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THOMAS A. SCULLY
CENTERS FOR MEDICARE AND MEDICAID SERVICES
MEDICARE PAYMENT FOR PHYSICIANS' SERVICES
HOUSE ENERGY AND COMMERCE SUBCOMMITTEE ON
FEBRUARY 14, 2002
Chairman Bilirakis, Congressman Brown, distinguished Subcommittee
members, thank you for inviting me to discuss how Medicare
pays for physicians' services. I have worked on Medicare
physician payment issues since 1989 when I was one of the
primary people in the previous Bush Administration negotiating
the creation of the resource based relative value physician
payment system, sometimes referred to as RBRVS. I personally
think that, over the years, this has been the most stable
payment system in Medicare, and historically there has been
far less controversy in physician payments than we have
witnessed with other providers. In fact, the resource-based
relative value system has worked reasonably well and often
is used by private payors. Last year we encountered a situation
where a number of factors combined to cause the formula,
as set in law, to produce a negative update. It is important
that we fix the mechanism and explain it to doctors so they
do not lose confidence in the system, and they continue
to provide beneficiaries with the vital care they need.
This year, Medicare will pay about $43 billion for physician
fee schedule services. Between 1997 and 2001, Medicare physician
spending increased from 17.6 percent to 20.5 percent of
total Medicare fee-for-service spending. Each year, Medicare
processes about 600,000,000 physician claims. The fee schedule
reflects the relative value of the resources involved in
furnishing each of 7,000 different physicians' services.
By law, we actually establish three components of relative
values -- physician work, practice expenses, and malpractice
insurance -- for each of these 7,000 services. The actual
fee for a particular service is determined by multiplying
the relative values by a dollar-based conversion factor.
And the payment for each of the services is adjusted further
for geographic cost differences among 89 different payment
areas across the nation.
Payment rates for physicians' services are updated annually
by a formula specified in law. The annual update is calculated
based on inflation in physicians’ costs to provide care,
then adjusted up or down by how actual national Medicare
spending totals for physicians’ services compare to a target
rate of growth called the Sustainable Growth Rate (SGR).
If spending is less than the SGR, the physician payment
update is increased, and if spending exceeds the SGR, the
update is reduced. The system was designed to constrain
the rate of growth in Medicare physician spending and link
it to growth in the overall economy, as well as to take
into account physician control over volume and intensity
of services. In large part, the formula has been working
The law that sets this formula is extremely prescriptive.
It does not give the Centers for Medicare and Medicaid Services
(CMS) the administrative flexibility to adjust physicians'
payments when the formula produces unexpected payment updates,
as we witnessed last year. The size of the negative update
for this year was a surprise when it became apparent last
September. As we looked at the actual numbers going into
the formula, we explored every issue and every alternative
that could have produced a different update, but we concluded
that we did not have any flexibility. We made sure that
every part of the update was accurate and fully in accord
with the law. I know that you, Mr. Chairman, and this Subcommittee,
are closely examining the issue and potential alternatives.
The Administration is willing to work with you to find a
budget-neutral way to ensure that physicians receive appropriate
payment for Medicare services, this year and in the future.
Several factors led to the negative update. First, there
has been a downturn in the economy, which affected the SGR
because it is tied to the growth in the country's Gross
Domestic Product. Second, actual cumulative Medicare spending
for physicians’ services in prior years was higher than
expected. Third, our measure of actual expenditures had
to be adjusted to capture spending information on services
that were not previously captured in the measurement of
actual expenditures. Counting these previously uncounted
actual expenses, as required by law, also increased cumulative
actual expenditures -- driving down the update. I explain
this in more detail later. The combination of a lower target
and higher expenditures produced the negative update to
physicians' payment for 2002. We are required by law to
make a formal estimate of the update for 2003 by March 1
of this year. While we are still finalizing this estimate,
our preliminary assessment is that the formula will produce
a significant negative payment update again in 2003.
Physicians argue that these negative payment updates will
hinder their ability to care for beneficiaries, and may
result in some physicians not accepting new Medicare patients.
We take these statements seriously, and are taking steps
to monitor beneficiary access to care to ensure that our
nation's most vulnerable citizens continue to receive the
care they need. As we consider how to improve the Medicare
physician payment formula, I think it's important to understand,
from a historical perspective, how and why the formula operates
the way it does today. It is, in fact, operating precisely
as it was designed in 1997 -- but we recognize that this
has produced some large short-term adjustments.
PHYSICIANS' PAYMENT BEFORE 1997
As the Medicare program has grown and the practice of medicine
has changed, Congress and the Administration have worked
together in an effort to ensure that Medicare's payments
for physicians’ services reflect these changes. As a result,
the physician payment system has changed significantly in
the past two decades. For many years, Medicare paid for
physicians' services according to each doctor's actual or
customary charge for a service, or the prevailing charge
in the physician's area, whichever was less. From 1970 through
the 1980's, spending for physicians' services grew at an
unaffordable and unsustainable average annual rate of more
than 14 percent. And, because the system was based on historical
charges, it produced wide discrepancies in payments among
different localities, medical specialties, and services.
These payment differences did not necessarily reflect actual
differences in the cost of providing services. As a result,
the system was roundly criticized in the 1980's as overvaluing
specialty services and undervaluing primary care services.
To address these criticisms, Congress directed the Physician
Payment Review Commission, an advisory body established
by Congress and one of the predecessor organizations of
the Medicare Payment Advisory Commission (MedPAC), to examine
different ways of paying physicians while protecting beneficiary
access to care, as well as slowing the rate of growth in
Medicare physician spending. On a bipartisan basis, and
with the support of the first Bush administration, Congress
accepted these recommendations and passed these and other
reforms in the Omnibus Budget Reconciliation Act (OBRA)
of 1989, and the new fee schedule was implemented beginning
January 1, 1992. The resource-based work component of the
fee schedule was phased in between 1992 and 1996.
Specifically, in its 1989 Annual Report, the Commission
recommended a number of ways to change how Medicare pays
physicians. The Commission first recommended instituting
a fee schedule for physicians' payments based on the resources
involved with furnishing each physician’s service, rather
than on historical charges. The Commission also recommended
that the relative value of three separate components of
each service -- physician work, practice expense and malpractice
insurance -- be calculated, as discussed above.
Under the Commission's recommendations, once the relative
values were established, they were adjusted for cost differences,
such as in staff wages and supply costs, based on the area
of the country where the service was performed. Then the
actual fee for a particular service for a year was determined
by multiplying the relative value units by a dollar-based
conversion factor. The American Medical Association (AMA)
provides support for the Relative-Value Update Committee
(RUC), a multi-specialty panel of physicians that plays
an important role in making recommendations so that the
relative values we assign reflect the resources involved
with both new and existing services. We generally accept
more than 90 percent of the RUC’s recommendations, and our
relationship is cooperative and extremely productive.
The Commission’s second recommendation was to provide financial
protection to beneficiaries by limiting the amount that
a physician could charge beneficiaries for each service.
The Commission’s third major recommendation was to establish
a target rate of growth for Medicare physician expenditures,
called the Medicare Volume Performance Standard (MVPS).
The MVPS target growth rate was based on physicians' fees,
beneficiary enrollment in Medicare, legal and regulatory
changes, and historical measures of the volume and intensity
of the services the physician performed. The MVPS was set
by combining these factors and reducing that figure by 2
percentage points, in order to control to growth rate for
physicians’ services. OBRA '93 later changed this to minus
4 percentage points. Actual Medicare spending was compared
to the MVPS target, which led to an adjustment, up or down,
to the calculation to finally determine the update a future
year. The law provided for a maximum reduction of 3 percentage
points, which OBRA '93 lowered to 5 percentage points.
PHYSICIANS' PAYMENT SINCE 1997
The Balanced Budget Act of 1997 (BBA) changed the physician
payment system in a number of ways based on Commission recommendations.
In BBA, the SGR replaced the MVPS. Like the MVPS, the SGR
is calculated based on factors including changes in physicians'
fees, beneficiary enrollment, and legal and regulatory changes.
However, the BBA did away with the historical target for
volume and intensity of physicians’ services. Instead, the
real per capita Gross Domestic Product, which measures economic
growth in the overall economy, was instituted as a replacement.
One other important difference between the old and the
new growth targets is that the old method compared target
and actual expenditures in a single year. If expenditures
exceeded the target in the previous year, the update was
adjusted for the amount of the excess in the current year,
but there was no recoupment of excess expenditures from
the previous year. Under the new SGR, the base period for
the growth target was locked in at the 12 months ending
March 31, 1997. This is the base period and remains static
for all future years. Annual target expenditures for each
following year equal the base period expenditures increased
by a percentage amount that reflects the formula specified
in the law, and they are added to base period expenditures
to determine the cumulative target. This process continues
year after year, adding a new year of expenditures to the
cumulative target. If expenditures in a prior year exceed
the target, the current year update is adjusted to make
annual and target expenditures equal in the current year
and to recoup excess expenditures from a prior year. While
the BBRA made some further technical changes to allow these
adjustments to occur over multiple years, that is the general
way the formula was established in law. The SGR is working
the way it was designed.
BBA also increased the amount that the update could be
reduced in any year if expenditures exceeded the target.
The maximum reduction was increased by 2 percentage points
to 7 percentage points. Thus, for example, inflation updates
in the range of 2 percent, reduced by the 7 percent maximum
reduction, would yield a negative update in the range of
5 percent. BBA also established a limit of 3 percentage
points on how much the annual inflation update could be
increased if spending was less than the target.
Additionally, BBA created a single conversion factor (previously
there were three separate ones for different types of services).
BBA also required that the practice expense component of
the relative value calculation, which reflects a physician's
overhead costs, be based on the relative resources involved
with performing the service, rather than the physicians'
historical charges. This change made the practice expense
component of the calculation similar to the physician work
component, and reflected actual resources. The change was
phased in over four years, and was fully implemented in
2002. BBA further required that the malpractice insurance
expense component of the relative value calculation also
be resource-based. The law required that the resource-based
practice expense and malpractice relative value systems
be implemented in a budget-neutral manner. The BBA provisions
affecting physicians accounted for about 3 percent of total
BBA 10-year Medicare savings. Because physician payment
accounts for about 17.6 percent of program payments in 1997,
the physician savings in the BBA represented by these changes
were perceived to be relatively modest.
The Balanced Budget Refinement Act of 1999 (BBRA) made
further revisions to the SGR in an attempt to help smooth
out annual changes to physician payments such as blending
cumulative and annual comparisons of target and actual spending.
Beginning with the 2000 SGR, the law required us to revise
previous SGR estimates based on actual data that became
available after the previous estimates. BBRA also required
us to make available to MedPAC and the public an annual
estimate of the physician payment update for the succeeding
year. This estimate is due on March 1 of each year, and
is very difficult to make, because none of the claims used
to determine actual spending are available by the time we
are required to make the estimate. Last year, we estimated
that this year's update would be around negative 0.1 percent.
However, when we determined the actual update, which was
published 7 months later on November 1, revised figures
lowered the Gross Domestic Product figures for 2000 and
predicted a slower growing economy for 2001 than was previously
estimated. Further, 2001 physician spending was higher than
our March estimate.
Additionally, in making updates to the list of codes for
specific procedures that are included in the SGR, we discovered
that a number of codes for new procedures were inadvertently
not included in the measurement of actual expenditures beginning
in 1998. Therefore, the previous measurements of actual
expenditures for 1998, 1999, and 2000 were lower than they
should have been. As a result, the physician fee schedule
update was higher in 2000 and 2001 than it should have been,
had those codes had been included. These updates, which
were inadvertently higher in 2000 and 2001, created a partial
downward adjustment on the physician fee schedule for 2002,
and will require a further downward adjustment for the 2003
physician update. The combination of these factors led to
the large negative update for 2002.
In its March 2001 report to Congress, MedPAC recommended
a complete repeal of the SGR system. MedPAC recommended
replacing the SGR with a different type of annual update
system like the one used for hospitals. That recommendation
was not enacted in 2001. At its January 2002 meeting, MedPAC
voted to make a similar recommendation to Congress in its
upcoming March 2002 Annual Report.
As you can see, the process for calculating payments for
physicians' services is highly complex. It is the result
of years of efforts by Congress, previous Administrations,
the Physician Payment Review Commission, and MedPAC to ensure
that Medicare pays physicians as appropriately as possible.
Today, while the underlying fee schedule and relative value
system have been successful, we recognize that the update
calculation has produced large short-term adjustments and
instability in year-to-year updates. I know that you, Mr.
Chairman, and others on this Subcommittee and elsewhere
in Congress are involved with legislative efforts to improve
the formula. I want to work with you and the physician community
to smooth out the yearly adjustments to the fee schedule
in a way that is budget-neutral across all providers. Although
we cannot adjust the payment formula administratively, we
have been working hard to do what we can, independent of
the update levels, to help physicians and other providers
in a variety of other areas.
HELPING PHYSICIANS OUTSIDE OF PAYMENTS
I worked in the hospital industry for years, and I know
how frustrating it can be for physicians and providers to
work with Medicare. We know that in order to ensure beneficiaries
continue to receive the highest quality care, we must streamline
Medicare's requirements, bring openness and responsiveness
into the regulatory process, and make certain that regulatory
and paperwork changes are sensible and predictable. This
effort is a priority for me personally, as well as for Secretary
Thompson and President Bush. And we have a lot of
activities underway to make Medicare a more physician- and
In June, Secretary Thompson announced that, as a first
step in reforming the Medicare program, we were changing
the Agency's name to the Centers for Medicare & Medicaid
Services. The name-change was only the beginning of our
broader effort to raise the service level of the Medicare
program and bring a culture of responsiveness to the Agency.
These are not hollow words: creating a "culture of responsiveness"
means ensuring high-quality medical care for beneficiaries,
improving communication with physicians and providers, and
increasing our education efforts. To promote improved responsiveness,
we have created eleven "Open Door Policy Forums" to
interact directly with physicians, as well as beneficiary
groups, plans, providers, and suppliers, to strengthen communication
and information sharing between stakeholders and the Agency.
I chair three groups: long-term care, rural health, and
diversity. My Deputy Administrator and Chief Operating Officer,
Ruben King-Shaw, chairs the Open Door Policy Forum for physicians,
and I participate in the meetings. Ruben listens to physicians'
concerns, and tries to fix them where possible. All of these
Open Door Policy Forums facilitate information sharing and
enhance communication between the Agency and its partners
and beneficiaries. My goal is to make CMS an open agency
-- one that explains its policies to the beneficiaries and
providers who rely on us.
We also are working to alleviate the regulatory and related
paperwork burdens that for too long have been associated
with the Medicare program. The Secretary has formed a new
Regulatory Reform Advisory Committee, comprised of providers,
patients and other experts from around the country to identify
regulations that prevent physicians, hospitals, and other
health care providers from serving Medicare beneficiaries
in the most effective way possible. This group will determine
what rules need to be better explained, what rules need
to be streamlined, and what rules need to be dropped altogether,
without increasing costs or compromising quality. To support
this group, we have developed a program, focusing on listening
and learning, to get us on the right track.
Under this program, we will conduct public listening sessions
across the country. We want to hear directly from physicians
and health care providers away from Washington, DC, and
Baltimore -- out in the areas where real people live and
work under the rules we produce and with people who do not
have easy access to policymakers to voice their legitimate
concerns. Our first regional hearing is on February 25 and
26 in Miami, Florida. Most of you in Congress have these
kinds of regular listening sessions with your constituents,
and I have already participated in 12 of these with a bipartisan
group of Senators and Congressmen. We want to hear from
local physicians, as well as seniors, large and small providers,
allied health professionals, group practice managers, State
workers, and the other people who deal with Medicare and
Medicaid in the real world. We are determined to get their
input so we can run these programs in ways that make sense
for real Americans with real life health care problems.
We hear from some of these people now, but we want to get
input from many, many more.
Like the physicians, providers, and beneficiaries who live
and work with Medicare every day, CMS staff have worked
with managing the system for years, and they too have suggestions
about how Medicare can operate more simply and effectively.
So, another aspect of our plan is to form a group of in-house
experts from the wide array of Medicare's program areas.
I have asked one of my close friends and advisors, Dr, Bill
Rogers, a local practicing emergency room physician, to
chair this group and challenge our in-house experts to suggest
meaningful changes. This group of in-house experts will
look to develop ways that we can reduce burden, eliminate
complexity, and make Medicare more "user-friendly" for everyone.
Furthermore, our Physicians' Regulatory Issues Team (PRIT)
integrates practicing physicians into our decision making
process, allowing us to develop policies that will better
serve beneficiaries and physicians. Specifically, PRIT members
work within the Agency to serve as catalysts and advisors
to policy staff as changes and decisions are discussed.
Team members have assisted us with:
- Streamlining Medicare forms, including the physician
- Improving operational policies;
- The PRIT also is working to improve current channels
of input from practicing physicians;
- Clarifying oversight policies; and
- Identifying and changing excessively burdensome requirements.
The PRIT also has initiated a Physician Issues Project,
where they sought and obtained from the physician community
their input on those Medicare issues that seem particularly
burdensome to them on a day-to-day basis. The PRIT identified
25 issues to address, and where change or elimination of
a requirement is not possible, we are looking for creative
solutions that, at the very least, provide more information
and clarification. I was very pleased that when I was in
Tupelo, MS, a few weeks ago with Representative Wicker,
the incoming Chair of the AMA,
Dr. J. Edward Hill, who is from Tupelo, gave me unsolicited
congratulations for the fine job that Dr. Barbara Paul and
the PRIT are doing. So it is working a bit already!
Furthermore, we are participating in and co-sponsoring
"preceptorships" with local county medical societies, where
our policy staff can get out in the field and "shadow"
physicians, watching them provide care, listening to lectures,
and even observing operating room procedures. This is a
great way for us to observe first-hand their daily work
life and the challenges they face in providing care to our
These outreach efforts will allow us to hear from physicians
and all other Americans who deal with our programs. We are
going to listen and we are going to learn. But we also are
going to change. I am committed to making lots of common-sense
changes and ensuring that the regulations governing our
program not only make sense, but also are in plain and understandable
language. This will go a long way in alleviating physicians'
fears and reducing the amount of paperwork that, in the
past, has all too often been an unnecessary burden on physicians.
IMPROVING PHYSICIAN EDUCATION
As part of our efforts to reinvigorate the Agency and bring
a new sense of responsiveness to CMS, we are enhancing our
education activities and improving our contractors' communications
with physicians and providers. The Medicare program primarily
relies on private sector contractors, who process and pay
Medicare claims, to educate physicians and providers and
to communicate policy changes and other helpful information
to them. We have taken a number of steps to ensure the information
our contractors share with physicians and providers is consistent,
unambiguous, timely, and accurate.
We recognize that the decentralized nature of our educational
efforts has, in the past, led to inconsistency in the contractors'
communications with physicians and providers, and we have
recently taken a number of steps to improve the process.
We have centralized our educational efforts in our Division
of Provider Education and Training, the primary purpose
of which is to educate and train both the contractors and
the physician and provider community regarding Medicare
policies. We also are providing contractors with in-person
instruction and a standardized training manual for them
to use in educating physicians and other providers. These
programs help ensure consistency so that our contractors
speak with one voice on national issues. We are continuing
to refine our training on an on-going basis by monitoring
the training sessions
conducted by our contractors, and we will continue to work
collaboratively to find new ways of communicating with and
getting feedback from physicians and providers.
We also are working to improve the quality of our contractors'
customer service to physicians and providers. Last year,
our Medicare contractors answered 24 million telephone calls
from physicians and providers. We now have toll-free answer
centers at all Medicare contractors. To insure that contractors
provide correct and consistent answers, we have performance
standards, quality call-monitoring procedures, and contractor
guidelines in place to make our expectations clear and to
ensure that contractors are reaching our expectations.
Additionally, we want to know about the issues and misunderstandings
that most affect physician and provider satisfaction with
our call centers so that we can provide our customer service
representatives with the information and guidance to make
a difference. To improve our responsiveness to the millions
of phone calls our call centers handle each year, we are
collecting detailed information on call center operations,
including frequently asked physician questions, the call
centers' use of technology, and the centers' training needs.
We will analyze this information so we can make improvements
to the call centers and share best practices among all our
contractors. We also developed a new Customer Service Training
Plan to bring uniformity to contractor training and improve
the accuracy and consistency of the information that contractor
service representatives deliver over the phone. In addition,
we are holding regular meetings and monthly conference calls
with contractor call center managers to ensure Medicare's
customer service practices are uniform in their look, feel,
Just as we are working with our contractors to improve
their physician and provider education efforts, we also
are working directly with physicians and other health care
providers to improve our own communications and ensure that
we are responsive to their needs. We are providing free
information, educational courses, and other services through
a variety of advanced technologies. We are:
- Making our Agency website more useful to physicians
through a new website architecture tailored to be
intuitive for the physician user. We want the information
to be helpful to physicians and their office and billing
needs. Once this new website is successfully implemented,
we will move to organize similar web navigation tools
for other Medicare providers. Additionally, we have improved
our Frequently Asked Questions section, making it more
intuitive and easier to search.
- Expanding our Medicare provider education website,
cms.hhs.gov/medlearn. The Medicare Learning Network
homepage, MedLearn, provides timely, accurate, and relevant
information about Medicare coverage and payment policies,
and serves as an efficient, convenient physician education
tool. In recent months, the MedLearn website has averaged
over 250,000 hits per month, with the Reference Guides,
Frequently Asked Questions, and Computer-Based Training
pages having the greatest activity. I encourage you to
take a look at the website and share this resource with
your physician and provider constituents. We want to hear
feedback from you and from your constituents, especially
physicians, on its usefulness so we can enhance its value.
In fact, physicians and providers can email their feedback
directly to the MedLearn mailbox on the site.
- Providing free computer and web-based training
courses to physicians, providers, practice staff,
and others. Interested individuals can access a growing
number of web-based training courses designed to improve
their understanding of Medicare. Some courses focus on
important administrative and coding issues, such as how
to check-in new Medicare patients or correctly complete
Medicare claims forms, while others explain Medicare's
coverage for home health care, women's health services,
and other benefits.
- Installing a Satellite Learning Channel to
provide Medicare contractors with the latest information
on contemporary topics of interest. We recently completed
the installation of a network of satellite dishes at all
contractor call centers to improve our training efforts
with contractor customer service representatives.
These reforms are just examples of the work we are doing.
We also have a comparable number of efforts underway to
reach out to beneficiaries and to make Medicare a friendlier,
easier-to-use program for them. These changes have been
my top priority in my nine months at CMS, and I will continue
to pursue these types of improvements as long as I am Administrator.
I took this job because I know how important Medicare,
Medicaid, and SCHIP are to Americans, and because I want
to make a difference in improving our health care system.
I am just as frustrated as you and all of the physicians
that you hear from when it comes to how confusing and complex
these programs are, and I am working hard to improve them.
I also am working hard to monitor beneficiary access to
care, while ensuring that America's elderly and disabled
can receive the high quality care they need and deserve.
The Administration is willing to work with Congress to
smooth out the physician payment system, but I know that
it will not be easy. Any spending increases will have to
be offset by corresponding adjustments in other provider
payment systems so that it is budget neutral in both the
short- and long-term. Therefore, improvements in physician
payments, or any other Medicare payments, likely will lead
to declines in Medicare payments for some other group of
providers. There will be tough choices to make. The Administration
will be helpful to you as you consider them. Thank you for
the opportunity to discuss this important topic with you
today. I hope that I have helped to explain the issues,
and I look forward to answering your questions.