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65–915CC 2000

THE BALANCED BUDGET ACT OF 1997: A LOOK

AT THE CURRENT IMPACT ON PROVIDERS

AND PATIENTS

HEARING

BEFORE THE

SUBCOMMITTEE ON

HEALTH AND ENVIRONMENT

OF THE

COMMITTEE ON COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

SECOND SESSION

JULY 19, 2000

Serial No. 106–145

Printed for the use of the Committee on Commerce

(

COMMITTEE ON COMMERCE

TOM BLILEY, Virginia, Chairman

W.J. ‘‘BILLY’’ TAUZIN, Louisiana

MICHAEL G. OXLEY, Ohio

MICHAEL BILIRAKIS, Florida

JOE BARTON, Texas

FRED UPTON, Michigan

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

Vice Chairman

JAMES C. GREENWOOD, Pennsylvania

CHRISTOPHER COX, California

NATHAN DEAL, Georgia

STEVE LARGENT, Oklahoma

RICHARD BURR, North Carolina

BRIAN P. BILBRAY, California

ED WHITFIELD, Kentucky

GREG GANSKE, Iowa

CHARLIE NORWOOD, Georgia

TOM A. COBURN, Oklahoma

RICK LAZIO, New York

BARBARA CUBIN, Wyoming

JAMES E. ROGAN, California

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi

VITO FOSSELLA, New York

ROY BLUNT, Missouri

ED BRYANT, Tennessee

ROBERT L. EHRLICH, Jr., Maryland

JOHN D. DINGELL, Michigan

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

RALPH M. HALL, Texas

RICK BOUCHER, Virginia

EDOLPHUS TOWNS, New York

FRANK PALLONE, Jr., New Jersey

SHERROD BROWN, Ohio

BART GORDON, Tennessee

PETER DEUTSCH, Florida

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

RON KLINK, Pennsylvania

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

TOM SAWYER, Ohio

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

KAREN MCCARTHY, Missouri

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

THOMAS M. BARRETT, Wisconsin

BILL LUTHER, Minnesota

LOIS CAPPS, California

JAMES E. DERDERIAN, Chief of Staff

JAMES D. BARNETTE, General Counsel

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

SUBCOMMITTEE ON HEALTH AND ENVIRONMENT

MICHAEL BILIRAKIS, Florida, Chairman

FRED UPTON, Michigan

CLIFF STEARNS, Florida

JAMES C. GREENWOOD, Pennsylvania

NATHAN DEAL, Georgia

RICHARD BURR, North Carolina

BRIAN P. BILBRAY, California

ED WHITFIELD, Kentucky

GREG GANSKE, Iowa

CHARLIE NORWOOD, Georgia

TOM A. COBURN, Oklahoma

Vice Chairman

RICK LAZIO, New York

BARBARA CUBIN, Wyoming

JOHN B. SHADEGG, Arizona

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi

ED BRYANT, Tennessee

TOM BLILEY, Virginia,

(Ex Officio)

SHERROD BROWN, Ohio

HENRY A. WAXMAN, California

FRANK PALLONE, Jr., New Jersey

PETER DEUTSCH, Florida

BART STUPAK, Michigan

GENE GREEN, Texas

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

THOMAS M. BARRETT, Wisconsin

LOIS CAPPS, California

RALPH M. HALL, Texas

EDOLPHUS TOWNS, New York

ANNA G. ESHOO, California

JOHN D. DINGELL, Michigan,

(Ex Officio)

(II)

2

C O N T E N T S

Page

Testimony of:

Connolly, Mary Lou, Administrator, UCSD Home care, on behalf of the

National Association of Home Care ............................................................. 90

Coughlin, Karen, Chief Executive Officer, Physicians Health Services

Health Plans, on behalf of the American Association of Health Plans .... 60

Hancock, Juliet, Program Consultant, Rehabcare Group, Incorporated,

on behalf of the National Association for the Support of Long Term

Care ................................................................................................................ 77

Hawkins, Daniel R., Jr., Vice President, Federal and State Affairs, National Association of Community Health Centers ...................................... 81

Richtman, Max, Executive Vice President, National Committee to Preserve Social Security and Medicare ............................................................. 74

Scanlon, William J., Director, Health Financing and Public Health Issues,

U.S. General Accounting Office ................................................................... 23

Tavenner, Marilyn, Chief Executive Officer, Richmond Market President,

HCA-The Healthcare Company, Johnston-Willis and Chippenham Medical Centers, on behalf of the Federation of American Health Systems .. 56

Wilensky, Gail R., Chair, Medicare Payment Advisory Commission ........... 15

Williams, David T., Director of Government Relations, Invacare Corporation, on behalf of the American Association for Homecare and the

Home Medical Equipment Services Industry ............................................. 96

Zetterman, Rowen K., President Elect, American College of Gastroenterology, on behalf of the American College of Physicians-American

Society of Internal Medicine ........................................................................ 65

Material submitted for the record by:

Agency for Health Care Administration, letter dated July 17, 2000, to

Hon. Michael Bilirakis .................................................................................. 115

American Association for Homecare, prepared statement of ........................ 115

American Hospital Association, prepared statement of ................................ 117

American Medical Association, prepared statement of ................................. 120

American Medical Rehabilitation Providers Association, prepared statement of ........................................................................................................... 122

American Physical Therapy Association, prepared statement of ................. 125

Association of periOperative Registered Nurses, prepared statement of .... 126

California Association of Public Hospitals and Health Systems, letter

dated July 31, 2000, to Hon. Michael Bilirakis .......................................... 129

Florida Hospital Association, prepared statement of .................................... 137

Hawkins, Daniel R., Jr., Vice President, Federal and State Affairs, National Association of Community Health Centers, Inc., letter dated

August 31, 2000, enclosing response for the record ................................... 139

Health Industry Distributors Association, prepared statement of ............... 131

McAndrews, Lawrence A., President and CEO, National Association of

Children’s Hospitals, prepared statement of .............................................. 132

Meijer, Mark, President, American Ambulance Association, prepared

statement of ................................................................................................... 133

Practice Expense Fairness Coalition, letter dated July 31, 2000, to Hon.

Michael Bilirakis ........................................................................................... 134

Rural Hospital Coalition, prepared statement of ........................................... 135

(III)

(1)

THE BALANCED BUDGET ACT OF 1997: A

LOOK AT THE CURRENT IMPACT ON PROVIDERS AND PATIENTS

WEDNESDAY, JULY 19, 2000

HOUSE OF REPRESENTATIVES,

COMMITTEE ON COMMERCE,

SUBCOMMITTEE ON HEALTH AND ENVIRONMENT,

Washington, DC.

The subcommittee met, pursuant to notice, at 10:04 a.m., in room

2123, Rayburn House Office Building, Hon. Michael Bilirakis

(chairman) presiding.

Members present: Representatives Bilirakis, Upton, Greenwood,

Deal, Burr, Bilbray, Whitfield, Ganske, Coburn, Shadegg, Bryant,

Bliley (ex officio), Brown, Pallone, Stupak, Green, Strickland,

DeGette, Barrett, Capps, Towns, and Eshoo.

Also present: Representative Fossella.

Staff present: Tom Giles, majority counsel: Carrie Gavora, majority counsel; Robert Simison, legislative clerk; Amy Drowskoski, minority professional staff; Karen Folk, Presidential Management Intern; and Bridgett taylor, minority professional staff.

Mr. BILIRAKIS. If we can have order, please, we will get started.

I am pleased to convene this hearing to review the impact of the

Balanced Budget Act of 1997, or as we fondly refer to it, BBA. Last

September, we held a similar hearing to examine the effect of this

law on the quality of care for patients across the country. Congress

subsequently passed legislation to rectify some of the unintended

consequences of the Balanced Budget Act and restored roughly $16

billion in funding over 5 years. This was a necessary first step to

stabilize affected health care programs while we continue our efforts to ensure their future viability.

This week, the Congressional Budget Office released its mid-session numbers, which project a significant budget surplus for fiscal

year 2001. We should all be very pleased that our belt-tightening

has paid off and we are no longer increasing the national debt.

However, the savings from the BBA have been far greater than

Congress anticipated when the law was enacted. For that reason,

it is important that we hold this hearing today. It is time for us

to step back and to review the continued impact of the BBA on providers and the patients they serve.

Just over 2 years ago, we enacted landmark changes to the Medicare program. Many of these changes were designed to provide for

more beneficiary choice and to help guarantee the solvency of the

Medicare program well into the 21st century. Those objectives have

2

been met. But as we know, and as often is the case, some unintended consequences ensued.

Today, we will hear from both the Medicare Payment Advisory

Commission and the General Accounting Office about challenges

facing the Medicare program, and I would like to welcome Dr. Gail

Wilensky and Dr. Bill Scanlon. Their objective testimony will help

us target areas of greatest need.

Other witnesses will focus on a multitude of areas affected by the

BBA. As we begin crafting legislation to correct some of these unintended consequences, the testimony from this hearing will help us

make informed decisions about the scope of any legislation. Each

witness can provide valuable insight into the effects of the BBA on

providers and on patients’ access to health care services.

For example, the Nation’s hospitals, including public, non-profit,

for-profit, teaching, and children’s hospitals, have waged a very

public campaign to remind Congress that the BBA is continuing to

have very real consequences for patients every day. Data from the

Florida Hospital Association shows that Shands Jacksonville Hospital in Florida will lose almost $32 million, in total, because of

changes under the BBA. Last year’s relief measure diminished

those losses, but only by roughly $1.3 million. The hospital will

soon be bankrupt unless the necessary assistance is received. I

think that these effects are being felt by hospitals around the country and certainly not just in Florida.

I would caution, however, that the days of runaway Federal

spending are over. While we work to ensure patients’ access to necessary services, we must remain vigilant guardians of taxpayers’

dollars. And as we draft legislation to further refine the BBA, we

certainly will not be reopening every provision. Relief must go to

those areas of demonstrated and compelling need.

This hearing will focus on issues within the jurisdiction of the

Commerce Committee and this subcommittee in particular. However, any legislation that ultimately moves forward will address

the issues of all relevant providers and patient advocates, and to

that end, we do welcome comments on any and all of the unintended consequences of the BBA.

I want to again thank all of our witnesses who have taken the

time to testify today. I know we all look forward to productive dialog. I would, before yielding to the ranking member, ask unanimous consent that the opening statements of all members of the

subcommittee may be made a part of the record. Without objection,

that will be the case.

Now I will yield to Mr. Brown of Ohio.

Mr. BROWN. Mr. Chairman, thank you, and thank you very much

for holding this hearing and getting us back in the middle of this

very, very important issue.

I would like to thank our witnesses for joining us this morning

and extend a special welcome to Dave Williams from Amherst,

Ohio. Dave is the Director of Government Relations for Invacare,

the Nation’s leading provider of durable medical equipment for

post-acute care. He is a nationally respected expert in health and

disability issues. Closer to home, he is a member of the Amherst,

Ohio, City Council.

3

In anticipation of this hearing, I spoke with administrators in

several health care systems in and around my district in Northeast

Ohio. Two themes emerged from this discussion. First, BBA cuts

are not only too deep, they are also too steep. No provider can be

expected to absorb cuts of this magnitude in this kind of timeframe

that is laid out in the BBA.

Second, the Medicare and Medicaid cuts obviously do not exist in

a vacuum. Health care providers are not contending with one cut

to one service one time. They are contending with multiple cuts to

multiple services over multiple years. They are not contending with

Medicare cuts only. They are contending with Medicare cuts, with

Medicaid cuts, with private sector managed care cuts. Unlike Medicaid and Medicare, managed care plans can negotiate bare-bones

payments by shifting blocks of patients from one provider to another, something we are seeing all too often. Some providers have

virtually no leverage. That is just the way it is.

Providers are not contending with flat costs, they are contending

with growing costs, tight labor markets, skyrocketing prescription

drug prices, the imperative to embrace new technology, new treatments. These costs are not exactly discretionary.

Finally, providers are not contending with lower reimbursement,

they are contending with both lower reimbursement and often no

reimbursement. The Nation’s uninsured population is 44 million

strong and is growing. The uncompensated care burden is not

spread evenly over health care providers, but many of the BBA

cuts are. In its March report, MedPAC asserted that Medicare is

not required to cover the shortfalls created by inadequate private

sector payments, understandably. But I also understand where Ms.

Wilensky and the MedPAC Commission are coming from. But if the

public sector does not acknowledge the collective threat to health

care providers and to their patients, who will? What about our

safety net providers, especially our big inner-city hospitals? Where

is their safety net?

Congress may not be required to look at the larger picture when

we consider Medicare payments, but we cannot ignore the larger

picture and then still claim that Medicare is fulfilling its mission.

If a provider has to cut service or close its doors, it does not matter

where the payment shortfall came from. All patients suffer.

If we were to privatize Medicare, it would be a different story.

Congress would pass the buck. Let the HMOs deal with provider

payments. Let HMOs deal with beneficiary quality and beneficiary

access. Then providers could compete with shareholders for adequate payments, beneficiaries could call HMO customer service

lines when they have access problems or quality problems, and

Congress could get out from under all this pressure.

Fortunately, Medicare is still a public program. Its mission is

still to serve the public good and we are still directly accountable,

and this subcommittee especially and in this Congress for that mission. In that context, I hope we will take action this year to restore

needed funding to Medicare providers, paying particular attention

to the Nation’s safety net providers. In the absence of universal

coverage, in a wealthy Nation riddled with medically underserved

areas, we simply must ensure adequate payment to public hospitals, especially, community health centers and other safety net

4

providers. Realistically, Medicare and Medicaid payments must reflect that fundamental goal.

Mr. Chairman, thank you.

Mr. BILIRAKIS. I thank the gentleman.

I would ask that other opening statements be held as close to 3

minutes as possible, and I now recognize Mr. Whitfield of Kentucky.

Mr. WHITFIELD. Mr. Chairman, I cannot think of a more timely

or important subject for us to be discussing today than what we are

discussing. The focus of this hearing is to consider the programs

which have been disproportionately affected as a result of changes

made in reimbursement under the BBA Act of 1997 and whether

Congress should restore monies to the Medicare and Medicaid programs.

I think each Member of Congress will be focusing on different

areas, but I, for one, want to focus on the DSH proportionate payment problem. For the first time, the BBA Act of 1997 imposed an

annual cap on the Federal Medicaid DSH dollars a State could receive. Many of these caps deserve a decrease over the fiscal year

1998-2002 window, and today, almost 33 percent of all hospitals

will operate at a loss this year, the highest number ever.

In Kentucky, the fiscal year runs from July 1 through June 30.

This year, 6 months into the fiscal year, all DSH monies had been

exhausted to pay indigent care that hospitals had to render

through June of 2000. This last year, Kentucky’s hospitals provided indigent care at a cost of $231 million and received only $159 million in DSH payments, a payment of 69 cents for every dollar of

indigent costs incurred. This left a $72 million shortfall of unreimbursed indigent care that hospitals were required to absorb.

At a time when the number of people without insurance continues to rise and hospitals are losing billions of dollars caring for

low-income patients, further reductions in DSH payments are illadvised, at best. For that reason, Ms. DeGette of Colorado, Brian

Bilbray of California, and I have introduced legislation to freeze

any further reduction in DSH payments to hospitals. This legislation must be passed before the most severe BBA cuts in DSH take

effect and strangle hospitals even more than they are today.

We all know that BBA has reduced payments to hospitals at a

far greater degree than was ever anticipated by Congress, and all

of us are committed to take steps necessary to restore some of this

funding, certainly to reduce any further reductions, and I look forward to working with this committee and other Members of the

Congress as we make efforts to address these problems.

Mr. BILIRAKIS. I thank the gentleman.

Mr. Pallone, for as close to 3 minutes as you possibly can do.

Mr. PALLONE. Thank you, Mr. Chairman. I have already shortened it. I want to focus on my home State of New Jersey, but obviously I think that this needs to be addressed on a national level

and that the problems with the BBA cuts are having a national impact.

The Balanced Budget Act of 1997 had a severe impact on New

Jersey’s hospitals. The cuts the BBA imposed have turned out to

be far greater than Congress intended and hospitals throughout

New Jersey and the patients they serve are suffering as a result.

5

Although last year’s Balanced Budget Refinement Act helped, it

was not nearly enough. Overall, the BBRA restored less than 10

percent of the cuts imposed by the BBA. The $123 million New Jersey hospitals actually received under the BBRA is just 6 percent

of the total Medicare reductions imposed by the Balanced Budget

Agreement.

These reductions have helped bring New Jersey’s hospitals to the

worst financial state in decades. Their average margin of profitability is negative 1.6 percent and Medicare margins are below the

national average. With the majority of BBA mandated cuts still to

come, New Jersey’s hospitals need Congress to take advantage of

the larger-than-expected budget surplus and pass a comprehensive

and significant refinement act this year.

Mr. Chairman, I just wanted to point out that the President and the Democrats have put forward a, over 10 years, a $50 billion

give-back plan which so far has met with total resistance from the

Republicans. We tried to include this plan with the Medicare prescription drug plan before the Rules Committee when the Republican prescription drug proposal came to the floor and it was

blocked in the Rules Committee. We tried again to include this last

week, attach it as a motion to recommit to the marriage penalty

bill that the Republicans proposed, and again, that was rejected by

the Republicans. So we are out there trying to bring this to the

floor and we are getting resistance from the other party.

Let me just mention a few issues that directly impact New Jersey. The inpatient payment reduction scheduled for fiscal year 2001

and 2002 should be repealed. Over the last 3 years, hospital inflation has been around 7 percent, yet the increase in payment has

been below 2 percent. The BBRA provided no inpatient payment relief to New Jersey hospitals.

The funding levels for indirect medical education should be maintained at 6.5 percent. If Congress wants to ensure we have adequate teaching facilities for health professionals, Congress must

provide an adequate level of funding. The reductions in IME funding scheduled for fiscal years 2001 and 2002 will place a heavy and

unnecessary burden on the teaching hospitals in my State and

should be scrapped.

The transfer provisions in the BBA should be repealed. Currently, hospitals actually receive a lower reimbursement when

some patients are moved more quickly to more appropriate, less expensive settings. The expanded transfer definition is especially

harmful to the delivery system in New Jersey, where 24 percent of

seniors seek additional care after they leave the hospital.

I also support, Mr. Chairman, repealing the 15 percent cut in

home health payments. This has had a major impact in New Jersey. And I also support inclusion of the safety net provisions in

H.R. 2341 our colleagues Mr. Burr and Mr. Towns have introduced

to strengthen community health centers.

But last, Mr. Chairman, I want to stress again that the Democrats have been out there. The President and the Democratic leadership have talked about this $50 billion plan over 10 years. We

should be allowed to bring this up. We have been trying to address

it and we are getting nowhere. This needs to be addressed in a bipartisan manner.

6

Mr. BILIRAKIS. The gentleman’s time has expired.

Mr. PALLONE. Thank you, Mr. Chairman.

Mr. BILIRAKIS. Mr. Bryant?

Mr. BRYANT. Thank you, Mr. Chairman. Thank you for holding

this hearing. I wake up every morning and come in here bright and

cheery-eyed and then consistently I hear from my good friend from

New Jersey how evil the Republicans are, and I do not like them

either. It makes me mad, those Republicans that do not like clean

air and clean water and want to throw senior citizens out on the

street and want to close all the hospitals out there so that nobody

can get medical care to help our rich friends. Everything up here

seems to boil down to that type of sentiment.

As a lot of us continue to try to preach up here, there is a way

to go about doing things and I think our chairman has set the right

course for us here. We are at a time now when all of us agree, we

have agreed almost since day one that, as the numbers began to

come in, that the cuts were too deep. There is no question about

that. We have been trying to, since, I know the 6 years I have been

in Congress, we have been trying to practice some discipline and

balance the budget and get a surplus going, things that everybody

now is claiming credit for, but it did not happen until about 1995,

when the change of Congress took place, if you want to get partisan

about it.

We are trying to do all that in that environment of keeping a balanced budget and being fiscally responsible on all these other

issues. We have got a surplus now, and because of these good practices we have put into play, we have got anticipated projected even

a bigger surplus than we thought.

So we are here today to talk about where and how do we address

those needs of restoring money back to the health care providers

to try to bring this more into line, and I think consistent with a

resolution that was passed that was sponsored, I think, by Representatives Wilson and Bilbray, overwhelmingly that we need to

find ways to capture parts of this money, not all of it because we

have got other responsibilities, too, but to again lessen some of

these cuts and to restore money.

This is not a Republican issue. It is not a Democratic issue. It

is not an Independent issue. We all agree that we want to do it,

but we have to do it in a fair, balanced, disciplined way as we are

trying to learn to do in Washington, something that has not gone

on for a number of years before we came up here and took control

of the Congress. So it is a hard lesson to learn, but we are trying

to stay that course and be responsible, yes, to the medical providers, but also to the senior citizens and to the young people out

there and to education and to the environment and anything else

you can name out there. It is not an easy task, but if we can continue to work together and not practice a politics of division that

so often happens up here, I think we have a better chance of doing

it.

With that, I will yield back my time.

Mr. BILIRAKIS. I thank the gentleman.

Ms. DeGette for her opening statement.

Ms. DEGETTE. Thank you, Mr. Chairman. I will add my thanks

for holding this hearing.

7

I want to emphasize that Medicaid and the CHIP program were

also included in the Balanced Budget Act of 1997 and I want to do

that because so often we forget that they are the forgotten sister

health programs to Medicare. But we need to remember these programs are both solely in our jurisdiction and I hope that we will

address issues that have arisen in them as well as Medicare in this

hearing and as we move forward.

I have sort of a smorgasbord of issues this morning, so I will try

to move as quickly as I can through them. The first one, I understand, has been mentioned, is this issue of the disproportionate

share program which is causing our Nation’s safety net hospitals to absorb $10.4 billion in reductions. Safety net hospitals like Denver Health, Virginia Commonwealth, Los Angeles Children’s Hospitals, and even for-profit hospitals are suffering tremendously

under these cuts.

As you have heard, Representative Whitfield, Representative

Bilbray, and I have been working assiduously on this issue for the

last number of months. Between our two bills, we now have 60 percent of the Commerce Committee as cosponsors and over 215 total

cosponsors in the House. I think this is an issue with significant

grassroots and bipartisan support and I believe we need to address

it with passage of legislation this year.

Second, I think the Commerce Committee needs to address some

issues on the children’s health insurance program. We talked about

this in full committee markup last week, and I would also like to

note a majority of the members of this committee are cosponsors

of bipartisan legislation that would grant States the option of providing coverage to pregnant women through the CHIP program, as

well as my bill, H.R. 827. Similar language is included in bills by

Representatives Emerson, Ganske, and Hyde, and Senator Bond

has introduced identical language that has been cosponsored by

Majority Leader Trent Lott and Senator McCain.

I am listening to my colleague across the aisle. I am really trying

to be bipartisan here, because I think these are bipartisan issues

that we need to address. There are a lot of other issues with the

CHIP program that I think can be fixed, as well.

A couple of other issues that I want to talk about, with regard

to Medicare, the Balanced Budget Act established a self-management education benefit for diabetics, for Medicare beneficiaries.

However, HCFA has failed to issue a final rule on this provision,

and what is more, it allowed the interim guidance to expire. As a

result, the availability of diabetes self-management education is

not increasing as intended by the BBA. As co-chair of the Diabetes

Caucus, with over 280 members, I think HCFA needs to act quickly

to revise the interim guidelines and complete its rulemaking. If we

can have adequate diabetes health management, we will avoid

many of the side effects that this disease can bear upon people.

Mr. BILIRAKIS. Will the gentlelady please finish up?

Ms. DEGETTE. Yes. I would just like to highlight one more concern I do not think we will hear about from anybody else, and that

is access to ambulance services. The BBA required HCFA to place

ambulance service providers on a Medicare fee schedule through a

negotiating rulemaking process. The problem is the BBA requires

the process to be conducted in a budget-neutral fashion, so HCFA

8

cannot actually talk about the costs. Unfortunately, there is a recent study that shows ambulance service providers may face a profound shortfall, so I hope we will address this, too, Mr. Chairman.

Once again, thanks for your consideration.

Mr. BILIRAKIS. I thank the gentlelady.

Now, in the interest of time here, we have a lot of hearing ahead

of us. I have asked members to keep their remarks to within 3

minutes. We have that prerogative. Dr. Ganske?

Mr. GANSKE. Thanks, Mr. Chairman. I will stay within 3 minutes.

I chose to sit in this spot because this is where I sat 5 years ago,

in 1995, and I very well remember one hearing that we had in

which I had the temerity to suggest that a tourniquet could

staunch hemorrhage, but applied too tightly could cause gangrene,

in more or less those words. Well, so here we are today and we are

looking again at some adjustment.

I would say the No. 1 problem in my district is the issue of rural

hospital reimbursement, and I think we need an across-the-board

inflationary adjustment for those hospitals because they have cost

increases that are beyond their control, for instance, their pharmacy and their drug costs, which we have debated a lot on that

issue in the last several weeks. Basically, we need to increase the

DRGs for those hospitals. I mean, it will not do my senior citizens

any good to have a prescription drug benefit if they do not have a

hospital to go to any more in their town.

So I look forward to this hearing and the testimony that we are

going to have from the panels and I hope we have enough chairs

for the second panel. Thank you, Mr. Chairman.

Mr. BILIRAKIS. I thank the gentleman.

Ms. Capps?

Ms. CAPPS. Thank you, Mr. Chairman, for holding this important

hearing. It could not be more timely.

As we know, the Balanced Budget Act of 1997 enacted some farreaching changes in the way Medicare pays health care providers.

These changes were intended to modernize and save money, some

$115 billion. Today, we know that the actual savings are much

larger than Congress had anticipated and that those changes are

affecting services. Providers say that delivery of care could be compromised. Many say that it already has become such.

The Balanced Budget Refinement Act, which passed last year

and restored $16 billion, was certainly a step in the right direction.

I was glad to strongly support that effort, but there is still so much

more to be done to bring relief to the hardest-hit providers. Like

many members, I hear again and again in my district regarding

these cuts in the BBA and how they are affecting quality health

care. I take these concerns very seriously. We are going to hear

more personal stories today, I know, and I want to give one of my

own, if I may.

Just recently, I met with the Santa Barbara Rehabilitation Institute, where my husband, Walter, received multi-disciplinary treatment after a serious car accident in 1996. This is the only freestanding non-profit rehabilitation center between Los Angeles and

San Francisco. Approximately 70 percent of their patient care is

9

paid by Medicare or Medicaid. They have been devastated by the

1997 BBA cuts.

If these cuts continue, the Santa Barbara Rehabilitation Institute estimates that they will have to shut their doors in 2 years,

this in the face of a huge public outpouring of support to the tune

of raising money to build a new facility. This institution saved my

husband’s life. The accident happened a few short months before

his election, to which he was elected to Congress. He would never

have been elected if it were not for this wonderful facility, non-profit facility in my community. Soberly, they told me a month ago that

they have cut to the point where they know in 2 years, despite public outpouring for a new facility, they will close their doors because

they cannot provide service.

The other large hospital in our community is Cottage Hospital,

a medical staff of more than 500, including a wide range of adult

and pediatric services. My constituents rely on it. They will experience a $23 million reduction in Medicare reimbursement from fiscal

year 1998 to 2002. The largest losses have occurred in graduate

medical education, with almost half of their GME costs not being

reimbursed. In addition, the reimbursement for Medicare patients

to Cottage has dropped significantly since 1997, is continuing to

drop. They know that the most severe drops are in the next 2

years. I am very deeply concerned that the ultimate quality of care

is being affected now and that unless something pretty dramatic

happens, that the worst is yet to come because many of these institutions have already pared as much as they can.

So I am looking forward to hearing from our witnesses today on

these and other critical issues. Thank you, Mr. Chairman.

Mr. BILIRAKIS. I thank the gentlelady.

The chairman of the full committee, Mr. Bliley. Chairman Bliley?

Chairman BLILEY. Thank you, Mr. Chairman. I am please that

the Health and Environment Subcommittee is holding this important and timely hearing today. This committee made important

changes to the Medicare-Medicaid programs 21⁄2 years ago. In addition, we created the State Children’s Health Insurance Program. It

is good to continuously monitor thee programs and the impact policy decisions have on the health care system. In particular, the

committee should know of any unintended consequences that may

have an adverse effect on access to care.

In the Balanced Budget Act of 1997, this committee made some

difficult decisions on how best to address the financial concern of

the Medicare program. Changes needed to be made and we made

them. The committee made tough choices. Moving to a prospective

payment system for hospital outpatient department services,

skilled nursing facility services, and home health services were just

some of the revisions. These were to achieve savings of $103 billion

over 5 years.

CBO continues to revise their estimates of spending in the Medicare program. It seems every revision they have released since passage of BBA 1997 shows that spending is less than originally anticipated. In addition, spending in 1999 was actually less than it

was in 1998. Just yesterday, the CBO released its mid-session review of its budget estimates, which showed that Medicare spending

10

is again lower than projected. At the same time, we are enjoying

a greater-than-expected budget surplus.

A resolution was offered by two members of this committee late

last month, Mr. Bilbray and Ms. Wilson, which declared it was the

sense of Congress that if CBO’s estimates showed a greater-thanexpected non-Social Security surplus, then we should consider further refinements to the changes enacted in BBA 1997. CBO now

estimates that this fiscal year 2000, non-Social Security surplus is

$84 billion, compared with an estimate of $26 billion just 3 months

ago, for an increase of $58 billion.

It is very timely that this hearing today considers how best to

refine even further the policies we enacted 21⁄2 years ago in BBA

1997. In doing so, however, we must be mindful that last November, Congress responded to problems some providers were facing in

the Medicare program due to changes made in BBA 1997 by restoring nearly $16 billion over 5 years to the Medicare, Medicaid, and

SCHIP programs. We worked on a bipartisan, bicameral basis with

the White House in refining the policies established in BBA 1997.

As further refinements are considered, it is important to recognize that it is hard to calculate the true impact of those recent

changes. We must not rush to spend money or change policy too

quickly.

I look forward to the testimony from our first panel of expert witnesses, Dr. Wilensky from MedPAC and Dr. Scanlon from the General Accounting Office. I also want to thank our witnesses on today’s second panel. I particularly want to welcome before the committee a constituent whom I consider a good friend, Ms. Marilyn

Tavenner. Marilyn is a registered nurse and the CEO of the Johnson-Willis and Chippenham Medical Center in Richmond, where

she also runs the Henrico Doctors’ Hospital, the John Randolph

Medical Center, and the Retreat Hospital.

Again, Mr. Chairman, thank you for convening this hearing, and

I yield back the balance of my time.

Mr. BILIRAKIS. I thank you, Mr. Chairman.

Mr. Stupak for an opening statement.

Mr. STUPAK. Thank you, Mr. Chairman. I will try to be brief.

I am especially concerned about the effects of BBA on rural

areas, especially like Northern Michigan, and let me just quote the

Director of the Center for Health Plans and Providers of HCFA

when he said, ‘‘About one in four Medicare beneficiaries live in

rural America and rural hospitals serve a critical role in areas

where the next nearest hospital may be hours away. Yet rural hospitals face special challenges. They have a higher per unit cost, difficulty maintaining enough patients to break even, and difficulty

recruiting physicians. Medicare has made exceptions and special

arrangements to address the unique needs in rural areas and

strengthen these vital facilities. Even before the BBA, Medicare

provided special payment support to more than half of all rural

hospitals.’’ These special challenges and concerns are why the BBA

has had a disproportionate effect in rural areas. The administration understands these concerns and has proposed a number of

steps, including $1 billion over the next 10 years to address those

concerns.

11

But I know that my providers and I believe that the outpatient

department and the cuts made there have really been detrimental

to rural hospitals. We need to change the flawed Medicaid payment

policy for community health centers, and that is why I strongly

support the enactment of H.R. 2341, the Safety Net Preservation

Act, and I join with a number of bipartisan members and urge the

committee to include that in any BBA relief.

With that, Mr. Chairman, I will yield back the balance of my

time because I look forward to hearing from our witnesses.

Mr. BILIRAKIS. I thank the gentlemen.

Mr. Burr for an opening statement.

Mr. BURR. Thank you, Mr. Chairman. Mr. Chairman, for the entire time that I have been in Congress, I have gone home and suggested to my constituents that they not judge us on what we do but

judge us on what we get wrong and how quickly we go back and

fix it, because I think, clearly, 51⁄2 years ago, we had a challenge

in Washington, a fiscal challenge, a policy challenge, one that doing

nothing was not an answer. We had to do something.

You do not get 100 percent of the things right when you have got

as big a task as we had, and with this, we did not get 100 percent

of the things right. Our target for health plans was intended cuts

of $22 billion over 5 years. The actual is $30 billion. Hospitals, $53

billion was the target over 5 years. Seventy-five is the actual.

Home health was $16 billion over five and the actual is $69 billion.

Nursing homes, $9.5 billion and the actual is $16.6 billion. In my district, Baptist Hospital lost $90 million in inpatient and outpatient payments and $40 million in IME payments as a result

of BBA. The BBRA only gave back $4 million to the Baptist Hospital.

Last fall, this House passed the BBRA. Included in that was H.R.

2341, a bill sponsored by Mr. Towns and myself. It had overwhelming support in the House and I think it is safe to say that

there was overwhelming support on the Hill. Unfortunately, in the

conference with the Senate, it was not included in BBRA, but we

did get some temporary relief. H.R. 2341 currently has 226 cosponsors in the House. Seventy percent of the Commerce Committee cosponsors this bill. Seventy-seven percent of the Health and Environment Subcommittee are cosponsors of H.R. 2341. The Senate

companion bill has 54 cosponsors. This is the year to enact this legislation, yet even with this much support, there are still people

that oppose this bill. For the life of me, I cannot understand why.

Community health centers have two major sources of money. One

pot of money is for Medicaid. The other pot of money is from the

Federal Government for the uninsured. When we tighten one too

much, the other has to pay out and there are losers, and in this

case it is the uninsured throughout this country.

Mr. Chairman, if we do not include H.R. 2341 in a final BBA refinement bill, community health centers and rural health clinics

will lose $1.1 billion in the next 5 years. That will be 1.3 million

uninsured that potentially go without coverage.

Now is the time for us to do this. I thank the chairman for his

holding this hearing and I look forward to this committee’s work

on a refinement bill.

Mr. BILIRAKIS. Thank you, sir.

12

Mr. Green for an opening statement.

Mr. GREEN. Thank you, Mr. Chairman, and again, like my colleagues, I appreciate you calling this important hearing. I appreciate the opportunity to focus on the status of our health care providers, the impact of the BBA in 1997. I am disappointed that we

do not have a representative from the public hospitals on our panel

today. Public hospitals serve the poorest of the poor, particularly

in Houston and other cities across the country. I know in Houston,

our public hospitals are in a crisis due to the funding reductions.

All hospitals have been devastated by the payment cuts in the Balanced Budget Act. Public as well as private hospitals need relief.

Like my North Carolina colleague, I agree, and I supported the

Balanced Budget Act of 1997, but also realize that it went much

too far and hopefully this Congress will correct it.

The Institute of Medicine, a nonpartisan advisory board, recently

completed its study of ‘‘America’s Health Care Safety Net: Intact,

Endangered.’’ In this report, the IOM concluded that the urban

safety net providers are in crisis. The increased number of uninsured, the growth of Medicaid, managed care, and reductions in

Federal funding have hurt not only public hospitals but all providers. IOM concluded that the safety net providers in our country

comprise a unique health care delivery system. They deserve

stronger Federal tracking and targeted direct support, and I agree

and I am hopeful that we will consider putting money back into our

Medicare system and keep in mind those living and providing care

in our urban areas.

One of the most important things we can do this year is examine

the impact of the BBA’s freeze on the disproportionate share, or the

DSH, funding. The Medicaid program is our Nation’s primary

source for the safety net hospitals that serve the most vulnerable

Medicaid, uninsured, and under-insured patients. The Balanced

Budget Act was supposed to cut $10.4 billion from DSH expenditures to States over 5 years with the impact coming this year and

next year. State DSH programs will receive a 30 percent reduction

in fiscal year 2001 and a 37 percent reduction in fiscal year 2002.

While the legislation we passed last year provided some relief for

hospitals, that relief was targeted primarily to the Medicare program. Fifteen percent of the BBA savings came from Medicaid, but

less than 3 percent of the funding we restored last year went to

Medicaid. I commend my colleague, Diane DeGette, for her efforts

on this issue, and her legislation to restore DSH funding should be

part of any Medicare give-back legislation.

Thank you, Mr. Chairman. I yield back my time.

Mr. BILIRAKIS. I thank the gentleman.

Mr. Greenwood?

Mr. GREENWOOD. Thank you, Mr. Chairman, for holding the

hearing. I am one who believes that managed care Medicare is a

great idea. Done properly and funded appropriately, managed care

as an option within Medicare stabilizes Medicare because it gives

us a predictable cost per beneficiary per year. It saves the taxpayers money by providing Medicare benefits at less than the average cost. And for the beneficiary, it has offered the opportunity to

have quality care without the cost of a medigap policy and with enhanced benefits, like prescription drugs.

13

But we have not been handling and funding managed care and

Medicare properly. We have been trying to buy it on the cheap, and

additionally, HCFA has not been much help in the regulatory

sphere. Last year, 41 plans terminated services to Medicare beneficiaries in 58 service areas and forced 327,000 seniors to choose a

new plan or move back into fee-for-service and 79,000 of them

could not get back because there was not a managed plan option

where they lived. Next year, 711,000 Medicare beneficiaries will

lose access to health benefits and choices next year as a result of

this underpayment.

Today, I am introducing the Medicare Beneficiaries Choice Stabilization Act, which will be a bipartisan plan to put Medicare Plus

Choice programs back on solid, stable financial ground. I hope, Mr.

Chairman, that that legislation can be included in our BBA fixes.

I also yesterday introduced a Hospital Indigent Care Relief Act

of 2000 with Ms. DeGette which will help in that area. And finally,

on Thursday of this week, I will introduce with Mr. Deutsch a bill

to increase Medicare reimbursement for mental health services for

low-income seniors.

Mr. Chairman, I hope that each of these critical areas can be addressed in the legislation that we ultimately adopt and thank the

chairman for the comments.

Mr. BILIRAKIS. I thank the gentleman. I think that completes our

opening statements.

[Additional statements submitted for the record follow:]

PREPARED STATEMENT OF HON. FRED UPTON, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF MICHIGAN

Mr. Chairman, thank you for calling today’s hearing to examine the impact that

the Medicare and Medicaid provisions of the Balanced Budget Act of 1997 are having on patients and providers. The Balanced Budget Act made the most sweeping

changes in the Medicare program since its inception. It is vital that we in Congress

closely monitor the implementation of those changes and their impact on beneficiaries’ access to care and quality of care.

I meet very regularly with my health care community, and I can tell you that they

are very concerned about the future of the health care delivery system in my district

and state and across the nation. If Medicare payments fail to reflect the real costs

of delivering quality health care and hospitals, home health agencies, nursing

homes, emergency ambulance services, and rehabilitation practices close, not only

Medicare beneficiaries but entire communities will suffer a loss of access to care.

This is particularly true in our rural areas. When rural hospitals close, physicians

and other health care providers may also be forced to leave the community as well.

I’d like to highlight some specific areas of concern that my health care community

has shared with me. First, there is a good deal of uncertainty and angst about the

implementation of the hospital outpatient prospective payment system. I want us

to take this opportunity today to determine whether the Health Care Financing Administration, hospitals across the nation, and the intermediaries are ready to implement the system in a way that will ensure fair and adequate payments reflecting

the intensity of care that is needed in each case.

Second, I hope we can revisit the issue of the caps on physical, occupational, and

speech and language therapy. I know we have postponed the effective date for the

caps, but I want us to focus on developing a more sensitive way than imposing arbitrary caps of ensuring that the care Medicare is paying for is necessary and appropriate.

Similarly, I want to revisit the 15 percent across the board cut in home health

care reimbursement. We have postponed the effective date of this cut, but I hope

that we can eliminate this cut and instead continue work out a more refined reimbursement system for ensuring that Medicare payments reasonably reflect the true

cost of providing necessary and appropriate care.

Fourth, I am very concerned about the implementation of the BBA requirement

of a fee schedule for ambulance services. It is my understanding from talking with

14

my ambulance service providers that the system that HCFA may promulgate will

not come close to reflecting the actual cost of providing these services. I want to encourage HCFA to continue to work with the ambulance community to get the system right before it is implemented.

Fifth, I hope that we can revisit the community health center provisions of the

Balanced Budget Act. I am concerned that the current provisions phasing down the

percent of costs for which state Medicaid programs must reimburse the centers

would, if further implemented, seriously undermine the survival of these safety net

health care providers for the poor and the uninsured. I’d like us to look instead to

implementing a prospective payment system that has incentives for efficiency but

that will permit community health centers to continue to meet the needs of the poor

and the uninsured with high-quality care and services.

I look forward to working with you, Mr. Chairman, my colleagues on the Subcommittee, and providers and beneficiaries to ensure that we are strengthening, not

threatening, access to care and quality of care.

PREPARED STATEMENT OF HON. ANNA G. ESHOO, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF CALIFORNIA

Like so many of my colleagues, I hear every week from health care providers in

my district that the cuts in the 1997 Balanced Budget Act are crippling them.

Hospitals, home health agencies, and nursing homes across the country say they

simply can’t provide quality medical care within the budget cuts we enacted just

three short years ago.

Mr. Chairman, as a New Democrat, I know the importance of fiscal responsibility

and budgetary constraint. However, I’m concerned that we may have gone too far.

A Lewin Group study found that payments to health care providers are already

$40 billion lower than we anticipated when we passed the BBA.

While some of the savings may be the result of outside forces, particularly an aggressive crackdown on fraud and abuse, it’s clear that the BBA cut deeper than

Congress expected or intended.

Before coming to Congress, I served as chair of the county hospital board in San

Mateo County, California. I know that a hospital can’t continue to offer services on

a negative margin. Something has got to give.

And I fear that the thing that will give is patient care. Without relief, hospitals,

home health agencies and nursing homes are faced with two options: cut back services or withdraw from the Medicare program altogether.

It’s already happening.

In the first year following enactment of the BBA, nearly 25% of home health agencies in the U.S. closed their doors, leaving over 500,000 seniors without services.

By the end of 1998, 400,000 beneficiaries were thrown out of their Medicare

HMOs when their insurance company terminated their contracts with Medicare.

We remedied some of these problems with last year’s Refinement bill.

The 15% across-the-board cut in home health services was delayed.

A two-year moratorium was placed on implementation of the therapy caps.

But there is much left to do. This is the second hearing we’ve held on this issue,

Mr. Chairman. I hope that the next action that this Committee takes is to write

a bill that takes care of these problems.

And I hope that this year’s bill includes Medicaid.

Last year’s BBRA did not include any money for Medicaid, leaving a large gap

for the public hospitals in my congressional district who serve a disproportionate

share of indigent clients.

BBA reductions in Medicaid DSH spending have been particularly dramatic in

California, where payments have declined more than $116 million in the past two

years.

Without relief, California DSH hospitals stand to lose another $164 million by

2002.

I’m a cosponsor of Rep. DeGette’s bill to eliminate any further cuts to Medicaid

DSH hospitals. I urge this Committee to include the DSH freeze, and other fixes

for Medicaid, in any givebacks bill we write this year.

CBO has given us the good news—we now have a $2.2 TRILLION non-Social Security surplus. The President has expressed his support for dedicating a large portion of this to BBA givebacks.

Now is the time to shore up the Medicare and Medicaid systems and ensure that

seniors continue to have access to good, quality healthcare.

I look forward to a bill that provides needed relief while still remaining true to

the BBA’s goal of fiscal responsibility.

15

PREPARED STATEMENT OF HON. JOHN D. DINGELL, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF MICHIGAN

Medicare is a good, solid program. For 35 years the program has ensured that

America’s seniors and disabled have dependable, affordable health care. Congress

should take care to ensure that the program remains strong and that beneficiaries

continue to have access to high quality health care.

The Balanced Budget Act of 1997 (BBA) was an attempt to reduce costs in the

Medicare program where there was evidence that the program was overpaying. Investigations by the Inspector General and the General Accounting Office and others

indicated areas where the program could do better. But some other changes may

have inflicted more harm than good.

I agree that there are some areas where Congress should revisit some of the

changes made in the Balanced Budget Act. I know that in my own district, hospitals

have struggled, and some, like Mercy Hospital, a provider of care to many low-income and uninsured patients, have even closed their doors. Other hospital closures

will follow. Community Health Centers, which are beginning to feel the effects of

the phase-out of cost-based reimbursement and the state Medicaid program’s transition to managed care, are struggling as well. These are matters that concern me

greatly.

However, we must keep in mind that changes as sweeping as those enacted in

the BBA take time to digest, and we must not act with haste. We should carefully

explore the issues and the merits of the claims. We want to act judiciously.

When contemplating program changes, we must keep our focus on the beneficiaries. There are a number of modifications that Congress could make that would

improve the program for beneficiaries. The first step is adding a solid prescription

drug benefit in the Medicare program that is meaningful and affordable. But, we

should also consider adding preventive benefits, buying down the hospital outpatient department co-payments, increasing enrollment of low-income beneficiaries

in assistance programs and other options to improve the program for seniors and

the disabled.

In conclusion, I welcome this hearing as a first step in exploring the need for further modifications to the changes made in the Balanced Budget Act of 1997. I hope

that our Committee will thoughtfully deliberate—and act—on this matter. I also ask

my colleagues not to forget those who depend on the program for their care—the

seniors and disabled. I hope that we will find it in our hearts to ensure they benefit

directly, as well as indirectly, from additional Medicare spending this year.

Mr. BILIRAKIS. I would now ask the distinguished panelists making up panel one to come forward. Dr. Gail Wilensky is the chair

of the Medicare Payment Advisory Council. Bill Scanlon is the Director of Health Financing and Public Health of the General Accounting Office. Both have appeared before this committee countless times in the past and I expect countless times in the future.

We will set the clock at 5 minutes, but by all means, if you have

got to go over it, it will not be any problem in that regard. Dr.

Wilensky, please proceed, ma’am.

STATEMENTS OF GAIL R. WILENSKY, CHAIR, MEDICARE PAYMENT ADVISORY COMMISSION; AND WILLIAM J. SCANLON,

DIRECTOR, HEALTH FINANCING AND PUBLIC HEALTH

ISSUES, U.S. GENERAL ACCOUNTING OFFICE

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

subcommittee. I am pleased to be here representing the Medicare

Payment Advisory Commission as its chair.

As you have indicated, MedPAC appeared before you in the fall

of 1999 indicating at that time, while we had some areas of concern, there was not clear evidence that wholesale changes needed

to be made to the Balanced Budget Act. There were some specific

areas of concern and Congress correctly took those up in the Balanced Budget Refinement Act. There are still issues that remain

and we would like to indicate some areas where we as a commisVerDate 11-MAY-2000 10:22 Apr 18, 2002 Jkt 010199 PO 00000 Frm 00019 Fmt 6633 Sfmt 6602 E:\HEARINGS\65915 pfrm01 PsN: 65915
16

sion have some concern, although we would again like to caution

that this does not mean that you ought to undertake wholesale

changes to the Balanced Budget Act.

Its purpose, of course, was to moderate spending and also to introduce more choice, as we have just heard, and it is obvious that

spending on Medicare has been moderated substantially. It was estimated that spending would increase at about 5.5 percent per year

in the first fiscal year. It increased 1.5 percent. It declined slightly

in the last fiscal year. It appears, as best we can tell through the

first 8 months, that Medicare spending is up about 3.5 percent over

last year, still under the spending that was projected by the Balanced Budget Act, but it does appear that spending is increasing

in this Medicare program.

However, in looking at potential changes, we ought not just to

look at spending patterns. They are important. They are important

by specific services. But we ought to ultimately look at what we

can tell in terms of what is happening to access. Ultimately, that

is what the Medicare program is supposed to be about, making

sure that our seniors get access to high-quality care.

There is not very much, if any, systematic evidence that seniors

are having difficulty receiving care under Medicare as a result of

the Balanced Budget Act, but there are some areas, either because

of what we can see going on in the spending patterns that have

raised concerns in the minds of the MedPAC commissioners or because of some principles in terms of how the payment structures

are laid out, that we think are appropriate for some further adjustment, and I would like to talk about the major areas of hospitals,

home care physicians, and the Medicare Plus Choice.

First, let me say once again that we continue to be plagued by

data problems. We have difficulty getting timely data. MedPAC

joined with HCFA to try to get an indicator survey going so we

would get a little bit more timely hospital data. We are continuing

to try to work on this. We are frustrated, we are sure you are frustrated, because it makes it difficult to make the best decisions.

Let me talk first about the hospital payments. As you know,

MedPAC in this year has recommended a substantially higher increase than is part of current law. We are recommending an increase that is about .5 to 1 percent above the market basket, and

there were three reasons why we came to that conclusion.

The first is that while we have gone to suggest take-back from

site of care substitution, that is, hospitals having some of the care

that used to be done inpatient being done more often in home care

or in nursing homes over the last decade, that attempting to recoup

for past movements did not seem prudent when we were observing

the sharp declines in total margins that hospitals were reporting.

Second of all, for the first time, there appears to be some downcoding. That is, in a systematic review of actual medical records,

it appears that hospitals are billing for lower rather than higher

or the right diagnoses for the patients that they have seen.

And finally, we are a little concerned about what has been happening with some of the scientific and advancement areas and also

the inpatient pharmaceutical costs that hospitals have to face. So,

therefore, we have suggested that there be a consideration given to

a higher update than is currently part of law.

17

We do recognize that the BBRA did look to help the hospitals in

a variety of ways last year, particularly in terms of softening the

transition to the outpatient PPS, to putting a hold on continued

downward payments in disproportionate share, and on the IME

part of the medical education payment. Nonetheless, the sense of

the commissioners was that for at least this one year, consideration

be given to this increased payments for hospitals.

With regard to home care, while we feel we know the least about

what is going on, particularly to the patients who are receiving

care, we are troubled by the very dramatic decline in spending that

has occurred in the last 2 years, a decline of 45 percent from

spending in 1997. This is an area where we had seen very rapid

growth in the 1990’s, both in terms of the number of services and

in terms of the number of people receiving services and in the number of agencies, but those numbers have declined sharply, closer to

1994 levels, and as I have indicated, a rather substantial decline

in absolute spending.

We believe that moving to the prospective payment system will

help. We think that there are some issues that need to be monitored in terms of making sure that access continues to occur for

people in home health. It is the sense of commissioners, although

we have not made this a formal recommendation because of the

timing, that the Congress would be wise to postpone the 15 percent

reduction in payments that has been part of current legislation because of these very substantial declines in spending that we have

seen. We think we will know more and the Congress will know

more when data becomes available and we have a better sense

about the clinical services provided to seniors as part of home care

and what it may mean if they do not continue to have these services.

With regard to physician care, there were a number of areas

where we have raised some questions, some of which were addressed in BBRA. We had some concern about the oscillations, the

swings in the sustainable growth rate, and the BBRA has moved

to reduce those and also to take care of some of the errors in terms

of the estimations that would occur, although they will be only in

the future.

And finally, we have encouraged further review about how HCFA

makes its estimates for the number of people who will be served

in the traditional fee-for-service program because that impacts the

sustainable growth rate.

And finally, let me say a word about the Medicare Plus Choice

program. As I indicated, that was supposed to be, that is, giving

more choices to seniors was supposed to be one of the objectives of

the Balanced Budget Act. We clearly are seeing a troubled program. In part, we think it is because there is some inherent conflict

with some of the goals that Congress has enunciated about what

they want from that program, saving money and also providing either more benefits or more choices.

We think regulatory burdens have been a problem. There has

been some attempt in the BBRA to address some of them and I believe HCFA is now sounding as though they also agree that regulatory burdens may have had some negative effect. And I believe

that the uncertainty about future payments has been a problem.

18

I continue to believe that the idea of having Medicare replacements is an important strength of the Medicare program and hope

that this committee and other committees of the Congress will look

to find ways to produce a stable set of Medicare replacement programs in addition to strengthening the traditional Medicare program.

Thank you, Mr. Chairman.

[The prepared statement of Gail R. Wilensky follows:]

PREPARED STATEMENT OF GAIL WILENSKY, CHAIR, MEDICARE PAYMENT ADVISORY

COMMISSION

Good morning Chairman Bilirakis, Congressman Brown, members of the Subcommittee. I am Gail Wilensky, chair of the Medicare Payment Advisory Commission (MedPAC). I am pleased to participate in this hearing on the Balanced Budget

Act (BBA) of 1997 and its impact on patients and providers.

When MedPAC last appeared before this subcommittee in September 1999, we

testified that although there was no evidence in support of wholesale changes to the

BBA, there were several areas in which specific steps could be taken to preserve

access to high-quality care for Medicare beneficiaries. The Congress addressed—or

began to address—some of the issues we raised when it enacted the Balanced Budget Refinement Act (BBRA) of 1999. Other issues remain unresolved and may warrant action. My testimony today discusses these unresolved issues and possible

courses of action. It concludes that in considering alternatives, the Congress should

take care not to oversolve problems. Changes as sweeping as those enacted in the

BBA necessarily take time to digest, and the uncertainty caused by frequent

changes in payment rates and systems may do more harm than good.

Introduction

The BBA was enacted to control the growth of Medicare spending and to provide

Medicare beneficiaries with additional choices for care through private health plans.

To control spending on services already paid prospectively, such as the services provided by hospital inpatient departments, the Act reduced payment updates in relation to what they would have been. To control spending on services that had been

reimbursed largely on the basis of costs or charges, such as those provided by hospital outpatient departments, skilled nursing facilities, and home health agencies,

the Act established new prospective payment systems. To control spending and to

expand beneficiaries’ choices of private health plans, the law also created the

Medicare+Choice program, which allows new types of plans to participate, and established new payment rules that raised payments to plans in some areas, lowered

them in others, and capped the growth in payments at less than the growth in feefor-service spending.

Since enactment of the BBA in 1997, Medicare outlays have increased at a rate

well below what was projected at the time. After flat or declining spending in fiscal

years 1998 and 1999, outlays for Medicare are now growing slowly. Through the

first eight months of fiscal 2000, spending has increased at only 3.5 percent, well

below the 5.5 percent rate projected when the BBA was enacted. This continued

slow growth in Medicare spending has raised concerns about whether the BBA may

have compromised beneficiaries’ access to high quality care. Much of this concern

has come from health care providers and plans. Over the past two years, providers

have asserted that the impact of the BBA has been harsher than was intended by

Congress, that the law’s intended effects have imposed undue burdens on them, and

that there have been specific problems with the Health Care Financing Administration’s (HCFA) implementation of the law.

Measuring beneficiaries’ access to care in traditional Medicare is a difficult exercise in the best of times. Because we cannot directly observe access on a timely

basis, we must often rely on indirect measures that we believe indicate providers’

ability and willingness to provide services. These indirect measures include trends

in spending for specific services and in providers’ financial performance. We also

make analytical judgments to help us determine where problems are likely to arise.

For example, we know payment systems that do not adequately account for variations in patients’ resource needs are likely to be problematic for beneficiaries with

the greatest need.

Last fall, before this Subcommittee, MedPAC testified on the implications of the

BBA for Medicare’s fee-for-service sector. We noted then that our efforts to assess

changes in access resulting from the BBA had been hampered by a paucity of data

19

and by the difficulty of sorting out the effects of changes in Medicare payment policy

from other policy changes and from developments in the broader health care market. In the case of hospital services, for example, we lacked systematic data on financial performance in the post-BBA period; the limited evidence we did have did

not allow us to attribute observed changes to Medicare. In the case of home health

care, we knew that spending and use had fallen, but we had no way to disentangle

the effects of payment changes enacted in the BBA from concurrent policy changes

intended to reduce fraud and abuse.

We also indicated in our testimony areas in which we had reason to believe that

technical aspects of Medicare’s payment systems could lead to problems. For example, we noted that the absence of an adjustment for case mix in the interim payment

system (IPS) for home health services could raise problems for patients with high

resource needs. We noted a similar concern with respect to the newly implemented

prospective payment system for skilled nursing facilities, which did not appear to

account adequately for the needs of high-acuity patients. Finally, we noted technical

difficulties with the sustainable growth rate (SGR) system used to update payments

to physicians.

A number of developments affecting fee-for-service Medicare have occurred since

we testified last September. In some areas—such as hospitals’ financial status—we now have data that allow us to make a better assessment of the BBA’s implications.

In other areas, changes enacted by the Congress in the BBRA have addressed the

issues we raised.

Gauging the success of the Medicare+Choice program is different than measuring

access to specific services in traditional Medicare. Here, the appropriate measure is

whether the program is meeting the Congress’s goals of controlling program spending and increasing beneficiaries’ choices of plan options. In our March 1999 report

to the Congress, MedPAC noted specific changes in regulatory policy—such as how

HCFA defined service areas and when the agency required submission of premium

data—that could encourage plans to participate without compromising the objectives

of the program. The BBRA codified these policies and made other changes intended

to put the Medicare+Choice program on a more solid footing.

The following sections provide more detail on what we know about the impact of

the BBA and BBRA for hospital services, home health care, physicians’ services and

the Medicare+Choice program. They also suggest possible courses of action.

Hospital services

Hospitals have been among the most vocal providers in seeking relief from the

BBA, in part because so many of their operations were affected by provisions of the

law. For inpatient services covered by the prospective payment system, the BBA

froze base payments in fiscal year 1998 and reduced updates in subsequent years,

instituted a new policy for transfer cases, lowered the adjustment for indirect medical education (IME) to teaching hospitals, lowered the adjustment received by hospitals that treat a disproportionate share (DSH) of low-income patients, and reduced

capital payment rates. For outpatient services, the BBA eliminated the so-called formula driven overpayment, extended reductions in payments for capital and services

paid on a cost basis, and directed the Secretary to implement a prospective payment

system for services still being paid at least partially on the basis of costs. Collectively, these provisions were intended to slow Medicare spending growth, bring inpatient payments in line with costs, and move payments for outpatient services from

a cost-based system to a prospective one.

In response to hospitals’ concerns that the BBA had been too harsh, the BBRA

increased IME and DSH payments for inpatient services and eased the transition

to the outpatient prospective payment system. The law raised the payment base for

outpatient services, provided partial protection against financial loss through 2003,

added an outlier policy to compensate for extremely high-cost cases, and allowed additional payments for certain drugs, biologicals, and medical devices for three years.

Hospitals’ financial status deteriorated significantly in 1998 and 1999. MedPAC

estimates that on hospitals’ largest lines of Medicare business—acute inpatient, outpatient, skilled nursing facility, home health, and inpatient rehabilitation and psychiatric—Medicare margins dropped from 9.8 percent in 1997 to 6.5 percent in 1998.

Considering acute inpatient services alone—which account for three-quarters of hospitals’ payments—hospitals’ Medicare margin fell from an historic high of 17.0 percent in 1997 to 14.4 percent in 1998. Excluding payments for graduate medical education, the fraction of hospitals with negative inpatient margins rose from 23 percent in 1997 to 29 percent in 1998.

To obtain more timely data, MedPAC is co-sponsoring with HCFA a new survey

of hospitals. Although data from this survey cover fewer hospitals and do not allow

us to break out margins on Medicare services, they are more current than the inforVerDate 11-MAY-2000 10:22 Apr 18, 2002 Jkt 010199 PO 00000 Frm 00023 Fmt 6633 Sfmt 6621 E:\HEARINGS\65915 pfrm01 PsN: 65915
20

mation on Medicare margins we obtain from cost reports. Based on this new survey,

we estimate the aggregate total margin for hospitals covered by Medicare’s inpatient

prospective payment system to have been 2.7 percent in 1999, less than half its

1997 level.

The drop in total and Medicare margins provides information we did not previously have, but two issues cloud interpretation of this information. First, while reduced Medicare payments played a role, lower private payments (relative to the cost

of care) accounted for about three-quarters of the decline in total margin between

1997 and 1998. Second, changes in margins do not translate directly into changes

in access or quality; instead, they indicate the pressure that hospitals face.

In assessing hospital inpatient payments, MedPAC relies on margin data for context, but we base our recommendations on updates to payments on a framework

that examines factors influencing providers’ costs or payments. Using this framework last year, we concluded that the update set in law for fiscal year 2000 was

appropriate. This year, however, we recommended an update of 3.5 to 4.0 percent

(0.6 to 1.1 percentage points above market basket). Three factors guided our reasoning. First, in view of the financial stress that hospitals are experiencing, we

elected to delay the phase-in of a downward adjustment for unbundling of services—

shifting the latter days of inpatient stays to a post-acute setting—that we have previously recommended until we can revisit the issue next year. Second, a first-ever

drop in the case-mix index—possibly reflecting more cautious coding by hospitals in

response to federal antifraud efforts—led us to recommend an upward adjustment

to offset the decline. And third, we recommended an increase for the costs of scientific and technological advances, primarily in response to the impact of new drugs.

With respect to outpatient services, some transitional problems are inevitable as

Medicare moves from cost-based reimbursement to prospective payment; hospitals

that cannot control costs adequately will face financial risk. However, the protections enacted in the BBRA make it unlikely that payment amounts will be too low;

changes in payment rates are probably not warranted. In view of the significant

change in payment policy that is being implemented, however, we do recommend

monitoring implementation of the outpatient prospective payment system to ensure

that it does not have unintended, adverse consequences on beneficiaries’ access to

care and that the quality of care delivered is not compromised.

Another important issue with respect to outpatient services is the coinsurance

paid by beneficiaries, which now averages almost 50 percent. Although coinsurance

amounts will remain fixed at their current dollar level until they are reduced to 20

percent of Medicare-approved payment amounts, the process will take decades.

MedPAC has twice recommended that the Congress enact legislation to accelerate

the reduction to achieve a 20 percent coinsurance rate in a more reasonable time

frame. By comparison, the most gradual phase-in Medicare has used to date for any

payment system change is 10 years.

Home health care

In response to extraordinarily rapid growth in spending for home care during the

early to mid-1990s, the Congress enacted major changes in the BBA as to how home

care agencies are paid. Prior to the BBA, agencies were paid on the basis of their

costs, subject to agency-specific limits based on per visit costs. The BBA imposed

new agency-specific limits based on average payments per beneficiary and average

payments per visit. This interim payment system was intended to achieve savings

until a prospective payment system could be put in place. The prospective payment

system is now scheduled for implementation in October.

Changes in home care have been the most pronounced of any sector of Medicare.

Even with the increase in payment limits that was enacted in 1998, Medicare

spending for home health services fell 45 percent between 1997 and 1999 and the

number of agencies has dropped from more than 10,500 to less than 8,000. By 1998,

the number of home health users per fee-for-service beneficiary had returned to its

1994 level, and the average number of visits per user was below the 1994 level.

Although these changes are dramatic, they cannot be completely attributed to the

payment changes enacted in the BBA. Concurrent policy changes, including antifraud initiatives targeting home care agencies, eliminating venipuncture as a qualifying service for home health eligibility, and imposing sequential billing (since discontinued) have all been important. Moreover, dramatic as the changes in spending

and use have been, interpreting what they mean for Medicare beneficiaries is not

easy. Without clear coverage and eligibility guidelines that reflect the clinical characteristics of beneficiaries—which MedPAC has previously recommended be developed—it is difficult to know how much of the decline reflects less inappropriate care

and how much reflects less appropriate care.

21

In MedPAC’s March report, we indicated our support of the prospective payment

system for home health care that HCFA intends to put in place in October. Although the proposed system will need refinement over the longer run, it represents

a substantial improvement over the IPS because it takes into account variation in

resource needs among home care patients. The proposed system will also incorporate an outlier policy for beneficiaries with extraordinary costs.

With a new payment system pending, MedPAC did not make formal recommendations in our reports to the Congress earlier this year with respect to payment rates

for home health services. However, given the dramatic changes in use that have already occurred, and the changes yet to come with introduction of the PPS, the general sense of the Commission is that reducing payment rates by an additional 15

percent, as currently scheduled in law for next year, would not be prudent without

additional evidence to justify such a reduction.

Physicians’ services

For physicians’ services, the BBA required a phase-in of resource-based payments

for physicians’ practice expenses. The law also created a sustainable growth rate

system for annually updating payments to physicians.

The transition to new payments for practice expenses started in 1999 and will

continue through 2002, as required by the BBA. During this transition, payments

for some high-volume surgical services will fall sharply. For example, the payment

rate for single coronary artery bypass graft will drop 19 percent and the payment

rate for total knee replacement will fall 23 percent. Questions have been raised

about the data and methods HCFA has used to determine changes in practice expense payments. The agency is working through these issues during a refinement

process that includes contractor support and the involvement of the physician community.

With respect to the SGR system, one issue that MedPAC identified last year—

the potential for oscillation in updates—was resolved by the BBRA. The BBRA also

directed the Secretary to correct estimates in previously issued SGRs to avoid by

locking estimation errors into future spending targets. This happened in 1998 and

in 1999, when underestimates of fee-for-service enrollment led to lower target levels

of spending.

MedPAC also recommended in March 1999 that the sustainable growth rate be

revised to include measures of change in the composition of fee-for-service enrollment—much like demographic adjusters for payments to Medicare+Choice plans—

and to include an allowance for cost increases due to improvements in medical capabilities and advances in scientific technology. The BBRA required the Secretary to

study these issues and their effects on the use of physician services, and the Agency

for Healthcare Research and Quality has begun this work.

We have no evidence that beneficiaries are experiencing problems with access to

physicians’ services. As we testified last year, a survey undertaken in early 1999

by Project HOPE for MedPAC showed that among physicians accepting all or some

new patients, more than 95 percent were accepting new Medicare fee-for-service patients both in 1997 before the BBA payment changes were introduced and in early

1999. Given that updates to the conversion factor were equal to or greater than increases in input costs in 1999 and in 2000, we would not expect to find different

results today.

Medicare+Choice

A key component of the BBA was the creation of the Medicare+Choice program,

which the Congress intended to provide Medicare beneficiaries with choices of plan

options and to help control the growth of Medicare spending. Some policymakers

saw Medicare+Choice as a vehicle to provide Medicare beneficiaries with richer benefits—lower cost sharing and prescription drug coverage—than those available in

the traditional fee-for-service program. And some policymakers wanted to see rapid

growth in the Medicare+Choice program to help set the stage for future changes in

the structure of Medicare.

Progress toward these goals has been minimal. On the one hand, spending per

enrollee in private plans has been controlled, primarily because of the slow growth

in fee-for-service spending which is used to determine updates. (Compared with the

previous payment rules, however, the Medicare+Choice program has probably increased spending, because the new rules have prevented the effects of the slow

growth in fee-for-service spending from being passed through fully.) On the other

hand, the goals of increasing choice and expanding access to plans with richer benefits remain elusive. The range of plan options has not increased, most beneficiaries

in rural areas still cannot enroll in Medicare+Choice plans, benefit packages have

become less generous, and enrollment growth has been stagnant.

22

Perhaps the most visible indicator of how the Medicare+Choice program is faring

has been announcements by health plans of contract terminations and service area

cutbacks. In January 1999, more than 400,000 enrollees were affected by such

changes; 50,000 lived in counties where no other plan was available. In January

2000, about 330,000 enrollees’ plans withdrew; 80,000 had no other plan available.

Plan withdrawals are likely to have an even greater impact in January 2001. In the

past several weeks, plans have announced contract terminations and service area

cutbacks indicating that nearly one million Medicare+Choice enrollees will be unable to remain in their current plans, and more than 150,000 enrollees will have

no Medicare+Choice alternative in their county. About 70 percent of Medicare beneficiaries lived in counties that had a Medicare+Choice plan in 1999 and 2000. That

fraction is unlikely to change next year, with fewer beneficiaries having access to

health maintenance organizations (HMOs), and some beneficiaries newly having access to a private fee-for-service plan.

Data on the availability of richer benefits tell the same story. The share of Medicare beneficiaries with access to a Medicare+Choice plan that did not charge a premium fell from 61 percent in 1999 to 53 percent in 2000. The share of Medicare

beneficiaries with access to a Medicare+Choice plan that offered prescription drug

coverage and did not charge a premium fell from 54 percent in 1999 to 45 percent

in 2000. These declines occurred in both urban and rural counties, but were most

pronounced in counties where the base payment was between $400 and $550 per

month.

Finally, there is the lack of new products. The BBA expanded Medicare’s risk contracting program, which previously had been open only to HMOs, to allow participation by preferred provider organizations (PPOs), provider-sponsored organizations

(PSOs), private fee-for-service plans, and high-deductible plans offered in conjunction with a medical savings account (MSA). To date, no PPOs, no MSAs, and only

one private FFS plan have joined. The one PSO plan that joined is withdrawing.

Three issues help explain why the Medicare+Choice program is not meeting expectations. First, the Congress’s goals for the program are partially at odds with one

another. For example, there is a basic conflict between controlling Medicare spending and providing richer benefits. The Congress wants to take advantage of the efficiencies associated with managed care, but it is still wrestling with how to do so

in a way that both attracts beneficiaries to plans and allows Medicare to share the

savings.

Second, both regulatory and market barriers may have made plans reluctant to

participate. An example of the former is the lack of participation by PPOs, which

are a popular option for people with employer-sponsored insurance. Plans that offer

a PPO option have argued that collecting the data and implementing the quality

improvement programs required by HCFA would be prohibitively costly given their

loose networks. An example of market barriers may be the case of rural areas,

which are often characterized by low population density and few or monopoly providers. Under such conditions, plans find it difficult to establish networks.

Finally, uncertainty about future payment streams may have made plans reluctant to participate. Under the old risk contracting program, plans could count on

regular increases in premiums because updates were based on fee-for-service spending, which grew rapidly from the late 1980s through the mid-1990s. Under the new

rules, updates are dependent on a spending changes in a sector that has been undergoing significant changes. The new rules have also held down updates to plans

in high-payment areas to fund higher payments in the so-called blend counties. Finally, plans have had to face the prospect of lower payment growth as a new system

of risk adjustment is phased in, with another new system scheduled to be implemented in 2004.The BBRA contained a number of provisions intended to push the

Medicare+Choice program forward. It increased payment rates directly by further

backloading the phase-in of risk adjustment, and indirectly by the pass-through effect of higher payments to fee-for-service providers. It provided for bonus payments—5 percent the first year and 3 percent the second year—to plans entering

areas with no existing Medicare+Choice plans. The law also changed requirements

regarding the definition of service areas and the timing of premium submissions,

which should make participation in the program more attractive.

In our March 2000 report, we supported the BBRA provisions intended to provide

Medicare beneficiaries with more coverage choices. Although the Commission made

no specific recommendations, we continue to be concerned about the stability of the

M+C program. For MedPAC to provide useful guidance on what to do next, Congress must make its priorities for the program clear. Maintaining access to richer

benefit packages will likely entail increasing spending. Expanding access to rural

areas may entail considering alternatives to requiring plans to assume full risk as

they now must, such as some form of split capitation.

23

Mr. BILIRAKIS. Thank you, Dr. Wilensky.

Mr. Scanlon?

STATEMENT OF WILLIAM J. SCANLON

Mr. SCANLON. Thank you very much, Mr. Chairman and members of the subcommittee. I am pleased to be here today to discuss

the effects of the Medicare payment reforms that were in the BBA

and potential modifications to them.

These reforms were intended to institute strong financial incentives to providers to operate efficiently and to provide only needed

services. Not surprisingly, the effects have been significant and you

are hearing much about the need for modification. Much of that attention has been focused on the fact that Medicare spending

growth has been much less than what CBO had predicted in 1997

that would occur with BBA changes. I think two points about that

difference are notable.

First of all, CBO’s director has indicated in testimony that CBO

does not believe its projections of the BBA impacts, with the exception of home health care, were understated. Rather, it believes that

lower inflation and increased efforts to reduce fraud and abuse

have contributed significantly to the lower growth.

Second, I think as many of you indicated in your opening statements and as Dr. Wilensky indicated, our concern should not be focused only on spending less than the estimated baseline. Our litmus test should be whether or not payments are too low to provide

necessary services to Medicare beneficiaries.

I would like to comment on three areas where we have ongoing

work with respect to BBA impacts that overlap somewhat with the

areas that Dr. Wilensky has talked about. They are home health,

skilled nursing facility care, and Medicare Plus Choice.

First of all, with respect to home health, there is no question

about the substantial drop in utilization in the last few years.

Here, even CBO indicates that the decline exceeded what it expected. It also exceeded what would have been required to stay

within the limits created by the interim payment system. Agencies

could have provided more services, served more beneficiaries, and

still be paid by Medicare. It is hard to determine to what extent

beneficiaries did not receive needed services due to agencies’ reaction to the interim payment system.

Our ongoing work shows that the recent contractions in home

health use are more concentrated in agencies and areas that had

substantially higher use and growth in the years preceding the

Balanced Budget Act. Significant concerns exist that all of that utilization might not have been justified.

While this has been the experience under the interim payment

system, the new home health prospective payment system to be implemented in October will fundamentally change the ways agencies

are paid and provide a cushion to deliver necessary services. The

episode rates in the PPS are based on prior, higher utilization levels rather than today’s significantly lower levels. Agencies will be

paid for all episodes of care provided, and as before, clear criteria

to review the appropriateness of claims will not exist. We are concerned that we could easily be facing again a large and inexplicable

growth in home health spending.

24

Nursing homes are a second area where the BBA’s impact on

service seems profound. On the one hand, five large nursing home

chains have entered bankruptcy since the PPS was implemented.

On the other, when we look at the facts underlying these bankruptcies and beneficiaries’ access to care, we do not see fundamental problems with the PPS. The financial woes of some nursing

home chains stem from the incompatibility of some of their preBBA business strategies and the SNF PPS, which created strong

incentives for efficiency. Prior to the Balanced Budget Act, these

corporations invested heavily in both nursing homes and ancillary

service businesses. The new PPS rates do not support disproportionate shares of nursing home revenue going to debt service and

make other nursing homes who are buying these companies’ ancillary services much more sensitive to the prices being charged.

There also do not appear to be significant problems with access.

Last year, we surveyed hospital discharge planners, who reported

that problems placing patients were not different than before. Since

that time, the use of skilled nursing facility care under Medicare

has increased.

We have noted, however, that the PPS system needed improvement. However, these improvements involve more appropriate targeting of the dollars to match patient needs. Given that the rate

of increases in SNF spending prior to the Balanced Budget Act mirrored the inappropriate incentives of the old cost-based system, it

would seem that the total dollars in the pool for SNF care are very

likely sufficient to support that care.

Finally, let me comment on our work on the Medicare Plus

Choice program, another area of profound change, and our conclusions are very similar to those of Dr. Wilensky. Medicare Managed

Care appears to be at a crossroads. Since the BBA’s enactment, 168

plans have either left the program or reduced the geographic areas

they serve and more plans are scheduled to follow in the year 2001.

Plans have stated clearly that they are not being paid enough to

stay in the Medicare program. However, our ongoing work shows

clearly also that Medicare Plus Choice plans are continuing to get

paid more than if their enrollees had remained in the fee-for-service Medicare program. Medicare loses money, on average, when

each beneficiary joins a managed care plan.

This paradox can be deciphered. Plans are paid too much for

what was originally intended, funding a more efficient means of

providing the package of Medicare coverage services. Plans are saying, however, that they are paid too little to do what they have

been doing, competing for beneficiaries by offering additional uncovered benefits for little or no additional premiums. The paradox

thus leaves you with a fundamental choice. Do you want to ensure

that Medicare Plus Choice plans are widely available so that beneficiaries have a choice of who organizes the delivery of their care?

If so, this may entail increasing the rates to those plans.

This choice, while seemingly affordable today, may prove problematic for the future. The demographics of the baby boom generation already make the projections of Medicare spending foreboding.

Preserving the program and its benefits will depend heavily on our

finding the most efficient ways to deliver services for the long term.

25

1Medicare Reform: Leading Proposals Lay Groundwork, While Design Decisions Lie Ahead

(GAO/T-HEHS/AIMD-00-103, Feb. 24, 2000).

We have considerable work in progress on these and other issues

related to the Balanced Budget Act and will be sharing some of the

results of that work with your staff during the month of August so

that you have as much information as possible as you consider

changes to the BBA.

Thanks very much, Mr. Chairman. This concludes my statement.

I would be happy to answer any questions you or the members of

the committee may have.

[The statement of William J. Scanlon follows:]

PREPARED STATEMENT OF WILLIAM J. SCANLON, DIRECTOR, HEALTH FINANCING AND

PUBLIC HEALTH ISSUES, HEALTH, EDUCATION, AND HUMAN SERVICES DIVISION, GAO

Mr. Chairman and Members of the Subcommittee: I am pleased to be here today

as you discuss the effects of recent Medicare payment reforms and the potential

need for additional refinements. The Medicare payment provisions in the Balanced

Budget Act of 1997 (BBA) were enacted to control rapid spending growth in the traditional fee-for-service program that was neither sustainable nor readily linked to

demonstrated changes in beneficiary needs. Essentially, these reforms changed the

financial incentives inherent in pre-BBA payment methods to more appropriately reward providers for delivering care efficiently. The BBA also created

Medicare+Choice to expand beneficiaries’ managed care options under Medicare and

bring payments more in line with the costs of providing covered benefits in the traditional program.

Since the BBA’s enactment, the Congress has faced pressure from providers to

undo the act’s payment reforms. With changes so sweeping, achieving perfection in

all the details at the outset is unrealistic. Accordingly, the Congress has monitored

experience with these changes and made certain modifications. To date, some of the

act’s provisions have taken effect, some have been modified by the Balanced Budget

Refinement Act of 1999 (BBRA), and others have just recently begun to be phased

in.

Calls for additional changes come at a time when federal budget surpluses and

lower Medicare outlays could make it easier to consider accommodating enhanced

Medicare payments. At the same time, however, the Congress is considering the addition of an expensive prescription drug benefit to the current program. In view of

the coming upsurge in the Medicare-eligible population, the Comptroller General

has cautioned repeatedly that, even before expanding benefits, projected Medicare

spending threatens to absorb ever-increasing shares of the nation’s budgetary and

economic resources. Thus, without meaningful reform, demographic and cost trends

will drive Medicare spending to levels that will prove unsustainable for future generations of taxpayers.1

My comments today focus on the BBA’s payment reforms affecting home health

agencies, skilled nursing facilities (SNF), and the health plans in Medicare’s managed care program, known as Medicare+Choice. My remarks are based on our extensive published and ongoing work in each of these areas.

In brief, the reactions by providers serving Medicare beneficiaries to BBA and

BBRA payment reforms share a similar scenario. Tightened payment policies have

required many providers to adjust their operations. The adjustments have been particularly disruptive for providers that took advantage of Medicare’s previous payment policies to finance inefficient and unnecessary care delivery. Industry representatives are advocating the partial restoration of payment cuts. Following are

the recent developments that have ensued since the BBA’s implementation in the

areas of home health services, SNF services, and the Medicare+Choice program:

• Home health services: Home health utilization has dropped substantially, well

below what would have been required to remain within the BBA-imposed payment limits. We expect the new Medicare payment system for home health services, scheduled for implementation in October, to generally provide agencies a

comfortable cushion to deliver necessary services.

• SNF services: Some corporate chains have declared bankruptcy. The new Medicare payment system for SNF services adequately covers the cost of beneficiaries’ services but no longer supports the extensive capital expansions or the

ancillary service business that corporate chains relied on to boost revenues.

26

• Medicare+Choice program: Many plans are withdrawing from Medicare. The withdrawals are tied to a combination of Medicare program changes and plans’ business decisions In addition, our ongoing work shows that payments to plans for

their Medicare enrollees continue to exceed the expected fee-for-service costs of

these individuals. The significance of this finding is that Medicare managed

care, although originally expected to achieve program savings, continues instead

to add to program cost.

In our view, the basis for potential changes to BBA reforms should be how they

affect beneficiaries’ access to necessary services and the long-term outlook for this

program. Therefore, progress needs to continue to better align provider payments

with the expected costs of the beneficiaries served and to bring about the fiscal discipline needed to contain Medicare spending in these areas over the longer term.

We will continue to monitor the payment reforms’ effects to help the Congress ensure that beneficiary access is protected, providers are fairly compensated, and taxpayers do not shoulder the burden of excessive program spending.

BACKGROUND

Medicare’s home health care benefit enables beneficiaries with post-acute-care

needs and chronic conditions to receive certain skilled nursing, therapy, and aide

services in their homes rather than in other settings. To qualify for Medicare’s home

health benefit, a beneficiary must be confined to his or her residence (‘‘homebound’’)

and must require intermittent skilled nursing, physical therapy, or speech therapy.

A beneficiary who needs only custodial or personal care does not qualify. Beneficiaries are not liable for any coinsurance or deductibles for these services and may

receive an unlimited number of visits, provided the coverage criteria are met. Historically, Medicare has reimbursed home health agencies their costs, subject to limits, for services they provide to the program’s beneficiaries. A prospective payment

system (PPS) for home health services will go into effect October 1, 2000.

The Medicare SNF benefit provides up to 100 days of post-acute care per spell

of illness. To qualify for SNF services, a Medicare beneficiary must need daily

skilled nursing or rehabilitative therapy services, or both, generally within 30 days

of a hospital stay of at least 3 days in length, and must be admitted to a Medicarecertified SNF for a condition related to the hospitalization. When the beneficiary

meets these conditions, Medicare covers all necessary services, including room and

board; nursing care; and ancillary services such as drugs, laboratory tests, and

physical therapy. Beginning on the 21st day of care, the beneficiary is responsible

for a daily coinsurance payment, which equals $97 in 2000. Until 1998, Medicare

reimbursed skilled nursing facilities on a cost basis. Payments for routine costs,

such as room and board, were subject to cost limits, but payments for capital and

ancillary costs were virtually unlimited. Medicare is phasing in a PPS for SNF services over a 3-year period that began in July 1998.

Medicare managed care plans have provided beneficiaries an attractive alternative to the traditional fee-for-service program. In return for giving up the freedom

to seek care from any provider, beneficiaries who enroll in plans typically receive

coverage for benefits not offered by the traditional program (such as routine physical examinations and prescription drugs) and enjoy lower out-of-pocket expenses.

Medicare pays the plans a fixed monthly amount for each beneficiary, regardless of

the actual costs of providing care to that individual. Previously, plan payment rates

were tightly linked to average local spending in the traditional fee-for-service program and only adjusted for certain beneficiary characteristics such as age and sex.

The BBA changed how plan payments were calculated beginning in 1998 by weakening the linkage to fee-for-service spending and required that, beginning in 2000,

payment rates reflect differences in beneficiary health status.

PENDING HOME HEALTH PPS RATES LIKELY TO BE ADEQUATE, BUT ARE UNTESTED TO

DATE

To curb rampant spending growth, BBA overhauled the program’s method of paying for home health services. Between 1990 and 1997, Medicare expenditures for

home health services went up three times faster than spending for the program as

a whole. This rapid rise has been attributed to many factors, including a loosened

interpretation of the home health benefit criteria and few controls to protect the program from abusive billing practices at a time when Medicare paid for every home

health visit with almost no scrutiny. In combination, these factors made conditions

ripe for providers to deliver more services to more beneficiaries in order to increase

their revenues.

In response to these problems, the BBA required, by October 1, 1999, the implementation of a new home health PPS, and until then, the implementation of an inVerDate 11-MAY-2000 10:22 Apr 18, 2002 Jkt 010199 PO 00000 Frm 00030 Fmt 6633 Sfmt 6621 E:\HEARINGS\65915 pfrm01 PsN: 65915
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2The Omnibus Consolidated and Emergency Supplemental Appropriations Act, 1999, P.L.

105-277, delayed the implementation of the home health PPS until October 1, 2000. 3 Impact of the Balanced Budget Act on the Medicare Fee-for-Service Program, Statement of

Dan L. Crippen, Director, Congressional Budget Office, before the House Committee on Commerce Sept. 15, 1999. 4 A risk-sharing arrangement that limits the amount a home health agency can lose or gain

would involve a year-end settlement that compares an agency’s actual Medicare-allowed costs

with its total Medicare payments. Payments above the costs would be constrained to a specific

percentage, as would agency losses. For further detail, see Medicare Home Health: Prospective

Continued

terim payment system (IPS) to slow spending growth.2 The IPS made the existing

per visit cost limits more stringent and added an annual agency revenue cap to control the number of services provided to beneficiaries.

Between 1997 and 1998, Medicare home health spending fell by nearly 15 percent,

while total home health visits dropped an unprecedented 40 percent. The Congressional Budget Office (CBO) attributes the decline to agencies’ tighter compliance

with benefit eligibility criteria and their cautious interpretation of IPS limits.3 Our

ongoing work on home health spending shows that these declines continued in 1999

and that the drop in utilization was most pronounced in areas where, pre-BBA, use

had grown the most and beneficiary utilization was the highest.

These findings suggest that part of the contraction in service delivery since the

BBA may be a correction of the excessive use when Medicare did little to control

home health spending. However, it may also reflect an inappropriate response to the

IPS by home health agencies. While remaining within IPS payment limits, all agencies could have served more beneficiaries and many agencies could have increased

the services provided each beneficiary. Yet the number of beneficiaries receiving

home health services declined 14 percent between 1997 and 1998 and is continuing

to fall. Because the payment limits under the IPS are not adjusted to reflect the

needs of individual patients, agencies must maintain a balance high-cost and lowcost patients in order to keep their costs below the IPS revenue caps. Agencies that

do not fully understand how these caps are applied may restrict their admissions

or reduce care to current patients further than necessary.

The home health PPS, which replaces the IPS on October 1 of this year, is a more

appropriate payment tool than the IPS because it is designed to align payments

with patient needs. Medicare will pay agencies a per-episode rate based on historical, national average utilization for each 60-day period during which a patient receives services. PPS rates are scheduled to be tightened a year later by 15 percent.

The per-episode payments are designed to control service provision during the episode, while giving home health agencies the flexibility to vary the intensity or mix

of services delivered. Home health industry advocates generally support the PPS,

but argue that the 15-percent payment reduction is unnecessary.

In our view, the new home health PPS rates overall are likely to provide agencies

a comfortable cushion to deliver necessary services. These rates are based on preBBA beneficiary use levels, which are widely regarded as excessive. PPS rates will

provide sufficient resources to restore a considerable portion of the service reductions of the past 3 years. They will not support, however, widely divergent levels

of utilization where some agencies supplied many more services than others for comparable patients.

Unfortunately, the new PPS has the potential to be advantageous to agencies at

the expense of beneficiaries and taxpayers. Under the per-episode method of payment, agencies can increase profits by skimping on the number of visits provided

within the episode. Agencies can also inappropriately expand the number of episodes provided by protracting the delivery of care over a longer period. No standards

exist for what the right amount of care is for specific types of patients, particularly

the right amount of home health aide care, which composed almost half of all visits

in 1997. Implementing safeguards to ensure Medicare payments are used to deliver

services to meet beneficiaries’ needs is a difficult task.

The home health PPS, while having a design superior to the IPS, is largely untested. It is built on the concept of paying for episodes of care, yet there is no consensus on what an episode should entail. In addition, similar to other new PPSs,

which vary payments according to patients’ expected needs, the potential exists for

payments to be too low for some episodes involving very sick patients and too high

for others. To minimize the potential for adverse effects for the program and individual agencies, we recommended in April this year that HCFA implement a risksharing provision whereby the government shares in any home health agency’s

losses under the PPS but also protects the program from any agency’s excessive

gains.4

28

Payment System Will Need Refinement As Data Become Available (GAO/HEHS-00-9, Apr. 7,

2000). 5Skilled Nursing Facilities: Medicare Payment Changes Require Provider Adjustments But

Maintain Access (GAO/HEHS-00-23, Dec. 14, 1999). 6Medicare Post-Acute Care: Better Information Needed Before Modifying BBA Reforms (GAO/

T-HEHS-99-192, Sept. 15, 1999). 7The proposed rule is contained in 65 Fed. Reg. 19188-19291 (Apr. 10, 2000) (to be codified

at 42 C.F.R. pts. 411 and 489). 8We could not determine what criteria were used to select these cases.

SNF PPS RATES COVER MEDICARE-RELATED COSTS

Under Medicare’s SNF PPS, facilities receive a payment for each day of covered

care provided to a Medicare-eligible beneficiary. Previously, SNFs were paid the reasonable costs they incurred in providing Medicare-covered services. Although there

were limits on the payments for the routine portion of care (that is, general nursing,

room and board, and administrative overhead), payments for ancillary services, such

as rehabilitative therapy, were virtually unlimited. Because higher ancillary service

costs triggered higher payments, facilities had no incentive to provide these services

efficiently or only when necessary.

By establishing fixed per diem payments for all services provided to beneficiaries,

the PPS attempts to provide incentives for SNFs to deliver care more efficiently.

SNFs that previously boosted their Medicare revenue—by using more or higherpriced ancillary services—will need to modify their practices more than others.

Recent accounts of nursing home chain bankruptcies raise questions about the

adequacy of Medicare’s SNF payments under the PPS. Our published and ongoing

work identifies several factors that contributed to the poor financial performance of

these corporations.5 Some corporations invested heavily in the nursing home and

ancillary service businesses in the years immediately before the enactment of the

PPS, both expanding their acquisitions and upgrading facilities to provide higherintensity services. Under tighter payment constraints, these debt-laden enterprises

are particularly challenged. The PPS not only puts a premium on operating their

SNFs efficiently, it changes the market for their ancillary services business as well.

It makes other SNF operators sensitive to the costs of ancillary services, so they

are no longer willing to purchase them at high prices. Thus, while SNFs have to

adapt to the PPS constraints, these large post-acute care providers may have greater adjustments to make as a result of the strategic decisions they made during a

period when Medicare was exercising too little control over its payments.

There are indications that SNF payment rates under the BBA are likely to provide sufficient—or, in some cases, even generous—compensation for services provided to a facility’s Medicare beneficiaries. Medicare’s average daily rate under the

SNF PPS in fiscal year 1999 was higher than the average daily SNF payment in

fiscal year 1997. The significance of this comparison is that 1997 payments were

thought to be excessive because they reflected 7 years of cost increases of more than

14 percent per year. In fact, some providers have been eager to adopt the PPS rates

well ahead of schedule. Currently, PPS rates are being phased in over a 3-year period, which began in July 1998. This transition period was designed to allow facilities time to adapt to the new payment system by continuing to tie a facility’s payment rates to its historical costs. The BBRA gives SNFs the option of forgoing this

transition period. Although a current tally is not available, HCFA estimates that

about half of Medicare-certified SNFs will opt to forgo the transition period to receive fully prospective rates as soon as possible.

Beneficiary access to SNFs, moreover, does not appear compromised under the

new PPS. Utilization levels in 1999 were higher than those in 1997. Hospital

lengths of stay for admissions likely to lead to a SNF stay have continued to decline,

suggesting that hospitalized patients continue to find SNF care.

Nevertheless, the SNF PPS initially proposed by HCFA was not flawless. Last

year, we testified before the full Committee about PPS design problems.6 A primary

concern was the possibility that facilities treating a disproportionate number of

high-cost cases might not receive adequate payments. HCFA is in the process of refining its method to account for patient needs in its payments. The goal is to redistribute payments across types of cases so that they more appropriately reflect each

patient’s expected costs. HCFA recently proposed such refinements to the case-mix

adjustment system, which are scheduled to be implemented on October 1 of this

year.7

In the meantime, BBRA included a provision that temporarily boosts payments

for certain cases by 20 percent, 8 which will add an estimated $200 million to Medicare SNF spending in fiscal year 2000. The provision is scheduled to expire on October 1, 2000, or when HCFA implements a refined case-mix adjustment system,

29

9Medicare HMOs: HCFA Can Promptly Eliminate Millions in Excess Payments (GAO/HEHS97-16, Apr. 25, 1997). 10Medicare Managed Care Plans: Many Factors Contribute to Recent Withdrawals; Plan Interest Continues (GAO/HEHS-99-91, Apr. 27, 1999).

whichever comes later. Industry advocates favor prolonging the life of the BBRA

provision and delaying the implementation of HCFA’s proposed payment modifications, which they assert are not sufficiently refined. CBO estimates that if the 20

percent payment increase remained in effect for 5 years, spending would increase

by $1.4 billion. In our view, the BBRA increase was helpful as a stopgap measure,

but fiscal prudence argues for implementing research-based improvements to the

rates as soon as practicable. Such improvements aim to distribute existing payments

more appropriately and thereby address the problem originally identified, while

avoiding the unwarranted expenditure of an additional hundreds of millions of dollars each year.

MEDICARE+CHOICE PAYMENTS REMAIN PROBLEMATIC

Although Medicare managed care plans have provided beneficiaries an attractive

alternative to the traditional program, they have never been a bargain for taxpayers. Prior to the BBA, studies by us, other government agencies, and private researchers concluded that, instead of producing expected savings, Medicare’s managed care option substantially increased program spending. Plans tended to attract

relatively healthy, low-cost beneficiaries, while Medicare’s payment rates reflected

the expected costs of a beneficiary in average health with average health expenses.

Consequently, plans received payments for their Medicare enrollees that well exceeded what Medicare would have paid had these individuals remained in the traditional fee-for-service program. Our study of Medicare plans in California showed

that aggregate plan payments exceeded plan enrollees’ estimated fee-for-service

costs by more than an estimated $1 billion in 1995. This finding suggests that many

of the additional benefits enjoyed by plan enrollees were the direct result of Medicare’s overly generous payment rates, not of efficiencies achieved under managed

care.9

The BBA sought to improve Medicare’s financial posture by changing the methodology used to establish managed care payment rates. Accordingly, the BBA slowed

the growth in payment rates relative to the growth in per capita fee-for-service

spending for 5 years and required HCFA to improve its risk adjustment of plan payments so that they more closely matched beneficiaries’ expected health care costs.

The BBA also included payment changes and other provisions to achieve a second

goal: increase the availability of plans and allow new types of plans to participate

in Medicare.

The declining participation of health plans in the Medicare+Choice program suggests that the BBA’s cost containment and expansion goals may be irreconcilable.

Since the BBA’s enactment, 168 plans have either left the program or reduced the

geographic areas they served. Recently, more plans announced that they will terminate their contracts or reduce their service areas effective January 1, 2001. Industry

representatives have largely attributed the withdrawals to the BBA’s payment rate

changes. The representatives contend that Medicare is no longer a sufficiently profitable line of business for some plans and that other plans have had to reduce the

benefits they offer and raise beneficiary premiums. They warn that the

Medicare+Choice program will continue to flounder unless payments are increased.

Our published and ongoing work suggests that several factors influenced plans’

decisions about whether to participate in Medicare+Choice or to participate only in

certain areas. As we reported last year, the 1999 withdrawals represented plans

that were recent market entrants, had enrolled few beneficiaries, or faced competitors that had substantially larger market shares, suggesting that plans made business decisions or used business strategies that could be sustained only in an era

of more generous Medicare payments.10 We will issue a report soon on the withdrawals in 2000 and 2001. While information on the 2001 withdrawals has only

been available for a few weeks, our analysis of the withdrawals in 2000 indicate a

pattern similar to that found for 1999.

Some health plans may find the payment rates established by the BBA to be too

low to warrant their future participation in Medicare+Choice. However, in our ongoing work, when we compared plan payments for enrolled beneficiaries in 1998 with

the estimated Medicare fee-for-service costs for these individuals, we found that

plans received payments that substantially exceeded what Medicare would have

paid for the plans’ enrollees had they been covered under the fee-for-service program. This paradox stems from differences in the intent of Medicare+Choice and its

30

evolution. On the one hand, Medicare+Choice plans are paid too much relative to

the original intent of Medicare managed care—to provide beneficiaries the package

of Medicare-covered services at less cost than the traditional fee-for-service program.

On the other, the plans may be paid too little for what they have been offering to

attract beneficiaries—a more comprehensive benefit package beyond that authorized

for fee-for-service beneficiaries for only modest or no premiums.

Efforts to expand the Medicare+Choice program, particularly one in which plans

cover prescription drugs, have been important, because the traditional Medicare program has not provided such coverage, and this program alternative has provided an

avenue for some beneficiaries to obtain drug coverage. However, if the Congress

adopts a prescription drug benefit for the entire Medicare program, there may be

less reason to have Medicare+Choice payments exceed the costs of providing services

in the traditional program. The problem of excess payments can be addressed in

part by better adjusting payments for the actual health status of enrollees. Such a

step would also protect those plans that attract sicker-than-average enrollees.

CONCLUSIONS

As anticipated, the BBA reforms have had significant effects on the delivery, cost,

and use of Medicare services. Changes in providers’ incomes and services to beneficiaries are becoming a reality. We have seen a rapid fall-off in home health use,

the bankruptcies of several large SNF chains, and continued health plan withdrawals from the Medicare+Choice program. Although providers have been quick to

attribute these changes to inadequate Medicare payments and call for extra federal

dollars, careful analysis indicates that these responses are adaptations to appropriately tightened payments following a period of unchecked growth.

Needed refinements to the BBA’s new payment policies for home health, SNF, and

managed care services are under development or are soon to be implemented. In assessing the merit of these refinements, prudence suggests that beneficiary needs

and the program’s prospects for long-term sustainability, not provider profitability,

should be paramount. We have several studies under way to inform these decisions

and we will continue to work with you to provide this important information.

Mr. Chairman, this concludes my prepared statement. I will be happy to answer

any questions you or other Members of the Subcommittee may have.

GAO CONTACTS AND ACKNOWLEDGMENTS

For future contacts regarding this testimony, please call William J. Scanlon at

(202) 512-7114 or Laura A. Dummit at (202) 512-7118. Individuals making key contributions to this testimony included James C. Cosgrove, Hannah F. Fein, Dana K.

Kelley, Erin M. Kuhls, and James E. Mathews.

Mr. BILIRAKIS. Thank you very much, Mr. Scanlon.

Dr. Wilensky, the last statement Dr. Scanlon made regarding the

Medicare managed care plans, do you agree with his assessment?

Ms. WILENSKY. I agree in general. There is one small addition I

would like to raise, and that is part of the problem has been inappropriate expectations on the part of seniors about how much they

could get in the way of additional benefits for free in a managed

care plan, that they could get some or that managed care plans

could provide care somewhat more efficiently, I think was the correct assessment.

What happened in the early years is that the amount that was

being spent in traditional Medicare was so high in some areas, in

the places where managed care plans were most likely to grow,

that seniors got used to having an enormous amount of benefits

provided for free. That expectation, even for those of us who believe

that managed care can provide care more efficiently and frequently

more effectively, is just out of whack with the reality, and it is that

painful contraction of having some additional benefits but not what

you have expected in the past.

There also may be a question of whether or not, as Medicare

spending gets back to a more normal level of growth, such as was

envisioned in BBA, that will put a little less pressure. The fact that

31

there has been such low growth has hit the managed care plans

very hard. Not only have they got the impact of that low growth,

but the high-care areas were under constraints, as well, and so

they really have been operating in the last 2 years under a lot of

constraints.

Mr. BILIRAKIS. You, in your remarks, mentioned the reducing of

regulatory burdens or the lack of reducing the regulatory burdens.

Ms. WILENSKY. Right.

Mr. BILIRAKIS. When we held our hearings regarding these concerns that so many of these HMOs were dropping out of Medicare,

we heard complaints that inadequate funding, particularly in some

areas of the country, and the regulatory burdens, the paperwork,

was also a very large part in forcing them out of the picture. That

is happening all over. That is certainly happening in our area of

Florida and it is just difficult to know exactly how to take care of

that.

Ms. WILENSKY. We have heard that is especially a problem in

some of the rural areas. We had some of the companies that provide in rural areas under the Federal Employees Health Care Plan

talk to several of us at MedPAC about why they were able to do

it there and not under Medicare and one of the responses was that

if they stayed in traditional Medicare, the hospital had far fewer

regulatory burdens than if that same hospital joined part of a Plus

Choice program, that the regulatory burdens were substantially

greater and that that was a major disincentive for both the physicians and the hospitals in some of the rural areas, along with other

issues.

Mr. BILIRAKIS. So even if we were to increase the reimbursements, if you will, the payments—— Ms. WILENSKY. These other problems need to be fixed.

Mr. BILIRAKIS. [continuing] it may not solve the problem?

Ms. WILENSKY. Right. I believe that. I believe it is not just a payment issue.

Mr. BILIRAKIS. That is an area that we have got to spend more

time on, but let me get into the home health benefits with you. In

your study of the impact of BBA 1997 on Medicare home health

benefits, could you identify any type of patients that were being denied or had a hard time securing home health services?

Ms. WILENSKY. We did a study where we looked at—we went to

survey some of the discharge planners and some of the advocates

for home health to try to see whether we could discern a problem.

We could not at that point document any particular access problem.

What we were hearing anecdotally is that people with special

needs, both for skilled nursing facilities prior to BBRA and also in

home care that had high acuity, were having trouble getting the

services or being accepted by home care. But we have not been able

to document that in a systematic way. We are now sitting down to

plan some additional surveys to see whether we can try to provide

some information, although we will not have any of that available

prior to August.

Mr. BILIRAKIS. Is it just too early to tell?

Ms. WILENSKY. There is nothing we can see that provides any

systematic evidence in the work that we have done thus far.

Mr. BILIRAKIS. Mr. Scanlon?

32

Mr. SCANLON. Mr. Chairman, I would note that in our survey of

discharge planners, we found a very similar result, in fact, that the

problems of some of these patients with more skilled needs, those

problems predated the BBA and the problem, in part, relates to the

lack of resources in communities to provide those skilled services.

But what we are finding right now in terms of the latest changes

in terms of utilization is a much sharper drop in terms of home

health aide services than we are finding it in terms of skilled services, which would suggest that, in some respects, we are reverting

to the type of home health benefit that we had more experience

with in the more distant past, where it was a skilled benefit aimed

at recuperation and rehabilitation following hospital stays and less

the long-term custodial benefit that we experienced in the mid1990’s.

Mr. BILIRAKIS. In your minds, and my time has expired so maybe

I will ask the question but not expect an answer, is there a dollar

figure that you feel would be necessary to give back to the providers to sort of get things back on the even keel? That is a question that I would ask you, and I do not know whether you have a

quick answer to that or not.

Mr. SCANLON. My quick response would be that the prospective

payment system is already going to put dollars back into the system and that we actually will see an increase and should see a potentially significant increase in utilization because of the incentives.

Mr. BILIRAKIS. So over a short period of time, you expect that

this would take place——

Mr. SCANLON. We do.

Mr. BILIRAKIS. [continuing] without any necessarily additional

dollars. Do you have an opinion, Ms. Wilensky?

Ms. WILENSKY. The biggest problem was we have so little idea

about whether what we were doing before was anything like the

right amount, but we would be glad to work with the committee

and the committee staff in the next month or 2.

Mr. BILIRAKIS. Thank you.

Mr. Brown?

Mr. BROWN. Mr. Chairman, thank you. Mr. Scanlon, I appreciate

your comments and want to pursue them on overpaying of managed care plans. The GAO has written a number of reports over the

past few years about Medicare’s payments to plans and Medicare

Plus Choice and its predecessors. These reports have concluded

that Medicare has consistently been overpaying managed care

plans. Talk a little, if you would, about Medicare’s historic overpayments to managed care plans, why are we overpaying, how much.

Give us some of that.

Mr. SCANLON. In the past, we had identified and other researchers had identified that Medicare was overpaying plans, principally

because the payments to plans were adjusted for differences in

beneficiaries’ or enrollees’ demographic status but not for differences in their health status, and that plans, on average, were attracting enrollees that were healthier than the average sort of

Medicare beneficiary, not a surprise given that people with more

significant illnesses may already have relationships with providers

33

who are not part of plans’ networks and, therefore, were reluctant

to join with a managed care plan.

That continues today. I mean, we are on the verge of improving

our risk adjustment process but we are not there yet. While there

were some people that hypothesized that as managed care grew,

which it was doing before the BBA, that these overpayments would

disappear because the population the managed care would sort of

average out to be the same as the population in fee-for-service.

What we found is that that is not the case. We will be issuing a

report within about a month that has looked at much more recent

data, looked at mature markets across the country, and found out

that this factor of favorable selection with healthier enrollees entering managed care persists.

Ms. WILENSKY. I would like to point out, though, that the studies

have focused on the entrants or those very small numbers of people

who exit. One of the big questions that has been very difficult to

look at is what happens as people stay in managed care plans for

substantial periods of time, and because some managed care plans

are made up of 70 percent of enrollees who have been there for 3

or more years and others are primarily new plans dominated by

new enrollees, this information on self-selection either into or out

of the plans really does not address, or has not in the past, the

large numbers of people who may be in these plans over a substantial period of time.

Mr. SCANLON. If I could add, we recognize that shortcoming of

other studies and have attempted to take into account the distribution of enrollees in plans by the length of time they have been

there. We recognize that people when going into plans have much

lower utilization of services than other beneficiaries. That is on the

average of about 35 percent lower. But we also have identified that

there is likely to be an immediate increase in their utilization of

services and that those increases will continue over time and we

have incorporated those into our estimate.

We have also tried to be very conservative about thinking about

costs of dealing with people that die and costs of people that are

leaving plans to make sure that if we are biasing results, we are

biasing them in favor of the plans, not sort of an over-finding that

there are excessive costs to the Medicare program.

Mr. BROWN. A couple of studies I have seen show how much

costs increase when people leave plans later in life, when taxpayers

are paying for their health care instead of managed care.

Let me pursue one other part of that, Mr. Scanlon. You said people just sort of naturally, more healthy people more naturally

gravitate toward managed care plans instead of traditional fee-forservice. What actions do the managed care companies take to encourage, to cream-skim, to encourage the healthiest people to go

into managed care? I understand there is sort of that natural proclivity to do that. I also understand, I believe, that managed care

companies try to encourage and increase that. What kinds of things

do you see there?

Mr. SCANLON. Mr. Brown, we have not looked at that in any systematic way. I think we probably have heard some of the same

anecdotes that you have in terms of maybe structuring the benefits

in a way that might attract healthier enrollees or in terms of where

34

one markets. But again, we have not looked at that systematically.

We know over time there has been probably much less of that that

has gone on than occurred very early in the history of the program.

Mr. BROWN. But for a for-profit insurance company, is it not natural and expected and understandable and justifiable from the bottom-line standpoint behavior to try to recruit into managed care

plans the lowest-cost beneficiaries?

Mr. SCANLON. If you are lucky enough to get the lowest-cost

beneficiaries, it certainly is good for the bottom line.

Mr. BROWN. I guess my time is about up. Thank you, Mr. Chairman.

Mr. BILIRAKIS. Mr. Whitfield?

Mr. WHITFIELD. Thank you. Ms. Wilensky, in the BBRA of last

year, I believe a provision was put in establishing what they call

a critical care access provision where certain rural hospitals of so

many beds and below would be able to have a cost-plus basis for

reimbursement. How significant do you think that will be in addressing some of the financial problems of the smaller rural hospitals?

Ms. WILENSKY. I think the critical care access program is potentially a very good program. I do not know that we have been able

to see very much the results yet, just because it is so soon, but in

principle, I believe it was a very good proposal.

A number of you mentioned concerns about rural areas. Let me

make two points. The first is, our June report for next year for

MedPAC will entirely be focused on rural issues, much more than

just BBA but providing health care in rural America and the interaction of Medicare and other issues. So we will be able to say much

more.

The second point is you have to be careful when you talk about

rural hospitals. Our look in terms of the work we have done already suggests that rural hospitals are faring very differently depending on who they are. Rural referral centers and sole community hospitals have substantial margins. They have both substantial Medicare margins, but they actually have pretty reasonable

overall margins, as well. Small Medicare-dependent hospitals, some

of which may become critical access hospitals depending on what

happens or some of the under-50-bed other rural may become

these, are having more difficulty. So we really—you have to be

careful when you talk about rural as to not sweep too many different types. Some of the programs that we have had in effect already have done a good job.

Mr. WHITFIELD. You had mentioned the report. When will this

report be available?

Ms. WILENSKY. This is each year MedPAC has two reports, a

March report and a June report. This will be our June report for

next year, and this is as a result of the BBRA. Among the many

requests that the Congress made was to have a major look at rural

issues and we have decided to devote our June 2001 report to

health care in rural America.

Mr. WHITFIELD. Okay. Mr. Chairman, I yield back the balance of

my time.

Mr. BILIRAKIS. I thank the gentleman.

Ms. DeGette to inquire.

35

Ms. DEGETTE. Thank you, Mr. Chairman.

Mr. Scanlon, the GAO has issued reports for a number of years

about the importance of health coverage for children and pregnant

women, particularly in the Medicaid program. For example, I have

an outstanding 1997 report here called ‘‘Health Insurance Coverage

Leads to Increased Health Care Access for Children,’’ where the

GAO found that health insurance coverage increases children’s access to preventative, primary, and acute care. This improves a

child’s health and saves lives. The same report says that there are

a number of studies that show access to care for pregnant women

decreases infant and child mortality.

I am wondering if you know whether anything has changed with

respect to the importance of coverage for children and pregnant

women since that report was issued in 1997.

Mr. SCANLON. I have seen nothing that would suggest that

changed. In fact, most of the studies continue to indicate that the

uninsured use less care than the insured and there has been nothing to contradict the positive effect that preventive and primary

care has for individuals, both children and pregnant women.

Ms. DEGETTE. From a policy perspective, then, do you think that

it would make sense to allow pregnant women to be covered by

Medicaid if the goal of CHIP is to improve children’s health care

coverage, including infants?

Mr. SCANLON. I think that represents a fundamental choice on

your part in terms of expanding the program. Given that it has

limited resources and even though we have not seen those resources being exhausted to this point, you have made a decision to

provide them for children and you would be expanding sort of the

pool that is going to be covered. Pregnant women are going to be

expensive, and at some point, there could be a crowd-out effect for

children given the limits on funding.

Ms. DEGETTE. But as I look at this 1997 study, for example, of

the top ten conditions that are treated in hospitals that have the

highest hospital charges, four of them are infants. Respiratory distress syndrome is the most expensive of all of the ten conditions,

even more expensive than spinal cord injury, heart valve disorders,

leukemias, and so on. Prematurity, which is in many studies I have

seen directly linked to lack of prenatal care, is the third highest,

and low birthweight is included in there. So in some ways, if you

gave coverage to pregnant women to have prenatal care, I would

think that that would actually save some money on the other end

for hospital costs for infants.

Mr. SCANLON. I cannot at this point say that it would save

money in the aggregate because while it would save money with respect to some individuals, whether or not the expansion of coverage

would cost more, but maybe also produce many positive other benefits besides saving money. But at this point, we have not done any

work to identify whether the net savings would exist.

Ms. DEGETTE. Is that something that might be on your radar

screen to do some analysis on?

Mr. SCANLON. It will be on our radar screen.

Ms. DEGETTE. I think that that is a good idea. Let me ask you

about some other issues on Medicaid and, in particular, CHIP, on

other related issues. You have also done some studies to the point

36

that barriers that States impose that limit the access to coverage

in the Children’s Health Insurance Program. There was a 1996 report called ‘‘Health Insurance for Children: State and Private Programs Create New Strategies to Ensure Children,’’ which said,

‘‘Simplified enrollment procedures and flexible eligibility documentation requirements minimized enrollment barriers and thus

encouraged program participation.’’ But then in 2000, GAO found

in its April 2000 report that some States are imposing significant

barriers to coverage despite the fact that ‘‘there is some flexibility

under Federal law.’’

So, I mean, we have now had 41⁄2 years of knowledge about what

does and does not work with CHIP in the States. I am wondering

if you have any views on what can be done by Congress to improve

this program that many of us think is really important but is also

a little bit flawed in its working.

Mr. SCANLON. As we have looked at the CHIP program, we have

found incredible variability across the States in terms of how they

are approaching the outreach process and the enrollment process,

and exactly as you have cited from our work, there are States in

which there are more barriers to becoming a CHIP enrollee, or

even if you have applied for CHIP and it is discovered that you are

eligible for Medicaid, to then become Medicaid-enrolled.

Efforts to reduce some of those barriers, or actions to reduce

some of those barriers would certainly facilitate enrollment. We

have not seen the kind of enrollment that we thought we might

sort of in the program yet. Whether the impetus should come from

the Congress or from individual States, I think that again is your

choice.

Ms. DEGETTE. Thank you. Thank you, Mr. Chairman.

Mr. BILIRAKIS. Mr. Bryant to inquire.

Mr. BRYANT. Thank you, Mr. Chairman, and I want to thank the

outstanding members of this panel and I know the second panel,

also, for your patience in sitting through our opening statements

and going through the questioning. We appreciate you being here.

Mr. Scanlon, let me ask you about a concern that has been raised

by members of this committee, including myself, about dollars that

we have allocated to the States in the BBA 1997 to be used to ensure children under the SCHIP program. The States that did not

spend all of their 1998 allotments are about to be forced to turn

over to HCFA these unspent funds to be redistributed to the States

who have spent their allocations. It is my understanding that only

12 States have spent all of their 1998 allotted amounts.

These States would argue, including my State—well, the other

12 States would argue that they should be rewarded for moving

quickly to implement the programs, knowing that unspent dollars

would be lost. Conversely, the other side, which includes my State

of Tennessee, will argue that, for whatever reason, it was difficult

getting started. In Tennessee, we are enmeshed in this TENNCare.

But the other States that did not are like us. They are facing this

situation. But most, I think all, of their programs are now up and

running, and since an overwhelming majority of the States have

not spent their 1998 allotments, they would like to have more time

to be able to spend these dollars.

37

Two quick questions. Do you think the States would spend down

their allotments if given more time, and second, why were so many

States unable to spend all their allotments?

Mr. SCANLON. We do think that States would spend down their

allotments if given more time, given that the spending more recently has been at a faster rate than it was in the early period of

the program. However, having said that, I mean, to spend their

1998 allotments, about half the States that have not done that yet

would only spend them in a year and the other half would probably

take 2 years before they have fully expended their 1998 allotments.

We think that the delays here are attributable to two things. One

is the difficult in some States in getting the program sort of up and

running, the combination of planning, the State’s effort, and getting HCFA’s approval of what a State was going to do. Some States

were much better positioned to do that. They had ideas in terms

of how they were going to cover children, and when the program

passed, they were ready to make proposals.

Other States, in order to get started, put into place what we call

placeholder programs in which they did a Medicaid expansion because it was the easiest thing to do, but then they have come back

subsequently and have set up a stand-alone program, which was

their original intent, but they did not want to wait until they could

put all of that into place. So I think that is one of the factors.

The other factor, I think, why money has not been spent is the

fact that we are in a good economy and, therefore, the pool of potential individuals, while large enough to absorb these funds if we

could reach them, is not so big that we have enough people choosing to apply for the program and, therefore, using up some of the

funds.

Mr. BRYANT. Does GAO have a position on whether these 38

States, such as Tennessee, should be allowed some additional time

or granted some mercy on this?

Mr. SCANLON. We do not see a downside to granting them additional time in the sense that the money, if it was to be reallocated

to the remaining States, that currently no State has actually spent

its 1999 allocation and here we are almost at the end of fiscal year

2000. So it seems that the money in the SCHIP program at this

point is adequate to allow the States that have not spent their

money additional time to spend it.

Mr. BRYANT. On behalf of our Governor and the citizens of Tennessee, we appreciate your kind words.

I would yield the balance of my time to Dr. Coburn.

Mr. COBURN. Thank you. I just had a couple questions on rural

hospitals and home care. Dr. Wilensky, do you have any data to

say that if you exclude paybacks, which a lot of the home health

firms have had to come up with, if you exclude those and those

that remain, do you have any data to say that the profitability or

capital structure of the home health agencies that are serving people in need in this country are in less good financial position than

they were before?

Ms. WILENSKY. We do not have information that is at that level

of detail.

Mr. COBURN. Mr. Scanlon?

38

Mr. SCANLON. No, Dr. Coburn, I think the only thing we can say

is we have seen the loss of a significant number of home health

agencies. But beyond that, the capacity of the remaining ones cannot be determined easily.

Ms. WILENSKY. One thing that we have noted in our discussions,

and as I mentioned earlier, the commissioners are concerned about

the substantial decline in absolute spending and the impact in

terms of the number of services provided, is home health by its nature tends to be able to be expanded more rapidly and, therefore,

some of the infrastructure concerns that may be raised with regard

to hospitals or skilled nursing facilities, we believe, are less critical

for home care. The question of whether they can get the adequate

labor, particularly aides, or whether the prospective payment system will be at the right level are, of course, very important. But

we are not quite as concerned about the actual infrastructure or

capital structure because of the fact that it appears services can be

expanded much more rapidly than in some areas.

Mr. BILIRAKIS. The gentleman’s time has expired.

Ms. Capps?

Ms. CAPPS. Thank you to our expert witnesses who have given

us good testimony. I would like to ask Mr. Scanlon about safety in

nursing homes. In the statement by Mr. Richtman, who is on the

next panel, he expresses the senior community concerns about

abuse and safety in nursing homes, patient safety, and I know that

the GAO has done work looking into these conditions for residents

in nursing homes and would love to hear briefly from you. I have

two other questions, also.

Mr. SCANLON. We have looked at the question of nursing home

quality and what we have found is that there unfortunately is a

significant number, about 15 percent, of homes in which residents

have suffered actual harm, or it has been identified that residents

have suffered actual harm when the homes were surveyed the last

two times and a considerable number of these are due to issues of

abuse.

We have real concerns about sort of the system that we have in

place to try and prevent this in terms of encouraging homes to remain of high quality and deficiency-free and we think that the Congress has provided HCFA the right tools in terms of statutory provisions to potentially influence the quality of care. We think that

it is also important that HCFA have the resources to be able to implement that system. But at the same time, we think we have not

yet given the system a chance to see whether or not it can improve

quality of care.

Ms. CAPPS. There is also a fear within the communities, my community particularly, that the problem of inadequate staffing may

grow worse with the implementation of the Medicare prospective

payment system, PPS, for nursing homes. We have a shortage of

workers at this time and to face this looming issue, it seems to

compound the concerns that people have. I am wanting to hear

from you about what your recommendations are in terms of addressing this with the PPS.

Mr. SCANLON. We also have heard many concerns about the issue

of staffing in nursing homes and are looking at this from a broader

perspective, in part because Medicare is a relatively small payer of

39

nursing home care, on average constituting about 10 percent. So it

is very important what is happening in terms of the other payers,

Medicaid and private patient.

One of the problems with respect to staffing today is the fact that

we have a good economy—— Ms. CAPPS. Yes.

Mr. SCANLON. [continuing] and traditionally, when we have had

good economies, nursing homes have had more difficulty in attracting workers as well as retaining workers. The turnover rate is extremely high. We know that a number of States have put passthroughs in their Medicaid reimbursement systems which target

money directly on staffing and we think that is a positive thing to

do when you find that you have a staffing problem.

With respect to the Medicare PPS, we do not think there should

be a profound impact or even a significant impact on the ability of

a home to staff, both given the small share of dollars that come

from Medicare as well as sort of the potential, I will call it cushion,

that has been built into those rates by the fact that we saw such

dramatic increases before the PPS was implemented.

Ms. CAPPS. I know my time is up, but if I could just pose another

concern that I have and it may be addressed now or later, is anyone looking at home health care declining services, the reasons for

it, and the surprise number of additional dollars saved in the BBA

cuts and what the reasons for some of this might be?

Mr. SCANLON. We definitely are looking at the pattern of declines

and trying to glean from the patterns of decline something about

sort of the why and the consequences of those declines. I mean, one

of the unfortunate things is that we do not have an expectation as

to what home health care should be doing and do not have the kind

of information that would allow us to develop a reasonable set of

expectations for home health care and then to know whether we

are meeting them or not.

Ms. WILENSKY. MedPAC will also be doing some further work in

terms of these issues for home care. We will be glad to make it

available when we have something.

Ms. CAPPS. Excellent. Thank you very much.

Mr. BILIRAKIS. I thank the gentlelady.

Dr. Ganske?

Mr. GANSKE. I am concerned about kind of a yo-yo effect on home

health care. The 1997 BBA basically addressed home health care’s

explosive growth. We have seen decrease in that. I am concerned

that if we loosen up the PPS too much, then we will see a big upswing again, which leads me to my question.

Dr. Wilensky, I thought a much better way of handling the home

health care was to basically do what we do in other parts of Medicare, which was to have a copayment in terms of the utilization of

services in home health care, and I believe that MedPAC in the

past has thought that a copayment system would be a better way

to go.

Ms. WILENSKY. Yes.

Mr. GANSKE. I mean, you could means-test that to help low-income senior citizens. Can you comment on that?

Ms. WILENSKY. In our last report, we did recommend for the second year report in a row for MedPAC that a coinsurance, copayVerDate 11-MAY-2000 10:22 Apr 18, 2002 Jkt 010199 PO 00000 Frm 00043 Fmt 6633 Sfmt 6602 E:\HEARINGS\65915 pfrm01 PsN: 65915
40

ment system be devised. We suggested that people who are on the

low-income support programs of QMB or SLMB be exempted from

that, that it be a relatively small payment, about $5 a visit, and

that there be a stop-loss provision. That is, that after some 60 visits, that there would be a reassessment about the need for home

care as a clinical visit and that if there was further need, that the

care be provided, of course, but there be no further copayments because we did not want to have it be a financial burden, and we

thought that would be a way to balance making sure there was access and also to put in some cost restraints on the usage.

The Congress obviously chose to go in a different direction as

part of the Balanced Budget Act. We will have to wait to see what

we can see after the implementation of the prospective payment.

There was widespread belief that the interim payment system that

was adopted was not a good system and so a sense that going the

next step now will be better than where we just were, whether or

not it will be as good or better than where you could have gone is

a harder question.

Mr. GANSKE. Well, I will make a prediction. We will be dealing

with this for some time.

Dr. Wilensky, on the next panel we are going to hear from Dr.

Zetterman on HCFA’s site of service differential payment methodology. Basically, I have heard from different medical specialties—

gastroenterologists, urologists, and others—about how HCFA is basically saying that if you do not do this type of procedure in your

office, you are going to get paid less.

Now, I have looked at some of those CPT codes, and as a surgeon, I think we are getting into an area where doing some of those

procedures in an office could be dangerous to the patient. Would

you care to comment on that?

Ms. WILENSKY. This is an issue, particularly looking at gastroenterology, that is part of our March report where we look at some

of the differentials in payment per site and they clearly are substantial, sometimes half of what you would get in your office if you

do it in a facility. The justification, at least initially, was that some

of the physicians’ direct costs or indirect costs that would have

been absorbed in the office are being absorbed by the facility and

therefore the actual payment to the physician should be less if that

is the case.

We have recommended that HCFA meet with the specialty

groups to try to decide if there is a clinical preference area. It may

well be that in areas, particularly some of the endoscopy differentials or other areas, that there ought to not be a higher payment

in the physician’s office because you do not want to encourage what

is regarded as clinically inappropriate behavior. So we have basically recommended that in these areas where the site of care is

substantially different, that there be more clinical dialog going on.

MedPAC has also been concerned that the groupings are sometimes too aggregative in the new prospective payment system and

that may also influence behavior. We do not actually believe that

physicians will choose their site according to these payments, but

we think it is not a good idea to put financial incentives to either

underpay or overpay depending on whether you do a procedure in

41

the outpatient or do a procedure in your office. So we are concerned.

Mr. BILIRAKIS. The gentleman’s time has expired.

Mr. GANSKE. Mr. Chairman, I will provide you with some examples of the types of procedures that I do not think you would want

to have done in a physician’s office.

Mr. BILIRAKIS. Great. That is what this is all about.

Mr. Stupak?

Mr. STUPAK. Thank you, Mr. Chairman.

Ms. Wilensky, in your testimony, you indicated that there has

been a decline of 45 percent in home health reimbursements, is

that correct?

Ms. WILENSKY. That is correct.

Mr. STUPAK. And I believe it is October 1 we are going to put

in a prospective payment system for home health?

Ms. WILENSKY. October 1, the system is supposed to move to prospective payment instead of the interim payment system.

Mr. STUPAK. Do you believe that will happen, prospective payments starting October 1?

Ms. WILENSKY. It is looking better. I was less certain that it

would, but HCFA has put out a rule that now has indicated the

base payment, and although we had some concerns at MedPAC

about the prospective payment system, our MedPAC commissioner

who comes out of home care who heads the New York Voluntary

Nursing Association had indicated that the sense was the interim

payment system was so bad in terms of its actual implementation

that an imperfect prospective payment system would be preferable.

Mr. STUPAK. It would still be preferable?

Ms. WILENSKY. It would still be preferable. That is now—because

we did have some concerns about the particulars of the prospective

payment system. The rest of the commissioners were impressed by

the pleas to go forward, because where we were right now was really not a good place.

Mr. STUPAK. Mr. Scanlon, do you care to comment on that at all,

on prospective payment, any kind of a baseline we can expect coming out of that October 1?

Mr. SCANLON. We do believe it will be in place on October 1,

given that HCFA has not issued the final rule on this, and I agree

with Dr. Wilensky and her MedPAC commissioner from the VNS

of New York that it is a major improvement over the interim payment system. The interim payment system just was not targeted

enough to be able to support appropriate care.

Mr. STUPAK. Will venepuncture be back in for home health as a

payment reimbursable?

Ms. WILENSKY. It as an event, my understanding, was reimbursable. It did not entitle the senior to the rest of home care services

and I do not believe there is a change there, but I do not know.

Mr. SCANLON. No, there will be no change. It cannot be the sole

basis for qualifying for home health care. If you need another

skilled service besides venepuncture——

Mr. STUPAK. But in rural areas where you have to travel so far

just to get your blood checked, and that may be the only service

you need, and that is ridiculous not to have it part of the system.

To put it mildly, I mean, we would go 30, 40 miles to have a regVerDate 11-MAY-2000 10:22 Apr 18, 2002 Jkt 010199 PO 00000 Frm 00045 Fmt 6633 Sfmt 6602 E:\HEARINGS\65915 pfrm01 PsN: 65915
42

istered nurse do it or have the registered nurse come to our house,

but if that does not happen, then we have to go to the emergency

room or a physician’s office and you will pay for it then. I think

it would be much more efficient if we would allow it under home

health.

Mr. SCANLON. It would be more efficient in terms of the covering

of that skilled service. The issue that I think was raised—— Mr. STUPAK. And also cost.

Mr. SCANLON. Well, the issue that I think that was raised,

though, that covering that one skilled service then entitled you to

all the other services that home health provided meant that many

people would receive a significant amount of aide care, as well.

Mr. STUPAK. So you can craft the rule that says venepuncture

should be allowed and that is the only service granted? Any other

services—— Mr. SCANLON. You could treat it as a separate service.

Ms. WILENSKY. Right.

Mr. SCANLON. It would be independent of the—it could be provided by home health agencies, but it would be independent of the

home health benefit as we know it today.

Ms. WILENSKY. And it could be paid as it is currently paid.

Mr. STUPAK. For a couple of years, we have always had that

trouble. You always cut us out, and in the rural areas, we have nowhere to go and it costs a heck of a lot more to have people go to

emergency rooms every time to have it done.

Ms. WILENSKY. My sense is there has not been a question that

that specific service should be paid. It is only a question of whether, if that is the only reason, that other services should be provided.

Mr. STUPAK. Then I cannot understand why we cannot draft a

rule that says that service only is paid under home health and let

the home health agencies do it, as opposed to make these patients

travel.

Let me go a little further. Dr. Wilensky, you mentioned hospitals

and the PPS and increase the IMEs and things like that. One of

the things I am hearing a lot from my hospitals is the cost of prescription drugs, especially in cancer-treating drugs. It has just gone

outrageous, 35, 40 percent increase in the last year or 2 per year,

and they just cannot pass all that cost on to the patient. Any

thoughts on that?

Ms. WILENSKY. Well, in an inpatient setting, the increase of prescription drugs will get fed into the DRGs but there will be a delay

of a couple of years because of how the data feeds in. It was one

of the reasons we suggested that the Congress consider a higher

than usual update this year because we know the last year or 2,

before these have been fed in, there have been substantial increases in cancer drugs and other inpatient drugs.

With regard to cancer drugs that are outside, some of the times

they are covered through special provisions—— Mr. STUPAK. But most of the times, they are not.

Ms. WILENSKY. That is obviously then relating to the broader

issue of prescription drugs and how you do it and when you do it.

Mr. BILIRAKIS. The gentleman’s time has expired.

Mr. STUPAK. Thank you, Mr. Chairman.

43

Mr. BILIRAKIS. Mr. Burr to inquire.

Mr. BURR. Thank you, Mr. Chairman.

Let me also deviate from the fixes for a second just to get a response from both of you. Would you agree that the cost of health

care today is no longer separated rural and urban? Would you

agree that the equipment costs the same?

Ms. WILENSKY. The equipment cost—— Mr. BURR. If you buy an x-ray machine, it costs the same in New

York City that it does in rural North Carolina?

Mr. SCANLON. The machine itself costs the same. The issue is

when we compute it on a per patient basis or per use basis, we

may not have enough people in North Carolina. That, I think,

is——

Mr. BURR. I am talking about the raw cost of the machinery.

Mr. SCANLON. The machine itself is the same price.

Mr. BURR. And lab work, probably the same. I mean, there may

be some variation, but in rural cases, they probably send it to an

urban facility to be read and the fact is that the cost is the same.

Would you agree that, really, the only difference is the real estate?

Ms. WILENSKY. Well, labor costs in some of the services can be

different, including in lab services.

Mr. BURR. But is MedPAC not seeing the same thing that I am,

and that is that the urban centers are now recruiting in the rural

areas, offering nurses and PAs unbelievable increases because they

have a shortage in the urban areas, and this has caused not only

a migration of the workforce, it has also caused the rural areas to

raise their rates to a point that is not reflective in a lot of the data

that we are picking up.

Ms. WILENSKY. Well, getting the right wage rate data is very important. Looking at labor costs is legitimate. You can certainly

make arguments that in some cases, the labor costs may be greater

because there is less competition in rural areas.

Mr. BURR. I had a rural hospital that had to make a mid-year

adjustment in their nursing staff’s pay because 30 miles away was

Greensboro, North Carolina, and that $1 increase in their nursing

staff was an unplanned adjustment to their annual budget of

$260,000. There is no formula that we have got that will pick that

up now. It may pick it up in the future, if it does, but the reality

is that they are going to come up with a shortfall. That is inherent

to the system, is it not?

Ms. WILENSKY. Yes.

Mr. BURR. It is.

Ms. WILENSKY. Yes.

Mr. BURR. Ms. Wilensky, let us go to home health for just a second, if we could. You mentioned that the board would propose a

delay in the 15 percent——

Ms. WILENSKY. That is now current law.

Mr. BURR. It is a temporary delay.

Ms. WILENSKY. Right.

Mr. BURR. Do you perceive a permanent elimination of the proposed 15 percent?

Ms. WILENSKY. It is hard to tell because of the dramatic swings

in spending that we have seen. It is certainly possible that we

would say there is no further need to moderate spending if the

44

slowdown persists. I think we are not sure what will happen when

we go from one system, interim payment, where you have been

doing a per visit for a daily charge to an episode payment, so we

think it is prudent to say we ought to wait and see. I would not

be surprised if that happened.

Mr. BURR. What were the policy reasons for a 15 percent reduction in payment?

Ms. WILENSKY. It was not our policy. I do not know.

Mr. BURR. It was not a policy. Do you know of any policy reasons, Mr. Scanlon?

Mr. SCANLON. I do not think there was a reason in terms of the

care being provided because we do not understand the home health

benefit. I think it was more an issue of, we have had such excessive

growth that we set a new target in terms of what we wanted to

spend and it involved a 15 percent cut.

Mr. BURR. Which is traditionally the way we do health care. We

work within the framework of the dollars and not necessarily concentrate as much on the policy, which is the No. 1 mistake, I think,

that this institution makes.

I think Bruce Vladek, then-administrator of HCFA, put it best.

When pressed, he said it makes the budget balance. That is how

they came up with 15 percent. That is why it was not five, it was

not ten. My only fear is that we fell into the same trap and adopted

the same philosophy and proposed legislation that also had an arbitrary, pull it out of the sky, 15 percent cut because it made the

numbers work and I think—— Mr. SCANLON. Mr. Burr, if I could add, at the same time, though,

there was such variation across the country in terms of the use of

home health care, if you took 15 percent off the areas that were

at the extreme high end, you might find no impact on the care

being provided and you would not disturb the areas that were providing much more modest levels of care.

Mr. BURR. And in some cases, the reimbursements with the proposed 15 percent cut forced the capital that was financing those

vital businesses in rural America to pull back, reduce services, or

go out of business, which puts me into nursing homes just real

quick. You mentioned them earlier. You said five firms had gone

into bankruptcy. Do you know how much of the marketplace those

five firms represented?

Mr. SCANLON. They were about 15 percent of the market.

Mr. BURR. Fifteen percent of the market? Did you look at the

market capital of the industry sector itself, in other words, the

stock price of the industry sector?

Mr. SCANLON. We did and we know that there has been a substantial sort of drop in those, in part because the expectations that

were built into the stock prices initially were expectations built

upon significant growth over time and as that growth evaporated,

so did the stock valuation.

Mr. BILIRAKIS. The gentleman’s time has expired.

Mr. BURR. Let me just add, Mr. Chairman—— Mr. BILIRAKIS. Well, very quickly.

Mr. BURR. [continuing] the stock devaluation of that industry

sector was 75 percent of the entire sector after BBA 1997 and I

think that though we might not see short-term shortfalls, I would

45

tell you that when we sit here and know that the senior population

in America will double over the next 20 years, the lack of investment in that single area of nursing home facilities is going to be

a tremendous challenge for this country to address in the future.

I thank the chairman.

Mr. BILIRAKIS. Ms. Eshoo to inquire.

Ms. ESHOO. Thank you, Mr. Chairman, for having this hearing,

and welcome to our witnesses.

I have a couple of questions that I would like to ask of you, Mr.

Scanlon, and I will state my questions first and then you can answer them. I do not want to run out of time on the questions. I

have not gotten this down pat yet, after all these years.

Dr. Wilensky testified that managed care plans have cited Medicare’s regulatory burden as a reason for leaving the Medicare Plus

Choice program. It is my understanding that many of the regulations serve an important purpose. Regulation, of course, can be a

blessing to some and a burden to others, a dirty word, or whatever.

But I would like to think that there are regulations in this that

serve the very important purpose of protecting seniors and their access to quality care.

I know that the GAO issued a report last year about how greater

Federal oversight is needed to protect seniors’ rights in Medicare

and its managed care. Could you just speak to HCFA’s regulations

and how they play an important role in protecting seniors’ rights?

My other question has to do with the attention that has been

given to the effects of BBA cuts on hospitals, especially teaching

hospitals and disproportionate share hospitals. I was very disappointed that we did not include anything in last year’s refinement bill to restore cuts to Medicaid DSH hospitals. I have experienced that. I know something about it. I chaired a hospital board

of directors of my county hospital before I came to the Congress,

so I saw firsthand the faces of people that came in to that facility,

shaping the kinds of services that they most needed, and how we

filled that role as a disproportionate share hospital. Would you

comment on the cuts endured by DSH hospitals under BBA and

what you would suggest we do to alleviate them?

So those are my two questions, and I thank you both for being

here.

Mr. SCANLON. With respect to the first question, in terms of

HCFA’s regulation of Medicare Plus Choice plans, we are very

much in agreement with Dr. Wilensky that there needs to be a balance in those regulations. I mean, I also think you might want to— if you do not like the word ‘‘regulation,’’ you can think of them as

purchasing specifications. We really want to sort of know what we

are buying from these plans and make sure that we are getting

what we paid for for the beneficiaries that are enrolling.

At the same time, we want to make sure that the burden of those

regulations on plans is minimized, and as Dr. Wilensky indicated,

some of the smaller plans in rural areas may find the current regulations too burdensome and that may be a significant factor in

their withdrawals.

In the case of many other plans, what we are finding is that they

are deciding to change service areas, meaning that they are complying with the regulations in some areas because they find the

46

market attractive enough and pulling out of other areas where the

market is not attractive enough.

While we are certainly in favor of this, we also think that HCFA

needs to be very efficient in terms of the burden they place on

plans in applying the regulations, and in addition to finding that

HCFA does not do a good job sometimes in applying the

regulations—— Ms. ESHOO. Can you give me an example of that, what you just

mentioned?

Mr. SCANLON. Well, the example I think that we had in the report you referred to is the issue of marketing to beneficiaries and

telling beneficiaries what the plans are going to provide them, and

what we discovered is that, one, poor information was being provided to beneficiaries in terms of not describing the benefits fully,

and second, plans were encountering the difficult issue of having

to deal with one regional office after another to get marketing materials approved and finding inconsistent application of the rules in

those different regions. HCFA has taken some steps to improve

that and we think that is very positive.

With respect to the DSH hospitals and the changes in BBA with

respect, and with BBRA with respect to the DSH payments, I

mean, I think we need to recognize some of the concerns and problems we have had with DSH over the past, the fact that DSH dollars were not always targeted in the best way in all States. Therefore, as you look at the changes in BBA, you see a very great difference across States in terms of the amount of reductions.

We have been looking at some of the States that are more significantly affected and trying to discover what is happening to the

safety net hospitals in those States as opposed to other uses of the

DSH dollars. At this point, while we recognize that it is preliminary, the impacts on many safety net hospitals are modest. The

question is, what is modest for me may not be modest for those

hospitals or in your eyes.

Ms. ESHOO. If there is a misuse of DSH dollars, then I think that

that needs to be identified. I do not think any one of us are going

to defend something that is not defensible. But DSH entirely is another story. I mean, we have set up a policy in this country that

recognizes those hospitals that take care of the poorest of the poor.

To dance on the backs of the people that need this the most is just

plain wrong.

Mr. BILIRAKIS. The gentlelady’s time has expired.

Ms. ESHOO. I do not think we can afford to have it cloaked in

one thing when it is another.

Mr. BILIRAKIS. The gentlelady’s time has expired.

Ms. ESHOO. Thank you, Mr. Chairman.

Mr. BILIRAKIS. Dr. Coburn will inquire.

Mr. COBURN. Thank you, Mr. Chairman.

I want to raise the level that Mr. Stupak raised on phlebotomy.

All HCFA has to do is to pay an increased fee for phlebotomy and

you will have the labs around this country coordinating rural phlebotomy. Make it where it is cost efficient for somebody to plan that

and it can happen, and we do not have to pay $65 every time somebody goes out and draws somebody’s blood. We can pay $20 or $25

and it can all be scheduled and be done and the labs would be more

47

than happy to do it because they would get to run and bill Medicare for the lab.

The second thing I wanted to address is we do have a problem

in prenatal care in this country, but providing a mechanism for

that does not necessarily solve it. In my hospital alone, we have 20

people a month drop in, no prenatal care. Ninety percent of them

meet all the requirements for Medicaid or Title 19 and they know

about it. They refuse to get it. So part of it is education, and we

can throw all the money at that we want. Until we educate people

about the need for prenatal care, we do not need to add another

dollar for it. We need to utilize the services that are out there.

I want to ask a question. Mr. Burr asked you about the 15 percent. Is it your consensus—I think it is certainly the members of

this committee—that that ought to go into oblivion as far as home

health care? There is no need to have that number there now and

we ought to eliminate that threat hanging over home health care

so that we can plan for the future. Would you all agree with that?

Ms. WILENSKY. MedPAC has recently had a sense of the commission that we would at least not like to see it go into effect now. We

did not take the position on ‘‘ever.’’ We just felt comfortable saying ‘‘not now.’’ I do understand the issue you are raising in terms of

planning for the future and that is really a question for the Congress. But we do believe that given the sharp reduction in spending, it is inappropriate at the present time to go forward with yet

another reduction.

Mr. COBURN. Mr. Scanlon?

Mr. SCANLON. I think we would not agree that it should be put

off completely because of the fact that we expect the situation

under the prospective payment to be so much different than under

the IPS, that we really need to witness that experience and then

make a decision about that.

Mr. COBURN. What do you mean when you say that? Do you expect a significant increase in payments for home health care under

the prospective payment versus the IPS?

Mr. SCANLON. That is what we are anticipating today. For one

thing—— Mr. COBURN. What do you estimate?

Mr. SCANLON. I beg your pardon?

Mr. COBURN. What do you estimate the increase to be?

Mr. SCANLON. We do not have an estimate of the increase because we have never had experience with a change that is this significant. One of the things that we are moving from is a per-visit

to a per-episode payment. We are moving to a system where it is

very hard to determine what is the appropriate number of episodes

for an individual and we do not have very good criteria by which

to review episodes to decide whether they should be paid for.

Mr. COBURN. Has HCFA in their final ruling allowed for outliers

on the prospective payment system?

Mr. SCANLON. Yes, they have. Yes.

Mr. COBURN. And will that not take care of—I do not understand

why you cannot know that. You know the diagnosis codes on all

these people that are under home health care now. Why can we not

apply the data based on new rule to look at what is happening

right now and look at what the costs are going to be?

48

Mr. SCANLON. We do not know what the volume of beneficiaries

are that are going to be using services.

Mr. COBURN. What about the volume right today? What would

be the comparison under the IPS versus the PPS for right now?

Has nobody looked at that?

Mr. SCANLON. They have, and there would be a likely increase

in terms of—— Mr. COBURN. How much?

Mr. SCANLON. I can get you those data, but I do not have them

here today.

Mr. COBURN. Would you be so kind as to bring—— Mr. SCANLON. I would be happy to do that.

Ms. WILENSKY. There is also the problem that you are now going

to go to a system where having the right coding, having coding is

going to make a big difference. One of the problems we have had

in the past is that we have not required and we do not really have

a good sense of what the diagnoses are that are requiring home

care services, nor the services that are actually being provided. It

is that dramatic a change that leads us not to know whether both

the kinds of diagnoses that will be coded and the volume—— Mr. COBURN. I want to get this next question in. I am very concerned about rural hospitals in this country. We have in my district

alone, and even with the changes last year, we still have five rural

hospitals that will probably not make it this year through the year

and I want to know what you all see coming down the road in

terms of the marked reduction in payments to the rural hospital,

especially in Oklahoma. What needs to be done to revitalize and

stabilize those hospitals so they are not bleeding?

Ms. WILENSKY. I indicated that MedPAC is going to focus its entire June report on health care in rural America. Our looking at

the margins suggests that there are substantial differences in the

financial well-being between the sole community rural referral centers being pretty financially robust and the small Medicare-dependent and under-50-bed hospitals that are not sole community hospitals which are more fragile.

Mr. COBURN. Mr. Scanlon?

Mr. SCANLON. We have left the work on hospitals largely to

MedPAC, but I think that we are in total agreement in terms of

the issue of targeting. I mean, in our mind, it is not necessary an

issue of not having enough resources overall that Medicare is providing but in making sure that they go to the right places, and the

issue of rural hospitals, as I am reminded on many occasions, the

differences within rural communities, the fact that there is very

rural and then there is rural, it is important to target sort of on

each of those to make sure that there is adequate service—— Mr. BILIRAKIS. The gentleman’s time is long expired, but when

would that report be available?

Ms. WILENSKY. Our report will be available next June. There

may be some——

Mr. BILIRAKIS. Next June? It will not do us very much good when

it comes to—— Ms. WILENSKY. Not for your August decisions, but for your next

year’s decisions.

Mr. BILIRAKIS. Mr. Strickland to inquire.

49

Ms. WILENSKY. Mr. Chairman, we can, however, provide you

with the information we have to date in terms of what is going on

in rural America.

Mr. BILIRAKIS. Well, if you would, I am sure that would be very

helpful.

Ms. WILENSKY. Yes.

Mr. STRICKLAND. Thank you, Mr. Chairman. I have two questions I would like to direct to Mr. Scanlon.

Mr. Scanlon, as you know, before BBA, community health centers

and rural health clinics received cost-based reimbursement from

Medicare. The BBA instituted a phase-out of this cost-based reimbursement system so that eventually the States could determine

their own payment systems for these services. Now, we passed a

provision in the BBRA that would slow down this phase-out from

occurring and would give these essential safety net providers more

time to adjust, and this is my question. Based on your experience

with community health centers and rural health clinics, what potential problems will these providers face if this cost-based reimbursement system continues to be phased out?

Mr. SCANLON. As also part of the BBRA, there was a study that

we were required to do in terms of looking at this question and we

have a report that we will be providing you in, unfortunately, November of this year, which is also beyond your August decision

point. But in doing prior work on community and migrant health

centers, what we have found is that there is about half that the

HRSA has found to be sort of suffering from either financial or

management difficulties and another 10 percent which they find to

be highly vulnerable, potentially sort of going out of business.

Mr. STRICKLAND. We are talking about 60 percent?

Mr. SCANLON. We are taking about 60 percent. Now, this is in

a world in which most of them are still being paid full-cost reimbursement, because except for States, and there are about a dozen

of those that have got 1115 waivers in their Medicare program to

introduce some other form of reimbursement, and for six States

that went to the 95 percent level. All the other States have stayed

at 100 percent cost reimbursement.

But what we have found is it is not only just an issue of revenues

that puts the community health centers sort of in trouble. It is also

an issue of management. As you move to different reimbursement

systems in States with 1115 waivers, where some managed care

plans are paying capitated amounts to the centers as opposed to

full-cost fee-for-service reimbursement, centers can do well if they

are well managed and they have enough other resources. We do not

have at this point enough information to give you on the proportions of centers that are in different situations and how they would

fare, but that is what we are trying to gather for you for November.

In the interim, there is an issue of you have slowed this down

and it is protective of the centers. This may be an area that you

want to think about in terms of slowing down some more because

of the role that these centers play. About 40 percent of their patients are the uninsured, and even though we have this good economy, we are seeing increases in the uninsured.

Mr. STRICKLAND. I guess it makes sense to me that if we do not

have the data and we will not have it for several months and these

50

are essential safety net providers, that we should, if possible, stop

this process until we do know what we are facing, because, as you

say, these centers do provide services to those who are least able

to help themselves.

Mr. SCANLON. I agree that it is important to have the information to understand this more fully. At the same time, though, I

think we need to, for the longer term, be thinking hard about the

appropriateness of full-cost reimbursement. We have moved away

from cost reimbursement for virtually every other provider type because of the poor incentives that we know it creates, and so we

need to think about how we can make these centers fully functioning without necessarily dependent upon cost reimbursement.

Mr. STRICKLAND. And I would agree with you, but I would reiterate my point, that until we have the essential information, we

ought to protect these centers, it seems to me. If we have the information and it validates a conclusion that we can move to a different payment system without hurting people, then I would fully

support that. But it seems as if we are moving forward without

having the kind of information we need to make a rational judgment. That seems reasonable to me. I do not know if it seems reasonable to you or not, sir.

Mr. SCANLON. It does seem reasonable and I wish we could provide you the information much sooner.

Mr. STRICKLAND. Could I have additional time, Mr. Chairman?

Mr. BILIRAKIS. You have another few seconds.

Mr. STRICKLAND. I will yield back the balance of my time.

Mr. BILIRAKIS. I appreciate that.

I just want to announce for the benefit of the panelists and the

second panel and the audience, we expect, in just a few minutes,

a series of votes. There will be one vote, then there will be a 10-

minute debate and a recommittal, and then another vote on the recommittal, and then a vote on final passage. We are probably talking 45 minutes to an hour. Right after we finish up with this panel,

we will break. That way, people can have an opportunity to go get

some lunch or whatever the case may be and then come back approximately in an hour’s time, depending, of course, when the final

passage takes place.

Having said that, the Chair would now yield to Mr. Deal.

Mr. DEAL. Thank you, Mr. Chairman.

I would like to follow up with Mr. Strickland’s last questions

about community health centers. As I understand it, you do not

have any statistics for those States that have already begun to

phaseout the cost-based reimbursement as to what effect that

phase-out might be having on their delivery of services to their patients, is that what I understand?

Mr. SCANLON. We do not at this point, no, sir.

Mr. DEAL. And that is what your November report——

Mr. SCANLON. That is what our November report will deal with.

Mr. DEAL. As you are probably aware, we are receiving the same

kind of complaints that I am sure you are receiving about the practice expense component and moving in that direction for reimbursement to physicians and specialties, in particular, and we are continuing to hear the complaints about the process whereby information is being gathered and the difficulty in arriving at a conclusion

51

as to how this transition of reimbursement should be made. Would

either of you care to enlighten us as to where this process is? As

you know, there are some groups urging us to abandon it and go

to a 50-50 formula and forget about completing the process. Please

bring us up to date, if you would.

Ms. WILENSKY. We are in the process of a transition as part of

the BBA. Rather than go to a full adoption of the practice expense,

the Congress put in a transition period. The transition and the

practice expense relative value was an attempt to try to align on

a relative basis practice costs across the different specialties and

the different procedures that they do. The complaint has been

raised as to whether or not that will mean that they cover absolute

expenses in terms of practice costs and the answer is there is nothing in the provisions to assure they will cover absolute costs, but

rather the allocation among the different specialties and the different procedures will make more sense. That is the relative issue.

The problem you get into of simply abandoning the relative practice expense is that there is a belief that some procedures and specialties were being heavily overpaid or disproportionately paid and

some procedures and specialties underpaid with regard to their

practice expenses and that staying with historical values really

builds in those inappropriate payments.

HCFA has been urged to have more conversations with specialists. That was something MedPAC and others have urged. My

sense is that is going on. But this question about absolute payments is one that I think needs to be clearly understood by the

Congress. This is one of the many areas, as Mr. Scanlon just referenced, where there is movement away from cost-based reimbursement to try to move to a different type of reimbursement system

and the main focus here is on the relative values, not the absolute

costs.

Mr. DEAL. Thank you. I would yield back, Mr. Chairman.

Mr. BILIRAKIS. I thank the gentleman.

Mr. Barrett to inquire.

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

for holding this hearing.

I have two questions. One relates to DSH, the other relates to

occupational therapy. I would like to start with you, Mr. Scanlon,

on DSH. I think a number of the speakers have talked about the

DSH problems in their States and I know that Mr. Whitfield and

Ms. DeGette have legislation to deal with the problems that have

been created by BBA in their States.

I represent Wisconsin, where the situation is a little different.

We get so little DSH money that the fixes that have been proposed

do not even touch us because they basically restore some of the

cuts that were made to some of the other States. But when you

have a State like Wisconsin that gets $7 million, which is much

lower than many of the States that are of comparable size, we are

looking for a way in a State that has a below-average income but

a significantly higher-than-average taxation on State taxpayers to

deal with this problem.

In your analysis, or has there been anything done to sort of demonstrate the rhyme and reason for how States get money under the

DSH formula?

52

Mr. SCANLON. Mr. Barrett, I can say that there is, in terms of

looking at the overall distribution. The focus really has been sort

of on what the consequences of the changes in DSH levels are for

sort of the hospitals in given States. We know that the changes are

more pronounced for States that had high levels of DSH in the past

and for States that had more of their DSH dollars going to institutions for mental disease. But that is the principal focus, is what

those reductions have meant.

I know your situation is very different in the sense that you are

talking about a small amount of DSH money to begin with. The

question for you would be sort of the adequacy of those dollars relative to the problem that you have.

Mr. BARRETT. Is there an analysis in existence that shows how

different States got the money they are getting now? I am trying

to decipher the code.

Mr. SCANLON. In terms of the historical growth?

Mr. BARRETT. Yes.

Mr. SCANLON. I think there are a number of analyses that address that issue. DSH was an uncontrolled expense until 1992, I

think, at which point there were some restrictions placed on DSH

expenditures by the Congress. At that point, it meant that some

States’ DSH dollars were frozen, could not increase over time, and

other States had some room to grow but chose not to grow. The determinants of why States chose not to grow, that, I do not think,

has been investigated.

Mr. BARRETT. From your standpoint, is there a policy correlation

between the amounts States get and their need?

Mr. SCANLON. There is more of a correlation after the changes

that are in BBA sort of will have been implemented than there was

before, because before, one of the concerns that we had about DSH

dollars was that they were not solely being used to meet their original purpose but they were being used to fund other things and that

was why the Congress initially acted in the early 1990’s to put restrictions on that, in 1991.

Mr. BARRETT. Dr. Wilensky, occupational therapy, my understanding is that it is treated differently for home health than it is

for Medicare, for SNF facilities. Would MedPAC support including

occupational therapy in the eligibility criteria for home health?

Ms. WILENSKY. That is not an issue we have taken up. We can

try to get back to you if we have any thinking on that subject.

Mr. BARRETT. What they are telling me is that the definition of

what is included for rehabilitation services is different for home

health than it is for some of the other services and that they are

not included in home health. Obviously, home health has taken a

huge beating since BBA and so it is maybe trying to, I do not want

to say board the Titanic, but I think that those are two areas that

need some further exploration.

Ms. WILENSKY. We will be glad to get back to you.

Mr. BARRETT. I would yield back the balance of my time.

Mr. BILIRAKIS. I thank the gentleman.

Mr. Towns, and my apologies to the gentleman. I did not realize

that he had come in before at least Mr. Barrett.

Mr. TOWNS. And also Mr. Strickland.

Mr. BILIRAKIS. And also Mr. Strickland?

53

Mr. TOWNS. Yes.

Mr. BILIRAKIS. A double apology.

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

that because now I am sure you are going to give me 10 minutes.

Mr. Chairman, one thing before I start my questioning, though,

could you set a definite time for us to return?

Mr. BILIRAKIS. No, I cannot because we do not know exactly

when the vote on the final passage will be. We have the first vote

at approximately 12:30 and then there will be a 10-minute debate

on recommittal, then a vote on recommittal, and then a vote on

final passage.

Mr. TOWNS. Could we say 10 minutes after the final vote? I think

we need a number.

Mr. BILIRAKIS. We will say 10 minutes after the final vote.

Mr. TOWNS. Thank you, Mr. Chairman.

Mr. BILIRAKIS. Boy, you are really picking on me today.

Mr. TOWNS. Thank you, Mr. Chairman.

Let me begin by saying, first of all, thank you very much for the

hearing and we thank the witnesses for being here. Of course, some

of our teaching hospitals are having great difficulty. I noticed in

the Balanced Budget Restoration Act we took the first step toward

restoring the BBA cuts of teaching hospitals. Do you feel or do you

agree that we need to restore even more of the cuts that we enacted in 1997 if our teaching hospitals are to remain vibrant?

Ms. WILENSKY. No, I do not, and I would like to explain why. We

think that a number of steps were done to help teaching hospitals

in BBA and others that we have recommended will also help teaching hospitals because of the kinds of work they do. The assistance

with regard to the transition to the outpatient PPS and the corridors that were put around so that there would not be too disruptive a change, and the fact that there is no longer savings to be

had from moving to an outpatient PPS was very important to the

teaching hospitals. They do a large amount of outpatient work as

part of their mission. There was a hold put on the reduction in

IME and disproportionate share and there were also some small

assistance to home care and skilled nursing facilities to the extent

that they are involved.

We are advocating an increase in the update factor for hospitals

this year, substantially larger than we have in our history, but we

think that in terms of the IME and DME change per se, that that

is an amount that is above the empirical level of support still and

that the specific way to deal with the higher costs of teaching hospitals could be better dealt with. We issued a report to Congress

last year and we have some further updates, so while we think

there are things that should be done to help hospitals to better differentiate their payments, to specifically go in and stop the reduction in IME payments that are now scheduled would not be a part

of the recommendations, at least that MedPAC has made to the

Congress.

Mr. TOWNS. So I think we will have another Balanced Budget

Restoration Act this year. So you would not support more permanent solutions to the plight facing the Nation’s teaching hospital?

Ms. WILENSKY. We would support an increase in payments to

hospitals this year which will obviously help the teaching hospitals

54

and we think the Congress needs to relook at how payments to

teaching hospitals are being made. We have issued now a separate

report and separate chapters in this report about how best to help

pay teaching hospitals. We think it is far more than just the level

at which the IME payment is made, and we would be glad to work

with you and your staffer about these issues. This is an area that

MedPAC has devoted a lot of study to.

Mr. TOWNS. Well, I sure would like to work with you on it, because let me just say right up front, the hospitals in New York City

are having great difficulty, I mean, serious difficulty, and I would

like to work with you in terms of seeing what we can do in terms

of finding some way to bring about some relief.

Thank you very much, Mr. Chairman. On that note, I yield back.

Mr. BILIRAKIS. I thank the gentleman.

Then we will go ahead and break until——

Mr. BROWN. Mr. Chairman, can I make an observation?

Mr. BILIRAKIS. The gentleman is recognized for an observation.

Mr. BROWN. Taking the time of Mr. Towns.

Mr. BILIRAKIS. Taking the time of Mr. Towns.

Mr. BROWN. Thank you, Mr. Chairman. Just a point of clarification. I hear our friend, Dr. Wilensky, refer to Medicare Plus Choice

as Medicare replacement plans, and she mentioned that in her testimony. I do not know if that is focus-grouped or poll-tested, but

I do not think it is the intent of anybody that I know in this Congress, certainly on this side of the aisle, and I do not know of anybody that really saw Medicare Plus Choice as a replacement for

Medicare. It is listed under Medicare Part C.

I bring that up only because I know there are efforts in this Congress to sort of back-door privatize Medicare, and to call that a

Medicare replacement plan goes a bit beyond what I think there is

any Congressional intent to do. Thank you.

Mr. BILIRAKIS. I do not know of any efforts to back-door privatize

Medicare, and I suppose I would probably know about it if there

were.

Mr. BROWN. Mr. Chairman, they are so far in the back door that

you may not have seen them.

Mr. BILIRAKIS. Yes, they may be that far back.

Ms. WILENSKY. And that is my term and I do not know if anybody else is using it. It is a way that I have found for myself to

distinguish between the traditional Medicare program and the

other, and I regard these as traditional Medicare alternatives.

Mr. BILIRAKIS. All right.

Ms. WILENSKY. So it is a way for me, but if you just use Medicare

Plus Choice outside of Washington, it does not convey a sense of

what you are talking about——

Mr. BROWN. And that, Mr. Chairman, is exactly the point. If you

are outside Washington and talking about Medicare replacement

plans, that sends a real message that privatization is around the

corner and it is not around the corner. It is a long way off and a

whole lot of us in this Congress do not want it privatized and a

whole lot of people in this country, an overwhelming majority, do

not want it privatized.

55

Mr. BILIRAKIS. The gentleman has made his observation. That

being the case, we will break for approximately an hour to an hour

and 15 minutes. Thanks so much.

[Brief recess.]

Mr. BILIRAKIS. Let us get started. Again, we apologize, but those

of you who have done this before know what it is like.

This second panel consists of Ms. Marilyn Tavenner, Richmond

Market President, HCA-The Healthcare Company, Richmond, Virginia. She has already been introduced by Mr. Bliley.

We also have with us Ms. Karen Coughlin, Chief Executive Officer of Physicians Health Services out of Shelton, Connecticut; Dr.

Rowen K. Zetterman, President Elect of the American College of

Gastroenterology from Arlington, Virginia, on behalf of the American College of Physicians and the American Society of Internal

Medicine; Mr. Max Richtman, Executive Vice President of the National Committee to Preserve Social Security and Medicare, except

that I do not see him right here; Ms. Juliet Hancock, Program Consultant for the RehabCare Group out of Saint Louis, Missouri, on

behalf of the National Association for the Support of Long Term

Care; Mr. Daniel R. Hawkins, Junior, Vice President of Federal

and State Affairs, National Association of Community Health Centers from here in Washington; Ms. Mary Lou Connolly, RN, MSN,

Administrator of UCSD Home Care, San Diego, California, on behalf of the National Association of Home Care; and Mr. David T.

Williams, Director of Government Relations at Invacare from Elyria, Ohio, the district of our ranking member.

Max, you are now here, so we are missing Mr. Hawkins. I assume we can get started. Ms. Tavenner, why do we not kick it off

with you. Your written statements, as per usual, are part of the

record. We will set the clock at 5 minutes. Hopefully, you can confine your remarks in that category, and hopefully you will complement and supplement your remarks verbally rather than redo

what is already in writing. Ms. Tavenner, please proceed.

56

STATEMENTS OF MARILYN TAVENNER, CHIEF EXECUTIVE OFFICER, RICHMOND MARKET PRESIDENT, HCA-THE

HEALTHCARE COMPANY, JOHNSTON-WILLIS AND

CHIPPENHAM MEDICAL CENTERS, ON BEHALF OF THE FEDERATION OF AMERICAN HEALTH SYSTEMS; KAREN COUGHLIN, CHIEF EXECUTIVE OFFICER, PHYSICIANS HEALTH

SERVICES HEALTH PLANS, ON BEHALF OF THE AMERICAN

ASSOCIATION OF HEALTH PLANS; ROWEN K. ZETTERMAN,

PRESIDENT ELECT, AMERICAN COLLEGE OF GASTROENTEROLOGY, ALSO ON BEHALF OF THE AMERICAN COLLEGE OF PHYSICIANS-AMERICAN SOCIETY OF INTERNAL

MEDICINE; MAX RICHTMAN, EXECUTIVE VICE PRESIDENT,

NATIONAL COMMITTEE TO PRESERVE SOCIAL SECURITY

AND MEDICARE; JULIET HANCOCK, PROGRAM CONSULTANT,

REHABCARE GROUP, INCORPORATED, ON BEHALF OF THE

NATIONAL ASSOCIATION FOR THE SUPPORT OF LONG TERM

CARE; DANIEL R. HAWKINS, JR., VICE PRESIDENT, FEDERAL

AND STATE AFFAIRS, NATIONAL ASSOCIATION OF COMMUNITY HEALTH CENTERS; MARY LOU CONNOLLY, ADMINISTRATOR, UCSD HOME CARE, ON BEHALF OF THE NATIONAL

ASSOCIATION OF HOME CARE; AND DAVID T. WILLIAMS, DIRECTOR OF GOVERNMENT RELATIONS, INVACARE CORPORATION, ON BEHALF OF THE AMERICAN ASSOCIATION

FOR HOMECARE AND THE HOME MEDICAL EQUIPMENT

SERVICES INDUSTRY

Ms. TAVENNER. Thank you, Mr. Chairman. My name is Marilyn

Tavenner, and as discussed before, I am CEO of Johnston-Willis

and Chippenham Medical Centers, which are located in Richmond,

Virginia. I also happen to be a registered nurse as well as a fellow

with the American College of Healthcare Executives and I serve on

the Board of Governors and the Legislative Committee for the Federation. In addition to Chippenham and Johnston-Willis, I also am

responsible for managing Henrico Doctors’ Hospital, John Randolph

Medical Center, and Retreat Hospital, all of which are located in

Richmond, Virginia.

Our doctors and our nurses are tireless advocates and committed

advocates for health care. We have over 30 parish nurses who have

created health ministries in their own congregations. We have a

physician who has created Noah’s Children, which is the only pediatric hospice program in the area, and we have many caregivers

who are committed to the residents of Virginia. Many of these caregivers have expressed concerns to me about their ability to continue to provide the care that they feel their patients deserve in

our current financially stressed environment.

All hospitals, both urban and rural, have been seriously and negatively impacted by the BBA, which has had a far greater impact

than anyone imagined when it was passed 21⁄2 years ago. In 1997,

Congress and the administration agreed to reduce Medicare spending by $103 billion. However, we now know today that these cuts

may be more than $225 billion. Last November, the BBRA restored

$1 billion in program spending for this year and $15.8 billion over

a 5-year period and we are very thankful for that, and yet, still almost one-third of the Nation’s hospitals will operate in the red this

year, the highest number ever.

57

Overall, hospitals are losing money on every Medicare beneficiary that walks through their door. Hospital margins are expected to drop by 55 percent in 2002. Congress cannot expect hospitals to operate with negligible margins, or in the red, and be able

to maintain the quality of service.

In my home State of Virginia, the BBA payment cuts are unprecedented. They are estimated at nearly $1.6 billion over a 5-year period. Just the four hospitals that I am responsible for will see $70

million in cuts because of BBA. This has a potentially devastating

effect on our ability to provide services and comes at a time when

we find our costs to be soaring, particularly prescription costs and

labor costs. Indeed, the number of uninsured even in our environment has increased by 13 percent from 1996 to 1998. It is clear

that Virginia hospitals, which are already among the most efficient

in the Nation, will be hard-pressed to achieve additional economies

to weather the BBA storm.

Congress must address this issue before it adjourns in the fall.

Our recommendations include giving all hospitals a full market

basket update, which is the hospital equivalent of the CPI. United

States has recommended that Congress increase the inpatient update between 3.5 and 4 percent in 2001. The administration in its

proposal released last month called for a full market basket update. The Hospital Preservation and Equity Act that would give

hospitals a full market basket update currently has 291 cosponsors,

including nearly 60 percent of the House Commerce Committee.

Second, freeze the Medicaid DSH reduction at 2000 levels to help

ensure quality, access to quality care for the vulnerable uninsured.

We commend the leadership of Congressman Bilbray, Congresswoman DeGette, and Congressman Whitfield, who have introduced

legislation that would accomplish this goal.

The BBA slashed hospital reimbursement for bad debt. Hospitals

incur bad debt when Medicare beneficiaries do not pay their share

of the costs associated with hospital stays. These cuts in bad debt

negatively impact hospitals that provide needed hospital care to

these low-income seniors. That is why we are pleased that Congressman Greenwood and Congresswoman DeGette have recognized this problem and introduced legislation to restore hospitals’

bad debt reimbursement.

Third, the BBA reduced Medicare DSH payments by 5 percent,

phased in over 5 years. The 1999 BBRA reversed a portion of this

cut. Restoring this funding will help hospitals that provide care to

low-income seniors remain viable. We understand that key committees, both in the House and Senate, including this committee, are

also moving toward a comprehensive BBA relief package. The Nation’s 39 million seniors who depend on America’s hospitals to meet

their daily health care needs desperately need this attention.

Mr. Chairman, thank you again for inviting the Federation to

testify, and as one of Chairman Bliley’s constituents, I would also

like to thank him for his long period of dedication to the people of

Richmond and we will sorely miss him.

[The prepared statement of Marilyn Tavenner follows:]

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PREPARED STATEMENT OF MARILYN TAVENNER, CEO, JOHNSTON-WILLIS HOSPITAL &

CHIPPENHAM MEDICAL CENTER, ON BEHALF OF THE FEDERATION OF AMERICAN

HEALTH SYSTEMS

Mr. Chairman, hello, I am Marilyn Tavenner, CEO of the Johnston-Willis and

Chippenham Medical Centers in Richmond, Virginia. I am a registered nurse, as

well as a fellow of the American College of Healthcare Executives, and I serve on

the Board of Governors and the Legislative Committee of the Federation of American Health Systems. The Federation represents nearly 1,700 privately owned and

managed community hospitals across the United States. As I am sure you will hear

from almost all of the witnesses today, the last few years have not been pleasant—

or easy—for anyone involved in delivering healthcare to patients.

In addition to Chippenham Medical Center and Johnston-Willis Medical Center,

I am also responsible for managing Henrico Doctors’ Hospital, John Randolph Medical Center, and Retreat Hospital, all in the Richmond, Virginia market. Together,

these hospitals annually treat 646,000 patients, 33% of which are Medicare and 19%

of which are Medicaid. We provide care to 57,500 uninsured patients each year. Our

doctors and nurses are tireless and committed advocates for their patients and their

communities. From the 30 parish nurses who have established health ministries in

their congregations, to the physician who created Noah’s Hope—our area’s only pediatric hospice, to the employees who serve as big buddies for Camp Comfort—a

youth bereavement program, or who packed and delivered 3,000 emergency meals

for the ‘Meals on Wheels’ program, our caregivers are on the front line in caring

for the residents of Virginia. Many of these caregivers have expressed concerns to

me about their ability to continue to provide the care their patients deserve with

the ongoing financial stress our hospitals are under.

The Problem: The 1997 BBA

All hospitals, urban and rural, have been seriously and negatively impacted by

the Balanced Budget Act of 1997 (BBA), which has had a far greater impact than

anyone could have imagined when it passed two-and-a-half years ago. In 1997, Congress and the Administration agreed to reduce Medicare spending by $103 billion

(’98-’02). However, we now know based on current projections that these cuts will

be more than $225 billion. And, over $125 billion of this unexpected windfall is forever ‘‘gone’’ to the Medicare program towards the surplus and other discretionary

spending.

Last November, the Balanced Budget Refinement Act (BBRA), a.k.a. the BBA

‘‘add back’’ bill, restored $1 billion in program spending for FY ’00, and $15.8 billion

over 5 years. We were, and are, very grateful for Congress’ thoughtful bipartisan

response. This Committee’s leadership was particularly helpful. However, between

November 1999 and January 2000, Medicare spending estimates fell by $8 billion

for FY ’00 alone, and by $73 billion over 5 years, wiping out—many times over—

the intended impact of the restoration package.

Both Houses of Congress have considered Medicare ‘‘lock box’’ proposals that

would ensure that any future unexpected savings would be reserved for Medicare.

Plus, the Administration has suggested taking Medicare ‘off budget’. These would

be enormous positive steps in strengthening the program.

The Impact of BBA on Hospitals

Almost one-third of all hospitals will operate in the red this year—the highest

number ever. No matter where you look, whether it is government reports or independent studies, hospital margins are sharply lower. The evidence is overwhelming:

• ‘‘The financial crisis in health care has shifted from the solvency of the Medicare

Trust Fund, which now appears to be intact until 2025, to the financial condition of the nation’s hospitals.’’ [HCIA Sachs/Ernst & Young LLP, March 2000]

• ‘‘The BBA’s impact has shaken the confidence of the financial markets in the

health care industry. Moody’s reported that the credit deterioration for U.S. notfor-profit hospitals continued throughout 1999. Therefore, as the need for capital increases, hospitals may find it difficult to access financial markets in order

to maintain adequate capital levels, e.g., new technologies.’’ [HCIA Sachs/Ernst

& Young LLP, March 20001

• The Ernst and Young study also found that ‘‘hospitals with less than 100 beds

are hardest hit by the BBA: their margins significantly decrease from positive

4.2 percent in FY 1998 to negative 5.6 percent in FY 2002, a drop of 233 percent.’’

• According to the Lewin Group, total hospital Medicare margins are projected to

be negative 2.5 in 2002, and stay negative through 2004 despite passage of the

BBRA.

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Overall, hospitals lose money on every Medicare beneficiary that walks through

their door. Total hospital margins are projected to fall by 55% in 2002. Clearly, Congress cannot expect hospitals to operate with negligible margins, or in the red, and

still maintain current services.

The Effect of BBA on Virginia’s Hospitals

In my home state of Virginia, the BBA payment cuts are unprecedented. According to the Lewin Group, these cuts will total nearly $1.6 billion over five years and

will have had potentially devastating impact on all major services-inpatient, outpatient, and home health care. This comes at a time when hospital costs are skyrocketing-especially prescription drug costs and labor costs—and when the number

of uninsured patients has increased dramatically—by 13% from 1996 to 1998. So,

while it is clear that Virginia hospitals—which are already among the most efficient

in the nation as measured by length-of-stay and case/mix data—will be hard pressed

to achieve additional economies to weather the BBA storm.

The Best Remedy for Hospitals

Congress must address this issue before it adjourns in the fall. To do so, Congress

should:

• Give all hospitals a full market basket (MB) update, which is the hospital equivalent of the Consumer Price Index (CPI). This full inflation update should apply

to both inpatient and outpatient services. For the last three years, hospital cost

inflation rose a total of 8.2%. The inflation adjustment policy from the BBA for

the last three years has been a freeze (FY ’98); MB -1.8 (FY ’99) and MB -1.8

(FY ’00), substantially below our costs increases. Labor costs, which account for

60% of a hospital’s budget, also continue to increase. Drug inflation continues

to rise at double-digit rates, and access to new technology continues to drive up

a hospital’s costs. The cumulative impact has been devastating.

Even Congress’ own Medicare Payment Advisory Committee (MedPac) recently recommended that Congress increase the inpatient update between 3.5

and 4.0% for FY ’01. The Administration, in its proposal released last month,

also called for a full Market Basket update. H.R. 3580, ‘‘The Hospital Preservation and Equity Act’’ that would give hospitals a full Market Basket update currently has nearly 300 co-sponsors, including close to 60% of the House Commerce Committee.

• Freeze the Medicaid DSH reduction at FY ’00 levels to help ensure access to quality care for the vulnerable uninsured. We commend the leadership of Congressman Bilbray, Congresswoman DeGette and Congressman Whitfield who have

introduced legislation that would accomplish this goal—H.R. 3710 and H.R.

3698. Between the two bills, this issue has attracted the support of more than

200 Members of Congress, including nearly 60% of the House Commerce Committee. For instance in California, absent Congressional action this year, the

state will see a devastating $164 million reduction in Medicaid funding over the

final two years of BBA ’97.

• Restore Medicare Bad Debt/Indigent Care reimbursement. The BBA reduced hospitals’ reimbursement for bad debt/indigent care from its pre-BBA level of 100%

to 55%. This occurred at the same time as the number of U.S. uninsured rose

from 39 million to better than 45 million. Hospitals incur bad debt when Medicare beneficiaries do not pay their share of the costs associated with hospital

stays. While most seniors have ‘‘Medigap’’ coverage for deductibles and co-pays,

there remain about 10% of ‘‘near poor seniors’’ who do not have Medigap and

do not qualify for Medicaid. Hospitals make every effort to collect this money

directly from the patient, but these are seniors who just cannot afford to pay

their portion of these costs. So, this cut in bad debt directly negatively impacts

hospitals that provide needed hospital care to these low-income seniors. This is

why we are pleased that Congressman Greenwood has recognized this problem,

and introduced bipartisan legislation to restore hospitals’ bad debts reimbursement rate to 100 %.

• Restore Medicare Disproportionate Share (DSH) payments. The BBA reduced

Medicare DSH payments by 5%, phased-in over five years. The 1999 BBRA reversed a portion of this cut, but it is still 3% in 2001 and 4% in 2002. DSH

hospitals provide the majority of care to Medicare beneficiaries, accounting for

over 58% of Medicare PPS payment for services in FY ’97. Additionally, these

hospitals are often the only source of medical care for the poor. Rural facilities

have been particularly hard-hit by this cut. Restoring this funding, with new

money, will help hospitals that provide care to low-income seniors to remain

viable.

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• Allow rehabilitation and long-term acute care (LTACs) hospitals to move to PPS

immediately. These facilities are a class of specialty hospitals and units that

were excluded from the Medicare hospital inpatient prospective payment system

(PPS) when it was enacted in 1983. The BBRA requires a case-mix adjusted,

per discharge, inpatient PPS for LTACs by October 1, 2002. The issue at hand

is that LTACs have been expecting a prospective payment system with its own

DRGs as an alternative to the flawed cost-based TEFRA system since the middle of the 1980’s when HCFA promised one, PROPAC recommended one, and

Congress mandated one. Instead, public policy has tended to focus on treating

the latest program aberration caused by TEFRA, i.e., high target rates, inequitable target rates between ‘‘old’’ and ‘‘new’’ hospitals, hospitals within hospitals,

transfer policies, etc. These tinkerings have inflicted severe damage on longterm hospitals, which according to the June 2000 MedPAC report, now have

negative margins. The hospital industry would like LTACs to go immediately

to the PPS, preferably through a bill introduced by Sen. Cochran (R-MS) and

supported by virtually every one of the 150 long-term acute care hospitals in

the United States. For rehabilitation hospitals, BBA’97 required the establishment of a case-mix adjusted PPS effective FY2001, with full implementation by

October 1, 2002. Implementation has been delayed, and many hospitals are anxious to move to the 100% PPS rates immediately.

The Process for Relief

The President recently offered a proposal, totaling more than $21 billion in relief

over the next five years. We understand that key Committees, in both the House

and Senate—including this Committee, are also moving toward a comprehensive

BBA relief package. The Federation hopes that these efforts move forward, and that

these will serve as the basis for a serious, bipartisan and bicameral BBA restoration

discussion.

We certainly hope that this hearing will encourage the House to place BBA restoration on the ‘‘must do’’ list for the House before Congress adjourns. The nation’s

39 million seniors, who depend on America’s hospitals to meet their daily healthcare

needs, desperately need this attention.

Mr. Chairman, thank you again for inviting the Federation to testify. As one of

Chairman Bliley’s constituents, I would also like to take this opportunity to thank

the Chairman for his years of dedication to the people of Richmond. Like all Virginians, we will certainly miss his leadership in the coming Congress.

At this time, I look forward to answering any questions you may have for me.

Mr. BILIRAKIS. Thank you, Ms. Tavenner. We will pass that

along to him.

Ms. Coughlin?

STATEMENT OF KAREN COUGHLIN

Ms. COUGHLIN. Mr. Chairman and members of the committee,

thank you for this opportunity to testify today. I am Karen Coughlin, the CEO of PHS Health Plans. I am testifying today on behalf

of the American Association of Health Plans.

Like Ms. Tavenner, I am also an RN and practiced at the bedside

for 10 years, taking care of sick children and babies in intensive

care units. I also ran nursing departments and hospitals over the

years, and for the past several years have been running managed

care plans. My focus when I get up and go to work every day is

trying to keep high-quality health care affordable for people.

The Medicare Plus Choice program offers important advantages

to both the government and to Medicare beneficiaries. Fifteen years

ago, the government made a compact with beneficiaries. By delivering care in a more efficient way, Medicare HMOs achieved cost

savings that were then passed on to beneficiaries in the form of increased benefits and reduced out-of-pocket expenses.

The success of the Medicare HMO program inspired Congress to

establish the Medicare Plus Choice program in 1997. Three years

later, however, the Medicare Plus Choice program has not fulfilled

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its progress of expanding health care choices for Medicare beneficiaries. Two major problems are responsible for this outcome.

First, the Medicare Plus Choice program is significantly underfunded, and second, the Health Care Financing Administration has

imposed excessive regulatory burdens on health plans participating

in the program. The funding program has been caused by the unintended consequences of the Medicare Plus Choice payment formula.

To illustrate this problem, please consider the following example.

Total premiums collected by health plans from OPM and from enrollees participating in the Federal Employees Health Benefits Program, the FEHBP, have increased for the average beneficiary by a

total of 29.1 percent between January 1997 and December of this

year. During this same period, however, government payments to

Medicare Plus Choice plans have increased for the average beneficiary by a total of only 8.6 percent.

In January 2001, at least 750,000 beneficiaries will be forced to

change health plans or return to the Medicare fee-for-service system. This number is more than the number who were similarly affected in the previous 2 years combined. Additionally, many other

beneficiaries have lost important benefits and are paying higher

out-of-pocket costs even though they are able to keep their health

plan.

To understand why beneficiaries are losing choices and benefits,

please consider that in 1998, in Foundation’s Eastern Region, for which I am responsible, we paid $1.10 in benefits for every $1 in

premium we received. Even if we had incurred no administrative

expenses, we could not survive while paying more in benefits than

we received in payments.

These disruptions have been particularly painful for low-income

Medicare beneficiaries, whose health security will be severely compromised if this program is not saved. Our plans have worked very

hard to prevent this situation from happening.

Despite our disappointment, this program has provided unprecedented value to Medicare beneficiaries and we are committed to

working with all of you to save the Medicare Plus Choice program.

We believe that $15 billion is needed over the next 5 years to stabilize this program on a long-term basis. A commitment of this

magnitude is needed to assure that the Medicare Plus Choice program fulfills its promise of preserving and expanding health care

choices for all Medicare beneficiaries.

We also urge you to combine this additional funding with meaningful regulatory reforms so beneficiaries are receiving quality and

value in their Medicare Plus Choice plans. It is critically important

to ensure that the benefits of regulations outweigh their costs. Currently, while the figure of 2 percent is often used to describe administrative costs under Medicare, that figure reflects only HCFA’s

cost and does not reflect any of the cost of complying with the

Medicare programs.

Recognizing that more than 6 million beneficiaries are relying on

the Medicare Plus Choice program to meet their health care needs,

we believe this is one of the most important issues facing Congress.

We look forward to working with the subcommittee to address this

critically important issue in the remaining days of the 2000 session. Thank you, sir.

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[The prepared statement of Karen Coughlin follows:]

PREPARED STATEMENT OF KAREN COUGHLIN, PRESIDENT AND CEO, FOUNDATION

HEALTH SYSTEMS’ EASTERN DIVISION

Mr. Chairman and members of the subcommittee, thank you for the opportunity

to testify on the impact the Balanced Budget Act of 1997 (BBA) has had on

Medicare+Choice organizations and the beneficiaries they serve. I am Karen A.

Coughlin, CEO of PHS Health Plans, an open-access HMO serving 1.1 million members in New York, Connecticut, New Jersey and Pennsylvania. I also serve as the

President and CEO of Foundation Health Systems’ Eastern Division, responsible for

the above named markets, as well as our operations in South Florida (Broward and

Dade Counties). My undergraduate degree is in Nursing and I practiced as an RN

at the bedside for the first ten years of my career, caring for infants and children

in neonatal and pediatric intensive care units. I served several years as the Head

Nurse of the Pediatric ICU at Loma Linda University Medical Center in California.

Foundation is the sixth largest Medicare+Choice plan in the nation. When I started at PHS Health Plans in 1998, Foundation covered 290,000 Medicare members

in 12 states. By January 2001, due to the problems I will discuss in my testimony,

we will have completely withdrawn from six states and terminated coverage for

57,000 Medicare members. Moreover, all of our remaining Medicare members have

suffered either a loss of benefits or an increase in premiums since 1998.

I am testifying today on behalf of the American Association of Health Plans

(AAHP), which represents more than 1,000 health maintenance organizations

(HMOs), preferred provider organizations (PPOs), and other similar health plans

that provide health care coverage to more than 140 million Americans.

AAHP’s membership includes Medicare+Choice organizations that collectively

serve more than 75 percent of those beneficiaries who have chosen Medicare managed care over the fee-for-service program. AAHP member plans have strongly supported efforts to modernize Medicare and give beneficiaries the same health care

choices that are available to working Americans. AAHP member plans have had a

longstanding commitment to Medicare and to the mission of providing high quality,

cost effective services to beneficiaries.

To fully understand the impact the BBA has had on Medicare+Choice plans and

enrollees, I believe we should begin by briefly reviewing the Medicare HMO program that existed before Congress established the Medicare+Choice program in

1997. Under the original Medicare HMO program, the government paid health plans

a set amount per month to cover the health benefits of each beneficiary. This

amount was based on 95 percent of the costs the government paid for beneficiaries

served by the Medicare fee-for-service system.

This Medicare HMO program offered important advantages to both the government and Medicare beneficiaries. The government paid less for beneficiaries who enrolled in Medicare HMOs; at the same time, beneficiaries were well-served by a system that allowed Medicare HMOs to provide high quality care while providing additional benefits—beyond those covered by the fee-for-service program—often at no additional cost to beneficiaries. By delivering care in a more efficient way, Medicare

HMOs achieved cost savings that were passed along to beneficiaries in the form of

increased benefits and reduced out-of-pocket costs. As a result, beneficiaries in

Medicare HMOs did not have to purchase costly Medigap coverage to protect themselves from health care expenses not covered by the old fee-for-service program.

The success of the Medicare HMO program was evidenced by the fact that beneficiaries signed up for Medicare HMO coverage in large numbers. From December

1993 through December 1997, enrollment in Medicare HMOs increased at an average annual rate of 30 percent. In states such as Pennsylvania, Ohio, and Texas, enrollment in Medicare+Choice plans increased even more rapidly. In December 1997,

shortly after the enactment of the BBA, Medicare HMO enrollment stood at 5.2 million, accounting for 14 percent of the total Medicare population—up from just 1.3

million enrollees and 3 percent of the Medicare population in December 1990.

Beneficiaries valued this important health care choice under the original Medicare

HMO program—and still value it today—because Medicare HMOs, when adequately

funded, are able to provide a more comprehensive package of benefits and lower outof-pocket costs than the old Medicare fee-for-service system. This is particularly important to low-income beneficiaries. For many seniors and persons with disabilities

who live on fixed incomes, having access to a Medicare HMO means that they can

spend their limited resources on groceries and other daily essentials—instead of

‘‘going without.’’ Beneficiaries also like Medicare HMOs because they provide coordinated care and place a strong emphasis on preventive services that help them to

stay healthy and avoid preventable diseases. According to a survey conducted by

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HCFA, when Medicare managed care enrollees were asked to rate their plans on

a scale of 1 to 10 (with 10 being the highest score), 50 percent assigned a ‘‘10’’ rating

to their plan and another 34 percent assigned an ‘‘8’’ or a ‘‘9’’ rating to their plan.

The success of the Medicare HMO program inspired Congress to establish the

Medicare+Choice program in 1997. The new program was intended to further expand beneficiaries’ health care choices by establishing an even wider range of health

plan options and by making such options available in areas where Medicare HMOs

were not yet available. Three years later, however, the Medicare+Choice program

has not fulfilled its promise of expanding health care choices for Medicare beneficiaries. Instead, a large number of beneficiaries have lost their Medicare+Choice

plans or experienced an increase in out-of-pocket costs or a reduction in benefits.

Two major problems are responsible for this outcome: (1) the Medicare+Choice

program is significantly underfunded; and (2) the Health Care Financing Administration (HCFA) has imposed excessive regulatory burdens on health plans participating in the program. The funding problem has been caused by the unintended

consequences of the Medicare+Choice payment formula that was established by the

BBA, as well as the Administration’s decision to implement risk adjustment of

Medicare+Choice payments on a non-budget neutral basis. Under this formula, the

vast majority of health plans have been receiving annual payment updates of only

2 percent in recent years—while the cost of caring for Medicare beneficiaries has

been increasing at a much higher rate.

To underscore the inadequacy of the government’s payments to Medicare+Choice

plans, I offer three examples for the subcommittee’s consideration:

1. Total premiums collected by health plans (from OPM and from enrollees) participating in the Federal Employees Health Benefits Program (FEHBP) have increased, for the average beneficiary, by a total of 29.1 percent between January 1997 and December 2000. During this same time period, government payments to Medicare+Choice plans have increased, for the average beneficiary, by

a total of only 8.6 percent. In 2001, government payments to Medicare+Choice

plans will again generally increase by just 2 percent—making this the third

time in four years that the annual update was 2 percent. In the Northeast (Connecticut, New York and New Jersey), medical costs per beneficiary have risen

12.5% since 1998, while Medicare reimbursement has only risen by 4.1%. Our

only options for keeping up with these costs have been to limit benefits or

charge premiums to beneficiaries.

2. In many geographic areas where large numbers of Medicare beneficiaries are enrolled in Medicare+Choice plans, government payments for Medicare fee-forservice beneficiaries will exceed government payments to plans on behalf of

Medicare+Choice beneficiaries by $1,000 or more per beneficiary in 2004.

These areas include—to name just a few—Los Angeles (which currently has

314,000 Medicare+Choice enrollees); New York (174,000 Medicare+Choice enrollees); Miami (134,000 Medicare+Choice enrollees); and Philadelphia (78,000

Medicare+Choice enrollees). This payment differential has challenged the ability

of health plans to offer beneficiaries the quality coverage they deserve and, additionally, to maintain provider networks and expand into new geographic

areas. 3. By establishing a blend of local and national rates, the BBA intended to reduce

the variation in Medicare+Choice payments among counties. As noted above,

however, the blend has been funded in only one year and government payments

to Medicare+Choice plans continue to vary among geographic areas, including

neighboring geographic areas. For example, the monthly payment from the government in 2000 is $485.76 in Fairfield County, Connecticut and $679.10 in

Richmond County, New York—a difference of $193.34 even though these areas

are only 40 miles apart.

These examples raise serious concerns about the adequacy of Medicare+Choice

payments. However, to fully appreciate the crisis in the Medicare+Choice program,

it is important for Congress to examine the impact it has had on Medicare beneficiaries.

In January 1999, 407,000 beneficiaries were forced to change health plans or return to the Medicare fee-for-service system because many health plans—faced with

inadequate government payments and excessively burdensome regulatory requirements—were forced to curtail their participation in the Medicare+Choice program.

In January 2000, 327,000 experienced similar disruptions in their health coverage.

Additionally, many other beneficiaries have lost important benefits and are paying

higher out-of-pocket costs even though they have been able to keep their

Medicare+Choice plans. To understand why beneficiaries are losing choices and benefits, please consider that, in 1998, in Foundation’s Eastern Region, the ratio of

medical costs to total reimbursements was 110% for our Medicare+Choice members.

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Even if we had incurred no administrative expenses, we could not survive while

paying more in benefits than we receive in revenues.

These disruptions have been particularly painful for low-income Medicare beneficiaries. A recent analysis by AAHP indicates that Medicare+Choice plans play an

important role in providing supplemental coverage (i.e., coverage that pays for services not covered by Medicare Part A and Part B) to Medicare beneficiaries who are

financially vulnerable. Our analysis indicated that a very large proportion of

Medicare+Choice enrollees are ‘‘unsubsidized’’—meaning that they do not receive

any third party assistance from, for example, a former employer or through Medicaid, in purchasing supplemental coverage for prescription drugs and protection

against out-of-pocket expenses. For many of these individuals, affordable

Medicare+Choice plans may be the only alternative to going without supplemental

coverage.

For many vulnerable beneficiaries, returning to the fee-for-service program, with

its higher costs and reduced benefits, would result in serious hardships. Changing

plans and health care providers—plus losing benefits such as prescription drug coverage and paying large supplemental coverage premiums—can be a highly traumatic and disruptive experience for low-income beneficiaries.

In an effort to address the crisis in the Medicare+Choice program, Congress enacted the Balanced Budget Refinement Act of 1999 (BBRA). While this legislation

was a step in the right direction, it provided only a small fraction of the resources

that are needed to fully stabilize the program on a long-term basis. As a result, the

Medicare+Choice program will experience further disruptions in January 2001.

As the subcommittee knows, July 3 was the deadline by which Medicare+Choice

organizations were required to notify HCFA of their intention to participate in or

withdraw from the Medicare+Choice program during the 2001 contract year and,

additionally, submit any proposed changes affecting premiums or benefits. In the

weeks leading up to this deadline, Medicare+Choice organizations were forced to

make extremely difficult decisions on these matters. Those health plans that decided

to curtail their participation in the program did so only as an option of last resort.

In many cases, health plans reluctantly concluded that—because Medicare+Choice

payments are inadequate and because the program’s regulatory requirements are so

burdensome—the Medicare+Choice program is not providing health plans a viable

framework for serving Medicare beneficiaries.

A survey recently commissioned by AAHP indicates that at least 711,000 Medicare beneficiaries will suffer the loss of their current health coverage in January

2001 because Medicare+Choice organizations are being forced to exit the program.

This survey was based on information provided by health plans covering 85 percent

of beneficiaries currently enrolled in the Medicare+Choice program. When the decisions of the remaining Medicare+Choice organizations are known, it is likely that

the total number of affected beneficiaries will be greater than the number who were

similarly affected in the previous two years combined.

This is unfortunate news for hundreds of thousands of Medicare beneficiaries and

it is disappointing to Medicare+Choice plans that have done everything possible to

avoid this unfortunate outcome. The reality is that these withdrawals could have

been avoided. For two years, AAHP and our member plans have urged Congress and

the Administration to take bold action to address the crisis in the Medicare+Choice

program. Although Congress took an important first step to improve

Medicare+Choice payments last year, the need for more meaningful changes has not

been addressed. Beneficiaries are now paying a heavy price for this inaction.

Despite our disappointment, we remain committed to the success of the

Medicare+Choice program and we will continue to work with you to advance the

changes that are clearly needed to put the program on sound footing. We are encouraged that there is bipartisan movement within Congress to enact such changes.

We also appreciate Congressman Bilbray’s resolution—approved by the House on

June 29 by a strong bipartisan vote of 404 to 8—which acknowledged that ‘‘inadequate reimbursement rates’’ are a problem in the Medicare+Choice program and

that action must be taken this year to address this critical issue. We thank the 28

members of this subcommittee who voted for this resolution.

We now urge you to take action this year on specific legislation that follows

through on the serious concerns you expressed when you voted for Congressman

Bilbray’s resolution. We believe Congress must provide $15 billion directly to

Medicare+Choice plans over the next five years to stabilize the Medicare+Choice

program on a long-term basis. A commitment of this magnitude is needed to assure

that the Medicare+Choice program fulfills it promise of preserving and expanding

health care choices for all Medicare beneficiaries. As you consider options for devoting more funds to the program, we urge you to assure that resources are allocated

in such a way as to assure that the Medicare+Choice program is viable in areas

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where beneficiaries have already selected health plan options and that the program

can expand in areas where such options are not yet widely available.

We also urge you to combine this additional funding with meaningful regulatory

reforms so beneficiaries are receiving quality and value in their Medicare+Choice

plans. It is critically important to assure that the benefits of regulations outweigh

their costs. Currently, Medicare+Choice plans are being forced to devote substantial

human and financial resources toward compliance activities, thus leaving fewer resources available for providing health care services to beneficiaries. One example of

a set of unnecessarily onerous requirements that merit immediate attention can be

found in the physician encounter data requirements under the Medicare+Choice risk

adjustment initiative. Preparations for their implementation are requiring an enormous commitment of resources by Medicare+Choice organizations, and this burden

will spill over to require similar efforts by their network providers. However, less

costly options are available that would meet HCFA’s need for data for risk adjustment purposes. We believe beneficiaries will be better served by a regulatory environment that assures quality of care and, at the same time, assures that the costs

associated with regulations do not unnecessarily divert resources away from patient

care and benefits.

Recognizing that more than 6 million Medicare beneficiaries are relying on the

Medicare+Choice program to meet their health care needs, we believe this is one

of the most important issues facing Congress. We look forward to working with the

subcommittee to address this critically important issue in the remaining months of

the 2000 legislative session.

Mr. BILIRAKIS. I guess you all know what the bell means, but we

do have a few minutes yet. Dr. Zetterman, please proceed, sir.

STATEMENT OF ROWEN K. ZETTERMAN

Mr. ZETTERMAN. Thank you, Mr. Chairman. Thank you for the

opportunity to testify. I am Dr. Rowen Zetterman and I appear

here today in my capacities as the President Elect of the American

College of Gastroenterology and as the Chair of the Board of Regents of the American College of Physicians-American Society of Internal Medicine.

My oral testimony today will focus on three policies that have resulted from the Balanced Budget Act of 1997 and that are of particular concern to the specialty of internal medicine and to gastroenterologists. The first is HCFA’s application of a site of service differential for certain endoscopic procedures that are provided less

than 10 percent of the time in the office. The second is the reduction of overall Medicare payments to physicians. And the third is

the reduction in payments to teaching institutions.

Prior to 1997, Medicare applied a site of service differential that

reduced the practice expense component of the physician’s professional fee when an office procedure was performed in the hospital

or in the ambulatory surgical center. Office procedures were defined as those services provided more than 50 percent of the time

in the office. HCFA’s 1997 proposal changed the site of service rule

markedly and introduced two distinct fee structures for the same

professional service. Typically, a physician is paid a lower fee for

services provided in the hospital or ASC and a significantly higher

fee where those services are provided in the office setting.

ACG and other GI organizations immediately objected to this policy change. Nevertheless, in January 1998, HCFA implemented

this bifurcated fee structure. This impact of the rule is particularly

felt with respect to GI procedures. Many of these procedures require sedation of patients, and while very safe, especially for our

older patients, it is still essential to ensure access to resuscitation

equipment, facilities, and personnel for those rare events in which

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complications occur. Well over 90 percent of these services are

being performed in the non-office setting. GI services make up a

relatively major portion of the small number of HCFA procedures

that are performed in the office less than 10 percent of the time,

but are still subject to the bifurcated fee schedule based onsite of

service.

There are two key problems with HCFA’s site of service policy.

The first and larger problem is that the new policy creates incentives to treat patients in the office instead of a Medicare-certified

hospital or ASC. Take, for example, colonoscopies. This is a major

diagnostic tool in the fight against colorectal cancer. By fiscal year

2002, Medicare will pay physicians 39 percent more for performing

diagnostic colonoscopy in the unregulated office environment than

for performing the same service in a hospital or an ASC which is

Medicare certified and meets criteria for quality and good training.

Because HCFA has established the bifurcated fee structure for

some but not all diagnostic and surgical procedures, there is a more

immediate and narrower problem relating to the standard HCFA

uses that identify those services appropriate for bifurcated fees.

There must be a standard, but HCFA has not articulated the

standard.

The absence of any standard for the bifurcated fee structure is

the issue which we today propose is appropriate for a modest legislative fix. Last year, the Commerce Committee’s mark in the BBRA

package included a provision which would have established a 10-

percent threshold before HCFA could establish a bifurcated fee and

would have remedied current and past economic inequities. At that

time, concerns were expressed by other organizations and the specific legislative language that might inadvertently apply to a larger

university of services and so it was dropped.

Such concerns have been addressed in the current legislative proposal, which has the endorsement of all three GI organizations and

ACP/ASIM has determined that it has no objection. ACG asks that

the committee favorably consider incorporating this proposed legislative fix in legislation to restore inappropriate cuts mandated by

BBA 1997.

BBA also made a number of other significant changes in the way

physicians were paid. This included replacing the volume performance standard with a sustainable growth rate system. However,

HCFA’s original method for estimating SGR was flawed, resulting

in a $3 billion shortfall in physician payments during 1998 and

1999. This financial burden has strained physicians’ abilities to

adequately serve Medicare beneficiaries and led to a joint lawsuit

against HCFA by the American Medical Association, ACPSIM, and

other medical organizations. In addition, this distortion of the SGR

will result in only a 1.8 percent net update. After inflation, this will

be less than what we would have been reimbursed in 2000.

Finally, we need to provide safety relief to the safety net of

teaching hospitals and we would encourage you to look critically at

disproportionate share payments.

So in summary, ACG and ACP/ASIM recognize that at the time

Congress enacted BBA 1997, it was doing so in an effort to control

large Federal deficits. It has become evident, however, that some

of these cuts, particularly relating to physicians’ services and

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teaching institutions, went too far. We hope you will take the opportunity to restore some of these cuts. Thank you very much.

[The prepared statement of Rowen K. Zetterman follows:]

PREPARED STATEMENT OF ROWEN K. ZETTERMAN, ON BEHALF OF THE AMERICAN COLLEGE OF GASTROENTEROLOGY AND THE AMERICAN COLLEGE OF PHYSICIANS-AMERICAN SOCIETY OF INTERNAL MEDICINE

I am Dr. Rowen K. Zetterman, and I appear here today in my capacities as President-Elect of the American College of Gastroenterology (ACG), and as the Chair of

the Board of Regents of the American College of Physicians-American Society of Internal Medicine. I am also one of the ACP-ASIM’s representatives in the House of

Delegates of the American Medical Association, but my testimony today is not on

behalf of the AMA.

In 1997, Congress enacted major reductions in Medicare spending as part of the

Balanced Budget Act of 1997 (BBA 97). As a result of these reductions and inappropriate payment policies from the Health Care Financing Administration (HCFA),

quality and access to care for millions of beneficiaries is being placed at risk. Today,

my testimony will focus on three specific BBA-mandated reductions that are of particular concern to the specialty of internal medicine and to gastroenterologists:

• HCFA’s inappropriate application of a site of service differential for certain procedures done by gastroenterologists that are provided less than 10 percent of the

time in the office.

• bbReductions in overall Medicare payments to physicians.

• Reduction in payments to teaching institutions.

Site of Service Differential for Certain Procedures Done By Gastroenterologists

HCFA’s application of a site of service differential to endoscopic procedures done

less than 10 percent of the time in the office is of great concern to gastroenterologists. My testimony on this issue reflects the particular concerns of the gastroenterology community, including ACG, about the site of service differential. As

an umbrella organization representing all internists, subspecialists as well as generalists, ACP-ASIM is addressing broader issues relating to the impact of the BBA

97 cuts and HCFA’s policies, rather than more narrowly focused issues like the site

of service differential for certain GI procedures. However, as explained later, ACPASIM has no objections to the legislative remedy that the ACG has developed for

the site of service problem for gastroenterology.

HCFA has applied a ‘‘site of service’’ differential to physician payments for a number of years. Prior to HCFA’s 1997 proposal, Medicare reduced the practice expense

component of the physician’s professional fee when an office procedure was performed in a hospital or in the ambulatory surgery center. ‘‘Office procedures’’ were

those services provided more than 50 percent of the time in the office. This rule

meant that diagnostic flexible sigmoidoscopy, which is performed more than 70 percent of the time in the office because no anesthesia is required, was subject to the

site of service differential. Diagnostic colonoscopy, which does require anesthesia, is

seldom performed in the office so the HCFA rule did not apply. HCFA’s 1997 proposal changed the site of service rule markedly, and introduced two distinct fee

structures for the same professional service. Typically, a lower fee is paid to the

physician if a service is provided in the hospital or ASC, and a significantly higher

reimbursement applies if the same procedure is provided in the office setting. This

policy is not applied consistently across the family of GI endoscopy. ACG and other

GI organizations immediately objected to this change in policy.

Nevertheless, in January, 1998 HCFA implemented this bifurcated fee schedule

and through a four-year phase-in, the spread between the higher (office) fee and the

lower (hospital/ASC) fee has grown markedly with each successive year. (See Table

I)

Identified Codes Include Major Colorectal Cancer Screening Procedures—This Fix

Would Help Remedy Underutilization of Medicare Colorectal Cancer Screening Benefit; HCFA’s Site-of-Service Rule Has a Disproportionately Heavy Adverse Impact on

Gastrointestinal Procedures

The impact of this rule is particularly felt with respect to gastrointestinal procedures. These procedures require sedation of patients and, while very safe, particularly in older patients, it is essential to ensure access to resuscitation equipment,

facilities and personnel for those rare events in which complications occur. Similarly, it is essential that there be some credentialling and review of adequacy of

training. In all of these services, well over 90% are being done in non-office setting,

i.e. hospitals or ASCs:GI services are the major portion of the small number of

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Medicare procedures which have fewer than 10% currently being performed in the

office, but to which HCFA still has applied the bifurcated fee schedule of the siteof-service rule. Included among these procedures are colonoscopies—the major diagnostic and treatment tool in the fight against colorectal cancer. The GAO recently

reported to the Senate Aging Committee that despite the new Medicare colorectal

cancer screening benefit, only 1% of Medicare beneficiaries are availing themselves

of screening.

When the phase-in is complete in 2002, Medicare will pay physicians 39 percent

more if he/she performs the diagnostic colonoscopy in the completely unregulated office environment, than provided for the same service performed in a hospital or ASC

which is Medicare-certified and meets criteria for quality and minimal equipment,

as well as the training/credentialling requirements that these facilities impose.

The anomaly whereby HCFA maintains a mechanism and standards which must

be met to qualify as a Medicare-certified ASC, and then implements a reimbursement system which pays physicians more if they perform cases in the office environment where none of the training, mandatory capacities to handle complications or

other ASC-required standards apply is inexplicable. As much as HCFA articulates

that the rationale for the higher physician payment for office-based services lies in

the higher practice expenses, it would be naive not to consider that a substantial

motivation is elimination of the Part A facility fee paid to those facilities that meet

the requirements for Medicare certification.

There are two key problems with HCFA’s site-of-service policy. The first and larger problem is that the new policy creates incentives which can result in patients receiving treatment in the office instead of the Medicare-certified hospital or ASC.

While some procedures can safely be performed in the right office setting—one with

some of the same criteria that are mandated for Medicare certified facilities—the

ultimate decision should not be based upon reasons other than what is best for the

patient. We are very concerned about how minimal quality of patient care can be

assured in the largely unregulated environment of the typical private physician’s office.

We are not here today to propose a solution to larger issues relating to site of

service or practice expenses. Keeping in mind that HCFA has set up this bifurcated

fee structure for some, but not all diagnostic and surgical procedures, there is a

more immediate narrower, problem relating to the standard HCFA uses to identify

those services appropriate for dual fees. There must be a standard, but HCFA has

not articulated it. We assume that such a standard would be tied to the percentage

of cases already being performed in the office, and also would take into account the

safety of the office setting. For example, coronary artery bypass graft surgery retains a single fee, presumably because HCFA believes it is not and ought not be

done in the office.

At one point HCFA directed its clinical practice panels to use the 10% threshold

as a benchmark, meaning that if a procedure is done less than 10% of the time in

office, then it would not be considered for the bifurcated fee. However, in response

to ACG’s comments and in meetings with ACG, HCFA has denied that this is their

standard (See Secretary Shalala’s Letter). This narrower problem—the absence of

any articulated standard for the bifurcated fee structure, as well as the unfair results from HCFA’s having reduced payments by 39 percent over the four-year phase

in to the 90-95% of GI physicians who, despite the HCFA disincentives, still have

declined to do these procedures in the unregulated office setting, but choose to take

their patients to Medicare-certified facilities-is the issue which we today propose is

appropriate for a modest legislative fix.

Last year, the Commerce Committee’s Mark in the Balanced Budget Relief Act

(BBRA) package included a provision, then-labeled as section 204(v), which would

have established a 10% threshold before HCFA could establish a bifurcated fee, and

would have remedied current and past economic inequities by instructing HCFA to

revert to a single fee structure (i.e., number of relative value units, or RVUs, then

proposed as the 1997 level that pre-dated HCFA’s change). At that point, the ACPASIM criticized the specific language, expressing concern that it might inadvertently apply to a much larger universe of services than the ACG intended. In the

interim, we have held frequent discussions among the ACP-ASIM and three major

GI organizations, namely, the American Gastroenterological Association (AGA),

American Society For Gastrointestinal Endoscopy (ASGE) and ACG. The current

proposed legislative language has the endorsement of all three GI organizations;

these changes also have prompted ACP-ASIM to withdraw its objections to this proposal.

Attached to my written testimony is an addendum that refers to comments, meetings and discussions with HCFA officials about this problem. Several members of

Congress from both parties have communicated their concerns about this policy to

69

the Secretary of HHS as well as to the HCFA Administrator. In a recent response

to one of these inquiries, Secretary Shalala addressed this issue in terms which

demonstrate: (1) the current absence of any agency standard; (2) the prospects for

creation of unintended financial incentives potentially steering where care is delivered; and (3) HCFA’s economic objective of avoiding payment of the facility fee to

those hospitals and ASCs that meet Medicare certification requirements. Her response, and ACG’s comments on her response, are summarized in the addendum.

A recent GAO report to the Senate Special Committee on Aging underscored that

the colorectal cancer screening benefit has not been utilized very widely by Medicare

beneficiaries—numbers were in the range of 1% uptake in 1998. While there are

many reasons for this, the reimbursement inequities of the inappropriate site-ofservice treatment, despite less than 10% office volume level must be considered as

a contributing factor.

Certainly, there is little logic in creating a national priority for colorectal cancer

screening and then whittling the payment rates to such low levels as to make them

a losing proposition for physicians. So, in the narrow fix to this site of service problem, Congress also would be making an important investment in favor of colorectal

cancer screening.

It is essential to recognize the proposed section 204(v) provision is not directed

to resolving concerns about the larger site-of-service differential issue. It addresses

solely an antecedent problem, the much smaller subset of services where the volume

of services performed in the office setting have never reached the 10% threshold.

This issue needs to be resolved distinctly from, and in advance of, any effort that

may evolve to address broader concerns about the site of service differential.

While we do not seek to address or solve the broader site-of-service differential

issue, we strongly oppose the solution to that issue which has been proposed by the

Medicare Payment Advisory Commission (MEDPAC), which will only compound the

problem, and further strip reimbursement rates.

We ask that the Committee favorably consider incorporating this proposed legislative fix for this narrow problem by articulating the 10% threshold, and requiring

HCFA to revert to a single fee structure—the fee currently being paid only for services provided in the office to be set at either the 2000 office fee, or the 2001 office

fee, whichever is higher, as to a limited number of specific services where office volume falls well below the 10%.

Reversing Overall Cuts in Payments to Physicians

The BBA made a number of significant changes in the way physicians were paid

under Medicare fee-for-service. This included replacing the volume performance

standard with the sustainable growth rate system (SGR) and phasing-in a new

method of calculating practice expenses for physicians. The SGR establishes a target

growth rate for Medicare spending on physician services, then annually adjusts payments up or down, depending upon whether actual spending is below or above the

target.

However, HCFA’s original method of estimating the SGR was flawed and resulted

in a $3 billion shortfall in payments to physicians during 1998 and 1999. This financial burden has strained physicians’ ability to adequately serve Medicare beneficiaries, and led to a joint lawsuit against HCFA by ACPASIM and 16 other medical organizations, which is still pending. Fortunately, the Balanced Budget Relief

Act of 1998 (BBRA) has corrected this technical flaw for the years 2000 and beyond.

The BBA’s new methods for establishing Medicare payment rates for physicians

still present significant technical concerns for physician organizations, especially

their potential for producing wide fluctuations in reimbursement rates from one

year to the next. To ensure physicians are fairly compensated for their services, and

in a manner that does not allow for precipitous fluctuations in income, MEDPAC,

in its March 1999 Report to Congress, recommended the following SGR improvements:

• Revise the sustainable growth rate to include measures of changes in the composition of Medicare fee-for-service enrollment.

• Revise the sustainable growth rate to include a factor of growth in real gross domestic product per capita plus an allowance for cost increases due to improvements in medical capabilities and advancements in scientific technology.

• Amend a provision of the Balanced Budget Act of 1997 to require the Secretary

to publish an estimate of conversion factor updates by March 31 of the year before their implementation.

• Reduce time lags between sustainable growth rate measurement periods by allowing calculation of the sustainable growth rate and update adjustment factors on

a calendar year basis.

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• Require the Secretary to correct estimates used in sustainable growth rate system

calculations every year.

The BBRA did produce some significant refinements to the SGR, primarily limiting oscillations in the annual update to the conversion factor, and requiring that

the SGR be calculated on a calendar year basis. The BBRA did fail, however, to reinstate the $3 billion shortfall in 1998 and 1999 physician payments, and to ‘‘increase the SGR to account for rising physician costs due to technological advances

and an aging population,’’ as noted in the November 22/29, 1999 issue of American

Medical News.

Though the SGR will be 5.8% for 2000, according to the April 24, 2000 issue of

American Medical News, the preliminary SGR estimate for 2001 of 2.8% is considered ‘‘too low’’ according to the MedPAC, in its June 2000 Report to Congress. The

MedPAC report explains that HCFA has underestimated the SGR by underestimating one of its key components, growth in traditional Medicare enrollment, by

overestimating the number of beneficiaries who will join Medicare+Choice plans.

This distortion of the SGR results in only a 1.8% net update to the Medicare physicians’ conversion factor, meaning the pool of Medicare funds available to pay physicians in 2001 will be substantially less than in 2000. This has led the MedPAC to

recommend that, ‘‘When preparing the final 2001 update to the physician fee schedule’s conversion factor, the Secretary (of the Department of Health and Human

Services) should review the data and methods used to project growth in enrollment

in traditional Medicare and explain the methods used to project that growth.’’ In its March 2000 ‘‘Report to the Congress: Medicare Payment Policy,’’ the

MedPAC shows that physicians display a serious erosion of their confidence in the

ability of Medicare and managed care plans to pay them fairly for their services,

as shown in survey findings:

• About 45% said that reimbursement levels for Medicare FFS patients are a very

serious problem, compared with 25% for private FFS patients. • A higher percentage of physicians—59%—reported that reimbursement levels for

FFS Medicaid patients are a very serious problem. • Physicians expressed the highest level of concern with the reimbursement levels

of health maintenance organizations and other capitated plans—about 66% of

the total surveyed.

The underfunding of physician services is contributing to concerns that the medical community has about other Medicare payment issues. Although there are different views within the medical profession on specific Medicare reimbursement/payment policies, there is widespread agreement that Congress should address the

underfunding of Medicare physician payments that was caused by the SGR and

other budget cuts.

Cuts in Payments to Teaching Institutions

The heart of the safety net are the nation’s academic medical centers and large

inner city hospitals. ACPASIM, in a October 1, 1999 letter to the House of Representatives’ Ways and Means Subcommittee on Health, was very vocal in expressing its concern about the BBA’s impact on these vital institutions, seeking restoration and/or relief from BBA cuts—especially those related to indirect medical education and DSH payments. The letter noted that the cuts would be particularly

harmful to teaching hospitals, which ‘‘often serve as providers of health care for

inner city populations that otherwise are underserved. They provide substantial

amounts of uncompensated care for poor and indigent patients. Graduate medical

education is the linchpin for these inner city safety net hospitals, and they cannot

survive if their educational programs are not adequately funded.’’ In the same letter, ACPASIM also warned Congress that ‘‘The BBA cuts also jeopardize our nation’s medial research enterprise... medical schools and teaching hospitals serve as

the crucible for much of the nation’s medical research...the Medicare BBA cuts undermine the ability of teaching hospitals to perform this vital mission.’’

The March 2000 MedPAC Report to Congress displayed great concern for the

BBA’s impact on access to hospital care, especially that obtained in public hospitals

and academic medical centers: ‘‘With the passage of the BBA, the Congress made

several changes in hospital payments that have the potential to affect beneficiary

access or reduce the quality of hospital care. These provisions included: no updates

to inpatient operating payments for hospitals under the Medicare Prospective Payment System (PPS) in fiscal year 1998 and limited updates from 1999 to 2002;

phased reductions in the per-case adjustments for the indirect costs of medical education (IME); temporary reductions for hospitals serving a disproportionate share

(DSH) of low income patients; and a new transfer policy for 10 high volume diagnosis related groups (DRGs) that reduces payment rates when hospitals discharge

patients in these DRGs to post-acute care facilities following unusually short stays.’’

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A November 1999 study by the Commonwealth Fund showed just how vital Medicare and Medicaid DSH payments are to the survival of safety net hospitals: In

1996, the year before the BBA was passed, ‘‘costs for uncompensated care at a sample of urban, safety net hospitals totaled $4 billion and represented 26 percent of

total costs. These costs were financed through state and local government subsidies

(59 percent), Medicaid DSH payments (29 percent), Medicare DSH payments (9 percent), and cost-shifting from privately insured patients (3 percent) . . . In 1996, without DSH payments, these hospitals would have experienced an alarming negative

7 percent margin... BBA cuts in DSH payments will reduce by half the surpluses

derived from Medicare and Medicaid payments (without accounting for the impact

of any other BBA reductions). Coupled with declining local government appropriations and market forces that include managed care and an eroding Medicaid patient

base, these cuts will severely undermine the ability of these hospitals to remain financially viable.’’

The most thorough analysis of the combined impact of the BBA and BBRA on academic medical centers is offered by the American Association of Medical Colleges,

which concluded in its April 21, 2000 Issue Brief: ‘‘America’s Teaching Hospitals

Still Hurt from the BBA.’’ The brief is quite critical of the BBA cuts, indicating that

‘‘the BBA’s significant Medicare and Medicaid payment reductions—along with a

highly competitive marketplace that is reducing private payer reimbursements to

teaching hospitals—will undermine the ability of teaching hospitals to support their

education, patient care and research missions.’’ The specific BBA cuts include $17

billion in reduced inflation updates for Medicare patient service payments and $10

billion in Medicaid DSH payment reductions from 1998 to 2002. Also, teaching hospitals’ additional payment from Medicare for indirect medical education costs was

being reduced from 7.7 percent in 1997 down to 5.5 percent in 2001, a $5.6 billion

reduction.

The AAMC Issue Brief also notes that the BBRA restored only about 6 percent

of the BBA cuts to teaching hospitals, giving back about $7 billion of the BBA’s reductions. This includes a one year delay in the schedule of reducing the IME to 5.5

percent, with the IME reduction ‘‘still representing the second largest inpatient payment cut for teaching hospitals after the reduction in inflation updates to patient

service updates.’’ Even with enactment of the BBRA, ‘‘total hospital profit margins

will continue to decline by over half from 4 percent in 1998 to 1.6 percent in 2002.’’

AAMC President Jordan J. Cohen, M.D. called IME payments ‘‘absolutely critical

for teaching hospitals to be able to appropriately care for the sickest patients, provide an environment in which clinical research can flourish, and train new physicians.’’ These points are underscored by the following AAMC statistics: Though U.S.

teaching hospitals represent 6% of all hospitals, that is where 44% of all indigent

care in the country is provided (10), and where 75% of all residents are trained and

a vast majority of the clinical research is performed.’’

The central, indispensable role academic medical centers play in medical research

and serving the indigent is also the theme of a May 10, 2000 article in the Journal

of the American Medical Association entitled ‘‘The Perilous State of Academic Medicine.’’ The article warns... ‘‘academic medicine is in serious danger... Without

prompt action, the results could be devastating...The vitality of teaching hospitals

and medical schools should be a primary concern of the president and congressional

leadership... Reversals should be made of the BBA cuts for hospitals.’’

CONCLUSION

The ACG and ACP-ASIM recognize that at the time Congress enacted the BBA

97, it was doing so in an effort to control large federal budget deficits and restore

solvency to the Medicare program. It has become apparent, however, that some of

the cuts—particularly those relating to physician services and teaching institutions—went too far, and that access and quality are being placed at risk as a result.

Now that the federal government is enjoying a large federal budget surplus, it is

time for Congress to re-examine the BBA 97 cuts and related HCFA policies, including the site of service differential for endoscopic procedures performed less than 10

percent of the time in the hospital. Our organizations are committed to working

with the Congress to restore adequate financing for all parts of the Medicare program and to correct HCFA policies that may endanger quality and access to care

for millions of beneficiaries.

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ADDENDUM TO ACG TESTIMONY ON SITE OF SERVICE POLICYON CERTAIN ENDOSCOPIC

PROCEDURES

excerpts from hhs’ secretary’s letter to house member on site-of-service

States 10% Not the Formal Standard, but No Standard Articulated

‘‘Your letter states that HCFA has a national policy exempting procedures performed less frequently than 10 percent of the time in a particular setting from having a site-of-service payment differential for that setting. There is no such Medicare

payment policy. Rather, in view of the volume of codes for which we had to develop

resource-based practice expense RVUs, we did not generally ask our expert clinical

panels to review practice expense inputs for services in a particular setting if our

data showed the services were infrequently performed in that setting. Ten percent

was used as a general guideline for establishing priorities for expert panel review.

However, for services such as diagnostic colonoscopies, which while performed only

about 5 percent of the time in an office setting still represent over 40,000 allowed

services in the office, we believe it is consistent with the statute to establish a payment amount that reflects the resources utilized in the office.’’

Site-Of-Service Policy May Implicitly Create Incentives, Even if Unintended

‘‘The relative values in our November 2, 1999, final rule are intended to reflect

relative resource-cost differences that physicians incur for services they provide in

different settings as required by law. These relative values are not intended to provide an incentive to furnish a service in a particular setting over another setting.’’

HCFA Has Desire to Spare the Facility Fee Paid to Medicare-Certified Facilities

‘‘However, the total Medicare payment—physician professional fee and facility fee

combined—is substantially higher when these procedures are performed in an ASC

or in a hospital than when performed in a physician’s office. For example, when the

new practice expense RVUs are fully effective in 2002, physician payment will be

about $160 higher for a colonoscopy performed in an office than in an ASC. However, this is more than offset by the ASC facility fee payment of about $400, which

is paid in addition to the physician fee.’’

Patient Quality of Care Issues

‘‘I assure you we are concerned about quality of care and patient safety. We are

not aware of any studies showing adverse outcomes from endoscopies performed in

the office setting. HCFA staff met with representatives of national physician gastroenterological organizations on this matter. We informed them that we would be

happy to examine any data they might have concerning adverse outcomes from

endoscopies performed in the office setting. To date, no such data has been provided.’’

AMERICAN COLLEGE OF GASTROENTEROLOGY COMMENTS

We agree that the application of the site-of-service policy to services with volume

under 10% in the office is, and always has been, improper. In this regard, there are

several ethical considerations and principles which the ACG believes must underlie

any resolution of this issue.

1. Any steering of patients, or decisions on how or where patients are treated that

is based on economics rather than what is best for the patient, is wrong.

2. There are certain services which are not appropriate or safe to be performed

in the office setting. There must be an objective standard to identify those procedures, rather than permitting HCFA to apply a purely subjective standard. We believe that the best objective standard is the percentage of services performed in the

office, before HCFA considered utilizing different office-based and facility fees. A

10% threshold, i.e. where at least 10% of cases are being done in the office before

a bifurcated fee would be considered, is probably as low as you reasonably could go

with any vestige of safety. It also is essential to recognize the implication of certificate of need issues; there are many facilities which would qualify for Medicare-certified ASC status (and would merit a Medicare Part A facility fee), except for the

state-level CON limitations—At present the profile of volume of services provided

in the office includes all of these cases, despite the fact that these facilities often

meet standards identical to the ASC. This tends to skew upward the number of

services which appear to be rendered in a pure ‘‘office’’ setting. A 20% threshold

would be wiser than 10%, but there is already some precedent from HCFA at the

10% threshold. If a service was not already being performed at least 10% of the time

in the office before HCFA sought to institute the site-of-service policy, that service

should never have been considered for a bifurcated fee.

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3. The Medicare program must have a standard. HCFA initially referenced a 10%

standard, but did not observe that standard in practice. At this point, either there

is a 10% standard, and HCFA has violated it, or there is no objective standard

whatsoever. An objective standard is required, not a subjective target that is very

prone to inconsistent, or even arbitrary, application.

The services with fewer than 10% office volume through 1996 (the last year before

HCFA mandated its policy), have been compensated at inappropriate levels due to

application of HCFA’s site of service differential over the course of three years’ fee

schedules. To remedy this problem, the ACG’s legislative proposal would establish

payments for these procedures at the CY 2000 or 2001 levels, whichever is greater.

GI procedures have seen fee reductions of over 65% since 1987, with still further

reductions slated in 2000-02. At this point, these services are significantly undercompensated (See Annals of Internal Medicine 1999; 130-525-530, an article on

‘‘Barriers to Office-Based Screening Sigmoidoscopy: Does Reimbursement Cover

Costs?’’ by James Lewis, MD and David Asch, MD), so any remedy to the site of

service problem must be linked to establishing an adequate level of compensation.

Mr. BILIRAKIS. Max and the rest of you, I guess we really ought

to run and cast this vote. It is only one vote, so hopefully Mr.

Brown and I can get right back and we can continue. Again, forgive

us, but we will recess for a few minutes.

[Brief recess.]

Mr. BILIRAKIS. We will get right back into it, and again, our

apologies.

Max, please proceed, sir.

STATEMENT OF MAX RICHTMAN

Mr. RICHTMAN. Mr. Chairman, Ranking Member Brown, good

afternoon. On behalf of the millions of members and supporters of

the National Committee to Preserve Social Security and Medicare,

I would like to thank you for the opportunity to discuss how we can

strengthen the Medicare program for beneficiaries as well as providers.

One of the most pressing issues facing Medicare beneficiaries

today is the lack of affordable prescription drug coverage. The National Committee strongly supports the creation of a universal, voluntary, and affordable prescription drug benefit as part of the

Medicare program.

Second, Congress should expand Medicare to cover new preventive services based on the expert recommendations of the U.S. Preventive Services Task Force. Adding to the list of preventive services covered by Medicare will improve life expectancy, decrease disability, and enhance Medicare’s financial stability. Waiving the coinsurance and deductible for all Medicare preventive services would

encourage greater utilization.

The National Committee, therefore, supports H.R. 3887, the

Medicare Wellness Act of 2000. This bipartisan bill expands Medicare to cover screening and counseling for some of the most common conditions among seniors, including hypertension, glaucoma,

osteoporosis, and high cholesterol. This legislation offers a cost-effective approach to disease management and injury prevention that

also looks back at some of the lessons learned from the BBA.

Third, the National Committee is concerned about the growing

out-of-pocket costs that seniors must absorb. The average Medicare

beneficiary spends nearly 20 percent of his or her income on health

care expenses. Along with services not covered by Medicare, there

are significant cost-sharing obligations, including a 20 percent coinsurance for hospital outpatient services. The creation of a prospecVerDate 11-MAY-2000 10:22 Apr 18, 2002 Jkt 010199 PO 00000 Frm 00078 Fmt 6633 Sfmt 6602 E:\HEARINGS\65915 pfrm01 PsN: 65915
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tive payment system for hospital outpatient services in the BBA

addressed this issue by limiting beneficiary copayments to 20 percent of the Medicare allowable charge. To reduce the fiscal impact

of these provisions, however, the Congress mandated a phase-in period of 40 years. We believe that Congress should reduce the phasein period for Part B copayment to 10 years.

Fourth, we support legislation to increase access to adult day

care, which allows seniors to be in a community-based setting that

promotes rehabilitation by providing social interaction, meals, and

therapeutic services. Unfortunately, existing Medicare regulations

require that seniors be homebound to receive home health care.

This means that attending a privately funded adult day care program for medical treatment could result in a loss of eligibility for

Medicare home health care. There are several bills that allow beneficiaries to use adult day care without losing their eligibility for

home health care, including H.R. 4028, sponsored by Representatives Chris Smith and Ed Markey, and H.R. 745, sponsored by Representative Pete Stark.

Finally, we are concerned about the growing problem of patient

neglect at nursing homes. Studies and testimony show that increased staffing provides improved care. Yet many nursing homes

fail to provide adequate staffing. Patient advocates fear that the

problem of inadequate staffing may grow worse under the PPS,

which has no safeguards to ensure that facilities provide the

amount of nursing services that they are supposed to. We are concerned that nursing homes may be dangerous places for seniors

and that taxpayers may not be getting their money’s worth when

it comes to nursing home care.

To address this serious concern, we urge this subcommittee to include in any BBA revision the provisions of H.R. 4614, the Nurse

Staff Accountability and Training Improvement Act of 2000. This

bill requires nursing facilities to report the aggregate amount of

nursing hours provided and allows the Secretary to make a proportional reduction in future payments to a facility if it falls short.

The legislation would also require nursing facilities reimbursed by

Medicare and Medicaid to post the current number and ratio of licensed and unlicensed nurse staffing positions responsible for patient care.

I would like to thank the chairman and the ranking member for

asking for our views on these important issues and we would be

pleased to assist the subcommittee with any additional information

it may need to act on these recommendations, and Mr. Chairman,

I still have 5 minutes, it seems.

Mr. BILIRAKIS. You were not supposed to notice that.

Mr. RICHTMAN. Thank you very much.

Mr. BILIRAKIS. Thank you.

[The prepared statement of Max Richtman follows:]

PREPARED STATEMENT OF MAX RICHTMAN, EXECUTIVE VICE PRESIDENT, NATIONAL

COMMITTEE TO PRESERVE SOCIAL SECURITY AND MEDICARE

Good morning. I am Max Richtman, Executive Vice President of the National

Committee to Preserve Social Security and Medicare, a grassroots education and advocacy organization with millions of members and supporters around the country.

Mr. Chairman, ranking member, thank you for this opportunity to share our views

with the Subcommittee.

76

With an expected non-Social Security budget surplus of $1.9 trillion over the next

ten years, this Congress has an historic opportunity to assist beneficiaries by expanding the current benefit package and reducing some of the cost-sharing features

of the program.

One of the most pressing issues facing seniors today is the lack of affordable prescription drug coverage. Prescription drugs have become as important today as hospital coverage was in 1965 when Medicare was created. So long as prescription

drugs are available to some, but not all seniors, there will be a substantial barrier

to necessary care for seniors. The National Committee strongly supports the creation of a universal, voluntary and affordable prescription drug benefit as part of

the Medicare program

Second, Congress should expand Medicare to cover new preventive services, based

on the expert recommendations of the U.S. Preventive Services Task Force. New developments in science have shown that a decline in health status is not an inevitable part of the aging process. A healthier lifestyle, even one adopted later in life,

can increase active life expectancy and decrease disability.

Adding to the list of preventive services covered by Medicare would improve the

quality of life for seniors and enhance Medicare’s financial stability. Waiving the coinsurance and deductible for all Medicare preventive services would encourage

greater utilization.

The National Committee supports H.R. 3887, the Medicare Wellness Act of 2000.

This bipartisan bill requires Medicare to pay for eight new services, including some

of the most common conditions among seniors hypertension; glaucoma; vision and

hearing loss; osteoporosis; and high cholesterol. The legislation offers a cost-effective

approach to disease management and injury prevention that also looks back at some

of the lessons learned from the BBA and addresses the underutilization of preventive services.

The National Committee believes that changes in Medicare financing and benefits

should protect all beneficiaries from burdensome out-of-pocket costs. The average

Medicare beneficiary spends nearly 20 percent of his or her income on out-of-pocket

for health care expenses, excluding the costs of long-term care. In addition to items

and services not covered by Medicare, beneficiaries have significant Medicare costsharing obligations, including 20 percent coinsurance for most Part B services and

a substantially higher coinsurance for hospital outpatient services.

This was partially addressed in the BBA. In creating the Prospective Payment

System for hospital outpatient services, Congress limited beneficiary copayments to

20 percent of what Medicare would pay for the services in another setting. To reduce the cost of the PPS, however, Congress agreed to a lengthy phase-in period.

For some services, the phase-in is forty years. We urge Congress to shorten that

phase-in to a ten year period for the Part B deductible. It is our understanding that

this would cost approximately $3-4 billion.

Fourth, we support passage of legislation that would amend the definition of

‘‘home bound’’ so that Medicare beneficiaries can receive home health benefits and

still attend adult day care programs. Home health services are essential for enabling Alzheimer’s patients and other cognitively impaired adults who at great risk

for institutionalized care to stay in their own homes.

Unfortunately, existing Medicare regulations require beneficiaries to be homebound to receive such services. Attending a privately funded adult day care program

for medical treatment can result in a loss of eligibility for home health care and

more costly institutionalization of beneficiary. This legislation ends that threat and

allows beneficiaries to receive home health care in a setting that promotes rehabilitation by providing social interaction, meals and therapeutic services beyond what

is required by the home health. This legislation is a winner, for Medicare and for

the beneficiary because it allows seniors to stay in a less costly and less restrictive

setting.

There are several bills that accomplish these needed reforms in home health care.

Reps. Chris Smith (R-NJ) and Edward Markey (D-MA) have introduced H.R. 4028

that would lessen the definition of ‘‘home bound’’ for patients with Alzheimer’s Disease, while H.R. 745 sponsored by Rep. Pete Stark (D-CA) would allow Medicare

beneficiaries and their families to choose adult day care centers as alternative settings for the provision of home health care.

Fourth, we are concerned about the growing problem of patient abuse and neglect

in nursing homes. Most nursing home residents have impaired physical or mental

function. Many are vulnerable to malnutrition, dehydration, injury, infection and

other complications and therefore need competent professional care and observation.

Studies and expert testimony show that increased staffing improves care. Yet, many

nursing homes fail to provide adequate staffing.

77

Patient advocates fear that the problem of inadequate staffing may grow worse

with the implementation of the Medicare of a Prospective Payment System (PPS)

for nursing facilities. The PPS provides homes with a capitated payment based on

the average cost of caring for someone with a particular diagnosis. In the aggregate,

the reimbursement a home receives may be adequate, but for the individual ward,

there will be an incentive to reduce staffing levels and save money where possible.

There are no safeguards to ensure that facilities provide the amount of nursing

services that are attributed to the payment category for which they are reimbursed.

We are concerned that taxpayers may not be getting their money’s worth when it

comes to nursing home care.

We urge this committee to include in any BBA revision the provisions of H.R.

4614, the Nurse Staff Accountability and Training Improvement Act of 2000. This

bill requires that Medicare-reimbursed skilled nursing facilities report the aggregate

amount of nursing staffing hours provided for the care of nursing home residents

every 32 days or in a time period corresponding to the facility’s regular billing cycle,

whichever is less. In cases where the Secretary determines that staffing is inadequate, he or she shall have the authority to make a proportional reduction in future payments to the facility.

This legislation would also provide the public with more information on staffing

at nursing facilities. The legislation would require nursing facilities reimbursed by

Medicare and Medicaid to post the current number and ratio of licensed and unlicensed nursing staff responsible for patient care. This information must be displayed in a uniform manner and in a place that is clearly visible to the public. Nursing facilities must also report average daily staffing ratios for the last cost reporting

period in a place that is clearly visible to the public. The bill also requires the Secretary to disclose facility specific nurse staffing information on the Internet.

I want thank the Chairman and the ranking member for soliciting our testimony.

We stand ready to assist the Subcommittee with any additional information it may

need to act on our recommendations.

Mr. BILIRAKIS. Ms. Hancock?

STATEMENT OF JULIET HANCOCK

Ms. HANCOCK. Good afternoon, Chairman Bilirakis and members

of the committee. I appreciate the opportunity to address you today

to discuss the Balanced Budget Act of 1997 and its current impact

on providers, patients, and the Medicare program.

My name is Julie Hancock and I am a program consultant for

the RehabCare Group. I currently provide clinical oversight and

therapist training in over 80 rehab programs in the nursing home

setting across the country. I am here today on behalf of the National Association for the Support of Long Term Care, which is a

trade association which represents over 150 companies that provide

products and supplies to skilled nursing home and home health

care patients. I am also a member of the American Physical Therapy Association. I am a PT by background.

We appreciate the opportunity to participate in today’s hearing.

We recognized that the Balanced Budget Act was passed with the

goal of slowing the rate of growth in Medicare. However, there

have been some unintended consequences. We are asking for your

relief in three specific areas.

First of all, the $1,500 cap on therapy services under Part B

should be delayed for an additional 3 years.

Second, the consolidated billing requirement that nursing homes

bill for Part B services should, at a minimum, be delayed or repealed until further studies are conducted to understand the impact on the beneficiaries.

Third, a separate transportation fee for portable EKG and

ultrasound services should be established so that these services can

be provided for nursing home residents onsite.

78

First of all, on behalf of my sick and frail elderly patients that

I see all over the country, thank you, Mr. Chairman and your colleagues, for providing a 2-year delay of the arbitrary $1,500 caps.

These financial limitations cut back on benefits for seniors and

harm those most in need of these services. The oldest and sickest

patients were the most affected. Congress enacted a 2-year moratorium. This moratorium is due to expire at the end of next year.

Mr. Chairman, I have attached to the handout a letter signed by

11 organizations urging your support for an additional 3-year extension, a 3-year extension to the moratorium on therapy caps

which we believe will provide HCFA, Congress, and the providers

necessary time to work cooperatively with consumers to effectively

find some alternatives.

The second issue is consolidated billing. This is a requirement

that nursing facilities bill for all Part B services. NASL asks Congress to repeal or, at a minimum, delay this requirement. There

are many rules that were passed by Congress to ensure the integrity of the program, but the nursing facilities do not have billing

professionals who can manage these billing requirements. They are

struggling now.

Nursing facilities have improved accountability. HCFA can implement changes to eliminate errors and duplicate billing. Program

integrity requirements enacted by Congress on rules for durable

medical equipment products and supplies have reduced the ordering of unnecessary services. And even the Inspector General in a

report has acknowledged DMERC success in addressing and correcting billing problems.

We are concerned that consolidated billing requirements will cost

nursing facilities money. Nursing homes will have to increase their

accounting and billing staff to handle patient bills, certificates of

medical necessity, and other requirements for appropriate billing.

Given the limited resources of nursing homes today, coupled with

the new PPS rules for Part A services just about to be implemented

in October, consolidated billing for Part B will limit the resources

available for patient care. It will hurt the patients. It is too much,

too soon.

The third point I want to discuss is Part B payment to ancillary

providers who provide services to patients in nursing facilities. The

benefit of bringing these services to the patients are twofold. The

first, it avoids the cost of ambulance transport to the hospital. And

second and most importantly, it eliminates the health risks of putting the frail elderly patients in ambulances.

We believe that a transportation fee needs to be added to the

basic fee. The OIG has estimated that over $100 million is spent

each year on unnecessary ambulance trips due in large part to

transporting SNF patients to diagnostic testing sites. Since HCFA

lacks the statutory authority to pay a separate fee for transporting

EKG and ultrasound equipment to the patient’s bedside, we ask

Congress to allow a separate fee for transportation.

In summary, the $1,500 cap on therapy services should be delayed for an additional 3 years. The consolidated billing requirement that nursing homes bill for Part B services should be delayed

or repealed. And third, a separate transportation fee for portable

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EKG and ultrasound services should be established so that these

services can be provided for nursing home residents onsite.

Mr. Chairman, this concludes my testimony. I will be glad to answer any questions or provide additional information. Thank you.

[The prepared statement of Juliet Hancock follows:]

PREPARED STATEMENT OF JULIET HANCOCK, PROGRAM CONSULTANT, REHABCARE

GROUP, INC.

Good morning Chairman Bilirakis and Members of the Committee. I appreciate

the opportunity to address you today to discuss the Balanced Budget Act of 1997

(BBA) and its current impact on providers, patients, and the Medicare program.

My name is Julie Hancock, and I am Program Consultant to RehabCare Group,

Inc. I currently provide clinical oversight and therapist training in over eighty rehabilitation programs in the nursing home setting. Rehabilitation includes physical

therapy, occupational therapy, and speech-language pathology services. I am here

today on behalf of the National Association for the Support of Long Term Care

(NASL), a trade association representing over 150 companies involved in the provision of ancillary services, products and supplies to skilled nursing home and home

health care patients. I am also a member of the American Physical Therapy Association (APTA).

We appreciate the opportunity to participate in today’s hearing and your Committee’s continuing efforts to monitor the impact of the comprehensive provisions of the

BBA—particularly the impact on Medicare beneficiaries.

We recognize that the BBA was passed with goals of slowing the rate of growth.

However, there have been some unintended consequences. We are asking for your

relief in three areas:

• First, the $1,500 cap on therapy services under Part B should be delayed for an

additional three years. • Second, the requirement that nursing homes bill for Part B services should at a

minimum be delayed, or outright repealed, until further studies are conducted

to better assess its impact on beneficiaries. • Third, a separate transportation fee for portable EKG and ultrasound services

should be established so that these services can be provided for nursing home

residents on site.

We will provide you some sound solutions to help ensure that Medicare beneficiaries continue to have access to quality services, and that program integrity is

maintained. Last year, under your leadership, some modifications were made to

these programs. Again, we are seeking your assistance.

Outpatient Therapy Caps

First, on behalf of the sick and frail elderly patients I work with on a daily basis,

thank you, Mr. Chairman and your colleagues, for providing a two-year delay in implementing the arbitrary $1,500 therapy caps imposed by the Balanced Budget Act.

These financial limitations, intended as a cost savings measure, cut back on benefits

for seniors and harmed those most in need of services. In recognition of the negative

impact these caps had on the most vulnerable patients, Congress enacted a two-year

moratorium in the Balanced Budget Refinement Act of 1999 (BBRA) effectively suspending the therapy caps for the years 2000 and 2001. This moratorium is due to

expire at the end of next year.

The BBRA provision also requires the Secretary of Health and Human Services

to recommend to Congress, by January 1, 2001, a revised policy on payment for

therapy services. Rather than using arbitrary dollar caps, this alternative payment

methodology is to be based on the classification of patients by diagnostic category

and use of services.

Mr. Chairman, we have with us today a letter signed by eleven organizations respectfully urging your strong support for an additional three-year extension of the

moratorium. It is our understanding that the Health Care Financing Administration

(HCFA) is making every attempt to meet the statutory deadline to make recommendations. While we have met with HCFA and intend to provide them data,

therapy services vary by patient. It is important to recognize that this is the first

year that all Part B therapy services are under a fee schedule without the arbitrary

therapy caps. Since the most current data available from HCFA is from 1998, we

believe that an additional three-year moratorium is necessary to ensure that proper

time and consideration is given to the establishment of a new payment methodology

for Part B physical therapy, occupational therapy, and speech-language pathology

services under the Medicare program. These provisions affect patients receiving

80

services in nursing homes, outpatient clinics, comprehensive outpatient rehabilitation facilities (CORFs), and by independent practitioners.

In addition, we believe that the types of savings sought under the BBA may have

already been realized by the shift in 1998 from a cost based reimbursement system

for outpatient therapy services to one based on a fee schedule. Extending the moratorium through 2004 will help determine whether the rehabilitation therapy payments under the fee schedule have been successful in providing the requisite savings sought under the BBA. Finally, therapy professionals and HCFA will need this

period of time to devise a new methodology to assess utilization of therapy services.

We respectfully ask for your support of a three-year extension to the moratorium

on therapy caps, which we believe will provide HCFA the necessary time to work

cooperatively with consumers and providers of care to effectively address this critical area of the Medicare program.

Consolidated Billing

The second issue that I wish to discuss with you this morning is the requirement

that skilled nursing facilities bill for all Part B services. Under the previous law,

nursing homes have accountability for all services provided to residents; however,

they could contract with providers to offer and bill the services. NASL thinks it is

very important for the Congress to take a second look at the requirement for billing

by skilled nursing facilities (SNFs) for Medicare Part B products and services that

are provided to skilled nursing facility residents. There are many services with varying requirements. Many nursing homes do not know these rules—many of which

were passed by Congress to ensure the integrity of the program—or have billing

professionals who can manage these billing requirements. We recommend that you

repeal or delay this requirement in order to conduct a study of the optimal degree

of oversight necessary in order to ensure patients are receiving covered services that

are medically necessary.

Administrative action on this has improved accountability. For example, it is our

understanding that HCFA has just begun implementing a number of internal standards that will eliminate errors and/or duplicate billing. Also, program integrity requirements enacted by Congress on rules governing durable medical equipment

(DME) products and supplies have reduced unnecessary billing that has been perceived in ordering Part B products. Even the Inspector General has acknowledged

DMERC success in addressing and correcting billing problems.

However, our most serious objection to consolidated billing is the unreimbursed

costs for the SNFs in implementing this requirement. Nursing homes will have to

increase their staffs for accountants, bookkeepers, software, and financial systems

in order to fully implement an accounting system that deals with patient records,

certificates of medical necessity and other requirements for appropriate billing.

Given the limited resources of nursing homes today, this new obligation will limit

the resources available for patient care.

Finally, skilled nursing facilities have had major challenges simply implementing

the basic BBA requirements due to HCFA’s inconsistent implementation of the new

SNF payment system. This is compounded by a lack of intermediary preparedness.

Additionally, on October 1, 2000 skilled nursing facilities must manage a five-fold

increase in the number of patient classification categories for SNF patient care reimbursement. Almost simultaneously, the consolidated billing requirement is scheduled to go into effect on January 1, 2001—this is simply too much, too soon! Accordingly, it is our recommendation that MedPAC conduct a thorough analysis of the

appropriate level of accountability and oversight which should be required of SNFs

for the products and services that they purchase under Medicare Part B for beneficiaries. We need much more precision in the type of standards and accountability

to assure patient quality care and access to services. Simply stated, implementation

of the consolidated billing requirements will hurt patient care.

The following organizations concur with this position: The American Health Care

Association (AHCA); The American Association of Homes and Services for the Aging

(AAHSA); The Health Industry Distributors’ Association (HIDA); and The National

Alliance for Infusion Therapy (NAIT).

Transportation Fee for EKG and Ultrasound Services

The third point that I want to discuss is Part B payment to ancillary providers

who transport services to skilled nursing facilities so that medically necessary procedures can be conducted at the patient’s bedside. The benefits of bringing the services to the patient are two-fold: it avoids the cost of ambulance transport to the hospital and, more importantly, it eliminates the health risk of transporting frail elderly patients whose condition could be compromised. The OIG has estimated that over

$100 million is spent each year on unnecessary ambulance trips, due in large part

81

to transporting SNF patients to diagnostic testing sites. Starting in 1996, Medicare

began bundling the cost of the transport fee for the provision of portable EKG and

ultrasound procedures. This has the effect of spreading the costs associated with one

or two percent of the procedures over one hundred percent of the procedures. In

other words, HCFA is paying ninety-eight percent of the providers for a service they

are not providing. Since HCFA claims they lack the statutory authority to pay a

separate fee for transporting EKG and ultrasound equipment to SNF bedsides, we

are recommending that your Committee initiate legislation to allow for a separate

fee for transportation. Since Medicare is already paying for the cost of transportation, this proposal is budget neutral. In fact, this proposal may actually save

money since it eliminates unnecessary ambulance transportation, and will only pay

the providers that actually incur the costs of transporting equipment and technicians.

In summary:

• The $1,500 cap on therapy services under Part B should be delayed for an additional three years.

• The requirement that nursing homes bill for Part B services should at a minimum

be delayed, or outright repealed, until further studies are conducted to better

assess its impact on beneficiaries.

• A separate transportation fee for portable EKG and ultrasound services should be

established so that these services can be provided for nursing home residents

on site.

Mr. Chairman, this concludes my testimony. I would be glad to answer any questions or provide additional information. Thank you.

Mr. BILIRAKIS. Thank you very much, Ms. Hancock.

Mr. Hawkins?

STATEMENT OF DANIEL R. HAWKINS, JR.

Mr. HAWKINS. Thank you, Mr. Chairman. It is good to see you

again. Mr. Chairman, Mr. Brown, and members of the subcommittee, on behalf of the National Association of Community

Health Centers, the more than 1,000 federally qualified community

migrant and homeless health centers nationwide and the 11 million

people who rely on them for care, thank you for this opportunity

to express our support for H.R. 2341, the Safety Net Preservation

Act, and to advocates for its inclusion in any BBA relief legislation

considered by the Congress this year.

Before I begin, let me express my sincere gratitude to you, Mr.

Chairman, and to Mr. Brown for your support for increased funding for health centers to allow them to serve yet additional numbers of uninsured, and to Mr. Burr and his colleague Mr. Towns

for their stalwart leadership and support in seeking to protect

health centers from the devastating impact of the BBA.

H.R. 2341, introduced by Mr. Burr and Mr. Towns and cosponsored by 24 of the 29 members of this subcommittee and 224 of

your House colleagues, is a common sense, fair, and long-term solution to the threat that a provision in the BBA poses to health centers and especially to the 4.5 million uninsured people that they

serve.

For 35 years, health centers have formed the backbone of America’s preventive and primary health care safety net for millions of

Americans who have difficulty accessing the traditional health care

system. Under the jurisdiction of this subcommittee and as required under the Public Health Service Act, health centers are required to make their care available to everyone who walks through

their doors, regardless of their health status, insurance coverage,

or ability to pay. Because of this, health centers serve an overVerDate 11-MAY-2000 10:22 Apr 18, 2002 Jkt 010199 PO 00000 Frm 00085 Fmt 6633 Sfmt 6602 E:\HEARINGS\65915 pfrm01 PsN: 65915
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whelmingly poor, uninsured, and medically underserved population.

This patient mix makes health centers unique among all health

care providers, but it also creates some unique problems for health

centers. In particular because almost 40 percent of health center

patients are on Medicaid, health centers are more vulnerable to

Medicaid revenue losses than other providers. Because health centers do not have the option of withdrawing from Medicare or Medicaid, nor would they want to, if Medicaid payments do not at least

cover the cost of serving Medicaid patients, health centers must

cover those revenue losses from the only other major source of revenue they have, the Federal PHS Act grants they receive to cover

the cost of caring for the uninsured.

Some 10 years ago, this subcommittee recognized the threat and

required health centers to be reimbursed on a reasonable cost basis

by Medicaid agencies for the care they provide to Medicaid patients. Since that time, health centers have increased the capacity

by over 4 million individuals nationally, including over 1.5 million

people, or more than 50 percent, who are uninsured, at a time

when the nation’s uninsured population grew by about half that

rate, and despite the fact that the appropriated dollars for health

centers remained stagnant over that period.

However, in 1997, the BBA ordered the phase-out and eventual

elimination of their Medicaid payment system. Under the BBA, the

real losers will be the millions of uninsured families who today rely

on health centers as their only source of locally available and affordable health care, people like the three families whose personal

details are provided in attachments to my written testimony.

While Congress eased the BBA’s phase-out rates in last year’s

Balanced Budget Refinements Act, the BBRA necessarily, nevertheless, allowed the elimination of cost-based reimbursement to

continue and did not establish a long-term solution. Under the current phase-out formula, health centers face an aggregate loss of

$45 million this year alone, or equivalent to the cost of serving over

130,000 uninsured individuals. Based on our projections, in 2005

when the system is repealed, health centers Medicaid losses could

cause nearly 1.5 million uninsured people, one out of every three

uninsured served by health centers today, to lose access to health

center services. This would come at a time when the number of uninsured is growing by a million a year and studies are documenting

that other providers of necessity are having to cut back on the

charity care they provide.

In order to avoid the devastating impact of this elimination of

the payment system, a coalition of public officials, safety net providers, and health care advocates have endorsed the Safety Net

Preservation Act to establish a minimum Medicaid payment floor

with a prospective payment system for health centers and rural

health clinics. This payment system is common sense and widely

supported and will stave off the elimination of cost-based reimbursement. That is why a bipartisan majority in this body and in

the Senate have cosponsored the bill.

Some will argue there is no need for Congress to protect health

centers from BBA cuts. I respectfully disagree with that statement.

To date, only eight States have established a secure, long-term

83

Medicaid payment system. We believe that Congress must safeguard the PHS Act dollars and establish a minimum Medicaid payment floor to protect those valuable resources and ensure access to

care for the people who rely on them.

That is why I am here to urge you, to plead with you on behalf

of the Resnicks, the Owens, the Fernihoughs, and the millions of

other Americans who rely on health centers today to include the

common sense Safety Net Preservation Act’s bipartisan and permanent payment system in any BBA relief legislation considered this

year.

Thank you, and I would be happy to answer any questions the

committee may have.

[The prepared statement of Daniel R. Hawkins, Jr. follows:]

PREPARED STATEMENT OF DANIEL R. HAWKINS, JR., VICE PRESIDENT, FEDERAL AND

STATE AFFAIRS, NATIONAL ASSOCIATION OF COMMUNITY HEALTH CENTERS

INTRODUCTION

Chairman Bilirakis, Representative Brown, and members of the Subcommittee: on

behalf of the National Association of Community Health Centers and the over 1000

community, migrant, homeless, and public housing health centers nationwide, thank

you for this opportunity to express our support for Balanced Budget Act (BBA) relief

for health centers. Members of this Subcommittee have repeatedly reaffirmed their

support for the crucial role that health centers have in providing a safety net to

those who, for whatever reason, are unable to obtain health insurance but still need

access to affordable primary and preventive health care services. Without question,

this Subcommittee is comprised of members with the strongest commitment to the

mission of health centers and a keen understanding of their need to remain viable

sources of affordable health care services for everyone, regardless of their ability to

pay for services.

Let me begin by expressing my sincerest gratitude to Chairman Bilirakis, Representative Brown, Representative Burr, and Representative Towns for your leadership to ensure that the more than 1000 health centers, which currently serve the

11 million people in over 3,000 communities across the country, remain viable as

they struggle to meet the needs of medically underserved communities. Chairman

Bilirakis and Representative Brown, thank you for leading the effort in the House

to secure additional funding for health centers, allowing them to meet the ever-increasing needs of uninsured Americans that are relying on them for care. Representatives Burr and Towns, thank you for your leadership in introducing legislation to

secure a permanent, fair, common-sense Medicaid payment system for health centers that will protect the grant funds invested by this Subcommittee in care for the

uninsured. I hope that my testimony today will further strengthen the already

strong support demonstrated by a significant majority of this Subcommittee, as well

as of the full Commerce Committee, for BBA relief for health centers and provide

a better understanding of the vital need to protect America’s primary and preventive care safety net.

COMMUNITY HEALTH CENTERS: GUARANTEEING ACCESS TO AFFORDABLE HEALTH CARE

SERVICES

For thirty-five years, health centers, alongside public hospitals, public health departments and free clinics, have formed the backbone of America’s health care safety net for millions of Americans who have difficulty accessing the traditional health

care system. A simple examination of their patient population demonstrates the importance of health centers to those that rely on them for care. Of the 11 million

health center patients:

—Every patient (a) lives in medically underserved rural, frontier, or inner city community or (b) belongs to a medically underserved population, including migrant

farm workers, the homeless, and those with linguistic or cultural barriers to

care; —40% lack health insurance coverage; —34% rely on Medicaid for coverage; and —85% are at or below 200% of the Federal poverty level (FPL).

Under the jurisdiction of this Subcommittee and as required by the Public Health

Service Act (PHSA), health centers are mandated to provide access to care for everyVerDate 11-MAY-2000 10:22 Apr 18, 2002 Jkt 010199 PO 00000 Frm 00087 Fmt 6633 Sfmt 6621 E:\HEARINGS\65915 pfrm01 PsN: 65915
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one that walks through our doors, regardless of their health status, insurance coverage, or ability to pay for services. Health centers proudly accept this responsibility

in return for the investment made by the American taxpayers in the form of PHSA

grants. However, this overwhelmingly poor, uninsured, and medically underserved

patient mix creates unique difficulties for health centers that are not necessarily

confronted by other health care providers.

Hurdles to Accessing Care

Health center patients typically confront significant hurdles when accessing

health care services, be they geographic, financial, linguistic, or cultural. Many of

these patients have had a history of poor health and suffer from health and social

problems that are seen much less frequently in insured, middle-class, or suburban

populations. These problems include greater incidence of chronic disease, a poor history of health maintenance, and a significant lack of understanding of proper nutrition and health. Generally, health center patients have more health care problems

and require greater chronic disease management and health education than the rest

of the patient population in America.

Inability to Pay for Health Care Services

Millions of health center patients have difficulty paying for health insurance or

health care services. More than 1 of every 3 health center patients lacks the financial resources to pay for the full cost of the care provided to them or their families.

To ensure access to care, health centers base their charges on a sliding fee scale

that takes into account the financial resources of the patient. Patients with incomes

over 200% of the FPL pay full price for services delivered. Everyone pays according

to his or her means. In return for guaranteeing this access to care, Congress provides health centers with grants through the PHSA that help defray the costs of

health care services provided to uninsured patients.

Underpayments by Public Programs Threaten Health Care Delivery to the Uninsured

Because of where they are located and whom they serve, 86% of health center patients are uninsured (40%) or covered by Medicaid (34%), Medicare (8%), or other

public assistance (4%). As a result, health center patients do not have a payer mix

that easily allows them to subsidize underpayments from public payers. In other

words, if Medicaid is not reimbursing health centers for the cost of providing care

to Medicaid patients, health centers are forced to look elsewhere to make up for the

shortfall.

The next portion of my testimony will examine in greater detail this crucial third

issue and how Congress addressed these underpayments by public payers a decade

ago.

UNDERSTANDING THE IMPACT OF LOW MEDICAID PAYMENTS TO SAFETY NET PROVIDERS:

THE HISTORY OF REASONABLE COST PAYMENTS TO HEALTH CENTERS

Threats to Care for the Uninsured

Community health centers are not the only providers to feel the pressure of reduced payments by public and commercial payers. The rise of managed care in

Medicare and Medicaid, and the reduced payment rates that follow, have forced all

providers to reevaluate their participation in these programs. Indeed, we have just

witnessed another massive withdrawal of managed care plans from the

Medicare+Choice program, citing insufficient payments. In Tennessee, the State legislature recently passed a massive bailout subsidy for managed care organizations

to keep them from completely withdrawing from the State’s Medicaid managed care

program, TennCare.

I ask the members of the Subcommittee: if inadequate reimbursements are forcing

insurance companies and managed care organizations to withdraw from Medicare

and Medicaid managed care, what kind of strain must low payments be placing on

not-for-profit community health centers?

All health care providers must seek to cross-subsidize when payments from a

third party source are insufficient. However, unlike most physician practices that

have paid for indigent care services by cross-subsidies from their commercial payers,

health centers do not have a substantial commercially insured patient base from

which to draw (see Appendix 1). Evidence abounds that the traditional response of

physicians and other providers to reduced Medicaid or Medicare payments has been

to (1) reduce their levels of indigent care and/or (2) reduce services provided to publicly insured patients.

Because of the shortage of commercial payments, health centers have three options if Medicaid, their largest third party payer, does not cover the cost of providing

care to its beneficiaries. They can (1) reduce health care services or reduce the numVerDate 11-MAY-2000 10:22 Apr 18, 2002 Jkt 010199 PO 00000 Frm 00088 Fmt 6633 Sfmt 6621 E:\HEARINGS\65915 pfrm01 PsN: 65915
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ber of health care access points, (2) close their doors entirely, leaving whole communities with little or no access to primary health care services, or (3) cover Medicaid

shortfalls with PHSA grants intended to defray the cost of caring for the uninsured.

The Committee must understand that health centers do not have the option of

withdrawing from Medicare or Medicaid—health centers are statutorily required to

provide access to care to everyone who walks through their door. This makes health

centers unique among all health care providers.

The Enactment of Medicaid Cost-Based Reimbursement for Health Centers

If health centers are to fulfill their unique statutory role as core safety net providers, it is crucial that Congress recognizes and protects the PHSA-dictated mission

of providing care to the uninsured. To do this, a ‘‘budgetary firewall’’ must be in

place to protect the financial integrity of PHSA grants and ensure that Medicaid

does not underpay health centers for services provided to Medicaid patients.

Over ten years ago, this Subcommittee recognized the threat that low Medicaid

payments pose to health centers’ ability to care for uninsured patients, and included

language in the Omnibus Budget Reconciliation Act of 1989 requiring Medicaid to

reimburse health centers on a reasonable-cost basis for services provided to Medicaid beneficiaries. In its report on this provision, the Committee wrote...

‘‘The Subcommittee on Health and the Environment heard testimony that, on

average, Medicaid payments to Federally-qualified health centers cover less

than 70 percent of the costs incurred by the centers in serving Medicaid patients. The role of the programs funded under sections 329, 330, and 340 of the

PHS Act is to deliver comprehensive primary care services to underserved populations or areas without regard to ability to pay. To the extent that the Medicaid program is not covering the cost of treating its own beneficiaries, it is compromising the ability of the centers to meet the primary care needs of those

without any public or private coverage whatsoever.’’. House Report 101-247,

September 20, 1989

So in the ten years since its enactment, has cost-based reimbursement met its

goal of ensuring ‘‘that PHS grant funds are not used to subsidize health center or

program services to Medicaid beneficiaries’’?

The answer to that question is an unequivocal, undeniable YES!!

In the ten years since the enactment of cost-based reimbursement, health centers

have been able to increase their capacity for uninsured care by 1.1 million people—

more than 40%. And this increase occurred at a time when the appropriated dollars

for the health center program were stagnant!

In other words, Congress received a higher rate of return on its annual appropriations investment in health centers because Medicaid cost-based reimbursement was

in place. Medicaid no longer underpaid for the care provided to Medicaid patients,

and as a result, PHSA grants were able to be used for their intended purpose—care

for the uninsured. One can only conclude that the phase-out and elimination of costbased reimbursement under the BBA will again reduce the effectiveness of the

PHSA grants, thereby reducing care for the uninsured at a time when their number

and needs have never been greater. If this occurs, millions of families who use

health centers—like those from Indiana profiled in Appendix II—will lose their access to care.

The Balanced Budget Act of 1997 and the Elimination of Cost-Based Reimbursement

The BBA phased-out and ultimately eliminated the Medicaid reasonable cost reimbursement system for health centers and rural health clinics. We recognize the

difficult choices that Congress had to make to balance the Federal budget in 1997.

But we also believe that the elimination of Medicaid cost-based reimbursement did

not take a holistic view of the interaction between Medicaid and other public health

programs. Recognizing this, Congress provided some relief last year for health centers by slowing the BBA’s phase-out rate. Unfortunately, the Balanced Budget Refinements Act (BBRA) did not establish a long-term payment system for health centers in the Medicaid program.

Let me describe the BBA’s phase-out methodology in this way. Imagine a grocery

store buys a gallon of milk from their wholesaler for $4.00, but the law allows the

purchaser to buy that same gallon of milk for $3.00. Does anyone believe that the

purchaser won’t buy the milk for $3.00? How long would that store sell milk? If they

did decide to sell milk, how long would they stay in business?

By eliminating the Medicaid cost-based reimbursement system and not replacing

it with an alternative payment mechanism to protect the grant funds, the BBA

threatens health centers’ fundamental ability to continue to make health care affordable and accessible to millions of low-income, uninsured, and medically underVerDate 11-MAY-2000 10:22 Apr 18, 2002 Jkt 010199 PO 00000 Frm 00089 Fmt 6633 Sfmt 6621 E:\HEARINGS\65915 pfrm01 PsN: 65915
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served Americans. Indeed, a recent report by the Institute of Medicine entitled,

America’s Safety Net: Intact but Endangered states...

‘‘Failure to support these essential [safety net] providers could have a devastating impact not only on the populations who depend on them for care but

also on other providers that rely on the safety net to care for patients whom

they are unable or unwilling to serve...

Over the years, Medicaid (and to a lesser extent Medicare) has become the financial underpinning of the safety net. Historically, Medicaid has provided the

majority of insured patients for most safety net providers and has subsidized

a substantial portion of care for the uninsured through such programs as disproportionate share hospital (DSH) payments and cost-based reimbursement for

FQHCs [Federally qualified health centers]...

A major cause for concern is the [Institute of Medicine’s] committee’s finding

that Medicaid as well as other revenues and subsidies that in the past have

helped support care for the uninsured and other vulnerable populations are becoming more restricted at a time that the demand on the safety net is rising.’’

In addition, in a special report issued in February 2000, the Kaiser Family Foundation’s Commission on Medicaid and the Uninsured stated . .

‘‘Unless alternative support mechanisms [to the BBA’s elimination of costbased reimbursement] are put in place, the reductions and eventual loss of the

FQHC payment system will raise major issues for health centers. The FQHC system has ensured that health centers can recover the reasonable cost of covered

services furnished to Medicaid patients...

As a result, deep downward shifts in Medicaid financing have significant implications for the ability of health centers to sustain a level of care for the uninsured that they were able to achieve over the last decade.’’

Despite the evidence, some remain skeptical that the BBA’s phase-out will have

this dramatic impact on health centers. We respectfully disagree with that assessment. The best example of what happens when cost-based reimbursement is eliminated can be seen in those States that have already taken that step as part of a

Section 1115 Medicaid waiver. In 1998, the certified public accounting firm of Goldstein, Golub, Kessler and Company (GGK) examined the impact of low-Medicaid

payments on health centers in Tennessee under the TennCare program. In GGK’s

study they found that, while the number of TennCare visits to health centers increased, the gap between revenues and costs per TennCare visit widened, resulting

in significant revenue losses for health centers.

By 1996, Tennessee’s health centers were losing almost $28 per TennCare patient

visit. This created an unfunded gap in reimbursement that forced health centers to

cover these losses out of PHSA grants. The result has been a reduction in the number of uninsured persons received care at Tennessee’s health centers, and the virtual elimination of all ‘‘supplemental’’ services, including health and nutrition education, parenting classes and community outreach—all of which have been proven

highly effective in improving the overall health of patients.

Be assured that this is not an isolated incident—it has happened to health centers

in several States across the country. In short, where the elimination of cost-based

reimbursement has occurred, health centers are forced to eliminate health care services or close delivery sites for their patients. There is no reason to believe that this

will not occur nationwide if BBA relief is not provided to health centers.

THE SAFETY NET PRESERVATION ACT: STABILIZING AMERICA’S PRIMARY CARE SAFETY

NET

The payment system included in H.R.2341, the Safety Net Preservation Act, is a

common-sense approach to protecting the significant Federal financial investment in

health centers from the elimination of reasonable cost based reimbursement under

the BBA. That is why the Safety Net Preservation Act is cosponsored by bipartisan

majorities of the Commerce Committee (37 of 53 members) and the House of Representatives (224 Representatives). Its companion legislation in the Senate, S.1277,

has garnered the bipartisan support of a majority of the Finance Committee (11 of

20) and the full Senate (54 Senators).

This legislation accomplishes three fundamental goals:

(1) It ensures that health centers are not forced to eliminate health care for their

uninsured patients because Medicaid does not adequately reimburse them.

(2) It addresses concerns about cost-based systems by creating incentives for efficiency and cost-containment.

(3) It preserves State flexibility by establishing a minimum Medicaid payment floor,

not mandating a particular payment methodology, and it also gives States the

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1The MEI is also used to calculate annual payment changes in the physician fee schedule for

the Medicare program.

ability to continue reimbursing health centers at 100% of their reasonable costs

if they choose.

The next portion of my testimony will describe how the Safety Net Preservation

Act’s payment system works and address some outstanding concerns about this bill.

Stabilizing Payments and Establishing Incentives for Efficiency

Over the last several years, Congress has enacted prospective payment reimbursement systems (PPSs) for hospitals, nursing homes, and home health agencies in the

Medicare program. Through prospective payment methodologies, governments can

predict and control the budgets of public insurance programs. Likewise, providers

can predict their reimbursement rates for services provided and can plan their

budgets accordingly.

In short, the Safety Net Preservation Act brings health centers into parity with

other providers participating in public insurance programs. In the initial year,

health centers payments would be frozen at their previous year’s per-visit payment.

Every year thereafter, the per-visit rate would be increased by the rate of inflation

calculated by the Medicare Economic Index (MEI) for primary care.1

This methodology creates significant incentives for health centers to control costs

and become more efficient. For example, if the per visit payment rate under the PPS

is $80 and a health center has a per visit cost of $83, the health center can either

(1) find ways to cut their costs and become more efficient or (2) lose revenues. Likewise, if a health center can reduce its cost per visit to $77 dollars, it would receive

$3 that it could reinvest into expanding services or delivery sites. By creating a

methodology in which health centers can be assured that Medicaid will cover the

cost of care for its patients, the Safety Net Preservation Act ensures that PHSA

grants can be used for their intended purpose—caring for the uninsured.

Protecting the Safety Net for the Long-Term

The Safety Net Preservation Act would reimburse health centers at a rate that

prevents the elimination of care for their uninsured patients. By filling this gap,

Congress ensures that its significant annual investment under the PHSA goes to its

intended purpose—providing access to affordable health care services for uninsured

people living in medically underserved areas.

Some argue that the BBA currently allows States to continue to reimburse health

centers at 100% of their reasonable cost based rates, thereby negating the need for

the Safety Net Preservation Act. Unfortunately, there is little evidence that States

will use this flexibility to establish long-term payment mechanisms to protect Federal PHSA grant dollars. For example:

—Of the 15 Section 1115 Medicaid waiver States, only two States

(Massachusetts and Vermont) have continually paid health centers on a costbased reimbursement methodology. The other 13 Section 1115 Medicaid waiver

States did not establish mechanisms at the outset to protect health centers from inadequate Medicaid payments and have forced health centers to dip into their PHSA

grants to cover their Medicaid losses. Recognizing this, Maryland and Oklahoma

have taken steps to reestablish sufficient Medicaid payments to these safety net providers, but only after the health centers suffered from years of Medicaid losses

under the waiver.

—Only four non-1115 waiver States have enacted legislation to continue adequate

reimbursements to health centers permanently. Other States have made only

a one-year administrative commitment to adequately reimburse health centers

for Medicaid patients, which can be changed or eliminated at any time. This

creates instability for health centers because they cannot develop plans for expanding service delivery sites, hiring new clinicians, or expanding health services, like pharmacy or mental health services, to their patients (insured or uninsured).

—In South Carolina, the State made a commitment to the health centers to continue Medicaid cost-based payments. However, several months later, South

Carolina reversed its decision and began to implement the cuts according to the

BBA/BBRA phase-out schedule. Health centers’ patients in South Carolina are

now feeling the effects of that broken commitment through service reductions.

In short, only 8 States have established a long-term Medicaid payment system for

health centers. We believe that this demonstrates the need for Congress to establish

a minimum Medicaid payment floor to protect PHSA grant dollars.

Thirty-five years ago, Congress established the health center program to ensure

that a nationwide network of safety net providers would be there for everyone, reVerDate 11-MAY-2000 10:22 Apr 18, 2002 Jkt 010199 PO 00000 Frm 00091 Fmt 6633 Sfmt 6621 E:\HEARINGS\65915 pfrm01 PsN: 65915
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gardless of where they lived. The Federal government wholly pays these PHSA

grant dollars to health centers that in turn benefit people in every State in the

country. We do not believe that the States should be allowed to take advantage of

the significant Federal investment in health centers by reimbursing health centers at

a rate that does not cover the cost of providing care to Medicaid patients. Rather,

Federal and State governments should be partners in ensuring that people have access to health center services. The Safety Net Preservation Act would allow that

partnership to flourish.

CONCLUSION: NOW IS THE TIME FOR CONGRESS TO ACT

Congress is again considering providing BBA relief to providers. The President

has supported a package of $21 billion in relief for providers and members of the

House and Senate have signaled their support for additional BBA relief.

The Safety Net Preservation Act has wide, bipartisan support in both houses of

Congress. In addition, the National Association of Mayors, the National Association

of Counties, the National Rural Health Association, the National Association of

Rural Health Clinics, the Health Care for the Homeless Coalition, and the National

Center for Farm Worker Health have endorsed this legislation. It also has the support of the House and Senate Rural Health Care Caucuses.

Last year, the Safety Net Preservation Act was included in H.R.3075, the House’s

version of the Balanced Budget Relief Act, which passed the House with 388 votes.

Unfortunately, the Conference agreement did not adopt the House position. In the

end, the Conference agreement reduced the BBA’s phase-out rate but retained the

elimination of the permanent Medicaid payment system.

Given that this may be the last opportunity to revisit the policies of the BBA,

health centers are calling on Congress to protect the struggling health care safety

net in America. That is why I am here to urge this Subcommittee, the full Commerce Committee, this House, and this Congress to include the common sense,

bipartis an, and permanent payment system included in the Safety Net Preservation

Act in any BBRA legislation considered by Congress and to see that it becomes the

law of the land before Congress adjourns this year.

Thank you and I look forward to answering any questions the Committee may

have.

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Mr. BILIRAKIS. Thank you so much, Mr. Hawkins.

Ms. Connolly?

STATEMENT OF MARY LOU CONNOLLY

Ms. CONNOLLY. Thank you, Mr. Chairman and members of the

subcommittee, for giving me the opportunity to testify on the impact of the BBA on the Medicare home health benefit. I am Mary

Lou Connolly and I am Administrator of the Home Care Program

at UCSD Health Care in San Diego. My remarks today are presented on behalf of the National Association of Home Care, NAHC.

NAHC is the nation’s largest home care organization, representing

nearly 6,000 Medicare-participating home care providers, including

nonprofit providers such as Visiting Nurse Association, for-profit

chains, hospital-based and free-standing providers, and government-run agencies.

While we are greatly appreciative of efforts taken by you and

your colleagues in 1998 and again in 1999 to mitigate some of the

unintended damage to home care caused by the BBA, it is essential

that further decisive action be taken this year to return the Medicare home care program to sound footing.

The reductions in Medicare’s home health benefit since enaction

of BBA 1997 have been startling and unprecedented. Home care

outlays have decreased from $18.3 billion in fiscal year 1997 to $9.5

billion in fiscal year 1999. From calendar year 1997 to 1999, the

number of beneficiaries served dropped nearly 1 million, from 3.5

million to 2.6 million. Home health claims dropped almost 50 percent and the average payment per patient dropped by 38.5 percent.

The Medicare home health benefit as a percent of the total Medicare program has decreased from 9 percent in fiscal year 1997 to

just 4 percent in fiscal year 2000.

The number of home health agencies has also taken a major hit,

with over 3,000 net closures since 1997 nationwide. In California,

my home State, there have been over 200 home health agency closures, and in San Diego, the city where my organization is, at least

15 agencies have closed or discontinued their Medicare businesses.

Various studies have concluded that for certain groups of homebound beneficiaries, especially those with medically complex or

longer-term care needs, access to the home health benefit has decreased. No further studies are necessary. Many agencies readily

admit that they have instituted more rigorous screening measures

upon intake to ensure that high-cost complex care admissions are

controlled. Surviving agencies feel they must limit the number of

such cases as they are certain to exhaust their already depleted

human and financial resources.

In addressing human resources, it should be recognized that

home care agencies are also faced with decreased staffing due to

cost reductions following BBA 1997. Staff who survived the BBA

reductions are now voluntarily leaving home care, citing the impossibility of meeting increased regulatory mandates, such as OASIS,

while being asked by administrators such as myself and nurse supervisors to care for more patients and to please do so more efficiently.

Transitioning from IPS to an underfunded PPS program is simply not enough to restore and preserve the Medicare home health

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benefit. The five national home health associations have reached a

consensus on the reforms necessary to protect the home health program and the beneficiaries it serves. The associations agree that

Congress must take the following actions in this legislative session.

First, eliminate the 15 percent cut scheduled to take effect October 1, 2001. I take issue with the statement made by GAO that

there is a cushion perhaps in PPS payments. If this 15 percent cost

cut does go through on October 1, 2001, we will see more agency

closures because agencies that have eliminated staff, reduced utilization, and cut costs to the bone to cope with IPS and whose PPS

payments are based on the IPS budget simply are not likely to respond to a payment system that pays them 15 percent below the

previous year’s amount by increasing service and access to care.

Second, restore access to care for high-need and vulnerable pa- tients as follows. Allow an additional expenditure of $500 million

in each of the next 5 years to be used as outlier payments for services to the most medically complex and costly patients. Increase

payments for home health services in rural areas by 10 percent,

and remove medical supplies from the per episode payment under

PPS.

The five associations also ask that HCFA confine OASIS data

collection and reporting requirements to only Medicare and Medicaid patients, and limit the items to the 20 elements which are actually needed to implement PPS and to provide for an emergency

payment mechanism during at least the first 6 months of PPS to

ensure there is no interruption in payments for services.

In addition, though not related to this hearing, NAHC and the

other associations encourage you to reject any efforts to impose a

copay on the home health benefit, as that issue has recently surfaced in the context of the prescription drug benefit.

Mr. Chairman and members, thank you for this opportunity. I

will be happy to answer questions later.

[The prepared statement of Mary Lou Connolly follows:]

PREPARED STATEMENT OF MARY LOU CONNOLLY, ADMINISTRATOR, UNIVERSITY OF

CALIFORNIA AT SAN DIEGO HOME CARE ON BEHALF OF THE NATIONAL ASSOCIATION

FOR HOME CARE

Mr. Chairman and Members of the Subcommittee, thank you for the opportunity

to testify on the impact of the Balanced Budget Act of 1997 (BBA97) on the Medicare home health benefit. My name is Mary Lou Connolly, and I am Administrator

of the home health division of the University of California at San Diego’s health

care system. My remarks today are presented on behalf of the National Association

for Home Care (NAHC). NAHC is the nation’s largest home care organization, representing nearly 6000 Medicare-participating home care providers, including nonprofit providers like the visiting nurse associations, for-profit chains, hospital-based

providers, government-run agencies, and freestanding providers.

While we are greatly appreciative of efforts taken by you and your colleagues in

1998 and again in 1999 to mitigate some of the unintended damage to home care

caused by BBA97, it is essential that further, decisive action be taken this year to

return the Medicare home care program to a sound footing. Data recently provided

by the Health Care Financing Administration (HCFA) provide a disturbing picture

of the current state of the Medicare home health program. From calendar year 1997

to 1999, the number of beneficiaries served dropped by nearly one million, from 3.5

million to 2.6 million, or by close to 25 percent. Total outlays for the same period

dropped from $16.7 billion to $7.7 billion. or nearly 54 percent. In those two years,

home health claims dropped by almost 50 percent, and the average payment per patient dropped by 38.5 percent (source: preliminary 1999 HCFA/HICS data).

Home health will transition to a prospective payment system (PPS) under Medicare on October 1 of this year. This new payment system is expected to be much

92

more appropriate in design than the existing system that was imposed by the

BBA97; however, because the global budget set for the PPS restricts outlays to what

would have been spent if the current system were to continue, episode payment

rates are expected to be inadequate and may perpetuate many of the access problems certain classes of patients (such as wound care patients) are experiencing

today. The change in the home health payment system will not correct all of the

problems in home health that have resulted from the BBA97.

Recently, NAHC, along with the four other national home health associations, developed a unified legislative agenda designed to restore and preserve the Medicare

home health benefit in light of the devastation wrought by the BBA97. The national

associations are agreed that true relief for the home care program cannot be

achieved without legislative action that encompasses both restoration of services to

patients who have lost care, and the elimination of further threats to the stability

of the Medicare home health program and our national home care infrastructure.

I will elaborate on the national associations’ unified position later in my testimony.

IMPACT OF BBA97 ON HOME HEALTH BENEFICIARIES AND PROVIDERS

Balanced Budget Act Leads to Unprecedented Reductions in Home Health Utilization

and Spending

The reductions in Medicare’s home health benefit since enactment of the BBA97

are startling and unprecedented. Since fiscal year 1997 program expenditures decreased 48 percent, from $18.3 billion in FY97 to $9.5 billion in FY99 (Fig. 1).

While other Medicare programs have seen reductions due to the BBA97, no other

decrease has been close to what the home health benefit has experienced (Table 1).

In fact, FY99 was the first year in the history of the home health benefit in which

Medicare outlays for skilled nursing facility care exceeded those of home health.

Less was spent on Medicare home health services in FY99 than was spent in FY94.

Table 1. Medicare Program Benefits, Fiscal Years 1997,1998,1999

Benefit Type

Amount ($billions)

FY97 FY98 FY99

Managed care ......................................................................................................... 25.0 31.9 37.4

Inpatient hospitals .................................................................................................. 88.3 87.0 85.3

Skilled nursing facilities ......................................................................................... 12.6 13.6 12.4

Home health ........................................................................................................... 18.3 14.0 9.5

Hospice .................................................................................................................... 2.1 2.1 2.5

Physicians ............................................................................................................... 32.0 32.3 33.5

Outpatient hospitals ............................................................................................... 10.7 10.5 9.7

Durable medical equipment ................................................................................... 4.1 4.1 4.2

Other ....................................................................................................................... 14.0 14.6 13.8

TOTAL MEDICARE ................................................................................................ 207.1 210.1 208.3

Percentage Change by Benefit Type ....................................................................... FY97-98 FY98-99 FY97-99

Managed care ......................................................................................................... +27.6% +17.2% +49.6%

Inpatient hospitals .................................................................................................. -1.5 -2.0 -3.4

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Table 1. Medicare Program Benefits, Fiscal Years 1997,1998,1999—Continued

Benefit Type

Amount ($billions)

FY97 FY98 FY99

Skilled nursing facilities ......................................................................................... +7.9 -8.8 -1.6

Home health ........................................................................................................... -23.9 -32.1 -48.1

Hospice .................................................................................................................... 0.0 +19.0 +19.0

Physicians ............................................................................................................... +1.1 +3.7 +4.8

Outpatient hospitals ............................................................................................... -1.9 -7.6 -9.3

Durable medical equipment ................................................................................... 0.0 +2.4 +2.4

Other ....................................................................................................................... +4.0 -5.5 -1.7

TOTAL MEDICARE ................................................................................................ +1.4 -0.9 +0.6

Source: HCFA, Office of the Actuary unpublished estimates for the President’s fiscal year 2001 budget.

Home health spending as a percent of Medicare dropped precipitously from 9 percent of total Medicare outlays in FY97 to just 5 percent of total Medicare benefits

in FY99. (Fig.2) HCFA’s current projections for FY2000 indicate that home health

will drop further, to 4 percent of total Medicare outlays.

Every state has seen reductions in Medicare home health utilization and expenditures since 1997. In one year, 1997 to 1998, visits decreased 40%, the average payment per patient decreased 29%, and the average number of visits per patient declined 30%.

The Congressional Budget Office (CBO) originally anticipated a $16.1 billion reduction in projected home health spending over five years following enactment of

BBA97. The most current CBO estimates and projections for home health show that

spending was reduced by a total of $19.7 billion in just two years (FY98 and FY99)

(Table 2). Based on the latest CBO projections, home care spending will be reduced

by a total of $69 billion over five years (FY98-FY2002)—or, more than four times

the intended reduction.

Table 2. Home Health Reductions Exceed $60 Billion Through FY2002

CBO Home Health Baselines ($billions) FY97 FY98 FY99 FY00 FY01 FY02 FY98-

02

January 1997 Outlays ................................................................ 19.0 21.1 23.2 25.3 27.5 29.9 127.0

BBA Target Outlays ................................................................... 19.0 20.0 21.2 21.2 23.3 25.2 110.9

March 2000 Outlays .................................................................. 17.5 14.9 9.7 9.8 11.1 12.5 58.0

Expected Reduction ................................................................... n.a. -1.1 -2.0 -4.1 -4.2 -4.7 -16.1

Actual Reduction ....................................................................... n.a. -6.2 -13.6 -15.5 -16.4 -17.4 -69.0

Network of Agencies Severely Diminished

Given the level of reductions, it is not surprising that home health agencies have

been closing at a rate of more than 90 per month since October 1997, leading to

a recorded net loss of over 3,000 agencies nationwide as of July 2000. HCFA data,

94

from which these figures are drawn, generally lags behind actual closures. These

losses are particularly problematic in states with large portions of their elderly population living in rural areas. There are now fewer agencies serving Medicare patients than there were in 1994.

Agencies Less Able to Provide Needed Care

Staffing levels of home health agencies have also decreased. From 1996 to 1999,

over 133,000 full-time positions in Medicare-certified agencies were lost. This reduction in full-time equivalent (FTE) staffing includes 51,395 fewer nurses, and 54,426

fewer home health aides available to care for patients in 1999 than were employed

by agencies in 1996.

The employment reductions in Medicare are in sharp contrast to forecasts of continued growth in demand for home care personnel resulting from strong underlying

demographic trends which include an aging population, increased availability of inhome medical technology, and consumer preference for avoiding institutionalization

or delaying entrance to nursing homes. The Bureau of Labor Statistics forecasts an

82 percent increase in the demand for key home health personnel for the period

1998 to 2008. Due to the severity of the payment reductions under the BBA97,

agencies increasingly are unable to offer competitive wages and benefits to attract

qualified staff, and labor shortages are developing across the country.

Agencies Must Subsidize Medicare to Provide Services

Concern about the financial viability of home health agencies is growing as cost

reports are settled and overpayment notices sent. One fiscal intermediary reported

that 91 percent of home health agencies they oversee had overpayments in 1998,

for a total of over one billion dollars. These figures give an indication of the extreme

degree to which home health agencies are subsidizing the Medicare home health

program.

Further, agencies throughout the nation have reported using funds other than

Medicare to help pay for the care they provide to Medicare patients. An informal

survey conducted during 1999 by NAHC revealed that 93 percent of responding

agencies must find other funding sources in order to maintain home health access

for Medicare beneficiaries. The median subsidy was $165,000. Agencies are tapping

funding sources such as state and local government monies, local community charitable funding, profits from other businesses or programs, personal lines of credit,

bank loans, bequests, hospital systems, and financial reserves in order to continue

providing care to needy and eligible Medicare beneficiaries. This continuing subsidization of the Medicare program means that agencies are less able to provide indigent care and other services that had been previously funded from some of these

same sources. and is threatening the financial viability of many agencies

Diminished Capacity to Serve Medicare Home Health Beneficiaries Leads to Access

Problems

Studies that have examined access to the home health benefit since 1997 agree

on one central point: for certain groups of beneficiaries, access to the home health

benefit has decreased. For example, a study of the effects of the BBA97 on home

health agencies conducted by The George Washington University (GWU) reported

that agencies were finding it increasingly difficult to meet the needs of high-cost patients, particularly complex diabetics. Among hospital discharge planners surveyed

as part of the GWU study, 68 percent reported it was increasingly difficult to obtain

home health services for Medicare beneficiaries.

Despite strong evidence that certain groups of eligible patients are in some cases

unable to find home health care, The Medicare Payment Advisory Commission

(MedPAC) in its March 2000 report to Congress equivocates on the issue of access.

The following excerpt from the report is particularly suggestive:

MedPAC sponsored a survey of home health agencies to examine whether access has been compromised by the IPS (MedPAC 1999). This research reveals

that the broad impact of the IPS (interim payment system] did not fulfill ‘‘the

worst predictions,’’ but has likely negatively affected beneficiaries (Abt Associates 1999). Results indicate that the new payment system has led agencies to exercise cost-cutting measures, including refusing services to Medicare patients

who have chronic, long-term conditions, especially diabetics. More than half of

agencies surveyed expected to exceed their per-beneficiary limits and said that,

as a result of the IPS, they would be more likely to decrease their Medicare caseloads, deny admission to certain types of patients, discharge certain types of patients, or reduce clinical staff or hours. [emphasis added]

In its summary of previous research about access, MedPAC’s report states:

The General Accounting Office (GAO) found that access generally has not

been impaired, despite the closure of approximately 14 percent of home health

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agencies since 1997 (GAO 1999). But interviews with key stakeholders in areas

with higher frequencies of closures suggest that home health agencies are asking

more detailed information about potential patients, and that patients who require costlier services are facing difficulty in finding an agency willing to provide visits. [emphasis added]

The controversy over the impact on access to home health is focused on how much

access has been compromised, not whether it has decreased. Several research institutes, including the Robert Wood Johnson Foundation, have funded studies to look

at the impact of the BBA97 on home health beneficiaries.

Media reports have also identified access problems due to the BBA97. An editorial

in the April 25 edition of The New York Times notes that spending on home care

services has dropped by over 45 percent since 1997. The Times editorial concludes

by calling for the restoration of the Medicare home health benefit stating that, ‘‘Congress had reason to rein in ballooning Medicare costs in 1997. But the nation’s oldest and most fragile citizens should not have to suffer for good intentions gone

awry.’’

The Move to Prospective Payment for Home Health: The Future of Home Care Hangs

in the Balance

In the midst of the chaos that the BBA97 created, home health faces a major

change in the Medicare payment system that is scheduled to take effect October 1,

2000. The IPS that began in October 1997 will be replaced by a PPS. The concept

behind the new system is to encourage efficient provision of home health services

by paying an amount based on the average national cost of treating a home health

client for 60 days. Final payments to agencies are based on the average base payment, and adjusted to take into account patient characteristics (case-mix) and labor

market differences (wage index). An outlier payment is provided for cases that exceed the expected costs.

The goal of the PPS for home health is to encourage efficient provision of services

without compromising quality. Under a cost-based reimbursement system, there is

no financial incentive to reduce utilization because providers are paid for each unit

of service. The IPS introduced a per beneficiary limit, which discouraged agencies

from providing care that costs more than their average cost of providing care in federal fiscal year 1994. There is no adjustment for patient need under IPS: therefore,

agencies have a financial incentive to avoid high-cost patients who may cause the

agency to exceed their aggregate per beneficiary limit. The PPS mitigates this financial incentive to avoid high-cost patients by paying greater amounts for higher need

patients and by allowing agencies to be paid for multiple episodes as long as the

patient continues to meet the Medicare home health coverage criteria.

NAHC has reviewed, digested and analyzed the final PPS rule as published by

HCFA on June 28. The final rule addresses many of the concerns voiced by NAHC

and the home care community. There are notable ‘‘improvements’’ in such areas as

increases in low utilization payment adjustments (LUPA), per visit payment rates,

billing and payment processes that enhance cash flow, and refinements to the casemix adjuster. These changes, however, do not make up for the inadequacy of the

overall funding of the home health benefit, which results in significant weaknesses

in even the best PPS.

In addition, the final rule leaves unresolved some of the conflicts and concerns expressed with the proposed PPS. Of particular concern is HCFA’s position on medical

supplies, which may mean a dramatically expanded responsibility for home health

agencies. It is NAHC’s position that an agency is only responsible for those medical

supplies used to treat illness or injury that occasioned the need for services.

RECOMMENDATIONS

As noted earlier, all five national home health associations—NAHC, the American

Federation of HomeCare Providers, the Home Care Association of America, the

American Association for Home Care, and the Visiting Nurse Associations of America—have reached a consensus on the reforms necessary to protect the Medicare

home health program and the beneficiaries it serves. The associations have established two priorities of equal importance—to restore and to preserve the Medicare

home health benefit. All five national home health associations agree that Congress

must take the following action in this legislative session:

Eliminate the 15 percent cut scheduled to take effect October 1, 2001. Although federal budget projections show growth in home health following implementation of the PPS in October 2000, these projections are overly optimistic in accounting for the 15 percent reduction in payment rates scheduled for October 2001. Agencies that have eliminated staff, reduced utilization and cut costs to the bone to cope

with the IPS, and whose PPS payments are based on the IPS budget, will not likely

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respond to a payment system that pays them 15 percent below their previous year’s amounts by increasing services. It is much more likely that a 15 percent cut in payments and below-inflation update factor will translate into additional agency closures, layoffs and even greater access problems.

Restore access to care for high needs and vulnerable patients. While outright elimination of the 15 percent will relieve the future threat or further devastation, an immediate infusion of dollars is necessary if access for certain hard to serve

patients is to be restored. The following actions will help agencies throughout the

country take on these patients with significantly reduced risk of financial devastation:

• Allow an additional expenditure of $500 million in each of the next five years to

be used as outlier payments for services to the most medically complex and costly patients;

• Increase payments for home health services in rural areas by 10% to address the

higher costs of delivering care in these areas; and

• Remove medical supplies from the per episode payments under the prospective

payment system and make payments under a fee schedule for only the supplies

that are actually used. Such a proposal should be fashioned so that it is budget

neutral.

It is also the consensus of the five national associations that Congress should direct HCFA to:

• Confine the OASIS data collection and reporting requirements to only Medicare

and Medicaid patients;

• Limit the OASIS assessment items to only the 20 questions which are actually

needed to implement the new PPS; and

• Provide for an emergency payment mechanism during at least the first six months

of the new payment system to ensure that there is no interruption in payments

for services.

Copayments

While not a focus of this hearing, the issue of imposing copayments on home

health services has recently surfaced in the context of a Medicare prescription drug

benefit. NAHC and the other national associations take serious issue with any

Medicare program ‘‘reforms’’ that restrict or eliminates any current benefits.

Home care plays an important role in the American health care system. Home

care patients tend to be older and poorer that the average Medicare beneficiary, and

in greater need of care. Copays would penalize the most vulnerable Medicare beneficiaries because of their illness.

NAHC urges Congress to reject any attempt to place a copayment on the Medicare

home health benefit for the following reasons:

• Copays are regressive and tax the sick:

• The elderly already pay high out-of-pocket health care costs, despite Medicare and

Medicaid coverage;

• Copays represent an unfunded mandate to the states whose Medicaid programs

will be responsible for the copay if the beneficiary is dually eligible for both

Medicare and Medicaid benefits;

• Copays would be another administrative burden on home health providers;

• Copays discourage use of cost-effective home care services, which may result in

the need to use higher cost care. thereby increasing Medicare outlays; and

• Copays may require further subsidization of the Medicare program by financially

ailing home health agencies since many low-income beneficiaries will be unable

to finance copays.

CONCLUSION

Mr. Chairman and members of the Subcommittee, these legislative and regulatory

changes would go a long way toward strengthening the home health infrastructure

and restoring beneficiary access to quality home care services. We thank you for

your sincere interest, and look forward to working with you and your colleagues as

you draft legislation to further refine the BBA97 with respect to home care services.

I am happy to answer any questions that you might have at this time.

Mr. BILIRAKIS. Thank you very much, Ms. Connolly.

Mr. Williams?

STATEMENT OF DAVID T. WILLIAMS

Mr. WILLIAMS. I guess this is batting cleanup.

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Mr. BILIRAKIS. And that is a compliment, is it not?

Mr. WILLIAMS. I do not know. Mr. Chairman, Congressman

Brown, and members of the committee, thank you for having this

hearing and providing me the opportunity to speak. In addition to

my position at Invacare Corporation, I am also on the board of the

American Association for Home Care, which is a national trade association representing home health agencies and HME providers.

HME providers are Invacare’s direct customers, so what I say

here today really represents the issues important to our customers

and to an industry which is really the complementary staff to the

home health agency. We like to say that there would be no HME

if there were home health agencies, and we know that home health

agencies are able to serve folks in their home because of the HME

we manufacture and provide.

The challenge for me in the clean-up position today is to impress

upon you the importance of a couple issues that are critical to our

industry. We have been on a panel where we have talked about billions and billions and the need for restoration and regulatory relief,

and I represent an industry that is a tiny fraction of the Medicare

budget. So hopefully, I will be able to pull something off and at

least impress you that there are two key issues that we would like

this committee to address.

Before I launch into that, I would really like to emphasize once

again that the industry that I am part of, home care and the home

medical equipment industry, is often cited by bureaucrats and regulators as needing to be reigned in because it is growing too fast,

and I would challenge that position because growth in home care,

growth in the HME industry, is good news for America. It is good

news because what we are talking about is a cost-effective, clinically appropriate, and patient-preferred alternative to more costly

options. This is an irrefutable fact.

The Hudson Institute Study in 1998 showed two things about

home care that were really important, and they included people

with severe disabilities in that cohort of their study. They said by

investing a little more money in home care, they were able to reduce the dependence on more costly facility-based care by 50 percent and that the people they diverted from facility-based care, the

cost of serving their health needs was 50 percent lower than in a

facility setting. So it is cost effective.

It is clinically appropriate. The best example that home care is

clinically appropriate is the fact that every major heart transplant

program in the country prepares their patients for surgery in their

homes because they get better clinical outcomes. That is a fact.

And patient preferred, the State of Ohio Department of Aging did

a study a few years back where they interviewed 10,000 Ohioans

age 55 and older and they asked them, if they ever needed longterm acute care, what would they want. Ninety-some percent of

them said, in their home. So home care is patient preferred, and

there are studies all over that duplicate that number.

So I just ask you to keep that in mind as you are shaping some

form of BBA relief. Now the two issues.

The first issue that I would like to talk about is a cost of living

adjustment for the HME services benefit. In the Balanced Budget

Act, that was frozen through the year 2002. In BBRA in 1999, ConVerDate 11-MAY-2000 13:35 Apr 18, 2002 Jkt 010199 PO 00000 Frm 00101 Fmt 6633 Sfmt 6602 E:\HEARINGS\65915 pfrm02 PsN: 65915
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gress acknowledged that maybe that was a little too much and they

restored 0.3 percent in 2001 and 0.6 in 2002. I do not think it takes

a whole lot of insight to realize that the freeze of the Medicare fees

has effectively reduced payments, because our customers, and indeed Invacare itself, we experience dramatic increases in the cost

of raw material, fuel, and labor. And so, effectively, we are in a

negative right now and it is continuing to go downhill and 0.3 percent is not really going to make up very much of it.

The effect has been really profound. Remember, the HME industry is largely made up of small entrepreneurial companies and they

just cannot withstand this kind of onslaught, and large companies

have been adversely hit, also. So full restoration of the cost-of-living adjustment is critically important.

The other piece, quickly, is we would ask Congress to exercise a

little more oversight as HCFA uses the new expedited inherent

reasonableness authority that was contained in the BBA. HCFA

has proven time and time again that they are incapable of promulgating rules around a program that is reasonable. They use flawed

data and they use questionable practices. In fact, in the BBA, report language was included to require HCFA to use statistically

valid and relevant data and a sound costing methodology. One

would think that was a prerequisite for the program.

So those are the two things our industry is asking for and I will

stand for questions with the rest of the panel.

[The prepared statement of David T. Williams follows:]

PREPARED STATEMENT OF DAVID T. WILLIAMS, DIRECTOR OF GOVERNMENT RELATIONS, INVACARE CORPORATION ON BEHALF OF THE AMERICAN ASSOCIATION FOR

HOMECARE AND THE HOME MEDICAL EQUIPMENT (HME) SERVICES INDUSTRY

Mr. Chairman, Congressman Brown and Members of the Committee: my name is

David T. Williams and I am the director of government relations for Invacare Corporation. I am pleased to be here to offer testimony on the impact of the Balanced

Budget Act of 1997, as it pertains to home-based health care and the home medical

equipment services industry.

Invacare Corporation is the world’s leading manufacturer and distributor of medical equipment and supplies for use in post-acute care settings. The company employs more than 5,000 people and is headquartered in Elyria, Ohio. Invacare has

domestic facilities in Ohio, Florida, Massachusetts, California, Maryland, Michigan,

Missouri and Texas. Invacare also has manufacturing operations in Canada, Mexico,

Australia, New Zealand, Denmark, the United Kingdom, France, Germany, Sweden,

Switzerland and Portugal.

I am also a member of the Board of Directors of the American Association for

Homecare (AAH), a national trade association representing home health agencies

and HME providers. AAH was formed earlier this year by the merger of the National Association for Medical Equipment Services, the Home Health Services and

Staffing Association and HIDA Homecare. It is the only association representing the

spectrum of providers committed to quality health outcomes in the home.

With your indulgence, I will speak on behalf of both Invacare and the Association.

In the course of this hearing, you have or will have heard compelling statements

from a wide spectrum of health-care providers. Each witness will try to make a case

for restoring some funding, correcting some error or eliminating a new regulatory

burden. I am no different than those witnesses who have preceded me and those

who will follow me. The purpose of my testimony is to bring to the attention of this

Committee, three provisions of the BBA that deserve your immediate attention.

However, before going into detail on these provisions, I would like to offer some observations about health care in the home.

Let there be no mistake, home-based health care has grown faster than any other

segment of the health care continuum. But, the growth in home care is not an indicator that something has gone wrong. The growth in home-based health services is

good news for America.

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It is good news because homecare is a clinically appropriate, cost-effective and patient-preferred alternative to facility-based health services. Please allow me to elaborate.

A study conducted by the Hudson Institute in 1998 concluded that home-based

health services are cheaper than and can reduce admissions to facility-based care.

This study was an in-depth look at the State of Indiana’s In-home/CHOICE program. A copy of this study will be forwarded to each member of this committee. For

the purpose of this hearing, however, two of the study’s conclusions are worth noting. First, the researchers noted that by placing increased emphasis and funding on

home-based health services, they were able to reduce institutionalization of Indiana’s frail elderly population by 50 percent. Second, the Hudson Institute reported

that home-based health services reduced spending for health care on this population

by 50 percent or more. Home care is cost effective!

There are a variety of studies that talk about improved clinical outcomes obtained

when a patient receives health services in the familiar surroundings of their home.

In one study conducted by Tufts University, a small group of 100 patients, diagnosed as frail elderly, was divided into two groups. One group received their health

care in a facility setting (a nursing home). The other group was provided with homebased health services. The mortality and morbidity statistics for the first group was

dramatically higher than those served in their home. A less ‘‘academic’’ demonstration of the clinical appropriateness of homecare can be found in heart transplant

centers across the country. In preparation for their surgeries, transplant patients

go on strict regiments of pharmaceutical and dietary therapy. Virtually every major

transplant center arranges for this therapy to take place in the home. Surgeons report that patients who come from a loving home environment are better prepared

and yield better outcomes. Homecare is clinically appropriate!

The Ohio Department of Aging surveyed a large number of adults over the age

of 55 years. Ninety percent of the respondents said that if they ever needed longterm care, they wanted that care to be delivered in their home. Several other studies report similar results. Homecare is patient preferred!

Yes, homecare has grown over the last two decades and it will continue to grow.

Advances in medical technologies and changes in Medicare’s payment structure

have spurred a considerable growth in the use of home care. As in every other aspect of modern medicine, home health care has benefited from an explosion of new

and emerging technologies. Things such as, the use of space-age materials to make

wheelchairs and mobility aids lighter and the application of micro-chip computer

technology in implantable devices used to dispense critical medication, make it possible for the care received in the home to equal or exceed that received in a hospital,

at a fraction of the cost. Today, it is common for a Medicare beneficiary to undergo

chemotherapy in the comfortable surroundings of his or her own home, a fete that

was inconceivable just a few years ago. In the future, advances in tele-medicine and

similar technologies will make it possible to further reduce health care costs and

improve the quality of health care provided in the home. None of these advances

could have been envisioned at Medicare’s inception in 1965.

I ask that the Members of this Committee, as you go about fashioning legislation

to refine the BBA, keep in mind the irrefutable fact that the growth in the utilization of homecare is good news for America.

Congress can go a long way toward insuring that America has a strong and vibrant homecare system that is capable of meeting the growing healthcare needs of

this country by addressing three provisions of the BBA. Our industry asks that this

Committee address the pending 15 percent reduction in payments to home health

agencies, the freeze on the annual cost of living adjustments for home medical

equipment and HCFA’s use of inherent reasonableness in any Medicare provider

‘‘give-back’’ legislation.

Eliminate the pending 15 percent reduction in payments to home health

agencies (HHA). The BBA included a congressional mandate to change the way

payment is made for home health services from a ‘‘cost plus’’ methodology to a prospective payment system. Because so little was known about the level of savings

that could be achieved under PPS, Congress included a provision to reduce payments to HHAs by an additional 15 percent, if saving targets were not hit. The Congressional Budget Office estimated the transition would save $16 to $19 billion over

five years. The transition is not even complete and the savings to Medicare is conservatively estimated to exceed $45 billion.

But the threat of an additional 15 percent cut continues to hover over home

health agencies and threatens the financial stability of these organizations. As you

can well imagine it is difficult, if not impossible, to attract investors or secure loans

when there’s a potential for a devastating reduction in fees on the books. It is a matVerDate 11-MAY-2000 13:35 Apr 18, 2002 Jkt 010199 PO 00000 Frm 00103 Fmt 6633 Sfmt 6621 E:\HEARINGS\65915 pfrm02 PsN: 65915
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ter of fundamental fairness that Congress acknowledge that home health agencies

have done their part by permanently removing the proposed 15 percent reduction.

Restore the annual Cost of Living Adjustments for HME services. The BBA

included a freeze on the Medicare fee schedules for durable medical equipment for

the years 1998 through 2002. This cut was in addition to a 30 percent reduction

in the fees paid for home oxygen therapy. The impact of this combination, on an

industry populated by many small entrepreneurial enterprises, has been devastating. Invacare is the largest creditor in the HME industry. Since 1997, there

has been a dramatic increase in bad and unrecoverable debt. The number of customers who have filed for bankruptcy is unprecedented. Small providers are going

out of business or being forced into consolidation at a record rate.

Large/national HME providers have also been hit very hard. PriceWaterhouseCoopers (PWC) has released some startling findings in an update of a 1999

survey of nine publicly held companies that provide home medical equipment and

services. PWC observes that the nine companies were earning a positive net income

in 1996, but three years later, two-thirds of them were losing money, bankrupt or out

of existence. This occurred during a period in which U.S. corporate profits for all industries rose by 18 percent.

The HME industry asks Congress to restore the Cost of Living Adjustment

(COLA) for fiscal years 2001 and 2002. Income from Medicare, not only was cut 30

percent for home oxygen but, all income for Medicare home medical equipment and

services has declined in real terms in the absence of a COLA, while costs to HME

providers—particularly labor and fuel costs—have continued to increase. By restoring two years of the COLA, the industry can regroup and begin to rebuild so its

members can be viable partners with Congress and HCFA in the mission to better

serve Medicare beneficiaries.

Note: Invacare and other vendors to the HME providers have done their best to

help our customers survive perilous economic conditions. Our company has assiduously avoided price increases in deference to our customers. At the same time, the

costs of raw materials, fuel and labor have continually increased and we can no

longer ‘‘subsidize’’ the Medicare program with artificially low wholesale prices. On

the first of October this year, Invacare will impose its first price increase since passage of the BBA.

Congress must provide oversight as HCFA begins to use its ‘‘expedited inherent reasonableness authority.’’ The BBA empowered HCFA to develop a

process for reducing the Medicare fee schedules for durable medical equipment

using an expedited process. The HME services industry acknowledges the fact that

HCFA must be able to make reasonable adjustments in the fee schedules for the

goods and services it purchases for beneficiaries. However, HCFA has repeatedly

abused this authority and clearly demonstrated its inability to exercise it in a reasonable and rational manner.

In the Balanced Budget Refinement Act of 1999 (BBRA), Congress acknowledged

that HCFA was ‘‘not playing fair’’ with its IR procedures. Report language was included in the BBRA requiring the agency to develop and use a sound costing methodology based on statistically valid and relevant data. Notwithstanding this provision, HCFA appears to be ready to impose several reductions of significant consequence, ignoring the mandate contained in the BBRA.

The attached table describes the potential consequences of this action, as they

pertain to 3 specific products manufactured by Invacare. HCFA proposes reducing

the Medicare fee schedule for these three products by an average of 38% (48% to

28%). If HCFA proceeds with this action, American businesses and Medicare beneficiaries will get hurt.

To demonstrate this point, let’s consider one product, a basic folding walker

(HCPCS E0135). Invacare sells this product to its customers, HME providers, for

$33.20. The provider must deliver the unit to the beneficiary’s home, measure and

adjust the unit for the individual, instruct the patient in its use and go through the

laborious process of collecting the copayment and billing Medicare. Using the principles of Activity Base Costing, it is estimated that the additional cost of providing

this product would be $55.91. Thus, the total retail cost—without any consideration

for profit margin—is $89.11. The proposed new Medicare fee schedule is $50.50.

This is neither reasonable nor rational.

Providers will be unable to take assignment on this product and Medicare beneficiaries will have to pay the full retail cost out-of-pocket and will have to have the

provider submit unassigned claims for the allowable amount. This is an unreasonable economic hardship for beneficiaries.

Equally important is the impact this kind of shortsighted policy has on American

businesses. While it is doubtful that anyone can produce a folding walker that can

yield profit at this price, some companies who have little interest in quality or effecVerDate 11-MAY-2000 10:22 Apr 18, 2002 Jkt 010199 PO 00000 Frm 00104 Fmt 6633 Sfmt 6621 E:\HEARINGS\65915 pfrm01 PsN: 65915
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tiveness will enter the market. HCFA will price legitimate American companies out

of the market opening the door to foreign products of dubious quality and questionable clinical effectiveness. The offshore products are not as durable, well engineered

and, often, are not as clinically appropriate as those manufactured by American

companies, like Invacare. Why should Medicare beneficiaries have to settle for less

than America’s best?

An interesting side note: Many of the offshore products flooding the market do

not even meet Medicare’s definition of medical equipment. To be considered a medical device federal law requires that the manufacturing location be registered with

the Food and Drug Administration. Registration with the FDA requires performance

with that agency’s good manufacturing practices (GMP). Many of these offshore

companies are not known to, much less registered, with the FDA. Thus, Invacare

and other American companies are placed at a competitive disadvantage by products

that do not even meet the definition of medical equipment.

Congress should mandate that HCFA promulgate final rules that demonstrate

‘‘sound costing methodology’’ and define what constitutes ‘‘statistically valid and relevant data.’’ The development of these final rules should be done in conformance

with the Administrative Procedures Act and incorporate the active and substantial

input of the HME services industry.

Conclusion: Home health care continues to evolve and expand to meet the increasingly complex needs of today’s Medicare beneficiaries. By capitalizing on technical innovation, home care providers can conduct increasingly complex medical and

therapeutic regimens in the comfort of beneficiary’s own homes. In addition, recent

studies have shown that an expanded home care benefit would reduce Medicare expenditures by avoiding costly institutionalization. We urge the Committee to recognize the many benefits of home care by strengthening Medicare’s commitment to the

home health benefit. You can do that by making sure that the following items are

incorporated into any ‘‘BBA Fixer’’ or ‘‘Medicare Provider Give-back’’ legislation.

We ask that Congress acknowledge the contribution that home health agencies

have made to Medicare cost containment and permanently eliminate the pending 15

percent cut. Further, Congress should restore the annual Costs Of Living Adjustment (COLA) for durable medical equipment. Finally, we believe that Congress

must exercise its oversight responsibility and insist that final rules addressing IR

be promulgated in full compliance with the Administrative Procedures Act and if the

procedures outlined and that these rules reflect the a sound costing methodology

that uses statistically valid and relevant data.

I want to thank the Chairman and Congressman Brown for providing me with

the opportunity to offer this testimony today. I would be happy to answer any questions you may have at this time. However, if any member of the Committee needs

additional information on any of the points raised in this testimony, please feel free

to contact me.

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Mr. BILIRAKIS. Thank you so much, Mr. Williams.

Of course, my gratitude to all of you for your efforts to try to help

us wade through this. I think I speak for all of us when I say that

we wish we had a magic wand that we could wave to solve all of

the problems. What we did in BBA 1997 had to be done. We

thought it had to be done the way we did it, and, of course, it

turned out that we did some bad in the process of the good.

Mr. Williams, you did not go into the issue of copayments. Ms.

Connolly did. Dr. Ganske earlier went into this in some detail. I,

in the past, am on the record as opposing copayments on home

health care. But taking a look at the real world today, an awful lot

of these home health care centers are possibly going out of business—and you are not going to sit there and tell me you support

copayments. Your job is probably every bit as political as ours.

But taking all that into consideration in a process of wanting to

save, or at least to keep the program from deteriorating any more,

is the subject of $5 copayments. For instance, just using it as a figure, throwing that out there, is that really such a really terrible

thing? Very quickly, because I do want to get into some of the other

areas.

Mr. WILLIAMS. I think the issue of copayments right now, to impose copayments at the time an industry is transitioning to a totally new payment system, that is just throwing gas onto the fire.

And if you want to make it not work and come away with even less

data to say whether or not PPS is the solution and if it needs further tweaking. If you throw copayments on there, it is like gas on

the fire.

Mr. BILIRAKIS. You probably would agree with that, Ms.

Connolly.

Ms. CONNOLLY. Yes, I would agree. I think adding copayments

adds still another administrative layer that a home care agency

will have to deal with.

Mr. BILIRAKIS. God knows we have got too many of them out

there already, do we not?

Ms. CONNOLLY. We are going to add to our cost to collect a minimal amount of money that many people will not want to pay.

Mr. BILIRAKIS. Ms. Tavenner, it seems almost like yesterday that

you testified, we have dragged this thing out so much because of

all these votes. I believe you said your four facilities would suffer

$70 billion in cuts as a result of BBA 1997, is that correct?

Ms. TAVENNER. Seventy million dollars.

Mr. BILIRAKIS. Oh, million, not billion.

Ms. TAVENNER. Million, over a 5-year period.

Mr. BILIRAKIS. That is better.

All right. In any case, I will ask my question. That is as a result

of BBA 1997. How much of those cuts are the result of overdoing

BBA 1997? In other words, as you testified, the contemplation was

that there would be a savings of, oh, I do not know, we have been

throwing around, let us say, $100 billion and it turns out there is

a savings of double that. So are we saying that you would have

contemplated half of those cuts as intended under BBA 1997 and

could probably have lived with those cuts that were intended, although you cannot live with the cuts as it ultimately has turned

out?

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Ms. TAVENNER. I certainly think that in our original contemplation, going back to 1997, we were estimating about half of those

cuts, and while we were not happy with that—I do not think anyone is happy to see the cuts—— Mr. BILIRAKIS. Yes, of course.

Ms. TAVENNER. [continuing] we had made and started and continue to make a lot of aggressive cost-reduction activities, particularly in the non-clinical area. So, yes, that would have been a much

better solution for us.

What has, I think, compounded where we are today is the labor

force issue and the drug issue, which I do not think any of us speculated. We thought we would have better control over the rate of

increase in those two areas and they have been out of control.

Mr. BILIRAKIS. I do not have that much time left and I trust that

Mr. Burr will go into the community health centers in addition to

so many other things that he is interested in. Being a strong supporter, as you know Mr. Hawkins, of community health centers and

the wonderful proven work that they do, I am just so very grateful

for his support and Mr. Brown’s. They really have been leaders on

the subject.

But I would ask you just one quick question. Apparently, and

your testimony supports this, the community health centers now

serve approximately 4.5 million uninsured, and yet we have, depending on whose figure you accept, maybe up to 8 or 10 times that

of uninsured. Could you do a better job with those uninsured, in

other words, increasing the amount of uninsured you serve?

Mr. HAWKINS. Well, we could certainly do so with some increased

resources. I mean, the cost of a year’s worth of care at a health center for each one of the people served is about $325, and that is an

average of four visits, including lab, x-ray, pharmacy, health and

nutrition education, et cetera.

Mr. BILIRAKIS. As related to what?

Mr. HAWKINS. As compared with?

Mr. BILIRAKIS. Yes.

Mr. HAWKINS. An average of about $450 on the average cost for

you and me according to Health U.S. and other statistics. It is not

all the care that they need. It is not the inpatient care. It is not

the specialty care.

Mr. BILIRAKIS. Right. Of course.

Mr. HAWKINS. But it is the primary and preventive health care.

What we could do, though, and this is what is important, is if Medicaid continues to pay its fair share for its beneficiaries, then we

can continue to grow and serve more.

I might make one last point. Every dollar that this Congress appropriates for health centers generates another $3 in State and

local support for the health centers which they put together in a

pool along with the payments made by the uninsured, because everybody pays something, at least a little something, a buck, two

bucks for the cost of their care. But they put that all together to

put a package together of resources to support care for those uninsured individuals.

What we can do and what has grown even more rapidly than

Federal grant support for health centers has been State, local, and

private philanthropic support, and we can do more to secure yet

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additional resources from those. It is not just relying on Uncle Sam

for every dollar needed. We do serve, health centers, this little

small contingent of 1,000 providers, 1 out of every 10 uninsured

Americans today, but we want to serve more. We serve one out of

every five low-income pregnant women who deliver every year.

Mr. BILIRAKIS. If we could only get our legislation in the managed care bill enacted, being able to expand your managed care

participation would be very helpful, but we are having some problems with that, as you know, over in the Senate.

Mr. Brown to inquire. Thank you.

Mr. HAWKINS. Thank you, sir.

Mr. BROWN OF OHIO. Thank you, Mr. Chairman.

Mr. Richtman, all of us are concerned, I think all of us on this

panel are concerned about provider payments and the impact that

these cuts have on the beneficiaries and I think you have all laid

that out very well, but I think there may be other ways we can adjust Medicare to help seniors. We have a patchwork of protections

for low-income Medicare beneficiaries. Some are dually eligible, get

Medicare and Medicaid. Others get assistance with premiums and

cost sharing, others with just a portion of the premium.

But even though this assistance is available, the number of beneficiaries enrolled is obviously much too low. What can we do to get

more seniors enrolled in programs that provide this kind of assistance to them?

Mr. RICHTMAN. Congressman Brown, you are talking, I think,

about the QMB program and the SLMB program, and as you know,

we found it very difficult to get people who are eligible to enroll in

these programs. Part of it is a lack of awareness. People not knowing the programs are there for them, and another part of it, frankly, is when the Medicaid program, I think, is involved in determining the eligibility, there is for some people a stigma associated

with that part of the eligibility that might be considered welfare,

Medicaid, as opposed to support for Medicare eligibility.

We have talked with some of our members about, and the Social

Security Administration about, having the Social Security Administration take a more active role in enrolling eligible beneficiaries for

both of these programs and actually enrolling them through the Social Security Administration, and that would obviate the need to go

to Medicare and to Medicaid.

Mr. BROWN OF OHIO. Can HCFA do that or does that have to be

done by Congress?

Mr. RICHTMAN. Well, we think the Social Security Administration

could do that.

Mr. BROWN OF OHIO. Thank you.

Mr. Hawkins, thank you for the good work that community

health centers do. I very much appreciate your work and the work

of the people in Ohio, also.

Mr. Williams, talk if you would, briefly, elaborate on the cost-ofliving adjustment issue.

Mr. WILLIAMS. Well, again, BBA froze the fee schedule for durable medical equipment at the same time that there was a major

hit, a reduction in the fee paid for home oxygen therapy services,

and that freeze was to go through the year 2002. Like I said, our

costs continue to go up. We would like to have that restored to the

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full COLA, which is about 2.3 percent for the year 2001. Considering the numbers that have been discussed in this committee, that

is really budget dust. I mean, we are talking about, it would scare

me, but about $500 million to $700 million for those 2 years.

But what our industry is looking for as much as anything is a

period where we can be stable, where we know that there is nothing else going to happen, where there is enough money to get in

there and to look at our inventories and to stabilize our businesses

so that we can grow and be a good partner with Medicare. Right

now, the HME industry is at a tremendous disadvantage and providers are constantly under attack with increased regulatory burdens and costs.

It is important to remember that the HME benefit, which people

have a tendency to look and see a wheelchair or a crutch or an oxygen concentrator and see it as a commodity, but the HME benefit

is a service. Our customers deliver the product to the patient’s

home, so they have been experiencing first-hand the fuel cost thing.

They have to measure the patient, adjust and fit. They have to

educate the patient. And then they go through the Medicare billing

process, which is a tremendously costly thing.

Under activity-based costing principles, it was recently estimated that for a $30—the wholesale price is $30, $32 for just a basic

walker—that the non-equipment acquisition cost to the provider are around $55. So the cost of our products are huge. All we are

asking is to be able to keep up with those and the full restoration

of the COLA would be a great step in the right direction.

Mr. BROWN OF OHIO. Thank you.

I just wanted to explain and sort of mention a frustration I think

several of us feel. Ms. Coughlin, you mentioned that when you

asked for $15 billion, the President’s plan, in 5 years, the President wants $21 billion, has asked Congress for $21 billion. Many think

we will not get that much. You are asking for five-sevenths of that

money, $15 billion over $21 billion, for one-sixth, one-seventh of the

beneficiaries.

What a lot of us have a lot of frustration about what managed

care has done in our districts, there are senior citizens in my district that 2 years ago were in United Health. They got cutoff last

year, went into QualChoice. They got cutoff this year, went into

Aetna. They got cutoff. They had to switch plans, switch doctors,

switch providers three times.

To come in here when GAO has said that you are overpaid and

to ask for $15 billion out of $21 billion available seems to be a bit

overkill, does it not?

Ms. COUGHLIN. Well, Congressman, it may seem like overkill to

individuals who are not involved directly in managed care. I am

trying to help understand how managed care plans can deal more

effectively and be more responsive to seniors and to individuals

with disabilities.

When you look at the painful decisions that we in our company

go through in determining whether or not we can stay in a particular marketplace, for example, the example you just gave is a

very vivid one, I think, because there are places where seniors have

switched from one plan to another and then that plan has to pull

out for that given year.

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And just making the decisions myself for the areas I am responsible for, is painful. That is the only way I can describe what you

go through, because in order to become eligible to offer Medicare

in a particular area, you go through a rather grueling process with

HCFA. It is very expensive to sell the plan. And then when you realize that you lose significant amounts of money—the example I gave in my testimony is very real. When you pay out $1.10 in care

for every $1 you bring in and you are not even counting any administrative costs, even a modest amount to administer the plan, there

are tough decisions. But we would not pull out if we could make

it work. It is sort of counter-intuitive.

Mr. BROWN OF OHIO. You want us to believe that, and I have

looked at the lists of executive salaries at Aetna and executive salaries in other for-profit managed care companies and you talk about

the painful decisions that you make—I am not saying you are one

of those executives that has those salaries, but I think that there

is never acknowledgement of over-promises.

I mean, managed care makes these promises to senior citizens.

You are either over-promising on purpose or you are not very good

at predicting any kind of future cost that most businesses in this

society have to predict. And then 2,000 seniors citizens and Dave

Williams in my county pay for it year after year and counties all

over the State and the country pay for those decisions that your

very, very, very well-paid executives have made when they make

these cuts and force these people into different decisions.

Then you have the chutzpah to come into this committee and ask for 71 percent of the $15 billion that we may or may not give out

when you see everyone sitting up here asking particularly for the

safety net hospitals and the community health centers and the people that Mr. Richtman represents, when those are the people that

are really hurting and your industry comes in here and asks for 71

percent of the $21 billion that this Congress might vote?

Ms. COUGHLIN. I think what—— Mr. BILIRAKIS. A very, very brief response to it, please.

Ms. COUGHLIN. Okay, I will. What I am trying to focus on is

being able to accommodate the needs of the seniors and the individuals with disabilities on 2 percent increase per year, and I do not

think there is anybody in the room that could believe that medical

costs are only going up by 2 percent a year. That is the increase

that we are getting at this point in time, compared to the Federal

employees, who cover a lot of people in this room who have gotten

29 percent increase over the past same 3-year period that I am

talking about we got 2 percent a year.

Mr. BROWN OF OHIO. And some hospitals in the inner city have

less and the community health centers may have less. I think we

have gone far enough.

Mr. BILIRAKIS. Dr. Ganske to inquire.

Mr. GANSKE. Dr. Zetterman, you raised some important issues on

the site of service differential issue and mentioned how this would

affect gastroenterology services. Are there other services that Congress should consider if we address site of service differentials?

Mr. ZETTERMAN. I think there are a number of areas that could

be considered, but, of course, at this moment, there are 13 GI procedures that have been specifically affected by this bifurcated fee

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proposal that sits there and is in place, and therefore we would

propose that those be the 13 that be initially dealt with in some

sort of a legislative fix.

Mr. GANSKE. Can you mention some other specialty areas?

Mr. ZETTERMAN. I think that perhaps one of the issues would be

to look at some sort of an articulated standard as to where this

should be put into place. All those things that are affected right

now in gastroenterology are things that occur less than 10 percent

of the time. I think another standard is the one that you yourself

raised earlier, and that is what can be appropriately and safely

done in an office setting might additionally be one other factor, and

you certainly raised that in earlier comments.

Mr. GANSKE. What would be your suggestions specifically for a

broad rule, rather than dealing with specific codes?

Mr. ZETTERMAN. I think one thing to do would be to articulate

or actually define a specific standard as to when that threshold

should be crossed, and we initially proposed that that be for procedures that are done less than 10 percent of the time in the office

would not be affected.

Mr. GANSKE. What would be your suggestions to this committee

for GME changes?

Mr. ZETTERMAN. I think there is no question but what we need

to protect the safety net hospitals. We have heard today much testimony about how the Balanced Budget Act affected particularly

the large teaching hospitals. There have been a number of proposals out there as how to effectively deal with it. I can provide to

the committee, if you wish, for example, a paper that is a physician

paper of the American College of Physicians-American Society of

Internal Medicine specifically on GME as a public good.

These hospitals in which graduate medical education occur include those hospitals that have a disproportionate number of indigent or uninsured patients, have a large percentage of elderly patients, have the group of patients that clearly need access to care

and sometimes have no other means to get it than through those

teaching hospitals. As a consequence, it really can be a public good

in how it provides care.

Therefore, we need to, I think, continue where we are. Perhaps

we should limit and stop progression of the indirect reductions that

are occurring right now and at least put a moratorium on it until

we can safely determine what those cuts and the impact of those

cuts can be.

Mr. GANSKE. I thank you and I yield back, Mr. Chairman.

Mr. BILIRAKIS. I thank the gentleman.

Ms. DeGette?

Ms. DEGETTE. Thank you, Mr. Chairman.

Ms. Tavenner, I think that you have quite accurately described

some of the issues that your group and others are facing, what

with both increased numbers of uninsured and also some of the

other measures that we have seen that affect institutions like the

ones you manage and other disproportionate share hospitals, and

also your answer to the question to the chairman about what kind

of cuts you expected and then what kind of cuts you got.

I wonder if you can expand on that answer a little bit and tell

me what you think will happen if we do not give some relief under

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H.R. 3710, my legislation on DSH assisted by Congressman

Bilbray, Whitfield, and others, and also Congressman Burr’s bill,

H.R. 2341, for the community-based institutions.

Ms. TAVENNER. I think that, again, going back to both DSH and

community-based institutions, what we are seeing is the increase

in the uninsured and the increase in folks who have inability—— Ms. DEGETTE. If you can just move that microphone a little closer.

Ms. TAVENNER. We are seeing those numbers rise—— Ms. DEGETTE. Right.

Ms. TAVENNER. [continuing] and we are seeing the cost of them

rise. And what the hospital is left with is, I think, ethically, hospitals cannot put the patient, ethically and legally, back into the

street. So we are a 24-hour-a-day, 7-day-a-week operation, so we

cannot control who comes into our organization and we are federally bound and State bound to care for those patients and we want

to care for those patients.

So what happens in a reimbursement situation where we continue to see decreases is that then we are forced to look at services

that basically are on the fringe, or what I call not our core services,

and make business decisions about whether or not we can continue

those. Home health is one. Hospice is another. So you start to look

at what services you can eliminate. Therefore, the patient ends up

staying longer in acute care, so you kind of have a cyclical effect.

Ms. DEGETTE. And that is more expensive, too, to you.

Ms. TAVENNER. Absolutely.

Ms. DEGETTE. Is there going to come a point, do you think, without relief that your core services will begin to be affected?

Ms. TAVENNER. I think we have seen that in some communities

already, and—— Ms. DEGETTE. Could you give me a couple of examples?

Ms. TAVENNER. Yes. Rehab services would be an example. Skilled

nursing units within hospitals, which in rural areas are frequently

a safety net for patients. We have seen skilled nursing facilities

within hospitals close. We have seen home health and hospice services close. We have seen rehab services close. Then I think once you

eliminate those services, then you start to look at psychiatry and

others where the payment mechanism just does not cover the cost.

Ms. DEGETTE. Mr. Hawkins, would you like to talk a little bit

about how you see some of those issues?

Mr. HAWKINS. Well, yes. If I could, although we are not bound

by the Emergency Medical Treatment and Labor Act, EMTALA,

which I think is being referred to here, and that refers to care to

the individual until they are stabilized, okay, not necessarily inpatient care unless that is what is necessary to stabilize the individual’s treatment, I think there is a little bit of a difference between

that and the legal obligation to take anybody who walks in the

door, regardless of their ability to pay.

Ms. DEGETTE. Right.

Mr. HAWKINS. But much the same as has been alluded to with

respect to the hospitals. As payment rates fall, the first thing to go

typically are services, and the first services to go are those services

that are either non-reimbursable and which are important to either

help get the patient into care—transportation, outreach, transVerDate 11-MAY-2000 10:22 Apr 18, 2002 Jkt 010199 PO 00000 Frm 00113 Fmt 6633 Sfmt 6602 E:\HEARINGS\65915 pfrm01 PsN: 65915
110

lation to help the care be meaningful—or the therapeutic regime,

the care that the doctor recommends or the nurse practitioner recommends be useful, like health or nutrition education, taking a

pregnant woman and saying, this is how you engage in good selfcare, good nutrition during pregnancy.

Ms. DEGETTE. Let me stop you right there.

Mr. HAWKINS. Yes.

Ms. DEGETTE. About that pregnant women issue, you heard me

ask that question before. Do you think that some of these problems

I talked about with the last panel in terms of the most expensive

infant care issues would be eliminated if we could somehow cover

pregnant women under Medicaid and CHIP.

Mr. HAWKINS. Oh, sure. I mean, many of those issues we struggle with that every day in health centers. Trying to get individuals

covered under Medicaid and CHIP, and I might add that for those

who keep talking about the stigma associated with Medicaid and

welfare, a study is about to be released which is going to essentially point to the fact that the so-called stigma relates to where

these people have to go to enroll and how they are treated. That

stigma disappears when they can enroll at a provider site or at a

community-based site, such as what your legislation is recommending, closer to home, that knows the individual, cares for them

both in a medical sense but also in a personal sense.

Ms. DEGETTE. Mr. Chairman, with your indulgence, would you

mind if I asked Ms. Tavenner to also answer that question about

the pregnant women?

Mr. BILIRAKIS. As long as she does so in a brief manner, please.

Ms. TAVENNER. I can be brief. I certainly think that working with

pregnant women, getting them in prenatal care and seeing them

through their pregnancy would reduce the complications of

newborns. So yes, I would support it.

Ms. DEGETTE. Mr. Chairman, I would like to ask unanimous consent to enter into the record a letter dated July 18, 2000, from a

number of groups, some who are here today, expressing support

both for my legislation and also Congressman Whitfield’s legislation.

Mr. BILIRAKIS. Without objection.

Ms. DEGETTE. Thank you.

[The information referred to follows:]

July 18, 2000

Honorable TOM BLILEY

Chairman

Committee on Commerce

U.S. House of Representatives

2125 Rayburn Building

Washington, DC 20515

DEAR CHAIRMAN BLILEY: The Medicaid Disproportionate Share Hospital (DSH)

program is our nation’s primary source of financial support for safety net hospitals

that serve the most vulnerable Medicaid, uninsured and underinsured patients. At

a time when the number of people without insurance continues to rise, and hospitals

are losing billions of dollars caring for low-income patients, further cuts in DSH are

ill-advised at best. That is why the undersigned hospital organizations strongly support legislation (H.R. 3698 and H.R. 3710) before the House Commerce Committee

that would stop Medicaid DSH program cuts scheduled for 2001 and 2002.

We are also writing to announce the results of a new analysis that finds hospitals

lose $7.9 billion per year caring for Medicaid and uninsured patients. The analysis

is based on the American Hospital Association survey data and was conducted by

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The Lewin Group. The new analysis highlights that despite the DSH program, significant Medicaid payment shortfalls exist for safety net hospitals serving Medicaid

and uninsured patients.

According to analysis:

• Hospitals lost $7.9 billion in 1998 on Medicaid and uninsured patients (even factoring in state and/or local governments appropriations that fund indigent care);

• Over five years, the estimated payment losses to hospitals total almost $40 billion;

• In 1998, on average, hospitals received 84 cents in Medicaid revenue and tax appropriations for every dollar it cost them to care for Medicaid and charity care

patients. This is the lowest payment-to-cost ratio for any payer, including Medicare and...

Protecting federal DSH allotments from reductions beyond FY 2000 levels, and

permitting federal DSH growth, does not completely fill the payment gap between

what Medicaid programs pay hospitals and the costs these hospitals bear caring for

Medicaid and uninsured patients. However, it will provide substantial relief for

many struggling safety net hospitals. We urge the House Commerce Committee to

report legislation introduced by Congressmen Whitfield and Bilbray and Congresswoman DeGette to stop the scheduled reductions in FY 2001 and 2002 in the Medicaid DSH program and prevent further losses for hospitals treating our most vulnerable Americans.

Sincerely,

AMERICAN HOSPITAL ASSOCIATION; ASSOCIATION OF AMERICAN MEDICAL

COLLEGES; CATHOLIC HEALTH ASSOCIATION OF THE UNITED STATES; FEDERATION

OF AMERICAN HEALTH SYSTEMS; NATIONAL ASSOCIATION OF CHILDREN’S

HOSPITALS; NATIONAL ASSOCIATION OF PUBLIC HOSPITALS AND HEALTH SYSTEMS;

NATIONAL ASSOCIATION OF URBAN CRITICAL ACCESS HOSPITALS; PREMIER, INC.;

AND VHA, INC.

Mr. BILIRAKIS. I would like to say to the gentlelady here publicly

that her legislation in this regard, who should quarrel against it?

I should think none. But we are going to be faced with a limited

amount of money to try to save what exists now and I am not sure

that we are going to be looking at brand new types of benefits, that

sort of thing, so——

Ms. DEGETTE. If the gentleman will yield just for one moment,

let me just assure you, my legislation is very fiscally conservative,

even more fiscally conservative than some others, and I do not

think it gives new benefits. I hope you will——

Mr. BILIRAKIS. Well, from a preventative standpoint, I mean. I

have made that argument many times in the past, and unfortunately, with CBO, it does not carry very far. But in any case, we

will talk about that.

Mr. Burr to inquire.

Mr. BURR. Thank you, Mr. Chairman. I do not know whether to

take a minute or to try to take 30 minutes because I think every

member could go one way or the other. I think we all have a pretty

good idea of what we need to do. The realities are, we do not have

enough money to do it.

But Mr. Brown raised a very good point, and I would tell you

that my answer would be slightly different than his conclusion

when he talked about the promises. What we have done is we have

over-promised as a Congress. We made people believe that, in fact,

we could produce a dollar’s worth of services for 85 cents and this

would be never ending, and the fact is that it cannot. We talked

about it earlier in the first panel, that this insane health care system that we have got right now, its reimbursements are based

upon historical cost.

Well, you know, try to tell historical costs to the future of health

care. We will all pay the same thing for what technology supplies

us, and that is the reason that we cannot figure out this transition

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that we are going through. It is the reason that you cannot produce

a formula that will take into account for home care the spike for

6 months of a 100 percent increase in gasoline costs and GAO will

not figure that in when they try to figure out where the profit or

loss is in a particular industry.

And it is insane, but just think about it. We sit here and talk

about GAO and CBO and PPS and IPO and IPS and HCFA and

HHS. We just made it too damn complicated, and unfortunately,

with every attempt to fix it, and they are all good intentions—mine

are better, but Mr. Brown’s are good, too—we are all well-intended,

but you are exactly right. What we have a tendency of doing is

moving a little further out the uncertainty that exists today. My

hope, and I wish we could have gotten the first panel to say, yes,

you should do away with the 15 percent for home health. It should

not be there. There is no way for private sector companies to run

with that type of knife hanging over their head if you expect anybody to invest today, much less in the future of businesses.

Long-term care is the greatest example. I think it is the one area

that this Congress has not paid enough attention to, because we

know the demographics in this country. If you understand those demographics, we have to start today with the bricks and mortar to

supply enough facilities to meet the need 10 years down the road.

Mr. Richtman, if you are talking about the preservation of Social

Security and Medicare, then long-term care is in there somewhere

with the people that you are here representing, and if you are not

an advocate out there saying, we need to make long-term care predictable, we need to make sure that the financial markets look at

this, not as a place to flee from but as a place to invest in, then

we have made a real mistake and you have made a real mistake

and your association has.

Let me get to some specific questions, because I think I could

keep this up really all day. I think our whole attempt is to try to

address some short-term problems and to begin to bring some predictability to every one of the sectors that are represented here. I

hope that when we complete it, we can look back and say, we are

not there but we have accomplished a few things that we needed

to accomplish.

Let me go to you, Mr. Hawkins. GAO kept referring to the fact

that we had to get away from cost-based reimbursements, and, in

fact, the Safety Net Preservation Act is to move to a prospective

pay system. Would you please elaborate on that just a little bit?

Mr. HAWKINS. That is right. I am so glad that you raised that,

because as I heard that this morning, we have got to move away

from cost-based, my reaction was, well, that is exactly what the

Safety Net Preservation Act does. Not only does it do that, however, it also provides the stability that you just referred to and

some equity in the form of a payment mechanism. It sets a floor.

It allows State flexibility.

And, by the way, it is amenable. If at some future point health

centers are found to be overpaid, it is amenable to adjustment because it basically sets a rate for the first year and then calls for

an adjustment thereafter based on a cost-of-living adjustor, the

Medicare Economic Index, which is in law. It is the same mechanism that is used to adjust other primary care payments, and when

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you look at other PPS systems, they can then be adjusted back

downward for MEI minus 1 percent or minus 2 percent, or perhaps

the MEI is not going to be sufficient.

I guess my thought was when I heard Mr. Scanlon say that this

morning, but you can move to provide permanent, fair, stable, common sense relief through the Safety Net Preservation Act. You do

not have to wait for that GAO report. First of all, you have three

other reports out there on the street in the last 3 months alone,

the Institute of Medicine, an earlier GAO report, and one by the

Kaiser Commission on Medicaid and the Uninsured, all of which

have said that cutbacks in Medicaid payments are hurting already

and seriously and negatively affecting health centers’ ability to care

for the growing numbers of uninsured and relief is needed. The

Safety Net Preservation Act does that without necessarily going

back to 100 percent cost-based reimbursement, and that is why it

meets all those tests.

Mr. BURR. I appreciate that. I will make sure to send that statement to Mr. Scanlon just to clarify it for him.

Mr. Richtman, let me ask you something from the standpoint of

who you represent and the interest that I think we would all agree

with. Specifically as it relates to the outpatient PPS issue with hospitals, what effect would a delay have on the implementation of

that, if any, on your beneficiaries?

Mr. RICHTMAN. Well, we feel, of course, our beneficiaries are already paying a lot of out-of-pocket costs and are not in a position

to pay even more. One fact or figure that I heard recently was kind

of astounding, that today, and this looks at a lot of out-of-pocket

costs, but today, a Medicare beneficiary on average pays out-ofpocket health care costs as a percent of their income at a higher

cost than before we even had Medicare. On average, a Medicare

beneficiary is paying more for health care as a percent of his or her

income out of pocket than before we had the Medicare program.

Mr. BURR. I remember when I was sworn in as a Member of Congress just 6 long years ago that wonderful health care plan, Mr.

Chairman, that I heard that all Members of Congress had was, in

fact, the same one I had in Winston-Salem when I worked for a

company with 50 employees. There was only one big difference,

that the same family plan that I paid $72 for with the company

paying 75 percent and me paying 25 percent for, when I became

a Member of Congress it now cost me $142 for the same coverage.

I very quickly called the president of the insurance company—

I felt that as a Member of Congress, I could do that now—and I

asked him, I said, you know, I am getting the same coverage and

it went from $72 to $144 and he laughed and I said, what is so

funny? He said, ‘‘Congressman, never let the Federal Government

negotiate your health care.’’

Now, I am proud to tell you that it has worked its way down over

those 51⁄2 years, but that statement has never left me.

Mr. Chairman, if I could for just a second——

Mr. BILIRAKIS. Well, you are already almost 4 minutes over.

Mr. BURR. I appreciate the indulgence of the chair.

Mr. BILIRAKIS. Without a unanimous consent request, I might

add, but go ahead very quickly so we can finish.

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Mr. BURR. One of the challenges that we have is to make sure

that we have a health care system in total that is ready to handle

the great changes and the great opportunities that will come in

pharmaceuticals, in devices, those that will be used every day at

the hospitals, that will be used at the community health centers,

they will be used in home care. One of the questions I had to ask,

if there is not home care, where do these people go? They stay in

the hospital. It is more expensive.

I mean, we try to sort of hide our head in the sand and say we

do not know the answer. We do know the answer. That is the reason that we created this segment of health care and now we sort

of run from it because, gosh, people use it. It grows too fast. Well,

whatever we create, there are going to be people there to game the

system.

I would only hope to say to each of you that as we begin to hopefully put some of these fixes back in, that you will work aggressively to make sure that we find the right balance, that we do not

go too far, and that, in fact, you help us with the structure of it

so that this system of health care in this country is able to handle

the technological changes that come in devices and pharmaceuticals and in care, because if we cannot, then, in fact, we will

flunk on that promise of supplying the best health care system

available in the world.

Mr. BILIRAKIS. And I would add to that, that we are really in an

ivory tower. We make these decisions up here, and with the exception of a couple of physicians that we have on this subcommittee,

we do not have the practical knowledge, practical experience. Unfortunately, that is when these unforseen consequences, unintended consequences take place.

So your help, not only today but your continuing help is so important. We worked awfully hard on trying to undo somewhat BBA

1997. Did we get adequate support, adequate honest type of inputs

from you all, from the industry? I am not sure. The industry would

say, hey, do not cut us at all, in effect.

So, basically, we are going to tie this all up now and thank you.

I would ask you if you would be available to respond to written

questions that might be submitted to you and do it within a relatively short period of time, because hopefully this is on a fast

track. I know we all want to see that. And in the process, let us

not approach it from the standpoint of, hey, we want all the money

back, all right? It is not going to happen. It just is not going to happen. So approach it from a realistic, practical understanding that

we have a tough job to do up here. It is a job that we created by

virtue of the unintended consequences in BBA 1997. So, hopefully,

we can do a little better this time around.

Thanks so very much for being here. This hearing is adjourned.

[Whereupon, at 3:47 p.m., the subcommittee was adjourned.]

[Additional material submitted for the record follows:]

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STATE OF FLORIDA

AGENCY FOR HEALTH CARE ADMINISTRATION

July 17, 2000

The Honorable MICHAEL BILIRAKIS

2369 Rayburn House Office Building

Washington, D.C. 20515

Re: Modifications to the Balanced Budget Act of 1997

DEAR CONGRESSMAN BILIRAKIS: As Congress reviews various proposals to reverse

certain restrictions on funding to hospitals, nursing home facilities and home health

providers from the Balanced Budget Act of 1997 (BBA), I would like to share with

you our concerns in these areas and ask your support for certain important modifications this year. They include:

• Freezing Disproportionate Share Hospital (DSH) cuts at F/Y 2000 level;

• Restoring funding to skilled nursing facilities; and

• Increasing home health provider payments.

Freezing Disproportionate Share Hospital Cuts:

Florida’s safety net hospitals that provide critical in-patient care for the uninsured and under-insured have been particularly affected by BBA reductions. State

disproportionate share hospitals have experienced significant cuts since fiscal year

1998. Additional cuts of $46 million are slated through fiscal year 2001, for a total

Florida reduction of $80 million over five years. Freezing these DSH cuts at the fiscal year 2000 level, as proposed in various House and Senate bills, would preserve

important health care delivery systems and maintain $46 million of critical funds

within our communities.

Three of Florida’s teaching hospitals serving large populations of the poor ( Jackson Memorial in Miami, Shands Jacksonville, and Tampa General Hospital rely

upon disproportionate share funding. These facilities are committed to a three-fold

mission of patient care, medical education, and research. In addition, they are engaged in highly specialized, state-of-the-art care, which is delivered to residents

from throughout the State. These hospitals provide trauma care, burn treatment,

neonatal and family care, and organ transplantation services to all Floridians. Developed and delivered through these vital DSH funds, these services save lives, reduce traumatic injuries and complications from strokes, and return people to their

lives sooner and healthier.

Skilled Nursing Facilities and Home health Providers Payments:

Other critical health areas that are emerging as fragile systems requiring repair

from the BBA include Florida’s nursing homes and home health providers. As you

know, concern for the viability of our nursing homes is the focus of a statewide review by a Long-term Care Task Force chaired by Lieutenant Governor Brogan. They

will be considering issues related to our elderly in nursing homes and alternative

care arrangements. Restoring funding to skilled nursing facilities, and increasing

home health provider payments—providing home care choices for our elders—would

offer some important assistance as we seek comprehensive solutions to address future viability of these critical industries.

To avoid potential declines in access to health care and to address deteriorating

financial conditions, which are accumulating in Florida’s hospitals and nursing

home, I urge your assistance in modifying the BBA before Congress adjourns. Thank

you for all you do to strengthen our communities, and assure all Floridians quality

of care.

Please feel free to call on me, or our Florida/Washington office at (202) 624-5885,

for any additional information on these timely and important issues.

Sincerely,

RUBEN J. KING-SHAW, JR.

Secretary

PREPARED STATEMENT OF THE AMERICAN ASSOCIATION FOR HOMECARE

The American Association for Homecare is pleased to submit the following statement to the Subcommittee on Health and Environment for House Commerce Committee. The American Association for Homecare is a new national association resulting from the merger of the Home Care Section of the Health Industry Distributors

Association, the Home Health Services and Staffing Association and the National

Association for Medical Equipment Services. The American Association for

Homecare is the only association representing home care providers of all types:

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home health agencies and home medical equipment providers, be they not-for-profit,

proprietary, facility-based, freestanding or governmentally owned.

WHAT IS A HOME HEALTH AGENCY?

Home Health Agencies provide skilled nursing care, therapy and home health aide

services to individuals recovering from acute illnesses and living with chronic health

care conditions. Health care services in the home setting provide a continuum of

care for individuals who no longer require hospital or nursing home care, or seek

to avoid hospital or nursing home admission. The range of home care services includes skilled nursing; respiratory, occupational, speech, and physical therapy; intravenous drug therapy; enteral feedings; hospice care; emotional, physical, and

medical care; assistance in the activities of daily living; skilled assessments; and

educational services.

WHAT IS AN HME PROVIDER?

Home medical equipment (HME) providers supply medically necessary equipment

and allied services that help beneficiaries meet their therapeutic goals. Pursuant to

the physician’s prescription, HME providers deliver medical equipment and supplies

to a consumer’s home, set it up, maintain it, educate and train the consumer and

caregiver in its use, provide access to trained therapists, monitor patient compliance

with a treatment regimen, and assemble and submit the considerable paperwork

needed for third party reimbursement. HME providers also coordinate with physicians and other home care providers (e.g., home health agencies and family caregivers) as an integral piece of the home care delivery team. Specialized home infusion providers manage complex intravenous services in the home.

HOME CARE IS JUST BEGINNING

Over the last two decades, advances in medical technologies and changes in Medicare’s payment structure have spurred a considerable growth in the use of home

care. As in every other aspect of modern medicine, home health care has benefited

from an explosion of new and emerging technologies. From the use of space-age materials to make wheelchairs and mobility aids lighter, to the application of microchip computer technology in implantable devices used to dispense critical medication, technology makes it possible for the care received in the home to equal or exceed that received in a hospital, at a fraction of the cost. Today, it is common for

a Medicare beneficiary to undergo chemotherapy in the comfortable surroundings of

his or her own home, an advance that was inconceivable just a few years ago. In

the future, advances in tele-medicine and similar technologies will make it possible

to further reduce health care costs and improve the quality of health care provided

in the home. None of these advances could have been envisioned at Medicare’s inception in 1965.

Recent changes to Medicare’s payment system have also spurred a growth in

home health utilization. In the late 1980’s, the Health Care Financing Administration’s (HCFA’s) rigid definition of the coverage criteria for home health services was

struck down by a United States District court, making it possible for more beneficiaries to access home health services. At roughly the same time, Medicare instituted a prospective payment system for hospital inpatient care, which reimbursed

hospitals according to the patient’s diagnosis regardless of the number of days spent

in the institution.

Together, these changes have resulted in a situation where more Medicare-eligible

beneficiaries are arriving home ‘‘quicker and sicker’’ than ever before. In turn, these

beneficiaries require increasingly complex health services. All indicators show that

as the ‘baby-boomers’ continue to age, this trend will continue. The American Association for Homecare believes that the increased utilization of home health care

prompted by these changes should be seen as a rational response to the changing

needs of Medicare beneficiaries and the increased ability of home health providers

to meet these needs.

HOME CARE IS ECONOMICAL

Importantly, home care is not only patient-preferred, it is also cost effective. Numerous studies have shown that home care providers are a cost-efficient component

of the healthcare delivery system, as they help keep beneficiaries out of costly inpatient programs. One study, conducted by an independent research organization, particularly demonstrates these savings. This study, The Cost Effectiveness of Home

Health Care, examines the highly successful In-Home/CHOICE program instituted

by the State of Indiana in 1985. Indiana provides 100% of the funding for this proVerDate 11-MAY-2000 10:22 Apr 18, 2002 Jkt 010199 PO 00000 Frm 00120 Fmt 6633 Sfmt 6621 E:\HEARINGS\65915 pfrm01 PsN: 65915
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gram, which covers the costs of home health care for qualified residents in need of

long term care in order to prevent institutionalizations.

The authors of the Study note that the coming crisis in health care funding for

America’s rapidly growing elderly population could be alleviated by home health

care programs such as Indiana’s. By avoiding institutionalized care, Indiana was

able to reduce inpatient caseload costs by 50% or more, while allowing patients to

receive care in the comfort of their own homes. The cost savings associated with this

increased reliance on home care were considerable. The study states that home care

for the elderly in Indiana can be provided for one half the cost of skilled nursing

facility care. Similar care for the disabled costs 1.5 times more in a skilled facility

than in the home. In addition, the quality control and screening procedures used

in the Indiana program have successfully avoided problems with fraud and abuse.

The Hudson Institute Study concludes that ‘‘Properly crafted and administered,

home health care can play a critical role in helping society meet the looming health

care needs of the ‘Baby Boom’ generation.’’

CONCLUSION

Home health care continues to evolve and expand to meet the increasingly complex needs of today’s Medicare beneficiaries. By capitalizing on technical innovation,

home care providers can conduct increasingly complex medical and therapeutic regimens in the comfort of beneficiary’s own homes. In addition, recent studies have

shown that an expanded home care benefit would reduce Medicare expenditures by

avoiding costly institutionalizations. We urge the Committee to recognize the many

benefits of home care by strengthening Medicare’s commitment to the home health

benefit.

PREPARED STATEMENT OF THE AMERICAN HOSPITAL ASSOCIATION

The American Hospital Association (AHA), on behalf of our nearly 5,000 member

hospitals, health systems, networks, and other providers of care, appreciates this opportunity to tell you first hand the dramatic impact of the Balanced Budget Act of

1997 (BBA) on America’s hospitals and health systems.

In 1997, Congress and the White House faced a large and seemingly intractable

federal budget deficit and projections that the Medicare Hospital Insurance Trust

Fund would be bankrupt by 2002 unless Washington acted.

Congress responded with the 1997 Balanced Budget Act. The Congressional Budget Office (CBO) estimated that the BBA would cut $116 billion from 1998 to 2002

in projected Medicare spending. More than $50 billion of these cuts were estimated

to come from reduced payments to hospitals. An additional $10 billion was to be cut

from Medicaid hospital payments.

The intent of Congress and the White House was to save the Medicare program.

The result, though, threatens the viability of America’s hospitals and health systems.

According to projections, the five-year impact of the BBA for hospitals and other

Medicare providers is over $200 billion, partially due to larger than anticipated reductions to providers. This unintended and excessive reduction in Medicare spending is severely affecting hospitals’ ability to provide vital patient care services.

Rural hospitals have been especially victimized by BBA Medicare and Medicaid

spending cuts. An independent analysis by the University of Washington’s Rural

Health Research Center in Seattle concluded that, for rural hospitals, the BBA’s cut

‘‘will sharply escalate in intensity and affect a wide range of the services they provide to Medicare beneficiaries. These hospitals will have to cut services to survive.’’

The study looked at six small, rural hospitals in separate states. The BBA’s effect

on them:

• Two rural health clinics had been closed.

• One that was scheduled to open never did.

• The hospitals’ home health agencies can’t take as many patients because of payment limits.

• Access to physical, occupational and speech therapy has declined at all the sites

studied.

Across the country, hospitals are struggling. Services are being cut and facilities

are being impacted:

• For Wilkes-Barre General Hospital in Wilkes-Barre, Pennsylvania, BBA Medicare

and Medicaid spending cuts have forced the hospital to make some tough decisions... like eliminating a diabetes center; health promotion programs; geriatric

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psychiatric inpatient services; a Women’s Health Network; the School of Anesthesia; and the ambulance service.

• In Arizona, BBA cuts have forced the John C. Lincoln Health Network to discontinue its disease management programs for patients with congestive heart

failure and chronic pulmonary disease. ‘‘Health Source,’’ a free health information service, also was discontinued. And a busy skilled nursing care unit, which

averaged 20 patients a day, was closed. Why? Take for example, one patient

whose stay was 93 days. The facility’s costs per day were $650; Medicare reimbursed only $260, resulting in losses of $36,270. Hospitals simply can’t continue

to provide services their communities need if doing so guarantees financial hemorrhage.

• BBA cuts are affecting more than just Medicare beneficiaries. In Stuart, Florida,

for example, Martin Memorial, a 336-bed facility, will shut down its nurse midwife program in October. The hospital is facing a $30 million decrease in Medicare reimbursements over five years. Martin Memorial had no choice but to

close the 17-year program.

• In Massachusetts, the state is expected to lose close to 23,000 health services sector jobs by 2005, according to a Standard & Poor’s/DRI report. The BBA’s fiveyear cuts of $1.7 billion for the state’s hospitals are a significant cause of the

job hemorrhage.

Last year, Congress and the White House recognized some of the BBA’s ‘‘unintended consequences’’ on hospitals and the patients they serve, when they enacted

the Balanced Budget Refinement Act of 1999 (BBRA), which restored an estimated

$16 billion of the BBA’s Medicare reductions. While the BBRA marked an important

first step to remedying the BBA’s unintended consequences, America’s hospitals

need additional relief. And here’s why.

THE CASE FOR BBA RELIEF 2000

When Congress passed the BBA, CBO estimated that hospitals would contribute

$53 billion over five years toward deficit reduction. Estimates now put that number

well over $75 billion. Congress should return, at a minimum, the excess funds it

did not intend to cut to America’s hospitals.

The BBA reduces Medicare payments for hospital inpatient services by providing

payment updates that are below the market basket index, which is Medicare’s measure of inflation. This below-inflation update has seriously hampered hospitals’ ability to keep pace and maintain access to services for Medicare beneficiaries. Over fiscal years 1998, 1999 and 2000, hospital inflation rates rose a total of 8.2 percent,

while the payment updates have totaled 1.6 percent.

Compounding the effects of the BBA is a series of market pressures no one could

have predicted in 1997. Labor, drug, blood, and technology costs are skyrocketing.

The costs of caring for all of our patients, including Medicare beneficiaries are increasing rapidly.

Since 1998, annual wages and benefits paid to registered nurses increased 6 percent, total employee benefits increased nearly 7 percent, and pharmacists’ wages increased more than 25 percent. As stated earlier, for the same period, hospitals’ annual Medicare updates have totaled only 1.6 percent.

The cost of prescription drugs has increased dramatically. The average price for

new drugs is about $71, more than twice the average price for previously existing

drugs. New and more expensive drugs are constantly emerging, replacing older

drugs and increasing the overall use of drugs in patient care. Yet, only a fraction

of the cost of new drugs is included in the inflation measurement the government

uses to calculate hospital payment updates.

The cost of blood also is on the rise. The Food and Drug Administration soon will

approve new blood screening techniques to make our blood supply safer. But quality

improvements will increase the cost of blood by $40 to $50 a pint, a 50 percent

jump. New techniques, such as ‘‘viral inactivation,’’ are expected to double or triple

the cost of blood. However, the cost of these new techniques is not included in today’s measure of hospital inflation.

In addition, providers will be required to make a major investment to comply with

new federal administrative simplification standards and with new patient record

privacy and security requirements. The White House estimates that new privacy requirements will increase the costs for providers and health plans by $1.2 billion for

the first year alone, and $3.8 billion over five years. Other estimates, however, have

put the cost as high as $43 billion. Current Medicare payment policies do not reimburse for these costs.

The economic outlook is so grim, that financial experts are losing confidence in

what has historically been a fairly stable industry. Moody’s Investor Service reports

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that downgrades in bond ratings for hospitals were the most ever in 1999, outpacing

upgrades 5-1. And this month, Moody’s reported that the 2000 financial picture is

not improving. In fact, the rating agency warned that the amount of debt affected

by downgrades in 2000 may be on course to actually exceed the total amount of debt

downgraded for 1999. A poor financial prognosis means it costs hospitals more to

borrow and invest in the people, technology and infrastructure necessary to keep

pace.

At the same time, America’s hospitals and health systems continue to serve as

the nation’s health care safety net... caring for those who have nowhere else to go

for care. Current estimates put the number of Americans who lack health insurance

at about 44 million. That number is projected to continue to increase, soaring to 55

million by 2010. Hospitals are America’s safety net for caring for the uninsured, but

at increasing costs. Government support makes up only a small portion of costs for

treating the uninsured.

The Medicaid DSH program is the primary source of financial support for safety

net hospitals that serve the most vulnerable citizens. Without this important funding source, these hospitals would be incapable of providing adequate access to

health care for many of these patients.

BBA cuts... rising costs . . . a darkening financial horizon...the problems of the

uninsured. Our ability to take care of our patients and communities is being seriously challenged. But it’s not just hospitals that are saying America’s health care

providers are facing a financial crisis... outside experts confirm that we need a cost

of caring adjustment.

WHAT OTHERS ARE SAYING

Recently, the Medicare Payment Advisory Commission (MedPAC), Congress’ advisor on Medicare payment issues, agreed that more needs to be done. The commission recommended that Congress increase the inpatient prospective payment system

update by between 3.5 percent and 4 percent—more than twice what is in current

law. MedPAC’s data analysis shows that nearly 35 percent of the nation’s hospitals

are operating in the red. This is due, in part, to the dramatic Medicare cuts contained in the BBA. MedPAC recognized the need for Medicare to keep pace with the

high cost of providing health care today.

In addition, two independent studies, one by the Lewin Group and another by

Ernst & Young/HCIA-Sachs confirmed that hospitals are unable to cover their costs

when treating Medicare patients. Lewin predicts that without further relief from the

BBA, 60 percent of hospitals may lose money treating Medicare patients by the end

of 2004. And the Ernest & Young study reinforces the Lewin results, by showing

that total Medicare margins, which measures the operating margin on all hospital

services to Medicare patients, continue to decline to dangerously negative levels.

Also, a recent analysis of 1998 data from the American Hospital Association survey, by the Lewin Group, found that hospitals lost $7.9 billion on Medicaid and uninsured patients. Over the next 5 years, the estimated payment losses to hospitals

will total almost $40 billion. In 1998, on average, hospitals received 84 cents in

Medicaid revenue and tax appropriations for every dollar it cost them to care for

Medicaid and charity care patients. This is the lowest payment-to-cost ratio for any

payer, including Medicare and commercial insurers.

No organization, including the nation’s hospitals and health systems, can continue

to serve if it gets paid less than the cost of providing services.

Mr. Chairman, it’s time for lawmakers to heed both the recommendations and the

warnings of financial experts. Hospitals and health systems need a cost of caring

adjustment.

Last week, CBO announced new on-budget surplus estimates of $2.2 trillion over

10 years—estimates that have more than doubled in four months. This is further

proof of what we’ve known for a long time: Congress and the Administration have

the resources to reverse the unintended consequences of the BBA. It’s time for

Washington to act.

BBA RELIEF 2000

The BBA has hit hospitals hard in ways no one could have foreseen when the law

was written. With today’s booming economy, now is the time to remedy the flaws

of the BBA.

Indeed, Washington has taken notice and the momentum for BBA relief is growing. The AHA is pleased to cite that 217 representatives have cosponsored the Medicaid Preservation Act (H.R. 3698/3710), legislation to prevent further reductions in

the Medicaid disproportionate share hospital (DSH) program. Similar legislation in

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the Senate is also gaining support with 24 senators cosponsoring Medicaid DSH relief (S. 2299/2308).

The AHA is also asking Congress for relief, including:

• For all hospitals, repeal of the last two year’s of the BBA’s inpatient market basket reductions; • For rural hospitals, a package of relief that would include: equalizing the qualification threshold for payments to rural hospitals under the Medicare disproportionate share (DSH) program; improving flexibility for Medicare critical access

hospital program; updating current rural payment classification systems; providing a payment adjustment for rural ambulance providers; and several technical changes for rural hospital services; and

• For teaching hospitals, continuation of the current adjustment for indirect medical

education of 6.5 percent;

Mr. Chairman, we enjoy a booming national economy, which is fueling a federal

budget surplus of billions of dollars. We can avert a health care crisis in our communities. We urge you and your colleagues to support our efforts to secure additional

BBA relief now and help ensure that high-quality health care will be there when

our communities need it.

Thank you for providing me with the opportunity to address you today.

PREPARED STATEMENT OF THE AMERICAN MEDICAL ASSOCIATION

We appreciate the opportunity to provide this written statement to the Subcommittee concerning the American Medical Association’s (AMA) recommendations

as the Subcommittee moves forward in its consideration of amendments to the Balanced Budget Act of 1997 (BBA).

The BBA imposed tremendous cuts in Medicare payments for various medical

services. Although these provisions required regulatory implementation, the Health

Care Financing Administration (HCFA) has imposed massive amounts of burdensome regulatory requirements on the physician, provider and beneficiary communities beyond what Congress had ever intended. Some of these BBA provisions or

their implementing regulations have adversely impacted or threaten to have such

impact on Medicare patient access to and quality of care. Thus, certain BBA ‘‘fixes’’

are needed to ensure that these results do not continue to plague beneficiaries.

Accordingly, the AMA recommends that the Subcommittee approve the following

amendments to the BBA:

Health Care Financing Administration (HCFA) Reform

The AMA recommends that the Subcommittee include in any BBA-reform

package provisions to (1) ensure that HCFA and its carriers devote the

proper level of resources to educating physicians concerning Medicare coding, billing and documentation requirements and (2) reform HCFA’s postpayment audit process.

As discussed above, HCFA, under the BBA, has imposed on physicians an overwhelming amount of burdensome regulatory requirements. As we recently testified

before this Subcommittee, physicians must comply with over 100,000 pages of complex regulations. Although HCFA expects physicians to understand all of these regulations, notices, fraud alerts, and program memoranda, the agency does not adequately educate physicians, especially with regard to Medicare billing requirements.

Indeed, physicians cannot receive written consistent and clear answers from their

carriers regarding coding, documentation and coverage issues.

Further, HCFA contractors have been sending post-payment review letters to physicians, which require the physician to submit to invasive, protracted and expensive

government audits in order to preserve his or her due process rights. In these postpayment review letters, HCFA contractors are identifying possible billing errors

from a small batch of claims and using these possible errors to ‘‘extrapolate’’ enormous overpayment amounts from physicians, suppliers and providers. During this

process, many HCFA contractors have no direct, face-to-face communication with

the physician, supplier, or provider who frequently have difficulty obtaining answers

from the carrier regarding their audit.

Many physicians are opting to retire or to no longer see Medicare patients, rather

than deal with the HCFA/carrier hassles and possibly undergo costly and lengthy

post-payment audits. This threatens patient access to care—especially in rural

areas—which, in turn, affects quality.

Accordingly, we urge the Subcommittee to ensure that any BBA-reform

legislation requires HCFA to remedy its over-zealous regulatory approach

to implementation of the BBA, especially with respect to the agency’s phyVerDate 11-MAY-2000 10:22 Apr 18, 2002 Jkt 010199 PO 00000 Frm 00124 Fmt 6633 Sfmt 6621 E:\HEARINGS\65915 pfrm01 PsN: 65915
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sician and provider education process as well as its post-payment review

enforcement activities.

HHS Accountability for Regulatory Costs

The cost of the numerous BBA and other burdensome regulatory requirements discussed above impose tremendous costs on physicians’ medical

practices. Yet, much of these compliance costs must be absorbed by physicians’ practices. Thus, the Secretary of the Department of Health and

Human Services (HHS) and HCFA should be required to calculate the costs

of new regulations and increase Medicare physician payment rates each

year to account for these costs.

HCFA annually updates Medicare payments to physicians to account for certain

factors, including inflation and legislative and regulatory factors affecting physician

expenditures. Yet, these updates do not take into account the costs of compliance

with the continuing onslaught of costly BBA and other regulations.

We urge the Subcommittee to pass legislation requiring the Secretary of HHS to

determine the cost of each regulation (and not simply those affecting the physician

payment schedule) on physicians’ practices and annually take such costs into account when updating Medicare payments to physicians. Further, for oversight purposes, we recommend that the Secretary be required to report to the Medicare Payment Advisory Commission (MedPAC) and the General Accounting Office (GAO) on

the costs imposed by all relevant regulations and to consult with organizations representing physicians concerning the methodology used in determining such impact.

Finally, we recommend that the GAO advise Congress on improvements to the Secretary’s methodology for calculating these regulatory costs.

Loan Deferment for Residents

We further urge the Subcommittee to include in any BBA-reform package

an amendment to improve the formula for determining whether medical

residents can qualify for a student loan deferment during residency.

The Medicare cuts imposed on the health care industry under the BBA have economically drained the system and have made it even more difficult on medical residents who generally are not paid enough to make ends meet, especially when they

are required to re-pay enormous amounts on their student loans during their residency.

Currently, under the Higher Education Act, there is a very strict formula based

on ‘‘economic hardship’’ for determining whether a student can get a loan deferment.

This formula is much too narrow to be effective, and many medical residents who

legitimately need a loan deferment for economic reasons fail to qualify. By the time

medical students begin their residency programs, which are generally four or more

years in duration, they must begin to repay their medical school loans, yet they typically are not paid enough to make ends meet. Last year’s national average gross

annual salary for first-year residents was about $34,000.

Based on national average figures (using full-time pay for first year residents and

monthly housing payments) and a federal debt burden of $72,000, a typical resident

would be left with less than $440 a month, after paying federal taxes, housing and

loan payments. This amount must cover all other expenses such as food, insurance,

utilities, telephone, state/local taxes, transportation, medical books, computer-related expenses, professional memberships, educational conferences, health care expenses, clothing, and entertainment/social activities. Yet, under current law, this

resident would not qualify for a deferment and thus would have to begin repaying

his or her loans.

With a minor adjustment to the formula, residents with over $48,000 in federal

debt (rather than $72,000) could qualify for federal loan deferment during their

residencies.

Thus, we urge the Subcommittee to approve a BBA-reform provision that

would permit residents, through a more realistic economic hardship formula, to obtain deferments for their full initial residency period if they

continue their education through a medical internship or residency program.

We thank the Subcommittee for the opportunity to provide our views concerning

the foregoing matter, and appreciate the Subcommittee’s efforts to provide relief

under the BBA. We look forward to working with the Subcommittee to achieve reasonable remedies for hardships imposed by the BBA and related burdensome regulatory requirements on Medicare patients, physicians and the provider community.

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PREPARED STATEMENT OF THE AMERICAN MEDICAL REHABILITATION PROVIDERS

ASSOCIATION

Mr. Chairman: This statement is submitted on behalf of the American Medical

Rehabilitation Providers Association (AMRPA). AMRPA is the national trade association representing approximately 325 freestanding rehabilitation hospitals, rehabilitation units in general hospitals, and other outpatient rehabilitation providers.

The majority, if not all, of our members participate in the Medicare program. For

rehabilitation hospitals and units, Medicare accounts for approximately 70% of all

discharges and revenues. Therefore, even temporary changes in Medicare reimbursement can threaten the security of a great number of facilities and consequently, the patients we serve.

BACKGROUND

Rehabilitation hospitals and units provide medical care and various therapies to

patients who, because of disease, injury, stroke or similar incidents, have impairments in their ability to function, either physically or cognitively. Our goals are to

help them regain their maximum level of functional capability and to return them

to independently living in their own homes. More than 80% of patients admitted to

rehabilitation hospitals and units return to their homes, in spite of the fact that

many have experienced severe disabilities. Many of the conditions producing the

need for rehabilitation are associated with aging, a significantly high percentage of

patients in rehabilitation hospitals and units are covered by the Medicare program.

In 1997, over 70% of patients admitted to such facilities were covered by fee-forservice Medicare. Accordingly, the policies of the Medicare program largely determine the availability and quality of rehabilitation services. And, there is little room

for error.

Rehabilitation hospitals and units are currently reimbursed for providing Medicare services under a payment methodology mandated by the Tax Equity and Fiscal

Responsibility Act of 1982 (TEFRA). This arrangement, which was intended to be

temporary, reimburses facilities on the basis of reasonable cost, subject to a payment ceiling (known as the ‘‘TEFRA limit’’).

Over time, this system developed a number of negative incentives, which led the

industry to advocate for implementation of a prospective payment system (PPS) for

inpatient rehabilitation facilities. In recognition of the need to modify payment

methodology , in the Balanced Budget Act of 1997 (BBA 97), Congress enacted a

PPS for inpatient rehabilitation to be implemented over two years, starting with

cost reporting periods beginning on or after October 1, 2000. BBA 97 calls for a 2%

reduction in total expenditures for rehabilitation services from that which would

have been spent absent the PPS. It also included several provisions aimed at reducing costs during the transition period until full PPS implementation. These included

a 15% cut in inpatient capital reimbursement and reductions in bonus incentive

payments and the TEFRA limits.

These interim measures, imposed by the BBA and intended to reduce Medicare

costs during the period prior to PPS implementation, now threaten the financial security of the nation’s rehabilitation providers as well as the access to services relied

upon by rehabilitation patients.

Earlier this year, the Health Care Financing Administration (HCFA) announced

that it is delaying the implementation of the rehabilitation inpatient PPS until cost

reporting periods beginning on or after April 1, 2001. Since HCFA has not yet promulgated the rehabilitation PPS rulemaking, this timeline is now highly questionable. These significant delays in the development of the PPS system render it unlikely that facilities will begin the transition to the PPS until the end of 2001, more

than a year later than originally planned.

Overall Medicare outlays for services delivered by rehabilitation hospitals or units

have been reduced by more than $600 million over three years. And although rehabilitation spending comprises just 2.3% of total Medicare spending, rehabilitation

hospitals and units have been forced to absorb almost 4.3% of BBA 97 spending reductions. Moreover, the sought-after cost reductions have already been realized. The

Medicare Payment Advisory Commission’s (MedPAC) June, 2000 Report to Congress, for example, noted that from 1997 to 1998, Medicare margins for rehabilitation facilities decreased from 6.3% to 1.8%.

The financial impact of the delayed implementation of the PPS and the realization

of Medicare cost savings that were the impetus for the reimbursement changes, as

well as the creation of a national budget surplus, make imposition of further financial burdens on the rehabilitation sector both unnecessary and especially risky. Congress should take action to ensure both the short-term financial stability of the rehabilitation hospital industry prior to the implementation of the rehabilitation PPS

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and the long-term financial capability of rehabilitation providers to offer care to an

aging population that will increasingly need its services.

I. Congress Should Ensure the Continuing Availability of Rehabilitation Services

Through Elimination of the 2% Reduction in Total Payments and a Temporary

1% Increase in Incentive Payments.

BBA 97 reduced both the total expenditures for inpatient rehabilitation services

under the PPS and changed the current payment methodology, including the bonus

incentives payments, that previously had been used to encourage and maintain the

most efficient provision of services. As implementation of the rehabilitation PPS continues to be delayed, these changes to the TEFRA payment system continue to contribute to the overall decline in the financial stability of the rehabilitation hospital

industry.

Section 4421 of the BBA 97 mandated that, in setting the rehabilitation PPS payment rates, the HHS Secretary reduce total expenditures for inpatient rehabilitation

services by 2% from what these would have been absent a PPS. Thus, in determining the rates to be paid under the rehabilitation PPS for FY 2001-02, only 98%

of the total amount that otherwise would be paid under TEFRA is to be taken into

account. In light of the significant reductions in Medicare spending for rehabilitation

services since enactment of the BBA, the additional 2% reduction in FY 2001-2002

reimbursement could devastate an industry already trying to cope with the fiscal

restraints resulting from BBA 97 initiatives.

The long-term financial security of the rehabilitation hospital industry would be

bolstered substantially by elimination of this reduction. The scheduled reduction

was originally enacted as part of the overall BBA 97 effort to obtain savings under

the Medicare program. Clearly, as demonstrated by Medicare reimbursement reductions for rehabilitation facilities, BBA 97 savings have already been achieved. Thus,

there is no longer any reason for Congress to require this additional reduction in

rehabilitation PPS reimbursement, particularly when one considers the additional

hardship that it will induce.

Additionally, the BBA 97 imposed several cost-savings measures. These included

reduction of bonus incentive payments, the program under which PPS-exempt hospitals and units, including rehabilitation facilities, were eligible to obtain an incentive payment that was the lesser of 50% of the difference between their costs and

the TEFRA limit, or 5% of the limit. Section 4415 of the BBA 97 reduced the applicable percentages to 15% and 2%, respectively. The negative effect of this provision

was further compounded for facilities that had TEFRA caps lowered to the 75th percentile under another BBA 97 provision. The industry estimates that, as a result

of these two provisions, the rehabilitation hospital industry lost approximately $144

million in payments in one year (based on FY 1997). A modest, yet significant, restoration in the form of a 1% increase in bonus payments until full implementation

of the rehabilitation PPS would help to alleviate interim financial concerns and restore a more meaningful incentive to increase productivity.

II. Until the PPS System is Fully Implemented, Congress Should Restore Full Capital Payments for PPS-Exempt Rehabilitation Hospitals and Units.

Because rehabilitation facilities and other PPS-exempt providers are reimbursed

on a cost basis, Congress previously exempted them from capital cuts. The rationale

for full reimbursement of capital for providers under cost reimbursement is that

such providers have no opportunity to make up for the loss of capital payments

through operating efficiencies. If costs go down, so does reimbursement. Section

4412 of the BBA changed this. It imposes a 15% reduction in capital payments for

PPS-exempt (TEFRA) hospitals and units for FY 1998-2002. This reduction in capital payments was not driven by policy considerations, but instead was implemented

solely for budgetary reasons.

As noted above, rehabilitation providers are heavily dependent on Medicare feefor-service, which covers 70% of rehabilitation admissions and an equally high percentage of revenues. By comparison, other PPS-exempt hospitals (e.g., psychiatric,

children’s) are far less Medicare-dependent. As such, the capital payment reductions

to PPS-exempt hospitals have a comparatively greater detrimental impact on the

renovation of plants and the building of more modern facilities by rehabilitation hospitals than by other PPS-exempt hospitals.

In terms of precedents, capital payments to acute care hospitals were decreased

with implementation of the acute care PPS only after four full years, and only

gradually over time. This progressive implementation initially included a 3.5% cut

in FY 1987, with gradual increases to 15% in FY 1989. Rehabilitation providers are

being forced to absorb capital reimbursement cuts much more quickly than were

acute care hospitals.

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A 15% cut in capital reimbursement costs PPS-exempt providers at least $62 million in one year alone. If capital and bonus incentive payments are not restored in

the short run, all rehabilitation providers will continue to receive payments below

cost. Therefore, Congress should restore full capital payment for PPS-exempt rehabilitation hospitals and units.

III. Congress Should Permit an Early Opt-In to Inpatient Rehabilitation PPS.

Under BBA 97, the inpatient rehabilitation PPS will be implemented gradually

over a two-year period. During the transition, facilities’ payments will be calculated

using a combination of TEFRA payments and new PPS payments. In year one, these

payments will consist of the aggregate of two-thirds of a facility’s TEFRA payments

and one-third of its PPS payments; in year two, facilities will receive payments

based on one-third TEFRA and two-thirds PPS. By the third year, all facilities will

be paid 100% under the inpatient rehabilitation PPS.

As noted above, the inpatient rehabilitation PPS was originally intended to go

into effect for cost reporting years beginning on or after October 1, 2000. HCFA announced earlier this year that it is delaying implementation of the system until cost

reporting periods beginning on or after April 1, 2001. Since HCFA has not yet promulgated the rehabilitation rulemaking, this timeline is now highly questionable.

Because most facilities’ cost years start later in the year, many facilities will not

begin the transition until the end of 2001 or even later, depending on the final implementation timeline.

While the transition period remains extremely important for many rehabilitation

facilities, some facilities believe that they can continue to provide high quality, costeffective care while moving directly to full PPS in the first year. In fact, these facilities perceive that trying to live under two payment systems for two years—TEFRA

and PPS—could lead to conflicting payment and service delivery incentives. It is important to ensure, however, that rehabilitation facilities which are not interested in

taking an early election to full PPS retain the ability to transition to full PPS over

a two-year period.

Permitting immediate movement to full PPS would reward facilities able to revise

their costs and service delivery patterns quickly to meet or come in under their PPS

limits. Congress provided such an election for the skilled nursing facility PPS, including necessary funding, in the Balanced Budget Refinement Act of 1999 (BBRA).

Congress should look to this precedent and allow an early opt-in. This change would

preserve facilities’ continued financial viability, thereby furthering their capacity to

carry out their primary mission, the delivery of care to persons with disabilities.

CONCLUSION

AMRPA believes that patients’ continuing access to quality rehabilitation services

is currently at risk. The confluence of reductions in total payments for services, including reductions in bonus incentives and capital payments, coming on the heels

of dramatic decreases in Medicare margins for rehabilitation services already have

resulted in huge losses for the rehabilitation hospital industry. With the following

actions, Congress can provide vital relief for rehabilitation facilities and preserve

the ongoing availability of rehabilitation services for the nation’s increasingly aging

population:

1) Congress should ensure the short-term financial stability of the rehabilitation

hospital industry prior to the implementation of the rehabilitation PPS by increasing the incentive payment by 1%, and ensure the industry’s long-term financial stability by eliminating the 2% reduction in the total amount to be paid

under the PPS for FY 2001-2002.

2) Congress should restore full capital payment for PPS-exempt rehabilitation hospitals and units.

3) Congress should permit an early opt-in for those rehabilitation facilities able to

more quickly adopt Congress’ plan.

In addition to the above priorities, AMRPA supports a three-year extension of the

moratorium on outpatient therapy caps. These caps, imposed by the BBA 97, bear

no relationship to patients’ clinical needs. The current moratorium, instituted by the

BBRA in response to the expressed concerns of patients and providers, applies to

calendar years 2000 and 2001. This, however, is unlikely to provide HCFA with sufficient time to adequately research and develop appropriate mechanisms to replace

the arbitrarily derived limits on beneficiaries’ access to needed rehabilitation services embodied in the cap. An extension of the moratorium should provide HCFA adequate time to complete its studies and to develop methodologies that will control

costs, while protecting patients’ treatment needs.

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We thank the Committee for this opportunity to submit testimony. AMRPA looks

forward to working with Congress as we face the future.

PREPARED STATEMENT OF THE AMERICAN PHYSICAL THERAPY ASSOCIATION

Mr. Chairman, members of the Subcommittee on Health and Environment, on behalf of the more than 68,000 member physical therapists, physical therapist assistants, and students of physical therapy, the American Physical Therapy Association

(APTA) is pleased to submit this statement for your consideration as you examine

the impact of the Balanced Budget Act (BBA) of 1997 on providers of health care

services and the patients they serve. For the purpose of this hearing, APTA’s testimony will focus on the impact the BBA and the Balanced Budget Refinement Act

(BBRA) of 1999 have had on the delivery of outpatient physical therapy services

under Part B of the Medicare program.

Many Americans will probably need physical therapy services at some time during

their life. As people grow older, they may suffer a stroke, break a hip, or sustain

other traumatic injury. Many of these illnesses and injuries occur unexpectedly and

require physical therapy services, which enable people to return to home, to work,

to school, or to an active retirement. If Medicare beneficiaries receive these services

on a timely basis, they are able to obtain maximum independence and increase the

quality of their life.

Recommendation

Under the current law, passed as part of the BBRA, the $1,500 caps on outpatient

rehabilitation services would be reimposed upon beneficiaries as of January 1, 2002,

if Congress takes no action. This year, as Congress considers further legislation to

address the impact of BBA provisions on providers and their patients, APTA strongly urges Congress to extend the moratorium on the $1,500 therapy caps for an additional three years.

The Health Care Financing Administration (HCFA) has only just begun to collect

data relating to the delivery of rehabilitation services in the various Part B practice

settings. Given the move in January 1999, to the Resource-Based Relative Value

Fee Schedule (RBRVS) for so many therapy providers and the imposition of the

therapy cap moratorium in January 2000, APTA believes it would be wise for Congress to allow greater time for data collection and analysis of physical therapy utilization under Part B before new mechanisms to limit care are enacted into law.

Background

Both the BBA and BBRA have significantly affected the delivery of physical therapy services to Medicare beneficiaries. Prior to the BBA of 1997, Medicare reimbursement for physical therapy services under Part B varied between practice settings. Outpatient services provided in skilled nursing facilities, rehabilitation hospitals/units, home health agencies, comprehensive outpatient rehabilitation facilities

(CORF), and rehabilitation agencies were reimbursed under a retrospective costbased system. Physical therapists in private practice and physician offices have

billed therapy services to Medicare under the RBRVS since 1992. Physical therapists in private practice had also been restricted to billing only $900 of care per beneficiary in a given calendar year.

The BBA made significant changes to Medicare payment policies for rehabilitation

services. Under the BBA, as of January 1, 1999, annual $1,500 per beneficiary caps

for physical therapy (including speech language pathology services) and for occupational therapy were imposed on Medicare beneficiaries requiring outpatient rehabilitation services. This represented a considerable reduction in reimbursement for all

settings, except the private practice setting, that had been caring for those with the

most serious conditions requiring long-term rehabilitation care (i.e. stroke, Parkinson’s Disease, traumatic brain injury, hip replacement). At the same time, the BBA

required all Part B providers to begin billing Medicare under the RBRVS system.

These drastic changes sent shockwaves through the rehabilitation community,

leaving providers confused on how to comply with the new law and how to instruct

their patients to receive necessary care. The changes also left patients confused

about what their Medicare benefits actually were.

APTA has long opposed arbitrary limitations on care for beneficiaries. The Association challenged that the $1,500 caps would not allow some patients with significant rehabilitation needs to receive appropriate coverage for care. The ability of

Medicare beneficiaries to receive the necessary physical therapy services under the

$1,500 limit was further exacerbated by Congress’ action to group speech-language

pathology with physical therapy under one $1,500 cap.

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In its June report to Congress, the Medicare Payment Advisory Commission

(MedPAC) stated that in 1996, ‘‘Physical therapy accounted for 70% of outpatient

therapy payments. Occupational therapy and speech pathology made up 21% and 9%

of payments, respectively.’’ The impact on patient care caused by combining physical

therapy and speech therapy within one cap is self evident given these utilization

numbers. Physical therapists were saddled with difficult decisions on how to treat

a patient with significant rehabilitation needs under a payment policy that was inflexible.

MedPAC analyzed the impact of the coverage limits and presented the results of

its analysis in its June 1998 report to Congress. MedPAC examined the 1996 claims

of patients treated in rehabilitation agencies and CORFs who incurred payments

that exceeded the $1,500 coverage limit. The Commission found that approximately

1⁄3 of patients in rehabilitation agencies and CORFs exceeded either $1,500 of outpatient physical and speech therapy or $1,500 of occupational therapy. MedPAC also

found that some types of patients were more likely to exceed the dollar limits. For

example, half of the stroke patients served in these settings exceeded the $1,500

cap.

During the 1997 Medicare debate, APTA argued that the caps would disrupt the

continuum of care, particularly since Congress chose not to impose the therapy caps

on outpatient hospital departments. APTA argued that patients would be forced to

change treatment settings once the cap had been reached in a non-hospital setting

and that it would disrupt their progress toward rehabilitation. In fact, APTA members made the Association aware of advertisements published by hospitals letting

seniors know that only in their outpatient clinics could they be assured of receiving

the necessary therapy they required, since other practice settings were capped at

$1,500 per year.

Rather than saving money for the Medicare program, the therapy caps merely redirected patients to receive care in an outpatient hospital department. APTA argued

that the only money that is saved by this policy is for those beneficiaries who deny

themselves appropriate care. In fact, this policy increases the cost of care to seniors

by forcing them to pay for care out of pocket once the cap had been reached if they

wished to stay with their chosen physical therapist.

As was expected, some beneficiaries complained to their physical therapist that

they experienced great difficulty obtaining access to needed services, because they

did not live near a community with an outpatient hospital clinic that provided physical therapy care.

APTA also argued that the $1,500 caps would be difficult to administer. Even before the Y2K problems of the Health Care Financing Administration (HCFA) became

apparent, it was clear that tracking a beneficiary’s care from practice setting to

practice setting would be an impossible task. For example, a physical therapist in

private practice would have difficulty determining whether a beneficiary has already

received $1,500 of outpatient therapy services in another setting during a given calendar year. In addition, if the beneficiary resided in Michigan for part of the year

and in Florida for the remainder, it would be difficult for either setting to know that

the beneficiary had already received services in another state.

In 1999, Congress took appropriate action as part of the BBRA to suspend the

$1,500 caps on therapy services to ensure that beneficiaries have access to necessary

physical therapy services. Today, all Part B physical therapy services are billed to

Medicare under a common fee schedule system. This will allow HCFA the opportunity to analyze care being provided across practice settings. APTA believes HCFA

will find that arbitrary limitations on care are unnecessary to control utilization of

services. However, HCFA must have the time necessary to make a complete evaluation of the system.

Thus, APTA strongly supports a three-year extension on the present moratorium

and subsequent delay of pending reports to Congress relating to utilization of services and a potential new methodology for payment of rehabilitation services.

Thank you for your consideration of these comments. Please feel free to contact

Patrick Cooney at (703) 933-0020 should you have questions regarding this statement.

PREPARED STATEMENT OF ASSOCIATION OF PERIOPERATIVE REGISTERED NURSES

OVERVIEW

AORN (the Association of periOperative Registered Nurses) is the professional association representing approximately 43,000 operating room nurses across the country. AORN applauds Chairman Bilirakis for his leadership in examining possible reVerDate 11-MAY-2000 10:22 Apr 18, 2002 Jkt 010199 PO 00000 Frm 00130 Fmt 6633 Sfmt 6621 E:\HEARINGS\65915 pfrm01 PsN: 65915
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finements to the Balanced Budget Act of 1997 (BBA). For the reasons outlined

below, AORN respectfully requests the inclusion of H.R. 3911, the Medicare Certified Registered Nurse First Assistant Direct Reimbursement Act of 2000, in any

BBA refinement package.

BACKGROUND

The BBA confirmed and expanded the role of non-physician assistants at surgery.

For example, the BBA increased the reimbursement rate received by Physician Assistants (PAs), Nurse Practitioners (NPs) and Clinical Nurse Specialists (CNSs) for

assisting a surgeon at surgery. The BBA also removed restrictions on the type of

areas and settings in which first assisting services of non-physician first assistants

may be covered by Medicare. (See Sections 4511 and 4512.) Regretfully, the BBA

failed to appropriately recognize the first assisting role of the certified Registered

Nurse First Assistant (CRNFA).

AORN URGES MEDICARE COVERAGE ELIGIBILITY FOR THE SURGICAL FIRST ASSISTING

SERVICES OF CERTIFIED REGISTERED NURSE FIRST ASSISTANTS

As this Subcommittee examines possible Medicare refinements to the BBA, AORN

respectfully requests the inclusion of H.R. 3911. This important legislation calls for

Medicare reimbursement for the surgical first assisting services of Certified Registered Nurse First Assistants (CRNFAs) at a rate of 13.6% of the surgeon’s fee.

This is the same rate at which Medicare currently reimburses non-physician first

assistants.

As first assistants, CRNFAs provide high-quality cost-effective care and perform

the same first assisting tasks and duties as surgeons, physicians, physician assistants, nurse practitioners and clinical nurse specialists who may currently receive

Medicare reimbursement for first assisting services. Reimbursing CRNFAs for their

surgical first assisting services would address this fundamental inequity while improving the quality and cost efficiency of the Medicare system.

MEDICARE REIMBURSEMENT FOR THE SURGICAL FIRST ASSISTING SERVICES OF CRNFAS

ALREADY ENJOYS BROAD BIPARTISAN SUPPORT ON THE WAYS AND MEANS COMMITTEE

With strong bipartisan support from his colleagues on the Ways and Means Committee, Rep. Mac Collins (R-GA) introduced H.R. 3911, the Medicare Certified Registered Nurse First Assistant Direct Reimbursement Act of 2000, on March 14,

2000. This legislation would provide Medicare reimbursement for the surgical first

assisting services of CRNFAs at 13.6% of the surgeon’s fee. The principal sponsor

(Representative Collins) and seven of the cosponsors (Representatives English,

Foley, Johnson, Lewis, McDermott, Shaw and Thurman) serve on the Ways and

Means Committee. Five of those cosponsors (Representatives English, Johnson,

Lewis, McDermott and Thurman) serve on the Ways and Means Health Subcommittee.

Cosponsors to date include Representatives Lois Capps (D-CA), John Cooksey (RLA), Nathan Deal (R-GA), Diana DeGette (D-CO), Philip English (R-PA), Mark

Foley (R-FL), Elton Gallegly (R-CA), Paul Gillmor (R-OH), Porter Goss (R-FL), Jim

Greenwood (R-PA), Peter Hoekstra (R-MI), Nancy Johnson (R-CT), Patrick J. Kennedy (D-RI), John Lewis (D-GA), Jim McDermott (D-WA), Charlie Norwood (R-GA),

Charles Pickering (R-MS), Clay Shaw (R-FL), Ted Strickland (D-OH), Mike Thompson (D-CA), Karen Thurman (D-FL), and Robert Wise (D-WV).

Further, Representative Collins and eight of his colleagues joined together in a

June 27, 2000 letter addressed to Chairman Bilirakis and others, which urged inclusion of H.R. 3911 in any appropriate legislative vehicle. Signatories included Representatives Capps, Collins, Deal, DeGette, English, Foley, Greenwood, Norwood

and Pickering. The letter, a copy of which is attached, persuasively argues that:

With respect to quality of care, CRNFAs provide a patient-centered continuum of care in the preoperative, intraoperative, and postoperative phases of

the patient’s surgical experience. CRNFAs often work in tandem with one or a

small group of surgeons; this maximizes communication and coordination and

minimizes the risk of medical error. In addition, in comparison with other nonphysicians who first assist, CRNFAs have significantly more experience and expertise directly in first assisting.

As for cost-effectiveness, CRNFAs seek reimbursement for first assisting at

13.6% of the surgeon’s fee; this is the same as currently is received by PAs and

NPs who first assist. By contrast, physicians who first assist receive 16% of the

surgeon’s fee. Health claims data from the Health Care Financing Administration (HCFA) reveal that physicians file more than 90% of the first assistant at

surgery claims for Medicare reimbursement. Use of CRNFAs would therefore be

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1 There are approximately 4,000 RNFAs in the United States. According to a 1995 survey

of the AORN Specialty Assembly, RNFAs are employed by hospitals and physicians, as well as

being self-employed as independently contracted health care providers. In addition:

• The average age of an RNFA is 42 years old.

• The average length of time as an RN is 17 years.

• The average length of time in the operating room is 15 years.

• The average length of time as an RNFA is 4.62 years. • Thirty percent of RNFAs have CRNFA credentials.

a high quality yet cost-effective alternative for the nation’s health care delivery

system, affording additional flexibility to surgeons, hospitals and ambulatory

surgical centers.

We feel strongly that increased use of CRNFAs in surgical first assisting likely would result in positive patient outcomes such as lower recidivism rates, decreased complications from surgery, higher patient satisfaction levels, and overall lower expected costs per patient.

Many nurses, surgeons, and others in our districts have expressed their support for H.R. 3911. Some of us have witnessed CRNFAs first assist at surgery.

In conclusion, we strongly support extending Medicare coverage eligibility to

CRNFAs for their surgical first assisting services at a rate of 13.6% of the surgeon’s fee and we respectfully urge that you include this proposal in an appropriate health legislative vehicle.

WHAT IS A CRNFA?

A CRNFA is a registered nurse first assistant (RNFA) who obtains national certification, a voluntary process. An RNFA already is a technically skilled, highly educated nursing professional who renders direct patient care as part of the

perioperative nursing process. The certification process raises an already high quality standard and recognizes those RNFAs who have achieved excellence in patient

care. The RNFA seeking certification must meet rigid requirements before applying,

including:

1. Current licensure as an RN, without provision or condition, in the United States;

2. Certification in perioperative nursing (CNOR);

3. Completion of a minimum of 2000 hours of practice as an RNFA 1 that includes

preoperative, intraoperative, and postoperative patient care;

4. Completion of a formal RNFA program that meets criteria established by the Certification Board Perioperative Nursing including training equivalent to a oneyear comprehensive post-graduate program involving both classroom and clinical studies in anatomy and physiology, assessment skills, asepsis/infection control, and an extensive surgical assisting curriculum. During the required clinical

internship, the prospective RNFA spends a defined number of clinical hours

under the supervision of a surgeon preceptor; and

5. A Bachelor and/or a Master of Science Degree in Nursing.

CRNFAs are recognized by the American College of Surgeons, the American

Nurses Association, the National League of Nurses, the National Orthopedic Nurses

Association, and the 50 State Boards of Nursing. Indeed, at their annual meeting

in June 2000, the American Nurses Association House of Delegates adopted Policy

Number 3.37, which supports federal recognition and reimbursement for CRNFAs

as first assistants.

HOW WOULD CRNFAS SAVE THE HEALTH CARE SYSTEM MONEY?

Health claims data from the Health Care Financing Administration (HCFA) reveal that physicians file more than 90% of the first assistant at surgery claims for

Medicare reimbursement. Physicians receive 16% of the surgeon’s fee for first assisting. CRNFAs are requesting only 13.6% of the surgeon’s fee for their first

assisting services. Use of CRNFAs is a high quality yet cost-effective alternative

for the nation’s health care delivery system, affording additional flexibility to surgeons, hospitals and ambulatory surgery centers.

CRNFAs are equally as cost-effective as other non-physician providers (PAs and

some NPs) who currently are reimbursed at 13.6% of the surgeon’s fee for first assisting. Moreover, CRNFAs receive more advanced education and training in first

assisting than any other non-physician provider who first assists. For example, PAs

commonly complete much less than the 2,000 hours of surgical assisting currently

required before RNFAs may take the CRNFA certification exam. NPs are not required to have any extensive training in first assisting and yet receive direct reimbursement.

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In addition, CRNFAs and RNFAs are the only providers—aside from the rare physician making house calls—who sometimes provide post-operative care by actually

visiting patients at home following surgery. The result is better continuity of care

and positive patient outcomes such as lower recidivism rates, decreased complications from surgery, higher patient satisfaction levels and overall lower expected

costs per patient. Until H.R. 3911 is enacted, enabling CRNFAs to receive direct reimbursement, there is no incentive to use these high quality, cost-effective providers

for first assisting in surgery.

WHO CURRENTLY REIMBURSES CRNFAS?

Though some commercial insurers provide coverage for the services of CRNFAs,

reimbursement is inconsistent and varies on a state-by-state, case-by-case basis. Although payment by BlueCross/BlueShield plans differs by state; generally, if the

CRNFA is not a contracted provider, BlueCross/BlueShield will pay the patient directly for CRNFA services. Many Medicaid plans also provide direct reimbursement.

COST ESTIMATE

H.R. 3911 is currently being scored by the Congressional Budget Office. An independent cost estimate by Muse & Associates determined that coverage eligibility for

CRNFAs under Part B of the Medicare program would cost $7.2 million in 2000,

increasing to $25.1 million in 2004 for a total cost over a five-year period of $84.6

million.

SUMMARY

As BBA Medicare refinements are considered, AORN respectfully urges this Subcommittee to extend Medicare coverage eligibility to CRNFAs for their surgical first

assisting services. Working in collaborative practice with surgeons, CRNFAs are

cost-effective to the patient and to the health care delivery system Because CRNFAs

would be reimbursed under Medicare at a lower rate than physicians who first assist, and because CRNFAs routinely provide much-needed patient assessment, education and counseling, inclusion of H.R. 3911 in any BBA refinement package could

well decrease the frequency and length of hospital stays resulting in improved patient outcomes and net savings to the Medicare program.

AORN appreciates this opportunity to submit its views with respect to the impact

of the BBA. Please contact our Washington Counsel, Karen S. Sealander of

McDermott, Will & Emery, at 202/756-8024 at any time with questions.

CALIFORNIA ASSOCIATION OF PUBLIC HOSPITALS AND HEALTH SYSTEMS

July 31, 2000

The Honorable MICHAEL BILIRAKIS

United States House of Representatives

Chair, House Commerce Subcommittee on Health & Environment

2125 RHOB

Washington D.C. 20515

DEAR MR. CHAIRMAN AND MEMBERS OF THE SUBCOMMITTEE: On behalf of the California Association of Public Hospitals and Health Systems (CAPH), I respectfully

submit the following written statement for the record of the subcommittee’s July 19,

2000, hearing, ‘‘BBA ’97: A Look at the Current Impact on Providers and Patients.’’

CAPH is a trade association representing more than two-dozen hospitals, health

care systems and academic medical centers in 18 counties—accounting for 86% of

the state’s population—throughout California. The members of CAPH share a mission and mandate to provide care to all the residents of California, regardless of

their ability to pay. Among the members of CAPH are county-owned and operated

facilities, University of California medical centers, and private, not-for-profit facilities sharing a common commitment to serving all people.

The Balanced Budget Act of 1997 significantly impacted the public hospitals and

health systems of California and the patients they serve. Specifically, BBA ’97 mandated reductions in the Medicaid disproportionate share hospital (DSH) program—

a critical source of funding for public hospitals and health systems in providing

needed health care services for low-income and vulnerable populations. The Congressional Budget Office estimated in 1997 that the reductions to Medicaid DSH

program payments imposed by the BBA would reduce expenditures by $10.4 billion

over five years. The reductions were designed to be phased in over a five-year period, with the largest reductions in the final three years. For California, this has

resulted in a decline of federal Medicaid DSH payments of more than $116 million

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over the past two years, with a further $164 million reduction, or 17 percent more,

slated over the next two years.

The members of CAPH comprise a public health care safety net in California that

serves the health care needs of the Medicaid, low-income, uninsured, and vulnerable

populations. These public health care systems form the core of the state’s health

care infrastructure. As open door providers that share a mission and a mandate to

serve the health care needs of all Californians, regardless of their ability to pay,

public hospitals and health systems are significant providers of inpatient, outpatient, and specialty health care services in their communities.

These vital institutions serve the bulk of California’s 7.3 million uninsured persons and are responsible for providing many critical health services in the community. Seventy percent of expenses at core open door providers are attributable to

serving low-income populations, including Medicaid and uninsured patients. Core

open door providers comprise six percent of hospitals statewide yet made up almost

40 percent of all uninsured inpatient discharges in California in 1998. Public hospitals and health systems provided ten million outpatient visits in 1998, of which

3.7 million were to uninsured patients. Moreover, care for the uninsured is becoming increasingly concentrated at open door providers. While the total volume of patients at public hospitals and health systems has declined, the number of uninsured

patients has grown 16% over the 5 years ending in 1998. These essential institutions also play a critical role delivering high-cost specialty services—such as burn

and trauma services—and other public goods that benefit all members of the community. For example, public hospitals and health systems operate more than 60 percent of all Level 1 trauma centers statewide, train about half of California’s medical

residents and provide over 60 percent of the state’s psychiatric emergency care.

The Medicaid DSH program is one of the critical funding sources that has maintained the fiscal viability of open door providers and allowed them to continue their

role at the heart of the state’s public health care infrastructure. During the mid1980s Congress recognized that a limited number of hospitals were shouldering a

disproportionate share of the responsibility for providing care to low-income populations, These hospitals were generally located in poor urban communities, faced

large uncompensated care burdens, did not serve many privately insured patients,

and experienced above-average costs due to the medical complexity of patients. Believing that targeted assistance to these hospitals was needed in order to preserve

access to care for low-income populations, Congress authorized disproportionate

share payments for these hospitals through the Medicare and Medicaid programs.

California’s Medicaid DHS program was created in 1991 and generated new federal funding for hospitals that treat the greatest numbers of Medi-Cal and uninsured low-income patients. Medicaid DSH Program dollars are critical to the stability and viability of California’s public health care systems and their ability to

serve the Medicaid, low-income, and vulnerable populations in our state.

Currently, public hospitals and Health care systems in California are facing increasing financial pressure. Despite the strong economy and budget surpluses at

both the state and federal levels, many open door providers in California are facing

budget deficits. This situation is the result of a growing uninsured population and

an increasing concentration of uninsured patients at open door providers, the rise

of Medicaid managed care, and declining patient revenues and subsidies, including

reductions in the Medicaid DSH Program, that have historically supported these

vital institutions. The loss of tens of millions of dollars in federal Medicaid DSH

funds has impacted hospitals’ ability to provide care to low-income populations, and

continuation of the scheduled reductions imposed by the BBA may potentially jeopardize access to health care for low-income and uninsured Californians.

When Congress deliberated the provisions of the Balanced Budget Act in 1997,

it faced a large federal budget deficit. Today, we enjoy a national economy that continues to flourish and a federal budget surplus of billions of dollars. As a result, we

can take steps to address the unintended consequences of BBA ’97 and ensure that

access to health care is preserved for low-income and vulnerable populations. The

Balanced Budget Refinement Act (BBRA) of 1999 was an important first step toward remedying the unintended consequences of the BBA and we greatly appreciate

the attention of Congress to these issues. However, while BBRA will help relieve

some pressing Medicare issues, it did not address the substantial cuts to the Medicaid program.

Prevention of the additional cuts to the Medicaid DSH program mandated by BBA

’97 is critical if safety net providers are to continue to meet the health care needs

of the communities they serve. Medicaid DSH payments help reimburse hospitals’

costs of treating Medicaid and low-income patients, particularly those with complex

medical needs and make it possible for communities to care for their uninsured.

Eliminating future BBA-imposed reductions in the Medicaid DSH program would alVerDate 11-MAY-2000 10:22 Apr 18, 2002 Jkt 010199 PO 00000 Frm 00134 Fmt 6633 Sfmt 6621 E:\HEARINGS\65915 pfrm01 PsN: 65915
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leviate some of the financial pressures facing those hospitals treating a disproportionately large number of Medicaid and low-income patients and help preserve access to care for vulnerable populations.

CAPH and its members urge your support for prevention of the additional cuts

to the Medicaid DSH program mandated by BBA ’97. Thank you for your consideration.

Sincerely,

DENISE K. MARTIN

President & CEO

PREPARED STATEMENT OF HEALTH INDUSTRY DISTRIBUTORS ASSOCIATION

REPEAL PART B SNF CONSOLIDATED BILLING

Position: HIDA favors repealing Part B consolidated billing scheduled to

be implemented at skilled nursing facilities (SNFs) as early as January 1, 2001.

SNF consolidated billing for Medicare Part B removes suppliers from the billing

and payment cycle, delays payment to suppliers, and threatens the stability of the

SNF supply chain. It also places new and considerable financial and administrative

burdens to SNFs at a time when many are financially vulnerable and virtually none

have the expertise to implement this provision of the 1997 Balanced Budget Act.

Justification:

Suppliers have worked closely and successfully with the four Durable

Medical Equipment Regional Councils (DMERCs) created by the Health

Care Financing Administration (HCFA) to manage complex Part B claims

arising from Medicare-covered stays in skilled nursing facilities (SNFs).

Part B medical equipment suppliers have developed the expertise necessary to bill

the DMERCs, including preparation and completion of signed Certificates of Medical

Necessity (CMNs) for certain services, signed physician order statements, and other

medical documentation deemed necessary by DMERCs. Under consolidated billing,

these suppliers would be removed from the billing and payment cycle and their expertise essentially wasted.

SNFs have no experience working with the DMERCs and are unfamiliar with the

detailed billing procedures they have put in place. Furthermore, the prospective

payment system (PPS) have left many SNFs financially strapped and ill-prepared

to assume yet another administrative burden from the Medicare program.

Consolidated billing threatens the stability of SNF supply chain.

It is not clear how and when suppliers can expect to be paid under this scenario.

Few SNFs have the cashflow to pay suppliers up front. It is likely that a supplier

would not be paid until a SNF has assembled a consolidated bill, submitted it to

the DMERC, and received payment. This may well result in delayed payment to

suppliers, many of whom rely on a relatively steady cashflow themselves in order

to remain in business.

Claims processing delays caused by incorrect submissions and other errors will ultimately delay payment to suppliers.

Consolidated billing threatens Medicare program integrity, which has seen considerable improvements in recent years.

A report released by the Office of the Inspector General (OIG) in February 2000

(OEI-04-97-00330; see www.dhhs.gov/progorg/oei/reports/a431.pdf) praised the

DMERCs for meeting HCFA’s objectives to develop medical policies and an aggressive educational and fraud prevention program, and reduce claims processing costs.

The OIG singled out the ‘‘excellent outcomes’’ DMERCs have shown in combating

fraud and decreasing claims processing costs.

Clearly, the present system works well. The Medicare program would be harmed

if suppliers are removed from their role as key DMERC partners and replaced with

inexperienced SNF billing staff.

Consolidated billing requires claims to be bundled, going against insurance industry practice to unbundle claims and examine each one for accuracy and appropriateness. This has saved private health plans millions of dollars each year by uncovering and correcting inappropriate billing practices.

Consolidated billing will be expensive to implement, breaching the budget-neutrality

of the 1997 Balanced Budget Act.

HCFA must train SNF staff on DMERC policies and procedures, produce training

materials, and update manuals.

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Claims processing costs will increase. We can expect a high incidence of denied

claims submitted by inexperienced billing staff. These claims will have to be resubmitted by the SNFs and reexamined by the DMERCs, which will increase costs for

both.

PREPARED STATEMENT OF LAWRENCE A. MCANDREWS, PRESIDENT AND CEO,

NATIONAL ASSOCIATION OF CHILDREN’S HOSPITALS

The National Association of Children’s Hospitals (N.A.C.H.) is pleased to submit

for the hearing record this statement in strong support of House passage of ‘‘Medicaid DSH restoration’’ legislation, such as H.R. 3698, the ‘‘Medicaid DSH Preservation Act of 2000,’’ by Representatives Ed Whitfield (R-KY) and Brian Bilbray (R-CA),

and H.R. 3710, the ‘‘Medicaid Safety Net Hospital Preservation Act of 2000,’’ by

Representatives Diana DeGette (D-CO) and Bilbray. The bills enjoy broad bipartisan

support, both in the Commerce Committee and in the House.

N.A.C.H. is a nonprofit trade association, representing more than 100 children’s hospitals across the country, including freestanding children’s acute care hospitals,

freestanding children’s specialty and rehabilitation hospitals, and children’s hospitals organized as part of larger hospital systems. They have missions of clinical

care, education, research, and public health promotion for all of the children of their

communities, regardless of their medical or economic need.

Background

Since 1981, Congress has required states to make ‘‘disproportionate share hospital’’ (DSH) payment adjustments to hospitals serving disproportionately large

numbers of low-income Medicaid-assisted and uninsured patients. This payment adjustment program was established because, historically, many states’ Medicaid programs have reimbursed hospitals for less than the actual cost of provided care. As

a result, much of the hospital care provided to Medicaid-covered individuals has

come from ‘‘safety net hospitals’’—hospitals with missions of serving patients regardless of their ability to pay—such as children’s hospitals, public hospitals and

teaching hospitals. Over the years, Congress has rewritten DSH payment policy several times. In 1991, Congress capped the amount of federal DSH funds each state

may receive. In 1993, Congress capped the amount of DSH payments an individual

hospital may receive. As a consequence, the total amount of spending for DSH funds

has been curtailed—it no longer experiences significant growth.

However, in 1997, as a way to find savings in the Medicaid program and to redirect some funding for other purposes, Congress again rewrote DSH policy by reducing federal DSH spending by an estimated $10.4 billion over the five year period

(1998-2002), as part of the ‘‘Balanced Budget Act of 1997’’ (BBA). Each state’s reductions in federal DSH funding were written directly into the legislation. Some states

received larger reductions than other states, and many states’ reductions are largest

in the last two years of the BBA’s implementation.

This massive reduction in DSH payments can make it increasingly difficult for

safety net hospitals, such as children’s hospitals, to continue providing quality

health care to all individuals, regardless of income.

Children’s Hospitals: Nation’s Safety Net Providers for Children

In many states, children’s hospitals are among the leading recipients of states’

DSH funds, in recognition of the fact that they are often the health care safety net

for children of low-income families, providing the full spectrum of primary, acute,

tertiary level, and post-acute care. Virtually all children’s hospitals are designated

by their states as ‘‘disproportionate share hospitals’ serving a disproportionate share

of children assisted by Medicaid and children who are uninsured.

Although they represent less than 30% of the nation’s population, children account for approximately half of all recipients of Medicaid assistance. In fact, about

one in five children and one in four infants in the United States rely on Medicaid

to pay for their health care.

Medicaid patients on average account for more than 45% of freestanding children’s hospitals’ inpatient days. It is not unusual for a children’s hospital to devote

60% or even 70% of its care to Medicaid-covered children. In addition, on average,

Medicaid patients and uninsured patients together account for almost 50% of children’s hospital’s total gross revenues.

Why Is Medicaid DSH Policy Vital to Children’s Hospitals?

DSH payment adjustments make a major financial difference to children’s hospitals. Medicaid payment falls far short of the cost of inpatient care provided by

children’s hospitals. In 1998, the average Medicaid base payment was $0.75 for

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every $1.00 in inpatient care expenses a freestanding children’s hospital incurred

to care for a Medicaid-assisted child. Even with disproportionate share payment adjustments, children’s hospitals received payments that on average amounted to

$0.85 cents for every $1.00 of expense incurred for care.

Without Medicaid DSH payments, some children’s hospitals would end the financial year with operating losses that could jeopardize their survival. Some would be

forced to curtail their outreach and community services for low-income families as

well as high cost specialty services for all children. Some would be jeopardized in

their ability to develop integrated networks capable of serving children enrolled in

capitated managed care plans.

Unless blocked, the BBA’s FY 2001 and 2002 reductions in federal Medicaid DSH

funds will threaten the health care safety net for all children and the ability of

many individual children’s hospitals to sustain financially their complex array of

services for all children.

Recommendation

N.A.C.H. strongly supports passage of Medicaid DSH restoration legislation, such

as H.R. 3698 by Representatives Whitfield and Bilbray, and H.R. 3710 by Representative DeGette and Bilbray. These bills enjoy broad bipartisan support

throughout the Commerce Committee and in the House. Currently, between the two

bills, there are over 220 cosponsors, including 32 members of the Commerce Committee. Passage of Medicaid DSH restoration legislation will help children’s hospitals across the country to continue serving the health care needs of all children,

regardless of their economic background.

PREPARED STATEMENT OF MARK MEIJER, PRESIDENT, AMERICAN AMBULANCE

ASSOCIATION

Chairman Bilirakis, Ranking Member Brown and distinguished members of the

Subcommittee, on behalf of the American Ambulance Association (AAA), I thank you

for this opportunity to submit written testimony on the impact that the Balanced

Budget Act of 1997 (BBA) has had on ambulance service providers and the patients

we serve. The ambulance industry is currently under enormous financial stress and,

unfortunately, the worst is still yet to come.

For years, ambulance service providers have been reimbursed for services rendered to Medicare patients at levels below their true operating costs. Ambulance

providers have struggled to make this system work and still remain in operation,

primarily by finding ways to pass on these costs to other payers as well as patients

themselves. Due to the mandate to accept assignment in the BBA, ambulance providers can no longer pass on legitimate costs to Medigap insurers.

A critical difference between ambulance operations and other health care providers, is that in most cases ambulance operations are required by law, most often

through licensure by the State in which they operate, to treat and transport emergency ambulance patients without inquiring into a patient’s ability to pay. All of us

who operate ambulance response agencies are supportive of this concept, yet it creates additional financial pressures unmatched by other health care providers. Ironically, ambulance services are among the lowest reimbursed health care providers

in most state Medicaid programs. This, combined with an increase in the number

of uninsured Americans, results in a devastating financial impact on ambulance operations who are mandated to provide emergency medical care and around-the-clock

coverage regardless of the ability to pay by those accessing this important service.

Annual Medicare increases have not, and will not, keep up with costs to provide

ambulance service.

• Patient care costs have increased as access to high quality, advanced life support/

paramedic ambulance services has grown to meet community needs and expectations;

• Administrative costs have dramatically increased due to increased paperwork burdens required by the Health Care Financing Administration (HCFA) and carriers, and costly claims appeals;

• Under the current reimbursement system, ambulance industry rates have been

artificially constrained since 1985 by the inflationary index charge. This index

limited annual Medicare increases to an annual adjuster set by the HCFA regardless of actual ambulance service cost increases;

• Exacerbating the above limits, a key BBA provision further limits annual increases to one percent less than the national inflation rate which has a

compounding five-year effect (1997-2002).

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This is all happening at the same time that HCFA is about to issue a new Medicare ambulance fee schedule as authorized by Congress in the BBA. When ambulance service providers feel the full impact of the BBA with the implementation of

the new Medicare ambulance fee schedule, the anticipated additional reduction in

reimbursement will be too much for many ambulance providers to survive. Unfortunately, at that point, the Medicare patients that we serve and the millions of Americans who rely on the nation’s 911 system will also feel the full impact of the BBA.

America’s ambulance providers are the backbone of the nation’s 911 emergency

medical response system. Whatever weakens the ambulance operations weakens the

911 system’s ability to respond to calls for medical help. Below cost reimbursement

for Medicare ambulance services will seriously degrade the entire emergency response system. Fifty percent of the average ambulance operation’s revenue comes

from serving Medicare beneficiaries. Therefore, ambulance providers will be unable

to operate, response times will increase and people confronting emergency medical

situations will be put at risk. Available, quality emergency medical services are a

critical access point and safety net for the poor and elderly needing emergency

health care services.

The same is true for nonemergency ambulance services provided to Medicare patients. With fewer ambulance service providers and below cost reimbursement for

those still in operation, access to quality, timely care for the most vulnerable beneficiaries will be jeopardized. Requiring ambulance companies to provide below-cost

services to Medicare undermines our ability to provide not only emergency and nonemergency ambulance services to Medicare patients, but to all Americans.

Project Hope, a highly respected health care think tank, arrived at a reliable estimate for the cost of providing ambulance services throughout the U.S. Applying the

Project Hope cost data to the current Medicare volumes and expenditures for ambulance transport services generates a total annual cost estimate of $3.74 billion to

provide ambulance transport services to Medicare beneficiaries. The BBA, however,

limits the Medicare reimbursement for ambulance services to just $2.65 billion,

which according to Project Hope data, represents a shortfall of $1.1 billion in 2001

in the cost of providing service.

In conclusion, the BBA will limit payments under the new ambulance fee schedule

to a level that will make it impossible for many, if not most, ambulance operations

to answer the call for help when it comes. In order to provide adequate ambulance

services for Medicare beneficiaries who access care throughout the nationwide 911

emergency response system, Congress must ensure that ambulance providers are

paid their true costs in providing services to Medicare beneficiaries. The safety net

of the nation’s health care system depends on it.

Again, thank you for the opportunity to provide the Subcommittee with this written testimony.

PRACTICE EXPENSE FAIRNESS COALITION

July 31, 2000

The Honorable MICHAEL BILIRAKIS

Chairman

Subcommittee on Health and the Environment

House Commerce Committee

U.S. House of Representatives

Washington, D.C. 20515

DEAR CHAIRMAN BILIRAKIS: On behalf of the Practice Expense Fairness Coalition,

which represents organizations with a combined membership of over 350,000 physicians, we are submitting this statement for the record of the hearing entitled BBA

’97: A Look at the Current Impact on Providers and Patients, held by the Subcommittee on Health and the Environment on July 19, 2000.

Specifically, we are contacting you to (1) express our strong opposition to a proposal by the Halt 2000 coalition to stop implementation of resource-based practice

expense payments (RBPEs) this year as part of a Medicare giveback bill, and (2)

offer an alternative that would address concerns about underfunding of physician

services—while preserving the mandate that payments for physician services be

based on the relative costs of each service, based on the best available data.

The Balanced Budget Act of 1997 mandated that implementation of RBPEs be

phased in over four years, to allow for methodological refinements during each year

of the phase in, following a one year delay in implementation. The Halt 2000 proposal would undo this carefully-crafted compromise by stopping the transition to

RBPEs for all services, except office visits, at the current blend of 50% charge-based,

and 50% resource-based, practice expenses. The 50% charge-based portion would

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perpetuate the inequities in payment that Congress resolved to end when it enacted

the BBA 97 compromise. Even if a few office visit services were exempted from the

halt, the vast majority of physician services would continue to be paid in large part

based on inaccurate historical charges, not on data on the costs of each service.

Our coalition has a better alternative to Halt 2000. This alternative would address

concerns about underfunding of physician services, due to past miscalculations of fee

schedule updates, by mandating a 3% increase in the dollar conversion factor for

the Medicare fee schedule. Unlike the Halt 2000 proposal, it would not abruptly

withdraw support for the ongoing transition to a payment system that bases Medicare payments on the relative costs of each service, based on the best available data.

The General Accounting Office in February 1999 reported ‘‘HCFA’s methodology

uses what are generally recognized as the best available data on resource-based practice expense values’’ (emphasis added). So the question is not if HCFA’s methodology

is fundamentally flawed—the GAO clearly said that it was not. The refinement

process mandated by the BBA 97 is the way to get further improvements made in

HCFA’s data and methodology. In fact, HCFA’s recently published proposed rule on

the CY 2001 fee schedule includes numerous changes that directly respond to concerns expressed about its data, including restoring payments for non-physician clinical staff costs for certain services done in the hospital and incorporating more recent survey data into practice expense calculations.

As Congress considers the Medicare giveback legislation, we urge you to support

the Practice Expense Fairness Coalition’s alternative proposal for a 3 percent increase in the dollar conversion factor for the Medicare fee schedule. Under our alternative, every physician and every specialty would be better off than under current

law. By contrast, under the Halt 2000 plan, some physicians would be worse off and

others better off than under current law. The 3 percent solution is simple and fair

to all physicians. Further details are in the attachment.

Sincerely,

AMERICAN ACADEMY OF DERMATOLOGY; AMERICAN

ACADEMY OF FAMILY PHYSICIANS; AMERICAN ACADEMY OF PEDIATRICS;

AMERICAN COLLEGE OF PHYSICIANS-AMERICAN SOCIETY

OF INTERNAL MEDICINE; AMERICAN COLLEGE OF RHEUMATOLOGY; AMERICAN

OSTEOPATHIC ASSOCIATION; AND RENAL PHYSICIANS ASSOCIATION

PREPARED STATEMENT OF RURAL HOSPITAL COALITION

Good morning Chairman Bilirakis; Ranking Member Brown and other distinguished members of the House Commerce Subcommittee on Health and Environment. We submit this testimony on behalf of the patients, providers and communities in which we own or operate a rural hospital. Collectively, Community Health

Systems, Inc., LifePoint Hospitals, Inc. and Province Hospital Company, Inc. represent roughly 10 percent of the rural hospitals in the United States. In terms of

number of facilities, Community Health Systems is the largest non-urban provider

of general hospital services in the United States and is the second largest non-urban

provider in terms of revenues.

We appreciate the opportunity to discuss the Balanced Budget Act of 1997 (BBA)

and its current impact on rural hospital providers, patients, and the Medicare program. As Congress considers reforms to grant necessary relief to rural providers, we

urge the Congress to embrace broad reforms that give relief to the majority of the

2,100 rural hospitals. These reforms should include:

• Equalizing Medicare disproportionate share (‘‘DSH’’) payments between urban

and rural hospitals;

• Providing a wage index floor;

• Eliminating market basket reduction for rural hospitals in FY 2001 and FY 2002;

and

• Restructuring qualifying criteria for Medicare dependent hospitals based on their

past three cost report years and the payment formula blend applicable to Sole

Community Hospitals and make the MDH program permanent.

Rural Health Care Market

Rural hospitals remain the key to providing rural communities with both economic development and access to quality and affordable health care. The loss of a

rural hospital to a community results in more than the loss of access to health care.

The economic impact of a closing of rural hospital in a rural community cripples a

community’s ability to attract new doctors, jobs and industry. A recent study indicated that health care provides 10 percent to 15 percent of the jobs in many rural

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1 Statement by Dr. Mary Wakefield before the Senate Agriculture Appropriations Committee

hearing on Rural Hospitals and Rural Economic Development 2 According to the ProPAC 1997, the current formula weighs Medicaid patient days equally

with patient days for Medicare beneficiaries who receive Supplemental Security Income (SSI)

cash payments, despite the fact the former group accounts for four times as much hospital cost.

Consequently, urban hospitals with at least 100 beds benefit from a steeply graduated payment,

while rural and small hospitals receive a lower fixed adjustment.

counties.1 When the secondary benefits of those jobs are included, health care accounts for 15 to 20 percent of the all jobs in rural communities.

Rural hospitals have been able to survive only because of a patchwork of ‘‘special

fixes’’ enacted by Congress in the last decade. The Balanced Budget Refinement Act

(BBRA) continued this pattern and provided relief for a small number of special

rural hospitals—Sole Community Hospitals (‘‘SCH’’), Critical Access Hospitals

(‘‘CAH’’) and Medicare Dependent Hospitals (‘‘MDH’’)—which represent less than 50

percent of the rural hospitals. As a result, most rural hospitals remain in a market

that is experiencing higher than expected payment reductions, a reduced number

of providers and excessive regulations that are reducing access to care for Medicare

beneficiaries in rural areas. The impact of these reductions and regulatory burden

is evidenced by:

• The Congressional Budget Office (CBO) estimate that Medicare spending fell by $8 billion dollars between November 1999 and January 2000. • The Medicare Payment Advisory Commission assessment that ‘‘rural hospitals

have lower inpatient margins... and rural hospitals were disproportionately

harmed by the BBA.’’

• The Health Care Financing Administration (HCFA) notation in the most recent

‘‘Inpatient Hospital Prospective Payment System’’ regulation that ‘‘approximately one third of rural hospitals continue to experience negative Medicare

margins.’’ The rule further states that HCFA ‘‘now believes that rural hospitals

merit special dispensation...’’

Special Needs of Rural Hospitals

Rural hospitals tend to be smaller, have difficulty attracting and keeping health

care professionals and are more dependent on Medicare patients. In order to remain

competitive, hospitals and the communities they serve must continue to be able to

recruit additional primary physicians and expand the breadth of services offered in

their hospital. To remain a vital part of the United State’s health care delivery system, rural hospitals need fundamental payment reform that extends relief to all

rural hospitals by improving wages, DSH payments and the hospital market basket update.

Medicare Disproportionate Share Payments

Since 1986, the Medicare program has made special add-on payments to PPS hospitals that treat low income patients. Concern for specific groups of hospitals resulted in Congress creating 8 different DSH formulas. (See Table 1). Each includes

a threshold for the low-income share needed to qualify. Medicare’s proxy for low income patients is based on two factors:

• The percentage of Medicaid patient days (‘‘Medicaid Utilization’’); plus

• The percentage of Medicare SSI patient days

Charity, indigent care and bad debts are not considered in the DSH calculation.

The current program applies a higher qualifying threshold for rural hospitals (30

percent for hospitals with greater than 100 beds and 45 percent for hospitals with

less than 101 beds, as compared to 15 percent for urban hospitals with greater than

99 beds and 40 percent for urban hospitals with less than 100 beds) and disproportionately weights Medicaid utilization, despite the fact that Medicaid utilization is

a poor measure of overall service to the poor.

Consequently, more than 95 percent of all DSH payments go to urban

hospitals and is highly concentrated in about 250 hospitals.2

Further, the BBA 1997 requires that HCFA recommend a new payment formula

for DSH adjustments that treat all hospitals equally. Recent MedPAC reports on

DSH funds found little evidence of any systematic relationship between the share

of poor patients a hospital treats and a per-case cost. Low income seniors and the

hospitals that serve them in rural areas deserve a more equitable system.

We urge Congress to equalize DSH payments between urban and rural hospitals.

Specifically, Congress should immediately equalize qualifying low income threshold

between urban and rural hospitals and phase-in the sliding scale distribution formula used to calculate the DSH payment for urban hospitals over 99 beds. It is also

our suggestion that urban hospitals be held harmless and that this proposal be imVerDate 11-MAY-2000 10:22 Apr 18, 2002 Jkt 010199 PO 00000 Frm 00140 Fmt 6633 Sfmt 6621 E:\HEARINGS\65915 pfrm01 PsN: 65915
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plemented with surplus dollars. Notably, HFCA in recent testimony before the Senate Agriculture Appropriations Subcommittee noted that they would consider ‘‘improving equity for rural hospitals in the Medicare DSH formula.’’ In a recent budget

analysis prepared by PriceWaterhouseCoopers, the transition to a uniform DSH

payment for rural hospitals under 100 beds is estimated to cost $709 million over

five years (2001-2005). Further, a transition into a uniform DSH payment and applying an urban distribution formula in 2001 is estimated to cost $2.95 billion over

five years (2001-2005).

Market Basket (MB) For Rural Hospitals

Rural hospitals have been doubly hurt by three consecutive years of below MB

updates. Although hospitals have become more efficient, the industry may be running out of cost cutting initiatives. The problem is more pronounced for smaller hospitals which have less elasticity of cost to volume.

We urge Congress to eliminate the market basket reduction for rural hospitals in

FY 2001 and FY 2002. A budget estimate prepared by PriceWaterhouseCoopers estimated that a market basket update for rural hospitals for 2001 and 2002 would cost

$748 million for rural hospitals under 100 beds and $8.73 billion for all hospitals

over five years (2001-2005).

Wage Index Floor

The current wage index reflects area differences in wage levels in the geographic

area of the hospital as compared to the national average wage level. Most rural

areas have a very low wage index because the index is based on a statewide average

hourly wages for rural areas. The wage index formula, while recognizing hourly

wage differences, does not take into account the greater number of hours per case

that is required in a lower volume setting due to baseline staffing requirements and

lower volume than urban hospitals. Thus, small rural hospitals may have a lower

average hourly wage but will require, all things being equal, a greater number of

hours spread over lower volumes to run their operations.

We urge Congress to provide a national wage index floor of .8500 to .9000 that

would provide a bottom end payment boost to the most disadvantaged rural hospitals. In a recent budget analysis prepared by PriceWaterhouseCoopers, a floor

wage index of .90 for rural hospitals under 100 beds is estimated to cost $382 million over the next five years (2001-2005).

Update Criteria For Medicare Dependent Hospitals (‘‘MDH’’)

A rural MDH is a hospital located in a rural area with 100 beds or less with at

least 60 percent of all discharges or days attributable to Medicare. The criteria for

the MDH program is based solely on a hospital’s 1987 cost report. Facts have

changed since then. Some current MDH’s may no longer qualify and other hospitals

that would otherwise qualify cannot because they did not qualify in 1987.

We urge Congress to make the MDH program permanent and to revise the MDH

criteria to (1) permit any three most audited years to be used to determine eligibility

and, (2) that would include the current 1996 blend-in afforded to Sole Community

Hospitals. In a recent budget analysis prepared by PriceWaterhouseCoopers, the

proposed definition change in the MDH criteria is estimated to cost $144 million

over five years (2001-2005).

Conclusion

The problems facing rural health care providers cannot likely be solved this year.

It is critical, however, for Congress to enact legislation that will extend real relief

to all rural hospitals by improving wages, equalizing DSH payments, revising the

MDH program and providing for a fair hospital market basket update.

PREPARED STATEMENT OF THE FLORIDA HOSPITAL ASSOCIATION

Mr. Chairman and Members of the Subcommittee:

My name is Charles F. Pierce, Jr., and I am President of the Florida Hospital Association, an association that represents 230 Florida hospitals and health care systems with over 200,000 hospital employees.

America’s health care system sits at the crux of a great paradox. In the midst of

a booming economy and escalating surplus, the facilities you and I and millions of

others have come to rely on for our health care needs face unprecedented financial

pressures and uncertainty about their future. Hospital leaders with as much as 20-

30 years of experience report they have never experienced anything like their current financial situations. A snapshot of hospitals in Florida following enactment of

the Balanced Budget Act shows the magnitude of this somber reality:

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• Reductions in Medicare payments to Florida hospitals are estimated at $3.6 billion.

• Almost 32% of all Florida hospitals reported losses in 1998.

• Over half of all hospitals saw a drop in net income from the previous year.

• Changes in bond ratings were dominated by five times as many downgrades as

upgrades.

The Balanced Budget Act cut too deeply in hospitals across the nation. Because

Florida has the highest percentage of Medicare beneficiaries in the nation, the impact is exceptionally severe and deeply disturbing. There are 2.8 million elderly in

Florida and the numbers are growing. Patients are older and sicker, requiring more

intensive services and support. Florida’s hospitals are expected to meet the needs

of these seniors despite BBA reductions amounting to $1 billion in the first two

years of its implementation and an additional $2.6 billion in the next three years—

even after the BBRA of last year. Though hospitals continue to scrutinize and

squeeze their budgets, the cost savings they realize do not begin to match the size

of the mandated Medicare cuts. What does the additional reduction of $3.6 billion

mean to our hospitals?

Even after the partial relief offered by the BBRA, Florida’s 27 rural hospitals,

which serve over 500,000 citizens, are expected to lose $50.6 million. These cutbacks

will have alarming consequences among communities solely dependent on the health

care services these facilities provide. Without additional relief, how will our rural

hospitals continue to serve these remote communities?

A number of services, particularly outreach services that undergird the health

needs of some of the most vulnerable in our society, have been closed. Martin Memorial Medical Center in Stuart, Florida, was forced to close an urgent care center for

residents of the isolated community of Indiantown, many of whom are migrant and

unskilled workers. The care center lost money every year, but Martin Memorial continued to support it as part of its community mission. This year, the hospital could

no longer afford to absorb the cost of the center. ‘‘It was a heart-wrenching decision

to announce we couldn’t finance the center any more,’’ Martin Memorial CEO Dick

Harman reported.

Bethesda Memorial Hospital in Boynton Beach had to make a similar, difficult decision when it closed its clinic for poor pregnant women in southern Palm Beach

County.

Mercy Hospital withdrew from the Dr. Rafael Penalver Clinic in Little Havana,

Miami, after losing $3.6 million in three years.

And Shands HealthCare, an eight-hospital system providing care to patients from

each of Florida’s 67 counties, has had to close all but two of its home health care

units because it lost more than $20 million annually after the BBA was enacted.

These are not isolated incidents. Over the last two years in Florida, 34 hospitals

experienced the closing of 271 acute care beds, 5 obstetrics programs, 295 psychiatric and substance abuse beds, and 122 skilled nursing beds. Without relief,

these kinds of safety net programs and—more importantly—the poor and needy people they serve, will suffer and their access to basic health care will be jeopardized.

Of great and growing concern is the reality that the BBA has forced health care

providers to reduce or eliminate other community and senior services. Nationally,

over 3,000 independent home health agencies have closed their doors in the past

three years. Already, 75 Florida communities have lost home health agencies, and

now they have none. Baptist Health Care of Pensacola has had to close two rural

health clinics and one home health agency. Memorial Healthcare System in Hollywood, Florida, could not expand its much-needed skilled nursing unit because the

BBA reduced its funding by $623,000. These are just a few of the many examples

of what is occurring in Florida. We are deeply concerned that almost 20% of all longterm beds in Florida belong to organizations that have filed for bankruptcy. ‘‘We’ve

seen some serious problems develop,’’ said Jim Booth, CEO of Interim HealthCare,

one of the largest home health agencies in South Florida. ‘‘Due to cutbacks in reimbursement, some chronically ill patients are not getting the necessary care.’’ If Congress does not intervene soon, where will our elderly seniors receive the care they

need?

Our hospitals are delaying the purchase of much-needed new and replacement

equipment and postponing important renovations. For Baptist Health Systems of

South Florida, the BBA delayed by one or more years a more accessible outpatient

facility, which would enable more people in the local community to receive basic

health care services. This major health care system also is concerned that its ability

to invest in critical medical equipment will be significantly limited in the future.

Without relief, how will our hospitals keep pace with the latest technology and

treatment opportunities our citizens deserve and have come to rely on?

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As hospitals struggle with the severity of the BBA’s impact, they are confronting

other social and economic factors that also dangerously strain their ability to provide necessary health care services. For example:

• There are 2.5 million Floridians (44 million nationwide) who have no health insurance. That number is growing. Crowded emergency rooms provide their only

medical recourse. Federal law requires hospitals to stabilize and evaluate anyone who comes into the emergency room, yet no reimbursement accompanies

this unfunded mandate. This means that hospitals must absorb these costs. In

1998, Florida hospitals provided over $1.2 billion in uncompensated care.

• New drugs and medical technology result in higher costs for patient care with no

increased payment for them. As you have heard in great detail, the average

price for new drugs continues to skyrocket and consumes an alarmingly higher

proportion of what it costs to treat patients.

• Severe shortages of nurses—currently Florida has over 4,800 open nursing positions—and shortages of other allied health professionals are causing labor costs

to spiral. Hospitals not only pay higher wages, but also offer signing bonuses

and increased benefit packages. These costs are rising as Medicare is reducing

payments.

• New regulations initiate major, costly compliance issues. Florida hospitals must

comply with regulations from 26 federal, 11 state, and 6 voluntary agencies. For

example, the estimated nationwide cost of implementing HIPPA is $43 billion—

dwarfing Y2K compliance costs. Where will the funds come from?

Indeed, Florida hospitals are facing unprecedented financial pressures and need

your help. We support enactment of legislation (HR3580) that provides a full market

basket update for fiscal years 2001 and 2002 under Medicare. BBA set the update

at market basket—a measure of hospital inflation—minus 1.1 percentage points for

each year. Elimination of the remaining two years of the BBA-mandated market

basket reductions provides an estimated $7 billion relief nationally, with $716 million for Florida hospitals. This bipartisan bill, which has been co-sponsored by 19

members of the Florida delegation, will simply re-establish a realistic link between

cost increases and appropriate payment rates. Under BBA, hospitals have seen costs

increase by seven percent while payments were updated by less than two percent.

The scenario will worsen during the next two years if no action is taken.

Additionally, we urge Congressional approval of legislation (HR3698, HR3710) to

protect federal disproportionate share hospital (DSH) allotments from reductions beyond FY 2000 levels and allow payments for uncompensated care to grow at the rate

of inflation. The Medicaid DSH program is the primary source of financial support

for safety net hospitals that provide care to the underserved and our most needy

citizens. HR3698 and HR3710 provide substantial relief for struggling safety net

hospitals, while still achieving significant savings in the DSH program.

Funding for these changes must come from the projected federal surplus and not

from payment reductions to hospitals in other areas.

Enactment of these bills provides a framework for Congress to remedy the damage caused by the Balanced Budget Act. Additional repairs will be necessary. There

must be a balance between slowing Medicare’s growth and responsible program financing. The Florida Hospital Association is encouraged that the Florida Delegation

and their bipartisan colleagues in Congress, as well as MedPAC, health care providers, and citizens across the nation are aligned in their conviction that something

must be done to reverse the devastating impact of the BBA on hospitals. In Florida,

something must be done quickly.

We look forward to working with you to strengthen our hospitals’ ability to fulfill

their mission—to provide quality care to the citizens in their communities.

NATIONAL ASSOCIATION OF COMMUNITY HEALTH CENTERS

August 31, 2000

The Honorable MICHAEL BILIRAKIS

Chairman, Health and the Environment Subcommittee

House Commerce Committee

2125 Rayburn House Office Building

Washington, DC 20515

DEAR MR. CHAIRMAN: Thank you for giving the National Association of Community Health Centers the opportunity to testify before your subcommittee in support

of H.R.2341, the Safety Net Preservation Act (SNPA), in July. Given the overwhelming support for this legislation among Commerce Committee members (as

well as majority support in the House of Representatives and Senate), we are hopeVerDate 11-MAY-2000 10:22 Apr 18, 2002 Jkt 010199 PO 00000 Frm 00143 Fmt 6633 Sfmt 6621 E:\HEARINGS\65915 pfrm01 PsN: 65915
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ful that Congress will recognize the importance of health centers and enact the common sense, long-term Medicaid payment system included in the SNPA.

This letter reflects our written response to the questions submitted by Representative Towns to be included in the hearing record. It is my hope that these responses

will further justify the importance of Congress’ timely action to provide BBA relief

for health centers.

Question 1: If your centers are legally mandated to serve any patient that walks

through the door, what services have your members had to reduce in order to honor

that mandate?

Health centers are unique providers because of their Congressional mandate, patient/payer population mix and the medically underserved areas they serve. In addition, centers provide more than just primary and preventive health care services.

Unlike other providers, health centers are required to provide services that help

their patients access the health care services they provide, such as translation services (for non-English speaking patients), transportation services (for elderly or other

patients without access to their own vehicle or public transit), and case management

services. Without these services, the health services they provide would not be nearly as effective or accessible to everyone in their communities.

In addition, health centers also provide other social service and education services

that give low-income people the tools they need to emerge out of poverty. These

services include, but are not limited to, health education and nutrition. Likewise,

health centers also provide services other than medical, including, in some cases,

dental, mental health, and pharmacy services.

Of course, as you understand, when health centers face financial pressure and

begin to suffer losses, including losses from Medicaid, they will do everything they

can to protect access to the basic primary and preventive health care services that

keep their patients healthy. As a result, these vital ancillary and enabling services

are among the first to be cut, leaving patients with greater barriers to accessing

health care. If a Spanish-speaking patient no longer has the ability to communicate

with a clinician, their access to care is severely impaired. Likewise, if a health center can no longer provide van service to the center, an elderly woman who has lost

her eyesight loses her access to care. Eliminating these services fundamentally undermines a center’s ability to provide the most needed care in the communities. This

means that health care needs would go unmet.

Of course, if a health center continues to lose money, it is forced to further restrict

its services. Such means could include laying off clinicians or closing service delivery

sites, like HIV/AIDS clinics, pediatrics clinics, or other satellite sites. Naturally, if

revenue losses are too great, the health center closes, leaving its community without

access to affordable health care. It is this result that the Safety Net Preservation

Act is intended to avert.

Question 2: In your opinion, why have only eight states implemented cost-based

systems for health centers?

Unfortunately, the Governors have consistently opposed Federal legislation ensuring adequate reimbursements to health centers designed to protect the integrity of

the Public Health Service Act grants for care for the uninsured. While I cannot ascribe motives to particular States, I can draw some conclusions based on the attitudes expressed in the several letters written by the National Governors Association

to Congress regarding the Safety Net Preservation Act.

First, indicative of the attitude expressed by the NGA, I do not believe that many

governors understand the unique role of community health centers. As you know,

health centers are required by Federal law to make their care accessible to everyone

in the medically underserved area they serve, without regard to insurance coverage

or ability to pay. Sadly, by advocating for policies that undermine health centers

and suggesting that there is no reason to treat health centers differently from other

providers, the NGA demonstrates a fundamental lack of understanding of the crucial role of health centers.

Second, the governors do not have a direct financial interest in protecting health

centers, whereas the Federal government has a significant financial interest in

doing so. In my opinion, if the governors were investing more than $1 billion of their

own funding in health centers to provide care for the uninsured, they would not be

opposing a permanent long-term Medicaid payment system that protects such an investment. Ultimately, because the grant dollars for the uninsured are not State

money, the NGA does not have the financial incentive to protect the health center

safety net.

Because the NGA does not govern at the local level, it fails to appreciate how crucial these health resources are to the communities they serve. That is why the Safety Net Preservation Act has been endorsed by the United States Conference of Mayors and the National Association of Counties—they directly understand how the loss

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of a health center will impact their communities. Unfortunately, it appears that the

NGA does not view centers in those terms and that is why I believe that so few

States have established a long-term Medicaid payment systems.

Question 3: Have community health centers benefited financially from their inclusion as network providers with Medicaid managed care plans?

Health centers provide those services that ensure that Medicaid recipients remain

healthy. In addition, centers provide services that provide them with the tools to

overcome poverty. That makes them valuable resources to managed care plans.

However, because most States have not moved to the widespread use of managed

care in their Medicaid programs, it is difficult to get a true sense of the precise impact of Medicaid managed care on safety net providers. In addition, due to the

BBA’s requirement that health centers receive ‘‘wrap around’’ payments to make up

the difference between managed care reimbursement and their reasonable costs,

health centers have not suffered as they would have without that ‘‘wrap around’’

protection.

While it is difficult to assess the impact of managed care on health centers in

most cases, we do have examples of the impact when managed care is used without

the protection of a long-term Medicaid payment system for health centers. In States

that have received a waiver of Medicaid requirements through Section 1115 of the

Social Security Act, we do have a better understanding of the impact of managed

care on health centers. Despite the fact that each of the 1115 States (except Oregon)

are required, as part of the terms and conditions of the approval of their waiver,

to reimburse health centers on a ‘‘cost-related’’ or ‘‘risk-adjusted’’ basis, few States

are actually meeting these requirements. Indeed, health centers in these States are

suffering severe losses because Medicaid managed care plans are only reimbursing

providers at a fraction of their cost and there is no mechanism to protect health centers’ ability to care for the uninsured. Health centers in Tennessee have lost millions of dollars under the State’s TennCare program. Likewise, health centers in

Oklahoma have been receiving only a fraction of their cost of providing care to Medicaid patients—placing them under severe financial pressure and forcing them to reduce services. In these instances (and throughout Section 1115 waiver States),

States are de facto relying on the Federal grant dollars to keep health centers operational while only reimbursing centers at a fraction of their cost of providing care.

I hope that my answers to these questions will provide some insight on the importance of community health centers and the need for a long-term Medicaid payment

system for health centers. Please let me know if I can be of any further assistance

to you.

Sincerely,

DANIEL R. HAWKINS, JR.

Vice President of Federal and State Affairs