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
- 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
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
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
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
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.
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
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
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
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
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.