Chairman Frist, Senator Brownback, distinguished Subcommittee members, thank you for
inviting us to discuss the importance of public financing to the public health
infrastructure. Programs administered through our agency -- Medicare, Medicaid, and the
State Children's Health Insurance Program -- all
play an integral role in supporting public health infrastructure.
The Balanced Budget Act of 1997 (BBA) created the Children's Health Insurance Program, which is providing a
landmark opportunity to improve children's
health and help working families who do not earn enough to afford coverage for their
children. I am happy to report that the CHIP program is strong and growing, with 52 plans
now approved that States and territories expect to cover up to 2.5 million children by
September 2000. We estimate that there are now more than one million children enrolled,
and coverage for these children also provides a new and important source of financial
support for the public health care facilities where they are receiving care.
The BBA also enacted important new payment system reforms that promote efficiency and
prudent use of taxpayer dollars. These reforms are critical to strengthening and
protecting Medicare so that it can continue its role in supporting the public health
infrastructure in 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.
The BBA included several provisions to strengthen the rural health care infrastructure.
Medicare had already provided special payment support to more than half of all rural
hospitals. The BBA provides additional support for small "critical access"
and other rural hospitals. And it authorizes payment for "telemedicine"
to bring urban technology and expertise to rural providers and their patients by phone and
computer. As a result, average Medicare payment per rural patient is now rising.
In most cases, the BBA 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.
The President's Medicare reform plan does set
aside $7.5 billion for adjustments to BBA reforms that may be needed to protect
beneficiaries' access to high quality care. If
there is credible evidence that adjustments are necessary to protect access to care, there
will be reserves on hand to fund those adjustments. The President's plan also includes several initiatives specifically
targeted to help rural providers. It makes it easier for rural facilities to be
reclassified to obtain urban payment rates, gives rural facilities larger pay hikes from
2003 to 2009, and adjusts the BBA's new
outpatient prospective payment system to increase payments to low-volume rural hospitals
and other facilities that would otherwise be disproportionately affected by the new
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 to 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 distinguish 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.
The BBA made substantial changes to the way we reimburse providers in the traditional
fee-for-service Medicare 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.
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
Rural Initiatives: Many initiatives were included in the BBA to maintain the
health care infrastructure in small rural communities and preserve access to existing
primary care services. In addition, provisions were included to provide limited acute care
and emergency care services to rural Medicare beneficiaries. These include:
- allowing very small "critical access" rural hospitals, those with no more than 15
inpatient beds that offer 24 hour emergency care and are located more than a 35 mile drive
from the any other hospital, to be reimbursed based on what they spend for each patient,
rather than on the average expected cost for specific diagnoses that most hospitals are
- extending the "Medicare dependent hospital" designation, which was set to expire, providing
higher reimbursement for rural facilities with less than 100 beds serving large numbers of
- permanently grandfathering special "rural
referral center" status for any hospitals
designated as such in 1991, which provides higher reimbursement to facilities with 275 or
more beds serving large numbers of beneficiaries living more that 25 miles away from the
facility or referred from other hospitals
- allowing rural hospitals whose average cost per case is 75 percent greater than their
current Medicare per case payment to be eligible for special "disproportionate share" payments available to hospitals serving large
numbers of low income patients
- authorizing payment for telemedicine, in which medical consultations are conducted via
phones and computers, for beneficiaries residing in a rural areas that have a shortage of
health care professionals.
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
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 stopped 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.
We are also taking steps to help home health agencies adjust, including an increase in
time to repay overpayments, a delay in the requirement to obtain surety bonds, and
limiting the amount of surety bonds to $50,000 and not 15 percent of agency Medicare
revenues as was proposed earlier.
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
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.