skip navigational links
DHHS Eagle graphic
ASL Header
Mission Nav Button Division Nav Button Grants Nav Button Testimony Nav Button Other Links Nav Button ASL Home Nav Button
US Capitol Building Search
HHS Home
Contact Us
dot graphic

Testimony bar

This is an archive page. The links are no longer being updated.

JUNE 27, 2001

Chairman Durbin, Senator Voinovich, distinguished Subcommittee members, thank you for inviting me to discuss the need for adequate nurse staffing levels. As a registered nurse, this issue is important to me personally, it is a priority for Administrator Scully and Secretary Thompson, and we look forward to working with you to address this growing concern.

Nurses and nurse aides play a critical role in caring for Medicare and Medicaid beneficiaries, sometimes working more than the equivalent of two eight-hour shifts in one day. Their work can be exhausting, emotionally as well as physically, and too often they perform their duties without receiving the credit they deserve.

Nursing requires great dedication, and research has shown that it is becoming more and more difficult to recruit and retain professionals to perform this difficult work. Moreover, studies continue to demonstrate that higher nurse staffing levels, especially registered nurse staffing, directly influence positive outcomes in patient care, and poor nurse staffing levels are associated with poor patient care.

We recognize the important role that nurses play in our health care system, and we value their dedication and hard work. In our role as the largest health insurer in America, we need to ensure that we pay health care providers appropriately. Numerous objective observers, including the General Accounting Office (GAO), the Health and Human Services Inspector General (IG), the Medicare Payment Advisory Commission (MedPAC) have found that Medicare payment levels in the last few years are more than adequate to cover the costs of providing high quality care in hospitals, skilled nursing facilities (SNFs), and home health agencies.

Despite the appropriateness of Medicareís reimbursement levels, our country faces a nursing shortage. We are analyzing the situation to determine the best way to ensure that our beneficiaries continue to receive the high quality care they need, and we are committed to reducing unnecessary burden and complexity in Medicare. We are sponsoring research into nurse staffing levels in nursing homes, and we are considering ways to guarantee that nursing homes meet the appropriate staffing levels based on the results of our research. Additionally, have been working with our partners, including the Health Resources and Services Administration (HRSA), to sponsor other nurse staffing studies. These studies will help inform solutions so that there will be enough highly trained, dedicated, caring people who will continue as nurses and provide the quality health care to the millions of people who depend on them.


The Centers for Medicare and Medicaid Services (CMS), formerly the Health Care Financing Administration, pay for the health care of almost 40 million Medicare beneficiaries. We strive to be prudent purchasers of care, paying appropriately for health services to allow physicians and providers to give high quality care to our beneficiaries. At the same time, we have a duty to the taxpayers to safeguard the Medicare trust fund. Striking this balance is an inexact science, and we work hard to get it right.

For the most part, we pay providers prospectively. This means facilities and providers receive a specific, predetermined base payment adjusted for local wages and the care needs of individual patients. We use different prospective payment systems (PPSís) for various industries to account for differences in the costs incurred by various types of providers. For example, we pay a per diem prospective payment rate to SNFs. This rate covers the costs of furnishing most covered nursing home services, including nursing services, room, board, and minor medical supplies; related costs such as therapies, drugs, and lab services; and capital costs including land, building, and equipment.

Similarly, we reimburse hospitals prospectively. For example, an inpatient hospital receives base payments reflecting the factors that influence the cost of care in inpatient hospital settings, including nurse wages. Additionally, if a hospital is recognized as serving a disproportionate share of low-income patients, or if the hospital is an approved teaching hospital, it receives additional reimbursement for each case paid through the PPS. And, if the hospital incurs large financial losses due to unusually expensive cases, it can become eligible for additional payments, protecting it from catastrophic losses due to exceptional circumstances. In these ways we pay different hospitals appropriately based on the national cost averages of the services they are providing, adjusted for circumstances that alter those costs for individual provider differences like geographic location and patient case mix.

The same is true in the home health setting. As long as beneficiaries continue to remain eligible for home health services, they may receive an unlimited number of medically necessary episodes of care. Medicare pays home health agencies for each covered 60-day episode of care. Payments cover skilled nursing and home-health aide visits, as well as covered therapy, medical social services, and supplies. We pay home health agencies at a higher rate to care for those beneficiaries with greater needs. And, as with hospitals, home health agencies receive additional payments for an individual beneficiary if the costs of the individualís care were significantly higher than the specified payment rate. Payment rates also are adjusted to reflect significant changes in a patientís condition during each Medicare-covered episode of care.

Prospective payment systems have been phased in for different provider types over the last two decades, gradually replacing systems that based reimbursement on each providerís reported costs. These prospective payment systems reimburse more accurately for services, and also offer the flexibility for providers to manage care for their patients in the most efficient and medically appropriate way. If providers perform health services for less than the prospective payment rates, the difference between the cost of the service and their payments becomes additional revenue for them, which can be used for profit or other purposes. If they continually exceed the prospective rates, they will lose money. Prospective payment systems provide the opportunity for providers to manage their practices effectively without government micromanagement.


While PPSís offer an important way to appropriately reimburse health care providers for services, like any other payment system they must be updated to reflect changing conditions in the marketplace, including inflation, and other factors that might raise or lower the cost of providing care. To deal with increases in the prices of goods and services that providers purchase, we update each PPS based on a market basket, or a grouping of goods and services that a health care provider, such as a hospital or a SNF, uses to care for patients. These goods and services include employee wages and benefits, professional fees, facility utilities, drugs, office supplies, and others. We weight each of these components based on the national average proportion of a provider's costs generated by that item. The market basket components are increased by a price index, an estimate of how much the cost of each item will change, called a price index. To determine the market basket update for a coming year, we multiply each component price index by its component weight. These figures for each component, taken together, make up the market basket. We use each industryís market basket to update that industryís PPS.

Market basket updates reflect changes in most nursing costs. For example, in the inpatient hospital PPS market basket, changes in nurse wages are captured in both the hospital industry and economy-wide measures of wage change. As a June 18, 2001 MedPAC memo points out, this combination of measures means that wage increases unique to the health field, like a nurse shortage, are reflected in the market basket wage increase in a way that would not be possible if only economy-wide price measures were used. Moreover, MedPAC reported that over the past decade, the actual hospital industry wage index has increased more slowly than the combination of wage measures used in the inpatient hospital market basket. This means that during that same time period, the wage component of the market basket rose about three percentage points more than hospital wages, generally giving hospitals higher payments than necessary to cover the cost of wages. We continually monitor the appropriateness of the weights and prices used to determine the market basket increases so we can accurately reflect the price increases facing providers in efficiently caring for our beneficiaries, including expectations of a tight labor market due to nurse shortages.

While the market basket reflects wages across an entire industry, we use a wage index to measure differences in the costs of labor across geographic areas. Since it can take years for providers to submit all of the necessary data to develop the wage index, we use data from 4-year old provider cost reports. This means that if wage variations across geographic areas occur due to a more recent trend, such as the nursing shortage, those geographic variations will not be reflected in the wage index data for several years. MedPAC examined this issue in its June 2001 Report to Congress, and concluded that nurse shortages appear to be occurring across most geographic areas. This means they should not impact the accuracy of the geographic-specific wage index.

Once we calculate the wage index, we use it to adjust the proportion of the national payment rate related to labor costs. Currently, our Office of the Actuary estimates that labor-related costs account for 71.1 percent of hospital costs, as determined from the hospital market basket. We intend to review this estimate when the market basket is rebased (which occurs every 4 to 5 years) as recommended by MedPAC in its June 2001 Report to Congress. Regarding nurses specifically, the Bureau of Labor Statistics estimates that nurses account for 30 percent of hospital employees. Additionally, nursing services represent approximately 30 percent of the historical cost we use to construct SNF PPS rates. We are considering reexamining our assumptions about the proportions of providersí costs that reflect resources purchased in local and national markets, as included in MedPACís recommendation in its June 2001 Report to Congress.

Using the market basket and wage index helps to ensure that our payment levels are appropriate. For instance, the first phase of our nursing home staffing study, Appropriateness of Minimum Nurse Staffing Ratios in Nursing Homes, Summer 2000, indicated that PPS payments actually exceeded the staff costs of both the minimum and preferred nurse staffing minimums identified in the report. Additionally, objective observers agree that our prospective payments have been adequate to allow providers to hire and retain the medical personnel, including nurses, necessary to provide high quality care for our beneficiaries. For example, in a December 1999 report, "Skilled Nursing Facilities: Medicare Payment Changes Require Provider Adjustments but Maintain Access," the GAO indicated that nursing homes continue to enjoy adequate profit margins, and that Medicare payment levels are appropriate for the services they provide. Similarly, in its March 2001 report to Congress, MedPAC noted that although hospital profit margins suffered following the Balanced Budget Act of 1997 (BBA), there are signs of significant improvement in fiscal 2000. Additionally, MedPAC found payments are on track, and said there is no compelling reason to alter the payment update already set in the law for fiscal year 2002.

It is important to note, however, that these assessments apply to industries generally. Individual providers within these industries may not share the same perspective. For example, some rural hospitals feel that payment updates do not reflect the costs they face. We are trying to address these individual cases. Under Medicare, there are four rural hospital designations that provide additional payments to rural hospitals and often relax certain Medicare restrictions for them. For instance, critical access hospitals, which are very small, limited service rural hospitals, are exempt from both the inpatient and outpatient PPS. Additionally, the Balanced Budget Refinement Act of 1999 (BBRA) and the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA) contained numerous provisions that significantly eased the burden of the BBA cuts for rural providers. BIPA also provided a temporary two-year increase of 10 percent to home health services provided in rural areas.

In addition to rural providers, these laws benefited specific industries as a whole. They provided substantial "givebacks" to reverse BBA cuts in Medicare spending. For example, BBRA provided SNFs a 4 percent across-the-board rate increase for fiscal years 2001 and 2002, as well as a 20 percent increase for the most common nursing home services. Likewise, BIPA increased the nursing component of the SNF PPS rate by 16.6 percent. BIPA also directed the IG to study whether this payment increase has had an effect on staffing in Medicare certified SNFs.

Paying providers appropriately to ensure our beneficiaries receive high quality care is our job. We give providers the flexibility to determine how to provide this care within the appropriate funding levels. As average hospital costs increase due to the need to pay higher wages to attract nurses, Medicare payments will increase through greater payment updates. However, Medicare payments are not earmarked for specific aspects of provider operations. It is up to the providers to decide how to best deliver care within their prospective payments. We believe that the vast majority of providers will make prudent business decisions that allow them to deliver high quality care in the most efficient way possible when they have the flexibility and the economic incentives to do so. Reflecting the appropriateness of our payment policies, MedPACís recent report on nursing and allied health education suggested that if Congress wants to influence the number, mix, and geographic distribution of health care professionals, it should pursue targeted programs supported with general revenues rather than Medicare payment policies.


While financial reasons may impact some providersí ability to hire and retain an adequate nursing staff, the reasons for the nurse staffing shortage run far deeper than financing. The GAO recently testified that a higher proportion of patients with more complex care needs has expanded demand for nurses with specialized training. They added that the increased use of technology has driven up the demand for a higher skill mix of registered nurses, and the expansion of care delivery settings has increased the demand for nurses generally. The GAO also suggested that job dissatisfaction, difficult working conditions, and low compensation also may contribute to the nurse shortage. In fact, studies indicate that dissatisfaction with working conditions is a major source of frustration for nurses, both domestically and in foreign countries. These studies indicate that current working conditions have led to the decline in enrollments in schools of nursing, an increase in the number of those leaving the profession, and an older nursing population remaining in active employment.

We are very concerned about the impact the nurse shortage could have on our beneficiaries. Last summer, we completed the first of two phases of research on the relationship between nurse staffing levels in nursing homes and quality of care. It represented the first time ever that a clear relationship between nursing home staffing levels and quality of care had been demonstrated in a statistically valid way, and marked a major step forward in understanding that relationship. This preliminary research represents only the first step we have taken to address staffing issues and improve nursing home quality. We have expanded our studies based on more current and comprehensive data, and we are validating our findings with individual case samples and examining other issues that may affect quality, such as turnover rates, staff training, and management of staff resources.

Once these studies are finished, the results may help us to better ensure our beneficiaries receive quality care. Currently, our Conditions of Participation (CoPs) for home health agencies, skilled nursing facilities, and hospitals, which these facilities must meet to receive Medicare reimbursement, require that they maintain adequate nurse staffing levels. As we complete further research, the results may enable us to require more specific minimum staffing levels to guarantee quality care.

We also continue to revise the entire set of hospital CoPs, based on our 1997 proposed rule. We anticipate completing this process in early to mid-2002. Although we did not propose staffing ratios in our proposed rule, we did offer a new Human Resources CoP. In addition continuing to meet current CoPs, under the Human Resources CoP hospitals would have to:

  • Ensure their staffing levels reflect the volume of patients, patient acuity, and intensity of the services provided to achieve desirable patient outcomes;
  • Develop and consistently use an explicit process to determine, on an ongoing basis, the appropriate level of nursing staff, including: registered nurses, licensed practical nurses, and nursing assistants; and
  • Make their staffing methodology and evidence of its use available to the public.

Additionally, in response to the Institute of Medicine report on medical errors, we committed to publishing our hospital Quality Assessment and Performance Improvement CoP as a separate final rule. Although these requirements do not relate directly to staffing, they will help support nurses in hospitals by fostering collaboration for quality improvement among all medical disciplines, including nursing.

Along with our nursing home study and CoP refinements, we are reviewing additional research to determine whether limits on the number of hours health professionals work will reduce the risk of unsafe care due to fatigue. We also have worked jointly with our partners in the Department of Health and Human Services (HHS) to further explore the impact of nurse staffing on patient outcomes. We have a history of working closely with HRSA on a variety of issues, and they are charged with providing national leadership to ensure an adequate supply and distribution of qualified nursing professionals. Recently, we collaborated with HRSA, the Agency for Healthcare Quality and Research, and the National Institute for Nursing Research to cosponsor a study on nurse staffing and patient outcomes in hospitals. We plan to continue working closely with our partners in HHS, to ensure our beneficiaries have access to the high quality care they deserve.


Nurses play a crucial role in caring for our beneficiaries, and we are concerned that the nurse staffing shortage could have a profound impact on the care our beneficiaries receive. We must continue to be vigilant and ensure we are paying health care providers appropriately so they can hire and retain adequate levels of nurse staff, and we are fulfilling this responsibility. We must continue to make the issue of nurse staffing levels a priority. We are working closely with our HHS partners, and we want to continue to work with you and others to find ways to address this growing concern. Thank you for the opportunity to discuss this issue with you today, and I am happy to answer your questions.

HHS Home ( | Topics ( | What's New ( | For Kids ( | FAQs ( | Site Info ( | Disclaimers ( | Privacy Notice ( | FOIA ( | Accessibility ( | Contact Us (

Last revised: July 2, 2001