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Testimony on the Balanced Budget Act of 1997 by Robert A. Berenson, M.D.,
Center for Health Plans and Providers
Health Care Financing Administration
U.S. Department of Health and Human Services
Before the House Ways and Means Health Subcommittee
July 25, 2000
Chairman Thomas, Congressman Stark, distinguished Subcommittee members,
thank you for inviting us to discuss the need to make further adjustments
to the Balanced Budget Act of 1997 (BBA). Congress and the Administration
worked together to make difficult decisions in enacting this historic law.
The BBA helped to eliminate the deficit, created the State Children's Health
Insurance Program, and reduced and restructured Medicare and Medicaid payments
to health care providers. Many of the provider payment changes were justified
and have contributed to improved efficiency and the unprecedented fiscal
health of the Medicare Trust Fund.
However, information gathered over the last three years suggests that some
of the policies may have the potential to affect the quality of and access
to health care services. To address this, the President worked with Congress
to increase home health care payments in 1998. We worked together again
last year in the Balanced Budget Refinement Act (BBRA) to make several necessary
adjustments for several types of providers. And we have taken several administrative
actions to smooth the transition to new policies and help health care providers
It appears, however, that problems persist. We have all heard reports from
health care providers of financial difficulties -- in part related to BBA
changes. We are concerned about the potential for reduced beneficiary access
to quality care. We believe it is warranted to make further prudent adjustments
to ensure that beneficiaries continue to have access to quality care. And
we want to work with this Committee, as we have done in the past, on legislation
to make needed adjustments.
The Presidentís Mid-session Review proposal includes numerous adjustments
that would increase payments by $21 billion over 5 years ($40 billion over
10 years) to hospitals, rural providers, teaching facilities, nursing homes,
home health agencies, managed care plans, and other providers.
The Presidentís proposal includes $9 billion over five years ($19 billion
over 10 years) to delay further BBA payment reductions, many of which are
scheduled to occur on October 1, and includes $11 billion over five years
($21 billion over 10 years) in unspecified funds for use in developing additional
PRESIDENTíS MIDSESSION BUDGET PROPOSAL Dollars
|| 5 Years
|Full inpatient hospital market basket for '01:
|Indirect Medical Education at 6.5 percent for '01:
| Repeal Medicare DSH reduction for '01
|Freeze in Medicaid DSH allotments for '01:
| Rural initiative:
|Adjusting Puerto Rico hospital payments to 75/25 blend:
|Delay 15 percent cut in '02:
| Full market basket
update for '01:
| Full market basket update for '01
|Delay therapy cap changes for an additional year:
| Indirect effect of specified policies:
| ESRD composite rate update of 2.4% for '01:
|TOTAL SPECIFIED POLICY COSTS:
|UNSPECIFIED PROVIDER RESTORATION POOL:
NOTE: Numbers may not add due to rounding. Ricky Ray
and diabetes increases would be funded out of the unspecified pool.
The BBAís fiscal discipline and our success in fighting fraud, waste, and
abuse have greatly improved the status of the Medicare Trust Fund, which
is now projected to remain solvent until 2025, 26 years beyond where it
was just 8 years ago. The prospective payment systems mandated by the BBA
are particularly important because they create incentives to provide care
However, these new payment systems mark a substantial departure from cost-
and charge-based reimbursement, and the transition can be challenging for
The improved status of the Medicare Trust Fund and the growing budget surplus
make it possible to pay for new BBA adjustments to help providers adjust
to these changes while still achieving the Presidentís goal of extending
the Trust Fund to at least 2030 and adding an affordable, voluntary prescription
drug benefit that is available to all beneficiaries. In addition to the
specific fee-for-service provider payment adjustments listed above, the
Presidentís plan would provide an estimated $25 billion over five years
to Medicare+Choice plans specifically for drug coverage.
Medicare+Choice (M+C) plans are finding it difficult to adjust to the BBA
changes while maintaining the extra services they have provided to beneficiaries
in the past. This is especially true for prescription drug coverage that
is not available in the Medicare fee-for-service program and which many
M+C plans offer, but for which they do not receive specific payment from
Medicare. Many M+C plans were able to offer drug coverage and other extras
because of excessive payments that were made to them before the BBA.
However, since the BBA was enacted, costs of the extra benefits provided
under many M+C plans -- particularly prescription drugs that are not offered
in the Medicare fee-for-service program -- have increased much faster than
spending for services in the Medicare fee-for-service program. Our success
in holding down fee-for-service costs is due in part to BBA provisions and
our fraud, waste, and abuse efforts, as well as other factors. Because payments
to M+C plans do not account for the costs of services which are not covered
in the Medicare fee-for-service program, plans have significantly reduced
the scope of their prescription drug coverage. For example, in the last
two years, the proportion of plans that limit drug coverage to $500 or less
has increased by 50 percent. In 2000, about 75 percent of plans limit drug
coverage to $1,000 or less.
Lack of payment to support drug coverage that is not available in fee-for-service
Medicare is a primary reason that some M+C plans are again announcing that
they will leave or reduce participation in the program, particularly those
with smaller market shares and strong competition. Difficulty in maintaining
provider networks is also a factor, as demonstrated by a recent Deloitte
& Touche report showing that half of the nationís largest hospitals
canceled an HMO contract in the past year. Because some M+C plans believe
that they cannot be competitive if they charge a higher premium or reduce
benefits, they have simply decided to withdraw from the program. We have
no control over their actions. We do believe, however, that even with premiums,
M+C plans still represent a valuable option for beneficiaries -- particularly
as an alternative to Medigap.
For 2001, about 85 percent of current M+C enrollees will be able to continue
with their current HMO. However, 65 M+C organizations have announced they
will leave the program and 53 will reduce their service areas, affecting
a total of 934,000 Medicare enrollees. More than 775,000 should have the
opportunity to enroll in another M+C plan, but about 159,000 will be left
with no other managed care option and few, if any, options for affordable
Nonetheless, payments to M+C plans continue to exceed what taxpayers would
spend for enrollees if they had remained in the fee-for-service program.
The General Accounting Office (GAO), in testimony before Congress last week,
affirmed that this is still the case despite BBA payment changes and that
"Medicare managed care, although originally expected to achieve program
savings, continues instead to add to program cost."
The best way to ensure that the M+C program is a strong part of Medicare
and an important option for beneficiaries is to ensure that all beneficiaries
have access to affordable drug coverage and to pay plans directly for providing
it. The Presidentís proposal to create a voluntary, affordable Medicare
prescription drug benefit for all beneficiaries would do just that. Under
the Presidentís proposal, M+C plans would be paid through a competitive,
market-based process in relation to their own costs, rather than through
Congressionally mandated administrative prices that have resulted in wide
variation in rates and beneficiary access to plans across the country.
Also, plans would be paid $2 billion directly beginning in January and
$25 billion over the next five years to provide the prescription drug coverage
that most beneficiaries want from managed care. This amount substantially
exceeds the $15 billion over five years that representatives of the American
Association of Health Plans have said, in testimony before Congress, they
need to continue participating in the M+C program. Beginning in 2002, beneficiaries
in fee-for-service Medicare would also be able to choose this benefit, regardless
of whether they live in areas where managed care plans have chosen to operate.
And beneficiaries in M+C plans all across the country would be assured of
drug coverage, rather than just those in areas where non-targeted assistance
for M+C plans would raise payment enough to support a drug benefit.
In addition, under the Presidentís Mid-Session Review proposal, M+C plans
would receive an additional $1 billion over five years through increases
to the payment rates which are based on the fee-for-service Medicare system.
We also announced on June 19 that we will work with the Medicare Payment
Advisory Commission (MedPAC), plans, beneficiary groups and others to develop
a slower phase-in of the current schedule for risk adjustment, administratively
addressing the concerns about the current schedule, while maintaining our
commitment to using comprehensive outpatient data beginning in 2004.
Meanwhile, to make sure that Medicare is a fair business partner, we have
been streamlining the requirements for M+C plans while making sure that
beneficiaries who choose managed care receive the benefits, protections,
and information they need and deserve. We have modified many requirements
in our contracts and operations to be more consistent with private and other
public purchasers, and we are implementing additional initiatives to further
streamline administrative procedures and lead to more efficient and consistent
oversight. Specifically, we are:
- Increasing flexibility in establishing a provider network, which will
allow health plans greater opportunity to serve rural areas;
- Improving freedom of choice by allowing plans to offer beneficiaries
a point of service option that broadens access to health care services
from both in-network and out-of-network providers; and
- Easing compliance plan reporting by eliminating the self-reporting
Medicare beneficiaries should know that, regardless of the decisions made
by private HMOs, they are still covered by a strong Medicare program. Their
HMO is required to cover them until December 31, 2000. We are continuing
to take strong steps to ensure that, no matter what decisions plans make
about their participation in the program, Medicare beneficiaries affected
by these changes have options. We are ensuring that beneficiaries who are
being forced to change their health care coverage are guaranteed access
to certain Medigap plans, regardless of any preexisting conditions, as the
law requires. And, in order to make the transition easier for these beneficiaries
and to help them make the right decisions about their health care coverage,
we are providing them with clear information on their new options and requiring
plans leaving the program to do the same.
Most experts agree that hospitalsí financial status has worsened recently,
as a result of several factors. In large part, this results from private
payment reductions. MedPAC has found that about three-quarters of the decline
in total hospital margins between 1997 and 1998 is due to lower private
payments. While Medicare hospital inpatient margins remain relatively healthy,
more hospitals had negative margins in 1998 than 1996.
Rural hospital inpatient margins dropped by nearly twice as much as urban
hospital margins did between 1997 and 1998. Rural hospitals face special
challenges Ė they tend to be smaller and often cannot attract or keep health
care professionals. They also are more dependent on Medicare patients and
therefore disproportionately affected by Medicare payment reductions. The
BBRA invested about $1 billion over 5 years to address many of these problems.
However, additional increases appear to be warranted to help the long term
viability of rural hospitals.
Hospitals that serve large numbers of uninsured people also are strained
by the increasing number of uninsured. Some uninsured use hospital emergency
rooms for primary care while others delay care until problems become more
severe and costly. While the number of uninsured has been rising, Federal
payments to disproportionate share hospitals (DSH) were reduced by the BBA.
This coincided with reductions in payments from private payers which traditionally
had helped fund uncompensated care. And academic health centers, which play
critical roles in making medical advances, caring for some of the most complex
cases, and providing service to underserved populations, also have experienced
a significant decline in total hospital margins.
To mitigate these funding problems, allow for more time to assess the full
impact of the BBA and BBRA, and to preserve beneficiariesí continued access
to quality care, the Presidentís plan would:
- Replace the BBA inpatient hospital
update for inflation, the "market basket" (MB) minus 1.1 percentage
points with a full MB update for FY 2001;
- Eliminate the BBRA indirect medical
education payment reduction for FY 2001, maintaining the additional
payments for IME at 6.5 percent;
- Eliminate BBRA DSH reduction of 3
percent for FY 2001;
- Replace the BBAís Medicaid DSH reductions
for 2001 with a one-year freeze, so that the Federal share DSH limits
for FY 2000 would also apply in 2001.
- Reserve about $1 billion over 10
years for rural provider policies. This will include policies to improve
the sustainability of rural hospitals, similar to those in the bipartisan
"Health Care Access and Rural Equality Act of 2000", introduced
by Sens. Conrad, Daschle and Reps. Foley, Berry, McIntrye, Pomeroy,
Stenholm, Tanner and others. We also will consider improving equity
for rural hospitals in the Medicare DSH formula.
- Provide fairer payments for inpatient
services in Puerto Rico by basing the payments more on the rates that
apply everywhere else in the nation.
The Mid-Session Review plan also modifies the Presidentís budget savings
policies by dropping the fiscal 2003 through 2007 policies to reduce hospital
market basket update and capital payment reductions and to further reduce
hospital bad debt reimbursement. These hospital policies would have saved
more than $25 billion over 10 years (before interactions).
Meanwhile, we have taken steps to help hospitals adjust to BBA and BBRA
changes. Most recently, we delayed implementation of the outpatient prospective
payment system to give both us and hospitals more time to prepare. We are
distressed about postponing the benefits of this new system for beneficiaries,
but the delay is necessary to be fully prepared for this substantial change.
We also are requesting that hospitals not collect deductibles or coinsurance
from Medicare beneficiaries beginning August 1 until we notify them of the
correct amount. And we will provide all hospitals with a "plain language"
flyer to help explain the change to beneficiaries.
To assure as smooth an implementation as possible, we have undertaken an
unprecedented provider education campaign which has included:
- Allowing hospital representatives
to attend our initial training session for intermediaries;
- Training sessions, town hall meetings
and satellite broadcasts for providers to explain the new system and
- Use of the HCFA website to post the
outpatient prospective payment system regulation, instructions, training
- Weekly conference calls since April with provider associations to keep
them apprised of the progress of implementation.
In addition, we are committed to implementing changes included in the BBRA
to accommodate new technology in the outpatient prospective payment system.
We are expanding the number of medical devices for which "pass-through"
payments will be made and continuing to work with the industry to determine
additional devices for which these payments can be made. We also have committed
to making unprecedented quarterly updates to the pass-through list to ensure
that the outpatient prospective payment system does not inhibit development
and use of new technologies.
In other steps to help hospitals, we have postponed expansion of the BBAís
"transfer policy" for all hospitals for a period of two years,
through 2002. As a result, the transfer payment policy will apply only to
the current 10 Diagnosis Related Group (DRG) categories, as prescribed by
the BBA. We are carefully considering whether further postponement of this
policy is warranted.
We have taken a number of specific administrative steps to assist rural
hospitals. For example:
- We have made it easier for rural
hospitals, whose payments are now based on lower, rural area average
wages, to be reclassified and receive payments based on higher average
wages in nearby urban areas.
- We are helping rural hospitals adjust
to the new outpatient prospective payment system by using the same wage
index for determining a facilityís outpatient rates that is used to
calculate inpatient rates.
- We also are working with colleagues
at the GAO and MedPAC to review the impact and appropriateness of the
wage index that is used to factor local health care wages into Medicare
payment rates and generally results in lower payments to rural hospitals
than their urban counterparts.
We also are implementing BBRA provisions, including:
- Easing BBA DSH and IME reductions;
- Extending the Medicare Dependent
Hospital program through 2005;
- Easing requirements for hospitals to qualify as Critical Access Hospitals;
- Allowing urban hospitals to reclassify to rural areas; and
- Allowing Sole Community Hospitals to have payments based on more recent
There has been a significant decline in home health spending since the
BBA. This is due in large part to elimination of overpayments, waste, and
fraud, but we are concerned about the potential for access problems in some
situations. GAO, MedPAC and the HHS Inspector General agree that there does
not appear to be system-wide access problems. However, some studies have
suggested that patients who have long-term conditions may have had increased
difficulty in accessing home health services. The President's plan would:
- Replace the current law home health
update of market basket minus 1.1 percentage points with a full market
basket update for FY 2001; and
- Delay the BBAís 15 percent reduction
for an additional year until FY 2003.
Home health agencies will be greatly aided by the new home health prospective
payment system that will take effect October 1. There has been a very positive
response to our regulation detailing how this system will work, and the
GAO has stated that it will "generally provide agencies a comfortable
cushion to deliver necessary services." We also have taken steps to
help home health agencies adjust to BBA changes, such as extending the time
to repay overpayments and postponing the requirement for them to obtain
SKILLED NURSING FACILITIES
The BBA created a new prospective payment system for skilled nursing facilities
(SNFs) that went into effect in 1998. This new system contributed to changes
in the SNF market. Recent GAO and HHS Inspector General studies have found
that SNFs were more cautious about admitting high-cost cases. An IG study
found that 58 percent of hospital discharge planners reported that Medicare
patients requiring extensive services such as intravenous medications have
become more difficult to place in nursing homes. Additionally, several large
private SNF chains have experienced financial problems that are primarily
due to business practices unrelated to Medicare, but compounded by Medicare
The President's plan would:
- Replace the BBA's SNF update of market
basket minus 1 percentage point with a full market basket update for
- Delay for an additional year (until
FY 2002) the application of the therapy caps providing additional time
for development of policies.
- Drop the nursing home bad debt reduction
The BBA limited yearly payments for Part B physical/speech therapy and
occupational therapy to $1,500 each per beneficiary. This limit meant that
a large number of therapy patients had service use that exceeded the payment
limits and thus paid for services out-of-pocket.
The BBRA put a two-year moratorium on the caps while a study is being conducted
to determine appropriate payment methodologies that reflect the differing
therapy needs of patients. However, the moratorium may not be long enough
to complete this complicated work.
We are continuing to work to refine the payment classification system in
a budget neutral way to ensure adequate payment for medically complex patients,
and particularly to account more specifically for the cost of drugs and
other "non-therapy ancillary" services. To immediately address
some industry concerns, the BBRA provided for a 20 percent increase in the
SNF prospective payments for 15 categories of patients to address perceived
shortfalls in payments for such patients until we are able to determine
the best way to make these changes. We implemented this BBRA provision in
early June, and nursing homes should be receiving the increased payments
for services delivered on or after July 1.
Using the best data available in 1998, we developed two payment classification
models we believed would ensure adequate payment for complex patients. We
issued a proposed rule in April 2000 which included refinements based on
these models and solicited public comments. In addition, we contracted with
outside experts to validate the models using more recent data. When we tested
the models with nationwide data from 1999 over the past few months, we found
that the models were no longer statistically significant in identifying
high-cost beneficiaries with complex care needs and the ancillary services
Proceeding with implementation of the proposed refinements based on these
models could have changed payment levels without any assurance that we were
distributing funds more equitably, creating incentives for efficient care,
and minimizing the risk of negative financial consequences. We therefore
are deferring the implementation of the refinements.
We will shortly begin consulting with outside researchers and experts to
begin further analysis using the 1999 national data aimed at determining
the feasibility of developing case-mix refinements that reflect current
practice. Our goal is to include a proposal for such refinements as soon
as possible. However, until a feasibility study is completed, we will be
unable to accurately forecast the potential and timing of such refinements.
In the meantime, the 20 percent increase in payments included in the BBRA
will remain in place until refinements of the system can be implemented,
which will be in fiscal 2002 at the earliest. In addition to the 20 percent
increase, the BBRA also provided for a 4 percent increase in payments for
all SNF beneficiaries, effective October 1, 2000.
END-STAGE RENAL DISEASE
Medicare covers about 300,000 people with end-stage renal disease (ESRD)
Ė people who have diabetes, hypertension or other diseases that result in
severe impairment of kidney function. Medicareís composite rate (payment
rate for outpatient dialysis services) has not kept pace with the increasing
acuity of patients and cost of services. For the past several years, MedPAC
has recommended updating the payment rate to reflect these factors.
The BBRA went part of the way to the MedPAC recommendation by updating
it by 1.2 percent in 2000 and plans for another 1.2 percent increase in
2001 Ė the first increases since 1991. The Presidentís plan would meet the
full MedPAC recommendation and increase rates by 1.2 percent for CY 2001
in addition to the BBRA increase of 1.2 percent.
The Presidentís plan also drops proposed payment reductions for laboratories,
ambulances, durable medical equipment, parenteral and enteral nutrients,
and prosthetic and orthotics for fiscal years 2003 through 2007, as well
as bad debt reductions for non-hospital providers, repeal of the BBRA managed
care risk adjustment policy, and the proposal for a preferred provider option.
We also are continuing with development of additional prospective payment
systems mandated by the BBA for inpatient rehabilitation facilities, and
mandated by the BBRA for psychiatric hospitals, and long-term care hospitals.
As mentioned earlier, the Presidentís Mid-Session Review proposal includes
$21 billion for unspecified policies. We look forward to working with Congress
to develop additional policies to help providers adjust to the many BBA
While it is essential that we maintain the fiscal discipline embodied in
the BBA, it is equally important that we make adjustments where necessary
to ensure beneficiariesí continued access to quality care. The improved
status of the Medicare Trust Fund, combined with current budget surplus
projections, provides the flexibility to make the prudent adjustments we
are proposing, as well as to make a voluntary, affordable Medicare prescription
drug benefit available to all beneficiaries. Enactment of such a benefit
is urgently needed to meet beneficiary needs. It also is the best way to
ensure that M+C plans can provide drug coverage and give beneficiaries the
options Congress intended in the BBA. I thank you for holding this hearing,
and I am happy to answer your questions.
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