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Testimony on the Balanced Budget Act and Rural Hospitals by Robert A. Berenson, M.D.
Director, Center for Health Plans and Providers
Health Care Financing Administration
U.S. Department of Health and Human Services

Before the Senate Appropriations Subcommittee on Agriculture, Rural Development, and Related Agencies
July 14, 1999

Chairman Cochran, Senator Kohl, distinguished Subcommittee members, thank you for inviting us to testify about our efforts to support America's rural health care providers.

This hearing provides a timely focus, as our monitoring and analyses suggest that some Balanced Budget Act (BBA) payment reforms may be having a disproportionate affect on rural Medicare beneficiaries' access to care. The President's Medicare reform plan includes several provisions to help ensure that rural Medicare beneficiaries continue to have access to the quality care they need, and we look forward to working with you to enact these essential reforms.

About one in four Medicare beneficiaries live in rural America, and rural hospitals serve a critical role in areas where the next nearest hospital may be hours away. Yet rural hospitals face special challenges. They have higher per unit costs, difficulty maintaining enough patients to break even, and difficulty recruiting physicians. Medicare has made exceptions and special arrangements to address the unique needs of rural areas and strengthen these vital facilities. Even before the BBA, Medicare provided special payment support to more than half of all rural hospitals.

The BBA includes several new provisions to strengthen the rural health care infrastructure. It provides extra support for small critical access and other rural hospitals, and it authorizes payment for telemedicine to bring urban expertise to rural providers and their patients. As a result, average Medicare payment per rural patient is rising.

However, because other BBA payment reforms may have a disproportionate impact on rural hospitals, and thus on beneficiary access to care, the President's Medicare reform plan includes provisions to:

  • make it easier for rural hospitals to qualify for higher urban payment rates;
  • help rural hospitals adjust to the new outpatient prospective payment system;
  • make additional administrative adjustments that will increase funding for rural hospitals;
  • give rural hospitals larger rate increases than they would receive under a straight extension of the BBA from 2003 to 2009; and
  • maintain the improvements in managed care payments built into the BBA, which have an indirect effect on hospitals.

The President's Medicare reform plan also sets aside $7.5 billion over 10 years to fund appropriate and justified modifications that may be necessary to smooth the transition to BBA reforms where beneficiary access to care is being compromised. That money could well be used to address specific concerns raised at this hearing. However, the BBA reforms are critical to strengthening and protecting Medicare. We are proactively monitoring the BBA's impact on beneficiary access to care. And we want to work with Congress, providers and beneficiary groups to determine how to address documented problems in the most carefully targeted and fiscally responsible way.

Most importantly, for rural (and other) health care providers, the President's plan dedicates a portion of the surplus to strengthen Medicare. Combined with reforms, this surplus dedication secures the life of the Medicare Trust Fund for over the next quarter of a century. This averts the need for excessive provider payment reductions that would be inevitable without new financing as the baby Boom generation begins to retire.

The President's plan also helps nearly half of rural Medicare beneficiaries who today do not have any coverage for prescription drugs. Rural beneficiaries have less access to employer-based retiree health insurance because of the job structure in rural areas. Also, three-quarters of rural beneficiaries do not have access to Medicare managed care, which typically offers free drug coverage to beneficiaries living in high-cost areas like Los Angeles or southern Florida -- despite the fact that all beneficiaries pay the same premium. This leaves rural beneficiaries at greater risk of not being able to afford medications that are central to their health. The President's plan gives all beneficiaries the option to pay a modest premium for a prescription drug benefit. This benefit will cover half of all prescription drug costs up to $5,000 when fully phased in, with no deductible -- all for a modest premium that will be less than half the price of the average private Medigap policy. As such, it provides an affordable choice for rural beneficiaries with unstable or expensive coverage, and a lifeline for those beneficiaries who simply have no options today.

Even as this plan is being debated, we are redoubling our efforts to actively address the special circumstances of rural beneficiaries. We are meeting with rural providers, visiting rural facilities, reviewing regulations' impact on rural health care, and conducting more research on rural health care issues. And we are participating in a workgroup with the Health Resources and Services Administration's Office of Rural Health Policy to make sure that we stay abreast of rural issues.


The BBA includes many provisions to aid rural hospitals and reform Medicare payment systems to promote efficiency and quality. We have implemented all of the provisions that provide assistance to rural facilities. 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 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 paid;
  • reinstating the "Medicare dependent hospital@ designation, which provides higher reimbursement for rural facilities with less than 100 beds serving large numbers of Medicare beneficiaries;
  • 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 that serve large numbers of beneficiaries living more that 25 miles away from the facility or referred from other hospitals;
  • allowing more rural hospitals to obtain special "disproportionate share@ payments available to hospitals serving large numbers of low income patients; and
  • authorizing payment for telemedicine, in which medical consultations are conducted via phones and computers, for beneficiaries residing in rural areas that have a shortage of health care professionals.

We also have implemented several BBA 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;
  • implemented the Medicare+Choice program which increases payment rates for rural health plans and allows beneficiaries to be offered options such as provider sponsored organizations and private fee-for-service plans;
  • established a National Medicare Competitive Pricing Advisory Commission to design and implement an essential demonstration project using competition to set rates for managed care plans;
  • begun implementing an important test of whether market forces can help Medicare and its beneficiaries save money on durable medical equipment; 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.

In most cases the BBA prescribes in great detail the changes we are required to make. However, we understand that rural providers may have more difficulty than others in adapting to some of these changes. We are committed to working with rural providers to help them adjust, and to affording maximum flexibility within our limited discretion as we implement BBA reforms.


The President's Medicare reform plan also recognizes rural beneficiaries' and providers= special circumstances and the disproportionate impact of BBA payment reforms on rural payments, and includes additional provisions targeted specifically to rural providers.

The President's plan will make it easier for rural hospitals to receive higher urban payment rates. Right now, rural facilities can obtain urban rates if the wages they pay their employees are at least 108 percent of average wages in their rural area, and at least 84 percent of average wages in a nearby urban area. The President's plan will adjust those wage thresholds so more rural hospitals can be paid the same as their urban neighbors.

The President's plan 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 system, which we expect to implement next year. An analysis included in our Notice of Proposed Rule Making shows that rural hospitals would be disproportionately affected by the new system.

We are therefore considering a budget-neutral three year transition to the new system that will limit the impact on rural hospitals. We are also delaying implementation of a volume control mechanism on the system that was called for in the BBA, which also will give hospitals extra time and money to adjust. And we may use the same wage index for calculating rates that is used to calculate inpatient prospective payment rates and take into account the effect of hospital rural/urban reclassifications and redesignations.

The President's plan includes other administrative actions that will help many rural hospitals. It will postpone extension of limits on payment when hospitals transfer patients with specific diagnoses to skilled nursing facility beds, home health agencies, or another hospital or hospital unit. And it will provide relief to home health agencies, including those affiliated with rural hospitals. It extends the time for agencies to repay overpayment without interest from one year to three years. It also postpones the requirement for agencies to obtain surety bonds until October 1, 2000, and limits the amount of bonds to $50,000 rather than 15 percent of annual Medicare revenues as was proposed earlier.

The President's plan further acknowledges the special circumstances many rural facilities face by giving rural hospitals larger rate increases than urban hospitals for inpatient care. Specifically, payment rate increases for inpatient rural hospitals would be larger than they would receive under a straight extension of the BBA from 2003 to 2009. The difference in rate increases between rural and urban facilities will decrease by 0.1 percent each year until the same update applies for rural and urban hospitals in 2009. Although this update is less than the full market basket, which would be the update under current law, it is higher than anytime during the BBA (1998 to 2002), and in fact, most years since the prospective payment system has been in operation.

And the President's plan includes $7.5 billion over 10 years to fund appropriate and justified modifications that may be necessary to smooth the transition to BBA reforms. That money could well be used to address specific access problems, such as those that may be developing in rural areas.

The President called on Congress to work with him to reach a bipartisan consensus on needed reforms this year. Any action we take to smooth the transition to BBA payment reforms must be fiscally prudent and carefully targeted to address areas where there is clear evidence that beneficiary access to quality care is in jeopardy. BBA payment reforms are critical to strengthening and protecting Medicare, and it is clear that they are succeeding in promoting efficiency and extending the life of the Medicare Trust Fund.


We are therefore actively monitoring the impact of the BBA to ensure that beneficiary access to covered services is not compromised. Our regional offices are gathering information from around the country to help us determine whether specific corrective actions may be necessary. We are 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 working with the National Rural Health Association to evaluate rural access to care. The Association has sent a questionnaire to all its members on the impact of BBA reforms on rural health services. They are asking for anecdotal descriptions of how services have been affected, and they expect to receive responses by the end of this month.

We also 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.

However, it is important to note that the BBA is only one factor contributing to changes in Medicare spending. We have significantly decreased the number of improper payments made by Medicare. And some payments have been slowed 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. 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 all committed to ensuring rural beneficiaries' continued access to quality care, and we are all concerned about the disproportionate impact of BBA reforms on rural health care providers. The President's Medicare reform plan addresses these concerns with specific proposals targeted to assist rural hospitals, and it provides funding to smooth the transition to BBA reforms which could well be used to address problems that may jeopardize rural beneficiaries' access to care. We are very grateful for the opportunity this hearing provides to discuss concerns facing rural hospitals and to explore how we might address them in a prompt and fiscally prudent manner. I thank you again for holding this hearing, and I am happy to answer your questions.

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