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Testimony on Medicare Payment Reforms by Nancy-Ann DeParle
Administrator, Health Care Financing Administration
U.S. Department of Health and Human Services

Before the Senate Finance Committee
March 17, 1999

Chairman Roth, Senator Moynihan, distinguished Committee Members, thank you for inviting me to discuss the Health Care Financing Administration's (HCFA) progress in implementing Medicare payment reforms enacted under the Balanced Budget Act of 1997 (BBA). I would like to also thank the Medicare Payment Advisory Commission for its advice for ensuring that Medicare continues to make appropriate payments and protects beneficiary access to care.

Medicare is the nation's largest insurer, covering some 38 million of our nation's elderly and disabled. Medicare processes about 900 million fee-for-service claims each year, is the nation's largest purchaser of managed care, and accounts for 11 percent of the federal budget.

We have implemented more than half of the 335 BBA provisions affecting HCFA programs, and many more are partially implemented. In the past year, we published 92 regulations and Federal Register notices implementing important Congressional directives, beneficiary protections, the Medicare+Choice program, and savings in the BBA that are critical to extending the life of the Medicare Trust Fund. We have made major strides in fighting fraud, waste and abuse, and cut our payment error rate in half in just two years. We also have converted the vast majority of Medicare HMOs to the new Medicare+Choice program and implemented a carefully planned National Medicare Education Program to help beneficiaries make informed health care decisions.

At the same time, we are tackling one of the most difficult Year 2000 computer challenges in government. This must be our highest priority. Unfortunately, meeting the Year 2000 challenge has forced us to make difficult decisions involving some BBA provisions. The vast majority of BBA provisions do not have to be delayed. However, on the advice of independent computer experts, we made the difficult decision last year to delay projects that could interfere with Year 2000 work. This included BBA provisions such as the hospital outpatient prospective payment system that we very much want to implement. We will make every effort to implement these provisions as quickly as our Year 2000 obligation allows.

I have brought a new team of leaders to HCFA to help us meet our BBA and Year 2000 challenges.

  • Gary Christoph, Ph.D., a computer scientist and security expert from the Los Alamos National Laboratory, serves as our first-ever Chief Information Officer and heads our information technology team and Year 2000 efforts.
  • Robert Berenson, MD, an internist who helped establish a private sector preferred provider organization Health plan, now leads our Center for Health Plans and Providers.
  • Jeffrey Kang, MD, a geriatrician who was a private sector managed care plan medical Director, is our Chief Clinical Officer and heads our Office of Clinical Standards and Quality.
  • Carol Cronin, Ph.D., a gerontologist who ran a private sector firm devoted to helping corporations educate their workers on Health care, is leading our Medicare beneficiary education program.
  • Marjorie Kanof, MD, a physician who has worked as a Medicare contractor medical Director, is in charge of implementing much stronger oversight of Medicare claims processing contractors.


The BBA includes important new Medicare fee-for-service preventive benefits, as well as payment system reforms that are critical to extending the solvency of the Medicare Trust Fund. We are making good progress in implementing these changes.

For the new preventive benefits, we have:

  • expanded coverage for test strips and education programs to help diabetics control their disease;
  • begun covering bone density measurement for beneficiaries at risk of osteoporosis;
  • begun covering several colorectal cancer screening tests;
  • expanded preventive benefits for women so Medicare now covers a screening pap smear, pelvic exam and clinical breast exam every three years for most women, and every year for women at high risk for cervical or vaginal cancer; and,
  • begun covering annual screening mammograms for all women age 40 and over, and a one-time initial, or baseline, mammogram for women ages 35-39, paying for these tests whether or not beneficiaries have met their annual deductibles.

We have made solid progress in implementing fee-for-service payment reforms. For example, we have:

  • modified inpatient hospital payment rules;
  • established a prospective payment system for skilled nursing facilities to encourage facilities to provide care that is both efficient and appropriate;
  • refined the physician payment system, as called for in the BBA, to more accurately reflect practice expenses for primary and specialty care physicians; and
  • initiated the development of prospective payment systems for home health agencies, outpatient hospital care, and rehabilitation hospitals that will be implemented once the Year 2000 computer challenge has been addressed; and,
  • begun implementing an important test of whether market forces can help Medicare and its beneficiaries save money on durable medical equipment. We are prepared to begin a test in Polk County, Florida of competitive bidding as a way to get the best quality and price for durable medical equipment and supplies. A toll-free hotline (888-289-0710) is available to answer beneficiary and provider questions about the project.

Inpatient Hospital Payment

We have implemented 74 percent of the inpatient hospital-related changes included in the BBA in updated regulations. These include substantial refinements to hospital Graduate Medical Education payments and policy to encourage training of primary care physicians, promote training in ambulatory and managed care where beneficiaries are receiving more and more services, curtail increases in the number of residents, and slow the rate of increase in spending.

We also froze inpatient hospital payments in fiscal year 1998, as required under the BBA, resulting in substantial savings to taxpayers and the Medicare Trust Fund. We notified Congress last year that we may need to postpone the payment update scheduled for October 1999 because of the Year 2000 challenge. However, if we sustain our current rate of progress in meeting that challenge, we may be able to implement the October 1999 update on schedule.


As directed by the BBA, we have taken concrete action to refine and implement the resource-based system for practice expenses under the physician fee schedule. We published the final regulation in November 1998, and began implementing the new system in January 1999, with a transition to full implementation by 2002. We were required by the BBA to implement the new system in a budget-neutral fashion. This will inevitably cause some physicians to see payment increases while others see decreases.

The methodology we used addresses many of the concerns raised by physicians and meets the BBA requirements. We used the American Medical Association's actual cost data to reflect all of a specialty's practice expenses, not just those linked with specific procedures. Our expert accounting contractor, KPMG Peat Marwick, attests that our methodology followed reasonable cost accounting principles. The General Accounting Office also is largely supportive of our methodology. We fully expect to update and refine the practice expense relative value units in our annual regulations revising the Medicare fee schedule. We welcome and encourage the ongoing contributions of the medical community to this process, and we will continue to monitor beneficiary access to care and utilization of services as the new system is fully implemented.

The Balanced Budget Act also requires that we implement a resource-based system for malpractice relative value units. We currently are in the process of developing the system and plan to include it in this year's proposed rule.

We notified Congress last year that, in order to ensure that all Year 2000 work is done correctly we may need to freeze our computer systems during a critical period of Y2K work, and would therefore have to delay the January 1, 2000, physician updates. We will know more about whether we may be able to do these updates on schedule after we have reached the government's March 31, 1999, Year 2000 compliance deadline. We share physicians' concern about these possible delays, and we want to work with physicians and Congress to evaluate our options and ensure that any necessary delays do not create a hardship and that any interim measures fairly reimburse physicians.

Skilled Nursing Facilities

We have made substantial progress in implementing the new skilled nursing facility prospective payment system. The old payment system was based on actual costs. The new system uses mean-based prices adjusted for each patient's clinical condition and care needs, as well as geographic variation in wages. It creates incentives to provide care more efficiently by relating payments to patient need, and enables Medicare to be a more prudent purchaser of these services. The BBA mandated the implementation of a per diem prospective payment system for skilled nursing facilities covering all routine, ancillary, and capital costs related to covered services provided to beneficiaries under Medicare Part A. In accordance with the BBA, we implemented the new payment system July 1, 1998.

We fully understand the concerns raised by providers about this new system, particularly those related to outlier and non-therapy ancillary services. The new payment system is complex, and we are working with providers to address these concerns. We know that this is not a static system and that it will require ongoing refinements.

We strongly believe the Resource Utilization Groups (RUGs), which are a key component of the system, must be periodically evaluated to ensure they appropriately reflect changes in care practice and the Medicare population. We are working closely with an expert research contractor to examine potential refinements to the RUGs model, particularly those associated with medically complex patients and non-therapy ancillary services, such as medications. We expect to have the results of this research by January 1, 2000, and to be able to make refinements shortly thereafter.

In addition to this research effort, we plan to host a Town Hall meeting next month with interested industry and consumer stakeholders to seek their first-hand advice on refining the current RUGs model. We will take the suggestions of the industry and the results of our contractor's research into consideration as we make necessary refinements. I want to assure beneficiaries, providers, and Congress that we appreciate the importance of this task and are committed to fairness and ensuring continued access to care.

Home Health

The BBA mandated a number of changes in the way Medicare pays for home health services to curtail unsustainable spending growth and fight what was widespread fraud, waste, and abuse. These changes are vitally important and have been a long-standing priority for HCFA and this Administration. Medicare spending on home health more than tripled in the 1990s, while the number of beneficiaries receiving home health services doubled. The new payment systems create incentives to provide home health care efficiently as well as control spending growth.

Congress wisely postponed the final implementation date for the home health prospective payment system because of our need to address the Year 2000 computer problem. We are working hard to develop the prospective payment system and believe that we are on track to meet the October 1, 2000 implementation deadline. This October, we expect to publish a proposed regulation for the prospective payment system so we can begin receiving and evaluating public comments. We anticipate that the final rule will be issued in July 2000.

We know some providers continue to have concerns about the home health interim payment system. Last year, Congress made important changes to the interim system to address some of these concerns. However, given the magnitude of the changes in home health payment, it is understandable that other concerns remain. We are committed to working with providers and Congress to ensure fairness and protect access to appropriate home care services covered by Medicare as we proceed toward prospective payment. We are monitoring the impact of these changes on beneficiary access to care and, thus far, do not have evidence on whether access to care has been compromised.

Hospital Outpatient Departments

The Balanced Budget Act empowers us to move away from charge-based hospital outpatient coinsurance, which has long been a priority for the Clinton Administration. The increased costs the current system imposes on beneficiaries are unfair. Regrettably, implementation of the prospective payment system as originally scheduled would have required numerous complex systems changes that could substantially jeopardize our Year 2000 efforts. Therefore, we have postponed implementation and are working to implement this system as quickly as the Year 2000 challenge allows. In the meantime, we are willing to work with the Congress to see if an alternative solution can be developed that might more quickly move us toward our shared goal of reducing beneficiaries' out-of-pocket costs for these services.

We issued a Notice of Proposed Rule Making in September 1998 outlining plans for the new system so that hospitals and others can begin providing comments and suggestions. We are making data files available to the industry, and we have extended the comment period until June 30, 1999 so the industry and other interested parties will have sufficient time and information to comment.

We have also implemented a BBA provision that eliminates an anomaly in the law, known as the formula-driven overpayment, which caused taxpayers to pay too much for certain surgical, radiological, and other hospital outpatient services. We implemented this change just two months after the BBA was enacted.

Rehabilitation Hospitals

We are in the process of developing a prospective payment system for rehabilitation hospitals as required under the BBA. We have contracted with Muse and Associates, Dr. Brant Fries at the University of Michigan, and Dr. John Morris at Hebrew University to conduct research and aid in development of a case mix classification system for rehabilitation hospitals. This new system is scheduled for implementation over a two year period beginning October 1, 2000. We are currently analyzing the positive and negative aspects of both a per-episode and a per-diem payment system based on a comprehensive assessment of each patient's condition and resource requirements. We have not ruled out either approach at this time. Our primary concern is to ensure that the system we adopt allows our beneficiaries to get the care they need and treats providers fairly. We appreciate the technical suggestions we have received from the industry in this regard, as well as the evaluation and advice provided by the Medicare Payment Advisory Commission and the General Accounting Office, and we will continue to work closely with them and Congress as this system is developed and implemented.


Medicare+Choice allows private plans to offer beneficiaries a wide range of options, similar to those available in the private sector. Medicare+Choice and other changes enacted in the BBA require a massive and important new beneficiary education campaign. Medicare+Choice includes important new protections for patients and providers, as well as quality assessment and improvement requirements. And it initiates a fairer and more accurate payment system.

We are very committed to successful implementation of Medicare+Choice. We believe that managed care and other private plans are important voluntary options next to original Medicare. Medicare managed care enrollment has nearly tripled under the Clinton Administration, from 2.3 million when the President took office to 6.8 million now. We now meet regularly with beneficiary and industry representatives to discuss ways to improve Medicare+Choice, and have begun making refinements based on these comments and discussions.

We have converted the vast majority of former Medicare HMOs to the Medicare+Choice program and published all BBA-mandated Medicare+Choice regulations. Last month we published initial refinements to these regulations which improve beneficiary protections and access to information while reducing plans' administrative workload.

We launched a national education campaign and participated in more than 1,000 events around the country to help beneficiaries understand Medicare+Choice and other important changes to Medicare. And we are establishing a federal advisory Committee to help us better inform beneficiaries.

Beneficiary Education

As mentioned above, we have launched the National Medicare Education Program to make sure beneficiaries receive accurate and unbiased information about benefits, rights, and options. The campaign includes:

  • mailing a Medicare and You handbook to explain new benefits and health plan options;
  • a toll-free "1-800-Medicare" call center with live operators to answer questions and provide additional print information on request;
  • a consumer-friendly Internet site, www.Medicare.gov, which includes comparisons of benefits, costs, quality, and satisfaction ratings for plans available in each zip code;
  • an alliance with more than 100 national aging, consumer, provider, employer, union, and other organizations who help disseminate Medicare+Choice information to their constituencies;
  • enhanced beneficiary counseling from State Health Insurance Assistance Programs;
  • a national media publicity campaign;
  • more than a thousand individual state and local outreach events around the country in senior centers and town halls, on radio call-in shows and other venues, and in languages ranging from Vietnamese to Creole; and,
  • a comprehensive assessment of these efforts.

In 1998, we tested the whole system in five states -- Arizona, Florida, Ohio, Oregon and Washington. Unfortunately, the decisions by some plans to withdraw from the program or reduce their service area significantly complicated our task. We learned a great deal in this "dry run," and focus groups indicated that a majority of beneficiaries found the information in the Medicare & You handbook to be informative and useful. We are also conducting cases studies to evaluate the education campaign in five communities in the five pilot States and one community outside the pilot States. Preliminary results from our assessment efforts are already suggesting ways to make Medicare & You easier to use, and links we can add to help users find key information faster on our website. These and other findings will help us to refine efforts for a full-scale, national campaign before the November 1999 open enrollment period.

As mentioned above, we are establishing the Citizens Advisory Panel on Medicare Education, in accordance with the Federal Advisory Committee Act, as a formal mechanism to obtain public input for improving our education efforts. The Panel will meet quarterly to help:

  • enhance our effectiveness in informing beneficiaries;
  • expand outreach to vulnerable and underserved communities; and
  • assemble an information base of "best practices" for helping beneficiaries evaluate plan options and strengthening a community infrastructure for information and counseling.

Panel members will include representatives from the general public, older Americans, specific diseases and disabilities, minority communities, plans and insurers, providers, and other groups.

We are also working to standardize plan marketing materials that summarize benefits so beneficiaries can make apples-to-apples comparisons. Our goal is to complete this work before the first annual coordinated open enrollment period in November 1999.

Reaching Out to Plans

We have taken several steps to encourage health plan participation in Medicare+Choice.

In addition to converting the vast majority of Medicare HMOs to the new program, we have added 12 new plans and expanded service areas for another 11 plans since last November, including the first provider sponsored organization with a Federal waiver from State licensure requirements. We are reviewing 24 new plan applications and 18 service area expansion applications.

Last summer we held outreach sessions attended by more than 1,500 plan representatives, and we continue to strengthen lines of communication with plans. We have named a senior official within HCFA, Tom Gustafson, whom plans can call directly if they have trouble resolving issues through normal HCFA channels.

As mentioned above, last month we published initial refinements to the Medicare+Choice regulation. The new rule:

  • clarifies that beneficiaries enrolled in an M+C plan that withdraws or is terminated from Medicare are entitled to enroll in other remaining locally available M+C plans;
  • specifies that changes in plan rules must be made by October 15 to ensure beneficiaries can make informed choices during the November annual open enrollment period;
  • waives the requirement for an initial health assessment within 90 days of enrollment for enrollees who stay in the same plan when they age into Medicare and for enrollees who switch plans but remain under the care of the same primary care provider;
  • allows plans to choose the form of the initial health assessment;
  • allows coordination of care to be performed by a range of qualified professionals;
  • limits the applicability of provider participation requirements to physicians; and
  • aligns requirements for terminating specialists with the process for other providers.

We intend to publish a comprehensive final rule with further refinements this fall.

To further facilitate plans participation, the President's budget includes a proposal to give plans two additional months to file the information used to approve benefit and premium structures. This "Adjusted Community Rate"data would not be due until July 1, rather than may 1. July 1 is the latest we can accept, process, and approve premium and benefit package data, have the data validated, and still mail beneficiaries plan information in time for the November open enrollment period. Given legislative schedules and the need to act immediately, we informed plans that the required filing date this year will be July 1. We look forward to working with you to enact legislation necessary to support this change that is so important to Medicare+Choice success.

Payment Reform

The BBA requires Medicare to "risk adjust"Medicare+Choice payments starting January 1, 2000. That means we must base payment to plans on the health status of individual plan enrollees. Data on individual beneficiary use of health care services in a given year will be used to adjust payment for each beneficiary in a Medicare+Choice plan the following year. Risk adjustment represents a vast improvement over current payment methodology. It helps assure more appropriate payments and curtails the disincentive in the current payment system for plans to enroll sicker beneficiaries.

Risk adjustment will help beneficiaries feel more confident in their Medicare+Choice options. It assures beneficiaries that Medicare pays plans the right amount to provide all necessary care because payments take each enrollee's health status into account. That will help people with serious illnesses, such as cancer or cardiovascular disease, who can benefit most from the coordination of care health plans can provide.

Risk adjustment will help taxpayers by addressing the main reason Medicare has lost rather than saved money on managed care. Many studies show that health plans enroll beneficiaries who, on average, are much healthier and less costly than those who remain in traditional Medicare.

Risk adjustment will also help level the playing field among Medicare+Choice plans. It tempers the risk of significant financial loss when plans enroll beneficiaries who have expensive care needs. And it focuses competition more on managing care than on avoiding risk. It also will help plans by alleviating concerns among beneficiaries that plans have financial incentives to deny care.

The law requires us to proceed with risk adjustment starting January 1, 2000, and does not specifically call for a transition. However, we believe we must implement these changes in an incremental and prudent fashion, and are, therefore phasing in risk adjustment over five years to prevent disruptions to beneficiaries or the Medicare+Choice program.

It is essential to stress that risk adjustment will not and cannot be budget neutral. Risk adjustment was required in the BBA because of substantial evidence that Medicare has historically overpaid plans because managed care enrollees tend to be healthier than beneficiaries who remain in fee-for-service Medicare.

If risk adjustment were budget neutral, Medicare and the taxpayers who fund it would continue to lose billions of dollars each year on Medicare+Choice. Budget neutral risk adjustment would cost taxpayers an estimated $200 million in the first year of the phase-in, and $11.2 billion over five years if health plans maintained their current, more healthy mix of beneficiaries. Actual savings to taxpayers will depend on the extent to which less healthy beneficiaries enroll in plans. Total payment may be higher for some plans than it would be under the current system if their enrollment becomes more representative of the entire Medicare population. Overall, we project plan payment to change on average by less than 1 percent the first year. The phase-in substantially buffers the impact. The federal government is forgoing an estimated $1.4 billion in savings in the first year and as much as $4.5 billion over the full five years because of the phase in. Impact on plans will be further buffered by an annual payment update for 2000 of 5 percent, and by blended payment rates that we estimate will be paid to 63 percent of counties in 2000 and in many cases will be greater than 5 percent.

Competitive Pricing Demonstration

We will soon begin a test of competitive pricing for managed care, as called for in the BBA. This test will provide objective data and actual experience that is needed to evaluate Medicare reform proposals that assume savings from competition among plans. Managed care plans will compete to offer benefits at the most reasonable cost. A bidding process, similar to what most employers and unions use to decide how much to pay plans, will be used to set Medicare+Choice rates.

To ensure broad community involvement, a Medicare Competitive Pricing Advisory Committee, chaired by General Motors Health Care Initiative Executive Director James Cubbin, has made recommendations regarding key design features. It also has selected the markets of Phoenix, Arizona and Kansas City, Kansas and Missouri, as initial demonstration sites. We are establishing local advisory Committees in these communities, and they will hold public meetings to ensure that local beneficiaries have a voice in how the test program will operate.

Ensuring Quality

The BBA raises the quality bar by requiring most plans to monitor and improve quality so beneficiaries can compare plans based on quality and we can use Medicare's substantial market leverage to be a prudent purchaser. We are working to incorporate quality assessment and improvement into original fee-for-service Medicare, as well. And we are committed to making measurable quality improvements throughout the Medicare program as part of our Government Performance and Review Act objectives for fiscal 2000.

All Medicare+Choice plans must report objective, standardized measurements of how well they provide care and services. They have been using HEDIS, the Health Plan Employer Data and Information Set, for reporting purposes since 1997. We also are using CAHPS, the Consumer Assessment of Health Plans Study, to objectively measure beneficiary satisfaction. We began requiring Medicare HMOs to conduct CAHPS surveys last year. This fall, we will conduct a CAHPS survey of beneficiaries who disenroll from plans, asking about the beneficiary's experience and why they left their plan, to give beneficiaries the perspectives of both those who left and those who stayed. And next year we will conduct a fee-for-service survey to provide beneficiaries with data on all options.

HEDIS and CAHPS results are being formatted so beneficiaries can make direct, apples-to-apples comparisons among their plan options, and are posted on our Website at www.Medicare.gov. Beneficiaries may also request HEDIS and CAHPS information through our 1-800-Medicare call center, and we will include this information in the 2000 edition of Medicare & You.

We recognize that it takes time for plans to adapt to the quality improvement requirements, and that a learning curve is involved. Therefore, we made several changes from our draft proposal to help plans comply. For example, we are:

  • requiring plans to conduct two performance improvement projects per year, which is comparable to standards of private sector accrediting organizations;
  • giving plans three years to achieve demonstrable quality improvements; and,
  • giving plans discretion as to where they conduct site visits for provider credentialing.

Appropriate flexibility will be provided so plans with networks that are less structured than traditional HMOs, such as PPOs, can meet these requirements. Our quality improvement systems will be sensitive to different plan structures and their different abilities to affect provider behavior.

We are extremely impressed with the quality improvement project outlines submitted by plans. Most are very thorough and thoughtful. Many include detailed benchmarks and timetables. They make clear that plans are very capable of achieving what Congress envisioned in the BBA.

Market Volatility

As you know, some Medicare HMOs did not convert to the Medicare+Choice program, and others reduced their service areas last year. While we are concerned about the impact on beneficiaries who were left with no other managed care options, it is important to put those business decisions in context. Some of the plans that withdrew had market positions or internal management issues that made it hard for them to compete. And they faced rising prescription drug prices and other commercial pressures. Many of the disrupted beneficiaries had several other plans to choose from, and all but 50,000 had at least one other plan option.

It is our understanding that the Federal Employees Health Benefits Program experienced a similar rate of plan pullouts, often affecting the very same counties. The vast majority of Medicare HMOs converted to Medicare+Choice, and we have approved several new plan and service area expansions. This suggests that plan withdrawal decisions have more to do with internal plan and larger marketplace issues than with Medicare rates or regulations. In fact, a certain amount of market volatility must be expected when relying on the private sector.

To buffer against such market volatility, the President's budget includes proposals to protect beneficiaries from such disruption by broadening access to supplemental Medigap polices if beneficiaries lose their plan option and allowing enrollees with end stage renal disease to move to another plan. We also provided for earlier notification of plan withdrawals in our recent refinement to Medicare+Choice regulations.


We are making substantial progress in implementing the many Medicare changes in the BBA. They expand options and improve services to our beneficiaries, create better payment systems, and extend the life of the Medicare Trust Fund. Clearly, more work remains. We are committed to continuing to work to ensure that we are fair and prudent as we implement payment systems, and above all do not compromise beneficiary access to care. I am grateful for the advice and assistance this Committee and the Medicare Payment Advisory Commission have provided. I thank you again for holding this hearing, and I am happy to answer your questions.

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