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Testimony on the Balanced Budget Act Impact on Patient Care by Michael Hash
Deputy Administrator, Health Care Financing Administration
U.S. Department of Health and Human Services

Before the House Commerce Committee, Subcommittee on Health
September 15, 1999

Chairman Bilirakis, Congressman Brown, distinguished Subcommittee members, thank you for inviting us to discuss possible necessary adjustments to the Balanced Budget Act Medicare fee-for-service reforms. The BBA includes important new preventive benefits and payment system reforms that promote access, 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.

Coverage of new preventive health benefits is among the BBA=s most significant impacts on patient care. 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 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.

And, as of January 1, 2000, we will begin to cover prostate screening, as well. These important additions to the Medicare benefits package will have a substantial impact on patient care by helping to prevent problems and identify them at earlier, more treatable stages.

The BBA also made substantial changes to the way Medicare reimburses 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 per diem 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;
  • 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 competition can help Medicare and its beneficiaries save money on durable medical equipment and supplies.

We have fully implemented the majority of the BBA=s more than 300 provisions affecting our programs, including the Medicare+Choice program. While the statute generally prescribes in detail the changes we are required to make, we are committed to exercising the maximum flexibility within our limited discretion in our implementation of these provisions.

It is clear that the BBA is succeeding in promoting efficiency, slowing growth of Medicare expenditures, and extending the life of the Medicare Trust Fund. However, according to both the HCFA actuaries and the Congressional Budget Office, the BBA is only one factor contributing to changes in Medicare spending. Low inflation from a strong economy is having an impact on total spending. Slower claims processing during the transition to new payment systems is contributing to a temporary slow-down in overall spending. And we have made substantial strides in fighting fraud, waste and abuse that have significantly decreased the amount of improper payments. For the first time ever, the hospital case mix index declined last year due to efforts to stop Aupcoding,@ or billing for more serious diagnoses than patients actually have in order to obtain higher reimbursement.

Change of this magnitude always requires adjustment. It is not surprising that some market corrections would result from such significant legislation. We are proactively monitoring the impact of the BBA to ensure that beneficiary access to covered services is not compromised. We are evaluating this information to assess the impact of BBA changes on beneficiaries and to determine what changes may need to be made to ensure continued access to quality care.

Thus far, our monitoring reveals evidence of isolated but significant problems. For example, there is reason to be concerned that some beneficiaries are not getting necessary care because of the BBA=s $1500 caps on certain outpatient rehabilitation therapies. We want to continue working with beneficiaries, providers, and Congress to closely monitor the situation, evaluate any evidence of problems in access to quality care, and develop appropriate, fiscally responsible solutions.

Because of our concerns, the President=s Medicare reform plan sets aside $7.5 billion from fiscal 2000 to fiscal 2009 to smooth out implementation of BBA payment reforms that may be adversely affecting beneficiary access to high quality care. Where there is credible evidence that adjustments are necessary to protect access to care, we want to work with the Congress to make appropriate adjustments. The President=s reform plan also dedicates a portion of the budget surplus to Medicare. This will help prevent excessive cuts in provider payment that otherwise would be necessary in the future as Medicare enrollment is expected to double over the next 30 years, and increased efficiencies alone will not be able to cover the increased costs.

The President=s plan also includes administrative actions to assure a smooth implementation process, and we are continuing to explore other actions. Those already underway address several key areas of concern:

  • Inpatient hospital transfers. The BBA requires the Secretary to reduce payments to hospitals when they transfer patients to another hospital or unit, skilled nursing facility or home health agency for care that is supposed to be included in acute care payment rates for ten diagnoses. It also authorizes HCFA to extend this Atransfer policy@ to additional diagnoses after October 1, 2000. To minimize the impact on hospitals, we are delaying extension of the transfer policy to additional diagnoses for two years.
  • Hospital outpatient payments. The BBA requires Medicare to begin paying for hospital outpatient care under a prospective payment system, similar to what is used to pay for hospital inpatient care. To help all hospitals with the transition to outpatient prospective payment, we are considering delaying a Avolume control mechanism@ for the first few years of the new payment system. The law requires Medicare to develop such a mechanism because prospective payment includes incentives that can lead to unnecessary increases in the volume of covered services. The proposed prospective payment rule presented a variety of options for controlling volume and solicited comments on these options. Delaying their implementation would provide an adjustment period for providers as they become accustomed to the new system.

We also are considering implementing a three-year transition to this new PPS by making budget-neutral adjustments to increase payments to hospitals that would otherwise receive large payment reductions such as low-volume rural and urban hospitals, teaching hospitals, and cancer hospitals. Without these budget-neutral adjustments, these hospitals could experience large reductions in payment under the outpatient prospective payment system.

And, to help hospitals under the outpatient prospective payment system, we included a proposal in the proposed rule to use the same wage index for calculating rates that is used to calculate inpatient prospective payment rates. This index would take into account the effect of hospital reclassifications and redesignations. For all of these outpatient department reform options, the rulemaking process precludes any definitive statement on administrative actions until after the implementing rule is published.

  • Rural hospital reclassification. Hospital payments are based in part on average wages where the hospital is located. We are making it easier for rural hospitals whose payments now are based on lower, rural area average wages to be reclassified and receive payments based on higher average wages in nearby urban areas and thus get higher reimbursement. Right now, facilities can get such reclassifications 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. We are changing those average wage threshold percentages so more hospitals can be reclassified.
  • Home health. The BBA significantly reformed payment and other rules for home health agencies. We are taking several new steps to help agencies adapt to these changes. We are increasing the time for repayment of overpayments related to the interim payment system from one year to three years, with one year interest free. Currently, home health agencies are provided with one year of interest free extended repayment schedules. We are postponing the requirement for surety bonds until October 1, 2000, when we will implement the new home health prospective payment system. This will help ensure that overpayments related to the interim payment system will not be an obstacle to agencies obtaining surety bonds.

We also are following the recommendation of the General Accounting Office by requiring all agencies to obtain bonds of only $50,000, not 15 percent of annual agency Medicare revenues as was proposed earlier. We are eliminating the sequential billing rule as of July 1, 1999. Many home health agencies had expressed concern about the impact of the implementation of this requirement on their cash flows and this measure should alleviate these problems to a large degree. And we are phasing-in our instructions implementing the requirement that home health agencies report their services in 15-minute increments in response to concerns that the demands of Y2K compliance were competing with agency efforts to implement this BBA provisions. Allowing this degree of flexibility for a temporary period will prevent agency cash flow problems or returned claims.

It is important to note that the BBA is only one factor contributing to challenges providers face in the rapidly evolving health care market place. Efforts to pay correctly and promote efficiency may mean that Medicare no longer makes up for losses or inefficiencies elsewhere. We are concerned about reports on the financial conditions of some individual and chain providers.

It is essential that we try to delineate the BBA=s impact from the effects of excess capacity, discounted rates to other payers, aggressive competition, imprudent business decisions, and other practices and market factors not caused by the BBA. And, as is underscored by the title of this hearing, it is essential that we focus on the impact on beneficiary access to high quality patient care.

Monitoring Access

These payment reforms have created change for many of our providers. 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. We are systematically gathering data several sources to look for objective information and evidence of the impact of BBA changes on access to quality care, including:

  • beneficiary advocacy groups;
  • healths plans and providers;
  • Area Agencies on Aging;
  • State Health Insurance Assistance Programs;
  • claims processing contractors;
  • State health officials; and
  • media reports.

We also are examining information 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 examining 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 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. The data also show that nursing homes may be slightly reducing the number of employees and the hours that they work.

The HHS Inspector General=s office has interviewed hospital discharge planners and nursing home Administrators about the BBA=s impact on patient care. They found that the proportion of beneficiaries discharged to skilled nursing facilities is unchanged from 1998. Hospital lengths of stay have not increased. Less than 1 percent of nursing home Administrators say the prospective payment system is causing access to care problems. However, about one in five discharge planners say it takes more time to place Medicare patients in nursing homes, while only 1 percent say it is Avery difficult@ to make such placements.

The Inspector General=s Office also found that both nursing home Administrators and hospital discharge planners say nursing facilities are requesting more information before accepting patients. About half of the nursing home Administrators say they are less likely to accept patients requiring expensive supplies or services such as ventilators or expensive medications, about half also say they are more likely to admit patients who require special rehabilitation services such as physical therapy following joint replacement surgery.

The Inspector General=s office also has agreed to interview discharge planners about access to home health care following BBA payment reforms, and the impact of the $1500 caps on outpatient therapy.

Specific BBA Provisions

Outpatient Rehabilitation Therapy: The BBA imposed $1500 caps on the amount of outpatient rehabilitation therapy services that can be reimbursed, except in hospital outpatient clinics. However, these caps are not based on severity of illness or care needs, and they appear to be insufficient to cover necessary care for many beneficiaries. Beneficiary groups are reporting many instances of problems with this cap, and we are very concerned about their adverse impact, particularly on individuals in nursing homes. As mentioned above, our HHS Inspector General colleagues have agreed to study this problem. We are providing data to the Medicare Payment Advisory Commission so it can analyze patterns of therapy service usage. And we will continue to work with Congress and others to determine what adjustments to the cap should be made.

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, subject to certain limits, and included no incentives to provide care efficiently. The new system uses average 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 costs as the base year, and implementation by July 1, 1998 with a three year transition blending facility-specific costs and prospective rates. 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.

We held a town hall meeting earlier this year to hear a broad range of skilled nursing facility concerns, and we continue to meet with provider and beneficiary representatives. There are concerns that the prospective payment system does not adequately reflect the costs of non-therapy ancillaries such as drugs for high acuity patients.

We are conducting research that will serve as the basis for refinements to the resource utilization groups that we expect to implement next year. We expect to have the research completed by the end of the year and to then develop refinements that we will be able to implement next October. Under the statute, we have the authority to refine these groups and redistribute money across categories in a budget neutral manner. We do not have discretion under the law to increase the overall level of payments to skilled nursing facilities. We fully expect that we will need to periodically evaluate the system to ensure that it appropriately reflects changes in both care practice and the Medicare population.

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 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 fall so we can begin receiving and evaluating public comments, and publish 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 the limits. The interim system includes a new, aggregate per beneficiary limit designed to provide incentives for efficiency that will be continued under the episode-based prospective payment system.

Last year Congress increased the cost limits in an effort to help agencies during the transition to prospective payment. 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 increasing the time for repayment of overpayments related to the interim payment system to three years, with one year interest free. And, effective July 1, we ended the sequential billing policy that had raised cash flow concerns for some agencies. Sequential billing was designed to ensure proper allocation of home health expenditures between Part A and Part B that is required by changes to financing of the benefit included in the BBA. We have determined we can accomplish this allocation through other means.

At the same time, we are implementing the Outcome and Assessment Information Set (OASIS). OASIS fulfills a statutory mandate for a Astandardized, reproducible@ home care assessment instrument. It will help home health agencies determine what care 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 significant quality or access problems. However, we have heard serious reports from beneficiary groups, our regional offices, and others regarding home health agencies that have inappropriately denied or curtailed care and incorrectly told beneficiaries that they are not eligible for continuing services. This may result from a misunderstanding of the new incentives to provide care efficiently, or from efforts to Acherry pick@ low cost patients and game the system. The Congressional Budget Office attributes some of the lower health spending to the fact that agencies are incorrectly treating the new aggregate per beneficiary limit as though it applies to each individual patient.

Recognizing this, we have therefore provided home health agencies with guidance on the new incentives and their obligation to serve all beneficiaries equitably. We have instructed our claims processing contractors to work with agencies to further help them understand how the limits work. Because home health beneficiaries are among the most vulnerable, we are continuing ongoing detailed monitoring of beneficiary access and agency closures. And, as mentioned above, we have taken several administrative steps to help home health agencies adjust to BBA changes, such as extending the time for them to repay overpayments.

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. We have carved out graduate medical education payments from payments to managed care plans and instead are paying them directly to teaching hospitals (and are proposing in the President=s Medicare reform plan to similarly carve out disproportionate share hospital payments).

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 would have substantially jeopardized 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 actively reviewing all of the comments from the industry and other interested parties that we received during the comment period, which we extended until July 30.

We are focusing most of our continuing work on 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 modifications to the system for inclusion in the final rule.

In addition to our work on the outpatient prospective payment system, we are proactively monitoring the impact of all Medicare payment changes on hospitals.

Physicians: As directed by the BBA, we are on track in 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 included 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.

The President=s fiscal 2000 budget contains a legislative proposal for a budget-neutral technical fix to ensure the BBA=s sustainable growth rate (SGR) 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 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 would result in unreasonable year-to-year fluctuations. Also, the SGR target cannot be revised to account for new data.


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. With changes of the magnitude encompassed in the BBA, some issues have arisen that may require adjustment and fine tuning. The President=s Medicare reform plan sets aside $7.5 billion to smooth out implementation of BBA reforms. It dedicates a portion of the budget surplus to Medicare, which will help protect against excessive provider payment reductions in the future as Medicare enrollment doubles over the next 30 years, and increased efficiencies alone will not be able to cover the increased costs. The President=s plan also includes administrative adjustments to help in the transition to new payment systems.

It is not surprising that necessary 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. We welcome the opportunity to look at any new information regarding beneficiary access to quality care. We are committed to continuing to look at refinements to the BBA that are within our administrative authority. We look forward to continuing to work with this Committee to identify concerns, and we will keep you up to date on the status our of implementation of the BBA.

The President is committed to working with Congress to enact bipartisan Medicare reform this year that includes more competition in the program, a long over-due prescription drug benefit that is available and affordable for all beneficiaries, and that dedicates a significant portion of the budget surplus to Medicare, and sets aside funding specifically for smoothing out the transition to BBA payment reforms.

I thank you for holding this hearing, and I am happy to answer your questions.

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