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80–837—PDF 2012

S. HRG. 112–768 

ROUNDTABLE DISCUSSION ON MEDICARE 

PHYSICIAN PAYMENTS: UNDERSTANDING THE 

PAST SO WE CAN ENVISION THE FUTURE 

HEARING 

BEFORE THE

COMMITTEE ON FINANCE 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

MAY 10, 2012 

( 

Printed for the use of the Committee on Finance 

COMMITTEE ON FINANCE 

MAX BAUCUS, Montana, Chairman 

JOHN D. ROCKEFELLER IV, West Virginia 

KENT CONRAD, North Dakota 

JEFF BINGAMAN, New Mexico 

JOHN F. KERRY, Massachusetts 

RON WYDEN, Oregon 

CHARLES E. SCHUMER, New York 

DEBBIE STABENOW, Michigan 

MARIA CANTWELL, Washington 

BILL NELSON, Florida 

ROBERT MENENDEZ, New Jersey 

THOMAS R. CARPER, Delaware 

BENJAMIN L. CARDIN, Maryland 

ORRIN G. HATCH, Utah 

CHUCK GRASSLEY, Iowa 

OLYMPIA J. SNOWE, Maine 

JON KYL, Arizona 

MIKE CRAPO, Idaho 

PAT ROBERTS, Kansas 

MICHAEL B. ENZI, Wyoming 

JOHN CORNYN, Texas 

TOM COBURN, Oklahoma 

JOHN THUNE, South Dakota 

RICHARD BURR, North Carolina 

RUSSELL SULLIVAN, Staff Director 

CHRIS CAMPBELL, Republican Staff Director 

(II) 

C O N T E N T S 

OPENING STATEMENT 

Page 

Hatch, Hon. Orrin G., a U.S. Senator from Utah ................................................. 1 

WITNESSES 

Wilensky, Hon. Gail, Ph.D., senior fellow, Project HOPE, Bethesda, MD .......... 3 

Vladeck, Hon. Bruce, Ph.D., senior advisor, Nexera, Inc., New York, NY ......... 5 

Scully, Hon. Thomas, J.D., senior counsel, Alston and Bird, LLP, Washington, 

DC .......................................................................................................................... 7 

McClellan, Hon. Mark, M.D., Ph.D., senior fellow, Brookings Institution, 

Washington, DC ................................................................................................... 9 

ALPHABETICAL LISTING AND APPENDIX MATERIAL 

Baucus, Hon. Max: 

Prepared statement .......................................................................................... 31 

Hatch, Hon. Orrin G.: 

Opening statement ........................................................................................... 1 

Prepared statement .......................................................................................... 32 

McClellan, Hon. Mark, M.D., Ph.D.: 

Testimony .......................................................................................................... 9 

Prepared statement .......................................................................................... 34 

Scully, Hon. Thomas, J.D.: 

Testimony .......................................................................................................... 7 

Prepared statement .......................................................................................... 44 

Vladeck, Hon. Bruce, Ph.D.: 

Testimony .......................................................................................................... 5 

Prepared statement .......................................................................................... 50 

Wilensky, Hon. Gail, Ph.D.: 

Testimony .......................................................................................................... 3 

Prepared statement .......................................................................................... 60 

COMMUNICATIONS

Center for Fiscal Equity .......................................................................................... 71 

National Committee for Quality Assurance (NCQA) ............................................ 75 

(III) 

(1) 

ROUNDTABLE DISCUSSION ON MEDICARE 

PHYSICIAN PAYMENTS: UNDERSTANDING THE 

PAST SO WE CAN ENVISION THE FUTURE 

THURSDAY, MAY 10, 2012 

U.S. SENATE, 

COMMITTEE ON FINANCE, 

Washington, DC. 

The hearing was convened, pursuant to notice, at 10:14 a.m., in 

room SD–215, Dirksen Senate Office Building, Hon. Max Baucus 

(chairman of the committee) presiding. 

Present: Senators Bingaman, Kerry, Wyden, Stabenow, Cantwell, 

Carper, Cardin, Hatch, Grassley, Roberts, Coburn, and Thune. 

OPENING STATEMENT OF HON. ORRIN G. HATCH, 

A U.S. SENATOR FROM UTAH 

Senator HATCH. Let us get this going. Senator Baucus has been 

detained down at the White House, and, as I understand it, he has 

asked me to get this moving. 

And let me just use some of what he would say. As is apparent 

from the physical seating today, today’s forum is not a traditional 

hearing. Senator Baucus and I agreed to try today as an experiment. We want to facilitate deeper discussion. If it works, we will 

try it again. If it does not, we will not. 

I have no doubt that my colleagues will let us know what they 

think. 

Now, this is Senator Baucus speaking. After the statements of 

our participants, we will dive into discussion. Any Senator may 

comment or ask a question, and any Senator or participant may 

follow up. There is no order of questioners. If you want to speak, 

signal that to the chairman or me, if I am doing it, and he will call 

on you as quickly as possible. Senator Baucus and I will do our 

best to make sure comments and questions come equally from our 

Democratic and Republican Senators so that everybody is given a 

chance. 

Now, I want to thank the chairman for convening—and it is a 

nice experiment here—today’s roundtable on this important issue, 

one that affects our Nation’s caregivers and patients. 

Now this is, without question, a distinguished panel. I know each 

and every one of you, and we are very proud to have all of you here 

today, and it means a great deal to this committee to have you 

here. 

It is an encouraging forum for promoting a bipartisan solution to 

the critical problems posed by Medicare physician reimbursement. 

2 

And, as many of you know, Chairman Baucus and I have both 

called for repeal of the flawed Sustainable Growth Rate payment 

formula. No one likes the annual end-of-the-year scramble to stop 

catastrophic payment cuts to physicians serving Medicare beneficiaries. Yet, while there is broad agreement that our current situation is not tenable, a solution has eluded the Congress up to this 

particular point. 

The flawed SGR policy really is a 2-part problem. The issue that 

typically receives our attention is how we pay for a repeal or temporary fix of the formula. But the problem we hope to address 

today is more challenging. How do we move beyond the SGR? If we 

repeal the SGR or freeze physician payments for an extended period of time, we have only kicked the can down the road. We have 

not fixed the system, we have only left it for others to address. We 

need to move forward toward a permanent solution, one that 

makes real advancements in how we pay for and deliver care. 

We need to provide a stable foundation for paying physicians 

today and tomorrow, not 5 or 10 years from now. And we must accept that many of these proposals advocated for today are, at best, 

years away from broad implementation and, quite possibly, will 

never work for many sole practitioners or small group practices 

treating Medicare beneficiaries. 

Now, I want to thank the chairman again for convening this 

roundtable, and I personally look forward to hearing from our witnesses. My hope is that we will not get distracted by the budget 

issues with which we are all well-aware. Instead, I know both of 

us look forward to a fruitful discussion about the steps we must 

take to address this complex issue and encourage practical and realistic solutions. And I hope that this is the beginning of a meaningful discussion or set of discussions for our committee. 

[The prepared statement of Senator Hatch appears in the appendix.] 

Senator HATCH. Now, I guess Senator Baucus is still not here. 

Let me just say that I am pleased to welcome our participants 

for today’s roundtable. All of them are former Administrators of 

CMS or its predecessor, the Health Care Financing Administration, 

known as HCFA. 

Today we will hear from Gail Wilensky. Gail is a senior fellow 

at Project HOPE. Gail was Administrator at HCFA from 1990 to 

1992. We are really pleased to have you here, Gail. 

Next we will hear from Dr. Bruce Vladeck. Bruce was here last 

year to testify before the committee, and I am happy that you were 

willing to come back. Bruce is a senior advisor at Nexera and 

served as Administrator of HCFA from 1993 to 1997. 

After that, we are going to hear from Mr. Thomas Scully. Thomas is senior counsel at Alston and Bird. He was Administrator of 

CMS from 2001 to 2004. 

Finally, we are going to hear from Dr. Mark McClellan. Mark is 

the director of the Engelberg Center for Health Reform at the 

Brookings Institution. Mark was the Administrator of CMS from 

2004 to 2006. 

As a reminder, your written statements will be included in the 

record. And so we will begin with you, Ms. Wilensky, and go from 

there. 

3 

STATEMENT OF HON. GAIL WILENSKY, Ph.D., 

SENIOR FELLOW, PROJECT HOPE, BETHESDA, MD 

Ms. WILENSKY. Thank you very much, Senator Hatch and members of the Finance Committee. Thank you for inviting me here to 

participate in this roundtable on Medicare physician payment reform. 

As you have just indicated, Senator Hatch, I have had the honor 

and privilege of directing the Medicare and Medicaid programs, as 

have my colleagues to my left. I served as the Administrator of 

what was then called the Health Care Financing Administration 

from 1990 to 1992. I chaired the Physician Payment Review Commission for 2 years after that, and I chaired the Medicare Payment 

Advisory Commission from 1997 to 2001. 

I am going to use my time to review a little bit the background 

as to what we had before we had the Relative Value Scale and how 

we have gotten to the position where we are, in order to give some 

thoughts about what we need to do next. 

As you know, for most services, Medicare uses a bundled payment service now. It started in 1983 when we moved hospital inpatient reimbursement to a prospective payment system. It has been 

expanded to the capital payments, to outpatient hospitals, to home 

care, and to nursing homes. When those types of bundled payments 

have been used, we have updated the amount paid using an inflation measure and made an adjustment for productivity. 

Physician payments continue to be and have always been very 

different from the bundled payment strategy that we use elsewhere 

in Medicare. There are some 7,000 or more Current Procedural 

Terminology codes that are used to bill. The updates were done by 

a top-down strategy initially, after the 1989 legislation, with the 

Volume Performance Standard, now the SGR and, also, adjustments for the Medicare Economic Index that is adjusted by these 

expenditure targets. The initial period for physician payment was 

from 1965 to 1984. 

Senator Baucus, welcome. 

The fees during that period were based on a historical charge 

basis. And what was seen using historical charges was that charges 

went up and volume of spending also went up. 

We had a second period starting in 1984 through 1991, right before the Resource-Based Relative Value Scale, or RBRVS, was implemented, when the increase was based on the Medicare Economic 

Index. Basically, we tried to measure the cost for physicians. What 

we saw there was also rapid growth in fees and rapid growth in 

spending. 

Looking at that period as a whole, it became clear that controlling only fees was not a very effective way to control spending. 

During the period of the 1980s, spending for physician services 

grew more rapidly than spending even for other services in Medicare. 

At the very end of 1989, the Congress had passed the Relative 

Value Scale. That was a very different way to try to have this very 

disaggregated fee schedule used. Rather than basing it on historically based charges, there was a calculation of work effort, practice 

expense, and liability. There was a limitation for the liability that 

beneficiaries would face. There was a deliberate intention to shift 

4 

some of the reimbursement away from proceduralists and toward 

primary care services, and away from urban and toward rural 

areas. 

At the same time, a volume control strategy was introduced to 

try to limit spending under this very disaggregated fee schedule. 

Initially, the Volume Performance Standard looked back 2 years 

and tied the increase not only to costs adjusted for changes in statute, but also looked at actual expenditures versus what the specified expenditures had been and made an adjustment either up or 

down based on whether expenditures were lower or higher than 

had been expected. 

There were some problems with it. It was an unstable way to 

make the adjustment, and it was replaced in the Balanced Budget 

Act with the Sustainable Growth Rate. You have had a lot of experience now with the Sustainable Growth Rate. It is basically tied 

to the growth in real GDP per capita. You are now using, since 

2003, a 10-year moving average rather than a single point in time, 

and it is used to update the Medicare Economic Index. 

There is good news and bad news with the change. The use of 

the Relative Value Scale was an attempt to get away from some 

of the biases historically that were regarded as being in the fee 

schedule, and the SGR was more stable than the Volume Performance Standard. But when you look at the incentives that are involved, they are just awful. There is no reward for efficiency. There 

is no reward for quality. There is, worst of all, no link to how any 

individual physician or the physician’s practice behaves, which is 

a very bad set of incentives. It makes it very hard to drive accountability or responsibility, basically because of the use of the 7,000- 

plus codes, combined with the SGR. 

To my mind, there are really two strategies that you can use in 

its place. One is, you could try to refine the Relative Value Scale. 

A number of people have made suggestions about how to do it to 

make it more accurate than it is now, using better data. And most 

importantly, you could set the Sustainable Growth Rate close to 

the physician’s own practice so there would be a direct link between the update and the actual behavior of the physician and the 

physician’s group. 

What I think is a better strategy is to try to move toward more 

bundled payments for physicians, as you have everywhere else in 

Medicare. You can start with chronic diseases, with or without ancillary services being provided. You can look at the high cost/high 

volume interventions. There are already some pilots that are moving in that direction, the ACE pilots. 

Believe it or not, 20 years ago, when I was the Administrator, 

we had the bypass demonstration that did precisely that. Bruce 

also had a chance to oversee that. It went on for 10 years. And you 

can begin to move to more accountable units in that way. 

The bad news is, there are no quick fixes on the horizon. To me, 

removing the SGR and not making any other changes in physician 

payment is simply not a solution. We know what will happen. Expenditures for physician services will grow more rapidly than other 

areas. 

5 

Unfortunately, because not enough work has been done over the 

last decade or two, despite many of us commenting on the need for 

it, there is no alternative ready for prime time right now. 

What we need to do is make sure the pilots get started as quickly 

as possible. And for me, I do not want to only see them bundled 

with hospital payment. I think it is a very serious mistake to push 

all physicians or to think all physicians will be employed by hospitals or are part of hospitals. 

We need to have a better way to pay physicians directly. I think 

that will continue to be an important part of the landscape in the 

future. 

Thank you. 

[The prepared statement of Ms. Wilensky appears in the appendix.] 

The CHAIRMAN. Thanks, Gail, very much. I apologize for being 

late. I was down at the White House. 

Bruce, go ahead. And thanks, all of you, for coming. I really appreciate it, Bruce, Tom, Mark, all of you. 

STATEMENT OF HON. BRUCE VLADECK, Ph.D., 

SENIOR ADVISOR, NEXERA, INC., NEW YORK, NY 

Mr. VLADECK. Thank you, Senator. 

This is such a distinguished group of people who have been 

through some similar experiences as I. I really want to make just 

a few points about these issues very quickly. 

I think there is a tendency, certainly, on the part of the policy 

community and a lot of our former colleagues, in the quest for 

something that is theoretically consistent or something that fits 

with people’s ideas of how the world ought to work, to make things 

more complicated than they really need to be. 

In fact, it is a very diverse health care system out there. It is a 

very heterogeneous system. It is very different from one community 

to another. 

I think we have learned in physician payment in the Medicare 

program over the last 40-some years that one size cannot possibly 

fit all and does not fit all. And I think defining the future directions forward in terms of one sort of cure-all or one particular solution or one easy and elegant kind of fix is not going to be successful 

over time. 

I very much agree with some of the comments that Gail has just 

made and some of the comments in Mark’s statement, in particular, about the importance of experimenting with bundled payments, of thinking about new units and different units of paying 

for physician services. 

We have done that, sort of in evolutionary terms, in some parts 

of the medical system over the years in the way we pay some surgeons, for example, and there are a lot of different ways. Further 

experimentation in other kinds of models, I think, is already underway. 

I think some of us are being reminded, watching the travails of 

our friends at the Centers for Medicare and Medicaid Innovation, 

that actually doing these experiments is often more complicated 

than one would hope. But there is an awful lot of ferment and an 

6 

awful lot of activity going on out there, and I think it is really a 

good thing. 

Just a couple of other sort of general points I would make. The 

notion that expenditures on physician services in the Medicare program are at risk of growing more quickly than other categories of 

expenditures and that that should be a particular problem, it is not 

clear to me that that is true. 

I think there is an underlying policy direction where we are trying to get services out of institutional settings, away from expensive institutional control, into outpatient and community-based settings. And, if you do that, you, over time, should spend less money 

on hospitals, you should spend less money on other kinds of health 

care facilities, and more money on physician services. 

So, depending on what you are getting for that increase in dollars over time, we might be better off if the share of physician services in the Medicare program increases. And I think that is just another example of how the application of uniform policies can 

produce undesirable sorts of results. 

I do think, however, that is imperative that we fix the RBRVS 

and that we address some of the problems inherent in its construction, many of them having to do with practice expense, and some 

of the problems inherent in the way it has evolved over the years. 

No matter how quickly we can move Medicare to other kinds of 

bundles or other kinds of payment methods, there is going to be an 

awful lot of fee-for-service payment in the American health care 

system for years to come. And part of the problem is that RBRVS 

not only sets relative Medicare payments, it is used by almost everybody else in the health care system as a way of evaluating the 

relative worth of physician services. 

And, to the extent that it continues to over-reward procedural, 

interventional, and technologically intensive services and to underreward basic primary care services, it exacerbates the already serious and worsening problem we have in our health care system of 

just having not enough primary care physicians and too many specialists. 

It is very difficult in many communities in the United States 

today for people coming out of primary care training programs to 

make enough money to pay off their student indebtedness, and it 

is very difficult even for well-insured, sophisticated consumers, like 

my children, who have recently relocated to major metropolitan 

areas, to find capable primary care doctors. 

So there are many components to that issue, but income is central to the problem, and the RBRVS is central to the income problem of primary care physicians. And there are a number of ways 

to address that or fix it, but I think we ought to decide, as a matter 

of policy, just to do something direct, possibly relatively arbitrary 

in the short-term, as part of a broader process of resetting these 

relative values. 

I think when we adopted the SGR as part of the Balanced Budget Act in 1997, I think the Congress made a mistake. It was not 

the only mistake we made in the Balanced Budget Act. And, as I 

have been thinking about the history of these events in preparation 

for today, I am reminded that, among other things, both the CBO 

and OMB badly misestimated the impacts on providers of most of 

7 

the major changes in payment systems in the Balanced Budget Act. 

And partially, as a result, Congress, in 1989 and then again in 

1999 and then again in 2001, significantly amended the legislation 

to change many of the payment formulas that had been authored 

by the Balanced Budget Act. 

One of the things that the Congress did not address at the time 

was the SGR, because it had not really kicked in yet and its effects 

had not yet really been seen. 

But, in fact, the way in which the SGR is written and the way 

it has been defined and interpreted by CBO creates this—what I 

strongly believe is this largely artificial, enormously large number 

that is identified with the cost of fixing it, which is an artifact not, 

as far as I can tell, of any underlying economic reality. It is an artifact of the way the formula was written and the way the projections are made. And so it has become a major deterrent for the 

Congress or for the executive branch to fixing a mistake that was 

made, along with many other mistakes in the history of legislation, 

about payment systems under the Medicare program. 

And I am hopeful that some combination of the need to address 

overall deficit reduction strategies more generally and a different 

kind of political climate in the relatively near future will create the 

opportunity for people to say, ‘‘We made a mistake in 1997. We created a formula that produces irrational and counterintuitive results, and we are just going to abolish it and start all over again 

in terms of some kind of cap on Part B payments.’’ 

That is the only way we are ever going to sort of get out of this 

morass. And I can tell you with some confidence that, while it will 

appear as a major crisis in terms of overall budgetary strategy, in 

the real world of how we pay physicians and how the government 

of the United States operates, it will have almost no visible effect 

whatsoever. 

So that is the political and psychological hurdle that needs to be 

surmounted if we are going to fix this very serious problem. 

Again, thank you very much for the opportunity to be here today. 

[The prepared statement of Mr. Vladeck appears in the appendix.] 

The CHAIRMAN. Thank you, Bruce. 

Tom, let us hear your wisdom here. 

STATEMENT OF HON. THOMAS SCULLY, J.D., 

SENIOR COUNSEL, ALSTON AND BIRD, LLP, WASHINGTON, DC 

Mr. SCULLY. Thank you, Mr. Chairman. Thanks for having us. 

I would just note, first, for the four of us, believe it or not, even 

though we disagree on the policy, we are all pretty good friends 

and have talked among each other for years, along with Nancy-Ann 

Min DeParle, who was Administrator, and Bill Roper and Leonard 

Schaeffer and the other, I guess, confirmed CMS or HCFA Administrators. And we have a very civil, friendly discourse regularly and 

keep up regularly, and it is a very nice thing. And I appreciate you 

having us here today. 

I have been very involved with this. As I noted in my testimony, 

I was one of the White House guys and the staff person, along with 

Bill Roper, in 1989 who got to push this thing through. So, sorry, 

8 

but at the time, it seemed like a good idea. And I still think it was 

a lot better than we had in 1988, and it was well-intentioned. 

It caused a lot of chaos. I think it, obviously, needs to be fixed. 

It was then called the RBRVS system. It was invented, at least 

conceptually, by Dr. Hsiao, a professor at Harvard. 

And what needs to be fixed is the SGR, and I went through some 

of the history of that, about why that happened in 1997. It was a 

swap. We needed to save money in 1997, and the physicians volunteered that as their saver. The hospitals took big hits, though, and 

the health guys took big hits, the skilled nursing facilities took big 

hits, and the physicians came in and said, instead of taking big 

cuts, let us just swap a formula change, and it was a big score from 

CBO, and that is why it was done. 

So, obviously, it did not work and needs to be fixed. But the intention and what happened with RBRVS was to basically come up 

with something, as Bruce said, a global system of figuring out, 

when you will go from 6,000 codes to 7,000 codes, as we have in 

the last 10 years—you have to add some—somehow it has to come 

out and be paid for, even if you do not have the SGR. So keeping 

some sense of budget discipline in this is very important. 

I think, in the long run, as Gail mentioned, the move to capitation is where the world is going, and I think the ACE program is 

a great example of that. I think the Accountable Care Organizations, while there are some flaws—and I agree with Gail’s concern 

about pushing people too quickly to a hospital-based system—but 

the concept is it is basically a physician-based concept, and it is the 

right direction to go. 

When I got to HCFA—I guess I am the only one who was both 

HCFA and CMS Administrator—we had 4 percent of people with 

Medicare Advantage. It is now 25 percent. I think that trend will 

continue to grow. But you still have 75 percent of people on Medicare fee-for-service, and we need to make sure that system works. 

So, regardless of how we drop the SGR, I think you need to make 

the continuing RBRVS/SGR system work. And one of the things I 

mention in my testimony is, I think one of the biggest mistakes we 

made was—it is not their fault, as I mentioned—we took the RUC, 

which was a big system of the U.N. for health care back in 1992, 

and gave it to the AMA. 

So when you sit around and decide who gets paid what, a surgeon versus a primary care doc, it is a system that is run through 

the AMA. It is not their fault, but it is very, very politicized. I 

think that was a big mistake, and I have said that in my testimony. 

I think that, when you go back to restructuring this, you should 

try to make it less political and more independent, because it is 

$75 billion a year or more at this point that gets redistributed, and 

it is very, very intense between physicians, and it is something that 

most people are not aware of. But it is very sensitive and I think 

we made a big mistake in the way it was done in 1992, and others 

may opine on that. 

The final thing I would say is, it may not be popular, but CMS 

is a great institution. There are a lot of great people. It spends 

$1 trillion a year. It is bigger than the Defense Department by 

quite a bit. 

9 

Some of the staff may remember, the first thing I did when I became CMS Administrator is I took the entire Finance Committee 

on a bus to Baltimore to see CMS. And I know that Senator 

Cardin, who is not here, has been there a bunch, because it is his 

State. 

But it is a great place. They are doing a great job. They spend 

an awful lot of taxpayer dollars. And I think understanding how 

these systems work, including the RUC, including how the physician payment system works and the details, is extremely important, and Congress spends not a lot of time on it. 

So I am thrilled that you are spending time on it today, and we 

are all happy to be here, and we will have input in helping you as 

you reshape it. But there is no doubt SGR is not working. There 

is no doubt it has to be fixed. But there is also, I think, no doubt 

in my mind, the sense of budget discipline—that was not there before 1989—needs to be retained. 

Thank you. 

[The prepared statement of Mr. Scully appears in the appendix.] 

The CHAIRMAN. Your last sentence again. 

Mr. SCULLY. Before 1989, there was no discipline at all in Part 

B, and, while the SGR system is flawed, some semblance of budgetary control, which RBRVS was, obviously, needs to be retained. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thanks, Tom. 

Mark? 

STATEMENT OF HON. MARK McCLELLAN, M.D., Ph.D., 

SENIOR FELLOW, BROOKINGS INSTITUTION, WASHINGTON, DC 

Dr. MCCLELLAN. Mr. Chairman, Senator Hatch, all of you, 

thanks for the opportunity to join you. 

The CHAIRMAN. I want to remind everybody here, we are going 

to try a different approach, kind of like the Supreme Court. We 

have 12 on this court. So when you finish, then we are just going 

to all ask questions and each respect each other. All of you respect 

all of us, we will respect you, nobody monopolize and anybody jump 

in, each speaks for himself or herself, in every sense of the term. 

Go ahead, Mark. 

Dr. MCCLELLAN. Thank you. I would like to get right to that discussion, but I did also want to highlight how important this issue 

is for health care reform. 

It is the physicians and the health professionals who work with 

them that are the linchpin of our health care system. They are the 

ones who make the decisions that influence how all the dollars are 

spent, make the decisions that influence what happens to patients, 

and how they are paid has a big impact on what they are able to 

do and the kind of care that they are able to support. 

You already heard from the rest of this distinguished panel about 

a lot of the details on where the RBRVS and SGR came from. So 

I am not going to recap that either. 

I do want to note just how much legislative effort ends up being 

devoted year after year to stopgap measures to plug or patch the 

SGR. And, as a result, both physician organizations and Congress 

have a lot less opportunity than they would otherwise to focus on 

real physician-led improvements in care that could reduce longVerDate Nov 24 2008 19:56 Jun 03, 2013 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 R:\DOCS\80837.000 TIMD
10 

term costs. And this gets harder and harder as the SGR target gets 

farther and farther away from where we are. 

By the time I got to be Administrator in 2004, in fact, we were 

all having hearings about how to reform the SGR and how to address these changes in payment that appear to be getting unsustainable. And you all may remember that we had a lot of discussions then about some of the ideas that you have already heard on 

this panel: moving away from fee-for-service payments toward more 

bundled payments or other efforts that would try to provide better 

support for improving care and lowering health care costs. 

What has happened since then is that both the opportunities for 

doing that have become clearer and the pressures for doing it have 

become clearer, as well. And, while Bruce is right that there is no 

easy, one-size-fits-all solution, I think it is very clear at this point 

that we cannot just do another patch or we should not just do another patch. 

And I want to thank you again for your leadership in making 

this year different, maybe the year when some real alternatives to 

the SGR actually emerge and can be sustained. In my written 

statement, I talked about what I think is the most important factor 

for that to actually happen, and that is some real leadership from 

the physician community. 

I think the good news there is that a lot of physician groups 

around the country—in their own practices and working with private payers and working through communities and working with 

Medicare on not just pilot programs, but now integral parts of 

Medicare, like the accountable care organization program—are asking the key question, which is, where are the best opportunities to 

improve care and avoid unnecessary costs for Medicare beneficiaries, and then how do we actually get the support we need, the 

financial support we need, which is not necessarily there in fee-forservice payments, to make it happen? 

These include ideas like relying more on nurse practitioners to 

help with managing care for chronically ill patients and for identifying patients who could benefit from preventive services who are 

not getting them, to spending more time being available for consultations with patients and reviewing with them what their treatment options are, what the evidence says, and being available if 

they are having complications, maybe heading off a visit to the 

emergency room, maybe heading off some unnecessary treatments 

and procedures. But it is very hard to do that with current fee-forservice payments, because a lot of those kinds of services that I 

just described either are not reimbursed at all or are reimbursed 

in a very limited way. 

So what these actual reforms are doing is not just hoping we can 

make things better, but shifting the way that the physicians receive payments from traditional fee-for-service and RBRVS towards 

either a bundle around caring for a patient overall within their specialty or coordinating care with other specialties. 

In my testimony, I give you a lot of examples of how that is happening in oncology, in cardiology, nephrology, surgery, radiology, 

pathology. Lots of specialties are moving in this direction, and 

there is also a lot of leadership taking place in primary care, where 

you can see the move towards medical home payments—which are 

11 

for coordinating care for a patient, managing their overall care— 

and away from fee-for-service payments is making a difference already for primary care physicians and giving them more opportunities to lead in these real reforms in health care delivery. 

In fact, in an ACO learning network that we support at Brookings, along with Dartmouth, there are many organizations in the 

private sector that have added accountability for overall costs and 

for overall health improvements to the medical home payments 

that they are giving to primary care physicians. 

As Tom was saying a minute ago, that is kind of the physicianoriented version of accountable care organizations, which is really 

expanding right now, not only in the private sector, but also now 

in the Medicare program as well. 

So I think this is a very important time for physician leadership. 

That needs to be matched by the kind of attention that you all are 

providing today by starting earlier, not waiting until the last 

minute, despite everything else that is going on, despite the presidential election, to turn these good ideas and positive steps that 

are taking place in the private sector and, to some extent, in Medicare already, into at least the start of a systematic change away 

from the SGR. 

So thank you again for the opportunity to help you address these 

issues and, hopefully, to help make these needed reforms happen. 

The CHAIRMAN. Thanks, Mark. 

[The prepared statement of Dr. McClellan appears in the appendix.] 

The CHAIRMAN. I will just ask the first question. 

First of all, the current SGR drives us all crazy. I think it especially drives this committee crazy. We have to figure out a way to 

pay for it every year. As you have said, it takes way too much time 

that could be devoted to other more important, longer-term issues. 

The drift I am picking up is this: let us get rid of this thing, but 

let us move sensitively and reasonably, appropriately, to a different 

sort of either bundled payment or ACO, medical home, or some 

kind of pilot project. 

I assume that is the drift among most, although, Bruce, you wonder about that a little bit. So we have a heterogeneous system. 

Maybe we should go that way a little bit. 

Anyway, my question is, which of these different areas tends to 

be most promising? How do we prioritize? How do we transition to 

whatever it is we are transitioning to? 

Sometimes the grass is always greener. We have to be careful 

where we are going. But whether it is the cardiologists—are they 

doing some of this? And orthopedists are doing some of this too, I 

guess. 

Why are some areas doing better than others, and where do we 

go? Anybody, just jump into it. Anybody. Anybody jump in here. 

Gail? 

Ms. WILENSKY. I would start where the money is. I would pick 

the procedures that are the high cost/high volume, and get those 

bundled. 

As I have said, we started when I was Administrator with a bypass demonstration, where all of the physicians who are involved 

in providing a bypass with the hospital came in, had a combined 

12 

payment, were monitored for quality and clinical outcomes—as best 

we were doing it in the 1990s—and patient satisfaction. 

The areas are chronic disease and the high cost/high volume procedures. And trying pilots right away that are—some that are 

wrapped with the hospital, which would match what the innovation 

center is trying to pilot. I would strongly urge some that do not include the hospital in an attempt to try to promote multi-specialty 

surgeon practices and more physician leadership. 

I agree very much with Mark’s statement: they drive the health 

care system. 

The CHAIRMAN. Bruce or anybody else, jump in anytime you 

want. 

Go ahead, Bruce. 

Mr. VLADECK. I would suggest that there are possible approaches 

that are less directive on the part of the government, and I would 

push to find more ways to open alternative paths so that different 

physician groups or different other kinds of provider groups could 

come up with their own ideas. 

And I would just suggest, for example, that if you take any sets 

of codes in the RBRVS that now have individual prices to them and 

you had a bunch of physicians in some community say, ‘‘We’ll provide services for the following 38 codes’’—which is not dissimilar 

from what Mark was talking about—‘‘and we have a formula that 

I think you could do that says, pay us 95 percent of what you 

would pay for the existing kinds of cases that you see,’’ whether 

they are high volume/high cost cases or they are just those that are 

particularly appropriate for new kinds of approaches or new kinds 

of incentives, you would get all kinds of interesting things. 

I think what we need to do is, rather than doing one experiment 

at a time, try to find formulas by which Medicare says to the physician community, ‘‘You can get paid item-by-item or we will encourage the bundling of different kinds of items, and here is a general 

methodology or formula for doing so, and, if you can put together 

a package, we will try it.’’ 

The CHAIRMAN. That would be similar to, for example, dualeligibles. CMS is trying to figure out pilot projects designed to 

manage duals. But they have two basic approaches as they try to 

coordinate it, instead of just, everybody comes up with his own 

way. 

Should that happen here too, as we move, and say to providers, 

docs, here are two or three basic approaches, or not? 

Mr. VLADECK. I think that would be definitely worth exploring. 

I think that is what we should do. You can get paid on a shared 

savings basis, or you can get paid an upfront 95 percent of what 

this set of codes would ordinarily pay in your geographic area, or 

then you could get paid fee-for-service. 

I think that is doable, and I think—to get to a separate digressive hobbyhorse of mine, you probably would have to increase the 

contractor budgets a bit out of appropriated funds in order to manage that. 

But I think with existing—I think private payers that have better computer capability than the Medicare contractors are playing 

around with this kind of stuff already. So I do not see any sort of 

technical or logical objection to doing it. 

13 

It would take you a while to figure out what the formulas ought 

to be, but you could do that. 

The CHAIRMAN. Just jump in. Anybody, just jump in. 

Senator STABENOW. Mr. Chairman, can I just follow-up? Because 

we are talking about alternatives and creative approaches. And we 

appreciate all of you being here. 

In health reform, we passed a number of options. I wonder if you 

could speak to that. We now have the pioneer accountable care organizations. They just announced a number of those. I am very 

pleased that Michigan was designated on three of those, and one 

is physician control and others. And then there has also been the 

multi-payer plan, multi-payer demonstration that is being put forward that is with private sector and hospitals and so on. 

We have bundled payments. We have a number of different 

things that we have done. So we are moving. The accountable care 

organizations right now are moving. There are demonstration 

projects. 

I am wondering how each of you would see these ramping up. 

What needs to happen at CMS to be able to really move forward 

with those in the process? And how could we do more of the multipayer opportunities? Because it seems like we gave the structure. 

They are now designating hospitals and provider groups to do these 

things. 

So, is it not more of just doing the things that we have already 

put in place structurally and trying to get them up and going and 

getting the results as quickly as we could? 

Mr. SCULLY. I think everything that is going on in the ACOs is 

great. As Gail alluded to, you have to be able to be a little careful— 

and I had this debate with Don Berwick in the Wall Street Journal. But the goal of ACOs was to drive doctors’ control of behavior, 

as Dr. Coburn knows. Doctors take care of patients, and the goal 

of ACOs was to empower doctors, to give them risk to keep people 

out of hospitals. 

And I used to run a big hospital association. I love hospitals. But 

the goal was to keep people out of hospitals and to pay the physicians for behavior to keep hospital beds empty. 

What has happened, which is a little dangerous, in the last 5 

years is that more and more of the ACOs are hospital-based. The 

number of physicians who were working independently and now 

work for hospitals has gone from 40 percent of physicians to 60 

percent in the last couple of years. 

So I love hospitals and I love the ACO movement and I love the 

capitation movement, and all this is a move in the right direction. 

You have to be a little careful that you do not make it so hospital 

facility-based, because the reality is, every hospital in the country 

has a crane in front of it, and they are very expensive. And the 

more you get into the hospital-based system, the costs go up, not 

down. 

And I love physicians, but this is all about financial incentives 

and—— 

Dr. MCCLELLAN. I do think this is why you need to make 

changes in the SGR. It is much harder for physicians to lead in 

these efforts when they are spending so much of their time lobbying about a short-term SGR patch and trying to make ends meet 

14 

with this kind of reform care. That is what we would like to see. 

But they are not getting paid in a way that supports it in their 

foundational payment system. 

So I am all for the pilots that move toward bundles and things 

like that, but when you have an underlying base system that is the 

core of physician reimbursement which does not support that kind 

of leadership, we are in the wrong place. 

Senator STABENOW. And if I could just quickly follow up on that, 

and I know that Tom wants to speak. 

I could not agree more about SGR and that we have to look at 

multiple things. I guess what I wanted to emphasize is that it 

seems like, through the Affordable Care Act, we have laid out some 

options, and it sounds like you guys are all talking about those 

kinds of options. 

And I know at least with the Detroit Medical Center, it is 

physician-based. It is one of the new ACOs. And so, Tom, if you are 

saying we need to do more that is physician-based, does that mean 

we need to be doing more around the ACOs to be able to model 

that or to be able to show that as pilots? Because it seems like we 

have put in place some steps right now that address what you are 

talking about. 

So is it a question of ramping it up or how fast we could do multiple models? 

Mr. VLADECK. Let me respond to that, if I may, very quickly. I 

think it is this committee that is responsible for the existence of 

the Medicare and Medicaid Innovation Center in the Affordable 

Care Act, and I think it is one of the most productive and important things in the law, and I think they are doing a wonderful 

job.— 

But they are still, by and large—even with all the efforts you 

made in the statute to streamline it—constrained by the definition 

of what they are doing as demonstrations, which means they have 

to have open public competition, which means they have to have 

a very elaborate system for evaluating competing applications, 

which means that OMB gets into everybody’s underwear throughout the entire process, and so on and so forth. 

And I think we are going to get wonderful results from that, but 

at the same time, I really think there ought to be a way to say, 

within the existing program structure, let us come up with some 

formulas or some templates for different payment models for physician services that are not demonstrators, that are just alternative 

ways to operate under the existing program. 

And you are in a different organizational and legal process that 

is much more accessible, much less formal, much less difficult to 

get people to participate in, and that is what I think is the next 

step or a supplemental step. 

Senator COBURN. Let me jump in here, if I may. 

CBO just published a review of 15 years of demonstration 

projects that showed not $1 was saved as a result—— 

The CHAIRMAN. I just want to ask, are those—— 

Senator COBURN [continuing]. Of the demonstration projects. 

The CHAIRMAN. Of the demonstrations in? 

Senator COBURN. Run by CMS. 

The CHAIRMAN. Run by CMS. 

15 

Senator COBURN. Over the last 15 years. We have a system, and 

we are not going to fix that system where we, in our country, we 

think somebody is paying the bill. 

So, rather than use the stick approach, which was what the SGR 

did, why don’t we use the carrot approach? Why don’t we evaluate 

physicians? 

First of all, every insurance company knows how either efficient 

or inefficient I am in my practice. They have the numbers on me. 

They know. And I will just tell you a little about an experience we 

had as a group of physicians. 

A new insurer came to town, and we refused to take them because their prices were too low. And so they bought from Blue 

Cross/Blue Shield our numbers, and they came back and offered us 

more than they did everybody else in town, because they wanted 

us to be in there, because it actually costs less for us to give the 

same care. 

Why could we not have a system that incentivizes the physicians 

positively rather than negatively? Because, if you think about the 

SGR program, the first year that we did a cut is when you got this, 

wow, you cannot do this ever again. But the point is that we 

blinked, because, if physicians really knew that if they were inefficient with the spending of dollars for their patients and that they 

were going to get a cut the next year, that incentive would have 

worked. 

What was intended by SGR was a good idea, but we blinked, because we did not change behaviors in terms of physicians. So what 

I would throw out to think about is, how do we design something 

that positively incentivizes physicians to be more efficient, to do 

things positively, so you can compare them in their region by what 

they do? 

It is nothing but a computer program, and you could say, at the 

end of the year, ‘‘My goodness, your average patient with diabetes 

had fewer complications in terms of the codes associated with that. 

You saved Medicare this compared to the standard in your area. 

We are going to give you a bonus. And, everybody else, next year, 

if you do not, we are actually going to cut you.’’ 

So where you could say in my region—Oklahoma, Texas, Kansas, 

Arkansas, and Louisiana—you can say, ‘‘Well, here is what the 

standard cost for this should be and, by the way, this group of physicians was well below that,’’ not based on geographic cost difference, but actual physician practices, and let us reward it. 

We tried the stick, and we do not have the guts to hold a stick. 

Why don’t we try an incentive? 

Ms. WILENSKY. Well, if you had the Sustainable Growth Rate or 

any kind of desired spending at the physician practice level, as the 

Blues plan did for you, that is fine. The problem that exists now 

is that you are penalized because you are a physician, and, collectively, physicians spent more than was desired under the Sustainable Growth Rate. 

It is similar as long as what it is you are being judged by has 

nothing to do with either your individual behavior or your practice’s behavior. If you want to have the judgment of your practice’s 

behavior, where you, as a practice, can control what you do, that 

is fine. When you start doing it at a metropolitan level, at a State 

16 

level, all orthopedic surgeons, no individual group can influence 

what happens, and that is both unfair and leads to bad behavior. 

So that is definitely one of the options, which is to have the 

tradeoff be at the physician’s practice level. That would be much 

fairer and would have at least good incentives. 

Senator WYDEN. On that point, I think Dr. Coburn raises an important point, because he is touching on this question of regional 

variation. And the fact is, out of the gate, regardless of value, you 

see—I am looking at my friend from Iowa, Senator Grassley, Senator Hatch, myself, Senator Cantwell, four States that are low-cost 

States, consistently have done exactly the kind of stuff you all are 

talking about, integrating health services. And again and again, we 

have been penalized for it. 

I have sat here for an hour listening to four people I admire very 

much and am still kind of baffled about what do we do around the 

proposition that not all States are created equal. 

The fact is that in some high-cost States, when the senior shows 

up, they get a higher payment, and this is baked into the SGR as 

of now. As of now, it is baked in to have these penalties for lowcost States that are giving value, that are doing what Dr. Coburn 

is talking about. 

What do you all think? Since we are talking about the future of 

health care providers, what can we do to start moving away from 

this kind of built-in disadvantage for people to hold costs down and 

deliver value? Because even after health reform, I had the hospitals of Oregon come in yesterday, and they were scratching their 

heads, and they said, ‘‘We all were working on this during health 

reform. We were all talking about trying to pay for value, get the 

incentives right, lift the penalties for low-cost States.’’ They said, 

‘‘We haven’t seen much happen as of now.’’ 

So now we have a chance to get this right with doctors. And 

what do you all recommend to change the baked-in penalty for Senator Hatch’s constituents, Senator Grassley’s constituents, Senator 

Cantwell’s constituents, mine, others who are from these low-cost 

States and want to support exactly what you are talking about, 

these incentives for quality, incentives for value? 

But right now we are already taking a shellacking, and it looks 

to us like we are going to get clobbered once more. 

Senator ROBERTS. On that point, could I just add something to 

pile on here in regard to your questions, since you left me out? 

[Laughter.] 

Senator WYDEN. You are a low-cost State. You are in. 

Senator ROBERTS. I am in. 

Senator WYDEN. And Mike is in, too. 

Senator ROBERTS. I have the privilege of representing 83 critical 

access hospitals. Montana is in the same boat. And the chairman 

and I feel very strongly that the original cut that we did to providers to provide—it used to be called PPACA. What do we call it 

now? Well, whatever. Anyway, the health care plan. I know what 

I call it, but we are not going to go there. 

But my main concern is that the rural health care delivery system, when I go out and have health care summits in Hays, KS or 

Dodge City or Abilene or, for that matter, Topeka, it is all the 

same. And here you have the SGR. You have three RVUs—I love 

17 

these acronyms—Relative Value Units, that really represent 7,000 

codes—7,000 codes. I have the top 20 right here. 

I went to the doctor this morning and found out I have a cracked 

kneecap. I wonder what code I am under? I have no idea. 

Dr. Coburn would say, put ice on it, put your leg up, and just 

forget about it, and I would not even have to go to a doctor. 

At any rate, something has to be done, it seems to me, because 

you have—the physician work and practice expense contribute to 

most of the determination of the ultimate payment. The physician 

work is 52 percent. Practice expense contributes 44 percent. Now, 

that is the administrative cost. That is all the nurses, and that is 

all the people who have gone through CMS Regs. 101, 102, and 

that is all they have so far in the universities to have people who 

will understand the codes with CMS. 

I have no confidence in CMS. I have no confidence in IPAB when 

they finally get organized. Something has to be done with the SGR. 

I know we tried. 

I really credit the chairman for holding this roundtable. We need 

something where we can come together in a bipartisan way and get 

traction, because we all know that this thing is not working. It 

tanked when the economy tanked. 

And so I wonder if some model could be worked out that would 

at least consider the regulations. In my last visit to the Dodge City 

Medical Center, which has expanded, we have people running the 

ACOs who are private contractors, and they come in and they try 

to find where there is a Medicare reimbursement that basically 

does not fit the criteria over 3 years. 

We lost two doctors, we gained one. I mean, the doctors are not 

even there yet. We have a new hospital administrator. We have an 

addition to the hospital. 

Now they want to do it for 10 years. I asked the hospital admin- istrator, ‘‘How much does this cost?’’ He said $50,000 a month. 

Now we have something called face-to-face. That means when 

Mildred in Cimarron, KS, 32 miles away, wants her prescription, 

and the nurse clinician cannot fulfill it with the local pharmacist, 

who is about to go out of business, but that is beside the point, 

then this doctor has to take 1 day off and go out to Cimarron and 

see Mildred. 

‘‘Hi, Mildred.’’ ‘‘Hi, Doc.’’ ‘‘Are you still using your prescriptions?’’ 

‘‘Yes.’’ ‘‘Are you following what you should do?’’ ‘‘Yes.’’ That is a 

whole day. What the hell is that? I just do not understand it. 

Now they want to even go back 10 years, and that is just two 

of—I could list you regulation after regulation after regulation. We 

sent 34 of them to Kathleen at HHS and then boiled it down to 

seven later on and still have not had much of a response. 

Something has to be done to figure out this number, 44 percent, 

in regards to practice expense, because it is just not right. And 

then I am really worried about whatever SGR we come up with or 

whatever—I do not know if it is in the SGR. We ought to rename 

it and call it something else. But at any rate, will it take into consideration rural areas, critical access, unique kinds of circumstances? 

There is a great thing here about medical home demonstrations 

that CMS is now trying to implement, and physicians who manage 

18 

patients with chronic disease would receive a payment to compensate them coordinating and communicating among specialists, 

social workers, case managers, patients, so on and so forth. 

We do not have those in rural areas. We have the hospital, we 

have a specialty hospital, and we have nurse clinicians. 

I know a lady who just went through this who apparently had 

a stroke, but the person who gives her exercise once every few days 

was called because she could not get in the emergency room, and 

a few days later she died. 

Now, I do not know if she got into the emergency room or if they 

had accepted her in the emergency room, but one of the situations 

was they did not think that she would fit under the circumstances. 

And she died. 

Now, I am rambling, Mr. Chairman, but I really think whatever 

we come up with—I worry about this global thing, and it is a numbers game in regard to CMS. We must be aware of different States, 

different regions, and, more especially, the rural health care system. And you know that. You have been a champion of the rural 

health care system for a long time. 

I am sorry for the rant. I did not get into oxygen tanks. I am 

learning. [Laughter.] 

The CHAIRMAN. You are saving that one. 

Mr. SCULLY. Unfortunately, Mr. Chairman, regionally, it is very 

different. So I think in Oregon you are probably up to 35 percent 

of people on Medicare Advantage. Change happens slowly. I will 

bet there is probably less than 5 percent in Kansas. 

So every geographical—every part of the country is different. But 

I think the thing that we roughly all agree on is that we still have 

75 percent of people on Medicare fee-for-service. So you are still 

going to be dealing with—the fact is, one of the seminal problems 

in Medicare, in my view, is the Federal Government, through CMS, 

pays every doctor the same thing. 

So, if you are first in your class at Harvard or whatever, or last 

in your class at University of Western Guatemala, you get paid the 

same thing. And changing that variation over the years is important, and that is one of the reasons I am a fan of Medicare Advantage. 

But short of the world going from 4 percent on Medicare+Choice 

to 25 percent on Medicare Advantage, which I think is a good development, we still have this massive program that is still on feefor-service. And, if you are going to deal with those docs on fee-forservice, you have to find the right incentives. 

And incentivizing doctors is the key, and I think we all agree on 

that. How do you provide—to say it is not the money is wrong. It 

is the money. Physicians are trying to do the right thing, but they 

follow financial incentives, and finding the right way to generate 

ACOs that are physician-driven, not necessarily hospital-driven, is 

key. 

One of the problems that I think Gail was alluding to is—and I 

love a lot of the hospital-based ACOs—physicians do not have the 

$20 million in a region, in Portland, to go out and start an ACO. 

Finding a way to create the capital pools for physicians, to cover 

physician-run groups, not hospital-run groups, that are going to go 

out and drive this—— 

19 

Senator WYDEN. But, Tom, the reason they are going out and 

creating ACOs in Medicare Advantage is because a lot of seniors 

cannot see a doctor in the fee-for-service system in Oregon. 

They go out and make 6 to 10 calls, they have a heart condition, 

they have high blood pressure, nobody will see them, and then all 

of a sudden you get what you characterize in your testimony—and 

I think it is appropriate—the ultimate bundle. 

But even in a place like Oregon, we are now at 41 percent Medicare Advantage, and it is good Medicare Advantage, the Medicare 

Advantage of high quality, guaranteed issue, community rating, 

that sort of thing, but we still have well over half in traditional 

Medicare. 

And, if you all could just tell us what you think ought to be done 

to deal with the fact—and I was glad that the chairman piped in 

that his is a low-cost State, too, because a big chunk of us on this 

committee have what amounts to millions of seniors going to see 

doctors, and there is a baked-in disadvantage under the reimbursement system for treating those people. 

And we thought it was going to get taken care of in the Affordable Care Act, and, as of yesterday, a big group of providers came 

in and said, ‘‘We sure haven’t seen much happen.’’ 

So what would you tell us to advocate for to try to get the incentives that you correctly identify? Every one of the incentives, and 

the paying for value that you have talked about, I am for. 

It is just, as of today, for a lot of us—those three up there at the 

top of the dais, and Senator Cantwell and myself—it sure does not 

look very good, because it just looks like we are getting another hit 

from what already is a system that discriminates against us. 

So let us start with you, Mark, and just tell us what you would 

do to make sure that all States can get the fruits of this new approach that rewards incentives and value. 

Dr. MCCLELLAN. Well, so long as Medicare fee-for-service is paying doctors on the basis of volume and intensity, which the current 

SGR program does, your physicians are not going to get ahead. 

And I would say for Senator Roberts, too, I have been to some 

of his critical access hospitals in Kansas, and the way that they 

want to deliver care, the way that they need to deliver care, involves things like tele-health, it involves relying on nurse clinicians 

and other health providers instead of physicians. 

And those things, as you heard from him, are not covered 

under—even though we have 10,000 codes, they do not squarely fit 

within any of them. 

What will help is a move away from fee-for-service towards the 

payments that are more tied to what each patient really needs. 

And so that is what I talked about in my testimony, what Bruce 

and others on the panel have referred to as different kinds of bundling, but focusing specifically on physician services, and done, I 

think, not as a pilot—I think we are past that stage—but building 

this into the Medicare program systematically. 

Maybe it could be done as an option so that people could stay in 

the traditional fee-for-service system or opt into this more bundled 

approach. But I think we are at the stage now where there are 

enough good ideas out there—and you have seen them in Oregon. 

Your State is trying to do this. The State has made a real effort 

20 

to move away from fee-for-service, and it is Medicaid and employee 

plans and the like, and that can be reinforced in Medicare and can 

be reinforced in every single specialty and primary care. 

The ideas are out there among the physician groups. I think it 

is up to this committee and leaders in Congress to give the physicians an opportunity to say how they would make those moves 

now. 

Senator WYDEN. They are good ideas. I am just not sure they 

work for those three States and mine unless we take away this 

baked-in disadvantage. 

Dr. MCCLELLAN. That is what you would do. You would be taking some of the payments that are baked in, the fee-for-service volume and intensity, and shift them to something else. 

If what is working in Oregon is things like a primary care physician or a cardiologist spending more time working together to track 

what a patient’s medication needs are, making sure they are on the 

latest evidence-based treatments, and spending time with them to 

prevent complications, the way to do that is to take what is currently in their fee-for-service payments that does not support 

that—maybe extra payments for the additional imaging procedures 

or lab tests or things like that—and convert some of those to a payment that would go to keeping the patient’s needs met. 

And there are good measures for that. That is what Dr. Coburn 

was talking about. It is not easy to do in many cases, especially in 

small practices, especially in practices that are treating vulnerable 

patients, but we do not have to make a wholesale change right now 

overnight to make this much easier for the doctors in your States. 

We can start getting that. 

The CHAIRMAN. I think what the Senator is getting at is, he is 

a little concerned that discrimination, if you will, will be baked in, 

and I think that that is his concern. If you go to bundling, that discrimination is going to still be baked in for low-cost areas. We are 

not dealing with the disparities in different parts of the country. 

Bruce? 

Mr. VLADECK. As a New Yorker, I probably ought to be the one 

to respond to this issue, and Senator Wyden and I have talked 

about it in the past. And Mark hit on one piece of this issue that 

is very critical if we are going to address these issues appropriately, and that is, until we can adjust adequately in the data 

about utilization patterns and outcomes for the characteristics and 

the differences in the characteristics of the patients being served 

from one community to another, we cannot fairly say that one place 

is more efficient than another. 

And, in fact, if you contrast some of the 3- and 4- and 5-yearold Dartmouth rankings of relative metropolitan areas on their relative efficiency, with some of the more recent work done by 

MedPAC or by CMS, which has the appropriate data adjustments, 

you get very different rankings, and you find out that most of the 

difference in per capita Medicare expenditures from one region of 

the United States to the other is, in fact, associated with home care 

and durable medical equipment, not with differences in utilization 

patterns, because, when you adjust for the characteristics of the patients, the differences are not as dramatic as has long been described. 

21 

Now, I think we have two sets of problems here. One problem, 

which is very real and which Senator Roberts talked about and 

Senator Coburn talked about, is I am increasingly convinced that, 

when it comes to physician payment and physician incentives, we 

probably just need to have a separate system for rural communities 

than we use for urban communities, because all of these new bundles and systems of care people are talking about require a degree 

of infrastructure and a critical mass that, as Senator Roberts said, 

is not realistic in smaller communities. 

The CHAIRMAN. Kind of like accountable care organizations. Like 

critical access hospitals, for example, just reimburse differently 

than—— 

Mr. VLADECK. And I think we have a model, and we sort of gave 

up in the hospital sector. We said for hospitals below a certain size 

serving certain kinds of communities, the Prospective Payment 

System is never going to work equitably for them, because the 

numbers just do not work. And so we created a critical access category, and I think there is no logical reason why we should not 

apply the same logic to paying physicians in rural communities and 

figure out what it takes. 

The most important variable with the physician in a rural community is not how high quality he is or how efficient he is, but 

whether he is there or not in the first place. So that is less of a 

problem on the Island of Manhattan. So we should not try to develop a 1-size-fits-all formula for these very different issues. 

On the other hand, I think we know less than we believe we do 

about the causes of variations in Medicare expenditures between 

the high-cost States and the low-cost States, as is evidenced by the 

fact, again, that the most recent data shows very different rankings 

of high-cost and low-cost than the Dartmouth atlas has been showing. And the IOM is in the middle of a study which you commissioned to try to look at these issues and disentangle them. 

I think we need to get some better information about these 

issues, and it is in the process of being developed. 

The CHAIRMAN. Could you explain to everybody what IOM is? 

Mr. SCULLY. The Institute of Medicine. I will not pick on the 

New York guys. 

Dr. MCCLELLAN. I am actually on that panel—as is Gail—and it 

is going to develop some better information. I am not sure it is 

going to completely resolve all the issues. 

Mr. SCULLY. But there are huge differences, and, if you carved 

out Dade County and Louisiana and pushed them out in the Atlantic Ocean, you would save a hell of a lot of money. [Laughter.] 

Can I give you two ideas that are a little different? And I agree 

with what Bruce is saying. 

In rural areas—Oregon is different than Kansas, and you are 

probably not going to have Medicare Advantage plans at 41 percent 

ever in Kansas. It is just not going to happen. 

But there are a couple of old programs that have been floating 

around. I know it is still on the books, Medicare Select, which I 

think may only exist in parts of Alabama, but it is basically a Part 

B capitation, where the doctors get capitated, they can take full 

capitation. All the Part A costs are passed through. 

22 

It is kind of half a loaf of Medicare Advantage. And, in a rural 

area where you only have hospitals and you are trying to give the 

docs the ability to go together and organize themselves—it actually 

started to take off. For a lot of reasons, it blew up under the 1997 

bill, which I can get into, if you like. But there are ways where you 

can create the right incentives for doctors to do more. 

One of the reasons I was such a big fan of creating Medicare Advantage—I think I made that name up one day—was because I 

hated Medigap plans, as Senator Wyden knows. We worked on that 

25–30 years ago when he was in the House. He was the original 

Medigap reformer. 

One of the worst incentives in the program is Medigap, which is 

private insurance, first-dollar coverage, which has 60-percent medical loss ratios; it is horrible insurance. You could go out in the 

rural areas, and, if somebody agrees to sign up to Medigap with a 

$250 deductible—— 

The CHAIRMAN. I worked on that with Senator Pepper. 

Mr. SCULLY. Yes. 

The CHAIRMAN. Senator Pepper. 

Mr. SCULLY. It is horrible. It is terrible. 

The CHAIRMAN. The medical loss ratios were just outrageous. 

Mr. SCULLY. And, if you gave people higher deductibles and said, 

if I were in rural Montana and you agreed to do Medigap with a 

higher deductible, then you get the good one. The ACO gets paid 

more. 

There is money in the system to create the right incentives for 

doctors, and there are existing programs around to do that, and I 

think we just need to find places to push more money for doctors 

to be incented to do the right thing. 

Ms. WILENSKY. It has come up a couple of times. The alternative 

to the current RBRVS fee-for-service system is not necessarily 

Medicare Advantage. That is an alternative. That is the ultimate 

in a bundle. 

Everyplace else in Medicare, you have directed the agency to 

move to a more bundled payment. So rather than focus on all of 

the little items that used to go on in the hospital, Medicare pays 

on the basis of a discharge, the diagnosis at discharge. And what 

happens during that whole experience is not Medicare’s problem, it 

is the hospital’s problem. 

My argument is that, if you want to have that same kind of 

refocus, you have to get away from billing 7,000–8,000 different 

codes, taking care of people, and get to a type of a bundle that is 

appropriate for physicians. 

If we see capitated systems growing, if we see premium support, 

if we see a very different world, that is fine. That is the ultimate 

bundle. You get around a lot of issues that you have to face otherwise. 

You still worry about volume with prospective payment. That is 

why you have a readmission penalty now being imposed. It does 

not necessarily pay for quality, but it could pay differentially for 

quality. 

But even in the rural areas, physicians who are taking care of 

people with single or multiple chronic diseases—congestive heart 

failure, congestive heart failure and diabetes, congestive heart failVerDate Nov 24 2008 19:56 Jun 03, 2013 Jkt 000000 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 R:\DOCS\80837.000 TIMD
23 

ure, diabetes, and hypertension—all of those tend to go together, 

but are not always together. 

Paying somebody, a physician, an amount to take care of a person with one or more chronic diseases for a year would be a very 

different mentality than billing them for every single service every 

time they walk into the hospital, and would allow them to focus in 

a different way. 

Those are the kind of adjustments you actually can do in terms 

of how you pay physicians so that you just get away from this very 

micro-level mentality that has had so much distraction in terms of 

the gaming that people do and the fact that they do not have a 

good reward when they are practicing conservatively and getting 

good clinical outcomes. 

It is just a question of how many times they bill and whether 

they bill for the expensive stuff or not. 

The CHAIRMAN. I do not know. Tom has been trying to—— 

Senator CARPER. Thanks, Mr. Chairman. Thank you all for coming and for your continued service to our country. 

Sometimes when people ask me what I think we ought to do in 

tax reform, I talk a fair amount about Bowles-Simpson, and I think 

they have a pretty good roadmap there. But I also talk about the 

underlying principles that I think we should adhere to as we follow 

tax reform. 

I use this as an example to lead to my question. I say tax reform, 

among the things it ought to do, should simplify the tax code, not 

make it more complex. It should stimulate economic growth, not diminish it. It should help us reduce the deficit, not increase it. It 

should make the tax code, arguably, fair, maybe more fair than before. 

Those are really underlying principles. We have talked about a 

lot of different directions for government specifically, and so forth. 

What would be most helpful for me is to hear each of you just 

share maybe one underlying principle; that is, where you try to fix 

this problem, address this problem, to make sure we get better 

health care outcomes for less money, or the same amount of money. 

Just give us a takeaway, an underlying principle that we, when 

we work toward solving this problem at the end of this year, should 

try to adhere to. For each of you, just one underlying principle we 

ought to adhere to, that would be helpful for me and maybe for my 

colleagues. 

Ms. WILENSKY. For me, rewarding the kind of behavior we want 

to see. 

The CHAIRMAN. Which is? 

Ms. WILENSKY. Producing good outcomes, focusing on the outcomes, and then, on all the inputs on what you do, shifting that 

focus. And, by the way, I would not mind extending that to the patient as well. 

Senator CARPER. What do you mean by ‘‘extending’’? 

Ms. WILENSKY. Rewarding the kind of behavior we would like to 

see, engaging in good health practices, encouraging that, discouraging or penalizing some who do not. 

Senator CARPER. We actually try to do that in our bill by allowing employers to provide premium discounts of as much as 30 percent for folks who take better care of themselves. 

24 

Ms. WILENSKY. Exactly. That is exactly what I was thinking. 

Senator CARPER. Thank you. Just one principle from each person, 

if you do not mind. 

Mr. VLADECK. I am going to be the outlier in this group and the 

deviant, which will not be the first time. I think the basic underlying principle that the principal goal of the payment system is to 

pay providers and to try to change the world through fine-tuning 

payment systems makes life more complicated and more difficult. 

So I think there are real issues of quality in the health care system that need to be addressed, but you can address them without 

dealing with how you pay people. 

There are real issues of creating incentives for more efficient 

care. Every time you write a check to a physician group, you do not 

have to have that incentive contained in it. 

The sort of ‘‘keep it simple, stupid’’ principle, I think, especially 

applies to both the tax code and to the Medicare program, because 

everybody from every interest, every stakeholder and every member, has some particular refinement that they want to put on it to 

move a particular agenda. 

So I would say, do not expect too much out of a payment system. 

Make sure that it is auditable, it is reliable, it is understandable 

by the providers and the beneficiaries, as well as by the government, and that you are clear about what you are paying for and 

what you are not paying for. 

You start from that and then you can adjust around the edges. 

If you are paying too much, you reduce the payments, et cetera. 

Senator CARPER. Thank you. 

Tom? 

Mr. SCULLY. Since I do not have to run for anything, I am an 

unabashed fan of the Healthy Americans Act. So I will not get into 

that. But if you could reinvent the world, that is what I would do, 

but I will not get into that with Senator Wyden. 

But if you had one thing to do this year, and I think Senator 

Baucus tried to start it, which was incredibly admirable—I am a 

huge fan of a tax cap—I would say, if you are really trying to 

change behavior, limit tax deductible excludability of health care to 

a very basic standard option and Blue Cross benefit, because you 

tried to do that a little bit in the ACA, and there was a lot of opposition to it. 

The tax policy drives a lot of behavior, and there are a lot of 

places to go, but if you put in a tough tax cap, you change behavior, 

you raise revenue for other things, you close the deficit, and that 

is absolutely the right thing to do, and I admire you for trying. 

Senator CARPER. Thank you. 

Mark? 

Dr. MCCLELLAN. I agree with the points about engaging consumers and helping people be healthier. I think that is probably 

the biggest, most important way to get to better health and lower 

costs. 

With respect to physician payment reform and trying to apply a 

pretty simple principle or, I would say, a pretty simple test, I think 

at the end of this process, if you can ask providers, and each specialty tells you that these reforms will improve care, that is a good 

first part of the test. 

25 

The second part on accountability is, is there a way to show that 

competently, to measure that this is getting the better care, it is 

getting to lower costs, as Dr. Coburn suggested. And I think, while 

that does mean we need to move away from our already complex 

system—I guess Bruce was saying the expectations for payment 

systems do not need to be that high, certainly not that high for improving quality in current fee-for-service—I think we can do better 

than that. 

I think these two principles, asking the providers themselves, the 

physicians themselves, are these changes that we have adopted 

going to improve quality, and, if they are confident about it, is 

there a measurable way to show it, would get us into a better 

place, and I think we can get there this year. 

Senator CARPER. Thank you all. 

Senator HATCH. Let me get into this to a degree, too. Some have 

suggested that the fee schedule will never separately work as long 

as the relative value of services is largely dictated by the AMA. 

What do they call it, the RUC? Historically, as I understand it, 

CMS has accepted about 90 percent of their recommendations, except this last year, when it was about 60 percent. I think that is 

about right. 

Now, I have three questions. One is this. Do you think this is a 

sea change in how CMS views the physician community recommendations, and do you view this as a positive or negative outcome to achieve greater stability in the fee schedule? That is number one. 

Number two is, I am having a rough time figuring out how you 

really effectively bundle, which a number of you have mentioned in 

your remarks in various ways. 

And, number three, what effect does—as a former medical liability defense lawyer, although it was a long time ago, I remember 

we used to tell them once they did away with the standard of practice in the community and opted for an open process that would 

take every case to the jury, we used to tell them, the doctors, 

‘‘Look, you better make sure of your history. You can no longer rely 

on the standard of practice in the community. You better make 

sure your history has every possible consideration of their medical 

condition,’’ even though a number of those tests really are not necessary. In other words, it led to unnecessary defensive medicine, 

which, from my standpoint, knowing what I did, about 95 percent 

of the cases that we saw coming through the office were frivolous 

cases brought to get the defense costs, which were considerable. 

So those three things I am a little bit concerned about. Can we 

ever address the costs without addressing unnecessary defensive 

medicine and the terrible situation we have with the medical liability litigation in our society today? 

So number one is, should we rely on the AMA or on this RUC, 

and is that 60 percent a valid thing compared to the 90–95 percent 

in the past? And then the other two questions as well. 

Ms. WILENSKY. The adoption by the agency started between our 

two periods. It happened innocently enough. Once you had the Relative Value Scale in place, you needed to have a way to update relative values and to allow for a change. 

26 

The AMA, as best we can tell—Bruce and I have had this conversation, trying to piece together exactly what happened. Sometime after I left to go to the White House, before he was sworn in, 

when there was a lot going on, it was implemented. But, in its first 

year, the AMA approached the agency about whether it would 

allow it or like to have the AMA be the convener that would include all physician groups and make some recommendations, which 

initially were very minor adjustments that hardly affected the 

RBRVS at all. The agency accepted the offer. 

It is important, and you have really indicated this by your mention of 90 to 60, the agency does not have to accept the recommendations by the RUC. It needs to have an outside convener. 

The question has been raised about whether the AMA is necessarily the best, although it is a big umbrella organization. 

You want to include physicians, but the agency has the right to 

reject any of the recommendations it feels inclined to and occasionally has done so, and apparently used to do so in a bigger way. I 

do not know what caused the difference. 

So it has the ability to take this on, but it would be very difficult 

for the agency internally to do this. It would want to contract with 

someone, and the question can be if this is the best group. 

I would like to do one quick response to your liability question. 

I have been trying to encourage people to think about a quid pro 

quo for physicians. I do think that it is unreasonable to ask clinicians and institutions to practice in conservative ways, try to push 

them that way financially without giving them some protection if 

they are, in fact, providing good evidence-based care, and that is 

really the key. 

And for me, it would be physicians who adopt the clinical guidelines of their own medical specialties—or you could convene special 

groups if you do not think they are always well enough developed— 

and follow a set of patient safety measures, which the Institute of 

Medicine has already developed. But, again, it could be reviewed 

to see if these are the best, but unless there is a case of criminal 

negligence, which occasionally can happen, these institutions and 

clinicians should be protected against liability. 

There is a lot of debate among policy analysts about how much 

this drives cost and how much it drives defensive medicine. But, 

until you take it off the table in a way that seems fair, giving 

something in exchange for the patient, which is better reliance on 

evidence-based medicine and patient safety in return for protecting 

the institutions and clinicians, it will be there hanging over their 

head and be very unhelpful. 

So, those would be the two things, I think. 

Mr. SCULLY. Senator, in my testimony, I congratulated—I think 

the reason is Jon Blum who is a former staffer for Senator Baucus 

and the Finance Committee, runs Medicare, and it is voluntary. 

CMS has a very small staff. The lead doc who did this for 10 years 

at CMS left last year, and, traditionally, they took 95 percent of 

the recommendations because they do not have a lot of information. 

I talked to Jon about it. I congratulate him. He has pushed back 

more in the past year than anybody else has, and I think that is 

very healthy. 

27 

So that does not mean the AMA is not doing the right thing. I 

just think it is—I have watched the RUC for years. It is incredibly 

political, and it just human nature. When you get the U.N. of docs 

together, of specialists who spend more money and more time and 

have a bigger impact, and they sit around a table—I have been to 

the RUC a couple times when I was the Administrator in Chicago. 

I can tell you war stories, if you all want to hear them, about trying to get pediatricians paid more. Magically, there are not any pediatricians on the RUC. 

I had problems with them with immunizations years ago. So 

really it is all about political representation, and the AMA does a 

good job given where they are, but they are a political body of specialty groups, and they are just not, in my opinion, objective 

enough. 

So, when you look at the history of it, CMS is starting to push 

back more, which is a good thing. I think it would be much better 

to have an arm’s-length transaction where the physician groups 

have a little more of an objective approach to it. And that is the 

infrastructure of $80 billion a year in spending. It is not a small 

matter. It is huge. 

Senator HATCH. Bruce? 

Mr. VLADECK. Gail and I were talking about this issue of the 

RUC and the AMA a little bit before the session began, and we 

agreed that there needs to be some body outside of CMS to deal 

with these issues and look at the issues of changing the codes and 

technical updates and so forth. 

The AMA is probably—even if they did the most objective professional job in the world, the appearance of conflict associated with 

it would over time, I think, be a problem. 

I suggested to Gail that we contract it to Project HOPE, and she 

demurred. So I think we ought to give it to the Engelberg Center 

at Brookings to do. I think they could probably do a very good job 

of it. 

But it is one of the pieces. We have to fix the RBRVS mechanism, and having a better way of updating it that is more transparent is a very important part of that subject. 

On your other two issues, I, again, find myself in the uncomfortable position of largely agreeing with Gail on both the importance 

of liability reform and—— 

Senator HATCH. See how good we are for you? 

Mr. VLADECK [continuing]. Its relationship to the development of 

quality standards and the development of safety standards and so 

forth. And there definitely ought to be a tradeoff. If we have professionally accepted standards and people meet them, that ought to be 

a defense against liability. 

I do also want to respond to your third point very quickly, and, 

again, it is back to the suggestion I made about not prescribing 

bundles, but prescribing a generic methodology by which you could 

take a subset of the 7,000 codes, if you are a physician or a physician group, and say, ‘‘Okay, we are going to do management of 

knee sprains; we are going take a single price for the following 14 

codes or 16 codes or 18 codes.’’ 

And the more sophisticated practices already have in their computers the bundles of codes they give for particular diagnoses. They 

28 

know what it costs them to produce. They know what they get paid 

for it. 

If you had some general formulas and templates, they could go 

to their Medicare contractor and say, ‘‘Instead of paying us under 

the existing system for sprained knees, how about a fee of $714. 

That is 95 percent of what you are now paying, and we can make 

money at that.’’ 

That is, I think, the kind of bundling we are talking about, and 

I think you can leave it up to the individual physician practices. 

Again, it is very hard for a solo practitioner to do this, but once 

you have four or five or six guys or gals together, you can really 

do all sorts of neat stuff. And I would just say, let us have a formula by which you can do it and see what happens. 

The CHAIRMAN. We are going to have to wrap up pretty soon 

here. 

Anybody else? 

Dr. MCCLELLAN. I was just going to add a couple more comments 

on Senator Hatch’s questions. The point about bundling is right. 

You do not want to create yet another bureaucratic system for physicians. You want a system that will help physicians do what they 

think is the right thing for their patients. And Bruce and I think 

the rest of the panel have suggested some ways to do that. 

And I want to commend you, Senator, and your staff for engaging 

the physician groups themselves, both at the national level and 

those in actual practice, including in Utah, for thinking about how 

to do this. 

Small practitioners do not have a whole lot of technical infrastructure. There are some pretty clear ways, if you look closely at 

each specialty, in which they could get paid better through steps 

like what we have talked about today, and I think we will certainly 

hope to continue to work closely with you all to find the best way 

to do that. 

I would add too that, to the extent that you do that, you take 

some of the pressure and power out of the RUC structure. And the 

RUC has taken a lot of criticisms for being too political, but let us 

face it: anytime you have a fixed pie and you are dividing it up between a bunch of different medical specialties, it is going to get political. 

I think the nice thing about some of these reforms is that it 

moves the status away from being a fight among medical specialties to rather a unified effort across physician groups, different specialties, to get overall costs down through improvements in quality. 

Now, all these debates are really focused on this 12 percent of 

Medicare spending that goes to physicians, when, if you would improve the way that physicians get financial support, you could do 

something about the 80 percent of health care spending that they 

influence. And even a small effect on those overall health care costs 

could do a lot to take the political pressure off this RBRVS process. 

And I also agree with the points about liability reforms. It seems 

like there is unanimity here that that should be addressed too, to 

help physicians deliver care better. 

The CHAIRMAN. John? 

Senator THUNE. Thank you, Mr. Chairman. 

29 

I am just curious about how, since the 1997 SGR was created, 

there has been sort of the advent of physician-owned hospitals. You 

have also seen in some areas of the country more systems where 

you have physicians who are sort of working at hospitals, and how 

that has influenced utilization, those two different types of models. 

And in a system-type approach, could you come up with a way 

in which you would sort of integrate the hospital and physician so 

you are not treating them differently in terms of reimbursement, 

so there is sort of an equality incentive for the entire system? 

I realize that is probably a hard thing to answer because you 

have different ways in which these models are constructed out 

there, but, clearly, there is a question about—there is always a 

question, I think, about utilization and how that is shaped by various incentives that might be achieved in different types of models. 

This is a sort of broad question. I know it is not an easy one to 

answer. But is there a way where you could get in a system-based 

approach where you would have sort of an integrated payment that 

would be incentivized based upon quality outcome, et cetera, where 

you would not have these sort of competing interests between hospitals and doctors? 

Mr. VLADECK. We have, Senator, 12 hospitals in New Jersey at 

this minute operating under a system where, for all their Medicare 

cases, there is a permitted gain-sharing incentive with their physicians that essentially bundles the payment for in-hospital services 

for the physicians with that for the hospital, and the so-called 

Model 1 under the bundled payment demonstration that CMMI is 

conducting follows on that model. 

Gail described earlier the cardiac bypass demonstration which 

began during her tenure, which was enormously successful, and we 

have been working on these ever since. 

What happened was, we were ready to go with the next generation of them in the early 1990s, and then the Stark law was passed 

and the anti-kickback law became more aggressive. So the Inspector General got a seat at the table and decided they did not like 

this kind of common incentive, and it took 10 years to figure out 

how to put together projects that addressed their concerns, and so 

forth. 

And the interesting thing is that the critical step in resolving the 

concerns of the program integrity people about having common incentives for physicians and hospitals was having robust quality 

measures and insisting on meeting the robust quality standards before anybody could get any incentive payments. 

And so as I say, there are experiments in this regard going on 

at the moment. The preliminary results are extremely encouraging, 

and I hope we are going to see a lot more of them very soon. 

Ms. WILENSKY. It is, of course, the purpose of the accountable 

care organizations to allow physicians and hospitals who have not 

been formally integrated to work together, show quality metrics, 

have auditable results, so that they can demonstrate savings, so 

that they would not then be subject to the Stark regulations. 

So it has been an attempt—starting with the gain-sharing that 

Bruce talked about that has taken a long time, and now the accountable care organizations—to allow that. 

30 

The CHAIRMAN. This has been very helpful, more helpful than I 

think many other gatherings/hearings, and I deeply appreciate it. 

I think the four of you should come up with some suggestions, 

short-term and long-term. That is, what do we do about physician 

payment reimbursement for this year, because we are going to be 

facing it, because the SGR is going to come up for a pay-for at the 

end of the year; and then, also, longer-term, how do we reform the 

physician payment system over the next several years? 

If you could maybe let us know within a month. And I have not 

figured out yet in what form you are going to let us know, but let 

us keep that open for the time being. 

But you have a lot of expertise. You have a lot of smarts and experience, a lot, and know a lot more about all of this than we do. 

So I know that is a bit of an imposition. I sprung that on you 

and did not give you advanced notice, but I am doing it anyway. 

It would be great if, within about a month from now, we get together one way or another and see what you come up with. We will 

work with you. We really want to work with you. This is teamwork. 

A lot of points came up here, and I know you will take them all 

into consideration and handle them in the appropriate way. 

Thank you very much. The hearing is adjourned. 

[Whereupon, at 11:48 a.m., the hearing was concluded.] 

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