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Testimony on Medicare Reimbursement by Tom Hoyer
Director, Rural Health Initiative and Chronic Care Purchasing Policy Group
Health Care Financing Administration
U.S. Department of Health and Human Services

Field Hearing in Billings, Montana
December 8, 1999

Senator Burns, thank you for inviting me to be here today with you and so many of Montana’s health care leaders. I am grateful for this opportunity to hear from you firsthand about your needs, concerns, and ideas.

We understand that you face unique challenges in serving the medical needs of beneficiaries in a State that is so vast and so rural. Assuring and enhancing access to quality care for rural beneficiaries is a priority for us. About one in four Medicare beneficiaries live in rural America, and rural providers serve a critical role in areas where the next nearest provider may be hours away. Yet many of these rural providers have higher costs than their more urban counterparts and face difficulty maintaining enough patients to break even. Medicare has made exceptions and special arrangements to address the unique needs of rural America and strengthen providers in these areas. And we are committed to continuing to work with you to ensure that these unique needs are met.

We are taking several new administrative steps through the Medicare program to help rural providers. We have already implemented a number of provisions in the Balanced Budget Act of 1997 (BBA) that help rural providers. And we are eager to implement additional provisions targeted to your specific needs in the recently enacted Balanced Budget Refinement Act (BBRA). The BBRA makes a substantial and critical investment in meeting the needs of rural providers and their patients.

These include:

  • allowing more hospitals to be designated as a Critical Access Hospital (CAH) or Rural Referral Center;

  • raising residency caps to strengthen hospital residency programs in rural areas;

  • holding rural hospitals harmless for 4 years during the transition to the new prospective payment system for hospital outpatient care;

  • providing an immediate increase in payments for skilled nursing facilities beginning in April through September 2002; and,

  • delaying the scheduled 15 percent pay cut for home health agencies and raising per beneficiary payment limits for agencies with limits below the national average.

We will continue to closely monitor how laws and regulations governing our programs affect rural beneficiaries and providers. And we want to work with you to make any additional adjustments that may be necessary to ensure that beneficiaries have access to the quality care they deserve.

Balanced Budget Act

The BBA included several provisions to strengthen the rural health care infrastructure, aid rural providers, and reform Medicare payment systems to promote efficiency and quality. We have implemented BBA 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, which also impact rural providers. 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;

  • 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 may in adapting to some of these changes. And some BBA changes may have had a disproportionate impact on rural providers and on beneficiary access to care in these areas.

In an effort to address provider concerns and ensure that beneficiaries continue to have access to care, we have taken a variety of administrative actions to assist providers in adjusting to the BBA changes. In addition, the President has recently signed the BBRA, which includes a number of provisions to address the unintended consequences of the BBA and further strengthen the Medicare program.

Administrative Actions

We have taken a number of administrative steps to moderate the impact of the Balanced Budget Act changes and assist rural providers in meeting the needs of the patients they serve. For example, we are implementing new policies to make it easier for rural hospitals, whose payments are now based on lower, rural area average wages, to be reclassified and receive payments based on higher average wages in nearby urban areas. As a consequence of these policy changes, rural hospitals will receive higher reimbursement. Similarly, we are helping rural hospitals adjust to the new outpatient prospective payment system by using the same wage index for determining a facility’s outpatient payments rates that is used to calculate inpatient rates. And we are postponing expansion of the BBA’s "transfer policy" for all hospitals for a period of two years. As a result, the transfer payment limits will apply only to the current 10 Diagnosis Related Group (DRG) categories, as prescribed by the BBA. And we are considering whether further postponement is warranted.

We also are taking administrative action to assist home health agencies. We are providing financial relief to agencies by extending the timeframe for repaying interim payment system overpayments from one year to three, with the first year interest-free. And we are postponing the requirement for home health agencies to obtain surety bonds until October 1, 2000.

In October 2000, we will refine the classification system for skilled nursing facilities in a budget neutral way, using our administrative flexibility. The refinements will redistribute payments among the various resource utilization groups (RUGs) and will likely increase payments for medically complex patients. We have commissioned Abt Associates to provide the information necessary for us to make refinements. The research is proceeding on schedule and we expect that refinements indicated by the research will go into effect next year.

Balanced Budget Refinement Act

Building upon the administrative actions that we have already taken to protect beneficiary access to high quality care and help providers adjust to BBA changes, the BBRA includes payment reforms and other changes to address some of the BBA’s unintended consequences. A number of these refinements will be particularly helpful to providers in America’s rural areas.


The BBRA refines and builds upon a number of Medicare policies to support rural hospitals. The BBA created a new prospective payment system for hospital outpatient care that pays set amounts for services that are similar clinically and in their use of resources. The BBRA refines this system by holding small rural hospitals harmless for 4 years. In addition, it includes a budget-neutral pass-through for certain drugs, devices, and biologicals, as well as an outlier policy to account for high-cost patients.

In addition, the BBRA refines and builds upon a series of long-standing Medicare policies targeted specifically towards supporting rural providers. For example, the BBRA allows certain hospitals to reclassify as rural for purposes of designation as a CAH, Sole Community Hospital, or Rural Referral Center. In addition, the BBRA includes a number of specific provisions to assist CAHs. These include:

  • applying the 96-hour length of stay limit on an average annual basis;

  • permitting for-profit hospitals to qualify for CAH designation;

  • removing the constraints on the length of stay in swing beds for certain rural hospitals;

  • allowing hospitals that have closed or downsized in the last 10 years to convert to CAH;

  • permitting CAHs to paid based on an all-inclusive rate; and,

  • eliminating coinsurance for clinical laboratory tests furnished by a CAH.

In addition, the BBRA extends the Medicare dependent hospital program for five years. It increases the number of residents in rural GME training programs by 30 percent and encourages urban GME programs to establish separate training programs in rural areas. And it rebases the targets for Sole Community Hospitals as well as increases the payment update for these hospitals to the full market basket for FY 2001.

Skilled Nursing Facilities

The BBRA provides immediate payment increases to skilled nursing facilities that treat high-cost patients. It creates special payments to facilities that treat a high proportion of AIDS patients, and excludes certain expensive items and services from PPS consolidated billing, such as ambulance services for dialysis, prostheses, and chemotherapy. Importantly, the BBRA provides an across-the-board increase of 4 percent for FY 2001 and FY 2002, and gives nursing homes the option of being paid at the full Federal rate beginning with their next cost reporting period. And it places a two-year moratorium on the BBA’s physical and occupational therapy caps, which appeared to be presenting particular problems for patients in these facilities. These changes and the refinements to the RUGs for the year 2000 will help ensure that payments are appropriate.

Home Health

Home health agencies will be aided by the BBRA changes through a delay in the BBA-mandated 15 percent payment cut until after the first year the PPS is in place. The BBRA also provides immediate adjustment to the per beneficiary limits for certain agencies; gives assistance payments to help agencies cover the costs associated with the OASIS quality system; and excludes durable medical equipment from consolidated billing under PPS. When the PPS is implemented, payments will be tailored to the condition and needs of the patients. In addition, the limit on the number payment episodes will be removed and agencies will receive outlier payments to cover more costly cases.


The BBRA also fixes the fluctuation in physician payments from year to year by modifying the formula for updating physician payment rates. It moves the sustainable growth rate (SGR) target for total physician spending, which is used to adjust inflation updates, to a calendar year basis beginning with 2000.

Graduate Medical Education

In order to strengthen our nation’s graduate medical education system, the BBRA makes several important changes. Under the BBA, teaching hospitals’ indirect medical education (IME) payment add-on was reduced to 6.0 percent in 2000, and 5.5 percent in 2001 and subsequent years. The BBRA will raise the add-ons to 6.5 percent in FY 2000, to 6.25 percent in FY 2001, and 5.5 percent in 2002 and thereafter. In addition, the BBRA begins to reduce the geographic disparity in direct medical education (DME) payments to teaching hospitals by raising the minimum payment levels to certain hospitals while limiting the growth in payments to hospitals receiving payments above 140 percent of the geographically adjusted average.

Rural Workgroup

We also are redoubling our efforts to actively address the special circumstances of rural beneficiaries. In fact, the Administration has begun a new Rural Health Initiative. 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. We are participating in regularly scheduled meetings with the Health Resources and Services Administration’s Office of Rural Health Policy to make sure that we stay abreast of rural issues. And we are working directly with the National Rural Health Association to evaluate rural access to care and the impact of recent policy changes.

Our goal is to engage in more dialogue with rural providers and ensure that we are considering all possible ways of making sure rural beneficiaries get the care they need. We are looking at best practices and areas where research and demonstration projects are warranted. We want to hear from those of you who are providing services to rural beneficiaries about what we can do to make sure they get the care they need.

We have put together a team for this rural initiative that includes senior staff in our Central and Regional Offices and dedicated personnel around the country. The work group is co-chaired by Linda Ruiz in our Seattle regional office and me. Each of our regional offices now has a new rural issues point person that you can call directly to raise and discuss issues and ideas. For those of you in Montana, that point person is Anne Kane in our Denver office. You can reach her at (303) 844-7122.


We are all committed to ensuring rural beneficiaries’ continued access to quality care, and we are all concerned about the disproportionate impact that policy changes can have on rural health care providers. The Balanced Budget Act, the administrative actions we have taken, and the Balanced Budget Refinement Act address these concerns with specific provisions targeted to assist rural hospitals. 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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