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Testimony on the Balanced Budget Act's Impact on Fee-for-Service Medicare by Robert A. Berenson M.D.
Director, Center for Health Plans & Providers
Health Care Financing Administration
U.S. Department of Health and Human Services

Before the Senate Finance Committee
June 10, 1999

Chairman Roth, Senator Moynihan, distinguished Committee members, thank you for inviting us to discuss the impact of the Balanced Budget Act on Medicare fee-for-service beneficiaries and providers. The BBA includes important new preventive benefits and payment system reforms that promote efficiency and prudent use of taxpayer dollars. These reforms are critical to strengthening and protecting Medicare for the future. The Medicare Trust Fund, which was projected to be insolvent by 1999 when President Clinton took office, is now projected to be solvent until 2015.

We have implemented more than half of the BBA's 335 provisions affecting our programs, including the new preventive benefits such as diabetes education, and a prospective payment system for skilled nursing facilities. In most cases, the statute prescribes in great detail the changes we are required to make. We are committed to affording providers maximum flexibility within our limited discretion as we implement the BBA.

Change of this magnitude always requires adjustment. It is not surprising that market corrections would result from such significant legislation. Our first and foremost concern has always been and will continue to be the effect of policy changes on beneficiaries' access to affordable, quality health care. We are proactively monitoring the impact of the BBA to ensure that beneficiary access to covered services is not compromised. Our regional offices are gathering extensive information from around the country to help us determine whether specific corrective actions may be necessary. We should be cautious about making changes to the BBA until we consider information and evidence of problems in beneficiary access to quality care.

It is clear that the BBA is succeeding in promoting efficiency and extending the life of the Medicare Trust Fund. However, the BBA is only one factor contributing to changes in Medicare spending. Our actuaries tell us that low inflation from a strong economy and aggressive efforts to pay correctly and fight fraud, waste, and abuse are also having an impact on total spending. We have significantly decreased the number of improper payments made by Medicare. And, for the first time ever, the hospital case mix index is down due to efforts to stop "upcoding,"the practice of billing for more serious diagnoses than patients actually have in order to obtain higher reimbursement. It is also important to note that some of the slowdown in spending growth results from slower claims processing and payment during the transition to new payment systems.

The BBA also is only one factor contributing to provider challenges in the rapidly evolving health care market place. Efforts to pay right and promote efficiency may mean that Medicare no longer makes up for losses or inefficiencies elsewhere. We are concerned about reports about the financial conditions of some providers. However, it is essential that we delineate the BBA's impact from the effects of excess capacity, discounted rates to other payers, aggressive competition, and other market factors not caused by the BBA.

New Preventive Benefits

One set of significant changes brought about by the BBA is coverage of key preventive health 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.

Payment Reforms

The BBA made substantial changes to the way we reimburse providers in the fee-for-service program. We have made solid progress in implementing these 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.

Monitoring Access

The payment reforms have created change for many of our providers, even though the percentage of providers who signed Medicare participation agreements increased by more than 6 percent to a record 85 percent for 1999. As mentioned above, our first and foremost concern continues to be the effect of policy changes on beneficiaries' access to affordable, quality health care. We are proactively monitoring the impact of the BBA to ensure that beneficiary access to covered services is not compromised. In addition to these efforts, we are systematically gathering data from media reports, beneficiary advocacy groups, providers, Area Agencies on Aging, State Health Insurance Assistance Programs, claims processing contractors, State health officials, and other sources to look for objective information and evidence of the impact of BBA changes on access to quality care.

We are examining information available from the Securities and Exchange Commission and Wall Street analysts on leading publicly traded health care corporations. This can help us understand trends and Medicare's role in net income, revenues and expenses, as well as provide indicators of liquidity and leverage, occupancy rates, states-of-operation, lines of business exited or sold by the company, and other costs which may be related to discontinued operations.

We are monitoring Census Bureau data, which allow us to gauge the importance of Medicare in each health service industry, looking at financial trends in revenue sources by major service sectors, and tracking profit margin trends for tax-exempt providers.

We are monitoring the Bureau of Labor Statistics monthly employment statistics for employment trends in different parts of the health care industry. Such data show, for example, that the total number of hours worked by employees of independent home health agencies is at about the same level as in 1996. That provides a more useful indicator of actual home health care usage after the BBA than statistics on the number of agency closures and mergers.

We are being assisted by our colleagues at the HHS Inspector General's office. They have agreed to study the impact of the BBA's $1500 limits on outpatient rehabilitation therapy. They have also agreed to interview hospital discharge planners as to whether they are having difficulty placing beneficiaries in home health care or skilled nursing facilities. Results of that study should help provide information in addition to surveys done for the General Accounting Office and the Medicare Payment Advisory Commission of home health agencies. And, because home health beneficiaries are among the most vulnerable, we have established a workgroup to develop an ongoing strategy for monitoring beneficiary access and agency closures.

Specific BBA Provisions

Home Health: The BBA closed loopholes that had invited fraud, waste and abuse. For example, it stopped the practice of billing for care delivered in low cost, rural areas for care from urban offices at high urban-area rates. It tightened eligibility rules so patients who only need blood drawn no longer qualify for the entire range of home health services. And it created an interim payment system to be used while we develop a prospective payment system. We expect to have the prospective payment system in place by the October 1, 2000 statutory deadline. We expect to publish a proposed regulation this October so we can begin receiving and evaluating public comments, and a final rule in July 2000.

The interim payment system is a first step toward giving home health agencies incentives to provide care efficiently. Before the BBA, reimbursement was based on the costs they incurred in providing care, subject to a per visit limit, and this encouraged agencies to provide more visits and to increase costs up to their limit. The interim system includes a new, aggregate per beneficiary limit designed to provide incentives for efficiency until the prospective payment system can be implemented.

Last year Congress raised the limits on costs somewhat in an effort to help agencies under the interim system. We are also taking steps to help agencies adjust to these changes, and in March we held a town hall meeting to hear directly from home health providers about their concerns. We are giving agencies up to a year to repay overpayments resulting from the interim payment system. And, effective July 1, we are ending the sequential billing policy that had raised cash flow concerns for some agencies. This rule was designed to help facilitate the transfer of payment for care not related to inpatient hospital care from Part A to Part B, but we have determined we can accomplish the transfer through other means. At the same time, we are implementing the Outcome and Assessment Information Set (OASIS). OASIS fulfills a statutory mandate for a "standardized, reproducible"home care assessment instrument. It will help home health agencies determine what patients need. It will help improve the quality of care. And it is essential for accurate payment under prospective payment.

To date, evaluations by us and the GAO have not found that reduced home health spending is causing quality or access problems. However, as mentioned above, because home health beneficiaries are among the most vulnerable, we are planning for ongoing detailed monitoring of beneficiary access and agency closures.

Skilled Nursing Facilities: We implemented the new skilled nursing facility prospective payment system called for in the BBA on July 1, 1998. The old payment system was based on actual costs and included no incentives to provide care efficiently. 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 a per diem prospective payment system covering all routine, ancillary, and capital costs related to covered services provided to beneficiaries under Medicare Part A. The law requires use of 1995 as a base year, and implementation by July 1, 1998 with a three year transition. It did not allow for exceptions to the transition, carving out of any service, or creation of an outlier policy. We are carefully reviewing the possibility of making administrative changes to the PPS, but we believe we have little discretion.

We held a town hall meeting earlier this year to hear a broad range of provider concerns. There were concerns that the prospective payment system does not fully reflect the costs of non-therapy ancillaries such as drugs for high acuity patients. We share these concerns and are conducting research that will serve as the basis for refinements to the resource utilization groups that we expect to implement next year. And we fully expect that we will need to periodically evaluate the system to ensure that it appropriately reflects changes in care practice and the Medicare population. We are concerned about anecdotal reports of problems resulting from the prospective payment system. As stated earlier, we have asked the HHS Inspector General to evaluate the situation.

Outpatient Rehabilitation Therapy: The BBA imposed $1500 caps on the amount of outpatient rehabilitation therapy services that can be reimbursed. We continue to be concerned about these limits and are troubled by anecdotal reports about the adverse impact of these limits. Limits on these services of $1500 may not be sufficient to cover necessary care for all beneficiaries. Because of our concern, our HHS Inspector General colleagues have agreed to study the impact of the BBA's $1500 limit on outpatient rehabilitation therapy to help us judge whether and how any adjustments to the cap should be made.

Hospitals: We have implemented the bulk of the inpatient hospital-related changes included in the BBA in updated regulations. We have implemented 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 have implemented provisions designed to strengthen rural health care systems. And we froze inpatient hospital payments in fiscal year 1998, as required under the BBA, resulting in substantial savings to taxpayers and the Medicare Trust Fund.

The BBA also called for a prospective payment system for outpatient care, which we expect to implement next year. The outpatient prospective payment system will include a gradual correction to the old payment system in which beneficiaries were paying their 20 percent copayment based on hospital charges, rather than on Medicare payment rates. 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. We are working to implement this system as quickly as the Year 2000 challenge allows. 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 do have greater concern for rural, inner city, cancer, and teaching hospitals because our analysis suggests that the outpatient prospective payment system will have a disproportionate impact on these facilities. We are reviewing the many comments we have received on the proposed regulation and we are continuing to develop possible modifications to the system for inclusion in the final rule.

Physicians: As directed by the BBA, we have begun implementing the resource-based system for practice expenses under the physician fee schedule, with a transition to full implementation by 2002 in a budget-neutral fashion that will raise payment for some physicians and lower it for others. The methodology we used addresses many concerns raised by physicians and meets the BBA requirements. We fully expect to update and refine the practice expense relative value units in our annual regulations revising the Medicare fee schedule. We plan to include the BBA-mandated resource-based system for malpractice relative value units in this year's proposed rule. 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.

We also are seeking legislation to refine the BBA's Sustainable Growth Rate for physician payment. Medicare payments for physician services are annually updated for inflation and adjusted by comparing actual physician spending to a national target for physician spending. The BBA replaced the former physician spending target rate of growth, the Medicare Volume Performance Standard, with the Sustainable Growth Rate (SGR). The SGR takes into account price changes, fee-for-service enrollment changes, real gross domestic product per capita, and changes in law or regulation affecting the baseline.

After BBA was enacted, HCFA actuaries discovered that the SGR system is unstable, and would result in unreasonable fluctuations from year to year. Also, the SGR target cannot be revised to account for new data. The President's fiscal 2000 budget contains a legislative proposal to deal with these issues.


The BBA made important changes to the fee-for-service Medicare program to strengthen and protect it for the future. These changes, along with a strong economy and our increased efforts to combat fraud, waste, and abuse, have extended the life of the Trust Fund until 2015. Change of the magnitude encompassed in the BBA inevitably requires adjustment and fine tuning. It is not surprising that market corrections would result from such significant legislation.

As always, we remain concerned about the effect of policy changes on beneficiaries' access to affordable, quality health care. We are proactively monitoring the impact of the BBA to ensure that beneficiary access to covered services is not compromised. Our regional offices are gathering extensive information from around the country to help us determine whether specific corrective actions may be necessary. And we welcome the opportunity to look at any new information regarding beneficiary access to quality care. We are committed to looking at possible refinements to the BBA that are within our administrative authority. However, we should be cautious about making changes to the BBA until we consider information and evidence of problems in beneficiary access to quality care. We look forward to continuing to work with this Committee to identify issues of concern, and we will keep you up to date on the status our of implementation of the BBA. I thank you for holding this hearing, and I am happy to answer your questions.

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