maybe 1 percent; in 2002, it 

went down 4 percent. Inflation has clearly increased. So physicians 

that are playing it straight, not trying to make up in volume and 

mix what they lose in fees, can’t be having their expenses covered. 

And that is why I think the Congress has to make a fundamental 

choice about what direction it wants to go. 

Now some physicians are doing very well under Medicare, not because of the fees, but because they are very aggressive in the volume and mix of services and the kinds of services they provide. But 

physicians that aren’t doing that really are not being treated fairly. 

If you want to stay with a very disaggregated fee schedule, 7,000 

codes, I really think the notion of thinking about having these 

spending limits at the level of the practice makes some sense. Then 

you can at least reward the conservatively practicing physicians, 

paying them more, and not the ones that don’t. 

But if you don’t want to go in that direction I think you need to 

think about having payments for bigger sets of services. And you 

can decide how to set those payments, whether you want to use 

historical fees, whether or not you want to have it be more marketbased, whether you want to have it administratively based. Typically when the bundles exist, when they were created, they were 

based on historically what existed in the area. But that is your 

choice. 

Mr. JOHNSON. Mr. Crane, do you have a comment? 

Mr. CRANE. Very briefly. I agree with what Ms. Wilensky said. 

You know capitation is the ultimate aggregator. It is a good starting point. In California, we have competitive bidding, and the 

groups are paid different amounts by the health plans who are— 

so there are market forces at work. It raises the question of whether there is overfunding or overfunding from the top, a separate subject we can talk about, but there is a market at work there, and 

I think it is a good platform for us to build on frankly would my 

answer. 

Mr. JOHNSON. Thank you, sir. 

Thank you, Mr. Chairman. 

Chairman STARK. Let’s see who we have got here on the list. 

Mr. Pomeroy, would you like to inquire, sir? 

Mr. POMEROY. Thank you, Mr. Chairman. 

I want to commend this panel. It has been incredibly interesting. 

It is my pleasure professionally to have worked with both Dr. 

Vladeck and Dr. Wilensky for many years. 

And I must say I find some of the testimony surprising. I hear 

Dr. Vladeck saying, well, maybe we ought to return to fee-for-service, and I hear the physicians, clinics, the professional groups saying they like capitated. Now, to me that is like Bizarro World. I 

would have thought that is 180 degrees off from what I expected 

from each of you. 

Mr. Crane, did I hear you say that California has achieved cost, 

low-cost medicine relative to other States? 

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Mr. CRANE. Well, we are struggling with an affordability problem. So we haven’t declared success. But on a relative basis, California’s health care costs are lower than other States. So, relatively, the answer is, yes, we have got a problem in California, as 

well. And we are wrestling with it at the same time. I mean, health 

care costs are rising precipitously. It is a problem everywhere. 

Mr. POMEROY. I might want you to provide, subsequent to this 

hearing, information substantiating what you have just told us. 

Not that I am accusing anything, but it is contrary to other data 

that I have seen. This is a CMS chart. You can’t see it, but you 

have seen perhaps this chart before where they basically plot on 

a matrix cost and quality. And I would point out, North Dakota is 

right here at the top of the graph in terms of costs and quality. 

And unfortunately, California is down here toward the bottom 

where the costs are more, but the quality is less in terms of outcome. 

I also believe that another chart here, Medicare spending per 

capita in the United States by hospital referral region shows California in a high category area, and as plotted in terms of cost, per 

capita cost, of final 2 years of life, California again is a nation leader on a per capita basis with a cost of $57,914 compared to just, 

for example, North Dakota, which happens to be below lowest, 

$32,523. 

So all of the information I have led me to exactly the opposite 

conclusion that you gave. One of the reasons that I had had this 

impression was because of a practice pattern in multi-specialty 

clinics that is very specialty intensive. This is discussed in some of 

the Dartmouth type reviews, and a chart that I have here shows 

that, for example, spending, physician payments per decedent, as 

tracked by those who have passed within a care system: UCLA 

Medical Center, $6,671; for comparison, Mayo Clinic, well known 

Minnesota-based highest quality, $2,935. So these are cost differences that are about the opposite of what the impression you 

have. 

Mr. CRANE. Sure. Well, I was referring to commercial HMO premiums. You are looking at, if I am hearing correctly in the main, 

aggregated numbers, California in the whole against other States 

products. It is the commercial HMO premium that is lower, showing its virtues of being more affordable. 

Mr. POMEROY. The commercial HMO’s also underwrite. They 

medically underwrite who they write. Is that correct? 

Mr. CRANE. Well, yes and no. They are not supposed to. 

Mr. POMEROY. I used to be a State insurance commissioner. 

And I don’t know California’s law. I expect the individual market 

does, and maybe the large group market doesn’t. I don’t know 

about the small group market. 

Mr. CRANE. I think that is the case. I, frankly, don’t have an 

answer to that question. 

Mr. POMEROY. Because this is looking at Medicare payments 

focused on, for example, that chart showing cost and quality is 

more germane to the topic under consideration by this panel because that is looking at the population we are considering in my 

view. 

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Mr. CRANE. Our hospital costs are high. There is no question 

about that. We have the variability problems that Wenberg has discussed. I was focusing on the commercial HMO premium. 

Mr. POMEROY. You said something in your testimony about incentives under fee-for-service versus capitated rates; I completely 

agree with you. I don’t mean to be putting you through a vigorous 

cross exam. 

I would like, Mr. Chairman, if I might throw out if I have a question for Dr. Vladeck and Dr. Wilensky as former CMS administrators albeit named HCFA at the time. Are there reforms that we can 

do that basically give more of a fair shake to these places for 

achieving better value under the system? 

Let me say, I define value by health outcomes as well as dollars 

expended. 

Ms. WILENSKY. It will mean delegating a lot more authority. 

There is a good start in MIPPA allowing for a review of outlier 

physician records so that there is an ability to see whether or not 

there are reasons supporting the outlier behavior, or whether or 

not this is just a problem. If the Congress wants to allow, for purposes of setting reimbursement, the cost of services to be considered, that is something that cannot be even considered as an element, in decision-making. This issue with regard to the direction 

of payment that you want to go, whether to keep it disaggregated, 

making it more focused in terms of the spending limit, is a matter 

of fairness to physicians in inducing the kind of behavior that we 

should want. It would require additional support to the agency. If 

payments are going to move in a different direction, either toward 

bundling services or toward maintaining disaggregated payment, 

but doing so on a much more individualized basis, CMS will need 

both additional authority and support, financial support, in order 

to take on these roles. I don’t see how the program can stay where 

it is now. The problems of continuing to have physicians participate 

by having fees that are held so low is just something that is not 

going to go away. I am sympathetic with the rebasing notion. In 

the end of the day, if you have a fix, I suspect you will have to do 

something like that because I can’t begin to image where you 

would get the money to pull yourselves out of the hole that has 

been dug since 2002. 

Chairman STARK. Mr. Ramstad would you like to inquire? 

Mr. RAMSTAD. I would, Mr. Chairman, and I would first of all 

like to thank the distinguished panel for your testimony here 

today. 

And I want to say, Mr. Chairman, not only do I hear thunder 

whenever the subject of the SGR formula is brought up, but I also 

hear voices. I hear specifically the voices of our former great Senators Paul Wellstone and Dave Duremberger who years ago consistently said and told the Senate how Minnesota providers are 

being punished, how Minnesota seniors are being cheated by this 

SGR formula. 

Unfortunately, that situation has only been exacerbated over the 

recent years. Minnesota, specifically Hennepin County, where 33 of 

the 34 cities I represent lie, Hennepin County providers deliver 

some of the highest quality health care in the Nation at some of 

the lowest costs, and the reimbursement levels are unconscionably 

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low, vis-a-vis States like California, Mr. Chairman, Florida, New 

York, and so forth. 

One of the distinguished Senators I just mentioned, I won’t say 

which one, used to use the now overused metaphor in describing 

the SGR formula, and that is, there is no way to put lipstick on 

that pig. Again, I am not going to tell you which one, but you can 

guess. 

Well, my point, Mr. Chairman and Members, is that, in my judgment, after serving here 18 years, about ready to leave the Congress, unfortunately, the situation has only gotten worse, and we 

need to scrap the SGR formula. I mean, any formula that is designed to reward utilization and not quality is going to provide this 

result. Why should anybody be surprised when we effectively reward and very directly reward utilization and not quality? 

So my question for the distinguished witnesses would be along 

the lines of what we heard from MedPAC representatives when 

they testified before this subcommittee and they—MedPAC suggests reforming physician payments by creating financial incentives for quality. And I would be interested to hear first of all, as 

to that general thesis of introducing quality as the primary determinant of reimbursements, what your opinion is and how we would 

measure quality. Start to left to right or however. 

Mr. VLADECK. Well, I think it is very important that the payment system be consistent with efforts to increase quality, but I 

think our experience on the hospital side at least over the last decade or so suggests that, with the right kind of information collection, with the right kind of openness and transparency about data, 

with the right kind of professional leadership, you can achieve very 

substantial increases in quality without messing with the payment 

system. And I think, given the range of technical and operational 

problems with most so-called pay-for-performance systems, they 

may actually make it take us longer to get to where we want on 

the quality side than accelerate the process. 

Mr. RAMSTAD. Let me just interrupt. Doesn’t the corollary 

question apply? That is, you said you can’t—well, can we make the 

formula fair and reflect efficient care without introducing quality? 

Mr. VLADECK. I think there is a real problem when you provide 

incentives to provide lower-cost care or to underprovide, as through 

capitation, to make sure that you protect the quality of services 

that are being provided. And I think that is why, under any payment mechanism, we need substantially greater information and 

substantially greater transparency about the quality of services 

that are actually being provided. I would only suggest that, to some 

extent, given all the other equity concerns you are trying to address, like regional disparities in payment systems that we can get 

more mileage in the direction of quality without trying to get too 

fancy in payment incentives. I would say, however, that you absolutely have to have a floor. My idea of good pay-for-performance 

policy is what the Congress has recently adopted relative to socalled ‘‘never events’’. 

Mr. RAMSTAD. My time is up. 

I would like to hear from the other witnesses just briefly. 

Ms. WILENSKY. Your problem in Minnesota is more with the 

relative value scale and not with the SGR. The reason is because 

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Minnesota is very conservative in its practice style. Physicians 

don’t do as much; that is, the spending per person is low. Medicare 

and physician payment focuses only on the reimbursement per 

unit, and that is what the problem is. I believe with all of my 

heart, you are focusing on the wrong part of the problem. If we had 

more use of capitation, that would go another way. Capitation 

forces you to look at the spending per person. But it is why, if you 

stay with this very disaggregated fee schedule, you have to think 

about what is going be done with to try and control spending. That 

gets you into the SGR. That is what makes it so unfair. You have 

to decide which way to go. But it is not the SGR. It is the RBRVS 

that produces the unfair results for Minnesota and Iowa and North 

Dakota and South Dakota. 

Mr. RAMSTAD. I am going to wrap this up because I don’t want 

to intrude on others’ time, but notwithstanding what I have said 

today or what the situation is in Minnesota with respect to the formula, Minnesota was recently ranked, and I am sure you saw this, 

as the healthiest State in the Nation and also as the State having 

the lowest rate of uninsured people in the Nation. So notwithstanding these tremendous obstacles, our providers need to be saluted for doing a tough job well, given these limitations especially, 

it is nothing short of incredible. 

I yield back Mr. Chairman. 

Chairman STARK. I thank the gentleman. 

And I just want to say it is the Chair’s intention to recess at 

11:45. Members who want a front seat at the memorial service may 

want to leave early. But I will keep going until we recess at 11:45 

and ask if Mr. Kind would like to inquire. 

Mr. KIND. Thank you, Mr. Chairman I appreciate it and thank 

you for holding this hearing and thank the witnesses for your feedback here today. It is something we need to delve into because the 

numbers are huge as far as what is coming up with SGR, and we 

have to work on where we are going to do as a community, as a 

Congress and as a nation to deal with it. Unfortunately, my colleagues from Minnesota and I are kind of in the same basket when 

it comes to regional disparities. I hail from La Crosse, Wisconsin, 

and you look at La Crosse and Mason City, Iowa, and Dubuque, 

and we are at the bottom when it comes to reimbursement but very 

high, fortunately, in quality of care. I think Minnesota’s health suffered a little bit after the Packers defeated the Vikings Monday 

night, but we are not going to go there, since he left the room. 

But in all seriousness, here is a question. I have come to the conclusion I am convinced we have got to be focused on outcomes and 

quality, not just because it makes sense but because politically I 

think it is the only way we can deal with this in this framework. 

I am so tired, and I know my friend sitting next to me is, too, with 

all the regional fights that we have over the reimbursement formulas around here, whether it is rural, suburban or urban, West 

Coast to East Coast, middle America. And if we can focus on outcomes or a performance-based reimbursement system in both the 

public and private sphere, it will put many of us in a much stronger position to argue because we can argue against it. We can argue 

against having a comparable performance-based objective in the 

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health care whether you are in New York City or L A or North Dakota. 

But my question is how soon can we get there? And that is the 

real rub, because we are having this bill on HIT right now, and we 

are trying to figure out a way to further incentivize it to get that 

happening. And the Chairman is right that it all has to, at the end 

of the day, it has to be, interoperable and the concern is the numbers are going to start hitting us very soon here if we don’t do 

something. If the goal is try to get to an outcome and quality-based 

system, how long is that going to take in order to put in place, establish the baseline and the data and the coordination that is going 

to be required? I would be interested to hear any of your thoughts 

on that. 

Bruce? 

Mr. VLADECK. I think it is important to not get carried away 

with the end point. We are making very substantial progress. 

There are ways to accelerate that progress, and Congress I think 

can play a vital role, particularly in terms of more rapid adoption 

of IT in physicians’ offices and incentives to do it and the absolute 

need for a larger Federal role on interoperability and on privacy in 

regional data sharing and all those things. That would help accelerate it. 

But I just want to, for my friends from the upper Midwest, I just 

want to suggest that we can do a lot with the quality of care in 

individual physician practices and individual hospitals. In order to 

move the community, we have to know a whole lot more about 

what affects the health of populations than we do. And we have to 

be very careful, as Dr. Nielsen suggested, to deal with issues of risk 

adjustment but not only at the individual level but at the community level as well. 

Because the fact of the matter is that all the data shows that 

while we talk all the time about how much excess utilization there 

is in the American health care system, lower income and minority 

Americans are still significantly underserved on many dimensions 

of care. And communities with higher proportions of those folks 

tend to actually look expensive because they use emergency rooms; 

they don’t get preventive services and so forth. But if we started 

to punish them because they have bad outcomes in those communities, we would be moving policy in exactly the wrong direction. 

Mr. KIND. Is this the ideal system we should be striving for to 

begin with? 

Ms. WILENSKY. We need to find a way, to use what has now 

become a very popular term, a way to get to some kind of accountable system. And it will vary, depending on where you are. In California where there are a lot of multi specialty groups in place, 

where there is a lot of capitation, it is a lot easier. You live in a 

place that is much less densely populated. Groups need to be 

formed here as well; physicians who are working with the hospitals 

can be a perfectly good accountable unit, or physicians working 

across specialties can, in an informal virtual way, be a perfectly 

good accountable unit. 

I am a big proponent of recognizing outcomes in payment. Yes, 

of course, you need to age adjust and health risk adjust. It is too 

foolish to think that should not be done. I have just completed 3 

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years on the WHO Commission on Social Determinants. Which 

raises the notion that if you want to look at population health, as 

important as it is to focus on the health care system, that is your 

charge, you need to consider other things like education in early 

childhood—— 

Mr. KIND. I am also a big believer in the feedback tools, what 

I refer to as peer pressure out there. 

Ms. WILENSKY. That is one of the reasons people think multispecialty groups are so effective is that there is constant peer feedback by the very nature of how people practice. 

Mr. CRANE. Very briefly, to answer your question, we could 

come to an outcome quality system fairly quickly if we brought 

pay-for-performance into Medicare Advantage as in California. 

There needs to be a business case for quality. There is not a business case for quality right now in original Medicare, nor is there 

really Medicare Advantage frankly, but in California, there is that 

platform, and we have long asked that we have Medicare Advantage be folded into that program. It can be done fairly quickly. It 

is a model. It be could replicated elsewhere. 

Dr. NIELSEN. It is cost that is driving all of this discussion and 

has been for years. But it has got to be primarily about quality because if it isn’t, you can save a lot of money by withholding services, and nobody wants that. We want the best value. We want the 

appropriate service. The barrier in much of the rest of the country, 

as Gail has alluded, is that many physicians are not in large 

groups. They are in small groups. They all have computers that do 

billing, but they do not have what we are talking about. And some 

other countries have made enormous investment in that HIT infrastructure so that in fact people practicing in solo practices can become the care coordinator. You don’t have to have a disease management company employed by a health plan to do care coordination. That is what doctors do all the time. They could do it better 

if they had more information and if they had feedback. So, frankly, 

that is where we really need to go. We need to test these very, very 

quickly. And what will work in California may not work in Idaho 

for sure. 

Mr. KIND. Thank you. 

Thank you, Mr. Chairman, I see my time has expired. Thank 

you. 

Chairman STARK. Thank you. 

Mr. Becerra, would you like to inquire? 

Mr. BECERRA. Thank you, Mr. Chairman. 

Thank you to all the panelists for their testimony. There was a 

recent article published by JAMA, the Journal of the American 

Medical Association, which indicated that only about 2 percent of 

students in medical schools intend to pursue a career in primary 

care, which obviously goes to the heart of the problem we are talking about right now. I think both Dr. Vladeck and Dr. Wilensky 

talked a little about the difficulties with primary care and treating 

areas that have very low-income populations. We have problems 

with over-utilization of specialty care services. And we know we 

need to emphasize much more the utilization of primary care services. But we also know that, and I think Mr. Pomeroy tried to get 

to this point to some degree as well, that in rural areas it is tough 

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to get a lot of primary care services. That same notion or point applies to urban low-income areas. Mr. Pomeroy and I always have 

discussions about how North Dakota and California really do differ. 

I point out that, just as he always likes to point out how UCLA 

and the Mayo Clinic differ, I tell him, you don’t have to go more 

than 5 miles away and UCLA Harbor Hospital differs dramatically 

from UCLA’s principal hospital or L A County USC Medical Center, which is in my district, which is providing great services but 

hardly any Medicare services. So its reimbursement is based solely 

on Medicaid and the DSH moneys that we get for disproportionate 

care hospitals and to some degree private insurance but very little. 

And so my question becomes, how do we not only deal with the 

issue of getting more medical students to want to go into primary 

care services, and how do we then make sure that we increase the 

number of primary care physicians and services available throughout the Nation; but how do you encourage the distribution of those 

services to go into the areas where there they are woefully lacking? 

Because you can go to Los Angeles, and Mr. Pomeroy loves to point 

out the discrepancies is in Los Angeles, but I don’t have to travel 

all the way to North Dakota to find a discrepancy between a hospital in Los Angeles and a hospital in North Dakota. I can go 15 

miles away from a hospital in Los Angeles to another hospital in 

Los Angeles. So how do we try to distribute those primary care 

services which we all agree we need to emphasize far more to make 

sure that not only do we increase the supply but distribute it well? 

And I would first go to Dr. Vladeck and Dr. Wilensky, but certainly 

Dr. Nielsen and Mr. Crane, if you like to also comment. 

Mr. VLADECK. I don’t think there is one quick answer, and I 

don’t think there is one easy solution. I think there is a demonstrated track record through supportive community health centers and through the development of both hospital-based and freestanding community health centers in bringing primary care to underserved communities. I think the irony is if you talk to people 

who run those centers now in metropolitan areas around the country, they are able to hire primary care physicians; they can’t get 

specialists because they can’t afford them and they can’t compete. 

Mr. BECERRA. They also rely a lot less on Medicare reimbursement—— 

Mr. VLADECK. They get very little reimbursement. 

Mr. BECERRA. So we are talking Medicare here, and while we 

are trying to increase the supply in these community clinics, they 

are going to get not a dime out of our whole discussion here. 

Mr. VLADECK. I would make one suggestion. I think over the 

years quite appropriately, and it is complicated to do, but the Congress has recognized the need for additional payments or categorization of facilities in the Medicare Program of which central 

access hospitals are the most dramatic, to make supplemental payments in order to attract or keep providers in rural communities. 

And I think if we figure out how to define the boundaries of the 

most highly impacted urban communities, we ought to build on 

that model and expand the very limited payment adjustments we 

make for certain kinds of inner city, in particular, practitioners to 

look more like the rural model in that regard. 

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Ms. WILENSKY. The notion that it will take a number of steps 

to respond to the complex problem of a shortage of physicians, particularly the primary care and low-income and rural areas, I think 

is obvious. I continue to like the strategy of selected loan forgiveness, not only for the specialty choice but also location choice. And 

that has to be quite finely defined. Sometimes we tend to focus on 

differences in geographic areas, but they tend to be very large metropolitan areas, big geographic units. As you are pointing out for 

a different reason, what goes on within that unit may be as diverse 

as between these units. That is also true in terms of aggressive behavior by the way. So if you think about ways to increase the supply, if you think about ways to have special targeted payments, you 

might be—I am a big fan of community health centers as we have 

discussed before. I don’t know if there is anything that prevents 

community health plans from being Medicare Advantage players as 

a way to have them, available particularly in areas that are either 

underserved in general or in rural areas. I know, there are a lot 

of rules as in terms of who can be a federally qualified health center, and we need to make sure that what was done presumably to 

protect patients isn’t keeping this mechanism from providing care 

to other underserved. And finally, just as an observation—— 

Mr. BECERRA. Gail, before you move, let me ask, do you believe 

that the health plans are interested in going into these community 

health centers given that most of the population going into these 

centers is the uninsured with little health care previously and possibly the type of patient that have will have to utilize services quite 

a bit? 

Ms. WILENSKY. No, what I meant was opening up who could 

be a Medicare Advantage plan to include a federally qualified 

health centers, and not limited only to insurance plans. So it is to 

allow them to come in, and that would begin to expand who would 

be there. 

We need to be careful; if we give increased payments for targeted 

areas, rural or underserved, that we not fall into what I observe 

happening with the critical care access hospitals, which is what 

starts out as a very tightly defined group, over time, for political 

reasons, it tends to encompass a much larger group and, therefore, 

loses its ability to actually target expenditures. I don’t know how 

you get politicians to not behave politically. But it is a change that 

I observed happening before. 

Dr. NIELSEN. I am going to give you a different answer based 

on my day job, which is that I am a dean of a medical school, and 

I deal with medical students making career decisions every single 

day. The money is very, very important. The loan forgiveness is a 

very important issue. 

There is more to it. There is not a great deal of apparent respect 

for the enormity of the work done by primary care physicians, and 

I say that because clearly things that people do every day on the 

phone with patients, on e-mail with patients, really critical, not 

valued by anybody. It does not take students any time to figure 

that out. 

And so while I would absolutely support everything that Gail 

said—I am going to get to what I don’t support in just a second— 

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loan forgiveness is one. Workforce planning is another if there were 

residency spots, and that gets controversial. 

But let me tell you what won’t work because this is America, and 

that is what Canada has done and has tried to do in a more tightly 

controlled way, and that is to force people to practice in a certain 

area. They tried that in Toronto just across the border. It didn’t 

work. Doctors in Canada are now restricted to the province where 

they live. They cannot move to another province. This is America. 

That is not what you do. I think you incentivize. You don’t mandate. 

Mr. BECERRA. But Dr. Nielsen—and Mr. Chairman, I know my 

time has expired. 

If you provide the incentive, that is okay. Can you provide a disincentive? If we are going to have money for incentives, we need 

to find money to pay for those incentives. Can we then on the back 

side say, we are going to provide incentives to do these things 

which we think is very valuable, get into rural, low-income urban 

areas, and we are going to provide a disincentive for you to go to 

the other areas which helps us pay for the incentives. Is that okay? 

Dr. NIELSEN. We have already done that. That is exactly what 

you have done to primary care. You have provided a disincentive. 

Does that work? Yes, it works. 

Chairman STARK. I am going to recognize Ms. Schwartz for a 

statement, and we will then have to adjourn very quickly. 

Ms. SCHWARTZ. Thank you, Mr. Chairman. 

And I appreciate hearing your comments and appreciate the 

chairman’s graciousness in including me in the hearing. 

I just want to just emphasize something that you all said in your 

answers, and that is, one, there is not a single solution, that there 

really is going to take increased reimbursements, recognizing medical home. But I want to reinforce the issue of the health IT and 

the ability—I am from the Philadelphia area, very fragmented traditional health system, not the multi-group of specialties at all— 

the fact that we could do more to incentivize the use of electronic 

medical records with clinical protocols, interoperable, and that a 

along with some of the other points you have made around loan 

forgiveness and medical home and other on kinds of reimbursement 

could really address some of the issues in both rural and urban 

areas and across population concerns as well. So I wanted to thank 

you for recognizing that and look forward to working with you in 

the future to be able to make sure we do that as well and scale 

that up as quickly as possible. 

And with that, I will yield back. 

So thank you. 

Chairman STARK. Thank you. 

I want to thank the panel, and the hearing is adjourned. 

[Whereupon, at 11:55 a.m., the Subcommittee was adjourned.] 

[Submissions for the record follow:] 

f 

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Introduction 

This statement is submitted to the Ways and Means Health Subcommittee on behalf of the nearly 94,000 members of the American Academy of Family Physicians 

as part of its hearings on Medicare Physician Payment held September 11, 2008. 

The AAFP appreciates the work this subcommittee has undertaken to examine how 

Medicare pays for the services that physicians deliver to beneficiaries. Family physicians also share the subcommittee’s concerns that the current system is inefficient, 

inaccurate and outdated. For this reason, the AAFP supports the restructuring of 

Medicare payments to value appropriately quality improvement and care coordination. AAFP believes that this restructuring should be done with the needs of Medicare patients foremost in mind. Since most of these patients have two or more 

chronic conditions that call for continuous management and that depend on differing 

pharmaceutical treatments, Medicare should focus on how to pay for the coordination of the care these patients need and on how to prevent expensive and duplicative 

tests and procedures. 

Most people in this country, including Medicare patients, receive the majority of 

their health care in ambulatory care settings, i.e., in the office of their physician. 

About a quarter of all of these office visits in the U.S. are to family physicians, and 

Medicare beneficiaries comprise about a quarter of the typical family physician’s 

practice. Currently, 82 percent of the Medicare population has at least one chronic 

condition and two-thirds have more than one. These are conditions which are managed with the physician’s guidance and for which the patient adapts his or her behavior. Successful management of these conditions means fewer trips to the hospital 

and doctors’ offices and less expensive medical care. But currently, Medicare does 

not compensate physicians’ practices for care management and care coordination 

that does not involve a face-to-face encounter with the patient. Coordinating the 

care that patients receive from a multitude of other health care providers is critical 

to the successful management of patients with chronic conditions. 

Finding a more efficient and effective method of paying for physicians’ services 

delivered to Medicare beneficiaries with a large variety of health conditions is a difficult but necessary endeavor, and one that has tremendous implications for millions 

of patients. The AAFP, therefore, is committed to participating in the design of a 

new payment system that meets the needs of these patients and the physicians’ 

practices that serve them. 

The AAFP believes that there are three elements that should be part of the effort 

to make Medicare more responsive to quality improvement and efficiency of service. 

These are allowing beneficiaries to designate their patient-centered medical home, 

staging quality measurement and reporting, and using health information technology to support the medical home and to collect and report useful quality data. 

Current Payment Environment 

The environment in which U.S. physicians practice is challenging. Medicare, in 

particular, has a history of making disproportionately low payments to family physicians and other primary care physicians, largely because its payment formula is 

based on a reimbursement scheme that rewards procedural volume and fails to foster the comprehensive, coordinated management of patients that is the hallmark of 

primary care and effective health systems throughout the industrialized world. More 

broadly, the prospect of steep annual cuts in payment resulting from the flawed formula is discouraging for all physicians and health care providers. In the current environment, physicians know that, without annual (and more recently semi-annual) 

Congressional action, they will face Medicare payment cuts in the range of 5–10 percent. Clearly, the Sustainable Growth Rate (SGR) formula belies its name and is 

not a workable, acceptable formula. 

Under the SGR, physicians face steadily declining payments into the foreseeable 

future—nearly 40 percent over the next nine years—even while their practice costs 

continue to increase. According to the Government’s own calculations, the Medicare 

payment rate for physician services has for several years not kept pace with the cost 

of operating a small business which delivers medical care. Physicians are being paid 

at 2001 rates. 

From the outset, the Medicare program has based physician payment on a feefor-service system. This system of non-aligned incentives rewards individual physicians for ordering more tests and performing more procedures. The system lacks incentives for physicians to coordinate the tests, procedures, or patient health care 

generally, including preventive and health-maintenance services. This payment 

method has produced expensive, fragmented health care. 

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The Patient-Centered Medical Home 

To correct these inverted incentives, the American Academy of Family Physicians, 

the American Academy of Pediatrics, the American Osteopathic Association, and the 

American College of Physicians recommend that Medicare compensate physicians 

for care coordination services. Such payment should go to the personal physician 

chosen by the patient to perform this role. Any physician practice prepared to provide care coordination could be eligible to serve as a patient’s personal medical 

home. 

The AAFP recommends that Medicare incorporate the patient-centered medical 

home concept into the program because to do so will not only improve quality but 

also make delivery of health care more efficient. An efficient payment system should 

place greater value on cognitive and clinical decision-making skills that result in 

more effective use of resources and that result in better health outcomes. The work 

of Barbara Starfield, Ed Wagner and others has shown that patients, particularly 

the elderly, who have a usual source of care, similar to a medical home, are 

healthier and the cost of their care is lower because they use fewer medical resources than those who do not. An abundance of evidence shows that even the uninsured benefit from having a usual source of care (or medical home). These individuals receive more appropriate preventive care and more appropriate prescription 

drugs than those without a usual source of care, and do not get their basic primary 

health care in a costly emergency room, for example. In contrast, those without this 

usual source have more problems getting health care and neglect to seek appropriate medical help when they need it. A more efficient payment system would encourage physicians to provide patients with a medical home in which a patient’s 

care is coordinated and expensive duplication of services is eliminated. 

The AAFP concurs with a June 2008 recommendation of the Medicare Payment 

Advisory Commission (MedPAC) that Congress should establish a budget-neutral 

payment adjustment for primary care services billed under the physician fee schedule and furnished by primary-care-focused practitioners. 

We also support the MedPAC recommendation that the Congress should initiate 

a medical home pilot project that includes a physician pay-for-performance program. 

The pilot must have clear and explicit thresholds for determining whether it can be 

expanded into the full Medicare program or should be discontinued. The AAFP believes the strength of the existing literature describing the effectiveness (both health 

and economic) of the medical home warrants expeditious incorporation of this care 

coordination concept into the Medicare program. 

We believe that eligible medical homes must meet stringent criteria, including at 

least the following capabilities: 

• furnish primary care (including coordinating appropriate preventive, maintenance, and acute health services), 

• conduct care management, 

• use health information technology for active clinical decision support, 

• have a formal quality improvement program, 

• maintain 24-hour patient communication and rapid access, 

• keep up-to-date records of beneficiaries’ advance directives, and 

• maintain a written understanding with each beneficiary designating the provider as a medical home. 

AAFP also believes Congress should encourage Medicare beneficiaries to identify 

and use a personal medical home by providing incentives such as reduced copayment and deductible amounts. 

Measures of quality and efficiency should include a mix of outcome, process and 

structural measures. Clinical care measures must be evidence-based. Physicians 

should be directly involved in determining the measures used for assessing their 

performance. 

Improving Quality 

Beyond replacing the outdated and dysfunctional SGR formula, a workable, predictable method of determining physician reimbursement—one that is sensitive to 

the costs of providing care—should align the incentives to encourage evidence-based 

practice and foster the delivery of services that are known to be more effective and 

result in better health outcomes for patients. Moreover, the reformed system must 

facilitate efficient use of Medicare resources by paying for appropriate utilization of 

effective services and not paying for services that are unnecessary, redundant or 

known to be ineffective. Such an approach is endorsed by the Institute of Medicine 

(IOM) in Crossing the Quality Chasm (2001). 

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Another IOM report, released in 2006 entitled Rewarding Provider Performance: Aligning Incentives in Medicare, states that aligning payment incentives with quality improvement goals represents a promising opportunity 

to encourage higher levels of quality and provide better value for all Americans. The objective of aligning incentives for quality improvement is to 

support: (1) the most rapidly feasible performance improvement by all providers; (2) innovation and constructive change throughout the health care 

system; and (3) better outcomes of care, especially through coordination of 

care across physician practice settings and over time. The AAFP concurs 

with these IOM recommendations: 

• Measures should allow for shared accountability and more coordinated 

care across physician practice settings. 

• Quality measurement programs should reward care that is patient-centered and efficient, and reward providers who improve performance as 

well as those who achieve high performance. 

• Providers should be offered incentives to report quality measures. 

• Because electronic health information technology will increase the 

probability of a successful quality measurement program, Medicare 

should explore ways to assist physicians in implementing electronic 

data collection and reporting to strengthen the use of consistent measures. 

Information Technology in the Medical Office 

The AAFP believes that quality, access and positive health outcomes must be the 

primary goal of any physician payment system. Prevention, early diagnosis and 

early treatment will simultaneously improve quality of life and ultimately save valuable health care dollars. But implementing data collection and reporting requires an 

initial investment from the health care provider in the form of electronic data and 

decision support systems. The AAFP urges the subcommittee to explore ways of 

making funding available for small physician practices to obtain and maintain adequate electronic health records and other tools that will enable such collection and 

reporting without the considerable administrative burden we fear it will be. 

Using advances in health information technology (HIT) also aids in reducing errors and allows for ongoing care assessment and quality improvement in the practice setting—two additional goals of recent IOM reports,. We have learned from the 

experience of the Integrated Healthcare Association (IHA) in California that when 

physicians and practices invested in electronic health records (EHRs) and other electronic tools to automate data reporting, they were both more efficient and more effective, achieving improved quality results at a more rapid pace than those that 

lacked advanced HIT capacity. 

Family physicians are leading the transition to EHR systems in large part due 

to the efforts of AAFP’s Center for Health Information Technology (CHiT). The 

AAFP created the CHiT in 2003 to increase the availability and use of low-cost, 

standards-based information technology among family physicians with the goal of 

improving the quality and safety of medical care and increasing the efficiency of 

medical practice. Since 2003, the rate of EHR adoption among AAFP members has 

more than doubled, with over 30 percent of our family physician members now utilizing these systems in their practices. 

In any discussion of increasing utilization of an EHR system, there are a number 

of barriers and cost is a concern for family physicians, especially those in small and 

medium sized practices. The AAFP has worked aggressively with the vendor community through our Partners for Patients Program to lower the prices of appropriate information technology. The AAFP’s Executive Vice President serves on the 

American Health Information Community (AHIC), which is working to increase confidence in these systems by developing recommendations on interoperability. The 

AAFP sponsored the development of the Continuity of Care Record (CCR) standard, 

now successfully balloted through the American Society for Testing and Materials 

(ASTM). We initiated the Physician EHR Coalition, now jointly chaired by ACP and 

AAFP, to engage a broad base of medical specialties to advance EHR adoption in 

small and medium size ambulatory care practices. In preparation for greater adoption of EHR systems, every family medicine residency will implement EHRs by the 

end of this year. 

To facilitate accelerate reporting, the AAFP joins the IOM in encouraging Federal 

funding for health care providers to purchase HIT systems. According to the RAND 

corporation and the U.S. Department of Health & Human Services, billions of dollars will be saved each year with the wide-spread adoption of HIT systems. The Federal Government has already made a financial commitment to this technology; unWWOODS2 on PRODPC68 with HEARING

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fortunately, only a few dollars trickle down to where the funding is not directed to 

these systems that will truly have the most impact and where ultimately all health 

care is practiced—at the individual patient level. We encourage Congress to include 

funding in the form of grants or low interest loans for those physicians committed 

to integrating an HIT system in their practice. 

Conclusion 

It is time to modernize Medicare by recognizing the importance of, and appropriately valuing, primary care and by embracing the Patient-Centered Medical 

Home model as an integral part of the Medicare program. 

Specifically, the AAFP encourages Congressional action to reform the Medicare 

physician payment system in the following manner: 

• Repeal the Sustainable Growth Rate formula at a date certain and replace it 

with a stable and predictable annual update based on changes in the costs of 

providing care as calculated by the Medicare Economic Index. • Adopt the patient-centered medical home by giving patients incentives to use 

this model and compensate physicians who provide this function. The physician 

whose practice has been recognized by an independent third party and designated by the beneficiary as his or her medical home should receive a permember, per-month care management fee in addition to payment under the fee 

schedule for services delivered. • Phase in value-based purchasing by providing a bonus payment to physician 

practices that report data related to specific quality measures. This additional 

payment should cover costs associated with the program and provide sufficient 

incentive to report the required data. Move to payment for the use of information technology to collect and submit appropriate quality improvement data. 

• Offer a program of low-cost loans to small and medium sized physician practices 

to purchase health information technology necessary to collect and report quality measurement data. Health information technology is a public good that ultimately will benefit all Americans. 

• Ultimately, payment should be linked to health care quality and efficiency and 

should reward the most effective patient and physician behavior. 

The Academy commends the subcommittee for its commitment to identify a more 

accurate and contemporary Medicare payment methodology for physician services. 

Moreover, the AAFP is eager to work with Congress toward the needed system 

changes that will improve not only the efficiency of the program but also the effectiveness of the services delivered to our nation’s elderly. 

f 

Dear Committee Members, 

I am a family physician who has practiced many years with different populations 

many of whom have been on and Medicare as well as Medicaid. 

In order to improve Medicare beneficiaries health outcomes reform needs to commit political will and resources to the following three measures: 

1. Primary care providers should be reimbursed at a higher rate than specialist 

for the difficult care that they deliver. 

For example: a dermatologist who spends two minutes with a patient, and may 

freezing something, may be reimbursed the same amount as a family physician who 

spends 30 minutes with a patient who has severe depression. Specialist are often 

pain more than twice the salary of primary care physicians. It is absolutely crazy. 

We need more primary care physicians-not because I am one-but because the 

health of this nation will improve!! Data shows that countries with more primary 

care (and perhaps, less specialty care) and well coordinate care leads to better 

health outcomes. In this country that means creating the right financial incentives. 

Medical students are going into specialty residencies more and more—the wrong direction. 

Medical students have learned about the ROAD (radiology, ophthalmology, anesthesia, dermatology) to happiness: high paying specialties with less work stress. It 

turns out that these are also the most competitive residencies for medical students 

to enter. 

2. Medicare should take an active role in recruiting and subsidizing primary care 

residencies programs. Because subspecialty fields are so lucrative, the residency programs tend to be 

3. Public health should drive Medicare reform decisions, not special interests. As 

long as special interests are the ones sitting before committees, and have the most 

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successful lobbyists, they will continue to benefit. However, the public’s health 

should be the only guide and the amount of money available should be the only 

guide. 

Thank you for my submission, 

Charles Mayer MD MPH 

Group Health Cooperative 

Harborview Medical Center, Department of Family Medicine 

f 

Dear Representative Stark: 

I appreciate being able to submit these comments on Reforming Medicare’s Physician Payment System. I am writing only as an individual, but with a perspective 

on physician payment that may be of help relating to primary care services and approaches being taken to a ‘‘Medical Home’’ model. In addition to being a Medicare 

Contractor Medical Director, I served on the AMA/Specialty Societies RVS Update 

Committee (‘‘RUC’’) for twelve years, six as its Vice-Chair, and have been many 

years a Co-Chair of Washington State’s Advisory Committee on RVS and related 

payment issues. I also sit on the CPT Assistant Editorial Panel, am a general internist and have been an NCQA physician reviewer for years, including specifically for 

Disease Management accreditation, which relates to this topic. I am hopeful my perspective may be of help. 

It is absolutely certain that the Medicare fee-for-service system is experiencing a 

worsening problem with access to services, particularly for primary care. The Medical Home concept, and its demonstration planned to start next year have been proposed as a possible solution. There is clear evidence that the types of close-communication with selected individual patients can result in improved clinical outcomes, 

and even some preliminary evidence that a portion of these may, over time, result 

in total service utilization savings for the system. This was a premiss of the adopted 

Medical Home demonstration. 

There is no possibility however, that such an approach can be successful for a 

large portion of Medicare enrollees, with a requirement to demonstrate three-year 

‘‘budget neutrality’’. To require both a large portion of Medicare enrollees and a 

three-year timetable will prevent any chance of a successful outcome. 

A much fairer ‘‘demonstration’’ of the potential of a Medical Home model would 

be a much more selected patient population (likely based on relatively high recent 

utilization and significant disease burden), where care and attention by a clinical 

team will have some chance of achieving a measurable gain within such a narrow 

timeframe. 

The RUC did a good job (with much work) in developing Medical Home codes that 

might be used for providers following large panels of patients in such a category. 

If, however, the demonstration continues to require a three-year budget neutrality, 

it would be greatly more likely that a much more selected, smaller patient panel 

would have some chance of success. 

A large problem in using Medicare payments for such patients is that Medicare 

disallows ‘‘screening’’ and (other-than-statutory) preventive care and makes it hard 

to utilize time-based billing to obtain a fair return on the time-consuming services 

these patients most need. If instead, the E&M codes were used as they are now, 

but allowing time-based billing of services for patients in a Medical Home demonstration, just as are now allowed for ‘‘counseling and coordination of care’’, this 

might have a chance of success. The only additional requirement should be that the 

record must clearly document both the total time by that individual provider for 

that patient on the date of service and the necessity for that time (subject to retrospective review). 

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Such an approach focused on selected patients with high probability of utilization, 

paying for the time necessary to work with such patients, could demonstrate a 

change in utilization within the (very-short) three-year timetable. Otherwise, it is 

certain that the ‘‘demonstration’’ as presently structured cannot succeed, and it will 

be a true loss to have some then come to a conclusion that a Medical Home model 

will not work, were it structured and phased differently with a way to assure providers had sufficient return for the work necessary to affect behavior and utilization. 

The Medicare system needs a successful approach to the Medical Home concept to 

be able to address worsening access problems, especially in primary care! 

I appreciate the opportunity to offer these comments, and will surely be glad to 

discuss any aspect with any who might find this of help. Thank you. 

Richard W. Whitten, MD, MBA, FACP 

Medicare Contractor Medical Director 

PO Box 1294 

Issaquah, WA 98027–0050 

f 

I would first like to thank Chairman Stark and Ranking Member Camp for holding this important hearing today on the way Medicare pays physicians, and I also 

would like to thank them again for their leadership in passing H.R. 6331, the ‘‘Medicare Improvements for Patients and Providers Act of 2008,’’ this past July. 

As you both are well aware, this vital legislation prevented a devastating 10.6 

percent payment cut for Medicare physicians in 2008 as mandated under the woefully misnamed Sustainable Growth Rate (SGR). In addition, the Medicare Improvements for Patients and Provider Act provided physicians with an important payment increase of 1.1 percent for 2009, which followed the recommendation of the 

Medicare Payment Advisory Payment Commission (MedPAC). As evidenced by the 

overwhelming bipartisan support in both chambers of Congress to override President Bush’s short-sighted veto, blocking these cuts was the right thing to do. 

Now that we’ve given our physicians an 18-month reprieve, I respectfully urge 

this subcommittee to work again in a bipartisan way to establish a new payment 

system for physicians. Central to any plan must begin with scrapping the SGR. 

Clearly, this ill-conceived system doesn’t work. Enacted in 1997, the SGR was, in 

my opinion, an attempt to balance the budget on the backs of doctors and other providers. Not only has it failed to curtail spending, but it incentives volume of services 

instead of quality of care, and may be expediting the shift from primary care services to specialty and sub-specialty services. 

Since 2003, Congress has enacted six ‘‘patches’’ to prevent cuts under the SGR. 

Although I have only been a Member of Congress for two of them, I can say that 

it is frustrating spending valuable time crafting fixes for this fundamentally flawed 

system. I cannot imagine the frustration that the Members of this subcommittee 

along with their staffs must feel spending countless hours crafting these legislative 

fixes when other crucial healthcare issues, like our shortage of primary care physicians, are left unresolved. So let us once and for all end all talk of patches or fixes, 

and come together in a bipartisan way to find a permanent solution to the way we 

pay our doctors. 

The distinguished panel assembled here today, which includes the President of 

the American Medical Association, will provide this subcommittee with a macro perspective of the Medicare payment system, offering numerous recommendations that 

I think are worthy of this subcommittee’s consideration. 

However, my purpose for testifying today is to provide the subcommittee with a 

view from the ground. The 22nd Congressional District of Florida is literally on the 

front lines of the Medicare debate with one of the largest populations of senior citizens in the country and a dedicated group of physicians serving this vulnerable population. 

When I was elected as their Representative, one of the first things I did was to 

convene a physician advisory group so I could hear firsthand the unique needs of 

both seniors and physicians in South Florida as well as better understand the distinct healthcare issues for this region. 

This advisory group has been consistently critical of the SGR. Medicare used to 

be known as the ‘‘Gold Standard’’ for physicians because it provided them with fair 

and sustainable reimbursement rates, but not anymore. As a result of this and other 

issues, we’re currently facing a severe shortage of qualified physicians in South 

Florida, potentially leaving many elderly and other vulnerable populations without 

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doctors to treat them. Failing to restructure the physician payment scheme under 

Medicare could hasten this exodus when the looming 20 percent cut arrives in 2010. 

We owe it to our seniors, to the men and women who helped to make this country 

the greatest in the world, to ensure that when they are sick, a doctor will be there 

to see them. It’s a fair deal, and one we must not turn our backs on. 

Thank you again, Chairman Stark and Ranking Member Camp, for holding this 

hearing today, and I look forward to working with you as well as the rest of Members of this subcommittee, toward crafting a permanent solution that pays physicians fairly for their services while maintaining the highest levels of quality for our 

nation’s seniors. 

f 

The National Business Group on Health (Business Group) appreciates the opportunity to submit written testimony for today’s House Ways and Means Health Subcommittee hearing on reforming Medicare’s physician payment system. The Business Group strongly urges Congress, employers, and health plans to implement payfor-performance on a widespread basis for hospitals, physicians, and other health 

care facilities and professionals. 

Founded in 1974, the Business Group is a member organization representing 300 

members, mostly large employers, who provide coverage to more than 55 million 

U.S. employees, retirees and their families and is the nation’s only non-profit organization devoted exclusively to finding innovative and forward-thinking solutions to 

large employers’ most important health care and related benefits issues. Business 

Group members are primarily Fortune 500 companies and large public sector employers, with 64 members in the Fortune 100. 

As you know, it is estimated that Medicare will be bankrupt by 2019, seven years 

earlier than previously expected and 23 years earlier than Social Security. In July, 

Congress delayed cuts to Medicare physician payments for 18 months. However, unless further legislative action is taken, Medicare’s payment rates will be reduced by 

more than 20 percent in January 2010. We believe it is necessary for the financial 

future of Medicare as well as for the quality and safety of care received by beneficiaries that pay-for-performance be used to harness the Government’s leverage as 

the largest purchaser of health care in the U.S. to move Medicare and all other payers towards paying for effective health care and quality outcomes rather than units 

or volume of services, as is currently done. 

Too often, payment under Medicare and throughout the health care system in the 

U.S. is made without regard to whether services are needed or are performed well. 

Fisher and colleagues (Annals of Internal Medicine, 2003) estimate that under the 

current system up to 30% of Medicare spending may be for excessive and unnecessary care. While cost is tied to quality or performance in most other industries, in 

health care, including in Medicare, the opposite tends to happen—we end up paying 

more for poor service and the additional health care needed to ‘‘correct’’ poor quality. 

Fortunately, Medicare is beginning to reverse this tendency in by not paying for socalled ‘‘never events’’ occurring in hospitals. 

CMS’ effort to stop payments for ‘‘never events,’’ is a significant first-step to improving the quality of care in the Medicare program and should be extended to physicians’ payments. As you know, a landmark 1999 Institute of Medicine (IOM) report estimated that preventable medical errors in hospitals might cause as many 

as 98,000 deaths annually. Many more people are injured by providers and countless more preventable deaths and injuries occur in outpatient settings. 

With the clinical comparative effectiveness research conducted by the Agency for 

Healthcare Research and Quality (AHRQ), the Federal Government and its research 

partners are producing important information that will help eliminate inappropriate 

treatments and ensure that the Government only pays for effective, high quality 

health care that works. It is important that the public and private sectors act together to develop the research evidence base for treatment and coverage policies so 

that clinicians, policy-makers, and consumers are able to make decisions that improve the quality of care and quality of life. 

Pay-for-performance promises to advance evidence-based medicine, improve the 

quality of health care for beneficiaries and improve the efficiency of the Medicare 

program. Under the Physician Quality Reporting Initiative (PQRI), CMS is taking 

the steps towards moving from being primarily a passive payer for health care to 

an active purchaser for health care, using its enormous power to buy the best possible care for millions of beneficiaries, just as Congress has asked it to do. Initial 

data reports that 15.74 percent (99,319 providers) of all professionals eligible to participate in the 2007 PQRI program attempted to do so. Of those providers, 92,218 

individuals submitted at least one measure successfully. The report also shows that 

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on average, providers attempted to report slightly more than three measures. More 

than half of the participating professionals so far appear to be on track to receive 

bonuses. The initial data also provides a glimpse of where participants are making 

errors in the reporting process, and that will guide future educational efforts by 

CMS. For example, the data shows that for one of the three diabetes measures covered, nearly half of the PQRI claims submitted were rejected because of ‘‘denominator mismatches,’’ which means the patient did not match the age or gender 

descriptor for the measure. In addition, more than 10 percent of claims were filed 

without the required National Provider Identifier number. Clearly, we have a long 

way to go. However, by using its huge purchasing power to drive excellence in care 

delivery, Medicare is not only beginning to protect and help its beneficiaries but it 

will also make the health care delivery system in the U.S. better and safer for all 

Americans, all of whom will be beneficiaries once they turn 65 or disabled. 

It is vital for the Federal Government to fully transition Medicare to a pay-forperformance system based on quality and efficiency. A recent study by CMS in 

Health Affairs reported that U.S. spending on health care is expected to double 

(over the next 9 years). It is urgent that the Federal Government work with employers and other purchasers to change the current system. The pay-for-performance 

movement continues to rapidly expand in the private marketplace. In recent years, 

employers and other health care purchasers have developed and adopted payment 

programs to reward quality in the health care system. As sponsors of health plans, 

employers currently use their flexibility, under ERISA, to innovate and close the 

gap between the quality of care that we have and the quality of care that we should 

have and need. 

Medicare should learn from the lessons of many of our nation’s employers who 

are already developing and implementing strategies aimed at improving the quality 

and value of the health care they purchase. Many National Business Group on 

Health members have taken the lead in promoting pay-for-performance, health care 

quality and transparency by participating in initiatives such as the Bridges to Excellence and the pay-for-performance programs of the Integrated Healthcare Association to make true health care transparency and quality a reality. Today, most 

large insurers and health plans already have a provider incentive program based 

on performance. 

Pay-for-Performance Successes in the Private Sector: 

1. Bridges to Excellence (BTE) Programs: BTE, a not-for-profit company, led 

by a multi-stakeholder board of directors comprised of physicians, employers and 

health plans, has published lessons learned and best practices of pilot region payfor-performance programs that included: rewarding physicians for practicing re-engineering and adopting health information technology; improving outcomes for patients with diabetes through preventive care (including more cost-efficient care); improving intermediate outcomes for patients with diabetes, hypertension, 

hyperlipidemia, coronary artery disease and cardiovascular disease; and implementing measures of effective ambulatory care treatment protocols for patients with 

recent cardiac events. To date, BTE programs have been successfully implemented 

in more than 18 states with over 80 employers and eight business coalitions, recognizing more than 10,000 physicians throughout the U.S. and paying more than $12 

million dollars in incentives. BTE analyzed diabetes episodes among claims data 

from 352,722 United Healthcare members in the Cincinnati and Louisville area 

from 2002–2004 and found that BTE-recognized endocrinologists and Primary Care 

Physicians (PCPs) had $3,480 and $3,820 respectively in lower average inpatient 

costs per episode than non-BTE recognized physicians. BTE-recognized physicians 

also took care of more episodes and more patients per physician than their non-recognized peers. This was true for endocrinologists (45 vs. 26 episodes per physician; 

and 35 vs. 20 patients per physician) as well as for PCPs (14 vs. 9 episodes per physician and 11 vs. 6 patients per physician). BTE-recognized endocrinologists had significantly lower average costs ($370 lower) for an episode of diabetes care than nonrecognized endocrinologists ($770 vs. $1,140). Another analysis of the costs associated with diabetes from the City of Cincinnati’s employees and dependents found 

that those who received care from BTE certified providers are 7.8% healthier on average than members cared for by non-BTE certified providers based on prospective 

relative morbidity scores for both populations in 2004 and 2005. A BTE pilot program from 2003–2006 for diabetes and cardiac care in New York had the highest 

number of patients seeing BTE recognized physicians, up from under 2% to 25%, 

which is significant given the savings of $350 per patient per year. 

The BTE programs have identified a number of key lessons learned and best practices to implement a successful pay-for-performance program, including: 

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• Using standard performance measures of clinical quality, focusing mostly on intermediate outcomes derived from medical chart reviews, not just claims; 

• Giving providers clearly defined costs and benefits of the program, which helps 

them determine the value of participating; 

• Using independent third-party organizations to measure the performance of 

providers, reviewing the data reported by these providers from medical records 

in their practice; 

• Bringing together many payers and/or purchasers to make rewards meaningful 

to providers; 

• Encouraging providers to adopt better systems of care, including health information technology, to systematically improve the delivery of care; 

• Assisting small practices which need significant help in re-engineering, as there 

are not many resources available to help them; 

• Understanding that a focus on a single disease may limit program uptake 

among primary care physicians; 

• Realizing that providers that become recognized in BTE’s programs are happy 

to get more patients—even those with chronic illness; and that 

• Employers and plans should combine a pull (bonus) with a push (steerage) to 

maximize the impact of a pay-for-performance program among their plan members. 

2. Integrated Healthcare Association (IHA): IHA, a multi-stakeholder association based in California consisting of major health plans, physician groups, and 

hospital systems, academics, consumers, purchasers (including employers), pharmaceutical and technology representatives has established uniform quality performance 

measures, incentive payments to physician groups and a public report card. Stakeholders have made progress towards improving clinical quality reporting, patient experience, use of information technology (IT) and patient care. Eighty-seven percent 

of physician groups reporting all clinical measures improved their overall clinical 

score by 5.3 percentage points from Year 1 to Year 2. One-hundred and thirty physician groups participating since the beginning of the program improved from 3 to 5 

percentage points on patient experience measures and from Year 1 to Year 2 there 

was a 54 percent increase of physician groups qualifying for at least a partial credit 

for IT adoption. 

The Business Group Believes That a Pay-For-Performance Program Should 

Include the Following: 

• Medicare should continue to adopt performance measures developed by nationally recognized quality measurement organizations, such as the National Committee for Quality Assurance (NCQA), researchers, and practitioner groups that 

have been vetted and recommended by consensus-building organizations that 

represent diverse stakeholders, such as the National Quality Forum (NQF) and 

measures established by the AQA Alliance and the Hospital Quality Alliance 

(HQA) Steering Committee. 

• Rewarding quality is paramount but rewarding quality care that is provided efficiently is also important and should be an essential part of any pay-for-performance initiative. 

• When measuring quality, focusing on misuse and overuse is equally important 

as underuse. There is plenty of evidence that more care is not always better 

for patients or even good for them. We also want to help people understand that 

choosing healthy lifestyles and evidence-based disease prevention and 

screenings can do as much or more for their health and quality of life as health 

care. Medicare has taken some excellent first steps with its ‘‘Welcome to Medicare’’ program and preventive services but more can and should be done. 

• To the extent possible, performance measures should incorporate outcomes of 

care in addition to structure and process measures. 

• CMS should improve the meaningful disclosure of easy-to-understand performance results to the public, including Medicare data, which will reinforce the 

value of pay-for-performance. 

• The health care system will need sufficient health information technology infrastructure to report performance measures. Some providers, particularly solo and 

small group physician practices and those serving low-income urban and rural 

areas, may need financial assistance to purchase needed systems, software, 

training and related services. 

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Why the Business Group Believes Purchasers Should Implement Pay-forPerformance: 

• A 2003 RAND study found that patients received only 55 percent of recommended care for fairly common medical conditions for which a broad consensus exists on care standards. 

• A single set of quality measures will reduce the administrative burden of data 

collection and make it easier for consumers and purchasers to compare quality 

among providers and facilities. 

Pay-for Performance Will Empower Consumers and Purchasers to Make 

Better Decisions on Their Health Care Providers: 

• According to the National Committee for Quality Assurance (NCQA), people enrolled in health plans that measure and publicly report performance data were 

more likely to receive preventive care and have their chronic conditions managed in accordance with clinical guidelines based upon medical evidence. 

• These improvements in clinical quality over time, the direct result of performance measurement and reporting, have saved the lives of 53,000 to 91,000 

Americans and prevented hundreds of thousands of serious complications. 

Again, thank you for allowing us to submit written testimony for today’s hearing 

on reforming Medicare’s physician payment system. We look forward to continuing 

to work with the Committee and CMS to transition our health care system to one 

based on performance, value, quality, efficiency and transparency that we can all 

be proud of and that serve its beneficiaries well for exactly the kind of health care 

and quality of life they deserve. 

f 

Dear Chairman Stark: 

Thank you for holding a hearing on Medicare physician payment on September 

11. The Society of Thoracic Surgeons (STS) greatly appreciates your dedication to 

finding a long-term solution to the flawed sustainable growth rate (SGR) payment 

system and for working to prevent Medicare payment cuts to physicians for the second half of 2008 and in 2009. 

We agree with your assessment that we must examine policy options that will encourage improved quality of care and efficient use of health care resources. The repeated need for congressional ‘‘rescue’’ of physicians from Medicare payment cuts as 

a result of the SGR is strong evidence that the current system of economic incentives and disincentives has failed to modify physician practice or control the growth 

of physician services. 

Our experience with data collection has shown that physicians are motivated to 

change the way they practice medicine when provided with credible clinical outcomes data. The result of providing performance feedback to physicians is improved 

outcomes and cost savings. The STS National Cardiac Database (NCD) captures 100 

percent of the procedures performed by each participant at more than 85 percent 

of the adult cardiac surgery programs in the country. The collection and reporting 

of this data for nearly 20 years has resulted in reductions in mortality rates in cardiac surgery by 70 percent below previously expected rates. The STS has spent approximately $15 million on the development and maintenance of this database, and 

participants have expended tens of millions in additional dollars which have to date 

been uncompensated by CMS and most other payers. 

The STS believes that physicians and their professional societies have an obligation to responsibly control health care expenditures. We believe that Medicare must 

support professional medical societies in the development and expansion of clinical 

databases. When risk-adjusted clinical outcomes data is linked with information on 

resource use based upon administrative claims data, we can assess the effectiveness 

and appropriateness of current and future treatment algorithms. The STS encourages you and members of the Subcommittee to consider a payment and regulatory 

framework that will incentivize meaningful self-regulation and will rely upon clinical databases as the mechanism by which self-regulation can be accomplished. Toward this end, I want to draw your attention to an editorial authored by John 

Mayer, Jr., M.D., Immediate Past President of STS. The editorial, published in the 

November 2007 issue of The Annals of Thoracic Surgery, emphasizes responsible use 

of health care resources through self-regulation and underscores the importance of 

providing physicians with clinical outcomes data. 

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I hope that as you continue your exploration into ways to correct and improve 

upon our current payment system you will draw upon the experience of STS and 

its members. Should you have any questions, please do not hesitate to contact me. 

Sincerely, 

W. Randolph Chitwood, Jr., M.D. 

President 

The Society of Thoracic Surgeons 

The American Health Care System and the Role of the Medical Profession 

in Solving Its Problems 

The Annals of Thoracic Surgery 

In the current issue of The Annals, two authors present opposing viewpoints on 

the optimal organizational structure for healthcare insurance in the U.S.1

Himmelstein and Woolhandler argue that a single-payer national healthcare insurance system would solve many of the current problems in financing, access, and delivery of healthcare, while Goodman suggests that reform should remove the current 

private and public health insurance third-party payer structures from the equation 

in order to promote competition among ‘‘providers’’ on price and quality and restore 

the doctor-patient relationship. I agree with both Himmelstein and Goodman that 

reimbursement may be at the root of many of the problems that the American 

healthcare system is facing. However, neither of these authors’ proposals would engage the medical profession in providing solutions, despite the fact that physicians’ 

pens and keyboards are still ultimately responsible for much of what American society spends on healthcare. 

Historically, members of a profession have had a number of important prerogatives and societal responsibilities, which include adhering to a code of ethics that 

includes the moral imperative to serve others,2 advancing a body of knowledge and 

transmitting it to the next generation,2 setting and enforcing its own standards and 

values,2 cherishing performance above personal rewards,2 self-regulation,3 and fairly 

distributing finite medical resources.4 Gruen et al recently noted that physicians 

have a ‘‘responsibility to address the rising costs of health care, which are a key 

threat to access.’’ 4 A conceptual model of the relationships between the professions, 

market forces, and society has been proposed by Krause.5 He describes the privileges and prerogatives of the professions as inherently in conflict with the forces of 

the free market, but notes that these ‘‘anti-market’’ privileges are granted to a profession by the state, representing society, only as long as society believes and trusts 

that the profession is acting in the societal interest and not in its own. Others have 

reached similar conclusions.6 At the same time, competition is proposed as a solution for the healthcare system 1 and physicians are then pulled in opposite directions 

by their responsibilities to society as members of a profession and by this societal 

imperative to ‘‘compete.’’ Added to this mixture is the centrally controlled administered pricing system used by Medicare, which has placed all physicians, but particularly cardiothoracic surgeons, under significant economic pressures by reductions in 

reimbursements for the services that they provide. The problem is exacerbated by 

the use of the MFS by a large number of third-party private payers. 

The question arises whether the medicine can survive as a profession in this environment. Although the MFS has important conceptual flaws, which are responsible 

for the declines in physician reimbursements, changes to this system could actually 

address some of the inherent conflicts that the medical profession and the American 

healthcare system are facing. The current MFS system is based on the Resource 

Based Relative Value Scale, which assigns relative value units (RVU’s) to each physician service. By law, each year Medicare sets a single ‘‘conversion factor’’ (in $/ 

RVU), based on the ‘‘sustainable growth rate’’ (SGR) formula, and this conversion 

factor is multiplied by the RVU’s for each service to yield the Medicare allowed 

charge.7 By controlling the conversion factor, the Federal Government has a simple 

mechanism to control aggregate Medicare physician payments, but since the total 

physician payment expenditures are capped by the SGR, a ‘‘zero sum game’’ results.8 When aggregate expenditures increase faster than called for by the SGR forWWOODS2 on PRODPC68 with HEARING


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mula, then physician payments in subsequent years must be reduced by decreasing 

the conversion factor to ‘‘pay back’’ the ‘‘overspending’’ on physician services that occurred in prior years. The SGR mechanism required reductions in the 2007 Medicare conversion factor 9 that were offset by last-minute legislation, but a 9.9% reductions in fees for each service are projected for 2008 without repeat Congressional 

action.10 The SGR formula that prescribes the annual Medicare physician payment 

update is ‘‘widely recognized as being fatally flawed and, if not greatly reformed, 

may result in reduced access to beneficiaries.’’ 11 However, SGR revisions require 

billions of dollars in additional Federal funding over the next ten years, a difficult 

hurdle with projected Federal budget deficits for the foreseeable future. From the 

physician perspective the fundamental conceptual flaw in the SGR mechanism is 

the economist’s assumption that individual physicians’ patterns of practice will be 

influenced by their recognition that current ‘‘over-utilization’’ will cause future reductions in the conversion factor. In a ‘‘zero sum game’’ 8 each participant attempts 

to maximize their own benefit, despite the negative effect that the aggregate behavior of all participants has on the subsequent year’s conversion factor. Each physician 

currently has no information or mechanisms to influence the concurrent behavior 

of other physicians, and there is no mechanism by which physicians can cooperate 

to husband society’s health care dollar. Thus, there is little ability to fulfill the profession’s self-regulatory responsibility to society. Situations where there is a conflict 

between ‘‘individual gain and the common good’’ and in which the participants are 

unable to communicate are characteristic of the ‘‘Prisoner’s Dilemma’’ 12 in game 

theory and the related case known as the ‘‘tragedy of the commons.’’ 13 The ‘‘commons’’ has been described as a ‘‘paradigm for situations in which people so impinge 

on each other in pursing their own interests that collectively they might be better 

off if they could be restrained, but no one gains individually by self-restraint.’’ 13 The 

recurring ‘‘crises’’ in Medicare physician reimbursement, which are directly related 

to the growth in the volume and complexity of physician services, would seem to 

indicate that the current Medicare reimbursement mechanism is providing the necessary elements for a tragedy of the commons to continue. 

However, modifications to this Medicare reimbursement mechanism could serve 

as an initial step to more effectively engage the medical profession in fulfilling its 

responsibilities to society and in addressing the societal problem of unsustainable 

increases in healthcare expenditures. The key concepts involve an ability to assess 

the effectiveness of the care that is provided and the ability to self-regulate. Ultimately, all physicians should wish to provide the most effective care for their patients, and ideally, the reimbursement system should promote effective care. I propose two changes to the current healthcare system to further these goals. First, each 

medical specialty or subspecialty should have a separate Medicare conversion factor. This change would create a significant incentive to self-regulate and exert some control on the growth in the number and complexity of medical services, and it would 

place the level of self-regulation at a level where such self-regulation could actually 

be effected. Second, Federal financial and administrative support for the establishment of clinical registries and databases should be provided so that a robust, credible assessment of individual physician performance and of the effectiveness of the 

diagnostic and treatment modalities being utilized would be possible. Free access to 

Medicare claims data would be essential to provide cost information. The Society of 

Thoracic Surgeons has taken an important leadership role in this area through its 

clinical database efforts 14 and the development of performance metrics.15 By taking 

these these two steps, each medical specialty would have the incentives and the 

mechanisms by which to self-regulate, the major missing factor in the current ‘‘tragedy of the commons’’ situation in the American health care system. 

One result of these changes would be an annual allocation of Medicare physician 

payment resources to each individual medical specialty rather than the current aggregate allocation for all physician services. It would be more effective to place these 

allocations at the individual specialty or subspecialty level for several reasons. First, 

each specialty would have an incentive to develop and implement the most effective 

practices, since all members of that specialty and their patients would benefit from 

more effective use of physician resources. Ineffective and excessive uses of physician 

resources would penalize the members of that specialty, rather physicians of all 

other specialties, as occurs under the current system. Second, this restructuring of 

the reimbursement system would also provide both an incentive and resources for 

specialties to develop and maintain outcomes-focused registries and clinical databases, which can provide feedback of risk-adjusted outcomes to individual practices 

and institutions with peer comparison data, and which can lead to improved patient 

care and clinical outcomes.16,17,18 Such a mechanism would provide needed data by 

which to judge effectiveness and would be essential to assessing resource utilization. 

It would also allow each specialty to monitor and attempt to improve the performWWOODS2 on PRODPC68 with HEARING

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ance of all physicians in the specialty, to identify and disseminate best practices, 

and to develop mechanisms to identify and assist institutions, practices, or individual physicians that have less favorable outcomes. In so doing, there would likely 

be a reduction in the variation in practices and outcomes that have been found to 

exist 19 and which have been the basis of many criticisms of medical practice in the 

U.S.20

An important change that could also result from this proposal is that Medicare 

allocation decisions for physician services could be made overtly rather than by the 

almost random allocations resulting from the collective action of individual physicians each acting in their own or their patients’ interests. Such allocation decisions 

must be made based on where an investment of societal resources is judged to be 

needed and, equally importantly, on what the results of previous investments of resources have been. A data-driven body responsible for making these Medicare allocation decisions would have to be created with significant representation from both 

the public and from the profession. However, even if one simply started with the 

current allocation levels and only allowed each specialty’s conversion factor to 

change annually in response to utilization, the proposed system would ameliorate 

the ‘‘commons’’ problem between specialties and would strongly encourage professional self-regulation by making specialty members accountable to their closest colleagues. 

Critics may question the placement of the resource allocation at the medical specialty level, but it is at the specialty level where organizational structure and the 

most natural alignment of physicians’ interests already exist. At this level, there is 

the greatest likelihood that collaboration and sharing of information on best practices, monitoring of clinical activity, and feedback of risk-adjusted outcomes data 

could be accomplished. Alternatives such as resource allocation by disease management category or by expansion of global payments (pooling Medicare Part A and 

Part B) for complex hospital services could allow allocation decisions to be made at 

the local institutional level for tertiary services, but there is currently little organizational structure at either the national or local level to allow self-regulatory activity to occur, and it does little to address the office-based imaging and evaluation and 

management services, which are the fastest growing and largest volume physician 

services for which Medicare pays.21 Furthermore, professional peers from the same 

specialty are arguably in the best position to develop clinically appropriate outcome 

measures and risk adjustment algorithms, and physicians are reliably motivated by 

comparative national peer data. This proposal would also not preclude collaboration 

among specialties to pool resources in dealing with complex patients, such as those 

with heart failure, in a coordinated and collaborative fashion. 

A second potential criticism is that while this proposal might be applicable for a 

smaller specialty, those with large numbers of practitioners may still have the conditions for the ‘‘tragedy of the commons’’ to occur. For these specialties, organizations exist at the state or regional level where the peer pressures and data collection 

could be effectively managed. 

Two other significant issues should be addressed. First, some specialties will 

argue that they have no control over their volume of services, including emergency 

room physicians, radiologists, anesthesiologists, and pathologists. These specialists 

have less control over how frequently patients present to them, but they would have 

an incentive to manage their services to provide the most effective use of physician 

resources. If resource allocation updates were made annually, then an increase in 

patient volume in the previous year that is outside the control of the specialty, e.g. 

an influenza epidemic, could be considered in making the subsequent year’s allocation. An equally important question is how physician services associated with new 

technologies and therapies could be funded to allow continued development of more 

effective therapies. The process of annual resource allocation decisions would have 

to include new funds for clinical ‘‘research and development’’ activities by physicians, but clinically based outcomes registries could facilitate the acquisition of information about the effectiveness of such new treatments and services. Notably, 

CMS currently links payment for expanded indications for cardioverter-defibrillator 

implants to a required submission of clinical information to a registry.22 Current 

Government and private healthcare funding mechanisms invest heavily in bench research, but far less Federal funding exists for the assessment of the effectiveness of 

therapies that are in the ‘‘gap’’ between the bench and accepted clinical practice. Expanded funding should support the acquisition of clinical effectiveness data on both 

‘‘established’’ and new treatments through expansion of professional society based 

outcomes registries. 

The most fundamental change resulting from this proposal is an expanded role 

for individual professional societies in not only developing guidelines and best practices, but also in monitoring and actively improving the clinical performance of their 

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members. The movement by medical specialty boards toward ‘‘maintenance of certification’’ is already underway. Incentives for each specialty to engage in monitoring members’ clinical performance and the effectiveness of treatments could enhance these maintenance of certification efforts. Pellegrino and Relman argue that 

‘‘medicine is, in essence, a moral enterprise and its professional associations should 

therefore be built on ethically sound foundations’’ 6 but also noted that ‘‘the history 

of professional medical associations reflects a constant tension between self-interest 

and ethical ideals that has never been resolved.’’ 6 If physician payment allocations 

were placed at the level of the individual medical specialty or subspecialty, the role 

of professional societies would expand to include the responsibility to husband the 

healthcare resources of American society. In so doing, medicine will have taken an 

important step toward resolving the tension between self-interest and ethical ideals 

and to better align our interests with the interests of the American society that we 

serve. In so doing, medicine could fulfill an important professional responsibility to 

society and simultaneously regain something of what it means to be a profession. 

References: 

1. Himmelstein DU, Woolhandler S, Goodman JC, Sade RW. Our Health Care System at the Crossroads: Single Payer or Market Reform. Annals of Thoracic Surgery, 2007; 84: 

2. Beering S. The Liberally Educated Professional, in Vital Speeches 1990; 576: 

398–401. 

3. ABIM Foundation, ACP Foundation, European Federation of Internal Medicine. 

Medical Professionalism in the New Millenium: A Physician Charter, Annals of 

Internal Medicine 2002; 136: 243–246. 

4. Gruen RL, Pearson SD, Brenan TA. Physician-Citizens. Public Roles and Professional Obligations. JAMA 2004; 291: 94–9 

5. Krause EA, Death of the Guilds, Yale University Press, New Haven, 1995. p. 

29–49 

6. Pelligrino ED, Relman AS. Professional Medical Associations. Ethical and Practical Guidelines. JAMA 1999; 282: 984–986. 

7. Medicare RBRVS: The Physicians’ Guide, Gallagher PE editor, AMA Press, Chicago, 2005, p 71–76 

8. Poundstone W. Prisoner’s Dilemma, Doubleday, New York, 1992, p. 51 

9. Federal Register, Vol 71. No. 231, December 1, 2006 p. 69760 

10. Federal Register Vol 72. No. 133, June 12, 2007 p. 38214 

11. Harrington, P. Quality As a System Property: Section 646 of the Medicare Modernization Act. Health Affairs. Variations Revisited. Project Hope. Millwood, VA, 

2004. VAR 136–140 

12. Poundstone W. Prisoner’s Dilemma, Doubleday, New York, 1992, pgs. 117–8. 

13. Schelling TC. Micromotives and Macrobehavoirs. W.W Norton & Company, New 

York, 1978, p 111 

14. Rich J, Official Testimony to U.S. House Committee on Ways and Means— 

Health Subcommittee, March 15, 2005 Serial No. 109–39. U.S. Government 

Printing Office DOCID f:26373.wais 

15. Shahian DM, Edwards FH, Ferraris VA, Haan CK, Rich JB, Normand ST, 

DeLong ER, O’Brien S, Shewan CM, Dokholyan R, Peterson ED. Quality Measurement in Adult Cardiac Surgery: Part 1—Conceptual Framework and Measure Selection. Annals of Thoracic Surgery 2007; 83: S3–S12. 

16. Ferguson TB et al. Use of continuous quality improvement to increase use of 

process measures in patients undergoing coronary artery bypass graft surgery: 

a randomized controlled trial. JAMA 2003; 290: 49–56 

17. Khuri SF, Daley J, Henderson W et al. The Department of Veterans Affairs 

NSQIP. The first national, validated, outcome-based, risk-adjusted, and peercontrolled program for the assessment and enhancement of the quality of surgical care. Annals of Surgery 1998; 228: 491–507 

18. O’Connor GT et al. A Regional Intervention to Improve the Hospital Mortality 

Associated with Coronary Artery Bypass Graft Surgery, The Northern New 

England Cardiovascular Disease Study Group. JAMA 1996; 275: 841–46 

19. Wennberg, JE and Cooper MM, editors, The Quality of Medical Care in the 

United States: A Report on the Medicare Program, The Dartmouth Atlas of 

Health Care 1999. American Health Association Press 

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20. Wennberg, JE, Practice Variations and Health Care Reform: Connecting the 

Dots. Health Affairs, Variations Revisited. 2004, VAR 140–143 

21. Catlin A, Cowan C, Heffler S, Washington B, et al. National Health Spending 

in 2005: The Slowdown Continues. Heath Affairs 2007; 26: 142–153 

22. http://www.cms.hhs.gov/medlearn/mmarticles/2005/mm3604 

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