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Full text of "Medicare issues under health care reform : hearing before the Committee on Finance, United States Senate, One Hundred Third Congress, second session, April 12, 1994"

S. Hrg. 103-964 

MEDICARE ISSUES UNDER HEALTH CARE REFORM 



Y4.F 49: S. HRG. 103-964 

fledicare Issues Under Health Care R... 



HEARING 

BEFORE THE 

COMMITTEE ON FINANCE 
UNITED STATES SENATE 

ONE HUNDRED THIRD CONGRESS 

SECOND SESSION 



APRIL 12, 1994 










^-•^ ^ 



Printed for the use of the Committee on Finance 



U.S. GOVERNMENT PRINTING OFFICE 
85-417— CC WASHINGTON : 1994 

For sale by the U.S. Government Printing Office 
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402 
ISBN 0-16-046755-1 




y \j / S. Hrg. 103-964 

MEDICARE ISSUES UNDER HEALTH CARE REFORM 



i 4. F 49; S. HRG. 103-964 

ledicare Issues Under Health Care R. . . 



HEARING 

BEFORE THE 

COMMITTEE ON FINANCE 
UNITED STATES SENATE 

ONE HUNDRED THIRD CONGRESS 

SECOND SESSION 



APRIL 12, 1994 




"^"^^dfili^iC. 



4 r 



Printed for the use of the Committee on Finance 



U.S. GOVERNMENT PRINTING OFFICE 
85-417— CC WASHINGTON : 1994 

For sale by the U.S. Government Printing Office 
Superintendent of Documents. Congressional Sales Office, Washington, DC 20402 
ISBN 0-16-046755-1 



COMMITTEE ON FINANCE 
DANIEL PATRICK MOYNIHAN, New York, Chairman 



MAX BAUCUS. Montana 

DAVID L. BOREN, Oklahoma 

BILL BRADLEY, New Jersey 

GEORGE J. MITCHELL, Maine 

DAVID PRYOR, Arkansas 

DONALD W. RIEGLE, Jr., Michigan 

JOHN D. ROCKEFELLER IV, West Virginia 

TOM DASCHLE, South Dakota 

JOHN B. BREAUX, Louisiana 

KENT CONRAD, North Dakota 



BOB PACKWOOD, Oregon 
BOB DOLE, Kansas 
WILLIAM V. ROTH, Jr., Delaware 
JOHN C. DANFORTH, Missouri 
JOHN H. CHAFEE, Rhode Island 
DAVE DURENBERGER, Minnesota 
CHARLES E. GRASSLEY, Iowa 
ORRIN G. HATCH, Utah 
MALCOLM WALLOP, Wyoming 



Lawrence O'Donneli., Jr., Staff Director 
LiNDY L. Paull, Minority Staff Director and Chief Counsel 



(II) 



CONTENTS 



OPENING STATEMENTS 

Page 
Moynihan, Hon. Daniel Patrick, a U.S. Senator from New York, chairman. 

Committee on Finance 1 

Packwood, Hon. Bob, a U.S. Senator from Oregon 2 

Durenberger, Hon. Dave, a U.S. Senator from Minnesota 3 

COMMITTEE PRESS RELEASE 

Finance Committee Sets Hearing on Medicare Issues 1 

PUBLIC WITNESSES 

Corry, Martin, director, Federal Affairs Department, American Association 

of Retired Persons, Washington, DC 4 

Davidson, Richard J., president, American Hospital Association, Washington, 

DC 6 

Duvall, Charles P., M.D., member, Council on Legislation, American Medical 

Association, Washington, DC 9 

Halvorson, George C, president and chief executive officer. Health Partners; 

and chair-elect. Group Health Association of America, Washington, DC 12 

ALPHABETICAL LISTING AND APPENDIX MATERIAL SUBMITTED 

Corry, Martin: 

Testimony 4 

Prepared statement 47 

Davidson, Richard J.: 

Testimony 6 

Prepared statement 57 

Durenberger, Hon. Dave: 

Opening statement . 3 

Prepared statement 71 

Duvall, Charles P., M.D.: 

Testimony 9 

Prepared statement with attachment 72 

Halvorson, George C: 

Testimony 12 

Prepared statement 83 

Moynihan, Hon. Daniel Patrick: 

Opening statement 1 

Packwood, Hon. Bob: 

Opening statement 2 

Communications 

American Academy of Ophthalmology 88 

American Health Care Association 89 

American Rehabilitation Association 96 

American Society of Internal Medicine 103 

Group Health Association of America (GHAA) 113 



(III) 



MEDICARE ISSUES UNDER HEALTH CARE 

REFORM 



TUESDAY, APRIL 12, 1994 

U.S. Senate, 
Committee on Finance, 

Washington, DC. 

The hearing was convened, pursuant to notice, at 10:00 a.m., in 
room SD-215, Dirksen Senate Office Building, Hon. Daniel Patrick 
Moynihan (chairman of the committee) presiding. 

Also present: Senators Baucus, Bradley, Riegle, Rockefeller, 
Daschle, Conrad, Packwood, Chafee, Durenberger, Grassley, and 
Hatch. 

[The press release announcing the hearing follows:] 

[PreBS Release No. H-23, April 8, 1994] 

Finance Committee Sets Hearing on Medicare Issues 

Washington, DC. — Senator Daniel Patrick Moynihan (D-NY), Chairman of the 
Senate Committee on Finance, announced today that the Committee will continue 
its examination of health care issues with a hearing on Medicare issues and health 
reform. 

The hearing will begin at 10:00 A.M. on Tuesday, April 12, 1994 in room SD-215 
of the Dirksen Senate Office Building. 

"The Committee will focus on the way Medicare should be treated under health 
reform," Senator Moynihan said in announcing the hearing. "We will examine spe- 
cifically the anticipated effects of Medicare budget cuts proposed in a number of 
major health care reform plans." 

OPENING STATEMENT OF HON. DANIEL PATRICK MOYNIHAN, 
A U.S. SENATOR FROM NEW YORK, CHAIRMAN, COMMITTEE 
ON FINANCE 

The Chairman. A very good morning to our distinguished wit- 
nesses and to our guests. Welcome back to these hearings. Senator 
Packwood and I have been talking about this. For those who keep 
track or want to keep on track, we have been thinking we would 
finish our hearings about the second week of May. Is that right, 
sir? So everybody will have every subject they wanted. 

Senator PACKWOOD. The Chairman has been very good, I think, 
about allowing any member who had somebody rational to call as 
a witness to let them appear. If we finish by May 15 and start 
mark-up by the middle of June, I still think we will be ahead of 
the House. 

The Chairman. There you are, as is only fitting. I would like to 
note for the record that on February 23 our distinguished former 
colleague Leon Panetta appeared before the Finance Committee 
and informed us that the administration would have a welfare re- 

(1) 



form bill before us on April 1. Senator Dole was irreverent enough 
to suggest April 2 and it is now April 12 and with nothing in sight. 

This morning we have a group of very distinguished witnesses to 
talk about Medicare matters for us and it comes in the wake of the 
report of the Trustees of the Social Security Trust Fund which was 
released yesterday, reported in this morning's press, and which 
makes a very powerful statement about the growth of Medicare. 

I have a table from the report which I will put in the record, 
which shows that between now and 1999 the average annual rate 
of growth of Medicare will be 10.6 percent. That is a rate that dou- 
bles every 7 years. Dr. Podoff having taught us as best he can the 
rule of 70. 

The estimate is that after health care reform the rate will drop 
from 10.6 to 8.9. Well, that doubles every 8 years, which is a pretty 
phenomenal rate, and a much higher rate than would be expected 
for health care costs generally. 

Senator Packwood suggested to me that these are not that bad 
after all. The world will not come to an end until the year 2001. 
I think I suggested that a millennia ago they thought the world 
would come to an end at the year 1001, so it just shows there are 
continuities in all these things. 

But we do find extraordinary growth rates projected in the near 
term and long term and they are the subject, among other things, 
of our hearing this morning. 

Senator Packwood? 

OPENING STATEMENT OF HON. BOB PACKWOOD, A U.S. 
SENATOR FROM OREGON 

Senator PACKWOOD. Mr. Chairman, I was elected to the Senate 
in 1968. So I started in January of 1969 and we were then, of 
course, accepting of the President's budget for the fiscal year 1970. 
And in 1970 the Medicare outlays totaled $7.1 billion. 

Even if we had followed the theory that you just announced 
about doubling every 8 years, we would still be only at about $70 
billion now. We dramatically increased beyond that. 

And as I look at Medicare projections I am reminded a bit — I 
cannot remember the name of the theory, Mr. Chairman, but it is 
the one that says, the universe is ever expanding. It is not finite; 
it is infinite. It continues to grow no matter what. I think that is 
what Medicare is. It is an ever-expanding universe that never 
ceases to grow. 

And always in the past we have underestimated its growth. We 
have usually overestimated the savings we hoped we would 
achieve. Not always, but usually we overestimated the savings and 
we underestimated the cost. One of the debates we now have is 
whether or not we should expand health benefits in any bill that 
we pass, including Medicare benefits, including some prescription 
drugs in outpatient, in Medicare. 

I am willing to look at those, Mr. Chairman, but I want to look 
at them very carefully. It is almost impossible to take back benefits 
once you have given them. It is one thing not to give them, but 
once you have possessed it and once it is in your hand, then it be- 
comes a right and you feel deprived if you lose it. 



So before we jump in to any new benefits, I hope we are as sure 
as possible that we can estimate the costs, remembering we've al- 
ways been wrong, and that we have revenues to pay for it. And if 
we do not have the revenues, we have not bellied up to the bar and 
voted for the revenues, then I would hope we would reform the 
health system, pass a health bill, but be very hesitant about new 
entitlements that we do not know the cost of and do not know if 
we can pay for it. 

The Chairman. Fairly said. If I could just make a point from a 
recent issue of Fortune Magazine. When you came to the Senate, 
sir, the life expectancy in the United States was 71 years. Today 
it is 76. I mean, those are momentous changes in something that 
is fundamental. Life expectancy for American women is now at 79.6 
years. So these things change right before your eyes, much less in 
very alluvial terms. 

Senator Packwood. Well, and as I recall, those life expectancy 
figures grow at both ends. Part of the increase is the fact that we 
are being more successful in keeping younger babies alive and 
younger people alive. So that is a factor, but I would like to see the 
figures of what is the life expectancy in 1968 or 1969 of those who 
were then let us say 65 and what is the life expectancy of those 
who are 65 now. I bet you the figures would be even more startling. 

The Chairman. I see Mr. Davidson nodding knowledgeably. We 
look forward to hearing his view on the matter. 

Senator Baucus? 

Senator Baucus. Thank you, Mr. Chairman. I have no state- 
ment. 

The Chairman. Senator Durenberger? 

OPENING STATEMENT OF HON. DAVE DURENBERGER, A U.S. 
SENATOR FROM MINNESOTA 

Senator Durenberger. Mr. Chairman, thank you. I have a state- 
ment I would like to be made a part of the record and two observa- 
tions. One, I thank you as our ranking member did for inviting us 
to invite on behalf of the committee, rational witnesses. I have one 
today from Minnesota, Mr. Halvorson; and others who I know well 
and I will vouch for their rationality as well. 

The second observation is Robert Pear picked up the trust fund 
and, of course, that is sort of easy to measure and easy to express 
in our speeches. But the reality is when you go out and you listen 
to doctors talk about health care reform or react to the talk about 
health care reform, they always say, well, we are only 19 percent 
of the problem or 20 percent or something like that. Why do you 
beat up on us? The answer is, because they determine about 90- 
some percent of the spending. 

We are not beating up on them either. But the reality is, when 
we did the DRG system here in 1983 we brought a rationality to 
the definition of hospitals. And the definition of a hospital today is 
no longer what it was in 1983. 

The question is, has the definition of what doctors do and how 
they do it, how has that changed in this period of time. We know 
from the evidence that the cost growth or the expenditure growth 
in Part A, the hospital trust fund, between 1980 and 1991, grew 



1.78 times while the growth in Part B, the medical expenditures, 
grew 3.15 times. 

We also know that Part B, just in the last 5 years, grew 23 per- 
cent faster than the economy. I know that is not doctors' personal 
income and nobody here wants to beat up on doctor personal in- 
come. But it is the way in which we are utilizing the system. 

So this is nothing compared to what is happening in Part B un- 
less we are willing to tackle the issue of more appropriate incen- 
tives on the part of physicians to use the system or help us use the 
system more appropriately. 

[The prepared statement of Senator Durenberger appears in the 
appendix.] 

The Chairman. Very much to the point. One of the things I think 
we have become aware of in these hearings is what enormous 
transformations keep happening, as if a great economic trans- 
formation is underway. The use of hospitals is very different today 
than it was just 10 years ago. What Schumpeter called the creative 
destruction of capitalism is to be seen everywhere or so it's my im- 
pression. 

Senator Grassley? 

Senator Grassley. Mr. Chairman, I have no opening statement. 
Thank you anyway. 

The Chairman. Thank you, sir. 

And so we turn to our most illustrious witnesses, each of whom 
is going to tell us more about life expectancy. Mr. Corry, you are 
first, sir, as Director of the Federal Affairs Department of the 
American Association of Retired Persons. 

STATEMENT OF MARTIN CORRY, DIRECTOR, FEDERAL AF- 
FAIRS DEPARTMENT, AMERICAN ASSOCIATION OF RETIRED 
PERSONS, WASHINGTON, DC 

Mr. CORRY. Thank you, Mr. Chairman and members of the com- 
mittee. The comments which a number of you have addressed in 
these preceding few minutes remind me that in 1983 when the cur- 
rent Chairman and the then Chairman Senator Dole, managed a 
rescue of the Social Security program, they included in that very 
comprehensive bill, along with Senator Durenberger's help and 
other members', a resolution of the Medicare Part A impending in- 
solvency. 

As you all remember, in 1983 Part A, the HI Trust Fund, which 
is reported today, was supposed to go belly-up in 1987. This com- 
mittee, and your colleagues in the House, have rescued the pro- 
gram, if you will, probably more times than you care to remember. 
But in each case the careful stewardship of this committee and 
your colleagues in the House have moved that program forward in 
a constructive way. 

Clearly that is going to be a challenge as we look at the whole 
issue of health care reform and maintaining the Medicare program 
as a viable program for older Americans and disabled Americans. 

Here inside the beltway Medicare is $150 billion and thousands 
of pages of statute and regulations. But to real people beyond the 
beltway, older and disabled Americans, Medicare has been their 
health plan for the last 30 years. 



They have rehed on this program as the mainstay of their health 
care, even though there are large gaps in that program today. Med- 
icare beneficiaries today pay as much or more out of pocket than 
they did when the Medicare program began. It is, however, a very 
successful program. The administrative costs of the program are 
exceedingly low, in the range of 2 to 3 percent, particularly relative 
to the private sector. 

The Medicare program works and clearly much of the concern 
that I suspect some of you may have heard during the recess from 
some of your older constituents reflects the fact that for all of its 
faults, blemishes and warts. Medicare beneficiaries value this pro- 
gram. Their families, including the younger members, value this 
program. 

Medicare pays about half of all Medicare beneficiaries' total 
health care costs today. There are some major gaps. The first, obvi- 
ously, being long-term care. But we would be short-sighted if we 
did not recognize that the costs of long-term care do not fall only 
on older persons. Indeed, both the financial as well as emotional 
costs fall on younger and middle-aged members of older persons' 
families. 

Family members are most often, as you well know, care givers. 
In fact, most care-givers tend to be women. They not only bear the 
burdens of physically providing the care, but also important eco- 
nomic burdens in reduced pensions, and in reduced Social Security 
benefits later in life. 

Prescription drug coverage is an girea that is particularly impor- 
tant to older Americans as well as younger Americans, given just 
the sheer advances in medicine. You spoke of the shift; in some of 
the costs from hospital costs in Part A to Part B. Some of that is 
clearly a conscious shifting of costs as hospital cost containment 
has ratcheted down. Some of it is the advance of medicine. 

Care which 10 years ago was provided in a hospital is today pro- 
vided in an out-patient setting and with pharmaceuticals. The fact 
of the matter is, the lack of a pharmaceutical benefit in the Medi- 
care program today means that the health care provided is less ef- 
fective than it otherwise would be. It results in too many cases in 
hospitalization for more acute incidents. 

The Chairman. Mr. Corry, could I just ask you if this is the case? 

Mr. CORRY. Certainly, Mr. Chairman. 

The Chairman. About 10 years ago, before some of the new phar- 
maceuticals came on line, about a quarter of operations in hospitals 
involved peptic acid diseases, did they not? 

Mr. CORRY. A very significant Eimount. I do not recall the num- 
ber. I will take your word for it. 

The Chairman. Yes, in that range. 

Mr. CORRY. Yes, sir. 

The Chairman. Those have all but vanished now. 

Mr. CoRRY. That is but one example of where advances in medi- 
cine today do not require hospitalization or if they require utiliza- 
tion of hospital facilities it is in an out-patient setting or with pre- 
scription drugs. 

The AARP has commended the President, as well as the sponsors 
of his legislation here in the Senate, as well as in the House, for 
including prescription drug coverage and a beginning at home and 



community-based care in the President's proposal. We commend 
these to others who are working dihgently to try to fashion, on a 
bipartisan basis, a health care reform bill that will pass muster not 
only here in the Congress but also with the American people. 

Finally, Mr. Chairman, I would just say, as I think the members 
of this committee know, AARP has been supportive of managed 
care programs in the past and will continue to in the future, as an 
option which ought to be available to all Americans, old and young 
alike. 

We would, however, take strong objection to a situation in which 
Medicare beneficiaries would be herded into managed care over 
their objections. We believe that it can play a useful role. It can 
help foster some competition. But ultimately we believe that if 
health care reform is going to address the really fundamental issue 
that has been driving public opinion on this issue for several years, 
we will have to confront the issue of controlling costs systemwide, 
not only in Medicare. 

This committee knows full well how difficult that job is. But if 
we continue to only reduce spending in the Medicare program ft^om 
what it otherwise is projected to be, we will continue to see cost 
shifting to the private sector and we will see an increase in a dis- 
turbing trend that we are hearing more about every week from our 
members, and that is real threats to access for Medicare bene- 
ficiaries. 

So with that, Mr. Chairman, thank you. I look forward to any 
questions from the committee. 

[The prepared statement of Mr. Corry appears in the appendix.] 

The Chairman. Thank you, Mr. Corry. We are not going to use 
our lights this morning. But if panelists could be concise enough, 
we will all get a chance to have an exchange in the aftermath. 

So, Mr. Davidson, we have been talking about your hospitals 
with great abandon until now. Here is your chance, sir. 

STATEMENT OF RICHARD J. DAVIDSON, PRESIDENT, 
AMERICAN HOSPITAL ASSOCIATION, WASHINGTON, DC 

Mr. Davidson. All right. Thank you, Mr. Chairman, and good 
morning. My name is Dick Davidson and I am the President of the 
American Hospital Association and I am pleased to be with you 
today to offer testimony on behalf of the nation's hospitals which 
I think you have acknowledged have changed rather dramatically 
in the past decade and are in for a lot of change over the next dec- 
ade; and it is change that we will advocate and help bring about. 
I want to say that right fi*om the beginning. 

Let me say as strongly as I can, hospitals support reform. We 
have praised President Clinton for providing the leadership and 
initiatives to put the issue on the table so that it can be debated 
openly and honestly. We support significant change and we have 
been advocating dramatic change since the fall of 1991 and I will 
talk about that in a little bit. 

Our reform vision, the way we see the future, in terms of health 
care delivery and financing is pretty pragmatic. First, we think 
every American ought to be guaranteed access to health insurance 
coverage. 



Second, we believe it is important that if we expand access that 
we not expand access into this dehvery system, which is frag- 
mented, uncoordinated. In our view, it is broken. It is important 
that we move into a new dehvery system where care is coordinated 
and we can do a much better job. 

And our third practical approach is that we have to have fair fi- 
nancing. We do not pretend there are no financial consequences of 
expanding access to all Americans. And our vision calls for very 
tough economic discipline for providers, using fixed payment. We 
are supportive of a fixed payment, a capitated payment methodol- 
ogy that will provide new kinds of incentives to change behavior of 
not only hospitals and doctors, but to also bring about a change in 
the capacity of the nation's hospitals. We need to deal with that 
and we need to deal with that soon. 

Moreover, our vision calls for more behavior change, in our opin- 
ion, for hospitals than any other proposal that is being discussed 
by the Congress. I just want to repeat that again. We think we are 
calling for more behavior change by what we advocate than any 
other proposal before the Congress and that is key. We must have 
behavior change. 

But, Mr. Chairman, unfortunately, we are not here today to talk 
about reform. We are here, I guess, to talk about kind of the same 
old, and if you will excuse me, the same old stuff. That is, Medicare 
spending reductions. No matter which way we go we always find 
ourselves in that dilemma talking about Medicare spending reduc- 
tions and I think we ought to acknowledge right up front that is 
not reform. That is not reform. That is not even business as usual. 

In fact, in our view, it is worse than business as usual. Medicare 
is already underpaying for the care for its beneficiaries, as we treat 
them in hospitals. You have seen the numbers. 

PROPAC, which is your own official advisory panel, states that 
today Medicare pays only 88 cents on the dollar for hospital care. 
And what is most sobering is that nearly every major health care 
proposal before the Congress, whether it be Democratic or whether 
it be Republican, calls for substantial reductions in the Medicare 
program, and at as much as twice the level of any previous reduc- 
tions in the history of the program since 1965. That is significant. 

So we come here before you today, Mr. Chairman, with the re- 
sults of a study that we asked the consulting firm of Lewin-VHI 
to produce on the effects of such Medicare reductions on hospitals 
so that you have some sense of what we are all up against. 

Let me begin by sajdng that these study results are not predic- 
tors of the future, but they are illustrations of the kind of pressures 
that hospitals face if such Medicare spending reductions alone are 
enacted. We have been talking about those kinds of reductions year 
after year and we always fear that that is a kind of action that 
could take place without reform. 

So I would like to share with you some of the key findings in our 
study. By the year 2000, which is only 6 years away, Medicare 
could be paying as little as 71 cents on the dollar for care given 
to Medicare in-patients — 71 cents. 

The Chairman. Does that assume any particular bill? Is that the 
President's bill? 



8 

Mr. Davidson. This is modeling the President's bill, Mr. Chair- 
man. 

The Chairman. Modeling the President's bill. 

Mr. Davidson. And we only use the President's bill 

The Chairman. Because others are similar or not dissimilar. 

Mr. Davidson. Yes. 

The Chairman. But this is specific. 

Mr. Davidson. We only use the President's bill because that had 
the details available to do this. But as I have said, virtually every 
major proposal that you are considering calls for similar cuts. So 
it is not just the President's bill, it is Republican measures as well 
as other Democratic measures. So we can talk to all sides of the 
issue and we want to make that very clear. 

Such spending reductions could make the Medicare program a 
worse payer than Medicaid is today. And all of us believe that that 
is a national embarrassment as it stands today. We could not imag- 
ine moving Medicare to being a poorer payer than Medicaid is. 

Virtually all hospitals, according to our study, and all States 
would be affected. Particularly hard hit would be rural hospitals, 
teaching hospitals, large urban areas and hospitals serving a dis- 
proportionately large share of low-income patients. 

Let me just note, Mr. Chairman, that in looking at the implica- 
tions of the study, we are very sensitive to the difficult task that 
confronts this committee. In essence, you have been asked to deal 
with the entire problem of health care reform with very narrow fi- 
nancing options available to you. We want you to understand that 
we understand the dilemma that that puts you in and the tough 
choices that that presents to this committee. 

But faced with Medicare reductions like these and their future, 
hospitals, too, face tough choices. You know, we do one thing, and 
we do one thing very well. That is that we take care of people. That 
is all that we do. And reductions like these would force hospitals 
to make some very painful choices. 

I have to raise these questions with you. You know, we talk 
about it all the time. When you are faced with the hard choices, 
what are the decisions that you make? Should we postpone upgrad- 
ing our facilities? Should we postpone buying the new piece of 
equipment? Everyone loves the technology that we have. Should we 
reduce services? When we do that, people get upset. Should we 
eliminate services that do not carry their own financial weight, like 
day care for seniors, like community outreach, like wellness pro- 
grams, like trauma centers, like burn units? None of them carry 
their own financial weight. We have to find other ways to finance 
them. 

Should we reduce our work force? I mean, we are labor intensive. 
We take care of people. You do that with people. How far do we 
go? 

Now these are the terrible trade-offs to be made in the face of 
such reductions and all of them would be felt more deeply than 
ever by hospitals, our patients and the communities that we serve. 
And most important — we think this is very significant — these ac- 
tions, as they are proposed now, would widen the gap between how 
we pay for and provide care for Medicare beneficiaries versus the 
rest of the population. 



And this is at a time when we are trying to reform the way we 
pay for and deliver care for all of the people in the United States. 
And instead we are going to lock the Medicare beneficiaries into a 
system and widen this gap. This kind of an action takes us in the 
absolute wrong direction and we can talk about that further. 

Let me conclude, Mr. Chairman, by urging that you and mem- 
bers of this committee reject Medicare funding reductions as an ac- 
ceptable way to finance health care reform. They are not accept- 
able. Hospitals cannot do reform and pay for it at the same time. 
These are very tough choices. Thank you. 

The Chairman. Thank you, Mr. Davidson. You could not have 
been more emphatic and specific. If nothing else comes out of this 
effort, I think Senator Packwood would agree, that the firm of 
Lewin-VHI will have prospered. [Laughter.] 

I do not know where they are. 

Senator BRADLEY. Well, at least it is not Chase Econometrics. 

The Chairman. Yes, at least it is not Chase. 

[The prepared statement of Mr. Davidson appears in the appen- 
dix.] 

The Chairman. Mr. Davidson has made a very specific statement 
about an aspect of each of the proposals before us. I hope you 
would all feel free to comment on it as we go along and we will 
be asking you questions in just a moment. 

And now Dr. Charles Duvall, who is a member of the Council on 
Legislation of the American Medical Association. Dr. Duvall, we 
welcome you. 

STATEMENT OF CHARLES P. DUVALL, M.D., MEMBER, COUNCIL 
ON LEGISLATION, AMERICAN MEDICAL ASSOCIATION, 
WASHINGTON, DC 

Dr. Duvall. Well, thank you very much, Mr. Chairman. It is an 
honor to be here. Members of the committee, we appreciate this op- 
portunity to testify. I am Charles Duvall. I am a practicing inter- 
nist right here in Washington, DC and a member of AMA's Council 
on Legislation and with me is Bruce Blehart, who is the Director 
of AMA's Division of Federal Legislation. 

The Chairman. Mr. Meishart, is it? 

Dr. Duvall. Blehart. 

The Chairman. Mr. Blehart, we welcome you, sir. 

Dr. Duvall. The American Medical Association believes that the 
Health Security Act holds out the promise of increased opportuni- 
ties for both current and future Medicare beneficiaries to receive 
care through the private sector. 

However, coverage should be at least equal to Medicare's current 
levels in order to be consistent with this promise. That is why the 
AMA supports the major principles involved in S. 1757, S. 1770, 
and S. 1575 and in their shared recognition that Medicare, indeed, 
is a unique program of health care coverage that must be preserved 
intact. 

In addition, we also support giving beneficiaries enhanced cov- 
erage options through the private sector. Individuals should have 
the freedom to chose the plan, public or private, that best meets 
their own peculiar needs. 



10 

Senator Rockefeller. Do you think they have that freedom 
today, sir? 

Dr. DuvALL. I think it can be expanded, Senator. 

Senator ROCKEFELLER. Do you think they have it today, to the 
extent that the American Medical Association talks about people 
having freedom of choice today to choose? Do you think they have 
it? 

Dr. DuVALL. I think they do today, yes. 

Senator ROCKEFELLER. I do not think they do. We will talk about 
it later. 

Dr. DuvALL. All right. One potential direction for the future as 
developed by the Health Subcommittee of the House Committee on 
Ways and Means is to use a new Medicare Part C as a vehicle to 
provide coverage for the uninsured, the unemployed and for those 
working in this Nation's small businesses. 

While the AMA endorses universal coverage, we do not support 
achieving it through a vast expansion of Medicare. Rather than cre- 
ate a massive and expensive new entitlement program, we believe 
a better approach would be to expand coverage through private sec- 
tor reforms, including insurance reform, risk pools and integration 
of Medicaid and uninsured populations into already existing pri- 
vate plans. 

Recent budget-driven history illustrates why we question the 
wisdom of achieving universal coverage through Medicare expan- 
sion. On top of a decade of program cutting, enactment of so-called 
savings proposals in S. 1757 would result in $124 billion of further 
Medicare "savings" through the year 2000. But this would be 
achieved at substantial human cost and the program would deterio- 
rate further and undermine the very fundamentals of physician 
payment reform. 

This committee, and especially Senators Durenberger and Rocke- 
feller, have had a vital leadership role in developing physician pay- 
ment reform and we are pleased that you will also be having an 
essential role in crafting our new health care system. 

We are concerned that these proposed future massive cuts send 
exactly the wrong signals about the degree to which physicians and 
other Americans can expect their government to honor commit- 
ments made as part of this kind of legislative process. These pro- 
posals can only be seen as instituting an unwarranted overhaul of 
the Medicare RBRVS and they inject instability and complexity 
into that system which was, indeed, instituted to provide just the 
opposite effect. 

They promise to dramatically accelerate a downward spiral of 
Medicare physician payments. With the PPRC telling us that Medi- 
care pays 59 percent of what private payers allow for the same 
service, and with primary care office overhead approaching 50 per- 
cent, the pressures for cost-costing are evident and will be even 
stronger if these proposals are enacted. 

It only stands to reason that we have strong and profound con- 
cerns about the broader implications of these cuts. It bears noting 
that virtually none of the administration's proposals for Medicare 
program cuts are even mentioned in the CBO just-issued report on 
deficit reduction options. 



11 

Finally, as the chart attached to our formal statement illustrates, 
these are truly draconian proposals. 

In conclusion, Mr. Chairman, we want to leave you with a clear 
understanding that the American Medical Association staunchly 
supports actions to reform our health care system. However, this 
restructuring should be done in a manner that builds on what 
works in this system. It should be a reform, not a total trans- 
formation. Medicare beneficiaries should have enhanced options be- 
yond government-structured health care coverage. 

Furthermore, it makes little sense to finance health care for one 
segment of the population by stripping funding from another, such 
as Medicare. Finally, the AMA will continue to support the ability 
of our patients, most especially our patients who are Medicare 
beneficiaries, to have free choice of coverage options and access to 
health care services only of the highest quality. 

Thank you very much, Mr. Chairman. 

[The prepared statement of Dr. Duvall appears in the appendix.] 

The Chairman. Thank you. Dr. Duvall. 

Senator Durenberger, would you like to introduce our concluding 
witness? 

Senator Durenberger. Well, Mr. Chairman, other than rational- 
ize there are lots of things I could say about George Halvorson. But 
he has recently written a book. Somebody has it here. I do not 
want to wave it around because we are not lugging things. 

The Chairman. No, there is a copy right behind. Wave it around. 
[Laughter.] 

The Chairman. It is called Strong Medicine. 

Senator DURENBERGER. All right, Strong Medicine. 

But George comes from a small town in rural northwestern Min- 
nesota, which is probably very much the same today as it was 
when he left. He associated with an institution which many people 
in medicine took pains in the 1930's to fight and to try to stamp 
out something called Group Health. 

Today things have changed dramatically and Group Health is 
now Health Partners. He does not come here to describe his insti- 
tution. But largely from a State like Minnesota and probably rep- 
resenting some of the cultural ethic, if you will, of the upper Mid- 
west, he can describe for you what people in a cooperative mode — 
as opposed to an alliance mode or you can use different names — 
but just sort of a sense of the spirit of cooperation, but what people 
who are both consumers of health care and providers of health care 
can do if properly motivated. 

I trust that one of the things he may comment on is that when 
we tried this in the Medicare program with our colleague John 
Heinz under TEFRA risk contracting, we proceeded to try to de- 
stroy the mood of cooperation by inappropriate payment systems. 

There is hope for the future. I introduced the legislative vehicle 
for that hope a couple weeks ago. Reintroduced it. I guess I intro- 
duced it originally back in 1985. But I do not know anyone who can 
speak more articulately for not just Minnesota but the North Da- 
kota that Kent and I spent time talking in last week. South Da- 
kota, just generally our part of the country than George Halvorson. 

The Chairman. Well, on that note, you are cautioned to be ra- 
tional at all times, Mr. Halvorson. We welcome you, sir. 



12 

STATEMENT OF GEORGE C. HALVORSON, PRESIDENT AND 
CHIEF EXECUTIVE OFFICER, HEALTH PARTNERS; AND 
CHAIR-ELECT, GROUP HEALTH ASSOCIATION OF AMERICA, 
WASHINGTON, DC 

Mr. HALVORSON. Well, thank you, Mr. Chairman. Thank you, 
Senator Durenberger, for that wonderful introduction. 

I do have the honor as serving as the President and CEO of 
Health Partners, a 600,000 member consumer-governed not-for- 
profit HMO in Minnesota. And I also have the honor of serving as 
Chair-Elect of the Group Health Association of America at this 
point and my primary testimony witness today will be on behalf of 
GHAA. 

We at Health Partners, however, participate actively in the Med- 
icare program, both in the risk program and as a social HMO. So 
I can speak from that experience as well. I am testifying today on 
behalf of GHAA, who has 350 health maintenance organization 
members with 33 million members, who account for about 75 per- 
cent of the total HMO enrollment nationwide. About 90 GHAA 
member plans have risk contracts with Medicare programs. This 
represents 77 percent of the plans who participate in Medicare; and 
92 percent of the enrollment in the risk program. Our members 
also participate in the program under cost-based arrangements. I 
am particularly pleased to be here today to talk about the role of 
HMOs in the Medicare program and in health care reform. 

HMOs provide comprehensive, high-quality care to more than 45 
million members nationwide and approximately 2 million Medicare 
beneficiaries. We focus on keeping people well by covering impor- 
tant preventive services and limiting out-of-pocket costs so that 
members are encouraged to see their personal physician wherever 
necessary. 

Consumers consistently give HMOs positive reviews, which are 
reflected in our high enrollment and our extremely high re-enroll- 
ment rates. Today about 45 million people, or roughly one out of 
every five Americans, who has health insurance is enrolled in an 
HMO by their own personal choice. 

GHAA estimates that the HMO enrollment will exceed 50 million 
by the end of 1994. HMOs promote quality of health care in many 
ways, including careful selection of providers based on professional 
qualifications and interest in working within a medical team. 

Eighty-five percent of HMO physicians nationwide are board cer- 
tified, compared to only 60 percent of all physicians nationwide. 
HMOs not only treat sickness, but they also make a unique con- 
tribution to promoting health. 

Speaking for a moment on our own health plan, our plan, for ex- 
ample, has made a commitment to work in partnership with its 
members to reduce the incidence of heart disease, diabetes and a 
number of other health care conditions by 25 percent over the next 
4 years. 

The Chairman. The next 4 years? 

Mr. HALVORSON. In the next 4 years by focusing on the health 
of our population. 

Medicare beneficiaries who enroll in HMOs are already realizing 
some of the central goals of health care reform. They have access 
to affordable high-quality comprehensive benefits in exchange for a 



13 

fixed monthly premium. HMO coverages for Medicare beneficiaries 
tend to be very affordable. 

Over 42 percent of the Medicare beneficiaries are charged a pre- 
mium for their HMO coverage of less than $20 per month. The 
HMO premium covers the Medicare enrollees' deductibles and coin- 
surance; and if you would take a look at average costs, the annual 
out-of-pocket costs for seniors who enroll in HMOs are about $600 
per year less than the average costs for seniors under traditional 
Medicare. 

A recent study of HMO Medicare beneficiaries showed that 
HMOs increased seniors' access to care and that about 90 percent 
of HMO members rated their HMO care as good or excellent. Four- 
teen out of fifteen HMO members would recommend their HMO to 
a friend or family member. We consider that to be a key indication 
of satisfaction. 

I mention all of those virtues of HMOs as a preamble to saying 
that as health care reform goes forward we strongly believe that 
all Medicare beneficiaries should have a chance to choose among 
delivery systems and that expansion of the availability of HMO 
membership to seniors should be an important aspect of this right 
to choose. 

We believe that Medicare contracting opportunities for HMOs, al- 
though the cannon should be improved, have created a solid foun- 
dation for the future. From this experience, several elements can 
be identified that we think will be important for the future, regard- 
less of the context of Medicare and health care reform. 

What is important to realize is that, despite the overall growth 
in the number of people in the U.S. who are receiving their health 
care through HMOs, there has not been the parallel growth in the 
number of Medicare beneficiaries enrolled in HMOs. This has been 
primarily due to the relatively low number of HMOs who have cho- 
sen to participate in the Medicare program, and it is not due to 
consumer reluctance to join Medicare HMOs. 

Consumers join HMOs when and where they are offered. How- 
ever, only one-fifth of the HMOs in this country are currently par- 
ticipating in the Medicare program. 

The Chairman. Does this reflect the payment rates? 

Mr. Halvorson. This directly reflects the payment rates. The 
payment approach that is available through Medicare is inad- 
equate, inconsistent, unpredictable and inequitable. And, it is the 
major reason 

The Chairman. Are there any other [Laughter.] 

Mr. Halvorson. And other than that, it is a fairly good system. 
[Laughter.] 

Mr. Halvorson. That is the direct cause. And inadequate rates 
are 

The Chairman. That is about as much incendiary talk as you get 
from a Swede. [Laughter.] 

Mr. Halvorson. Mr. Chairman, at the risk of correcting you, a 
Norwegian. 

The Chairman. Sorry, sir. [Laughter.] 

The Chairman. A profound mistake in that part of the world. I 
do apologize. 

Mr. Halvorson. A distinct difference. 



14 

Several bills have been introduced that would change the current 
risk contracting methodology and I would like to make a couple 
comments today about the bill that Senator Durenberger has just 
introduced, the Medicare Choice Act of 1994 and two quick com- 
ments about the administration's Health Security Act. 

We are pleased and not at all surprised that Senator Duren- 
berger has given improvement of the Medicare risk contracting pro- 
gram a high priority and that he has introduced the Medicare 
Choice Act of 1994. That bill incorporates some important prin- 
ciples of consumer choice among delivery systems for beneficiaries. 
It calls attention to the need for comparative information on health 
plan offerings that will permit Medicare beneficiaries to make truly 
informed choices for the first time. 

In addition, it acknowledges that the reimbursement mechanism 
must be improved in order for HMO options for Medicare bene- 
ficiaries to expand. We look forward to working with Senator 
Durenberger and his staff to ensure that a mechanism is developed 
to allow Medicare beneficiaries to compare the values of the var- 
ious options available. 

Now, relative to the administration's bill, while we find signifi- 
cant areas to support the administration's bill, such as the com- 
prehensive benefits and the universal coverage, GHAA opposes the 
provisions that would add an arbitrary ceiling and floor to the 
AAPCC payment methodology. We believe that provision would 
drive HMOs away from Medicare rather than attracting HMOs to 
it. 

The reduction that would result from the application of that arbi- 
trary ceiling is inequitable because it is proposed in combination 
with the compounding reduction that you have already heard about 
from other speakers, a compounding reduction in the fee-for-service 
Medicare payments that create the AAPCC. 

The AAPCC is a formula based on those payments and the ad- 
ministration's proposal is to reduce those payments, and on top of 
that, reduce the result. In other words, this reduction would un- 
fairly penalize risk contracting HMOs. GHAA also opposes the pro- 
posal in the administration's bill that would establish an outlier 
pool for high-cost cases. That would be funded also by reducing the 
AAPCC. 

The fact is that the outlier pool is not necessary. Commercial re- 
insurance is available to HMOs who need it and HMOs with suffi- 
ciently large enrollment self-insure. A primary impact of that provi- 
sion would be to increase administrative costs for the government 
and for the HMOs and it would discourage HMOs from working 
with Medicare. 

In conclusion, I would like to say that under health care reform, 
regardless of how the Medicare program is treated, there should be 
a strong commitment to offering Medicare beneficiaries a choice of 
delivery systems. HMO Medicare beneficiaries should continue to 
enjoy the same advantages of HMO membership as other HMO 
members, including high-quality, affordable comprehensive health 
services. 

GHAA and I look forward to working with the committee and 
with Senator Durenberger and staff to do anything we can to fur- 
ther this cause. Thank you, Mr. Chairman. 



15 

The Chairman. We thank you, Mr. Halvorson. 

[The prepared statement of Mr. Halvorson appears in the appen- 
dix.] 

The Chairman. I know that Senator Rockefeller will probably 
want to speak to some of these points as well. Could I just make 
one query? Earlier on I commented on — and Mr. Davidson was very 
emphatic about this — the extraordinary transformations in medi- 
cine that are going on right before us. The introduction of pharma- 
ceuticals that dealt with peptic acid disease has dramatically re- 
duced the operations that perhaps made up a quarter of all medical 
operations in hospitals and changed the stay in hospitals — Dr. 
Duvall is acknowledging — in the course of a decade. And you said 
something casually which Senator Bradley picked. The idea that 
you were undertaking a 25 percent reduction in heart disease, dia- 
betes, and I think you mentioned one other affliction. 

Senator DuRENBERGER. Pre-term birth. 

Mr. Halvorson. Pre-term birth is another. Right. 

The Chairman. Yes, sir. In 4 years. 

Mr. Halvorson. Yes. 

The Chairman. Among your 50 million people. That is a lan- 
guage you could not talk 20 years ago. Is this in part due to to the 
advent of pharmaceutical treatment of some kind? I believe in the 
case of heart disease there is that effect taking place, is there not? 

Mr. Halvorson. Mr. Chairman, the medical science of preven- 
tion has made huge progress in the last several years. We now 
have a very good sense of exactly what causes heart disease for 
most Americans. We have a good sense of who is at high risk for 
diabetes and things that can be done to prevent that. We have a 
much better sense of what the indicators are that someone is at 
risk of premature birth. 

What we are doing is identifying people at high risk in each of 
those categories and intervening in their health prior to the time 
that they have the heart attack or they become diabetic with the 
goal of working in partnership with them to move them back down 
the risk spectrum to a lower level of disease. 

The Chairman. This is almost a new field of medicine; is it not? 

Mr. Halvorson. It is almost a new field of medicine, and it is 
clearly where health care needs to go. 

The Chairman. Right before your eyes. Yes, right before your 
eyes. As we say primum non nocere, we do not want to get in the 
way of that. Thank you very much. 

Senator Packwood? 

Senator Packwood. Mr. Corry, AARP opposes means testing of 
Medicare; is that correct? 

Mr. Corry. Opposes it, yes, sir. 

Senator PACKWOOD. Yes. Why do you oppose it for Part B where 
the general fund is picking up about 75 percent of the cost and we 
means test lots of other things? Why should we not means test at 
least that part of Medicare? 

Mr. Corry. Senator, Medicare, whether it is Part A or Part B, 
is part of a social insurance system in this country in which indi- 
viduals pay in throughout their lives with the expectation that they 
will be eligible for benefits upon either reaching age 65, being dis- 
abled, or other specific criteria. 



16 

What the Association has said repeatedly, as you know, the 
members of the committee know, is that to means test the pro- 
gram, that is in the form sense to turn it into a Medicaid-hke wel- 
fare program would harm public support for the program. 

However, we have been, as you know, very supportive of progres- 
sive financing; sometimes almost to a fault. The Medicare program 
like Social Security involves both a combination of payroll taxes 
and progressive financing. In the case of the Part B program, indi- 
viduals pay in their Part B premiums which finance currently 25 
percent of outlays. 

Higher income older Americans, those really even in the middle 
income range, pay significantly more into Medicare Part B than do 
lower income beneficiaries because they pay income taxes. That is, 
they are helping support the other 75 percent. 

When you add the fact that as a part of the 1993 Budget Act, 
Congress included increased taxation of Social Security up to 85 
percent above certain thresholds 

Senator Packwood. I cannot remember, was AARP opposed to 
that, the means testing of Social Security? 

Mr. CORRY. We have opposed means testing Social Security or 
Medicare. We worked with this committee in 1993 to try to fashion 
a fairer provision relative to the increased taxation of Social Secu- 
rity. We did not support the President's proposal on that. We 
worked with the Chairman and other members of the committee to 
address that. 

Senator Packwood. Let me rephrase it. Do you consider what we 
are now doing to Social Security in the sense if you have enough 
income you are going to pay part of the taxes, do you regard that 
as means testing? 

Mr. CORRY. We have made a very clear distinction as we believe 
our members do, and the general public does, between progressive 
financing — what one pays in to support a program versus an out- 
right means test, ala welfare program. To do the latter is to seri- 
ously harm support for the program. To do the former is consistent 
with tax policy as well as our general approach to public subsidies. 
That is that they should be financed on a progressive basis. 

Senator PACKWOOD. It is OK to means test it going in, but not 
means test it coming out? 

Mr. CORRY. I would not say it is OK to means test it going in. 
What we have supported is progressive financing. 

Senator, I am not playing semantic games with you here. It is 
a very important distinction. 

Senator Packwood. All right. I am not sure I agree with you, but 
I understand the distinction. 

Let us assume that we are going to try to pay for whatever bene- 
fits that we are going to add and we just do not have the money. 
So we say, OK, we just leave Medicare alone. Just leave it the way 
it is. We do not want to add prescription drugs or anything else. 
We will not phase it in. We will go ahead and pass the health re- 
form bill ex-Medicare. Would AARP support that? Assuming you 
like the bill, would AARP support that? 

Mr. CORRY. Ultimately, that is a decision which our Board will 
have to reach. What our Board has said consistently over the past 
several months — and Senator Moynihan visited with a number of 



17 

our leadership back in late January — is that we believe that inclu- 
sion of long — term care in particular is fundamental to the support 
of older Americans. 

The point here I think is really beyond whether or not AARP 
supports or endorses any plan. We have been working with our 
membership for the last 5 years to try to educate them about some 
of the problems in health care, not just in Medicare, as well as 
some of the trade-offs, some of the very difficult options. 

We believe that every public opinion poll, every piece of data we 
can get our hands on, both quantitative and qualitative, shows very 
clearly that across all ages, not just for the aged, inclusion of a 
long — term care program, dramatically increases support for health 
care reform because it addresses one of the cost fears that people 
have sitting around the kitchen table. 

The issue of cost in health care reform is the glue in that debate, 
both at the macro level as well as at the level of the kitchen table. 

Senator Packwood. Is that the end of the answer? 

Mr. CORRY. For now. 

Senator PACKWOOD. It kind of abruptly stopped. I am still not 
sure I understand the answer. Are you sa3dng that some start to- 
ward long-term care is almost, even if it is a modest start, is al- 
most a quid pro quo for AARP to support any health reform bill? 

Mr. CORRY. What I am sa)dng, Senator, is what our Board has 
said, which is that inclusion of a long-term care program is fun- 
damental to the support of older Americans and, based on public 
opinion data across all ages, it is critical to the support of people 
of all ages. 

When you include a provision for home and community-based 
care, it dramatically increases support for health care reform. That 
is as far as I can go vdth you today. Senator. 

Senator Packwood. There is no question about that. If we in- 
clude prescription drugs, it expands the support for it even further. 
The more we add, the more support there is. 

Mr. CORRY. I would say, Senator, that clearly when older Ameri- 
cans as well as their families look at a benefit package in health 
care reform, they view that as part of — not the entire equation but 
part of — the equation in dealing with the problem of costs that they 
confront. 

The comments of some of the other panelists and the Chairman 
about the changes in behavior and personal responsibility are 
equally important. We find among our members, and particularly 
among our younger members — half of our members are under 65 — 
that there is a growing awareness that personal responsibility 
helps to reduce health care costs. It is not simply a matter of the 
government regulating. Each individual bears some responsibility 
to stay healthy and that is really a changed environment fi-om even 
just a few years ago. 

Senator Packwood. Thank you, Mr. Chairman. 

The Chairman. Thank you. Senator. 

Could we agree that the AARP is the A-A-R-P and not "arp." 

Mr. CoRRY. Thank you, Mr. Chairman. We could. 

The Chairman. There you are. 

Senator Bradley. Arp was a great artist. 

The Chairman. Arp was a great artist says the Senator. 



18 

Senator Grassley. ARP is an agricultural subsidy. [Laughter.] 

Mr. CoRRY. I am learning more each minute. 

The Chairman. Therefore, organizations are called what they 
wish to be called in this committee. 

Senator Baucus? 

Senator Baucus. Thank you, Mr. Chairman. 

As I understand it, the AMA and the Hospital Association and 
AARP essentially opposed these Medicare reductions because they 
cannot make ends meet if these proposed reductions go into effect. 
That is taking no other factors into consideration. 

Of course, a major other factor is Medicare cuts in the context 
of health care reform, particularly under the President's plan or 
under other bills that are proposed here. That is, individuals will 
have health insurance. They will get vouchers, or something, to pay 
for health care. A lot of hospitals today face the problem of charity 
care and I can understand it. If there are Medicare cuts to hos- 
pitals, that puts greater pressure on charity care, maybe even less 
charity care. 

But, of course, all of this again is the context of other provisions 
that we are talking about here. I wonder if you could address that, 
Mr. Davidson, particularly in the President's plan — theoretically all 
patients would have health insurance, would be paying health pre- 
miums to the alliance, to the plans and therefore to the hospitals. 

Mr. Davidson. Well, the cuts that the President proposes on 
their face are not connected to anything in terms of behavior 
change as well. And, in fact, the President's plan does not call for 
changing the delivery system for people who are enrolled in the 
Medicare program. Meaning, there is an expectation that somehow 
we will be able to extract savings, pay providers less, and yet not 
change the behavior of the patients in those programs. 

So we start at the outset saying that if we are going to extract 
any savings in Medicare, and there are certainly some savings to 
be extracted, by changing the incentives and changing the behavior 
of an awful lot of people, if we go down that path, there are some 
things that can happen. But the President's plan does not propose 
this. 

None of the plans before the Congress propose this until Senator 
Durenberger's proposal for a choice. 

Senator Baucus. Sorry, do not propose what? 

Mr. Davidson. Integrating the Medicare program into new deliv- 
ery systems. As Mr. Halvorson was calling for, we need more incen- 
tives to have people who are in the Medicare program move to inte- 
grated delivery systems. 

Senator Baucus. They keep saying that Medicare under the 
President's plan people would have health insurance. So there 
would be less need to cost shift in the hospitals and second, there 
would be less burden on Medicare or private pay patients who do 
not now have insurance to buy the resources for the charity care. 

Mr. Davidson. Senator, everyone would assume that if you are 
going to have more flow of money to pay for care for people who 
did not have the ability to pay before, you can then extract cuts on 
the other side. 

The fact of the matter is, if you listen to those numbers, if we 
pay 71 cents on the dollar for treating senior citizens and you pay 



19 

88 cents or 82 cents for treating medically indigent patients, and 
then ultimately the remainder of your patients, even those who 
could not pay before, let us say pay 100 cents on the dollar, we are 
confronted in the hospital community with fixed-based contracts, 
managed care contracts, that are all at cost or negotiated dis- 
counts. 

All of this does not add up, meaning, it does not come out to 100 
cents on the dollar when you put them altogether. So everybody 
cannot get it at a discount. Somebody has to pay retail. 

Senator Baucus. I still do not understand this. If there are a lot 
of patients today who are charity care, who do not have health in- 
surance, for example, and if under health care reform those people 
now do have insurance so they are also, therefore, pa3dng into the 
system, would there not be less need for Uncle Sam through Medi- 
care disproportionate share to provide charity care for hospitals? 

Mr. Davidson. We would hope that down the road that there 
would be less of a need for a cost shift given that segment of our 
population having an ability to pay. In most cases, that represents 
about 5 percent of a hospital's annual revenues — some $10 billion 
in the system in totality. So when you add all of these numbers up, 
that will help a bit, but it would never take you to a logic that says 
that you could reduce Medicare payment to 71 cents on the dollar 
and still have this system work. 

Senator Baucus. One observation I have is this. I come from a 
State which is rural. A lot of smaller hospitals have a hard time 
meeting Medicare needs. Some of them are on the verge of folding. 
I do not ever see that with large hospitals. Are there large hos- 
pitals — I mean, over 250 beds, 500-bed hospitals — in this country 
that fold, go belly up? 

Mr. Davidson. Yes, sir. 

Senator Baucus. Where are they? 

Mr. Davidson. They are in scattered urban areas around the 
country. In fact, let me address that point. I think it is a very im- 
portant point, because one of the things that we look at in terms 
of hospital financial statistics is aggregate margins that represent 
an apparent, on their face, health of America's hospitals. The last 
year that we looked at them, 1992, the aggregate margins for the 
nation's hospitals were roughly 4.7 percent of total margin. 

Now that looks like that makes for a healthy hospital system. 
But there is dramatic differences between institutions. One out of 
every four hospitals in America is in serious financial trouble. 

The Chairman. One out of every four hospitals? 

Mr. Davidson. One out of every four, meaning operating with 
negative total margins. You can add to that another 25 percent 
that are on the margin of being in financial trouble at any time. 
So that if there is no predictability in the payment system, they 
could be in trouble very fast and our numbers would say that 50 
percent of America's hospitals seem to have some degree of stabil- 
ity. But if we keep undermining the base upon which we pay for 
all of this care, those institutions, too, could be in trouble. 

So we have seen. Senator, the closure on average of between 30 
and 40 hospitals each year — some small, some larger, some rural, 
some urban. They are not in a clear pattern in terms of a specific 
area in the country. We often wonder what keeps New York City 



20 

hospitals alive because they have been going from negative margin 
to negative margin to negative margin. 

The Chairman. So do New York City hospitals. 

Senator Baucus. I must say though, there is a bit of a difference 
because in urban settings, if an urban hospital closes or merges or 
some combination occurs, patients there can always get health 
care. 

In rural America when a hospital closes it is gone. There is no 
health care. There is no alternative because there is no other hos- 
pital. Which leads me to conclude that in rural America because 
there is every incentive to stay alive, it is literally life and death, 
that hospital will make every cut, it will make every efficiency to 
stay alive. 

Whereas, in urban settings because patients can always go some- 
where else when a hospital closes, a lot of the reasons why urban 
hospitals close have a lot to do with the efficiencies and inefficien- 
cies, but also have to do with mergers and consolidations and so 
forth. So there is really apples with oranges. 

Mr. Davidson. Well, I think you are right. I think that for rural 
America what we find, as we see those institutions being in trouble 
and ultimately closing, there is always an attempt to try to leave 
something in the community so that there is access at least to pri- 
mary care and the referral to some other kind of institution. 

Senator Baucus. The main point I am trying to make here 
though is, we all get a little worried about Medicare cuts in hos- 
pitals. Obviously, there are a lot of other areas where there are 
going to be in health care far more a lot more dollars coming in. 

When we talk about the "devastating effect" that Medicare cuts 
are going to have on hospitals, I think it is more honest, frankly, 
to also talk about the other sources of money that offset the Medi- 
care cuts so we get a more realistic picture of what is happening. 

Mr. Davidson. I think the danger. Senator, is that if we decide 
on a starvation strategy to squeeze out capacity, we may squeeze 
out the wrong capacity meaning the very thing that you said. 
There may be essential institutions that are on the edge of finan- 
cial trouble and just by cutting payment across the board for all in- 
stitutions they may be forced out of business and forced to close. 
They may not be the ones that you want closed. 

Our view is that we have to have a system that has incentives, 
community-by-community, for people to come together and make a 
determination about the appropriate levels of capacity through col- 
laboration, working with each other. 

In your State we have hospitals looking at developing a state- 
wide network so that there are connections with one another and 
so there is an ability to move patients from place to place. That is 
the direction we need to go. 

The Chairman. I think the answer is we discuss both. 

Senator Durenberger? 

Senator Durenberger. Mr. Chairman, thank you. 

Thank you, George, for your presentation. I would like to make 
one observation about your plan's advertisement — actually I held 
up the advertisement at a hearing a couple weeks ago and I am 
glad you gave it some meaning, particularly in light of a reference 



21 

earlier to herding people into managed care which we hear about 
so much. 

Health maintenance organizations generally got a bad name and 
herding is just one of those. But if you think about what George 
told you in terms of the 600,000 members who have an opportunity 
not only to maintain their own personal health, but because of the 
cooperative nature of the ownership, of their individual ownership 
in this organization, everyone benefits if each person tries to make 
their contribution toward their personal health maintenance. 

This is a two point something billion dollar a year organization. 
This is no experimental ARP farmer group or something like that. 
This is $2.38 billion last year, I think, in revenue; 600,000 mem- 
bers and it is for real. It is really happening and it can happen all 
over America. 

The second point is on the importance of what all of these people 
are testifying to, and Senator Baucus' comments. Last week, I was 
in Wadena, Minnesota — the Tri-county Hospital there. Wadena 
County, 20 percent of its residents are Medicare eligible; 30 percent 
are Medicaid eligible; but 50 percent of the hospital admissions — 
and I think this is our typical small towns — 57 percent of the hos- 
pital admissions are paid for by Medicare. 

I went through the hospital that night and everybody was over 
65. Another 13 percent are Medicaid. While I was ending my visit 
about 8:00 in the evening, the on-call doctor came down and he 
said, "I just had to tell you, today I have had 50 calls. The first 
one came at 3:00 a.m. Seventy-five percent of those calls were from 
Medicaid persons." 

I would guess that 90 percent of them were not urgent emer- 
gency kind of caUs. This is the way in which our rural hospitals 
today are being used. So when you hear the reality that Medicaid 
or medical assistance on the average nationally is pa3dng 72 cents 
on the dollar and some of our States 40-some cents on the dollar 
of charges, and Medicare is down to 82 cents on the dollar or 85 
cents, whatever Dick Davidson said. 

The reality is, there are not many folks left in Wadena to bear 
the cost shift for the lower payments by Medicare, Medicaid or the 
over utilization comp£u*atively of the system. I think that is the 
point that Max is making and the point that each of the witnesses 
has been making here today in terms of adequacy of the payments. 

Now if I can go to the next point, for those of us who come from 
some of the more conservative practicing States, the average 
amount per capita for Medicare spending last year was $3,171. In 
the District of Columbia, that was $4,224. In Minnesota, $2,248 or 
29 percent below the national average. I do not have the Utah fig- 
ure or the Oregon figure, but they were substantially below Min- 
nesota. 

Now to translate that, and even within our communities, Henne- 
pin the national average is $3,171 on a monthly basis translating 
this into what is cedled the AAPCC, which is the way we try to 
compute the average cost per month of these payments. 

New York City, as we have discussed before, is at $624.41 per 
month over a national average of $378.13. Albany, New York which 
is a big city is $341.52. It is actually below the national average. 
Hennepin County, Minnesota, which is the most populous county 



22 

in our State, the City of Minneapolis is there, it is over a milUon 
people, $352.10. Right next to it Scott County, Minnesota, $252.27. 

People do not sit in Hennepin County and get all their care in 
Hennepin County or sit in Scott County and get all their care in 
counties. As we all know, people are getting their care in commu- 
nities much larger and this kind of disparity and the way in which 
we continue to reimburse on a county by county or whatever it is 
basis needs to be dealt with. 

And whatever is the appropriate way, and we have talked about 
this, not just for those of us who come from rural States and sus- 
tain the rural hospitals, but because at some point in time in my 
State it is now the major political issue, is sending our money to 
other parts of the country where it is not being spent as well as 
we try to spend it here. 

So I think the challenge of universal coverage is to deal with 
that. If I may, Mr. Chairman, just one question. 

The Chairman. Yes, please. 

Senator Durenberger. I ask this of George. As it relates to ben- 
efits versus services, we are going to be laboring here about how 
to define benefits and one of the arguments some of us will be mak- 
ing that it would be to everyone's advantage if we gave a definition 
to the benefit but leave the specific services that flow from that 
benefit to each of the health plans. 

And as it relates to seniors and people with disabilities who are 
eligible under Medicare, would you describe for us the value in our 
setting a benefit which is comparable to the current kinds of bene- 
fits that we have in the Medicare program, but leaving the specific 
services that flow from that benefit to each of the health plans if, 
in fact, people are able to choose a health plan rather than staying 
in the existing fee-for-service system. 

If they stay in the fee-for-service system now, they do not get 
prescription drugs. There are certain things they do not get. If they 
could move into an accountable health plan with a reasonable reim- 
bursement system, how might this additional services flow fi*om 
the same benefit description? 

Mr. Halvorson. Mr. Chairman and Senator Durenberger, I 
think that is a very important point. The reason it is an important 
point is because this trick definition of individual eligible benefits 
can in some ways almost be crippling. 

Let me give you a quick example; congestive heart failure in our 
system. We basically provide all of the care necessary for patients 
with congestive heart failure. One of the things we have discovered 
is the benefits of intervening early with those patients we identify 
who are at high risk of the disease. We basically create a special 
care plan for them that actually involves us putting scales in their 
homes and having a nurse call them everyday to make sure that 
they have not had a weight change. Because if they have a weight 
change, it is an indication of fluid retention. 

Basically, through that type of thing and a series of other similar 
programs we have reduced the number of admissions to the hos- 
pital for congestive heart failure by half for the population we are 
serving. We have improved the quality of care for those people sig- 
nificantly. We have reduced our cost of care because we do not 
have to admit these people to a hospital. 



23 

The Chairman. And there would be a corresponding decline in 
bypass operations? 

Mr. Halvorson. And there is a corresponding decline, particu- 
larly in hospitalizations, for that population. There is a cost savings 
to it, but more importantly there is a major quality of care im- 
provement because we are checking on this population. We can do 
that in a pre-payment setting. There are no fees for scales. There 
are no fees for telephone calls by nurses. There are no fees for care 
plans. 

So basically we could not afford to deliver that kind of care out- 
side of a prepajrment system. So what we need to do is to be obli- 
gated to provide the basic services that the people need, but we do 
not want an excess amount of restriction on the specifics because 
it stifles and even prevents creative and effective solutions in many 
cases. 

The Chairman. That is an important point and we thank you, 
sir. 

Thank you, Senator Durenberger. 

Senator Grassley? 

Senator Grassley. Mr. Davidson, I think Senator Baucus got at 
the main point I wanted to get at. I might follow it up with just 
a few questions. But I cannot do anything more than emphasize 
what he emphasized, except for a proposition that some might have 
in this committee that because we have additional revenue coming 
in under a universal plan by people paying that are not paying 
today, that that might make up for some of the cuts in Medicare. 

I do not accept that or if I accept it, I surely do not think it is 
going to make up all that lost revenue. But even given that, in a 
State like mine where we have the third highest percentage of peo- 
ple over 65 and the highest percentage of people over 85, and 
where we have 92 percent of our working population covered by in- 
surance — 8 percent that are not covered — we do not have the lee- 
way in our State that a State that has 15 percent or more — in 
other words above the national average — of uncovered who will be 
covered under health reform to make what we would lose in Medi- 
care. 

I think that is a given, at least it is not going to be evenly dis- 
tributed, it seems to me, around the country, if that is the particu- 
lar case. 

In your statement you did mention the negative impact on teach- 
ing hospitals, on large urban areas and on communities with hos- 
pitals serving disproportionate large numbers of low-income pa- 
tients of large Medicare reductions. But I do not know whether you 
meant to leave out Medicare — dependent hospitals. 

But just a simple question. Did the Lewin study analyze the im- 
pact of the Clinton health plan on Medicare — dependent hospitals? 

Mr. Davidson. It looked at all hospitals and they were ju'^t a 
piece of that. Senator. 

Senator Grassley. All right. When we were working on legisla- 
tion to phase out this program, we assumed that a phase-out of the 
urban rural differential this year in October would make up most 
of the revenue lost from the phase-out of the Medicare-dependent 
hospital program. Now I understand that probably a majority of 



24 

Medicare-dependent hospitals in Iowa will be driven into the red 
when they drop out of the program. 

Would this be the case in other States as well, do you know? 

Mr. Davidson. Yes, sir. 

Senator Grassley. It would be. 

Thank you, Mr. Chairman. 

The Chairman. Thank you. Senator Grassley. 

Can we not all agree we see a problem here that has got to be 
addressed? You are not going to keep your hospital system paying 
71 percent of the costs for a certain class of patient. Something in 
that arithmetic does not compute. 

Senator Bradley, you no doubt have figured a solution to this. 

Senator Bradley. Yes, I have, Mr. Chairman, but I am going to 
keep it to myself for the time being. 

The Chairman. Put in play in the last minute. 

Senator Bradley. Right, the last minute. 

The Chairman. I see. 

Senator Bradley. Mr. Davidson, you mentioned that you thought 
that we were unnecessarily constraining ourselves as we think 
about national health care because we have a very narrow funding 
base. Each of you — Dr. Duvall, Mr. Halvorson, and Mr. Davidson, 
I think Mr. Corry — have also talked about the need to change be- 
havior as a way to reduce costs. 

What behavior would you like to change? Dr. Duvall? 

Dr. Duvall. I think one of the things we can do besides working 
with you through the future as things do change in a kaleidoscopic 
way that other 

Senator Bradley. I am thinking of individual behavior. 

Dr. Duvall. I think the incentives that we are seeing with the 
RBRVS is one good answer to your question, so long as we do not 
take that payment reform vehicle and destroy it as some of the 
President's proposals would start to do. 

Senator Bradley. All right. Mr. Davidson? 

Mr. Davidson. Senator Bradley, most Americans are in charge 
of their own care. They make decisions about who to see. Most of 
them pick out specialists. Very few people have a quarterback for 
their care, someone to kind of help them navigate through the sys- 
tem. 

We think that there ought to be some form of shared responsibil- 
ity between individuals and the health plan that they be enrolled 
in, and that the behavior change there can be helpftil in getting 
people to the most effective mechanisms. 

We think we have got to have new incentives that change the be- 
havior of hospitals and doctors and our patients as well. The kinds 
of things that Mr. Halvorson is talking about are the very kinds 
of things that we are sajdng ought to be sweeping America. We 
have got to have people stopping trying to put each other out of 
business in the hospital sector and coming together and working in 
collaboration, focusing on changes in health status in the commu- 
nity. 

You know, we do a tremendous job of taking care of people who 
show up at our door. We have no idea whether we improve health 
status in the community. 



25 

Senator Bradley. Now one of the things we have had a number 
of witnesses come before us and talk about is individual behavior 
that drives health care costs and the effort to try to change certain 
individual behavior that drives health care costs. 

We had one witness — Mr. Califano came from the Center of Ad- 
diction at Columbia University and talked about the tremendous 
costs that come from use of tobacco. Another person talked about 
tremendous costs that come from violence and particularly guns in 
this society. 

Now, you know, you are lamenting a funding base that is nar- 
row. Do you support the dollar tax on tobacco? 

Mr. Davidson. Absolutely. 

Dr. DuvALL. $2, sir. 

Senator Bradley. $2, OK. 

Mr. Corry? 

The Chairman. Do I hear $3? 

Senator Bradley. Mr. Corry? [Laughter.] 

Mr. Halvorson. You have $3, sir. 

The Chairman. Halvorson says $3. Mr. Corry, bid it up. [Laugh- 
ter.] 

Senator Bradley. Mr. Halvorson, I cannot see you but I assume 
you are still there. I will have to catch you on TV here. [Laughter.] 

Do you say yes? 

Mr. Halvorson. Yes. 

The Chairman. He said $3. 

Senator Bradley. All right. Let me ask you this. So on the retail 
end you support a $1, $2 — you said $3 — tax on a pack of cigarettes. 
What about on the marketing end? Right now across this country 
there are 16-year-olds and 15-year-olds receiving packets from R.J. 
Reynolds that advocate Joe Camel, who is sweeping high schools 
across this country. Sign up with Joe Camel at age 15 and become 
addicted to tobacco. 

Now, the view expressed in some places, here one, that the com- 
panies that advertise tobacco should not have a tax deduction. Why 
should companies that send advertisements to get kids hooked on 
tobacco have taxpayers subsidize them by giving them a tax deduc- 
tion? Now, if we eliminate that, let us say we could raise a billion 
dollars to pay for health care, does that make sense to the AMA? 

Dr. DuVALL. Yes, sir. We are strongly in favor of that. We are 
so much against Joe Camel, the company put a Joe Camel ad up 
on the building next to our Executive Office Building in Chicago. 
We would be against continuing that deduction and the very adver- 
tising itself 

Senator Bradley. Mr. Davidson? 

Mr. Davidson. Senator, tobacco, if taken as prescribed, is certain 
to cause you to be a patient in our hospital at some point. If that 
can be avoided and it ultimately takes you to death, you have 
tough choices to make. We would support taxing on tobacco and 
other actions that are appropriate. 

Senator Bradley. And removal of the deduction for advertising? 

Mr. Davidson. Why not? 

Senator Bradley. Mr. Halvorson? 

Mr. Halvorson. If tobacco were invented today, it could never 
legally be brought to market. 



26 

Senator Bradley. So why should taxpayers subsidize its adver- 
tising? 

Mr. Halvorson. Exactly. 

Senator Bradley. You support eliminating it? 

Mr. Halvorson. Why should taxpayers subsidize any portion of 
it? 

Senator Bradley. Mr. Corry? 

Mr. Corry. Senator, I think more than simply looking at tobacco 
advertising is in order. Yesterday's Times, Sunday's Times, carried 
the story of direct consumer advertising by pharmaceutical compa- 
nies. We have heard much from this committee and other commit- 
tees about whether or not there is induced demand in the area of 
pharmaceuticals or other areas of health care. 

So I think if you address the obviously worthy issue of deduc- 
tions 

Senator Bradley. Does AARP support the denial of the tax de- 
duction for tobacco advertisers? 

Mr. Corry. We have supported your efforts in that in the past, 
Senator. 

Senator Bradley. So the answer is yes? 

Mr. Corry. And we expect to continue to. 

Senator Bradley. Thank you. 

The Chairman. Thank you. Senator Bradley. 

Senator Hatch? 

Senator HATCH. Thank you, Chairman Moynihan. I appreciate 
your holding these hearings. According to the Congressional Budg- 
et Office the "proposed savings" — I have to put them in quotes be- 
cause I do not think they are there — would grow from $19 billion 
in 1998 to $37 billion in the year 2000 and $77 billion in the year 
2004. 

Most of those cuts, according to the CBO, would be made in re- 
imbursements to hospitals, physicians, and other providers of 
health care services. Now that is something that causes me a great 
deal of concern as I know it does other members of the committee. 

I am not opposed to examining needed policy changes in Medi- 
care, but I am opposed to arbitrary reductions and I am opposed 
to them solely for the purpose of providing health care to non-Medi- 
care beneficiaries who are now uncovered. And it is of great con- 
cern to me when I hear reports that the reimbursement schedules 
are deterring doctors from wanting to treat patients who are on 
Medicare and Medicaid. 

You know, I believe we have got to watch that closely. And to cut 
the program at a time when you are not even making adequate re- 
imbursements just seems crazy to me. Over the past 30 years, the 
Finance Committee has always been committed to the 35 million 
people beneficiaries which the program serves. I think we have to 
enhance that commitment, not just stay committed to it. 

But let me just ask one question to all of you. Section 2003 of 
the President's bill gives the Secretary authority to exclude from 
coverage under Medicare part A drugs for which the Secretary has 
not been able to negotiate an acceptable price. Now this provision 
clearly gives the Secretary authority to deny new drugs to senior 
citizens because of their price. 



27 

The experience of countries such as Britain which operate under 
a global budget is that care is rationed to the elderly. Now, we 
know that the elderly have routinely been denied life-saving treat- 
ments and drugs in Britain. Can you give us your thoughts about 
how you see the impact of such an exclusion on the delivery of new 
drugs for the elderly? May we start just left to right? 

Mr. CORRY. Senator, I think probably more has been said and 
written about that one section than any of the other provisions. It 
provides obviously a broad grant of authority to the Secretary. We 
believe that if there is — and we believe there should be — an out- 
patient pharmaceutical benefit, there has to be strong cost contain- 
ment. 

There will obviously have to be special attention paid to be sure 
that so-called breakthrough drugs, if they are really breakthrough 
drugs, can be brought onto the market, keeping in mind the invest- 
ment that the pharmaceutical company may have made. 

However, I want to recall, if you will, the experience that we had 
with the Medicare catastrophic drug benefit. As Senator Chafee, 
Senator Durenberger, and others remember who helped to try to 
fashion that benefit, in the end, in the conference report there was 
no cost containment. That was left for next year or the following 
year or the next reconciliation bill. 

The lack of that cost containment drove the premiums through 
the roof. As I think both of you will recall, trying to find the last 
billion dollars to pay for that benefit drove that so-called surcharge 
or supplemental premium another $300 on the maximum. 

So we would be very, very careful, obviously, to be sure that 
breakthrough drugs can indeed be brought onto the market be- 
cause of the benefit that they would bring. But at the same time, 
we want to be sure there are strong cost containment provisions. 
We are talking, obviously, with a lot of pharmaceutical interest to 
try to see whether or not they have other ideas. But we would urge 
you to exercise real caution in this area to be sure that there is cost 
containment on any pharmaceutical benefit. 

Senator HATCH. Dr. Duvall? 

Dr. Duvall. The AMA would share your concern. Senator, of 
having that much power centralized. With any new breakthrough 
drug there would be a strong scientific base to its development. I 
doubt if there would be great opposition for fair accountability of 
those development costs, which probably can be actuarialized and 
accounted for. 

The savings that Senator Moynihan talked about in terms of the 
drugs used in treated acid peptic disease are a good example of 
savings that can accrue to the system through drug development. 
I think an even better example is the experience with mental 
health care needs with the major tranquilizers and other mood al- 
tering drugs. I mean, there are many savings that can be achieved. 

I think one thing that we should be looking at more seriously as 
a more positive incentive is better research funding, probably 
through NIH mechanisms typically to help support the research 
and offset some of the costs of these new drugs under development. 

Mr. Davidson. Senator Hatch, I would put it in a different con- 
text and say that the last thing we want to get into is a regulatory 



28 

arrangement to regulate the infusion of technology and pharma- 
ceuticals and all of the rest. 

What we need to do is to reverse the incentives. These things 
need to come on line into the market place, into delivery systems 
that have fixed payment where we ultimately are very careful 
about the way we allocate our resources and there needs to be a 
lot of discretion in the use of new technology and new pharma- 
ceuticals and there must be shared responsibility in organized de- 
livery systems. 

That is the best way to treat these matters as opposed to regulat- 
ing them. 

Mr. Halvorson. Senator Hatch, I would agree very much with 
what Dick Davidson just said. We should be focusing on what 
works. We should be focusing on using drugs that improve out- 
comes. And when drugs do improve outcomes, we ought to be using 
them, and we ought to be using them in the context of teams of 
providers working to improve the overall output and outcomes of 
the system. 

If we delegate that to some regulatory body, the likelihood is that 
that would be somewhat arbitrary, somewhat bureaucratic, some- 
what inflexible. I have little confidence that it would be as effective 
as a marketplace approach would be. 

Senator HATCH. Thank you, Mr. Chairman. 

The Chairman. Thank you, Senator Hatch. 

Senator Rockefeller? 

Senator ROCKEFELLER. Thank you, Mr. Chairman. Mr. Chair- 
man, I am struck by some degree of irony here. In posing a ques- 
tion to Dick Davidson, with whom I had a very good talk two 
nights ago when I was in Pittsburgh, I would point out to him that 
the Lewin study is very much like the Nunn-Domenici amendment 
which we had on the floor the other day, which would have cut $99 
billion out of Medicare willy-nilly. And then, of course, the purpose 
was to save that for Defense. 

And to his great credit, John Chafee voted against it. He is, how- 
ever, the only member of the Republican side of this committee 
who voted against that amendment. So when we are talking about 
cuts in Medicare, we have various ways of expressing our views on 
cuts in Medicare. That is typical of Senator Chafee and showed his 
courage. He was joined by Senator Jeffords in that. 

And, of course, the amendment carried. As you know, the amend- 
ment won. Then Senator Mitchell was smart enough to be able to 
turn that into a sense of the Senate resolution, but otherwise it 
would have been binding by the Senate. That would be just dev- 
astating and I hope all of you gentlemen understand that when we 
talk about Medicare. 

What the Lewin study basically demonstrates is a Nunn-Domen- 
ici amendment. And from the hospital point of view — and this has 
been mentioned already — PROPAC says that Medicare pays you at 
about 90 percent. You did not disagree with that when we talked 
in Pittsburgh. 

Mr. Davidson. Eighty-eight cents on the dollar. 

Senator ROCKEFELLER. AJl right. So Medicaid, which is less, and 
PROPAC says it is about 80 percent, 80 cents on the dollar. Medic- 
aid is going to disappear except for the long term part. That is all 



29 

going to be a part of the Clinton plan and paid at the same rate 
that others who are in the alliances wrill be paid. So that will be 
a big bonus for you, will it not? 

No more Medicaid. 

Mr. Davidson. We would like to believe that that improved pay- 
ment will be a big help. 

Senator Rockefeller. But if it passes it will be. 

Mr. Davidson. It will be improved 

Senator Rockefeller. And that is not reflected in this study? 

Mr. Davidson. No, that is not. 

Senator Rockefeller. Universal coverage, of course, would end 
the inappropriate use, wasteful use, of emergency rooms and would 
mean that you would have the end of uncompensated care for hos- 
pitals; is that not correct? 

Mr. Davidson. We do not think that that is actually correct, Sen- 
ator. 

Senator ROCKEFELLER. How is that incorrect? 

Mr. Davidson. No matter what direction you go, there are al- 
ways going to be people who fall outside of this. 

Senator Rockefeller. Yes, so there may be 1 or 2 percent. 

Mr. Davidson. I am talking about aliens and so forth. 

Senator Rockefeller. But instead of having 40 million you are 
going to have 3 or 4 million. Most everybody is going to have 
health insurance. Virtually everybody is going to have it. 

Mr. Davidson. But I would like to caution you that there is a 
difference between having coverage and having access. Last year, 
and this year as well, where the 90 million Americans will visit 
hospital emergency rooms, spend a day in the hospital 

Senator Rockefeller. I do not want you telling stories. This is 
my 5 minutes. 

Mr. Davidson. All right. 

The Chairman. Now you can have a little extra. 

Mr. Davidson. The point is that they will still come even with 
health insurance to hospital emergency rooms because they may 
not have access to a physician. That pattern is clear with many 

Senator Rockefeller. Yes, but it is going to be a much dimin- 
ished pattern, because what is going to happen over the next 6 or 
7 years is that while we are implementing health care reform the 
American people are going to grow tremendously in their under- 
standing of access, what they can do about health care, and also 
their own individual responsibilities. And emergency room use is 
going to go down, it is going to be used for what emergency rooms 
are meant to be used for. 

You would agree with that, would you not? 

Mr. Davidson. But not for the Medicare population in that we 
are not seeking alternative ways to treat them. 

Senator Rockefeller. I have not gotten to Medicare yet. All 
right? 

Mr. Davidson. All right. 

Senator Rockefeller. But Medicare is outside that system? 

Mr. Davidson. Yes. 

Senator Rockefeller. But Medicaid is in the system and all of 
a sudden your reimbursements, therefore, go from 80 cents, let us 



85-417 - 95 - 2 



30 

say, to 100 cents on the dollar or something of that sort. It would 
be, what, everybody else pays in the alliance. 

You would also have the advantage of malpractice reform, which 
I hope will be stronger than what the President has. That would 
help you, would it not? 

Mr. Davidson. It certainly would help. But we need to realize 
that that will help in a limited way in terms of the actual fiscal 
impact. 

Senator Rockefeller. But every 1 percent, 2 percent of what- 
ever counts, does it not? 

Mr. Davidson. Sure. One percent multiplied many times adds up 
to a big number. 

Senator ROCKEFELLER. Right. And then there is also going to be 
clarification of anti-trust laws for hospitals and this is also true for 
doctors; is it not? In malpractice reform, will that not help you. Dr. 
Duvall? 

Dr. DL'VALL. I think it will probably help us more than the hos- 
pitals because it has to do with what we do. 

Senator Rockefeller. But it will help. Yes. 

And for both of you anti-trust laws will be clarified so that you 
are able to negotiate, and collaborate when appropriate. Will that 
not be helpful? 

Mr. Davidson. That will be helpful. 

Senator ROCKEFELLER. The standard benefit package will reduce 
your need to track insurers different coverage rules, will it not? 

Mr. Davidson. It should be helpful. 

Senator ROCKEFELLER. Will not the single claim form, which will 
surely be part of health care reform, will that not enormously re- 
duce the 1,500 different pieces of paper that you have to deal with? 

Mr. Davidson. If, in fact, you pass the President's plan, that 
would be a big help. 

Senator ROCKEFELLER. And hospital costs for health insurance 
premiums for their own employees, in fact, will grow much more 
slowly than today. So that your 80 percent would, in fact, be cheap- 
er than before because of the alliances and the efficiencies that are 
achieved through that. Premium contributions will be more equi- 
table. Hospitals will no longer have to pay for health coverage for 
their workers' spouses; is that not true, if we pass the Clinton bill? 

Mr. Davidson. Yes. 

Senator Rockefeller. So that is a help. Health benefits admin- 
istration costs will be dramatically reduced. I think we have al- 
ready talked about that. 

Well, I guess I would just ask one final question, in that I have 
not asked any. [Laughter.] 

Mr. Davidson. You have asked me some, Senator. 

Senator Rockefeller. We agreed that a trillion dollars is being 
spent on health care this year, 1994. We agreed that about $200 
to $250 billion of that is inappropriately or unnecessarily waste- 
fully or, in some cases, fraudulently spent. There is no disagree- 
ment on that, is there? 

Mr. Davidson. We will not debate it. 

Senator ROCKEFELLER. Is there some part of that which belongs 
to hospitals? 

Mr. Davidson. Conceivably. 



31 

Senator Rockefeller. Thank you, Mr. Chairman. 

The Chairman. Thank you, Senator Rockefeller. Did we all agree 
on $250 bilHon? 

Dr. DuvALL. No, not me. 

The Chairman. All right, as usual we are not 

Senator Rockefeller. Mr. Chairman, I have to say it is a figure 
which I have found over the last number of years very few people 
disagree. 

The Chairman. Well, we do not hear a lot of disagreement. 

Senator Rockefeller. Yes. 

Mr. CORRY. Mr. Chairman, if I could perhaps take a moment to 
address Senator Rockefeller's comment. I think what you are hear- 
ing from this panel is not a lack of recognition that there will be 
additional reductions in Medicare, whether it is in health care re- 
form or as part of the Entitlement Commission's recommendations 
which this committee might take up, or whatever the next floor 
amendment might be. 

I do not think that anyone here seriously suggests that there will 
be no further Medicare reductions in the future. I think what we 
are saying, however, is that the careful stewardship which this 
committee has exercised needs to continue to protect the program's 
integrity over the years, that that integrity is showing signs of 
stress, not only in rural areas, but also in urban areas; not only 
for providers, but also in terms of access and growing costs for 
beneficiaries. 

When the committee has acted as a part of budget reconciliation 
over the years, we all know for a fact this committee has tried to 
make the best of a bad situation at times. In the case of health 
care reform, I think we see the opportunity that these savings will 
be no less challenging but can help move forward a comprehensive 
bill. 

The Chairman. Thank you, sir. Can I just go back to Mr. 
Davidson's point that a quarter of all hospitals have negative total 
margins. Is that not what you said? 

Mr. Davidson. Yes, sir. 

The Chairman. Which is to say that total payments from all 
sources are less than total costs. Well, that is not something that 
can continue indefinitely and we have to address that, and Mr. 
Halvorson agrees. I am interrupting. 

Senator Daschle? 

Mr. Davidson. Mr. Chairman? 

The Chairman. Sir. 

Mr. Davidson. May I make a comment? 

The Chairman. Please, sir. 

Mr. Davidson. The Senator's questions are very significant, if, in 
fact, you were to enact the President's plan in terms of what other 
changes may take place. The only point of our entire study was to 
give you a sense of the magnitude, even if there is a 20 percent 
margin of error in our research, give you 20 percent. You will still 
see those numbers being dramatic and the only point is that there 
is fragility in this system. 

And as we move forward toward reform, you want to be certain 
that you do not dislocate the very institutions that you expect to 
provide access to those people who will have expanded access. That 



32 

is our entire point. We are for tough choices and we will work with 
you on that. 

The Chairman. I am sure Senator Rockefeller agrees. 

Senator Rockefeller. I have no argument with that. 

The Chairman. You have no argument whatever. Good. 

Senator Daschle? 

Senator Daschle. Thank you, Mr. Chairman. 

My concern is that we have not sufficiently used this opportunity 
to explore what the witnesses would do if they were in our position. 

Each of you has heard the ominous predictions of how Medicare 
will impact the budget in future years. You have heard Leon Pa- 
netta and countless others describe in vivid detail how health care 
spending will have extraordinary implications for the Federal budg- 
et if we do little or nothing. 

It is projected that if we do little or nothing, costs in Medicare 
will rise at least 11 percent over each of the next 5 years. That 
would mean at the end of 5 years Medicare costs will be 50 percent 
greater than they are today. 

Last year you vehemently opposed a proposed cap of 4.7 percent 
on entitlement increases. You have now indicated concern about 
the President's proposed 2.3 percent cut in the rate of expenditure 
increase which would still allow Medicare expenditures to grow 
more than double the rate of inflation over the course of the next 
5 years. 

Put yourself in our shoes. Let me just stop here and ask, would 
you all agree that 11 percent is too high? 

The Chairman. Can I ask, is the question ought you to have 11 
percent or will you have 11 percent? 

Mr. Davidson. Senator, you cannot look at the number in isola- 
tion. It was just last year, OBRA-93. We cut $56 billion out of the 
Medicare program. Three years before that, OBRA-90 you cut $43 
billion out of the Medicare program. 

Senator Daschle. Mr. Davidson, that is not what I am asking. 
We are being told that we can expect growth in the program to 
equal or exceed 11 percent roughly each of the next 5 years. What 
I am asking is whether there is at least general agreement that 
that 11-percent increase on an annual basis for Medicare is too 
high. 

Mr. Davidson. I think it is a reflection of a prediction of the de- 
mographics of the Medicare population and the traditional patterns 
that we have used to take care of people. And we have to change 
the patterns and develop new incentives. 

Senator DASCHLE. But that is not what I am asking, and we will 
get to that. But would you agree that 11 percent is too high? 

Mr. Davidson. I think 11 percent is an accurate reflection of 
what real costs will be under the current system. 

Senator Daschle. And we should accept that? Is that what you 
are telling me? 

Mr. Davidson. No, we are saying — no, we are recommending 
that you change and provide 

Senator Daschle. So it is too high. 

Mr. Davidson [continuing]. New incentives for the delivery of 
care to Medicaid patients. 

Senator Daschle. Mr. Corry? 



33 

Mr. CORRY. Sir, I think what we are saying to you and what we 
have said consistently is to focus only on Medicare will not work. 

Senator DASCHLE. But who is suggesting that that is all we do? 

Mr. CORRY. I am not sure that all of the — as I say, I do not want 
to speak for those here. I am not sure that everyone here would 
ascribe to that. We are saying that you need system wide cost con- 
tainment provisions, whether it is the President's plan or someone 
else's plan that you wish to look to. 

If you look at what is happening in the Medicare program's rates 
of increase versus the private sector. Medicare's per enrollee costs 
have been lower than in the private sector. If you look over on the 
tax side of the ledger, the growth in health tax expenditures, par- 
ticularly on the employer deduction, is as fast if not faster than the 
Medicare program. 

So what we are suggesting to you is, rather than only look at 
Medicare and Medicaid, which promotes more cost shifting to the 
private sector, you look at the whole system and solve Medicare's 
problem when you solve the rest of the system. 

Senator Daschle. Well, I think that is not even contested. Ev- 
eryone understands the need for some comprehensive systemwide 
solution to the problem of spiraling health care costs. But if we are 
to judge our success in containing costs, surely we must look at the 
rate of growth in program costs during the out years. 

You have indicated generally that 11 percent might be too high 
for a lot of good reasons. You have also indicated to us that the 
President's proposed limit of around 8.7 percent may be unaccept- 
able. I guess my question is, what would be a reasonable target 
that you would suggest to us if those figures are unacceptable and 
how would you get there? 

Dr. DUVALL. I think it is dangerous to pick a number like that. 
That is why the AMA is against global budgets or predetermined 
caps like you all discussed the other day. 

Senator Daschle. But then how do you judge success, Dr. 
Duvall? 

Dr. Duvall. Well, you are going to still have the numbers and 
there still can be a process of good faith negotiation between the 
stakeholders in working with those numbers. There are so many 
variables and complexities. I mean, who would have predicted an 
AIDS epidemic 10 years ago? Who would have predicted the ant- 
acid drug success? 

I think we would have to work to get as much fat out of the sys- 
tem as possible using outcomes analysis and better research and 
more competitiveness. But I think to pick a single number and 
somehow decree it as chipped in stone is fallacious at the outset. 

Senator Daschle. Well, no one is suggesting that we pick a num- 
ber and lock it into concrete. But I am saying we have to use some 
measure by which to judge our success. All I am asking is your 
guidance on how we do that. 

Mr. Davidson? 

Mr. Davidson. In our reform recommendations, in terms of our 
vision of the future, we believe there needs to be an independent 
national commission that has oversight of the determinations of re- 
source allocation for health care and that it is fair to say that this 
Commission should establish a definition of benefits to be in any 



34 

national standard benefit package and ultimately provide to you a 
budget mark that can provide a given set of benefits and have you 
vote them up or down. 

We believe that this Commission ought to be the one that ulti- 
mately determines capitated rates because it does a lot of research 
and focuses on this and then gives you a set of recommendations, 
and that this Commission be the one to determine whether, in fact, 
that 11 percent number is accurate. 

In the absence of effective oversight and full, broad examination 
of this in the light of day, it is hard to make these determinations. 
We think there ought to be a body that gives sunshine to all of 
these issues. And we ought to consider the question of whether we 
have targets and goals in terms of national expenditures and that 
we talk about them, and we monitor behavior and we look at new 
disease categories, and in some years we may come in under a goal 
or a target and in other years we might exceed them, but we would 
understand why. 

Today we do not have an ability to answer that. So we would 
start with that notion first and then after that we would say that 
you have to bring about reform in the way health care is delivered 
for all Americans. You cannot isolate the Medicare population from 
changing the way we deliver care. And virtually all of the proposals 
that are being looked at isolate Medicare. They must be integrated 
in order to make these things happen. That is essential to behavior 
change. 

The Chairman. I think Mr. Halvorson had wanted to comment. 

Mr. Halvorson. If I could make two very brief comments. One 
is that you might find it very useful to look at the cost of Medicare 
on a per capita basis and not on a total program basis, because oth- 
erwise you are bringing too many issues to bear. And it is difficult 
to identify whether or not any cost containment is taking place 
without that per capita cost factor brought in. 

The second point is, it is almost impossible to achieve any kind 
of efficiency in a nonsystem where providers do not work in teams 
toward common goals and continue to be separate business units, 
each reimbursed for volume. It is almost impossible to make the 
system efficient. 

Therefore, 11 percent is probably a pretty good predictor. It is 
not a great goal, but it is a good predictor. 

Senator Daschle. Thank you. 

The Chairman. Well, there was a cold north wind. You are used 
to those. [Laughter.] 

Senator Conrad? 

Senator Conrad. Thank you, Mr. Chairman. Well, before I start 
with that maybe I could say for the benefit of the record and my 
colleagues, as we were talking about rural hospitals I did a little 
checking in our State. Fully 20 percent of the hospitals in North 
Dakota are operating at a loss — 10 of the 50 hospitals are operat- 
ing at a loss. 

The 35 smallest hospitals, those below $5 million of receipts, are 
all on average operating on negative margins. The next 6, the me- 
dium-sized hospitals, had total margins of plus 5 percent; the 8 
largest, plus 3.4 percent. 



35 

So when we look at the Medicare cuts that are proposed or re- 
ductions of increases more accurately than cuts, reductions in in- 
creases that are proposed, that is a sobering thought when you 
have 10 of your smallest hospitals already operating on negative 
margins. Fully 20 percent of the hospitals in my State currently op- 
erating under negative margins and I would venture to guess every 
one of them has a disproportionate share of Medicare-eligible pa- 
tients. 

Some have suggested to me, well, we are going to have a greater 
percentage of people covered and that is going to offset the Medi- 
care reductions. The problem with that is, 91 percent of the people 
in my State are already covered. It is very hard to see how the 
math works out. 

Frankly, I think those hospitals that have a disproportionate 
share of Medicare-eligible patients, that already are flowing red 
ink, would be out of business. That is 20 percent of the hospitals 
in my State. 

Mr. Chairman, when we get down to the final determination this 
is going to be very much on my mind in any plan. 

The Chairman. Of course it will be. 

Senator CONRAD. In how it deals with those special situations of 
a rural State. 

Mr. Davidson, you referred to the Lewin study. And Senator 
Rockefeller I think quite properly went through all of the defects 
of that study, things that are left out. 

Let me ask you this in a subjective way. Knowing what you know 
about the operations of hospitals around the country, even with 
these other factors put into the equation that Senator Rockefeller 
went through, is it your judgment that rural hospitals with a dis- 
proportionate share of Medicare-eligible patients under any of the 
plans that suggest significant savings in Medicare would have their 
survival threatened? 

Mr. Davidson. Senator, I think it is fair to say, and I think we 
all need to understand, that whatever direction we go in, not all 
hospitals will survive and perhaps not all should. It means we are 
talking about a major reconfiguration of the hospital field in Amer- 
ica. And the test is, what is the way to reconfigure the field. Is it 
this starvation diet strategy or is it a strategy that provides incen- 
tives for people to come together in communities, perhaps through- 
out your State, and make some determinations as to where the es- 
sential players need to be. 

The American Hospital Association will not recommend to you 
that you have a payment system to keep all ships afloat. We will 
not do that. The reality is that all ships are not going to stay afloat 
and the issue is the mechanism by which we make the determina- 
tion. That is what we are talking about here. 

The current payment system is not the way to do it. It has the 
wrong incentives. And just starving everybody is going to damage 
your institutions and maybe the wrong ones. We have to have a 
different mechanism to do this. That is what we are advocating. 

Senator CONRAD. Let me ask you, if I can followup, and then I 
want to go to Mr. Halvorson. Do you think something like EACH- 
PCH can help with that reconfiguration? 

Mr. Davidson. Yes, sir. 



36 

Senator Conrad. You are supportive of that approach? 

Mr. Davidson. Yes, sir. 

Senator CONRAD. Mr. Halvorson, you talked about HMOs. Every 
time I talk about HMOs to people at home I get two reactions. 
Number one, lack of choice. All of a sudden you are going to be 
caught up in a system in which you cannot chose your doctor. You 
are going to go to somebody else that is going to be a gatekeeper 
and they are going to determine who you see. 

And if they do not think you should see a certain specialist, you 
are not going to see that specialist. What is your response to that? 

Mr. lC\.LVORSON. My response is that all of the people in our 
health plan are there by choice. They chose us as their doctor when 
they chose the health plan, number one. 

Number two, within the health plan, our members can chose a 
different doctor at any time, and people are not locked into a doc- 
tor. One of the myths about HMOs is that you are assigned a doc- 
tor or given a doctor or you go to a particular doctor and cannot 
change. That is absolutely a myth. People can change physicians 
all the time. 

The third point is that, just taking our health plan, for example, 
I think we have more physicians in our health plan than the States 
of Montana and Wyoming combined. I think we have more than 
adequate choice within the health plan of physicians, and we have 
very carefully chosen the physicians to begin with, based on their 
credentials and their quality and their ability to do the job. 

So, we typically do not have a choice problem. There is a myth 
that there is a limitation on choice within the plans, but that is not 
true. The other issue relative to that, is in North Dakota you are 
blessed with two wonderful large multispecialty group practices — 
Fargo Clinic and Dakota Clinic — who are very likely the core of any 
kind of HMO. 

Once people have chosen between those two organizations, they 
would be given a free choice inside of those organizations, which 
would be as good or better than anything they have right now. 

Senator CoNRAD. Mr. Chairman, might I ask one final question? 

The Chairman. Would you please? 

Senator CONRAD. The other thing that I hear about HMOs is the 
fear of many that incentives will change from doing too many tests 
and too many procedures to too few. That is, when you move from 
a fee-for-service plan that has the incentive, all the incentives flow 
toward doing more tests, more procedures. 

When you go to an HMO format, a capitated amount for each 
member of the group, is there not an incentive to do too few proce- 
dures, too few tests, provide too little service? 

Mr. Halvorson. In the early days of HMO organization, the only 
HMO models that existed were the staff model plans where the 
physicians were on salary. And in that model there is absolutely 
no financial incentive for the physician to deny any services or to 
not do anything relative to any given patient. 

As HMOs evolved, there was a brief period when capitation was 
probably not done as well as it could have been. I think there were 
some stories that came out of that time frame. 

Overall though, HMOs do not incent physicians individually not 
to provide care. The marketplace demands quality. The consumers 



37 

demand quality. What we have been urging, and Senator Duren- 
berger's bill provides for, is national measurements of quality. 

In fact, HMOs have taken the lead, through the HEDIS program, 
in establishing the first uniform measurements of quality across 
the board because we want consumers to have absolute peace of 
mind, that when they purchase care, they are getting care of meas- 
urable high quality. 

And, if we were going to design a perfect health care delivery 
system for the future, it would be a delivery system in which con- 
sumers could pick between teams of providers based on the meas- 
urable quality of care and on the known satisfaction within those 
programs, so that we can really empower consumers to make 
choices, and we can reward the system for quality. So I would not 
consider that to be a major issue. 

Senator Conrad. Thank you. 

The Chairman. Thank you, indeed, Senator Conrad. 

Could I just make a point? We earlier talked about the question 
of breakthrough drugs and I think that it should be recorded that 
in the President's bill the Secretary shall appoint an Advisory 
Council on breakthrough drugs that will examine the reasonable- 
ness of launch prices of new drugs that represent a breakthrough 
or significant advance over existing therapies. 

I do not think those are terms that would suggest any meth- 
odological rigor. What is a breakthrough? Do you know a break- 
through drug when you see one, Dr. Duvall? Does it come through 
and you say I have a breakthrough drug and I have just an ordi- 
nary everyday drug? 

Dr. Duvall. It would be hard to. Well, you can tell from the 
science though. 

The Chairman. The JAMA will tell you something large has hap- 
pened in the clinical tests and such. 

Dr. Duvall. I know it would have to have a scientific rigor that 
substantiated the excitement. 

The Chairman. Yes, it worries me as a term. It is a military 
term or a football term. I do not know what. But it is not a medical 
term. 

Senator Chafee? 

Senator Chafee. Thank you, Mr. Chairman. 

The Chairman. Oh, yes, when the sons of Eli break through the 
lines. Is that not what happens? Here is this other line. 

Senator Chafee. Our team shall never fail. Bull dog, bull dog, 
bow-wow-wow. Eli Yale. [Laughter.] 

Now I am extremely interested in the efficacy of HMOs and it 
just seems to me as you have outlined it, and with other informa- 
tion that has been available that their ability is extraordinary. And 
what I think is one of the prime rationales in favor of HMOs is 
their effort to keep people well, keep people healthy, as Mr. 
Halvorson said. Keep them from getting sick. 

From your testimony, Mr. Halvorson, you indicated that 20 per- 
cent of all insureds in our Nation now are in HMOs. You and I dis- 
cussed this last Wednesday, Mr. Chairman. 

The Chairman. Yes. 

Senator Chafee. I think I said it was 40 percent and I was off. 
It is 20 percent. I would have thought it was higher. But on the 



38 

other hand, of the Medicare beneficiaries only 4 percent are in 
HMOs. 

Mr. Halvorson. That is right. 

Senator Chafee. Now, what is the matter here? As I understand 
it, under the so-called — everything has a name in this business — 
TEFRA risk contract — that the Medicare beneficiaries that are in 
HMOs, the HMO is only reimbursed at 95 percent of the average 
within the area. 

I presume that is a disincentive to start with. Is that right, Mr, 
Halvorson? 

Mr. Halvorson. Yes. 

Senator Chafee. In our State an HMO that tried to take care of 
the Medicare beneficiaries and indeed provided prescription drugs 
under this so-called TEFRA risk contract went broke, could not do 
it. What has been, one, your experience; and, two, would somebody 
tell me, if they know, what is the rationale for only paying 95 per- 
cent? Why not pay 100 percent? 

Mr. Halvorson. Senator, you make a couple of very good points. 
One of them is that the TEFRA program does reimburse at 95 per- 
cent. That 95 percent is a calculation that supposedly is based on 
the area cost of fee-for-service. The truth is, those numbers are, as 
Senator Durenberger pointed out earlier, extremely inconsistent 
numbers. 

You can cross a county line and see a reimbursement drop in one 
foot by $50 or $100 a month per senior for no discernible reason. 
We do not know information about the rates until very late in the 
year, typically November/December. When we find out the informa- 
tion, we do not know if the rates are going to go up or going to go 
down. 

So one of the major reasons that only 4 percent of the Medicare 
population is in an HMO is that most HMOs have just said, "this 
is not a good program for us." There is no point in participating. 
The vast majority 

Senator Chafee. Now let me ask you as an HMO representative 
and representing not only your company but the industry, suppose 
we reimburse it 100 percent. Would that make any difference? 

Mr. Halvorson. I suspect that would make a difference. I also 
think 100 percent of what? I mean, one of the issues is that there 
is still a tremendous geographic inconsistency county to county 
that is a problem. This applies to fee-for-service Medicare as well. 

I saw a situation in our State where a hospital basically moved 
itself across a county line to get into a different reimbursement 
level, to get into a metro reimbursement level versus a rural reim- 
bursement level. There are some very inappropriate ways of com- 
puting the average area per capita cost. But, yes, 100 percent 
would be much better than 95 percent. 

The Chairman. I bet you would say that. 

Mr. Halvorson. I would say that, yes. [Laughter.] 

Senator Chafee. Well, I suspected he would say that also. But 
the question is, would it make any significant difference. 

Mr. Halvorson. I think it would make a difference in a great 
number of cases that are marginal, yes. 

Senator Chafee. What do you say, Mr. Corry, to that approach? 
In other words, I know in certain parts of the country if the Medi- 



39 

care beneficiaries enroll in the plans, for example, they get pre- 
scription drugs. And thus in the southwest an3rway, there is a sub- 
stantial number of Medicare beneficiaries that join those plans. 

Mr. Halvorson. Right. 

Senator Chafee. Now that is what you call a three-for. The indi- 
vidual wins; the plan makes money; and the U.S. Government 
saves money. 

Mr. CORRY. Hopefully. 

Senator Chafee. But that cannot be apparently duphcated. At 
least it was not duplicated in my section of the country. 

Mr. Corky. We have been very supportive of HMOs and man- 
aged care generally over the years. As a choice, as an option for our 
members, where it is available and where it is good quality. We 
have members who are enrolled in HMOs — for example, some of 
Senator Durenberger's constituents are real cheerleaders for this 
kind of care because it does provide them with something that they 
cannot get elsewhere, but also because they chose to do that. 

I think the short answer to your question about how the 95 per- 
cent, goes back to the original Stockman — Gephardt legislation 
back in the late 1970's and early 1980's and the history of which 
is probably more checkered than you can cover right now. 

But we have always been concerned that our members have that 
option. It is true that in many cases that is the only way they can 
get prescription drug coverage. There is a difficult hurdle, if you 
will, though for many older persons in exercising that option over 
and above the issues of payment to the provider. That is, they have 
a physician perhaps of many years. 

We often find that when someone who is older chooses to go into 
an HMO it is either because their physician has migrated over or 
their physician has retired and they are in the market, if you will, 
for a new physician. We expect that is going to be somewhat dif- 
ferent for our younger members. 

The 40 percent figure you used. Senator, I think is roughly the 
proportion of those in the labor force who are in some kind of man- 
aged care. We expect that many individuals will stay in that. 

Senator Chafee. You mean that the figure was distorted because 
of insured to include Medicare? 

Mr. CORRY. I do not know where the figure came from, but my 
recollection is that 40 percent of the working population. 

Senator Chafee. Mr. Halvorson, you gave us the figure of 20 per- 
cent of the insured are in 

Mr. Halvorson. In HMOs. 

Senator Chafee. Is that when you include 20 percent of what — 
20 percent of a group that includes Medicare beneficiaries? 

Mr. Halvorson. Of the total insured population. 

Senator Chafee. Which means Medicare and Medicaid? 

Mr. Halvorson. I think it does, yes. I think the difference be- 
tween the 20 percent and the 40 percent is that the 40 percent 
probably includes the preferred provider organizations. So it is 
closed-panel managed care, but it is not HMOs. 

Senator Chafee. All right. I am sorry to interrupt you, Mr. 
Corry. 

Mr. Corry. In any case, we expect that as more of our members, 
and half of our members are under age 65, have the experience, if 



40 

it is a good experience, in some kind of managed care system, 
whether it is a formal closed panel HMO or otherwise, that they 
may well choose to remain in that if they can. 

Currently though there is a real hurdle for them to do that. So 
this is something that for someone who is 75 or 80 may be a very 
daunting issue. But for someone who is 55 or 60 looking at Medi- 
care eligibility 5 or 10 years out, it may be the natural thing to do. 

Senator Chafee. Well, Mr. Chairman, I just hope that in our de- 
liberations here in deciding what to do in these various problems 
that we always bear in mind that we follow a course that there are 
incentives for the people to stay well and there are incentives for 
those providing services to keep the people well. 

Maybe fee-for-service does that. But clearly in an HMO that is 
true. Now I do not know what my time is here. 

The Chairman. You have all the time you wish, sir. 

Senator Chafee. Doctor, am I a cynic to think that there is a 
greater incentive in a managed care plan to keep people healthy 
than in a fee-for-service arrangement? 

Dr. DuvALL. I do not think there is a greater incentive. I think 
it is more clearly and programmatically seen. But, you know, pri- 
vate doctors characteristically have been doing all the things that 
were talked about at the end of the table. Maybe that is why so 
many Medicare beneficiaries continue to choose fee-for-service. We 
try to keep people well. It is actually not a covered service, such 
as screening for cancers in the older population without symptoms, 
except every other year mammograms and now pap smears. I mean 
that this limited coverage has just been a recent thing. 

We are doing it all the time and we are doing it under what you 
would call a counseling part of the code, which is not covered or 
paid for. We can do more and we can improve our ability to do that. 

I would like to insert one other thing in terms of choice, which 
I think is terribly important. It was described how patients choose 
us as part of a plan and after that they have pre-choice. I under- 
stand what you are saying. 

That represents an entirely different way for the American pa- 
tient to be thinking. Normally they choose a doctor. So that is a 
slightly different choice than most people generally make. There is 
no reason with modern technology that that freedom and that abil- 
ity to make a choice cannot be preserved. 

Even in Senator Durenberger's bill, which we have not had a 
chance to study yet, that choice is out there like in the Federal pro- 
gram here in town. We would commend that, but it can be made 
and preserved even on an episode of illness basis without any real 
difficulty. 

We talked about the HEDIS 2.0 study and quality report cards. 
These are all things you need as you search for value in health 
care dollars and you cut the price right down to the very bone it- 
self. You need to know when not to make that last cut before you 
have cut actually into quality. 

So keeping the fee-for-service option available is the way to rec- 
ognize that Americans walk with their feet: if they do not like the 
quality they will tell you by going somewhere else. 

Senator Chafee. Just one quick question to see if I understand 
it. It was said here that — I guess by Mr. Davidson — a very substan- 



41 

tial number of our hospitals are running in what we call negative 
margins. That is a euphemism for at a loss, is it not? 
Mr. Davidson. Yes, sir. 

Senator Chafee. Now, where I come from you cannot run at a 
loss very long, except apparently the Federal Government. What is 
the difference? Do they make it up with endowment income or 
charitable contributions or what? 

Mr. Davidson. The institutions that I cite to you. Senator, are 
ones that at the end of the year have taken in less money than 
they spent in taking care of patients. That may already include en- 
dowments to offset some of those numbers so that they are actual 
net margins that I am talking about. You can only run a system 
like that so long. 

It is like anyone's household budget, or a business or anything 
else, there is a point when you cannot ultimately in the most seri- 
ous case meet a payroll. That is what these institutions can be up 
to if, in fact, we go down the path as we have talked about in our 
study. 

I would like to just make one note, because I think it is very im- 
portant because some questions have been raised about the study 
and what it is that we have shown you. The study was done in iso- 
lation because the Medicare plan is not in the President's proposal. 

And second, there is no intent of the President's proposal to take 
any savings to expand access to other Americans. So we did our 
methodology — and I would have wanted Senator Rockefeller to 
hear this — we did our methodology just as it has been proposed. 
The Medicare program is isolated from the rest of the reform plan 
in the President's proposal and it does not bode well for those insti- 
tutions that have these tough margins. 

Now, we call for changing the way things are delivered and over 
time we will get there. But you may lose a lot of critical providers 
before you ever get to where you want to get to. 

Senator Chafee. Thank you, Mr. Chairman. I just would point 
out finally that the points that Senator Rockefeller ticked off— the 
administration reform, the anti-trust reform — all of those are in- 
cluded in the bill that I and others submitted. 

Second, we provide prescription drugs in our legislation. That 
would be part of the uniform benefit package for those Medicare 
beneficiaries who chose to come into our system. There would be 
prescription drugs available for them. 

Thank you very much. 

The Chairman. Thank you. Senator Chafee. 

Senator Conrad. Mr. Chairman? 

The Chairman. Please, Senator Conrad. 

Senator Conrad. Might I ask a last question of Mr. Davidson. 

The Chairman. It sounds like we are going to put him up against 
the wall or something. [Laughter.] 

You can ask a further question by all means. 

Senator Conrad. Thank you, Mr. Chairman. I will not put him 
up against the wall at this time. 

Mr. Davidson. Thank you, Senator. 

Senator Conrad. He has had a tough enough day here. The rea- 
son I wanted to ask a last question is, I thought it would be a mis- 



42 

take for us to conclude this panel without talking about the re- 
search hospitals and the teaching hospitals specifically. 

I have just the last week have met with the University of North 
Dakota officials. We have a medical school that works through hos- 
pitals in the State. The week before I had met with the Dean of 
the Stanford Medical School. 

I am getting a consistent message that we have to be especially 
sensitive for the research and teaching hospitals because we have 
basically through a back door developed a system to take care of 
their special needs. That is, the costs of running these research fa- 
cilities, the teaching hospitals, is higher than other facilities. 

We have found arrangements by which we take care of the prob- 
lem. Now there is great concern in health care reform that those 
special provisions will be lost and that these great institutions that 
are providing a significant service in the country will fail, will fi- 
nancially fail. 

And, Mr. Davidson, I wonder if you would comment on that ques- 
tion and alert the committee as to how we deal with this question. 

Mr. Davidson. Well, currently teaching and academic medical 
centers derive a lot of their income through rates paid through 
Medicare and other payers that offset direct and indirect medical 
education costs. We are aware that that is how we have decided 
to, in fact, fund medical education and research. 

So that every time you seek to change the way you pay for care 
you have the potential of damaging the equilibrium in those insti- 
tutions. And it seems to me it is a fair question to raise the public 
policy issue of is there an alternative way to carve those costs out 
of those institutions and find a different way to flow the funds. 

One of the options is to create a national pool with redistribution 
of that money back to those institutions so that their regular rates 
can permit them to be competitive with other institutions in the 
community. 

It seems to me there are other options that we can look at and 
we would be very pleased to work with you, Senator, and members 
of this committee in looking at those options in cooperation with 
the Association of American Medical Colleges. 

Senator CONRAD. I just would conclude by saying it is very im- 
portant that we do that because clearly their rates are higher than 
others with whom they would be expected to compete. 

The Chairman. Can I then say that the President has given me 
a very personal mandate that we attend to this question. Dr. Da- 
vidson said that, speaking of hospitals who have negative total 
margins, the New York City hospitals are just hugely the case. 
Those are hospitals that go back a long way and have seen endow- 
ments built up over two centuries dissolve. 

I mean, the College of Physicians and Surgeons at Columbia was 
chartered by George II and relates to the time when physicians 
looked at you but did not touch you; and surgeons were the ones 
who did all the bloody work. And on balance, everyone was worse 
off when it was all over. 

But you cannot be involved as we have in the last year in these 
hearings without having a sense that we are in a heroic age of 
medicine. After all these years, since about 1930 — I see Mr. 



43 

Halvorson agreeing, Dr. Duvall probably does — medicine finally can 
do wondrous things. 

And this whole question of preventative care takes on a wholly 
new dimension in the context of the developments in genetics. We 
can know about people who are going to have diabetic troubles, 
which no doctor would have known 50 years ago. When you got a 
disease you went to the doctor because you were sick and he tried 
to figure out what you were sick of and tried not to hurt you in 
the form of helping it to cure itself. 

But keeping that intense dynamism is so important and avoiding 
rules made from Washington. Part of our Medicare problem surely 
is that we have tried, I am sorry to say, to micro manage. John 
Chafee, who is not present at the moment, will describe sitting 
down with Pete Stark in a room off the House Chamber at 3:00 in 
the morning and deciding how much we will charge for heart by- 
passes. 

And even in the best of worlds they do not know and cannot. I 
have learned that Dr. Kessler of the Food and Drug Administration 
said there is no statutory or regulatory definition of breakthrough 
drugs. Do not act like we know, that we can tell you what a break- 
through drug is. 

And we do have problems with preserving the creativity in the 
system. I wonder if I could ask Mr. Halvorson something I have 
heard but do not know at any level, which is to say that the Uni- 
versity of Minnesota Medical School is having difficulties. Is that 
my understanding? Just that as medical care has become less de- 
mand driven and more cost conscious the medical school is finding 
itself in some troubles. 

Mr. Halvorson. Senator, that is absolutely accurate. The Uni- 
versity of Minnesota has not maintained its traditional referral 
base or referral volumes and is looking at some creative ways of 
getting more actively involved in managed care to play a slightly 
different role. 

But the future they see for themselves, if everything projects for- 
ward, straight line, is not a good one. 

The Chairman. Is not a good one. Now here you are, I think this 
is a hugely important point. Take Minnesota, you have the most 
advanced health care systems. You have the largest coverage I 
think of anybody, perhaps North Dakota is slightly better, but you 
are neighbors. I mean, everything is what we would hope it to be 
and you look up and say, but our medical school is not in good con- 
dition. 

That is an irony which we want to be attentive to. I am sure you 
would all agree. There are extra costs associated with this heroic 
age of discovery. We do not want to put an end to that because we 
are rationalizing other aspects of the system. Would you not agree? 

Mr. Halvorson. Mr. Chairman, if I could speak just to the Min- 
nesota situation. One of the things that we as a health plan have 
done is merged with a teaching hospital, brought it into our sys- 
tem, and we are taking on some of the accountability for some of 
the residency programs because we know that there has to be a 
medical education program. 

The Chairman. Not just education research. 

Mr. Halvorson. Right. 



44 

The Chairman. No. A cautionary tale. 

Senator Durenberger, would you like to have the last word? 

Oh, and may I say that this Thursday our hearing will be de- 
voted to academic health centers. 

Senator DuRENBERGER. Mr. Chairman, thank you. I will not try 
to follow up on the comments relative to medical education or the 
University of Minnesota Hospital. I think we will probably get into 
that on Thursday. But between now and then and then during the 
rest of the week we are going to be reminded of an issue that was 
raised here when Dr. Reischauer was testifying on CBO. That is 
the inability of the Congressional Budget Office to estimate the ex- 
penditure consequences of behavior change. 

We have talked for the last three hours about behavior change 
and the need for behavior change and everyone here has agreed on 
its necessity. We have listened to examples of parts of this country 
in which behavior change have produced results in expenditure, in 
diminished expenditures without diminishing quality or at least 
presumptively. 

But we will get in a couple of days one of the first estimates of 
the so-called Managed Competition Act, which will show that it 
costs huge bundles of money. And then a week or two after that 
we will get estimates on the Chafee bill, which is going to say it 
is going to cost huge bundles of money. 

The defect, as I understand it, in the Congressional Budget Of- 
fice approach is that they insist on nationwide cumulative evidence 
of behavior change. They are unwilling to go into a market like 
Minnesota, go into a market like the Bay Area of California, go into 
the Albany situation, whatever may be going on in Albany that re- 
sults in a $341 payment, and say this kind of behavior change re- 
sults in the following expenditure consequences. 

And if, in fact, the stimulus for that behavior is incorporated into 
the rules that are in the Clinton bill, the Chafee bill, the Breaux- 
Durenberger bill and so forth, then we might have national results 
over a five-year period of time showing us the following con- 
sequences. 

I did not raise this, Mr. Chairman, to debate with Reischauer or 
CBO. We will carry on that debate in other areas, but it will al- 
ways come back here. And so your offer six weeks ago just to con- 
vene a meeting of some kind at some point with estimators I think 
is going to be very, very critical. 

The tough part in this getting health care reform passed this 
year is going to be to decide how do we get the universal coverage 
for the guarantee. 

The Chairman. Right. 

Senator Durenberger. And that means we are going to have to 
have some of these estimators sitting down with us and determin- 
ing one way or another. Out there in the future we are going to 
have to look differently at the national process for estimating the 
consequences of everything we have heard here today. 

I want to make sure that the Medicare population has the same 
chance as everybody else in America to benefit from this behavior 
change. They will not get it from more cuts. They will not get it 
from all of the rest of the recommendations on cutting the growth 
and the expenditure. They will only get it as everyone of these wit- 



45 

nesses said, from changing the way we deUver and the way they 
buy and they need to be given those opportunities. 

They will not be given those opportunities if we stick with the 
way the CBO currently makes its estimating. 

The Chairman. I think, Senator Durenberger, that is exactly the 
note to close on. We are going to have to make a judgment about 
the estimators. Because universal health care is our goal and we 
are going to get to it in this Congress. 

But I can solve one question, which is, why are costs so low in 
Albany. I cannot absolutely solve it, but I can tell you that our two 
youngest children were born in Albany, as usual, in the winter. 
This was back in the 1950's in the old days of the organization 
there, and it would snow and snow. Minnesota has nothing on the 
snow in Albany, and nothing was ever done about it. And when 
asked why, the local alderman explained that the man who put it 
there takes it away. And enormous costs are saved just by waiting 
until April. [Laughter.] 

And on that note, we will never know. Thank you very much for 
an extraordinary, helpful panel. 

[Whereupon, at 12:27 p.m., the hearing was adjourned.] 



APPENDIX 

Additional Material Submitted 



Prepared Statement of Martin Corry 

Good morning. My name is Martin Corry. I am Director of Federal Affairs for the 
American Association of Retired Persons (AARP). Thank you, Mr. Chairman, for the 
opportunity to testify today on the future of the Medicare program under health 
care reform. 

AMERICA NEEDS MEANINGFUL HEALTH CARE REFORM IN 1994 

Reflecting the clearly expressed wishes and concerns of our members, AARP sup- 
ports health care reform that provides every American 

• quality health care coverage, not merely as a goal, but on a timetable specified 
in law; 

• a long-term care benefit that guarantees security and peace of mind to Ameri- 
cans of all ages who are faced with severe disabilities and chronic illnesses; 

• prescription drug coverage to assure that no American is denied access to essen- 
tial, often life-saving drug therapies; 

• system-wide cost-containment that assures consumers affordability, and doctors 
and hospitals a fair price; and 

• financing that is fair and adequate. 

AARP commends the members of Congress in both parties who have introduced 
proposals that would achieve universal coverage. We are particularly pleased that 
the President and co-sponsors of the Health Security Act, S. 1757, have included the 
following critical provisions: 

• a home and community-based long-term care benefit for disabled persons of all 
ages; 

• coverage of prescription drugs on similar terms for Medicare beneficiaries as for 
all other Americans; and, 

• protections for non-working older Americans not yet eligible for Medicare. 

HEALTH CARE REFORM MUST STRENGTHEN MEDICARE 

AARP believes that pursuit of a better health care system for all Americans 
should include strengthening Medicare. For 35 million older and disabled Ameri- 
cans, Medicare provides an important level of affordable health security, and it is 
enormously successful and popular across all age groups. Rather than tear down the 
Medicare program through unrealistic program cuts or large-scale restructuring, 
health care reform must build on Medicare's successes and fill the gaps in benefits 
and low-income protections. Medicare can and should be maintained and strength- 
ened as part of health care reform. 

AARP believes that Medicare will continue to play a significant role in a reformed 
health care system, and that Congress should take care not to erode further Medi- 
care's promise of limited health security. In fact. Medicare beneficiaries are in great 
need of important benefits such as prescription drugs, preventive care, and out-of- 
pocket limitations that are not part of Medicare today. And, all Americans need pro- 
tection against the devastating costs of long-term care. 

Clearly these benefit expansions will require additional financing, and AARP has 
always been willing to help identify funding sources and educate our members about 
the trade-offs involved. AARP believes that Medicare savings should be a part of 
this funding, but only in the context of system-wide cost containment and in a way 
that does not harm beneficiary access to care. 

(47) 



48 

what's good about medicare 

Medicare is the cornerstone of health care coverage for older Americans. Since its 
inception, Medicare has dramatically increased access to health care for those age 
65 and over and the disabled by guaranteeing coverage regardless of health status 
and by attempting to keep costs for Medicare-covered services affordable. 

Beneficiaries can choose where and from whom to receive care — from physicians 
or certain non-physician providers, through a standard fee-for-service or managed 
care setting. 

Medicare also seeks to guarantee the quality of care through an external system 
of peer review and quality standards. Peer Review Organizations (PROs) independ- 
ently monitor care, investigate beneficiary complaints, and review hospital discharge 
decisions. 

While rising health care costs are a problem throughout the health care system 
Medicare has established important mechanisms that have consistently reduced the 
program's anticipated growth rate. Over the past decade Medicare has used innova- 
tive strategies to control program costs. Medicare's prospective payment system has 
significantly reduced the volume and price of hospital care. Similarly, following im- 
plementation of Medicare physician payment reform, physician volume growth 
dropped dramatically. In fact, since introducing cost containment measures. Medi- 
care has been more successful than the rest of the health care system at controlling 
costs — one reason why some private insurers are now adopting Medicare's payment 
methods. The Congressional Budget Office recently found that between 1975 and 
1990 annual growth in Medicare costs per enroUee was consistently less than the 
growth in private insurance costs per enroUee (Chart I). 

Medicare's low administrative costs — about 2 percent of program outlays in 1992 — 
help maintain its reputation as one of the most efficient federal programs. By con- 
trast, administrative costs of private health insurance range from 5.5 percent to 40 
percent of benefit costs. 

MAJOR GAPS IN THE MEDICARE PROGRAM 

While Medicare guarantees that virtually no one 65 or older is uninsured, there 
remain substantial gaps in coverage, inadequate protections against high out-of- 
pocket costs, and access problems. Major gaps in Medicare include: 

• no long-term care coverage; 

• no outpatient prescription drug coverage; 

• Minimal preventive benefits; 

• inadequate low-income protections; and 

• no out-of-pocket limits. 

THE STABILITY OF MEDICARE — COST CONTAINMENT, MEDICARE SAVINGS, AND 

FINANCING REFORM 

AARP commends President Clinton and co-sponsors of S. 1757 for their willing- 
ness to establish tough cost containment throughout the health care system. Reform 
must include enforceable limits on private sector health spending, such as premium 
limits or ratesetting, if it is to be credible. There is little evidence to suggest that 
"competition" by itself — the approach relied on in both Senator Chafee's and the 
Cooper-Breaux bills — will adequately contain health costs. 

Medicare savings will result from a system-wide approach to cost containment. 
But, absent system-wide reforms — and if reductions are unmatched in the private 
sector — the Medicare program could not sustain large reductions without creating 
quality and access problems for beneficiaries. 

Over the past several years the Medicare program has been cut significantly — 
more than $80 billion in cumulative Medicare cuts throughout the 1980s, $43 billion 
in Medicare cuts enacted in OBRA90 and most recently, $56 billion in Medicare cuts 
enacted as part of OBRA93. Increasingly, we are hearing from our members that 
they are paying for these Medicare cuts in reduced access to care. 

The President's plan proposes an additional $118 billion in Medicare cuts between 
1996 and the year 2000. Senator Chafee's legislation would reduce Medicare spend- 
ing by a similar amount. The Congressional Budget Office (CBO) recently found that 
while Medicare spending grew at an annual per-capita rate of 3.1 percent between 
1985 and 1991, total U.S. health spending grew at an annual per-capita rate of 4.8 
percent. In fact, CBO found that between 1975 and 1990 annual growth in Medicare 
costs per enrollee was consistently less than the growth in private insurance costs 
per enrollee, The reason for this difference is that Medicare is controlled through 
the federal budget process but private health care spending is not. 



49 

Absent system-wide cost containment, the Association will oppose any further ef- 
forts to cut Medicare. Moreover, the proposed Medicare savings, even if they can be 
achieved, are not a broad or permanent financing source for health care reform. 
Once the system is made more efficient, we will need to identify more lasting fund- 
ing sources for the public cost of health care delivery. 

Following is our assessment of some of the specific Medicare cuts now being pro- 
posed. 

BENEFICIARY INCOME-RELATED PREMIUM 

AARP has strongly opposed increasing the Medicare Part B premium for higher- 
income beneficiaries outside the context of health care reform. In the absence of 
comprehensive reform, a high-income premium would constitute nothing more than 
a cost-shift to beneficiaries without adequate control over system-wide spending. 

We also believe that if Part B premiums are income-related, then private-sector 
premiums should be income-related as well. In 1994 alone, the federal government 
will "spend" $74 billion by providing tax breaks for employer-paid health care pre- 
miums. This provision is one-of the fastest growing tax expenditures in the budget. 

It does not seem fair that taxpayers would continue to subsidize the health care 
premiums of a Wall Street executive with a salary of more than one million dollars 
a year while subsidies to Medicare beneficiaries with much lower incomes are sub- 
stantially reduced. If Congress and the President believe that "income relating" pre- 
miums is a good idea for the elderly and disabled, then it is at least as good an idea 
for the rest of the country — including the Congress itself We estimate that income 
relating the tax subsidies for private insurance premiums in the same manner as 
Medicare Part B premiums would raise substantial revenue (Chart II). 

HOME HEALTH COINSURANCE 

The President's and Senator Chafee's proposals call for a 10 percent coinsurance 
on home health services, and the recently approved Ways & Means Health Sub- 
committee proposal includes a 20 percent coinsurance. These proposals would create 
a significant financial hardship for many Medicare beneficiaries, particularly those 
with low to modest incomes and the very old. For example, a 10 percent coinsurance 
requirement would cost the average Medicare home health user $425 in 1994, or 
$560 for the average user age 85 or older. This is on top of an estimated $2,500 
in premium and out-of-pocket costs that older Americans will pay on average for 
medical care in 1994. 

The home health coinsurance would also put physicians who treat the frailest a'nd 
sickest Medicare beneficiaries in the difficult position of recommending care they 
know their patients cannot afford. 

OUTPATIENT HOSPITAL COINSURANCE 

Beneficiary coinsurance for hospital outpatient surgery, radiology, and diagnostic 
services far exceeds the standard 20 percent for other Part B services. This occurs 
because Medicare's payment is based on a blend of hospital and ambulatory surgery 
center costs and charges while beneficiary coinsurance is based solely how much a 
hospital bills for the service. Since the amount a hospital charges is usually higher 
than what Medicare approves, beneficiaries end up paying considerably more than 
the 20 percent coinsurance they pay for other Part B services. The Prospective Pay- 
ment Assessment Commission (ProPAC) estimates that beneficiaries are paying 
anywhere from 37 to 54 percent in coinsurance. As beneficiaries increasingly receive 
services in hospital outpatient departments in lieu of inpatient care, the problem is 
getting worse. 

None of the health care reform proposals being considered by Congress would cor- 
rect this inequity. In fact, a proposal in the Health Security Act would actually 
make the situation worse. Under the proposal. Medicare would end up paying the 
Medicare-approved amount for a service minus what the beneficiary pays in coinsur- 
ance. For instance, if a hospital charged $300 but Medicare approved only $ 100, 
then the beneficiary would pay $60 (20 percent of $300) and Medicare would pay 
only $40 (which is $100 minus $60). As Medicare pays hospitals less for outpatient 
services, it puts pressure on hospitals to increase the amount charged to private pa- 
tients. This results in a cost-shift to beneficiaries because beneficiary coinsurance 
is based on 20 percent of the same hospital charge paid by private patients. As 
charges go up, beneficiaries will pay more. This vicious cycle won't stop until bene- 
ficiaries pay 100 percent of the Medicare-approved amount and Medicare pays noth- 
ing. 



50 

REDUCTIONS IN MEDICARE PROVIDER PAYMENTS 

There is a widening chasm between what Medicare reimburses and what the pri- 
vate sector pays for hospital and physician care. According to the Physician Pay- 
ment Review Commission, Medicare now pays physicians on average, 59 percent of 
private rates. These gaps in payments have resulted in greater cost shifting onto 
the private sector and less willingness on the part of providers to treat Medicare 
patients. 

The President's and Senator Chafee's proposals would further reduce Medicare 
payment updates for both hospital and physician services, even before the reduc- 
tions in the Omnibus Budget Reconciliation Act of 1993 (OBRA93) go-into effect. At 
the same time, payment rates for Medicaid patients and the uninsured will increase 
to private insurance levels. The critical question for the Association is whether pri- 
vate sector cost containment proposals will reduce Medicare-private payment gaps 
and begin to address Medicare access problems. In the new system, Medicare bene- 
ficiaries could become the least profitable patients for providers to treat and experi- 
ence the same access problems Medicaid patients currently must face. 

THE STRUCTURE OF MEDICARE — BENEFICIARY OPTIONS 

It is a reasonable objective to expand the availability of managed care options in 
Medicare in order to determine whether alternative delivery systems can gain wide- 
spread support among older Americans. At the present time, there is simply not suf- 
ficient enrollment in managed care plans to draw definitive conclusions about their 
appropriateness for or acceptability to Medicare beneficiaries. As of April 1994, 
there were approximately 1.9 million Medicare beneficiaries enrolled under risk con- 
tract HMOs — only 5 percent of total Medicare beneficiaries. An additional 450,000 
beneficiaries participated in the Medicare Select program, HCFA's 15-state PPO 
demonstration. Thus, about 7 percent of all Medicare beneficiaries receive services 
through managed care organizations. This compares to about 45 million in the 
under-65 population enrolled in HMOs and an additional 122 million eligible to use 
PPOs — over 50 percent of the under-65 population. 

AARP believes that Medicare beneficiaries should have managed care available as 
an option, and we support approaches that would level the playing field to enable 
managed care organizations to compete equally for Medicare beneficiaries. AARP 
has long supported improving the HMO reimbursement methodology under Medi- 
care to encourage reasonable participation levels in the Medicare program on the 
part of health plans and to ensure that Medicare payments to such plans are set 
at appropriate levels and are cost effective. 

We object, however, to proposals that seek to push beneficiaries into managed 
care by making critical benefits, such as prescription drugs, available only to those 
who enroll in managed care plans. That kind of incentive unfairly penalizes bene- 
ficiaries who remain in fee-for-service arrangements. Moreover, many Medicare 
beneficiaries, particularly in rural areas, simply do not have access to managed care 
plans. 

AARP strongly supports retaining Medicare as a distinct program rather than dis- 
mantling it or forcing beneficiaries into state-based alliances or systems. \ye are not 
convinced that states would be able to develop and maintain consistent, high stand- 
ards with respect to the oversight and enforcement that would be necessary to sup- 
port a takeover of the Medicare program. It will take time and experience for the 
states to learn how to run a new system without adding 35 million more people. 
If Congress decides to grant a limited number of states the authority to integrate 
Medicare into broader statewide systems, the Association urges that the public be 
given ample opportunity to review and comment on such -.vaiver requests and that 
states be required to demonstrate — with thorough Federal validation — not simply 
"assure," that: 

• Medicare beneficiaries will receive the same benefits and protections as the 
under-65 population; and 

• Medicare funds are earmarked so that states cannot divert such funds for other 
purposes. 

FILLING THE GAPS IN MEDICARE 

As Medicare savings result from health care reform, it will be essential to redirect 
those savings toward filling the major gaps in Medicare — chiefly coverage for long- 
term care and prescription drugs. On average. Medicare pays for only about half of 
Medicare beneficiaries' total health care costs. Out-of-pocket health care costs for 
older Americans, excluding nursing home care, are estimated to have increased by 
122 percent on average since 1987, roughly five times faster than the increase in 



51 

their income over the same period. These data are based on a comprehensive report 
on out-of-pocket expenses of older Americans which will be released next week by 
AARP and the Urban Institute. 

LONG-TERM CARE 

The inclusion of meaningful new home and community-based long-term care cov- 
erage in the health care reform legislation is vital to our members and their families 
and is critical to AARP's support for any health care reform proposal. We commend 
the President and cosponsors of S. 1757 for including home and community-based 
care in the bill. Regrettably, long-term care was excluded from both the Chafee and 
Cooper-Breaux bills. 

Following are key reasons why AARP believes long-term care must be included 
in any health care reform proposal: 

Health care coverage for acute illness alone will not give families real security and 
peace of mind. Over 37 million Americans have no insurance for hospital and doctor 
costs, but ever 200 million have no insurance for long-term care costs. For Ameri- 
cans of all ages, paying the costs of long-term care, either for themselves or for fam- 
ily members, is one of their greatest concerns. For families, there is no difference 
between spending $20,000 on home care and spending $20,000 on hospital care. It 
is still $20,000 they do not have. 

Long-term care is an intergenerational family issue. All family members are vul- 
nerable — children born with a disability, parents paralyzed in an accident, or grand- 
parents stricken with Alzheimer's disease. Approximately one-third of those who 
need home and community-based care are under 65 years of age. 

Caregivers are being unfairly burdened. Family members provide the vast major- 
ity of long-term care to persons of all ages. But caregivers place their own health 
in jeopardy and frequently are forced to leave the labor market, thereby suffering 
not only short-term loss of income, but also long-term reduction in Social Security 
and private pension benefits. 

Private sector solutions cannot work. The private market has not provided nor can 
it provide adequate and affordable protection against the cost of long-term care, par- 
ticularly with regard to home and community-based services. Private long-term care 
insurance that provides meaningful coverage is very expensive and excludes people 
with pre-existing conditions or mental disorders. Few can afford the cost of mean- 
ingful private long-term care insurance. 

Coverage for home and community-based care would give families new choices and 
help them avoid having to place loved ones in nursing homes. Right now, almost 4 
out of 5 public long-term care dollars are spent on nursing home care. This reflects 
our system's institutional bias, while most would prefer to stay at home. 

A new home and community-based care program would create new jobs and be 
good for the economy. For example, Lewin-VHI, Inc. estimates that the President's 
home care proposal will create approximately one million jobs. Absenteeism and 
burn-out among working caregivers will decline. Some adult disabled persons will 
be able to work with the new assistance available. 

If we want the public to support health care reform it is critical that the proposal 
include long-term care. The findings from each of the four surveys that ICR Re- 
search Group has conducted between April, 1993 and January, 1994 show that bi- 
partisan public support for health care reform increases dramatically when long- 
term care coverage is included. The most recent survey of 2,012 adults, conducted 
between January 26 and February 1, 1994 found that 64 percent of respondents 
were more likely to support a health care reform proposal that included comprehen- 
sive long-term care coverage and 42 percent were much less likely to support a 
health care proposal with no long-term care coverage. 

It makes little sense to provide financial protection against the cost of an acute 
illness but leave people vulnerable if they suffer from a chronic and disabling condi- 
tion. The need for these services is interrelated. Results from research conducted on 
the Social Health Maintenance Organization (SHMO) demonstrations in the late 
1980's indicate that: 1) about 70 percent of initial referrals for community-based 
long-term care originated from the medical care system; (2) 37 percent of the care 
plans developed for home and community care included concurrent authorization for 
medically necessary skilled services; and (3) individuals' levels of disability fre- 
quently changed and were due to acute episodes of illness. 

To make long-term care coverage affordable and accessible to all Americans, the 
Association believes that the ideal solution is a social insurance program, similar 
to Medicare and Social Security, that would provide a comprehensive set of benefits 
in the home and community, as well as in nursing homes. Other fundamental prin- 
ciples that underlie AARP's views on long-term care include: (1) effective cost con- 



52 

tainment mechanisms: (2) financing which is equitable broadly based, and afford- 
able to all individuals; (3) coordination between the acute and long-term care sys- 
tems to assure a continuum of care across an individual's lifetime: (4) assurance of 
high quality care: and (5) support for informal caregivers. 

It is important to point out that the Health Security Act would strictly limit new 
federal expenditures for home and community-based care by (1) not providing an in- 
dividual entitlement to services; (2) capping federal expenditures; (3) leaving nurs- 
ing home coverage largely to the private market, with new standards and tax incen- 
tives; (4) imposing stringent eligibility criteria; (5) providing for a long seven-year 
phase-in period; and (6) providing for income-related copayments. It is also impor- 
tant to note that most states will realize significant savings from this provision due 
to Medicaid offsets derived from the greatly enhanced federal match rate under the 
proposed new program (on average, 85 percent vs. 57 percent under Medicaid). 

It is our hope that new coverage for home and community care will be included 
in health care reform legislation will receive strong bipartisan support (as it does 
with Americans in all age groups). AARP will work with Congress to help fashion 
a long-term care benefit that is both meaningful and afTordable. 

PRESCRIPTION DRUGS 

Currently, about 70 million Americans lack prescription drug coverage, and those 
who cannot afford to pay for their medications out-of-pocket are too frequently de- 
nied access to essential, oflen life-saving drug therapies. This can compromise their 
health status and make them more likely to receive unnecessary and more expen- 
sive care. AARP firmly believes that any viable health care reform proposal must in- 
clude a universal prescription drug benefit. 

This problem is most severe for older Americans as the combined effects of high 
prices, heavy utilization, and the absence of afTordable insurance coverage for pre- 
scription drugs have substantially reduced their access to needed drug therapies. A 
1992 survey sponsored by AARP showed that: 

• older Americans use significantly more prescription drugs than other age 
groups to maintain their health; 

• prescription drug insurance coverage declines rapidly as age increases (Chart 
III); and 

• out-of-pocket costs for prescription drugs are significantly higher for older 
Americans than for their younger counterparts. 

In addition, fifly-eight percent of older Americans surveyed reported that, com- 
pared to other health care costs, they had a problem paying for their prescriptions; 
over half of these said it was a major problem. Moreover, about ten percent said 
they had to cut back on necessary items, such as food and heating fuel, to afford 
their medications. 

AARP believes that a meaningful Medicare prescription drug benefit must include 
the following basic elements: 

• guaranteed access to needed drug therapies; 

• effective cost containment; 

• stable, broad-based, and equitable financing; 

• protections for low-income beneficiaries; and 

• provisions that encourage appropriate prescribing, monitoring, and use of medi- 
cations. 

AARP is pleased that the President's proposal includes a Medicare drug benefit 
that adequately addresses most of these elements. We are concerned that the pro- 
posals offered by Senators Breaux, Chafee, and Durenberger would not guarantee 
access to needed medication nor address most of the other elements we believe are 
important. 

AARP strongly believes that effective cost containment must be part of any pre- 
scription drug benefit. If effective cost containment is not included, the benefit may 
quickly become unaffordable. This was clearly the case during the development of 
the Medicare Catastrophic Coverage Act (MCCA). Due to the lack of effective cost 
containment, the projected cost of the MCCA drug benefit (and the resulting esti- 
mates of premiums to be paid by beneficiaries) skyrocketed even before the bill 
made its way through the conference committee. 

We believe the President's proposal includes effective cost containment through 
payment limits that encourage the use of generic drugs and through rebates re- 
quired from manufacturers. Moreover, the President's proposal retains adequate in- 
centives for research and development. We recognize, however, that other cost con- 
tainment mechanisms may be effective as well. For example, a few major pharma- 
ceutical manufacturers are offering potentially meaningful alternatives for providing 
drug coverage to Medicare beneficiaries while controlling costs. AARP believes that 



53 

cost containment mechanisms should not impede convenient beneficiary access to 
needed medications or pharmacy counseling. Although we have not seen the details 
of these alternative proposals, we have expressed a willingness to review them. We 
recognize that cooperation from the industry could help to expedite Congressional 
action on this important benefit. 

AARP is concerned about the "voluntary" price restraint proposals currently advo- 
cated by the pharmaceutical industry. The industry claims that its "voluntary" ef- 
forts are working and backs its claim by citing the Producer Price Index (PPI) for 
pharmaceuticals, which was 3.1 percent in 1993. According to a recent Senate Spe- 
cial Committee on Aging report, however, drug manufacturer price inflation at the 
retail level — where most older Americans buy prescription medications — continued 
to increase much faster than general inflation in 1993. In fact, according to the re- 
port, "forty of the top 200 drugs increased in price at the retail level more than 
twice the rate of general inflation, which was 2.7 percent in 1993." 

Clearly, voluntary cost containment is entirely inadequate and merely perpetuates 
cost shifting from the inpatient market, where HMOs and hospitals negotiate deep 
discounts from manufacturers, to the outpatient or retail market, where similar dis- 
counts are not offered. 

We look forward to continuing to work with you and your colleagues to ensure 
that a prescription drug benefit that guarantees access and contains costs is a part 
of the health care reform proposal that emerges from this committee. 

PREVENTION 

Medicare does not cover most preventive services needed by beneficiaries. In fact, 
only in the last few years has Medicare covered biennial mammograms and pap 
smears. Beneficiaries still do not have coverage for life-saving preventive services 
such as colorectal and prostate cancer screenings, and periodic checkups. Regret- 
tably, neither the President's nor Senator Chafee's plans would change this short- 
sighted Medicare policy. We commend the co-sponsors of the Cooper-Breaux pro- 
posal to expand Medicare coverage in this area. AARP supports coverage of preven- 
tive benefits that are determined to be appropriate and effective for Medicare bene- 
ficiaries. 

LOW-INCOME PROTECTIONS 

Medicare does not provide adequate protections for low-income beneficiaries. 
About 4.5 million Medicare beneficiaries are dually eligible for Medicaid or receive 
full or partial assistance for Medicare premiums deductibles, and coinsurance 
through the Qualified Medicare Beneficiary (QMB) program. The QMB program 
pays Medicare premiimis and all Medicare cost sharing for persons below the pov- 
erty level but pays only for Part B premiums for those between 100 and 120 percent 
of the poverty level. 

Still, almost 2 million Medicare beneficiaries eligible for the QMB program do not 
receive benefits, and many more low-income beneficiaries above the QMB threshold 
need assistance to pay for care not covered by Medicare. 

Both the President's plan and the Chafee plan would expand federal subsidies for 
the low-income — but only for those under the age of 65. AARP strongly recommends 
that health care reform legislation offer equal protections for low-income Medicare 
beneficiaries. 

OUT-OF-POCKET LIMITS 

Unlike many employer-sponsored health plans today, Medicare does not limit the 
amount individuals must pay out of pocket for covered services. As a result, bene- 
ficiaries who are sicker and require substantial hospital and physician care often 
pay thousands of dollars each year in cost-sharing. Or, they can buy expensive 
medigap plans to help protect against these high costs. Out-of-pocket health care 
costs for older Americans — even when premium payments and long-term care costs 
are excluded — are substantially more than for younger populations. 

Unfortunately, neither the President's nor Senator Chafee's plans establish an an- 
nual out-of-pocket limit on cost-sharing for Medicare beneficiaries. 

CONCLUSION 

In conclusion, Mr. Chairman, AARP believes that Medicare can and should be 
maintained and strengthened as part of health care reform. In so doing, we will help 
achieve health security for all Americans and begin to move toward a more com- 
prehensive system of health care. , 



54 

We commend the President, as well as the many members of Congress on both 
sides of the aisle who have brought the issue of health care reform to this stage. 
AARP will work with the Congress in a bipartisan way to ensure that comprehen- 
sive benefits are guaranteed to Americans of all ages in a final health care plan. 
Strengthening Medicare is a critical step toward that guarantee. 



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57 

Prepared Statement of Dick Davidson 

Mr. Chairman, I am Dick Davidson, president of the American Hospital Associa- 
tion. On behalf of AHA's 5,000 institutional members, I am pleased to have the op- 
portunity to testify here today. The issues we are discussing — the role Medicare will 
play in financing health care reform, and whether Medicare beneficiaries will be- 
come part of the reformed health care system — are absolutely central to the reform 
debate. 

Hospitals strongly disagree with the idea that Medicare reductions are a reason- 
able way to finance reform. We don't believe there are resources in the system to 
allow such large — truly unprecedented — reductions without seriously undermining 
both hospitals' ability to carry out the changes that will be needed under reform and 
hospitals' responsibility to provide high quality care for Medicare patients, and for 
all patients. Today, we draw on new data, which we asked the health consulting 
firm Lewin-VHI to develop. 

HOSPITALS SUPPORT FUNDAMENTAL REFORM 

As we begin, however, I want to be very clear about one thing. Hospitals are firm 
supporters of fundamental health care reform. I couldn't be prouder of the work our 
members have done in developing a progressive, practical vision for reform. Our vi- 
sion is centered on three core objectives: 

• Guaranteed coverage and access to care; 

• Restructuring the delivery system to deliver more efficient and effective care; 
and 

• fair financing. 

We use our three goals as a template, against which we measure all other reform 
proposals. No proposal now on the table would achieve all our goals — so we do not 
endorse any single reform plan. We are, however, working to support elements of 
proposals that do move us toward our reform vision. And, we are providing construc- 
tive suggestions to strengthen areas we feel fall short. That is the procedure we are 
following today, explaining to you why proposed Medicare reductions and the failure 
to integrate the Medicare population in reform undermine achieving our fundamen- 
tal goals. 

Many of the congressional health care reform proposals would make unprece- 
dented cutbacks in the rate of increase in Medicare spending to pay for reform. The 
Administration's proposal would reduce Medicare spending by $118 billion over the 
next six years in order to finance health care reform. This is twice the size of any 
reductions previously taken from Medicare. Other proposals, including those offered 
by Rep. Pete Stark (D-CA), Sen. John Breaux (D-LA)/Rep. Jim Cooper (R-TN), and 
Sen. John Chafee (R-RI) also would reduce Medicare spending by significantly more 
than ever before. 

It's important to remember that these proposed reductions come on top of OBRA 
1993 legislation, which cut $56 billion from projected Medicare spending; and on top 
of $43 billion in reductions approved just three years earlier as part of the 1990 
budget summit agreement. Furthermore, outside of the health care reform debate, 
many members of Congress favor limiting future spending on entitlement programs, 
including Medicare and Medicaid. Others support a requirement to balance the fed- 
eral budget on an annual basis — an approach that would hit hard on the largest 
federal programs, particularly Medicare. 

We should also put these reductions in the context of current inadequate Medicare 
payment rates. The Prospective Payment Assessment Commission (ProPAC) — the 
independent agency set up by Congress to oversee Medicare — has concluded that 
Medicare payments to hospitals already fail to keep pace with hospitals' costs. 

NEW ESTIMATES ON IMPACT OF REDUCTIONS 

The Lewin-VHI estimates give us a preliminary forecast of what could happen in 
the future with Medicare reductions of the magnitude envisioned in the Administra- 
tion's reform proposal. It is important to note that these estimates do not pretend 
to predict the future with any certainty — they are highly sensitive to underlying as- 
sumptions about future growth in hospital costs. They are, however, illustrative of 
the kinds of pressures that hospitals face if Medicare spending reductions alone of 
this size are enacted. And the magnitude of those pressures is sobering: 

• By the year 2000, after six years of spending reductions. Medicare could pay 
hospitals only 71 cents for every dollar of inpatient care delivered to a Medicare 
patient. 



58 

• The spending reductions could make the Medicare program an even poorer payer 
than today's Medicaid program, which currently pays hospitals about 82 cents 
on the dollar. 

• While most hospitals and all states are aflFected, teaching hospitals, large urban 
areas, and communities with hospitals serving a disproportionately large num- 
ber of low-income patients would be particularly hard hit. 

The study uses Medicare reductions contained in the Administration's plan be- 
cause it was the most detailed available at the time the study began. Among the 
health care providers and Medicare beneficiaries who would be affected by the 
President's spending reductions, Administration estimates indicate that hospitals 
are hardest hit, taking $70 billion of the $118 billion in proposed reductions. 

The data show that reductions like these, with no accompanying reform steps 
such as expanding health care coverage, could cause significant financial losses for 
hospitals. While arguably losses might be mitigated by reducing the rate of growth 
in hospital costs, hospitals' ability to squeeze down costs is limited. As ProPAC re- 
cently reported, 60 percent of hospitals' cost increases from 1985 to 1989 were due 
to factors beyond hospitals' control — inflation in the general economy (39 percent) 
and increasing complexity of patients treated (21 percent). Hospitals are deeply con- 
cerned that losses of the size estimated by Lewin-VHI cannot be made up through 
increased efficiency and will therefore undermine our ability to deliver high quality 
care and to participate in health care reform. 

One reason for our concern is that the current health care environment, with its 
growth in managed care, means that Medicare reductions will be felt by hospitals, 
patients, and communities more deeply than ever before. In the past, hospitals have 
been able to shift unfunded costs to other non-government payers — meaning higher 
costs for these patients and their employers. Managed care contracts, however, nar- 
row this option. So, too, do the growing number of private insurers who negotiate 
discounted prices. And, under many of the comprehensive health care reform pro- 
posals that seek to limit private sector spending, the ability to cost-shift is reduced 
even more. 

HOSPITAL CHOICES ARE FEW UNDER MEDICARE REDUCTIONS 

This leaves hospitals with unpalatable choices for controlling costs: reduce the 
size of the hospital work force, or reduce services and programs, or both. Hospitals 
are reluctant to reduce their work force, because doing so jeopardizes their ability 
to do their job well — hospitals are very labor-intensive institutions. Similarly, it is 
often easier to eliminate certain services than to restructure services in order to 
cross-subsidize care. Hospitals will continue to work to provide care more efficiently. 
But, given these economic facts of life, additional Medicare payment reductions 
would be felt more deeply than ever by hospitals, patients, and the communities 
they serve. 

Such reductions also threaten the ability of hospitals to participate in health care 
reform. Expanding the covered population, restructuring the delivery system, 
reconfiguring hospitals and other services for the future, and investing in new tech- 
nologies to meet the demands of the new system — all will need adequate resources. 
For example, the infrastructure improvements we all endorse in order to reduce ad- 
ministrative costs — electronic billing, computerized patient records, new information 
systems — will require an up-front investment. 

Specifically for hospitals, getting beyond the traditional acute care role that will 
be necessary under reform would be jeopardized by excessive spending reductions. 
For example, consumer education, wellness, and outreach programs — not funded by 
the current system — are among the most vulnerable when finances are squeezed. 

Alternative sources of financing health care reform are available to spread the 
cost of reform more broadly, beyond hospitals, physicians, and other health care pro- 
fessionals who will already be deeply aff"ected by change. For example, more than 
$75 billion could be raised by increasing or imposing federal excise taxes on hand- 
guns, assault weapons, ammunition, tobacco and alcohol. Significantly, the use of 
many of these items often contributes to poor health and hospital emergency depart- 
ment visits. 

IMPLICATIONS FOR PATIENTS AND COMMUNITIES 

Hospitals want to see reform done right. Many hospitals have already begun to 
provide care in more cost-effective, collaborative ways. For example, ProPAC reports 
that the number of hospitals with health maintenance organization and preferred 
provider contracts increased from 37 percent in 1985 to nearly 62 percent in 1992. 
And, ProPAC also reports that in 1993, more than 30 percent of the nation's hos- 
pitals were involved in collaborative relationships with physicians, whether a formal 



59 

physician/hospital organization (14 percent), a management services organization (7 
percent), or a foundation that negotiated managed care contracts for the hospital 
and physicians as a unit (4 percent). Forming collaborative provider networks and 
reconfiguring services for the future, however, present major financial and organiza- 
tional challenges for hospitals. It is unfair to expect hospitals to deliver on health 
care reform and pay for it, too, through deeper Medicare spending reductions. 

We understand that not all hospitals will survive in a reformed health care sys- 
tem. In fact, the kind of massive restructuring that we propose will result in merg- 
ers, consolidations, and closures — this is the most responsible and thoughtful way 
to reduce excess capacity and eliminate overlap and duplication in high technology 
and services. 

But the kinds of indiscriminate Medicare spending reductions proposed hit hard- 
est on the most financially vulnerable institutions — those barely breaking even or 
already operating at a loss and those treating large numbers of Medicare bene- 
ficiaries. These hospitals may be the very facilities that need to remain open to as- 
sure access and coverage to underserved populations and achieve the broader goals 
of health care reform. Hospital closures should be based on the needs of commu- 
nities, not on a particular hospital's financial health. Decisions to merge or close fa- 
cilities should be made at the local level within the community. 

RESTRUCTURED DELIVERY SYSTEM AND MEDICARE "INTEGRATION" 

The size of proposed Medicare reductions presents another obstacle for achieving 
fundamental health care reform — it creates a greater-than-ever schism between how 
we pay for and provide care for Medicare beneficiaries and for the rest of the popu- 
lation. This is the opposite direction of where we want to go. 

Currently, Medicare beneficiaries are presented with a delivery system that 
stresses specialization over primary care; administrative complexity over simplicity; 
and fragmented care rather than coordinated care. Many of us have had the experi- 
ence of helping an elderly friend or family member deal with stacks of confusing 
bills and forms, or trying to coordinate their medical care between the physician and 
the hospital or some other health care provider. 

At the same time, some Medicare beneficiaries still face barriers to receiving basic 
primary care. According to the Physician Payment Review Commission, the inde- 
pendent congressional commission overseeing payment to physicians under Medi- 
care and Medicaid, the lack of availability of primary care is the most common com- 
plaint made by Medicare beneficiaries. 

We believe it's absolutely essential that the Medicare population be part of the 
same reformed system as other Americans — that Medicare beneficiaries be "inte- 
grated" into reform. And, just as strongly, we believe that the reformed health care 
system include the kinds of collaborative provider networks we touched on earlier. 
In AHA's reform vision, such collaborative arrangements are called "community care 
networks(SM)" — locally based, networks of hospitals, doctors, other health care pro- 
viders, and social service and community agencies, working together to improve the 
health of people in the community. 

Community care networks focus on primary care, prevention, and coordinating 
care to ensure that all patients — young and old — receive the right kind of care at 
the right time and in the most appropriate setting. A capitated payment system — 
an upfront fee for each enrolled person — improves efficiency and creates the proper 
incentives for providers to work together to keep patients healthy. 

Networks would also help patients navigate the complex maze of available health 
care services. This is particularly important for Medicare patients, because they use 
more services more often. 

In addition, if the Medicare and non-Medicare populations are part of the same 
reformed health care system, providers would have the same incentives to deliver 
appropriate and cost-effective care to Medicare beneficiaries as they would for other 
patients. Imagine hospitals trying to improve coordination and efficiency if more 
than 30 percent of what they do is driven by a set of incentives that represent the 
inefficiencies of our current fragmented system — which would be the case if Medi- 
care, comprising, on average, a third of hospitals' patient revenue, remains out of 
the reformed health care system of the future. 

But it is not clear that these opportunities for better patient care and more effi- 
cient case management will be available to Medicare beneficiaries and encouraged 
under health care reform. As a first step, all reform plans should encourage Medi- 
care beneficiaries to join managed care plans where available. Interest and partici- 



<SM) — Community Care Network, Inc. uses the name Community Care Network as its service 
mark and reserves all rights. 



60 

pation could be increased through education and information about the advantages 
managed care offers, by providing financial incentives or increased benefits for join- 
ing managed care plans, and by expanding the types and numbers of managed rare 
plans offered to Medicare beneficiaries to allow them more flexibility to choose their 
own physician. We support these and a number of similar initiatives contained in 
Sen. Dave Durenberger's (R-MN) bill, S. 1996, that work toward these ends. 

Integrating Medicare patients into the reformed delivery system makes good pub- 
lic policy sense. But more importantly, it makes good sense for the older Americans 
we serve. 

CONCLUSION 

Hospitals have been and will continue be a constructive force as our nation moves 
toward a fundamentally reformed health care system. We believe our role on the 
front line of health care delivery gives us valuable insight and experience to bring 
to that process. We are willing to contribute to the shared sacrifice that will inevi- 
tably be part of reform. Our vision of reform does just that, with its incentives for 
economic discipline and dramatic changes in the structure of health care delivery. 

What we are not willing to do, however, is jeopardize the quality of the health 
care we deliver to our Medicare patients, and to all our patients. We firmly believe 
that the Medicare spending reductions proposed in the Administration's plan and 
in many other congressional health reform proposals would undercut our ability to 
deliver high quality care. 

Continued Medicare reductions are likely to result in further staffing reductions, 
delays in purchasing new equipment, postponing the upgrading of facilities, closing 
certain services in order to maintain other services at peak quality, and jeopardizing 
the research and education programs that have kept Ajnerica's health system on the 
cutting edge of scientific development. 

In addition, we believe it is absolutely essential that the Medicare population be 
part of the same reformed system as other Americans, and that the reformed system 
expand managed care opportunities for Medicare patients and for all patients. Only 
through such Medicare "integration" will beneficiaries have strong incentives to seek 
cost-effective care and their providers have consistent incentives to treat them in 
the most cost-effective way. 

It is for these reasons that we urge you to reject Medicare reductions contained 
in the Administration's plan and in other congressional reform proposals and in- 
stead consider the many alternative sources of financing available as your commit- 
tee goes about the difficult work of shaping health care reform. And, we urge you 
to include Medicare beneficiaries under tne reform umbrella as the best way to work 
toward more cost-effective delivery of care for these patients. 



61 



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67 
KEY ASSUMPTIONS MADE BY LEWIN-VHI 



;i Medicare PPS inpatient operating margins are defined as Medicare inpatient operating 
revenue minus Medicare inpatient operating costs divided by Medicare inpatient operating 
revenue (R-C)/R. 

:j The following provisions of OBRA 1993 have an impact on hospitals and are included in 
the "OBRA 1993" portion of this analysis: 

Reductions in the PPS update factor 

Changes in indirect medical education payments 

Phase-out of day outlier payments 

Hospital protection against certain changes in the wage index 

Regional referral center extension 

Small Medicare-dependem rural hospital paymeru extension 

Regional floor extension 

^ The following provisions proposed by the President would have a fiirther impaa on 
hospitals and are included in the "Medicare Reductions Under the Health Security Act" 
portion of this analysis: 
• - Reductions in the PPS update factor 

Reductions in the indirect medical education adjustment 
Reductions in disproportionate share hospital payments 

;i Margin estimates reflect Medicare PPS inpatient operating revenues and costs only. 
Capital and other Medicare revenues (e.g., direct medical education) are not included. 
Margin estimates reflect the impact of the proposed Medicare spending reductions and do 
not reflect the impact of other provisions included in the Health Security Act. 

Q Hospital costs are assumed to grow by the rate of increase in the hospital maiket basket 
index plus 2.9 percentage points, or about 7.3 percent annually over the projection period. 
This rate of growth is about 1 percentage point less than historical rates of growth after 
adjusting for inflation. 

^ The LewLn-VHI model is a "static" model, so it does not include behavioral changes (e.g., 
changes in the organization of hospital service delivery) or changes in industry structure 
(e.g., no hospital closings or consolidations). This is because it is impossible to predict 
which types of hospitals may restructure, consolidate, or close. Moreover, little 
information is available to allow experts to model into the future how hospitals and the 
health care system generally might respond to the system-wide kinds of regulatory and 
market changes being proposed. 

3 The proposed change to an "all-payer" pool for indirect medical education costs is not 
included in the Medicare PPS margin estimates because non-Medicare funds (from regional 
and corporate alliances) would also be included in the pool, and would distort the Medicare 
PPS-only analysis. Medicare indirect medical education payments, reduced as specified by 
the Administration, are included and are assumed to continue until the year 2000. 

J The Administration's proposal would significantly reduce Medicare disproportionate share 
payments as states form health care alliances. Because the timing of states' reform 
activities cannot be known, margin estimates assume that OBRA 1993 disproportionate 
share provisions continue in effect through 1997 and the disproportionate share provisions 
proposed by the Administration are fully implemented in 1998. 

^ No estimates were made for the state of Maryland because the state operates under a 
federal waiver and has a distinctive rate siting system. 



68 



NOTICE 

This document is not 

available for public 

release until 10:00 a.m. 

Eastern time, Tuesday, 

April 12, 1994 



MEDICARE REDUCTIONS: 

UNFAIR TO EXPECT HOSPITALS 

TO DELIVER ON HEALTH CARE REFORM 

AND PAY FOR IT TOO 



BACKGROUND: 

Hospitals support comprehensive health care reform centered on three goals: 

^ Guaranteed coverage and access to care: 

^ More efficient and effective delivery of care; and 

Za Fair fmancing. 

Hospitals understand that extending health coverage to the uninsured will take additional 
resources. We cannot, however, support unprecedented reductions in Medicare funding as a 
major source of these resources. Such reductions would be counter produaive -- they would 
undermine our ability to achieve reform and threaten patient services. 

For example, health care reform - forming collaborative provider networks; reconfiguring 
hospitals and other services for the future -- will present major financial and organizational 
challenges for hospitals. It is unfair to expect hospitals to dfiliysj on health care reform and 
pay for it too through deeper Medicare spending reductions. 



69 

Many of the congressional health care reform proposals would make unprecedented cut backs 
in the rate of increase in Medicare spending to pay for reform. The President's proposal 
would reduce Medicare spending by $118 billion over the next six years in order to fmance 
health care reform. This is twice the size of any reductions previously taken from Medicare. 
Other proposals, including those offered by Representative Pete Stark (D-CA), Representative 
Jim Cooper (D-TN), and Senator John Chafee (R-RI) also would reduce Medicare spending by 
significantly more than ever before. 

Outside the health care reform debate, many memben of Congress favor limiting future 
spending on entitlement programs, including Medicare and Medicaid. Others support a 
requirement to balance the federal budget on an annual basis -- an approach that would hit hard 
on the largest federal programs, particularly Medicare. 

Alternative sources of financing health care reform are available to spread the cost of reform 
more broadly, beyond hospitals, physicians, and other health care professionals who will 
already be deeply affected by change. For example, increasing alcohol and cigarette excise 
taxes ($86 billion), scaling back nuclear weapons production (S3 billion), and asking host 
nations to share in more of the cost of U.S. troops stationed abroad ($10 billion) would raise 
nearly $100 billion over five years toward health care reform financing. 



STUDY FINDINGS: 

New estimates prepared by Lewin-VHI look at the impact on hospitals of Medicare spending 
reductions. It is important to note that these estimates do- not pretend to predict the future with 
any certainty - they are highly sensitive to underlying assumptions about future growth in 
hospital costs. However, these estimates are illustrative of the kinds of pressures that hospitals 
face if Medicare spending reductions alone of this magnitude are enacted. 

The Prospective Payment Assessment Commission (ProPAC) has already concluded that today, 
payments to hospitals under Medicare's Prospective Payment System do not keep pace with 
hospitals' costs. The new Lewin-VHI estimates confirm that this pattern will likely continue. 

The study uses the President's plan -- the most detailed available - as an example. Among 
the health care providers and Medicare beneficiaries who would be affected by the President's 
Medicare spending reductions, administration estimates show that hospitals are hardest hit, 
taking $70 billion of the $1 18 billion in proposed reductions. 

Data show that reductions Uke these, with no accompanying reform steps such as expanding 
health care coverage, could cause significant financial losses for hospitals. Losses might be 
attenuated by reducing the rate of growth in hospital costs. But hospitals are concerned that 
losses of this size can not be made up through increased efficiency. Medicare reductions could 
undermine hospitals' ability to transform and improve the health care system for patients and 
threaten their ability to continue to deliver quality care in the communities they serve. 



70 
The Lewin-VHI data show: 

^ By the year 2000, after six years of spending reductions. Medicare could pay hospitals 
only 71 cents for every dollar of inpatient care delivered to a Medicare patient. The 

overall Medicare Prospective Payment System (PPS) inpatient operatmg margins for all 
hospitals in the U.S. could be negative 29 percent (see table 3). 

^ These spending reductions could make the Medicare program an even poorer payer 
than the Medicaid program is today, which currently pays hospitals 82 cents on the 
dollar. 

^ Coping with the spending reductions already enacted in the Omnibus Budget 

Reconciliation Act (OBRA 1993) will be difficult enough for hospitals. Lewin-VHI data 
show that by the year 2000. the overall Medicare PPS inpatient operating margin for all 
hospitals in the U.S. would be negative 12 percent as a result of changes enacted in OBRA 
1993 (see table 1). The additional reductions proposed by the President could lower this 
margin by an additional 17 percentage points (see uble 3). 

^ Particularly hard hit are teaching hospitals, hospitals in large urban areas, and 
hospitals serving a disproportionately large number of low-income patients. By the 
year 2000, Medicare PPS inpatient operating margins could be reduced by 22 percentage 
points for teaching hospitals; reduced by 19 percentage points for large urban hospitals; and 
reduced by 26 percentage points for hospitals receiving both indirect medical education and 
disproportionate share adjustments. 

^ After six years, regardless of hospital type — large or small, urban or rural, teaching 
or non-teaching — most hospitals face signincant Medicare losses. Under current law. 
Medicare PPS inpatient operating margins for various types of hospitals are expected to 
average between positive 4 percent and a negative 18.5 percent (see table 1). If the 
President's reductions were enacted. Lewm-VHI dau suggest these margins could average 
between a negative 19.9 percent and a negative 32.2 percent (see table 3). 

^ All states are negatively affected. After the enactment of OBRA 1993. hospital margins 
varied considerably by state (see uble 2) But Lewin-VHI data show that if the Medicare 
reductions proposed by the President are enacted, all states would lose significant shares of 
revenue, driving Medicare PPS inpatient operating margins down (see table 4). 



IMPUCATIONS: 

Medicare spending reductions have serious implications for the future of health care reform, 
hospitals, patients, and communities. 



71 

Hospitals may be without the resources needed to achieve comprehensive reform -- to 
reconfigure the way in which they deliver care to be more efficient and to refocus on the 
health of the patients and communities they serve. 

Cuts will be felt by hospitals, patients, and communities more deeply than ever before. In 
the past, hospitals have been able to shift unfunded costs to other non-government payers, 
meaning higher costs for patients and employers. But this avenue will be narrowed, if not 
closed, by the current rapid growth in managed care in the private sector as well as by 
many of the comprehensive health care reform proposals that propose to limit private sector 
spending. Thus, hospitals will have to cut costs which could mean personnel and service 
cutbacks. 

Some communities may see their hospitals close for the wrong reasons -- not because they 
are no longer needed, but because they are fmancially weak. The kinds of Medicare 
spending reductions proposed hit hardest on the most fmancially vulnerable hospitals -- 
those barely breaking even or already operating at a loss and those that treat large numbers 
of Medicare beneficiaries. These hospitals may be the very ones that need to remain open 
to assure access and coverage to underserved populations and achieve the broader goals of 
health care reform. 



Prepared Statement Hon. Dave Durenberger 

Mr. Chairman, the President told us that he wanted to assure six things with 
health reform: Security, simplicity, savings, choice, quality, and responsibility. 

I believe we will pass a health care bill this year, and meet the President's goals. 
We must meet these goals, however, without creating cumbersome bureaucracies, 
Federal or state government regulatory schemes, or price controls. I believe we will 
meet those goals by changing the market incentives. The reform must allow markets 
to do what only markets can do — increase efficiency, lower costs, and improve qual- 
ity. And, the bill must not leave the Medicare program out. 

Mr. Chairman, none of the health reform proposals bring these essential elements 
of health reform to America's seniors and disabled. Every health care reform plan, 
including the two I am sponsoring, have failed to address the underlying cost and 
access problems and they do not integrate seniors and the disabled into a 21st cen- 
tury health care system. 

I believe they deserve better. They certainly deserve the same benefits as every- 
one else. And, the seniors in Minnesota know this. A few weeks ago, I received a 
letter from one of my constituents, Mr. Howard Huelster of St. Paul, Minnesota. He 
wrote, "I am shocked and offended by the huge discrepancies between Medicare's 
payments to Minnesota seniors compared to payments to seniors in Florida, Califor- 
nia and New York." Mr. Huelster goes on to say, "While I know it would be unfair 
to ask for the same high payment that Florida's seniors get, it would be fair to ask 
for all seniors in all states to receive the same payment! This might well force the 
inefficient health care providers in other states to become as efficient as Minnesota 
health care providers." It's for these reasons and seniors like Mr. Huelster, that I 
introduced the Medicare Choice Act. 

This Committee has a long history with giving Medicare beneficiaries the ability 
to choose managed health care. The Senate Finance Committee invented the current 
payment formula, soon after the Medicare program was created. The current for- 
mula was created to prevent HMOs from "cream skimming." HMOs, however, have, 
since then, grown sufficiently to be major providers in many markets — therefore, 
their ability to cream skim has diminished. 

It is now time to reform the payment formula to take advantage of the cost-saving 
opportunities in the current health care market. Fortunately, the experience of this 
Committee will allow us fix the payment formula to give beneficiaries real choice 
among providers of Medicare benefits. 

While serving on this Committee, I have recognized the need to restructure the 
Medicare program to fulfill the promise of true health care security for the elderly 
and disabled. In the 99th and 100th Congresses, I introduced the "Medicare Voucher 
Act of 1986" and the "Medicare Private Health Plan Capitation Improvement Act 
of 1987" to allow Medicare beneficiaries the full range of health care options avail- 



72 

able to the rest of the population: The goals of these bills were identical to the goals 
of the "Medicare Choice Act of 1994." 

We planted the seeds for the Medicare Choice Act in 1982 when we created 
TEFRA risk contracts. These contracts allowed seniors to choose more benefits, at 
a lower cost and with less paperwork, through Health Maintenance Organizations 
(HMOs). Unfortunately, we tied federal HMO payments too tightly to the flawed 
Medicare fee-for-service payment scheme. HMOs, therefore, never liked the project, 
and now participate in only a few parts of the country. 

To address the flawed payment system and to increase the number of plans and 
beneficiaries choosing to receive care through cost-effective, managed-care plans, the 
Medicare Choice Act creates a new payment methodology. The new payment scheme 
allows managed-care plans to bid to serve Medicare beneficiaries, and pays all the 
plans in an area the same rate based on the lower bids. Thus, managed-care plans 
can determine the premium they need to serve seniors and the disabled, and com- 
pete in the open market to attract medicare beneficiaries. 

With people choosing between plans based on cost and quality, the plans will 
strive, as any competitor does, to provide the best services at the lowest cost. This 
is our best hope for getting Medicare costs under control without reducing quality 
or services that result from squeezing money out of Medicare. 

The Medicare Choice Act also allows retirees to stay with their employers' plan. 
I have often wondered why retirees should not receive health care at age 65 just 
as they received it at age 64. Under this bill, one of the options seniors can choose 
will be to continue in their former employer's health plan, as long as it provides 
Medicare benefits. Under this provision, the only change at age 65 is the Federal 
contribution toward the plan's premium. 

The Medicare Choice Act will also place responsibility where it belongs. Health 
plans will be responsible for maintaining the health of their members and using the 
best medicine efficiently in order to compete. The Federal Government will finally 
live up to its responsibility to provide the financial security that was the original 
intent of Medicare. No one will be surreptitiously and irresponsibly shifting costs 
from the Federal Government to other payers. 

Mr. Chairman, there are many details that we need to work out in health care 
reform. I am excited by the progress see that we are making every day. I believe 
we can accomplish great things this year in health reform. 

We can do it, and we will. And when we do, I want to include older Americans 
and Americans with disabilities in health care reform. The Medicare Choice Act be- 
gins this process. 



Prepared Statement of Charles P. Duvall 

Mr. Chairman and Members of the Subcommittee: 

My name is Charles P. Duvall, MD. I am an internist and clinical oncologist from 
Washington, DC. I am a Clinical Professor of Medicine at Georgetown University, 
and I am a member of the American Medical Association's (AMA) Council on Legis- 
lation. Accompanying me is Bruce Blehart, JD, Director of the AMA's Division of 
Federal Legislation. On behalf of the AMA, I am pleased to have this opportunity 
to testify regarding directions for the Medicare program in a reformed American 
health care system. 

In our appearance today, and indeed in all of our considerations on the myriad 
issues that are encompassed within health system reform, medicine continues to 
focus on our traditional and paramount concerns — expanded access to high quality, 
affordable care for all of our patients. For our elderly and disabled patients, the 
Medicare program demonstrates that these concerns can be addressed. With the 
Committee, the Congress and the entire country coming to grips with the very is- 
sues that Medicare resolves for the elderly and the disabled, there is an underlying 
question: how will health system reform affect the Medicare program and its more 
than 30 million beneficiaries? From our perspective, there is a tremendous positive 
potential to provide Medicare beneficiaries greater choice in health care coverage op- 
tions; there also is a serious threat to Medicare beneficiaries if program cuts are 
enacted that are anywhere near the magnitude proposed under the Health Security 
Act, S. 1757. 

The Health Security Act holds out the promise of increased opportunities for fu- 
ture Medicare beneficiaries as well as current beneficiaries to receive care through 
the private sector alliance based health plans and through employment-based plans. 
However, there is no certainty that any of these potential coverage mechanisms 
would be better, or even as good as, the current Medicare program, and this cer- 
tainly would not be in keeping with the promise of the Medicare program. 



73 

The AMA has further concerns that the proposed budget driven program changes 
would result in program deterioration. These proposals would undermine the fun- 
damentals of 1989 legislation that set into motion Medicare physician payment re- 
form, including the resource-based relative value scale (RBRVS). This Committee, 
and Senators Durenberger and Rockefeller in particular, had a vital role in the de- 
velopment of physician payment reform, and we are pleased that you also will have 
an essential role in crafting health system reform. We are pleased that you will be 
addressing the proposed Medicare program cuts that we believe threaten access for 
Medicare beneficiaries. These further massive cuts send exactly the wrong signals 
about the degree to which physicians and other Americans can expect their govern- 
ment to honor commitments made as part of health system reform. 

medicare's role under health system reform 

The health system reform bills under your consideration address the future of 
Medicare in some detail. The AMA supports the major Medicare principles of S. 
1757, S. 1770, and S. 1579 in their shared recognition that Medicare is a unique 
health care coverage program that must be preserved. The AMA strongly supports 
the Clinton Administration's position, as recently underscored by HHS Secretary 
Donna E. Shalala, that it will be necessary to "preserve Medicare" as part of any 
health system reform package. In maintaining Medicare, we think that beneficiaries 
also should have enhanced coverage options through the private sector. 

As you know, the Health Subcommittee of the House Ways and Means Committee 
has reported a proposal to use a new Medicare Part C as the vehicle to provide cov- 
erage for those without coverage, the unemployed, and for small business. While the 
AMA endorses the Subcommittee's directions that would result in universal cov- 
erage, we do not support the vast expansion of Medicare envisioned in the proposal. 
Rather than create a massive and expensive new entitlement program under a new 
Medicare Part C, the AMA believes a better approach would be to expand coverage 
for other targeted groups, such as the uninsured, through private sector reforms, in- 
cluding insurance reform, use of risk pools, and integration of Medicaid and unin- 
sured populations into private plans through the use of subsidies. (The subsidy/inte- 
gration ciirection is similar to the Administration's approach under S. 1757.) We also 
support improved Medicaid payment to levels at least on par with Medicare. 

Greater options could also be made available to the current Medicare population 
so that individuals would have the ability to choose the plan, public or private, that 
best meets their needs. Our Council on Legislation is scheduled to examine Senator 
Durenberger's recently introduced proposal, S. 1996, that we think holds promise for 
allowing Medicare beneficiaries greater choices for their health care coverage. 

PROPOSED medicare CUTS 

In 1989, physicians entered into an agreement with Congress and the Administra- 
tion when Medicare physician payment reform was enacted. With the Administra- 
tion and most Members of Congress asking physicians and all of our society to enter 
into an even more comprehensive and far reaching social compact to reform the en- 
tire health care system, we are dismayed that an integral part of the Administra- 
tion's health system reform plan as well as other proposals abrogate many of the 
very agreements over payment reform that were achieved with such difficulty and 
solemnity five years ago and that are now just completing the phase-in period. 

In considering further Medicare program cuts, it must be remembered that they 
would fall on top of a decade of significant program cuts and that all of the OBRA 
93 budget actions have yet to occur. Of the $124 billion in overall Medicare savings 
that would be achieved through the series of policy changes specified in S. 1757, 
savings related to Medicare Part B would amount to $31.5 billion through 2000. It 
bears noting that virtually none of the Administration's proposals for Medicare pro- 
gram cuts are even mentioned in the Congressional Budget Office (CBO) March 
1994 report. Reducing the Deficit: Spending and Revenue Options. Furthermore, the 
need from a budget deficit viewpoint for this magnitude of program cuts is question- 
able when we can see that the rate of program growth is diminishing. The amount 
Medicare pays for services is also diminishing when compared to private sector pay- 
ments. According to the Physician Payment Review Commission's (PPRC) just re- 
leased report, where Medicare paid 68% of the average amounts paid by Blue Cross 
Blue Shield and Commercial insurers in 1989, this figure has gone down to 59% in 
1994. 

Looking at a number of the proposals from S. 1757 together, they can only be seen 
as instituting an unwarranted overhaul of the Medicare physician payment schedule 
that is based on the RBRVS, and is the basis of over one fourth of all physician 
payments. These proposals undermine the fundamentals of physician payment re- 



74 

form and threaten access for Medicare beneficiaries. They inject instabiUty and com- 
plexity into a system instituted to provide just the opposite. They reflect a seeming 
and unseemly cynicism about physicians as "deep pockets" from which both deficit 
reduction and health system reform can be funded. They promise to dramatically 
accelerate a downward spiral of Medicare physician payments. With the PPRC tell- 
ing us that Medicare pays 59% of what private payments run for the same service 
(even though an older or disabled patient often will require more time in providing 
the care), the pressures for cost shifting are evident and will be even stronger if 
these proposals are enacted. It only stands to reason that we have such strong and 
profound concerns about the broader implications of these cuts. 

Taken together, the proposals to establish cumulative expenditure goals for physi- 
cian services, use real Gross Domestic Product (GDP) to adjust for volume and in- 
tensity, eliminate even the limited level of balance billing, repeal the restriction on 
the maximum reduction permitted in the default update, and limit payment for phy- 
sicians' services in so-called high-cost hospital medical staffs, will almost certainly 
send Medicare physician payments and spending on needed services into a tailspin 
from which they will never recover, and will exacerbate cost shifting and other pres- 
sures. The attached table illustrates this point. 

The AMA also finds a series of proposals that would "overhaul" the RBRVS to be 
particularly inappropriate. The proposals (modification of Medicare payment for of- 
fice consultations, revisions to the RBRVS practice expense values, payment adjust- 
ments for office visit work RVUs, and reductions in the work RVUs for those serv- 
ices identified as having high ratios of work RVUs per procedure time) generally 
would manipulate the RBRVS to reach the predetermined outcome of a substantial 
increase in the Medicare payments for designated primary care services. The AMA 
is committed to an RBRVS that is based on accurate measures of physicians' re- 
source costs, and these proposals fail this measure. The RBRVS should be based on, 
and only on, accurate measures of physicians' resource costs; it should not be re- 
vised solely to achieve inter-specialty payment goals. Relative value adjustments 
outside of the normal refinement processes, solely to achieve inter-specialty payment 
redistributions, threaten the RBRVS and its continued viability, especially for use 
beyond Medicare. 

Our detailed discussion on the Medicare Part B proposals set out in S. 1757 are 
attached to this statement as an appendix. These issues were under public scrutiny 
at the end of last year, and we still concur with the points expressed in a November 
4, 1993 bipartisan letter to the President from forty-one (41) Members of the House 
of Representatives: 

"Medicare and Medicaid savings of the magnitude that are contemplated in 
your proposal, coupled with those already enacted as part of the OBRA 93 and 
OBRA 90, will continue to push many health care providers toward the brink 
of financial disaster and risk eroding access to care for millions of poor, elderly 
and disabled Americans. It is unclear whether the rigid, formula-driven budget 
caps that your proposal would impose on the Medicare and Medicaid programs 
bear any relation to the actual health needs of a community, or if they will be 
flexible enough to respond to changing and unforeseen circumstances." 
Even though a substantial amount of savings would be attained from these pro- 
posals, we are concerned that this would be achieved at far too great a human cost. 
As further stated in the Representatives' November 4 letter: 

"... the level of reductions you have suggested in your proposal may place 
these important programs for the poor, elderly and disabled in severe financial 
jeopardy." 

CONCLUSION 

In conclusion, we want to leave you with the clear understanding that the Amer- 
ican Medical Association staunchly supports actions to reform our nation's health 
care system. However, this restructuring should be done in a manner that builds 
on what works in the existing system. Medicare beneficiaries should have enhanced 
options beyond government structured health care coverage. Proposals that essen- 
tially will eviscerate the Medicare program as a means to fund other aspects of 
health care delivery fails this litmus test and only exacerbates the cost shift problem 
that is one of the central rationales for reform. It makes little sense to finance care 
for one segment of the population by stripping funding from Medicare. Positive steps 
should be tried, such as means testing for higher income patients and other reason- 
able measures such as allowing managed care options and voluntary enrollment in 
purchasing co-ops for beneficiaries. Finally, the AMA will continue to support the 
ability of our patients, including Medicare beneficiaries, to have free choice of cov- 
erage options and access to health care services of the highest quality. 



75 



MEDICARE PROPOSALS FROM S. 1757, "THE HEALTH CARE SECURITY ACT" 
VIEWS OF THE AMERICAN MEDICAL ASSOCIATION 



ESTABLISHMENT OF CUMULATIVE EXPENDITURE GOALS FOR PHYSICIAN SERVICFS 

Using fiscal year 1994 as a base, this provision would compare the two factors of cumulative 
Medicare Volume Performance Standards (MVPSs) and cumulative actual expenditure increases to 
determine the annual default conversion factor update. The conversion factor update for a category of 
physicians's sei^ices for a year beginning with 1996 would increase or decrease by the percentage by 
which the cumulative increase in actual expenditures for that category of physicians' services for that 
year was less than or greater than the MVPS for that category of sei^ices for that year. 

Preliminary simulations of this proposal demonstrate that the cumulative MVPS will almost cenainly 
send Medicare physician payments into a tailspin from which they will never recover. This new 
"update" process would be compounded by the proposal to substitute real Gross Domestic Product 
(GDP) for the real data on historical medical volume and intensity, and the proposed elimination of 
any floor on payment reductions. With expenditures highly likely to come in over the target in future 
years, fees probably would be reduced each year and there would be no limit on this reduction. The 
penalty for exceeding the MVPS compounds each year, and the concept of individual physician 
responsibility for the volume and intensity of services become irrelevant in the confusion. 

Discussions with staff from the PPRC and the HCFA Office of the Actuary suggest that one of the 
worst features of this provision, which would impose a double penalty on physicians for years in 
which expenditures exceed the MVPS, is likely to be subject to a technical correction. Nonetheless, 
the PPRC has also concluded that the cumulative MVPS should not be used if the other MVPS 
tightening provisions of S. 1757 are enacted. We cenainly agree, but also feel that the current MVPS 
structure, as modified by OBRA 93. is likely to lead to the same kind of persistent mismatches 
between expenditures and the MVPS that will be aggravated by the cumulative MVPS. We continue 
to oppose the cumulative MVPS, even if revised to eliminate the double penalty and even if other 
proposed MVPS cuts are scaled back. Under this proposal, the gap between Medicare and private 
payments is certain to continue its current downward trend. According to the Physician Payment 
Review Commission's (PPRC) just released report, where Medicare paid 68% of what an average of 
Blue Cross Blue Shield and Commercial insurers paid in 1989, this figure has gone down to 59% in 
1994. 

USE OF REAL GDP TO ADJUST FOR VOLUME AND INTENSITY 

The Clinton proposal would eliminate the historical medical volimie and intensity factor (and the 
performance standard) from the MVPS and replace it with the average per capita growth in the re<ii 
GDP for the 5-fiscal-year period ending with the previous fiscal year (increased by 1.5 percentage 
points for primary care services). While we do appreciate the improvement this represents over the 
September 7 draft, that proposed elimination of this factor entirely, this will only serve to further 
drive down updates. In general, growth in real GDP per capita has been far below historical levels of 
medical volume and intensity growth. For 1986-1992, the average annual growth in real GDP was 
2.30% while the average growth in real volume and intensity (as measured by the Medicare Trustees) 
was 6.94%. The PPRC has projected that the current volume and intensity allowance will be 2 to 2.5 
percentage points above real GDP. 



76 



This proposal improperly assumes that the appropriate rate of growth for health care expenditures is 
GDP. This presumption flies in the face of the fact that the provision of health and medical care 
occurs in a highly service intensive sector of our economy, similar to the education sector, where the 
labor and the costs of services historically exceed the costs of goods. And, in truth, the costs 
associated with providing this care also should not be unexpected. These costs historically have risen 
at a rate above the rate of growth in the GDP, the consumer price index, and other economic 
measures. Furthermore, the technology intensive nature of health care today and in the future acts as 
an accelerant and is a further significant reason why there is the gap between real GDP and real 
medical volume and intensity. This gap also represents a real demand for the services from which 
our patients benefit. 

Nevenheless, the proposal arbitrarily would limit program growth leading to spending increases far 
below even nominal GDP growth. This proposal is unacceptable, as it would eliminate any remaining 
shred of credibility for the MVPS as a reasonable guideline for the evaluation of spending on 
physician services. 

REPEAL OF RESTRICTION ON MAXIMUM REDUCTION PERMITTED IN DEFAULT 
UPDATE 

The floor on MVPS payment reductions was an integral part of the OBRA 89 compromise. It served 
to protect physicians and patients from excessive and automatic application of the MVPS formula. 
Nevenheless, OBRA 93 just three months ago increased the nuximum MVPS-related payment 
reduction from 3% to 5%. This change has already eroded the floor on MVPS-related adjustments 
that was an integral part of the OBRA 89 agreement. By the outright elimination of this floor, the 
other changes set out in the Administration's proposal would combine to wreak maximimi havoc on 
physician payment reform. 

REDUCTION IN CONVERSION FACTOR FOR PHYSICIAN FEE SCHEDULE FOR 1995 

Following on OBRA 93 reductions in the 1995 conversion factor, S, 1757 proposes even steeper 
reductions in the conversion factor update for non-primary care services in 1995. It would allow the 
full 1995 default update only for primary care services and would reduce the 1995 conversion factor 
update by 3 percentage points for all other services. 

Given that all indications are that 1993 actual Part B physicians spending will be well below the 1993 
MVPS, especially for surgical services, it appears that this proposal will once again prevent 
physicians from realizing promised payment increases. This provision further abrogates the 
agreement that created the MVPS, and would be added on top of cuts already scheduled for 1995 that 
were enacted in OBRA 93. This provision would be little more than a jump stan to a future of 
diminishing real payments for services provided Medicare beneficiaries. 

LIMITATIONS ON PAYMENT FOR PHYSICIANS' SERVICES IN HIGH-COST HOSPITAL 
MEDICAL STAFFS 

The Plan would create an elaborate scheme of hospital medical staff MVPSs. In general, this 
provision would require the Secretary of HHS to project a hospital-specific per admission relative 
value for the next year by October 1 of each year (begirming with 1997) for each hospital and to 
estimate whether or not this hospital-specific projected relative value will exceed the allowable 



ll 



77 



average per admission relative value applicable to the hospital for the following year. The allowable 
average per admission relative value is set as a percentage of the median 1996 hospital-specific per 
admission relative value and is set differently for urban (120% for 2000 and beyond) and rural 
(140%) hospitals. It would be adjusted for case-mix, disproportionate share, and teaching stams. If 
anv overage is projected, the Secretary would reduce all payments made for hospital inpatient services 
provided by physicians on that medical staff by 15%. 

The AMA is very concerned by the many negative implications of this proposal. It would: 

• create a new and onerous regulatory structure that would be based on non-existent 
data, and that would not account for severity and case mix; 

• require the Secretary to project hospital-level average relative values per admission 
and. based on these projections , would withhold the full 15% of all payments for 
medical care even if the projected overage is 1 % or even . 1 % (The MVPS experience 
shows the limit of the nascent "science" of volume/intensity projections.); 

• delay reconciliation until October 1 of the following year, even though relevant data 
would be available by April 1 ; 

• establish specific standards for "high cost" medical staffs in advance of any provisions 
for public notice and comment; 

• assume that DRG-based case mix adjustments were appropriate for physician 
payments; 

• require medical staffs to establish expensive fiscal and administrative strucmres to 
monitor care using measures that may not be appropriate for such a purpose; and 

• violate agreements on MVPS-structure that were made as a result of OBRA 93. 

Finally, this proposal would shift both hospital and physician payment incentives to reward the 
provision of the least care. Physicians as well as other care givers should not be penalized for 
advocating care for their patients. This certainly violates the principles of security, responsibility, 
quality and choice. 

ELIMINATION OF MEDICARE BALANCE BILLING 

The Administration proposes to impose mandatory assignment on all Medicare Part B claims as of 
January 1, 1996. The AMA strongly protests this change, except for those with incomes less than 
200% of poverty. Again, this is a major violation of the agreements reached in reforming physician 
payments under Medicare in 1989. This also is inconsistent with the Physician Payment Review 
Commission's (PPRC) annual recommendations to the Congress. This change would exacerbate 
current cost shifting pressures. Also, as previously noted, this type of action will increase Part B 
spending as patient out-of-pocket costs are reduced. Panicularly with Medicare payment levels 
continuing to shrink in comparison to the private sector (now at 59%), there is a legitimate role for 
balance billing. Finally, it must be noted that this represents a small portion of beneficiary liability 
and that assignment is accepted on the vast majority of claims. According to the AARP's Issue Bnef 



78 



(March 1994, Number 17). balance billing was responsible for 9% of total out of pocket liabilities for 
Pan B by source in 1990 (other factors: deductibles - 9%; coinsurance - 39%; and premiums - 
43%). The AARP also noted that declines in balance bills are expected to continue. 

RBRVS OVERHAUL 

Section 4115 of the Plan, titled Medicare Incentives for Physicians to Provide Primary Care , proposes 
what can only be referred to as an "RBRVS overhaul." This provision addresses: 

• Medicare payment for office consultations; 

• payment for office visit work and practice expense relative value units (RVUs); 

• resource-based RBRVS practice expense values; and 

• payment for services with high ratios of work RVUs/time. 

In general, these proposals manipulate the RBRVS to reach a predetermined outcome— a substantial 
increase in the Medicare payment levels for primary care services. (Under current law. primary care 
services include office visits, emergency department services, and several other categories of visits; 
they do not include consultations, hospital visits, or critical care.) 

The AMA is committed to an RBRVS that is based on accurate measures of physicians' resource 
costs. We have made a major commitment to organize physician groups into a Relative Value Update 
Committee (RUC) in order to maintain the RBRVS's scientific validity. HCFA already relies on the 
RUC results in the RBRVS update process. (We would be pleased to provide further information on 
this activity for the Committee and its staff.) 

The RBRVS should be based on. and only on. accurate measures of physicians" resource costs. 
RVUs should not be revised solely to achieve inter-specialty payment goals. Relative value 
adjustments outside of the normal RUC and refinement processes, solely to achieve inter-specialty 
payment redistributions, threaten the RBRVS and its continued viability, especially for use beyond 
Medicare. Finally, the AMA continues to have concerns about funding specific policy changes by 
reducing RBRVS RVUs. We continue to favor a separate Medicare Adjustment Factor to make such 
budget neutrality adjustments. A separate Medicare adjustment factor would recognize budget 
neutrality needs, avoid distortions to the RVUs. and avoid allowing Medicare budget constraints to 
drive non-Medicare RBRVS systems. 

Resource-Based Practice Expenses - This proposal calls for the Secretary of HHS to increase practice 
expense (PE) RVUs for primary care services by 10% staning in 1996. with RVUs reduced for all 
other services by a budget neutral amount. It also calls on the Secretary to establish a resource-based 
PE method that could be implemented in 1997 and to report to Congress by June 30. 1996, on the 
methodology for this system, including a presenution of the data utilized in developing the 
methodology and an explanation of the methodology 

The AMA continues to support a PE smdy by the HHS Secretary. Prior to completion of the RBRVS 
transition in 1996 and without the results of this smdy. we oppose implementation of resource-based 
practice expense RVUs Although a 10% increase in the primary care practice expense RVUs would 



79 



be consistent with current projections of the PPRC's resource-based practice expense method, it 
would result in payment reductions for all other services regardless of whether the PE RVUs would 
increase or stay unchanged under the ultimate RBRVS PE methods. This proposal, on top of the just 
enacted OBRA 93 updates that favor primary care services, is premature 

Office Consultations - This proposal would cut Medicare payment rates for office consultations to 
equal those for office visits beginning in 1996. It would use resulting savings to increase payments 
for office visits. Under this proposal and based on 1993 national (no geographic adjustment) RBRVS 
amounts, it would be possible that payments for new patient office visits would increase by 5.5% and 
payments for office consultations would decrease by 23-31 %. Medicare payments to specialties 
providing a substantial share of primary care services would rise— family physicians (2. 1 %), 
internists (.2%) and allergists (1.3%). Payments to other specialists, including cardiologists (-1.3%), 
gastroenterologists (-2.3%), and neurologists (-6.5%), would fall. 

This provision would make large cuts in current consultation payments to fund small office visit 
increases, and it would be contrary to PPRC conclusions that consultations should have higher 
average work intensities. 

Office Visit Work RVUs - This proposal would increase office visit work RVUs by 10% to reflect 
"office visit pre- and post-time." The RVUs for all other services would be reduced to fund this 
change, as with the PE RVU increase. The assumption is that all pre/post-service time is not 
included in the current RBRVS values. We are concerned that the methodological or data basis for 
this change is unclear. Furthermore, this provision would have a significant negative effect, and that 
this consequence also would fall on some specialties usually thought of as providing primary care. 
Our impact projections forecast that the combined effect of the provision and the 10% increase in 
primary care PE RVUs would require a 2.3% decrease for all other services. Combined impact 
projections show a 3.8% increase for family practice, a 1.9% increase for internal medicine, a 0.9% 
decrease for general surgery, and a 2.3% decrease for radiology. 

Reduce the Work RVUs of "Outlier Intensity" Procedures - Beginning in 1996, this proposal would 
require the Secretary to reduce the work RVUs for "outlier intensity" procedures, or classes of 
procedures, that have a high ratio of work RVUs per procedure time. "Savings" would be used to 
increase payments for primary care services. This proposal resembles the approach in OBRA 93 to 
reduce "outlier" PE RVUs. No specific threshold or level of reduction is suggested, nor is there a 
publicly available database with this information. 

This proposal would simply assume that "outlier" intra-work RVUs are inappropriate, even though 
they were developed by the same Harvard RBRVS method used for the overall RBRVS and have not 
been altered by HCFA's refinement process. The AMA opposes such an arbitrary series of 
reductions outside a formal RVS update and refinement process. The RUC currently is working on 
methods that could be used to identify overvalued services. This proposal could distort the relative 
values for both outlier services and primary care services. It could also set a precedent for non 
budget-neutral reductions for other categories of "overvalued" services. 

COMPETITIVE BIDDING 

The Health Security Act" calls for the use of competitive bidding as a mechanism to pay for various 
health and medical services. In addition to broad authority to determine what would be purchased 



80 



through competitive bidding, the proposal specifically calls for this method to be used as the payment 
mechanism for MRI and CT scans (including physician interpretation), and clinical diagnostic 
laboratory services. If competitive bidding does not result in a 10% reduction in the fee schedule for 
clinical laboratory services, the Secretary would be required to reduce such fees to achieve the 10% 
reduction. 

While competitive bidding may be appropriate as a purchasing mechanism for goods and services 
where quality is readily discerned or generally does not vary, it is wholly inappropriate for the 
purchase of professional services that are tailored to dynamic and highly individual needs. 
Competitive bidding is a panicularly inappropriate mechanism to purchase medical and health care 
services, and it violates the principles of security, responsibility, quality and choice. 

Where items are standardized or easily specified, such as nuts and bolts, competitive bidding is a 
logical mechanism for choosing the supplier of goods. However, where professional services are 
being purchased, even what appears to be a "standardized" service may not be so easy to quantify. 

Competitive bidding may result in a reduction in the quality of and access to the service sought. The 
potential for reduced quality is panicularly real in the health care sector of the economy where the 
services are unique due to many variables, including the involvement of individual patients, 
physicians, hospitals, and other health care providers. 

While initial savings may be generated by competitive bidding, the savings may be counterbalanced 
by a loss in the quality of health care services and diminished access to care where the "winning " 
bidder is remote from the patient, or where "non-winners " cut back on their provision of the 
particular service. Such savings are short-sighted and carry the high potential for a negative health 
care outcome. 

We continue to maintain that the competitive bidding mechanism for selecting a provider of such 
distinct and individual care services is just not appropriate. Serious questions that ultimately revolve 
around the quality of care provided readily arise: 

• How would quality of the provider bidding on the services be determined? 

• Would providers be allowed to bid on services that are outside of their current area of 
service provision? 

• Would tum-around time be affected by the bid price? 

• Will patients be inconvenienced or costs increased if physicians are unable to provide 
or atuin special services through their offices or other settings? 

• Would the competitive bid process force losing competitors out of business, thereby 
limiting access to care? 

• How is the bid area to be defined? What would be the impact of a national or 
regional provider of services on the bid? How would such a provider participate in 
the bid process? 



81 



In addition to the specific questions raised here, serious consideration must be given to the future of 
the health care industry in an area where a competitive bid demonstration is allowed. Under the 
current system, a large number of entities may deliver services, price information should be readily 
available, and physicians and their patients are free to elect to have services provided by one provider 
as opposed to another. Where there is dissatisfaction with the provider services, physicians and their 
patients should have the option of voting with their feet and going to a new provider. Under a 
competitive bid system, this ability will be either eliminated or greatly diminished. There has been 
some experience in this area with the competitive bidding of pap smears by some states. 
Unfortunately, the results were often poor quality. As a result, those contracts have been terminated. 

Under a competitive bid program, dissatisfied beneficiaries are unable to exercise true freedom of 
choice. Eliminating freedom of choice eliminates a major quality check that oftentimes is a patient's 
or referring physician's only sigmficant option in directing care: the ability to seek care from the 
complete range of physicians and other health care providers. 

We urge rejection of competitive bidding as a means to purchase unique health and medical care 
services. Being a low bidder carries no guarantee of quality. In a truly competitive market, 
purchasers are free to elect to receive services from the provider of their choice. This would not be 
the case in a competitive bid environment and the end result is one where it is the potential recipient 
of the services who may suffer. Our patients stand to be the ultimate losers from such a direction that 
clearly is contrary to the important goal of free choice. 

CENTERS OF EXCELLENCE 

President Clinton's proposed "Health Security Act" would provide the Secretary with broad authority 
to enter into contracts, using a competitive process, with "centers of excellence " This would be done 
for cataract surgery and for other services deemed appropriate by the Secretary. All payments made 
to such centers, including payment for physicians' and other professional services would be made 
directly to the center. The proposal is silent as to criteria for or the definition of "centers of 
excellence." 

The AM A questions the feasibility of establishing "centers of excellence" using a competitive process 
as a way to either contain Medicare costs or improve quality. Several questions arise in considering 
the "centers of excellence" proposal: 

• How many of these "Centers" will be established in a given geographical area? 

• How far will Medicare beneficiaries be required to travel to receive health care 
services at these centers, and how will follow-up care be provided? 

• If key individuals on the medical staff in one of these centers leave, does the center 
lose it "excellence" rating? 

• If a Medicare beneficiary is unable or unwilling to receive care through a convenient 
"center of excellence" for a particular service, will reimbursement be denied? 



82 



• What happens if the best heahh care facility providing a specific health care service 

refuses to bid on being designated a "center of excellence '? Will Medicare 
beneficiaries be denied the services of this facility? 

Furthermore, physicians who are not providing services through one of these "centers of excellence ' 
and other non-designated facilities could be perceived by the public as providing poor quality 
services. This would be a serious misperception and an unfortunate result of establishing these 
"centers of excellence." The AMA believes that too many problems arise to justify establishing 
"centers of excellence" as a formal part of the Medicare program. 

Medicare MVPS and Conversion Factor Cuts 

Health Security Act, S. 1757 



Percentage of Actual 1995 Payment 



105% 



lOCWtfi 



95% 



90% 



85% 



80% 



75% 



Primary Cara 



70% 




Othar 



1S95 



1996 



1997 



1998 



1999 



2000 



Year 



CMin9« M tmmmii 






Awtl 1M4 
IrvrM* mnt 9, 1 7f7 MtVW9 J% » m tm»l' fw tl 



83 

Prepared SxATEMEhrr of George Halvorson 

Good morning. I am George Halvorson, CEO of HealthPartners HMO in Min- 
neapolis, and chairman-elect of the Group Health Association of America (GHAA). 

HealthPartners is a 600,000-member, consumer-governed, nonprofit HMO that in- 
cludes Group Health, Inc., a staff-model HMO, and MedCenters Health Plan, a 
group-model HMO. HealthPartners currently has over I 6,000 Medicare bene- 
ficiaries enrolled in our Medicare risk contract, and almost 6,000 Medicare bene- 
ficiaries enrolled in our Social HMO. 

I am here today testifying on behalf of GHAA, which represents 350 health main- 
tenance organizations (HMOs) with 33 million members who account for about 75 
percent of total HMO enrollment nationwide. Almost 90 GHAA member plans have 
risk contracts with the Medicare program. This represents 77% of plans that partici- 
pate in the program and 92% of the enrollment in the program. Our members also 
participate in the program under cost-based contracts. 

HMOS, medicare, AND HEALTH CARE REFORM 

I am pleased to be here to talk about the role of HMOs in the Medicare program 
both today and in the future as health care reform takes place. In the course of my 
testimony, I will address the five following major areas: 

• the advantages of HMO membership for Medicare beneficiaries; 

• policies needed to retain and expand HMO membership as an option for Medi- 
care beneficiaries in the future; 

• problems with the current Medicare risk reimbursement system; 

• S. 1996, Senator Durenberger's bill to improve the Medicare risk contracting 
program; and 

• provisions of the Administration's health care reform proposal that would im- 
pact HMO Medicare contracting. 

BACKGROUND 

HMOs are care systems that deliver that care through teams of health care pro- 
fessionals. Their primary goals are keeping their members well and providing high- 
quality, coordinated health care. Consumers consistently give HMOs positive re- 
views, which are reflected in high enrollment renewal rates. In fact, HMO enroll- 
ment has quadrupled during the past decade alone based almost entirely on 
consumer choice. Today, about 45 million people — roughly one out of every five Amer- 
icans who have health insurance — are enrolled in HMOs, and GHAA estimates that 
HMO enrollment will exceed 50 million by the end of 1994. The vast majority of 
these HMO members selected their plans in an environment of choice — they chose 
to be our members. 

What is it about HMOs that makes them attractive? HMOs organize the delivery 
of comprehensive health care services in a way that makes a great deal of sense 
to many Americans. The benefit packages we offer tend to be significantly broader 
and more complete than those offered by indemnity insurers. Out-of-pocket costs are 
invariably lower. Typically, HMO members benefit from being able to select a per- 
sonal physician within each health plan who knows their needs and can coordinate 
any specialty care the members may require. Our members also benefit ft-om pre- 
dictable, low out-of-pocket costs, and they are not burdened by the need to file 
claims forms to take advantage of covered benefits. In fact, the administrative sys- 
tems in many of our plans are much less costly than typical insurance administra- 
tion in this country — and many plans incur administrative costs that are, in fact, 
lower than those incurred in single payer systems like Canada. 

HMOs promote quality in many ways, including careful selection of providers 
based on professional qualifications, and interest in working within a coordinated 
system. Eighty-five percent of HMO physicians nationwide are board-certified, com- 
pared to only 60 percent of physicians nationwide. We routinely monitor and ana- 
lyze ambulatory clinical practices to improve the quality of the delivery system and 
cost-effectiveness of care in ways that are not available or possible for traditional 
health care insurance arrangements. 

Many policy makers think of HMOs as an urban or suburban phenomenon. In 
fact, HMOs have a successful track record in rural communities. In 1990, 30 I 
HMOs served both urban and rural counties, and 15 more served rural counties 
only. Involvement is growing as doctors, consumers, and administrators find new 
ways to adapt HMO models to meet the unique needs of rural areas. 

Let me speak for a moment about our own health plan. Our plan, for example, 
has made a commitment to reduce the incidence of heart disease, diabetes, preterm 



84 

births, and several other key conditions by 25 percent over the next four years. That 
type of commitment to real health is only possible in an HMO environment. 

CURRENT HMO PARTICIPATION IN THE MEDICARE PROGRAM 

Under current law, HMO have three options under which they may contract with 
the Health Care Financing Administration (HCFA) to provide Medicare covered ben- 
efits to Medicare beneficiaries. These options are: 

• contracting as health care prepayment plans (HCPPs) on a cost basis to provide 
some or all of the Part B services; 

• contracting as federally qualified HMOs or as competitive medical plans (CMPs) 
on a cost basis to provide all Part A and Part B services; and 

• contracting as federally qualified HMOs or as competitive medical plans (CMPs) 
on a risk basis to provide all Part A and Part B services. Under this option 
HMOs are paid based on prospectively determined rates that are intended to 
reflect 95 percent of the amount HCFA would have paid if the beneficiaries en- 
rolled in the HMO had remained in the fee-for-service Medicare program (95 
percent of the adjusted average per capita cost [AAPCC] of providing the cov- 
ered benefits). 

As of March 1, 1994, approximately 600,000 Medicare beneficiaries were enrolled 
in HMOs with HCPP contracts; 162,000 Medicare beneficiaries were enrolled in 
HMOs with cost contracts and almost two million Medicare beneficiaries were en- 
rolled in HMOs with risk contracts. 

• Advantages of HMO Membership for Medicare Beneficiaries 

Medicare beneficiaries are already realizing some of the central goals of health 
care reform. They have access to affordable, high quality, comprehensive benefits in 
exchange for a fixed monthly premium. Medicare HMO members receive all Medi- 
care covered benefits but in addition, they also have access to comprehensive cov- 
erage at affordable and totally predictable cost. 

This is possible because under the risk contracting program, HMOs return to the 
beneficiaries in the form of added benefits any difference between 95 percent of the 
AAPCC (intended to represent the fee-for-service cost of providing the Medicare ben- 
efits) and the premium the HMO would need to provide Medicare covered services. 
Beyond the benefits HMOs can provide with the "savings" generated by cost-effec- 
tive care, most HMO Medicare risk contractors also add benefits that make Medi- 
care beneficiaries' coverage closer to the comprehensive benefits offered to other 
HMO members. 

Over 42 percent of Medicare beneficiaries are charged premiums for their HMO 
coverage of less than $20 per month. Almost half of premiums for these coverages 
cost less than $50 per month. The HMO premium includes the Medicare enrollee's 
Medicare deductibles and coinsurance. This means that these Medicare out-of-pock- 
et costs are translated into a predictable amount per month, rather than being im- 
posed at the time of service. 

Indicative of the importance of preventive services to HMOs is the fact that over 
97 percent of plans cover routine physicals; almost 90 percent cover immunizations; 
over 80 percent cover eye exams; and 65 percent cover ear exams, which are not 
otherwise covered by Medicare. Other services included by HMOs include health 
education, outpatient drugs, foot care, and dental services. Over one-third of HMOs 
with Medicare risk contracts include an outpatient prescription drug benefit, a bene- 
fit that is highly valued by seniors. 

The positive impact of HMO enrollment on the health care of Medicare bene- 
ficiaries was documented in a study published by Mathematical Policy Research, 
Inc., last December. The study demonstrated the benefits of Medicare beneficiaries' 
receiving coverage through HMOs. These benefits included increased access to care; 
quality of care that is at least the same, and in many cases superior to fee-for-serv- 
ice care — while using fewer resources; an increased range of choices for bene- 
ficiaries; more coverage at lower costs; high member satisfaction; and a potential to 
generate Medicare program savings. 

The study found that about 90 percent of HMO members rated their HMO care 
as good or excellent. Members were particularly satisfied with the plans' afford- 
ability. Fourteen of fifteen HMO members would recommend their HMO to a friend 
or family member. This is a key indicator of satisfaction with health care. Many 
other studies also illustrate HMOs' record of quality. 

• A study published in Medical Care, for example, showed that "For five of six 
(cancer) screening tests examined . . . members of HMOs are significantly more 
likely to have received the test within the last three-year period." (Medical 
Care, 1991) 



85 

• Another study comparing treatment decisions among 140,000 Califomians with 
clogged coronary arteries found that HMOs offer the best way to avoid unneces- 
sary medical treatment without sacrificing needed care. (New England Journal 
of Medicine, December 9, 1993) 

In addition, Medicare risk contracting HMOs serve a disproportionate number of 
low-income beneficiaries. HMOs reduce financial barriers to care — annual out-of- 
pocket costs for the average HMO member are $600 less than in Medicare fee-for- 
service — including the HMO premium. HMOs therefore protect beneficiaries from 
catastrophic financial costs. HMOs do not impose lifetime maximums or spell of ill- 
ness limitations on benefits. Medicare risk contracting HMOs provide an affordable 
choice for comprehensive coverage to low-income elderly — those unable to afford in- 
surance industry Medigap premiums and significant, unpredictable, out-of-pocket 
costs. 

FOUNDATION FOR EXPANDING HMO PARTICIPATION IN THE MEDICARE PROGRAM 

As the health care reform debate moves forward, decisions will be made about the 
impact of reform on the Medicare program and whether to include the program in 
any restructuring of the nation's health benefits marketplace. We believe Medicare 
beneficiaries should have a chance to choose among delivery systems. Expansion of 
the availability of HMO membership will be an important aspect of this right to 
choose. 

GHAA believes that existing Medicare contracting opportunities for HMOs — al- 
though they can and should be improved — have created a solid foundation for the 
future. From this experience several elements can be identified that will be impor- 
tant to fostering future HMO participation in the Medicare program, regardless of 
its treatment in the context of health care reform. 

These elements include the following: 

• Maintain the opportunity for HMOs to receive capitation, so that care will not 
be compromised and constrained by the inherent limitations of the traditional 
Medicare fee-for-service payment approach. 

• Permit HMOs to offer a broader benefit package than Medicare covered bene- 
fits. HMOs emphasize preventive, care, early intervention, and coordination of 
care in order to provide high-quality, cost-effective services. If they were re- 
quired to offer benefits limited to the Medicare benefit package, they would lose 
the capability to cover services that are essential to meeting these goals. (We, 
for example, have cut the readmission rate for seniors with congestive heart 
failure in half with a special program that involves putting special scales in 
their homes and having nurses call each patient daily to check on their weight 
and health status. That program has significantly improved the health status 
of the seniors involved, and it reduces costs — because it reduces hospitaliza- 
tions. That program, and others like it, would not qualify for reimbursement 
under traditional Medicare fee-for-service payment. Medicare only pays for sick 
people, not for keeping people well.) 

• Retain HMOs' ability to enroll Medicare beneficiaries outside the risk contract- 
ing program. It is difficult for HMOs with small numbers of members to absorb 
the random cost of illness for Medicare beneficiaries. For some HMOs, current 
cost-based reimbursement mechanisms provide an opportunity to gain experi- 
ence in meeting the special needs of Medicare beneficiaries without incurring 
the significant financial risk that can accompany risk-based reimbursement. 

• Improve the highly flawed and inconsistent reimbursement mechanism in the 
current Medicare risk contracting program, which is currently based upon the 
adjusted average per capita cost (AAPCC) calculation. 

• Assure Medicare beneficiaries a choice among health care delivery systems, in- 
cluding both HMO or other managed care offerings and fee-for-service coverage. 

IMPROVEMENTS IN THE MEDICARE RISK CONTRACTING PROGRAM 

Despite the overall growth in the number of people in the U.S. who are receiving 
their health care through HMOs, there has not been parallel growth in the number 
of Medicare beneficiaries enrolled in HMOs. This has been primarily due to a rel- 
atively low level of HMO participation in Medicare — and not due to consumer reluc- 
tance to join HMOs. Consumers join HMOs where they are offered. Only one-fifth 
of plans are currently participating in the program. They serve around four percent 
of Medicare beneficiaries nationally. 

Inadequate capitation rates are the major reason for the relatively low participa- 
tion of HMOs in risk contracts, and thus the low rate of growth in program enroll- 
ment. Such inadequate rates are a particularly serious barrier to participation in 
rural areas. Key problems are: 

\ 



86 

• The rates are unstable from year to year, which makes planning difficult, if not 
nearly impossible, for HMOs. 

• The rates are not sufficiently risk adjusted to reflect the risk mix across dif- 
ferent contractors. 

• The geographic area on which the rates are based is the county in which the 
beneficiary resides. Counties do not adequately reflect patterns of health care 
services or health plan market areas. Rates in adjacent counties vary signifi- 
cantly and haphazardly. The only consistency seems to be an inadvertent dis- 
crimination against rural counties and areas where the health care providers 
are cost efficient. 

• The rates are tied to the traditional fee-for-service costs in a given area, and 
not to HMOs' costs of providing health care. One very interesting fact that you 
should consider carefully is that the AAPCC tends to be significantly lower in 
areas that have high HMO enrollment because of the "spillover effect." This 
makes perfect sense. Physicians who have adopted a more efficient practice 
style, because of participating in HMOs are likely to practice the same style of 
care with their fee-for-service patients. That change in behavior reduces fee-for- 
service costs and, because of the AAPCC formula's link to fee-for-service that 
efficiency reduces AAPCC rates as well. In other words, the payment approach 
creates a penalty for efficiency. It is hard to argue that that's good policy. 

GHAA has developed a list of general principles that should be used to evaluate 
proposals for new or revised Medicare risk payment methodology. The method 
should: 

• be perceived as being objective and fair, and support efficiently operating deliv- 
ery systems, even when the systems enroll populations that consume substan- 
tial health care resources; 

• result in relatively stable and predictable payments, with appropriate recogni- 
tion of valid year-to-year changes in input costs; 

• reward improvements in the efficiency of the market; 

• adequately adjust for differences in the illness burden of beneficiaries; 

• recognize appropriate variations in local utilization patterns and practice style 
as they influence HMO, health care practice; 

• recognize appropriate and legitimate local variations in local input costs; and 

• be relatively easy for the government to administer. 

COMMENTS ON PROPOSED CHANGES TO THE, PAYMENT METHODOLOGY FOR RISK 

CONTRACTS 

Several bills have been introduced that would change the current risk contracting 
payment methodology. Our comments today are focussed on Senator Durenberger's 
Medicare Choice Act of 1994, and the Administration's Health Security Act. 

S. 1996, MEDICARE CHOICE ACT OF 1994 

We are pleased that Senator Durenberger has given improvement of the Medicare 
risk contracting program a high priority, and that he has introduced the Medicare 
Choice Act of 1994. The bill incorporates important principles of consumer choice 
among delivery systems for beneficiaries. It also calls attention to the need for com- 
parative information on health plan offerings that will permit Medicare beneficiaries 
to make truly informed choices. In addition, it acknowledges that the reimburse- 
ment mechanism must be improved in order for HMO options for Medicare bene- 
ficiaries to expand significantly in the future. 

Important issues addressed by the bill include: 

• consideration of a newly defined geographic areas for rate setting purposes. The 
current county basis on which the AAPCC rates are calculated is clearly unsat- 
isfactory to all parties — the seniors, the government, and the health plans — and 
the Medicare market areas proposed in S. 1996 deserve further examination. 

• introduction of a bid process into the rate-setting mechanism also has been con- 
sidered by a GHAA Technical Panel, primarily composed of actuaries. The Panel 
found that a bid process holds promise for improving the reimbursement mecha- 
nism. However, using only the lowest bid in the establishment of Medicare pay- 
ment levels could also create year to year instability in the rates. Averaging low 
bids or using an alternative method that would limit significant unpredictable 
fluctuations in payment should be included. 

The bill also proposes that health plans must offer either the Medicare benefit 
package, including the Medicare cost-sharing levels, or "actuarially equivalent Medi- 
care benefits," which would include all Medicare covered benefits with cost-sharing 
actuarially equivalent to the Medicare coinsurance and deductibles. GHAA urges re- 
consideration of this requirement, since it would be extremely difficult to calculate 



87 

and would also have the effect of requiring HMOs to offer benefits less comprehen- 
sive than those necessary for the efficient delivery of high-quality care. Coverage of 
preventive services and a coordinated approach to care management that uses dif- 
ferent settings of care, when appropriate, are critical to HMOs' basic benefit offer- 
ings. 

GHAA also is concerned about the coordinated open enrollment requirement. Med- 
icare beneficiaries must be individually contacted and given a full explanation of the 
way in which HMO services are delivered by providers to ensure that beneficiaries 
are making an informed choice about HMO membership. Although comparative in- 
formation about health plans is important, it is unlikely to be enough by itself to 
communicate the information needed by beneficiaries to make the right personal 
choice about joining an HMO. 

Currently, many HMOs enroll Medicare beneficiaries on a year-round basis in 
order to permit adequate time for the contact necessary to fully inform prospective 
members and to accommodate the needs of employers for coverage of retirees. Addi- 
tionally, enrollment of large numbers of Medicare beneficiaries at a single time of 
year could stress both administrative and delivery systems of ETMOs. A more flexi- 
ble approach to enrollment would be beneficial to both health plans and Medicare 
beneficiaries. 

administration's health care reform proposal 

While we find significant areas to support in the Administration's bill, such as 
comprehensive benefits and universal coverage, GHAA opposes the provisions that 
would add an arbitrary ceiling and floor to the AAPCC payment methodology, and 
it would drive HMOs away from Medicare rather than attracting us to it. There is 
wide recognition that the AAPCC payment mechanism is flawed, and any efforts to 
alter HMO risk-based Medicare reimbursement should address the underlying prob- 
lems with the calculation rather than ignoring them. 

The reduction that will result from application of the ceiling particularly inequi- 
table since it is proposed in combination with a compounding reduction in the fee- 
for-service Medicare payments that create the AAPCC. In other words, this reduc- 
tion would unfairly penalize risk contracting HMOs since they will already be im- 
pacted by Medicare cuts on the fee-for-service side. HMOs participating in Medicare 
risk contracts would thus be affected by fee-for-service reductions in several ways. 

GHAA also opposes the proposal in the Administration's bill that would establish 
an outlier pool for high-cost cases, which would be funded by reducing the AAPCC. 
This is an expensive and unnecessary bureaucratic involvement in the risk proc- 
ess — and it will also discourage HMO involvement in Medicare because it will be 
seen as a mechanism to cut Medicare costs. If the pool is not drawn upon by risk 
contractors with high-cost cases, then it will simply be an unfair way of reducing 
HMO payments. 

The fact is that the outlier pool is not necessary — commercial reinsurance is al- 
ready available to HMOs who need it, and HMOs with sufficiently large enrollment 
self insure. It would be burdensome for HMOs to justify that they have high cost 
cases that qualify for the outliers, since HMOs that capitate providers may not have 
data readily available on costs for providing care to individual beneficiaries. It also 
would be burdensome for HCFA to audit the documentation produced by the risk 
contractors. The primary impact of the provision would be to increase administra- 
tive costs for the government and the HMOs, and to discourage HMOs from working 
with Medicare. 

Conclusion: HMOs and Medicare Under Health Care Reform 

Under health care reform, regardless of how the Medicare program is treated, 
there should be a strong commitment to offering Medicare beneficiaries a choice of 
delivery systems. HMO Medicare beneficiaries should continue to enjoy the same 
advantages of HMO membership as other HMO members — high quality, affordable, 
comprehensive health care services. 

GHAA and I look forward to working with the Committee. We are pleased that 
Senator Durenberger has focussed attention on the Medicare risk contracting pro- 
gram. We hope to be able to add our expertise to further refinem ents of the pro- 
posal. 



Communications 



Statement of the American Academy of Ophthalmology 

Mr. Chairman and members of the Committee: 

My name is Allan Jensen. I am an ophthalmologist in private practice in Balti- 
more and Secretary for Federal Affairs for the American Academy of Ophthalmol- 
ogy. 

On behalf of the Academy's 20,000 ophthalmologists — physicians who provide pri- 
mary and comprehensive medical and surgical eye care — I am pleased to have this 
opportunity to present this statement. 

The American Academy of Ophthalmology strongly believes that all Americans 
should have access to quality health care including appropriate and affordable eye 
care. We believe that an appropriate level of eye care is necessary in order to pro- 
mote general well-being, independent daily functioning, enhanced quality of life and 
increased economic productivity. 

The Academy commends the Finance Committee for its attention to Medicare is- 
sues associated with health system reform. As the Committee moves forward with 
its consideration of Medicare, we wanted to bring your attention to a specific issue 
of great importance to ophthalmology and our patients — "centers of excellence." 

Section 4135 of the Health Security Act mandates the establishment of central- 
ized government-endorsed surgical centers or so-called "centers of excellence" in 
urban areas throughout the country. Services provided at these centers would in- 
clude coronary artery bypass surgery (CABG), cataract surgery and other surgical 
procedures determined by the Secretary of Health and Human Services. A rebate 
payment would be provided directly to those patients who received services at the 
centers. 

The basis of the "centers of excellence" concept, as it relates to cataract surgery, 
is the Medicare Cataract PPO Demonstration project. This project, initiated by the 
Health Care Financing Administration (HCFA) in 1993, was developed as a means 
of testing "the feasibility of an alternative pricing arrangement for episodes of cata- 
ract surgery." 

Project demonstration sites currently include Cleveland, Ohio; Dallas/Ft. Worth, 
Texas; and Phoenix, Arizona. Providers at these sites are paid on a negotiated dis- 
counted global fee basis by Medicare. This fee includes the costs of the physician 
and facility, intraocular lens, and selected preoperative and postoperative tests and 
visits. 

The Academy strongly opposes the expansion of the Medicare Cataract PPO Dem- 
onstration project in the form of "centers of excellence" for the following reasons: 

QUALITY of care PROBLEMS 

The Academy strongly believes that cataract surgery is not appropriate for "cen- 
ters of excellence." The centralization inherent to the "centers" concept may be ap- 
propriate for procedures such as transplants and coronary artery bypass (CABG) but 
not necessarily for cataract surgery. 

For complex inpatient procedures such as CABG, outcomes commonly vary signifi- 
cantly among providers. Centralizing procedures with providers of known superi- 
ority or "excellence" could result in improvements in quality. 

Cataract surgery patients, by contrast, would not benefit from this centralization 
of providers. Cataract surgery is a widely accessible outpatient procedure performed 
by most community ophthalmologists. "Excellence" is already widespread as the De- 
partment of Health and Human Services' Agency for Health Care Policy and Re- 
search (AHCPR) has determined that the success rate for the procedure is 95-per- 
cent. It is highly unlikely that centralized cataract surgery centers could improve 
on this success. 

(88) 



89 

Today's community-based ophthalmologists follow their patients over the patient's 
lifetime. The ophthalmologists are aware of the patient's medical history and are 
aware of conditions such as diabetes and other systemic problems. This knowledge 
allows the physician to make appropriate clinical decisions that ensure quality pa- 
tient care. 

The cataract "centers" performing a single procedure will unnecessarily splinter 
this long-term physician-patient relationship. As a result of the rebate payment of- 
fered by the "centers," patients will be drawn out of the relationship at a time when 
appropriate clinical decisionmaking is most critical — when surgery is necessary. The 
quality of care will suffer needlessly as a result of this disruption. 

NECESSITY OF CARE PROBLEMS 

The Academy also is concerned that the cataract "centers of excellence" could re- 
sult in significant necessity of care problems. The community-based ophthalmol- 
ogist, providing comprehensive eye care over the long-term, has assessed the pa- 
tient's visual functions and understands the patient's visual needs, i.e., the patient 
may read extensively or drive a truck for a living. With this knowledge, the physi- 
cian can work with the patient to decide if surgery is necessary. Surgery is offered 
as an alternative only when it is in the patient's best interest. There is little incen- 
tive to perform a procedure prematurely. 

By contrast, the providers at the "centers of excellence" have no long-term rela- 
tionship with the patient. The "centers" can succeed only if their negotiated dis- 
counted bundled fee is offset by increased volume in surgical procedures performed. 
In effect, this requirement for volume creates a government-endorsed incentive to 
perform surgery. Unethical and unnecessary care could result. 

This threat of inappropriate care is further exacerbated by the rebate payment 
provided to patients who undergo surgery in the "centers." The Academy questions 
whether the Federal government should be paying individuals to receive surgical 
care. 

ACCESS PROBLEMS 

The Academy also believes that, by centralizing surgery in urban areas, the "cen- 
ters of excellence" proposal creates an additional access problem for the rural elder- 
ly. These elderly would be encouraged to travel potentially longer distances for out- 
patient surgery and follow-up care. Centralization would only add to the predica- 
ment of rural providers struggling to maintain their patient base and practice. 

CONCLUSION 

In conclusion, the Academy believes that cataract patients, who are most often el- 
derly, receive the highest quality, most cost efficient care from community-based 
ophthalmologists who work nand-in-hand with their patient's general practitioner or 
family doctor. Encouraging these older Americans — among the nation most vulner- 
able — to leave their community-based provider could result in unnecessary care and 
diminished quality outcomes. For this reason, the Academy urges the removal of 
cataract surgery from the "centers of excellence" provisions. 

The Administration estimates approximately $110 million in savings per year 
from the "centers of excellence" provisions. The Academy estimates that removing 
cataract surgery from this section will reduce total savings by approximately one- 
third. The majority of savings from the "centers" provisions come from CABG whose 
total Medicare costs (including facility costs), are nearly twice that of cataract sur- 
gery. 

We thank the members of the Committee for their attention to this important 
issue and we appreciate the opportunity to present this statement to you. 



Statement of American Health Care Association 

Chairman Moynihan, Senator Packwood and members of the Senate Finance 
Committee, the American Health Care Association (AHCA) appreciates the oppor- 
tunity to provide you with our Association's position on the Medicare changes pro- 
posed in the President's Health Care Reform proposal. AHCA is a federation of 51 
affiliated associations representing 11,000 non-profit and for-profit nursing facilities, 
residential care, and subacute providers nationally. 

AHCA is strongly opposed to the reduction in Medicare's routine cost limits for 
skilled nursing facilities (SNFs) and supports the establishment of a prospective 
payment system for Medicare reimbursement to those facilities. 



90 

REDUCTION IN ROUTINE COST LIMITS FOR SKILLED NURSING FACILITIES 

AHCA Strongly opposes Section 4106 of the President's Health Care Reform Plan. 
Section 4106 dramatically reduces the ceiling on routine costs for services provided 
by SNFs. This provision will devastate SNFs ability to provide quality care for cur- 
rent and future residents. Further, it is contrary to the Congressional intent to es- 
tablish a prospective payment system for SNFs. 

Section 4106 would reduce the maximum amount reimbursable for routine skilled 
nursing services from 112% of the mean to 100% of the mean (or less if determined 
by the Secretary of Health and Human Services) to preserve the effects of the exist- 
ing freeze in 1995. The Administration projects reimbursement to be reduced by 
$830 million in fiscal years 1996-2000. AHCA strongly opposes the reduction in rou- 
tine cost limits for SNFs for three reasons: 

• This reduction will have a dramatically negative impact on the quality of resi- 
dent care. Our data indicate it will reduce reimbursement to eacn SNFs by an 
average of $65,000 in 1998 alone. 

• This proposal is contrary to Congress' expressed intent to have a prospective 
payment system for SNFs in place by October 1, 1995; and 

• This reduction will significantly reduce the effectiveness of Sec. 1119, the ex- 
tended care or subacute benefit which facilitates the movement of patients in 
need of inpatient services into facilities that are an alternative to costly hospital 
care. Such a drastic reduction in routine cost limits will make it extremely dif- 
ficult for SNFs to provide care to subacute patients eligible for this benefit. 

AHCA estimates, based on HCFA data, demonstrate the impact the reduction will 
have on providers. We estimate that: 

• By 1998, with a freeze in routine cost limits, at least 60% of nursing facilities 
will not get reimbursed for the full costs of their Medicare residents. Should 
acuity or utilization increase in response to the demand for cost effective 
subacute care, the percent will be much higher. Currently, 26% of facilities' 
costs exceed their reimbursement. 

• Total cumulative unreimbursed costs between 1994 and 1998 will be nearly $2 
billion. In 1998, unreimbursed costs will be $675 million, equalling 12% of total 
costs. This means an average unreimbursed cost of $65,000 per nursing facility 
in that year alone. This eauals the salaries of five nursing assistants. 

• To preserve the effect of tne freeze, the routine cost limit will have to drop from 
the current 112% of average faciHty costs to at least 100% in 1995 and then 
down to 90% in 1998. 

This will occur as the nursing industry is reeling from $1.1 billion in Medicare 
cuts from the Deficit Reduction Act of 1993. The attached charts demonstrate the 
effect of that reduction by state. In that bill our ability to raise capital was curtailed 
with the repeal of Return on Equity. The proposed cut will force facilities to reduce 
staff. These actions which curtail capital and staff make it extremely difficult to 
care for residents including the subacute patients. 

Section 4106 maintains the current inefficient retrospective reimbursement sys- 
tem. Instead of exacerbating the problems of the current system with deep and arbi- 
trary cuts, a new Section 4106 should be adopted that establishes a prospective pay- 
ment system that reimburses all SNFs based on resident acuity, efficiency incen- 
tives, and fair-value rental for property administrative costs. 

MEDICARE PROSPECTIVE PAYMENT SYSTEM FOR SKILLED NURSING FACILITIES 

Congress have expressed an increasing interest in establishing a prospective pay- 
ment system for SNFs. In the mid-1980s. Congress created a prospective payment 
option for low-volume Medicare SNFs. Then, with the Omnibus Budget Reconcili- 
ation Act of 1990 (OBRA '90), Congress asked the Health Care Financing Adminis- 
tration (HCFA) and the Prospective Payment Commission (ProPAC) to analyze a 
prospective payment option and report their findings to Congress. Finally, the 
OBRA '93 report language directed HCFA to design and install a prospective pay- 
ment system for SNFs by October 1, 1995. 

At the same time that Congress has been examining a prospective payment for 
Medicare, the states have been rapidly introducing prospective payment systems for 
Medicaid. Nearly every state Medicaid payment system is prospective in nature, of 
those almost half include some form of case-mix payment, about one-third utilize 
some form of fair-value rental payment for property costs, and most use explicit pay- 
ments as efficiency or quality incentives. Properly funded, many of these systems 
provide the proper balance among the competing demands of efficiency, quality, and 
cost savings. 

It is certainly legitimate to ask why Congress' interest is so keen on prospective 
payment for Medicare, while states have been similarly focused on prospective pay- 



91 

ment for Medicaid. The reason is that the retrospective, cost pass-through payment 
system that Medicare currently employs (and that most Medicaid programs started 
with) offers providers no reward for balancing efficiency and cost-saving efforts, with 
acceptable levels of patient care and access. 

AHCA has developed a prospective pajmient system design using the collective ex- 
perience of the states. The AHCA design is an opportunity to achieve goals beyond 
the current Medicare payment system. Specifically, it can achieve: equal access for 
heavy-care patients (including subacute care); quality care for all Medicare patients; 
efficiency incentives for providers; and cost savings for the Medicare program. 

The prospective payment system design achieves multiple goals by identifying five 
separate cost centers and establishing targeted goals for each. The cost centers, 
their goals, and the mechanisms used to achieve those goals are briefly described 
below: 

Nursing service costs will be paid using a facility specific, prospective rate that 
is determined each year from each facility's nursing service costs and its patient 
case mix relative to the industry as a whole. The case-mix score of each facility 
will be measured annually using patient data from the MDS or MDS+ applied 
to a RUG III patient classification system. Payment rates for heavy-care pa- 
tients will be enhanced with a small, but effective access incentive. This atten- 
tion to nursing service costs and the use of payments that vary by patient acu- 
ity will enhance quality care and ensure equal access to care for patients of all 
acuity levels. 

Administrative and general costs will be paid at facility specific, prospective 
rates determined annually from the relationship of each facility's administrative 
and general costs to a fixed industry standard. The more efficient the facility, 
the more economically healthy it is and the greater the prospects for cost sav- 
ings to the Medicare program since the gains from efficiency are shared be- 
tween the provider and the Medicare program. The single focus for this cost 
center is cost containment achieved through facilities lowering costs in the pur- 
suit of efficiency incentives. 

Therapies are to be paid on a fee-for-service basis with the fees established 
through data on therapy costs submitted annually by each facility. Payments 
then are made as units of therapy services are provided to Medicare patients 
in the facility. Clearly, the goal is to provide quality care by ensuring that pa- 
tients with rehabilitative potential receive adequate therapy services. 
Property costs are to be paid through a fair-value rental system that focuses 
on the economic use value, rather than the accounting costs, of the land and 
physical plant. This involves establishing each year the current value of the 
land and physical plant of each provider and pajdng a rental based on the yield 
of long-term treasury bonds in the recent past. The focus here is quality care 
and a fair return on the capital investment of the provider. 

The last cost center includes minor ancillaries that cannot be paid on a prospec- 
tive per diem because of their high interfacility variation, raw food that needs 
to be protected in the interests of quality care, and property taxes and property 
insurance costs that are highly variable from jurisdiction to jurisdiction and 
over which facilities exercise little control. 
The proposed system is based on the collective experience of state payment sys- 
tems and draws in particular from the Mississippi system which has proven to work 
quite well. This system addresses the deficiencies in the current Medicare system 
while ensuring access to quality care for its beneficiaries. 

CONCLUSION 

AHCA strongly requests that the Senate Finance Committee substitute the cur- 
rent Section 4106 in the President's health care reform proposal with a new provi- 
sion establishing a prospective payment system for Medicare reimbursement to 
SNFs. We are willing to work with the Committee on this important issue. 



92 



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93 

Four Year Impact of Current Medicare Freeze 
Provisions on Skilled Nursing Facilities 

Table 1: Percent Over Their RCLs 



Number of 
SNFs 



1994 



1995 



1996 



1997 



1998 



43.5^0 i^.t'i 55iVo "5T7P 



MMtoM 



10370 36.5% 




Amancan HMlti Car* AMociatton 02A>1/94 SAANALYSISNREIMBVMEDICARBCYCLEI IVPAULFZ-WBI 



85-417 - 95 



94 




Cumulative Dollar Loss 1 994-98 Due 

to Unreimbursed Costs over the RCL 

Under Current Freeze Provsions 




OoflorLoss: 1994-1998 

■ -60); 22^^ to-&^4^^.4S (12) 

■ -S^44^ 45 to -191 3^204 85 (13) 
□ •lV3^2D4^to -4;07A».U (13) 
D -V0753O.Uta -AqBSS.14 (13) 



95 

Four Year Impact of Current Medicare Freeze 
Provisions on Skilled Nursing Facilities 

Tal)l9 2: Unreimtxjrsed Cotta ovar tha RCLa 




1994 

(S194 030 7711 



199S 

i^j,4e3.i3 



1996 



1993 



($1,462,558) 



$1,309,028) 
(J4J7a«23| 

($4,084. 748) ($4,779,309) 

:{jia,nT,esB)|JS6s57WBn» 

(S2J220.363)| ($2,624,076) 



'—I III Hat 



($1.62Z229) 



Iir(ff(42E;7sH^Sm04an«) 

($5.501.652) 

23^3725612731 

($3,426,061) 



!IZliS83B&574)|.^3BaSB4,37(9 SSBBTJOaiSQ 



(£333.052)1 



($477,058) 



TTpg 171.106)1 Z^2se6ai33z)|JSEZSa22Mi5i^ 

($5,224,464) i($7.81 8.016) 
'91.733.005) I ^(pr-m^KKTf 

($1,677,8071 ($2,632,371) 

2&:.(S7a,486)| :^»i 

^($7,596.55111 

;ses*.i47.*4«)t 



($3,892,024) 



($11,269,162)1 
::2v,S3.48a063j| 

($2,649,254) 

16.114,059) 

«0.557,7B5) 
^0880370)1 

;$61Z27 1) 

' Snc 

;$4.632.1B5) 
B»a5B4t 

($4,526,928) 

:$953.016) 

($2,385,428) 

,0501362) 

$6,136,066) 



( $1.788.287) 
■$8i5Z890) 



($685,332) 



($680.251,694! 
($1,960,988) 



CutnulaUvB 



^($8,143,090) 
^^1Z72Bi;] 85)1.^^1,501.924) 

($27,652,776) 



^($7,034,176) 

&nSSs334eLeas) 

( $6.17a882) 

f '•ii»gfi0iaa2jgD 



J^jSD 86,075.233) 

($19,025,803) 
JZ^^lSS«,99e.12D) 
_^^($1 .687.063) _^^($4,508.183) 
■ .^l4g(t«>38<0»1) Zi2ISlft230t5Z5) 




iSSXaE3B9 BBSBKHOStUQI 



qt18.4a0.067) 
($11^17.334) 






140^73) 



($3,485,131) 



J.m7799) 
1.411.146) 



($68.35Z116) 
.d£lff m 33 . 205) 
($17,660,661) 

($ 75.489.253) 

SSBS3, 



($74,712,798) 
Jt2S;iBiJZ2] 
($31,753,911) 
»t1,83BJ43) 
j$109.002.773) 
«) 
3.131.566) 
•) 



($8.811850)1 

»mieB2}i 



1.868.(668)1 
1 ,6^.976) [ 



129.450) 
" .80© 
:.226.802) ( $7.436.980) 

^($23,567,960) 

SBwn.Jgy.HP) 



.060,;a>3) 




5.487.127) 



_[$7.773,381)| 
^$909,933)1 



561.740.524) 
3,244,929) 
14.495,138) 




Anatcan H«wn Car* Anoomon Ozni/M S:\ANALYSIS\nBUSMEDCAnBCYO.EI1\PAtXFZ.WB1 



96 



American 
{ Rehabilitation 
ffl Association 

STATEMENT OF 

ROB SCHWARTZ, PRESIDENT 

THE AMERICAN REHABILITATION ASSOQATION 

BEFORE THE SENATE FINANCE COMMITTEE 

U^. SENATE 

REGARDING HEALTH CARE REFORM 

AND MEDICARE 

APRIL 12, 1994 



Mr. Chairman: 

The American Rehabilitation Association, formerly the National Association of Rehabilitation Facilities 
("N ARF') appreciates your holding hearings on the subject Medicare and in President Clinton's health 
care reform plan. 

The American Rehabilitation Association (American Rehab.) represents over 900 medical, vocational, 
and residential community-based rehabilitation facilities. These include the majority of free-standing 
PPS-exempt rehabilitation hospitals, rehabilitation units, and those PPS-exempt long term hospitals 
involved in rehabilitation. 

American Rehab, has been concerned for a number of years about the current payment methodology 
for Medicare PPS-exempt rehabilitation hospitals and units and those long term hospitals which serve 
rehabilitation patients. This methodology, known as TEFRA, for the Tax Equity and Fiscal 
Responsibility Act of 1992, pays PPS-exempt entities their costs, subject to a limit known as the TEFRA 
target ceiling limitation. To this end, the Association, at its October 1993 Board of Directors' Meeting, 
adopted a proposal to put forth to the Congress and the Administration on moving towards a 
prospective payment system for these PPS-exempt entities, to allow for interim rebasing between the 
date legislation is enacted and when the PPS would go into effect, and to expand the conditions for 
exclusion from the PPS. 

We recommend that this proposal be considered by the Committee at the time it considers health care 
reform and as part of any changes it may consider to the Medicare system. 

I. Background 

For several years, providers of inpatient rehabilitation services have been divided by a fault line 
created by TEFRA limits on Medicare reimbursement Hospitals and units that were in existence in 
the early 1980s generally have low limits, while newer hospitals and units have much higher limits, 
or none at all. Since Medicare is a major source of revenue for most providers of rehabilitation, 
representing 60% of inpatient days an average, this is a major issue. The extent of this division can 
be seen from the data on Attachments 1 and 2, which show the position of hospitals and units relative 
to TEFRA limits. These data are drawn from cost reports for years ending in 1990 and 1991, the most 
recent periods available through HCFA. 

Some relief was provided for hospitals and units over their limits in OBRA 90, whereby a portion of 
costs over limits are reimbursed starting with fiscal years begiiuiing on and after October 1, 1991. 
There is general recognition that the TEFRA system, intended in 1982 to be a temporary measure, is 
seriously flawed for the following reasons: 



97 



1. Medicare pays widely varying amounts for similar services, producing serious inequities among 
competing institutions. 

2. New hospitals and units can establish limits based on contemporary wage levels and otherwise 
achieve much higher limits than older hospitals. 

3. By treating all rehabilitation discharges as having the same economic value, the TEFRA system 
provides a strong incentive to admit and treat short-stay, less complex cases and to avoid long-stay 
complex cases. 

4. Because any change in services that will increase average length of stay or intensity of services 
will likely result in cost over a TEFRA limit, the system inhibits the development of new 
programs. 

5. The process for administrative adjustment of limits does not provide a remedy because it is not 
timelv (HCFA never decides cases within the period required by law) and does not recognize 
many legitimate costs. 

II. The Proposal 

This proposal has three elements: adoption of a prospective payment plan for rehabilitation based on 
Functional Related Groups (FRGs), as an interim step pending adoption of FRGs, rebasing of TEFR.4 
limits to reflect current costs and expanding the conditions for exclusion from the PPS. Rebasing does 
not cure the principal defects of TEFRA — the absence of adjustment of payment to reflect case mix 
and the distortions in costs and services produced by TEFRA limits. It is intended only to mitigate 
the worst financial inequities of TEFRA, pending early introduction of a PPS for rehabilitation. 

The actions and analyses described below are budget neutral. This point is discussed below. 

A. Prospective Payment For Rehabilitation 

The rebasing plan outlined below will provide some temporary relief from a poor regulatory scheme. 
In any event, such adjustments are helpful, but do not remedy one point that is a fatal flaw of TEFRA: 
basing payment on the assumption that all patients in rehabilitation have the same requirements for 
service. Only a payment system that is based on appropriate classification of patients relative to 
anticipated duration and intensity of treatment will cure this defect. 

In 1991, American Rehab, entered into a contract with the Department of Rehabilitation Medicine of 
the University of Pennsylvania Medical Center to determine the feasibility of developing a patient 
classification system for inpatient rehabilitation. That research produced a classification system, titled 
Functional Related Groups (FRGs). The system predicts length of stay in inpatient rehabilitation based 
on a combination of impairment group, functional motor, and cognitive status and age. The FRG 
system was developed with data from 58 hospitals and 69 units that contributed to the Uniform Data 
System (UDS) data base. The research team, headed by Dr. Margaret Stineman, was completing the 
final report In 1993. 

Thus, a patient classification system for inpatient rehabilitation now exists. That system mav be 
refined and improved, but the objective of creating a classification system that reasonably measures 
expected duration and intensity of treatment has been attained. There are 57 FRGs. A payment system 
based on patient classification would adopt the format of the Medicare PPS, substituting FRGs for 
DRGs. A rehabilitation hospital or unit would be paid a fixed amount per discharge based on a 
patient's FRG classification. Other adjustments used in the DRG system, for regional wage variations 
and disproportionate share, would also apply. The amount to be paid for a Medicare patient treated 
in a rehabilitation hospital or rehabilitation unit could be the product of the following calculation: 



98 



Standardized amount x FRG x wage index (applied to the wage portion) x 
disproportionate share (if applicable). 

The two new elements in this calculation are the standardized amount and the FRG. A standardized 
amount would presumably be the average cost for Medicare discharges in a given period. 

Beyond determining a standardized amount, a few other issues would need to be addressed. These 
include possible effects of underreporting differences between hospitals and units, transitional rules, 
and treatment of passthrough costs. The University of Pennsylvania is currently conducting research 
on the impact of co-morbidities on the FRGs and outliers. While there are some small variations for 
intensity ot services per day, most of the differences among FRGs reflect lengths of stay. 

American Rehab, is advocating adoption of the Functional Related Groups (FRGs) as a basis for 
Medicare payment for inpatient rehabilitation services while continuing to encourage research to 
enhance the predictive capacity of the system, including specifically the effect of co-morbidities and 
outliers. 

B. Expanding Conditions for IZxclusion 

The current regulations setting forth the conditions for exclusion of rehabilitation hospitals and units 
from the Medicare prospective pavment system require that 75".. of inpatients require intensive 
rehabilitation services for 10 stated conditions. They are stroke, spinal cord injury, congenital 
deformity, amputation, major multiple trauma, fracture of femur, brain injury, arthritis, bums and 
neurological disorders. This regulation is based on data reflecting those conditions seen by 
rehabilitation providers in the late 1970's The practice of rehabilitation medicine has changed 
considerably since that time, reflecting the impact of new technologies and survival rates. The 
proposal is to add four conditions reflecting the changes in the practice in the field over the time. The 
four conditions proposed to be added are cancer, pulmonary, cardiac and pain. 

C. Modification To TEFRA 

1. Rebasing 

A rehabilitation hospital, long term hospital or rehabilitation unit currently having TEFRA limits 
would be assigned its Medicare cost reporting period ending on or after September 30, 1993, as a new 
TEFRA base year. Limits for subsequent periods would be determined based on per-dischargc 
Medicare operating cost in this period. 

2. Hold Harmless Incentive Payments, If Any 

To protect incentive payments received in the new base year, a "hold harmless" provision would be 
added. Medicare pavment per discharge in any subsequent period would not be less than the Medicare 
payment per discharge in the new base year (operating cost plus incentive divided by discharges) 
updated to the year in question. 



3. Allowance for Facilities With Very Low Limits 

Some rehabilitation hospitals and units have made radical changes in operations because of TEFRA, 
usually dramatically reducing lengths of stay through case mix changes and other means. This was 
necessary because the financial drain imposed by restrictive TEFRA limits offered no alternatives. 
Rebased limits for this group will continue to inhibit appropriate patient admission and treatment. 

To address this problem, no rehabilitation hospital or unit would, in the rebasing process outlined 



99 



above, be assigned a limit that was less than TO^n of the national average for its class of provider. The 
national average would be determined by HCFA from the most recent period for which data are 
available and updated to the rebasing year by appropriate TEFRA update factors. The 70"'o floor is 
proposed because any facility that is meeting the criteria for exclusion from PPS and Medicare coverage 
guidelines for treatment of rehabilitation patients cannot reasonably have costs much less than this 
amount. 

4. Limits for New Facilities 

Rehabilitation hospitals, long term hospitals and rehabilitation units excluded from the PPS on or after 
October 1, 1993, would continue to establish base years and TEFRA limits in accordance with present 
policy. However, Medicare operating cost per discharge in the TEFRA base year would not be 
recognized in calculating limits for subsequent periods to the extent to which it exceeded the estimated 
national average limit for its class of provider for that year by more than 10°'o. The estimated national 
average limit would be determined by taking the actual national average for the most recent period 
for which data are available subsequent to rebasing and updating it to the current year by TEFRA 
update factors. 

The purpose of this limit is to restrict the potential for new providers receiving unlimited cost 
reimbursement while in direct competition for staff and patients with hospitals and units subject to 
TEFRA limits. 

5. Full Market Basket Updates 

The foregoing actions would inhibit potential increases in Medicare outlays for inpatient rehabilitation 
by eliminating the open-ended opportunity to create high TEFR.A limits and the current ability of many 
providers to increase costs and be reimbursed 100",. by the Medicare program. In recognition of these 
changes, rehabilitation should be exempted from any freezes or reductions in TEFRA updates and 
receive updates at the full market basket. 

6. Budgetary Implications 

The net effect of this proposal, if adopted, would be to reduce TEFRA limits for hospitals that are 
under their limits and raise limits for those that are over, subject to the points discussed in 2 and 3 
above. Based on data for fiscal years ending in 1991 (the most recent data available from HCF.A), this 
action would reduce the budget baseline for inpatient hospital rehabilitation services. The Federal 
budget baseline assumes that all providers are paid at their limits. This is logical since under current 
law thev have the right to have reimbursement up to such levels, if and as costs are incurred. 

.Mtachments 1 and 2 provide data on the collective position of rehabilitation hospitals, long-term 
hospitals, and rehabilitation units in the most recent reporting periods available from HCFA (mostly 
1991). These data account for about 90".. of providers in these categories. 

Using the data on these schedules and the database from which they were drawn, the Federal 
budgetary effect of the actions proposed (using 1991 data) is as follows: 

Costs over limits allowed by rebasing: 

1. Units ' 5109,900,000 

2. Hospitals (rehab and long term) $ 32,500,000 

3. Total • 5142,400,000 



100 



4. Less cost sharing over limits' 

(OBRA 90) $ 44,400,000 

5. Net increase from rebasing (line 3-4) $ 98,000,000 

6. Minimum Limit 70% of national average $ 54,000,000 

7. Retention of incentive payments $ 52,000,000 

8. Total cost of proposal (line 5 + 6 + 7) $204,000,000 

9. Offset from reduction of limits to cost (lines 9 - 8) ($224,600,000) 

10. Net effect on Federal Budget ($ 20,600,000) 

An allowance for administrative adjustment of limits is not included because there are no good data 
on this item. In any event, such adjustments are probably no more than the "net effect" amount shown 
above. 

These calculations use data from cost reports ending approximately two years ago and current data 
would certain yield different numbers. It is reasonable to assume that the relationships of these factors 
would be similar in more recent periods. 

ill. The Schedule 

Because not all hospitals and units now produce data on functional status of patients, it is assumed 
that perhaps two years will be required to introduce such a system. Over 50% of rehabilitation 
hospitals and units are now reporting data to the UDS and most others use similar systems. For the 
latter, conversion or adaptation would not be a major problem. UDS has already modified its data 
collection system to compute FRGs. In light of this constraint and the time required for consideration 
of this proposal, rebased TEFRA limits should be effective for two cost reporting periods beginning 
on and after October 1, 1994. Medicare reimbursement for periods beginning on or after October 1, 
1996, should be controlled by a FRG-based system. 

Submitted by, 

Rob Schwartz 
President and CEO 



Attachments 



' The Omnibus Budget Reconciliation Act of 1 990 provides for partial Medicare payment 
of cost over limits. The Medicare program now reimburses 50Wc of cost over the TEFRA 
ceiling to a maximum of llO^c of such ceiling. The amount shown is that which would have 
been paid automatically under this provision and, therefore, is not additional cost associated 
with rebasing. 



101 



ATTACHMENT 1 



MEDICARE COSTS VS. TEFRA LIMITS 
OF LONG TERM AND REHABILITATION HOSPITALS 



Total Hospitals Reporting 167 

Under Limit 62 

Over Limits 53 

No Limits 52 

Average Length of Stay (Under) 23.49 

Average Length of Stay (Over) 25.44 

Average Length of Stay (No Limit) 27.88 

Average No. Medicare Days (Under) 13,137 

Average No. Medicare Days (Over) 9,827 

Average No. Medicare Days (No Limit) 7,406 

Average No. Medicare Discharges (Under) 559 

Average No. Medicare Discharges (Over) 386 

Average No. Medicare Discharges (No Limit) 266 

Average Cost per Discharge (Under) $10,436 

Average Cost per Discharge (Over) $11,509 

Average Cost per Discharge (No Limit) $17,552 

Average TEFRA Limit (Under) $12,761 

Average TEFRA Limit (Over) $9,920 

Average Cost per Day (Under) $444 

Average Cost per Day (Over) $452 

Average Cost per Day (No Limit) $629 

Average Medicare Cost Under Limits $1,300,792 

Average Medicare Cost Over Limits $613,688 

Total Cost Under Limits $80,649,080 

Total Cost Over Limits $32,525,450 



102 



ATTACHMENT 



MEDICARE COSTS OF REHABILITATION UNITS VS. TEFRA LIMITS 



Total Units Reporting 618 

Under Limit 276 

Over Limits 328 

No Limits 14 

Average Length of Stay (Total) 20.7 

Average Length of Stay (Under) 19.5 

Average Length of Stay (Over) 21.9 

Average No. Medicare Days (Total) 3,911 

Average No. Medicare Days (Under) 4,117 

Average No. Medicare Days (Over) 3,738 

Average No. Medicare Discharges (Total) 189 

Average No. Medicare Discharges (Under) 211 

Average No. Medicare Discharges (Over) 171 

Average Cost per Discharge (Total) $10,217 

Average Cost per Discharge (Under) $9,355 

Average Cost per Discharge (Over) $10,942 

Average TEFRA Limit (Total) $10,431 

Average TEFRA Limit (Under) $1 1 ,827 

Average TEFRA Limit (Over) $8,982 

Average Cost per Day (Total) $490 

Average Cost per Day (Under) $480 

Average Cost per Day (Over) $500 

Average Medicare Cost Under Limits $521,615 

Average Medicare Cost Over Limits $335,066 

Total Cost Under Limits $143,965,460 

Total Cost Over Limits $109,901,640 



103 



statement 

of the 

American Society of Internal Medicine 

to the 

Senate Finance Committee 

on 

Medicare and Health System Reform 

April 12, 1994 



Introduction 



On behalf of the nation's largest specialty, the American Society of Internal Medicine (ASIM) is 
pleased to present it's views on Medicare and health system reform legislation. As the specialty 
that provides the greatest number of Medicare beneficiaries with primary and subspecialty care, 
the internists represented by ASIM-and their patients-have the greatest stake in any changes that 
Congress may make in the Medicare program. Internists are increasingly concerned that 
Medicare payment cuts and flawed payment policies are beginning to diminish access to needed 
services, especially primary medical care services. It is essential that as part of health system 
reform legislation. Congress address the current flaws in Medicare's payment policies. At a 
minimum. Congress must assure that overall system reforms 'do no harm'-that is, any changes in 
Medicare payment methodologies, rates, coverage or benefits should not exacerbate the 
problems that are leading to diminished access to primary medical care and other services by 
internists. ASIM believes that Congress should enact health system reform legislation that: 

1 . Provides universal coverage, while maintaining a pluralistic system of health care 
financing and delivery. ASIM continues to believe that requirements that both employers and 
individuals contribute to the cost of health insurance coverage is the most feasible approach. 

2. Reforms discriminatory practices in the insurance industry. Pre-existing condition 
exclusions must be eliminated in their entirety, and community rating must be mandated. 

3. Expands choice of physician and health plan. Individuals should be able to choose from a 
wide menu of health plans, including fee-for-service plans. Properiy constructed, purchasing 
groups or alliances can provide such wider choice. Purchasing groups should not have broad 
authority to regulate health care delivery, premiums, or fee schedules, or to exclude plans who are 
able to meet minimum standards (including solvency requirements, insurance mart<et reforms, 
mandated benefits, and reasonable and non-intnjsive data reporting requirements) from 
participation. All health plans should also be required to offer a point-of-service option, which 
would allow individuals to go outside the plan's physician and "provider* network, for covered 
services, with reasonable limits on the cost-shanng that can be imposed when sen/ices are 
received on a point-of-service basis. 

4. Puts physicians and patients In control of clinical decisions. All health plans should be 
required to establish a participating physician review board, that would review and approve all 
utilization review criteria and methodologies, criteria for accepting or excluding physicians from 
the plan, quality review, appeals of reimbursement denials, and other issues that directly affect the 
services that physicians can provide to their patients. If health alliances are created on a 
mandatory or voluntary basis, and if they are given any authority over complaints about the quality 
of care provided within a health plan, appeals of health plan denials, and/or disclosure of clinical 



104 



data, then the alliances should also be required to establish physician and "provider" review 
boards that review and make recommendations on such clinical issues. Physicians who are 
nominated by state and national medical societies, including specialty societies, should be able to 
serve on the alliance governing board without running afoul of conflict-of-interest restrictions. If a 
national board or other national policy-making body is established that would have any degree of 
authority over clinical issues, then a parallel physician advisory board should also be created to 
review, advise, and make recommendations to Congress, the administration, the board, and the 
public on utilization and medical necessity standards, quality assurance methods and standards, 
benefit expansions or exclusions, and other issues that also determine the services that 
physicians are able to provide their patients. Physicians who are nominated by their professional 
associations should be guaranteed representation on any national board. 

5. Cost escalation should be restrained through competition between health plans, 
competitive pricing of physician services, liability reforms, practice guidelines, and 
negotiated and flexible spending targets, rather than through premium limits, fee schedule 
caps, rate-setting, or price controls. ASIM believes that mari<et-based reforms will be more 
effective in controlling costs, and will not engender the access and quality problems that 
inevitably will occur under more regulatory approaches. Internists support a deliberative process 
for reaching agreement on reasonable and predictable spending targets or goals, provided that 
the targets do not represent an absolute limit on spending, that they do not trigger automatic cuts 
in premiums or payments if the targets are exceeded, that they are established through agreement 
among the 'stakeholders* rather than through an arbitrary and fixed formula, and that there is a 
process for reaching agreement on what should be done if the targets are exceeded, which could 
include agreed-upon targeted interventions to restrain cost increases or changes in the targets if it 
turned out they were not realistic after all. Efforts to restrain cost increases should address such 
factors as patient demand for new technologies, defensive medicine caused by this country's 
wasteful and litigious liability system, and administrative costs that result from intrusive and 
unnecessary government regulations. All current and proposed government regulations affecting 
medical care should be submitted to a rigorous cost-effectiveness analysis, and withdrawn or 
modified if such analysis shows that the compliance costs exceed the presumed benefits. 
Approaches that rely on excessive bureaucracy should not be accepted. 

5. Achieves real liability reform, Including a cap on non-economic damages and a sliding 
scale limit on attorney's fees. The Office of Technology Assessment recently released a report 
that concluded that a cap on non-economic damages is one of the few reforms that have been 
shown to lower liability costs. Health system reform legislation that fails to deal with the massive 
inefficiencies and costs created by our current tort system will not succeed in controlling costs, 
eliminating unnecessary procedures, and improving quality. 

6. Provides fair compensation for all physicians' services, but especially primary medical 
care services provided by internists and other physicians. As explained later in this statement, 
access to pnmary medical care is likely to be diminished further unless steps are taken now to 
Improve payments for primary medical care services, to reduce the regulatory burden placed on 
primary medical care and other office-based physicians, and to redirect training programs to 
produce a more desirable mix of generalists to specialists. 

7. Does not rely on Medicare as a source of financing for health system reform, if Medicare 
spending Is capped or reallocated to support broader reforms, it Is essential that primary 
medical care services t>e protected from further reductions. Because of flaws in Medicare 
payment methodologies. Congress should not mandate the Medicare rates or methodologies 
for all payers. ASIM specific views on Medicare are discussed in the remainder of this statement. 

8. Requires Individuals to contribute to the cost of their own medical care, through 
appropriate co-Insurance and deductibles. Individuals should also be given the option of 
'self-Insuring* their t>asic medical care by allowing them to establish tax-free medical savings 



105 



accounts, with insurance to cover catastrophic expenses above a specified level. The 
medical savings accounts should be offered as an option, along with a wide choice of 
managed care, fee-for-servtce and other Insurance options. Appropriate cost sharing 
requirements are necessary to give everyone a financial stal<e in the services that are provided to 
them. Medical savings accounts would be an attractive and viable option for some individuals but 
not for others. Individuals should be able to decide whether or not they should establish a 
medical savings account or enroll in more conventional insurance programs. 

IncorporatinQ Medicare into Broader Reforms 

ASIM does not favor incorporating Medicare af this time into broader health system reforms. Until 
more experience Is gained in the reforms affecting other Americans, it is premature to dismantle a 
program that is generally successful in providing adequate access to care (despite the growing 
problems discussed below) in favor of an untried system. Ultimately, however, ASIM believes that 
it would be appropriate for patients now enrolled in Medicare to receive their medical care under 
the same delivery and financing systems as all other Americans. This should occur only after 
sufficient time is spent evaluating and making improvements in the broader-based reforms, and 
must be done in a manner that does not disrupt or adversely affect the benefits or access to care 
for the Medicare population. In the interim, Congress can enact policies that will make it easier to 
incorporate Medicare patients at a later date into the broader based refomis, such as by 
improving problems in Medicare payment policies that result in Medicare payments being 
considerably below private sector payments, and by making changes in the methodologies used 
in the private sector payments that will make them more consistent with the resource based 
relative value scale (RBRVS) used by Medicare, but without mandating the Medicare payment 
rates or other flawed payment policies. Our views on this are discussed later in this statement. 

Improving Medicare Payments for Primary medical care Services 

As Congress considers proposals to reform the health care system, it is essential that it address 
not only the lack of insurance coverage for many Amencans, but other factors that reduce access 
to needed services. More specifically, if access is to be assured, then the growing economic antf 
environmental obstacles to the provision of primary medical care services must also be 
addressed. Expanded insurance coverage cannot, by itself, guarantee access to essential 
medical care if the economic policies make it impossible for physicians to provide primary medical 
care services. 

Already, many patients are experiencing problems in obtaining needed primary medical care 
services. The Physician Payment Review Commission, in its 1994 report to Congress, noted that 
although Medicare beneficiaries 'generally' are not experiencing access problems, several recent 
surveys found that when access problems are encountered, they usually involve primary medical 
care services. The commission's report discusses the results of two commission surveys, one 
being a comprehensive mail survey of all 540 congressional offices, and the other being a brief 
mail-in questionnaire included in the November, 1993 AARP Bulletin . The commission notes that 
"such data may underrepresent the true scope of any access problem, particulariy for vulnerable 
populations. . . ' (emphasis added by ASIM). Even with the acknowledgement that the surveys In 
all probability underrepresent the growing difficulties encountered in obtaining access to primary 
medical care services, they do support the conclusion that access to primary medical care is at 
risk for a growing number of Medicare patients. More specifically, the commission found that ' . . 
. access problems centered around pnmary care physicians. Of congressional offices that 
mentioned physician specialty, more than half the responses were for family practice, general 
practice, and internal medicine physicians. In the AARP survey, problems in finding primary care 
physicians were noted in 60 percent of responses. In most cases, beneficiaries were trying to find 
a new primary care physician after moving or after their previous physician had moved or retired. 
The finding that primary care is the center of beneficiaries' access complaints is re-enforced by 
recent physician surveys. The commission's 1992 survey of physicians found that 10 percent of 



106 



primary care physicians were not accepting new Medicare patients, versus 3-4 percent for other 
specialties. Similarly, a 1992 American Medical Association (AMA) survey found that 9 percent of 
primary care physicians were accepting no new Medicare patients, versus 4 percent for other 
physicians. Other survey results indicate the problem may even be larger." A footnote in the 
commission report notes that the AMA survey found that less than 70 percent of primary care 
physicians, versus 80 percent for other physicians, were accepting new Medicare patients. In a 
1992 survey of members of the American Academy of Family Physicians, 28 percent reported not 
accepting new Medicare patients. 

ASIM has not conducted its own formal survey on internists' willingness to accept Medicare 
patients. The letters and calls from our members, and anecdotal reports presented at ASIM 
meetings, suggest that a substantial and growing number of internists who provide primary 
medical care do not accept new Medicare patients, and for those who do accept Medicare, it is 
increasingly difficult to provide them with the services that they need for Medicare payment rates 
that are only 59 percent or less than private sector payments for comparable services. 

The commission's data on the impact of the Medicare fee schedule support the view that it is not 
creating adequate incentives for primary medical care. Despite the fact that internal medicine is 
the specialty that more Medicare patients depend on tor primary medical care than any other, the 
commission reports that from 1991-1993, Medicare payments per internist decreased by two 
percent and total Medicare revenue per internist dropped by six percent. Ironically, the drop in 
total Medicare revenues for internists was the same as the decrease for ophthalmology, and only 
slightly less than the decrease in total Medicare revenue for surgery (eight percent). These data 
do not include cardiology or gastroenterology in internal medicine. Medicare revenues for 
Internists decreased by a greater amount than was the case for radiology and urology, both of 
which experienced zero reductions in Medicare revenue. Thirty-seven percent of non-procedural 
internists experienced reductions of five percent or more in Medicare payments. 

Ironically, even though Medicare payments for internists increased by a small amount, these 
increases were more than offset by reductions in the volume and intensity of services rendered by 
internists. Internal medicine was the only specialty that had a net reduction (four percent) in the 
volume and intensity of services provided to Medicare patients. Because internists were more 
successful in reducing volume, they have been penalized with less Medicare revenue, while the 
other specialties that increased volume and intensity were rewarded with more revenue. This is 
exactly the opposite of what should have occurred under any rational payment system. 

Given the unmistakable conclusion that the Medicare fee schedule and related payment policies 
are lowering payments for the specialty that provides pnmary medical care to more patients then 
any other, there should be little question about why more patients are having difficulty finding 
physicians who provide primary medical care, why more and more physicians are not accepting 
Medicare patients, and why it is essential that Congress act now to correct the problems that are 
discouraging physicians from entering into-and remaining in-primary care. 

ASIM believes that the trend toward reduced access to primary care is likely to worsen if private 
sector and governmental economic and regulatory policies continue to create disincentives for the 
provision of primary medical care services. Despite efforts to improve payments for primary 
medical care services, it is apparent that public and private sector health insurance programs 
continue to undervalue primary medical care services. The data presented above show that the 
Medicare fee schedule, which was supposed to create incentives for primary care, has not 
accomplished what was intended. Medicare budget cuts, and differential fee schedule updates 
that have provided larger annual increases for services other than primary medical care services, 
have undermined the intended improvements for primary care. Because the Medicare fee 
schedule and related policies are increasingly being adapted by private insurers. Medicare's 
flawed policies have an impact that affects far more individuals than the patients enrolled in the 
program. At the same time, the regulatory costs and hassles associated with providing primary 



107 



medical care services has increased. Unless Congress takes action now to address thie financial 
disincentives for primary medical care services, more Americans are likely to expenence 
difficulties in obtaining needed primary care. 

Recommendations to Create Incentives for Primary medical care 

At a minimum, ASIM urges Congress to adopt the following policies to create economic incentives 
for primary medical care-and to forestall policies that would do further harm to pnmary care: 

1 . Congress should mandate substantial Increases In Medicare payments for primary care 
services— defined by law as office, nursing home, home, and emergency room visits— as part 
of health system reform legislation. The Increases should be at least as great as those 
called for In the President's Health Security Act (HSA). 

The HSA proposes to increase payments for primary care services in a budget-neutral manner by 
redistributing relative value units (RVUs) from certain other designated services. Since concerns 
have been expressed by some that Congress should not legislate changes in RVUs that could 
'distort* the resource based relative value scale (RBRVS), it would be appropriate to mandate 
bonus payments for primary care services that are at least equivalent to what would be achieved 
by the HSA. These bonus payments should be applied to primary care services rendered in all 
localities, and should be added to the fee schedule payment at the time that primary care services 
are reimbursed. Budget neutrality could be maintained by offsetting the costs of the primary care 
bonus by lowering the fee schedule conversion factor for all other services. HHS should also 
support further research to detemiine if the existing RVUs for primary medical care and other 
evaluation and management services are adequate. The 1994 PPRC report expresses support for 
bonus payments for primary care services as an alternative to the HSA's proposed changes in 
RVUs. 

2. Congress should mandate a 1 995 fee schedule update for primary medical care services 
that Is at least equivalent to, or higher than, the update for other categories of services. It 
should not allow the current law update, which would provide a lower Increase for primary 
medical care services than other services, to go Into effect by 'default* 

Primary medical care services are disadvantaged under the volume performance standards 
(VPSs) that will determine the 1995 "default" update. Unless Congress acts to change the default 
update, it appears that surgical procedures will receive a much higher update than primary 
medical care services. This would represent the third consecutive year in which primary medical 
care services received a lower update than surgical procedures. As long as primary medical care 
services continue to receive lower updates than other services, the payment inequities that 
discourage physicians from providing primary care will grow. Further, as long as surgery 
continues to receive annual increases that are greater than for primary medical care, Congress' 
and the administration's commitment to primary care will continue to be doubted by most primary 
care physicians. ASIfwl appreciates the strong stance taken by the Finance committee last year in 
support of a full update for primary care services, which was included in OBRA 93. We recognize 
that this was accomplished despite formidable opposition from some in Congress and from some 
physician groups. Although this cleariy was a positive step, it must be recognized, however, that 
surgical procedures still received a higher update than primary medical care services. 

3. Congress should reject the administration's proposal to replace the current VPS formula 
with a fixed target based on per capita growth In gross domestic product and to eliminate 
the floor on the default "update* for all services. Congress, the administration, and the 
Physician Payment Review Commission, In consultation wKh medical organizations, should 
develop alternatives that would guarantee adequate updates for primary medical care 
services. 



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In 1993. Congress enacted legislation, as part of OBRA 93, to create a separate VPS for primary 
care services. The intent was to correct ttie flaws that disadvantage primary medical care 
compared to other services. Unfortunately, however, Congress also made the VPSs for all 
categories of services (pnmary care, surgery, and "other* nonsurgery) more stringent, and lowered 
the floor on the default update (minimum update) for all services. The effect of these changes, 
which will determine the default updates beginning in 1 996, will be to make it more difficult to 
keep spending within the VPSs, while at the same time lowering the minimum update that would 
be guaranteed by law. The likely result will be lower updates for all services, including primary 
medical care. 

The administration has now proposed to make the VPSs even more stringent, and to eliminate 
entirely the floor on the annual updates. The Physician Payment Review Commission has 
concluded that these changes are likely to result in annual negative updates-XUa\ is, absolute 
reductions, in payments-for all services, including primary medical care, beginning in 1 998. It 
also projects that this will widen the gap between Medicare's payment rates and those of other 
payers. Medicare currently pays only 59 percent of private sector rates, and the gap has widened 
in recent years. Although the administration has proposed an additional allowance for the primary 
care VPS. this is likely to be insufficient to protect those services from being reduced. The 
administration proposal would also have a disproportionately adverse affect on hospital visits, 
consultations, and procedures provided by physicians who also provide primary medical care 
services. 

Congress should reject the administration's proposal, and develop alternatives that would 
guarantee fair and adequate updates for primary medical care services. Consideration should be 
given to providing a lower "performance standard reduction" factor for primary care services than 
for other services, as the Senate Finance Committee proposed to do last year, and to providing a 
separate and higher minimum default update (floor) for primary care services. We greatly 
appreciate the support that this committee gave last year to the separate VPS for primary care 
services and the lower performance standard reduction for this category, even though the latter 
was not enacted. 

4. Congress should mandate that HHS develop resource based practice expense relative 
value units, and Implement them no later than January 1 , 1 996. Interim measures to Increase 
undervalued practice expense RVUs should be considered. 

The PPRC, HCFA, the Harvard group that developed the RBRVS, most physician groups and 
outside experts agree on one thing: the current charge-based methodology remains one of the 
biggest flaws in the Medicare fee schedule, and is among the principal reasons that primary care 
visit services, and other evaluation and management services, continue to be undervalued by the 
fee schedule. Last year. Congress mandated reduced payments for practice expense RVUs it 
considered to be overvalued, but did not mandate a change in the methodology for undervalued 
services, or interim increases in payments for those services. A proposed mandate that HHS 
develop a resource based practice expense methodology was unfortunately dropped from OBRA 
93 on procedural grounds (the "Byrd" rule). We appreciate the fact that the Finance committee 
did support the resource based practice expense mandate in its version of the budget 
reconciliation. The fact that the current methodology, which greatly disadvantages primary 
medical care, remains intact is a source of great concem to internists. We believe that it essential 
that Congress mandate a con-ection, that it do so without delay, that it require that it be 
implemented as early as possible, and that it authorize HHS to implement the new methodology 
without having to get approval again from Congress. We are concerned that unless Congress 
acts now, this necessary change will continue to be stalled within HHS over policy disputes and 
arcane technical grounds. The problem is not that the data to accomplish this can't be produced, 
or that an appropriate methodology can't be developed, or that this can't be done anytime in the 
near future-all excuses that have been used in the past by some to forestall action. If Congress 
mandates that this be done, we believe that it can be implemented by 1996 in a methodologically- 



109 



defensible manner. Further, Congress should consider making interim increases in undervalued 
practice expense RVUs to move payments toward the desired goal. 

4. Congress should reject proposals to mandate equivalent payment rates for Medicare and 
private payers or to mandate the Medicare payment methodologies for all payers. 

Because of the flaws discussed above, the Medicare fee schedule and related payment policies 
should not be applied to private sector rates. . Reducing private sector payments to the Medicare 
rates will be particularly detrimental to primary medical care services that are already undervalued 
in private and public sector fee schedules. Alternatives that would move toward greater 
consistency in public and private sector payment policies merit consideration, provided that they 
create adequate incentives for primary medical care and do not lock in existing inequities. 
Because of the inequities in Medicare payment policies, the Medicare fee schedule is not an 
acceptable basis for achieving greater uniformity and consistency. 

5. Congress should not prohibit balance billing under Medicare and other programs. 
Instead, It should InstKute measures to use market forces to bring about competition and 
predictability In payments and fees for physician services. 

A prohibition on balance billing under Medicare will reduce the already low payment rates under 
this program, which will be especially disadvantageous to primary medical care. Further, balance 
billing limits under Medicare and other programs represent a form of price controls, which in turn 
will introduce distortions and undesirable changes in medical practice. The experience to date 
with the Medicare fee schedule, which has fallen far short of what was expected by Congress 
when it mandated the reforms, indicates why Congress must tread carefully before moving toward 
fixed fee schedules, with no balance billing, for other payers. ASIM's competitive pricing 
proposal, discussed in the next section, presents a better way to provide individuals with the 
information needed to predict their out-of-pocket expenses, and to bring greater uniformity and 
predictability into private sector payments, without the problems created by balance billing limits. 

Introducino Competitive Pricino for Phvsician Services 

As an alternative to balance billing limits, fixed fee schedules, and all-payer rate setting, ASIM has 
for the past two years been advocating an innovative proposal to introduce greater uniformity and 
price competition into fees for physician services. Our 'competitive pricing' proposal has since 
won the support of noted Princeton economist Uwe Reinhardt. a member of the PPRC; Business 
Week magazine, which endorsed it; and the AMA. It is a feature of the reforms enacted last year 
by the state of Maryland, and has received positive commentary in the PPRC's 1994 report. 
ASIM's proposal would create a simple yardstick for patients to compare the fees charged by 
physicians and the payments for fee-for-service health plans. It does not require that patients 
research the fees charged by physicians, or depend on unworkable approaches like posting of 
fees in physician services. Instead, it would give all patients a chart that easily presents the 
percentage differences between each physician's charges and their plan's allowed payments. 

Here's how it would work. Congress would mandate that all physicians and fee-for-service payers 
use an expanded and improved RBRVS, similar to the one used by Medicare (but without 
Medicare's conversion factor, VPSs, and other flawed policies), to establish their own annual 
charge and payment schedules. Improvements would be made in the RBRVS, such as basing the 
practice expense RVUs on resource costs. On an annual basis, each health plan would select its 
own dollar conversion factor (multiplier) for the RBRVS, based upon what it believes would be 
competitive in the community. Each physician (or in the case of a physician group that billed 
under the same provider number) would similariy select their own annual conversion factor. The 
Insurer's conversion factor, each physician's conversion factor, and the percentage difference 
between the conversion factors of each physician and the health plan would be calculated, and 
provided (by the insurer or employer) in a directory to individuals enrolled in the health plan. 



no 



(Alternatively, a purchasing group, health alliance or state agency could compile the information 
and publish the directory). 

With this information, a patient could easily determine if a physician's charge for covered services 
is the same as the insurer's allowed payment schedule, and if not, how much higher (by 
percentage difference) the physician's charges would be They would be able to compare how 
each physician's charges compare with all other physicians within the same specialty in the same 
community. The patient could choose a physician who exposes them to little or no out-of-pocket 
costs (one who has the same conversion factor as the insurer), or a physician who charges more, 
If the patient felt that the services provided by the physician with higher fees were worth more. 
Physicians who charged more than what most insurers' allowed would have a strong incentive to 
lower their conversion factor, unless they can demonstrate to patients they are worth more. 

This system would end the 'black box* that now exists for patients: patients do not now have 
access to what their insurer allows toward covered services, they do not know what the physician 
charges, and their is no easy way to compare the charges of one physician compared to another. 
For the first time, they could reliably predict their maximum out-of-pocket expenses due to balance 
billing. And, for the first time, real price competition would be introduced into physician services. 
Further, by using an RBRVS similar to Medicare's, it would create incentives for primary medical 
care and move private sector payments in the same relative direction as fwledicare's fee schedule, 
which are necessary pre-requisites to including Medicare patients in the broader system reforms. 
But it would not lock physicians and health plans into the low and inequitable payments created 
by Medicare's conversion factor, balance billing limits, and volume performance standards. 

The PPRC's 1994 report to Congress (p. 68 of the report) describes the ASIM proposal, saying 
that *To limit their financial liability, consumers would be able to use this information (comparisons 
of the conversion factors in 'an easy-to-understand format") to select physicians whose 
conversion factors would result in low balance billing. Physicians would thus face market 
pressures to select conversion factors that were competitive with their colleagues Rather than 
through government rules, consumers' financial protection would be met through their selection of 
providers." Because of the merits of this approach, the commission included it as "one key 
feature" in its recommended policy on balance billing. It proposes to require physicians to 
disclose their balance billing percentage on annual basis The commission departs from the ASIM 
approach, however, by still insisting that an upper limit on balance billing should be imposed. 
ASIM strongly believes, however, that if patients have access to comparative price information in 
an "easy-to-understand" format-as the commission acknowledges our proposal would do-there is 
no need to impose a limit on balance billing. The logic of the commission's belief that balance 
billing limits would still be required escapes us. Further, i1 experience with the competitive pricing 
approach found that some patients were exposed to unaffordably high fees, despite the price 
competition that would be introduced. Congress could always revisit balance billing limits. 

Dr. Reinhardt, in an article published in the April 25, 1993 issue of RoM CaH, states that the high 
price transparency alone would probably drive health care prices toward greater uniformity and 
acceptable levels, even without explicit rate regulation." He also argues that 'if doctors used the 
same list of procedures and all hospitals likewise, many billions of dollars now spent on 
paperwork could be saved." For a Congress that is seeking maximum administrative savings to 
finance reform, and that it looking for ways to restrain inappropriate pnce increases without rate 
regulation-and for patients who are looking for an easy way to predict out-of-pocket expenses- 
the appeal of ASIM's competitive pricing proposal should be obvious. We strongly urge the 
Finance committee to support this innovative approach instead of fixed fee schedules, balance 
billing limits, or mandating the Medicare rates and methodologies tor all payers. 



e 



Ill 



Workforce Reforms 

In addition to creating economic Incentives for primary medical care, ASIM continues to believe 
that a national physician workforce policy, that would encourage a better distribution of 
generalists to specialists, is needed. We have endorsed Senator Rockefeller's Pnmary care 
Workforce Act of 1993 to establish such a policy, with some suggestions for improvements in a 
few specific provisions. ASIM disagrees with those who believe that the market can itself correct 
the problem. We specifically believe that workforce legislation should include the following: 



1. 



Requirements that all payers pay into a pool to fund graduate medical education (GME). 



2. A goal that at least 50 percent of physicians be trained In general internal medicine, family 
practice, and pediatrics. In working towards this goal, care must be taken that the quality of 
scientific training is not sacrificed in the effort to achieve greater numbers of generalists. We 
strongly believe, however, that this should be a goal, not a rigid quota. A national commission, as 
described below, should have the flexibility to recommend policies that may differ somewhat from 
the goal, provided that those policies are consistent with the objective of increasing the proportion 
of generalists compared to other specialties. The workforce policy should take into consideration 
the role played by intemist-subspecialists in meeting the primary medical care needs of the 
country. 

3. A national commission, with adequate representation from practicing physicians, including 
primary care physicians, to advise Congress and HHS on the workforce policy. 

4. Enforcement of the workforce policy by changes in GME payments to residency programs. 

5. Increased training in appropriate ambulatory settings without sacrificing the quality of scientific 
training. 

6. A cap of 11 percent on total training positions. 

7. A timetable for implementation that achieves that changes as quickly as is feasible, without 
disrupting medical students and physicians who are currently in training. 

We look fonward to working with the committee on legislation consistent with these principles. 

Other Issues 

There are several other issues, not necessarily related to Medicare, that we would like to address. 
ASIM IS concerned about the direction and specifics of several of the recommendations in the 
PPRC report. We believe that the report is excessively oriented toward regulatory approaches to 
health system reform. Ironically, the commission opposed regulation on one key issue-requiring 
that all health plans offer a point-of-service option-where regulation is needed. Specifically: 

1 . For the reasons discussed eariier, we fundamentally disagree with the PPRC's support for 
expenditure limits and fixed fee schedules with no balance billing. 

2. We disagree that health plans should be able to Voluntarily" offer a POS plan but should not 
be required to do so. Since market forces are pushing more Amencans into plans that restrict 
choice of physician, it is essential that all plans offer an "escape valve" so that patients can go 
outside a health plan's networi< for specific services. The POS plans now being offered 
voluntarily by the industry typically impose punitively high Ci^ t-sharing on individuals who 
exercise this option, and/or restrict them to obtaining primary medical care services only from the 
plan's physician and "provider* network. Offering Individuals a choice of only one POS plan, 
which Is the commission's preferred alternative to mandatory POS. is inadequate, since this could 



112 



force individuals to choose an othenwise inferior plan simply to obtain trie choice provide by a 
POS plan. They should instead by able to choose the best plan that meets their need-and be 
able to pay a little more to go outside their chosen plan's network when they decide it's 
necessary. Further, if the cost-sharing imposed by the single POS plan is excessive, very few 
individuals may be able to afford to use this option. If choice is to be available to individuals 
other than the wealthy, it is imperative that Congress mandate that all plans offer POS, that the 
cost-sharing difference for the POS option be set at a reasonable limit, and that plans be 
prohibited from requiring that individuals obtain primary medical care and preventive services from 
the network. 

3. We disagree with basing the Medicare VPSs on changes in gross domestic policy (GDP) and 
making it cumulative. ASIM does agree though that if this change is made, it should be done in a 
budget neutral manner, as the commission recommends. 

Conclusion 

America's internists remain committed to working with Congress to enact comprehensive reform 
that guarantees coverage to a standard benefits package, that reforms the Insurance industry, that 
offers the widest possible choice of health plan and physician, that puts physicians and patients 
in control of patient care, that makes real reforms in the medical liability system, that relies on 
competition and professionally-developed practice guidelines to control costs rather than 
expenditure limits and price controls, and that makes improvements in Medicare's flawed payment 
policies, especially those policies that disadvantage pnmary medical care. We look fonward to 
working with the committee in producing a bill that is consistent with the objectives and the 
recommendations in this statement. 



10 



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Statement of the Group Health Association of America (GHAA) 

Good morning. I am George Halvorson, CEO of HealthPartners HMO in Minneapolis, and 
chairman-elect of the Group Health Association of America (GHAA). 

HealthPartners is a 600,000-member, consumer-governed, nonprofit HMO that includes 
Group Health, Inc., a staff-model HMO, and MedCenters Health Plan, a group-model 
HMO. HealthPartners currently has over 16,000 Medicare beneficiaries enrolled in our 
Medicare risk contract, and almost 6,000 Medicare beneficiaries enrolled in our Social 
HMO. 

I am here today testifying on behalf of GHAA, which represents 350 health maintenance 
organizations (HMOs) with 33 million members who account for about 75 percent of total 
HMO enrollment nationwide. Almost 90 GHAA member plans have risk contracts with the 
Medicare program. This represents 77% of plans that participate in the program and 92% 
of the enrollment in the program. Our members also participate in the program under cost- 
bjised contracts. 



HMOs, Medicare, and Health Care Reform 

I am pleased to be here to talk about the role of HMOs in the Medicare program both today 
and in the future as health care reform takes place. In the course of my testimony, 1 will 
address the five following major areas: 

• the advantages of HMO membership for Medicare beneficiaries; 

• policies needed to retain and expand HMO membership as an option for Medicare 
beneficiaries in the future; 

• problems with the current Medicare risk reimbursement system; 

• S. 1996, Senator Durenberger's bill to improve the Medicare risk contracting 
program; and 

• provisions of the Administration's health care reform proposal that would impact 
HMO Medicare contractmg. 



Background 

HMOs are care systems that deliver that care through teams of health care professionals. 
Their primary goals are keeping their members well and providing high-quality, coordinated 
health care. Consumers consistently give HMOs positive reviews, which are reflected in 
high enrollment renewal rates. In fact. HMO enrollment has quadrupled during the past 
decade alone based almost entirely on consumer choice. Today, about 45 million people — 
roughly one out of every five Americans who have health insurance — are enrolled in 
HMOs, and GHAA estimates that HMO enrollment will exceed 50 million by the end of 



114 



1994. The vast majority of these HMO members selected their plans in an environment of 
choice — they chose to be our members. 

What is it about HMOs that makes them attractive? HMOs organize the delivery of 
comprehensive health care services in a way that makes a great deal of sense to many 
Americans. The benefit packages we offer tend to be significantly broader and more 
complete than those offered by indemnity insurers. Out-of-pocket costs are invariably 
lower. Typically, HMO members benefit from being able to select a personal physician 
within each health plan who knows their needs and can coordinate any specialty care the 
members may require. Our members also benefit from predictable, low out-of-pocket costs, 
and they are not burdened by the need to file claims forms to take advantage of covered 
benefits. In fact, the administrative systems in many of our plans are much less costly than 
typical insurance administration in this country — and many plans incur administrative costs 
that are. in tact, lower than those incurred in single payer systems like Canada. 

HMOs promote quality in many ways, including careful selection of providers based on 
professional qualifications, and interest in working within a coordinated .system. Eighty- 
five percent of HMO physicians nationwide are board-certified, compared to only 60 
percent of physicians nationwide. We routinely monitor and analyze ambulatory clinical 
practices to improve the quality of the delivery system and cost-effectiveness of care in 
ways that are not available or possible for traditional health care insurance arrangements. 

Man\ policy makers think of HMOs as an urban or suburban phenomenon. In fact. HMOs 
have a successful track record in rural communities. In 1990. 301 HMOs served both 
urban and rural counties, and 15 more served rural counties only. Involvement is growing 
as doctors, consumers, and administrators find new ways to adapt HMO models to meet the 
unique needs of rural areas. 

Let me speak for a moment about our ovvn health plan. Our plan, for example, has made a 
commitment to reduce the incidence of heart disease, diabetes, preterm births, and several 
other key conditions by 25 percent over the next four years. That type of commitment to 
real health is only possible in an HMO environment. 



Current HMO Participation in the Medicare Program 

Under current law. HMO have three options under which they may contract with the Health 
Care Financing Administration (HCFA) to provide Medicare covered benefits to Medicare 
beneficiaries. These options are: 

• contracting as health care prepayment plans (HCPPs) on a cost basis to provide 
some or all of the Part B services; 

• contracting as federally qualified HMOs or as competitive medical plans (CMPs) on 



115 



a cost basis to provide all Part A and Part B services; and 

• contracting as federally qualified HMOs or as competitive medical plans (CMPs) on 

a risk basis to provide all Part A and Part B services. Under this option HMOs are 
paid based on prospectively determined rates that are intended to reflect 95 percent 
of the amount HCFA would have paid if the beneficiaries eru-olled in the HMO had 
remained in the fee-for-service Medicare program (95 percent of the adjusted 
average per capita cost [AAPCC] of providing the covered benefits). 

As of March 1. 1994, approximately 600,000 Medicare beneficiaries were enrolled in 
HMOs with HCPP contracts; 162.000 Medicare beneficiaries were enrolled in HMOs with 
cost contracts and almost two million Medicare beneficiaries were enrolled in HMOs with 
risk contracts. 

Advantages of HMO Membership for Medicare Beneficiaries 

Medicare beneficiaries are already realizing some of the central goals of health care reform. 
The\ have access to affordable, high quality, comprehensive benefits in exchange for a 
fixed monthly premium. Medicare HMO members receive all Medicare covered benefits 
but in addition, they also have access to comprehensive coverage at affordable and totally 
predictable cost. 

This is possible because under the risk contracting program. HMOs return to the 
beneficiaries in the form of added benefits any difference between 95 percent of the 
AAPCC (intended to represent the fee-for-service cost of providing the Medicare benefits) 
and the premium the HMO would need to provide Medicare covered services. Beyond the 
benefits HMOs can provide with the "savings" generated by cost-effective care, most HMO 
Medicare risk contractors also add benefits that make Medicare beneficiaries" coverage 
closer to the comprehensive benefits offered to other HMO members. 

Over 42 percent of Medicare beneficiaries are charged premiums for their HMO coverage 
of less than $20 per month. Almost half of premiums for these coverages cost less than 
$50 per month. The HMO premium includes the Medicare enrollee"s Medicare deductibles 
and coinsurance. This means that these Medicare out-of-pocket costs are translated into a 
predictable amount per month, rather than being imposed at the time of service. 

Indicative of the importance of preventive services to HMOs is the fact that over 97 percent 
of plans cover routme physicals; almost 90 percent cover immunizations; over 80 percent 
cover eye exams; and 65 percent cover ear exams, which are not otherwise covered by 
Medicare. Other services included by HMOs include health education, outpatient drugs, 
foot care, and dental services. Over one-third of HMOs with Medicare risk contracts 
include an outpatient prescription drug benefit, a benefit that is highly valued by seniors. 

The positive impact of HMO enrollment on the health care of Medicare beneficiaries was 



116 



documented in a study published by Mathematica Policy Research, Inc., last December. 
The study demonstrated the benefits of Medicare beneficiaries" receiving coverage through 
HMOs. These benefits included increased access to care; quality of care that is at least the 
same, and in many cases superior to fee-for-service care — while using fewer resources; an 
increased range of choices for beneficiaries; more coverage at lower costs; high member 
satisfaction; and a potential to generate Medicare program savings. 

The study found that about 90 percent of HMO members rated their HMO care as good or 
excellent. Members were particularly satisfied with the plans" affordability. Fourteen of 
fifteen HMO members would recommend their HMO to a friend or family member. This 
is a key indicator of satisfaction with health care. Many other studies also illustrate HMOs" 
record of quality. 

• A study published in Medical Care, for example, showed that "For five of six 
(cancer) screening tests examined . . . members of HMOs are significantly more 
likely to have received the test within the last three-year period." {Medical Care, 
1991) 

• Another study comparing treatment decisions among 140.000 Califomians with 
clogged coronary arteries found that HMOs offer the best way to avoid unnecessary 
medical treatment without sacrificing needed care. (New England Journal of 
Mcdicma. December 9, 1993) 

In addition. Medicare risk contracting HMOs serve a disproportionate number of low- 
income beneficiaries. HMOs reduce financial barriers to care — annual out-of-pocket costs 
for the averaoe HMO member are $600 less than in Medicare fee-for-service — including 
the HMO premium. HMOs therefore protect beneficiaries from catastrophic financial 
costs. HMOs do not impose lifetime maximums or spell of illness limitations on benefits. 
Medicare risk contracting HMOs provide an affordable choice for comprehensive coverage 
to low-income elderly - those unable to afford insurance industry Medigap premiums and 
significant, unpredictable, out-of-pocket costs. 



Foundation for Expanding HMO Participation in the Medicare Program 

As the health care reform debate moves forward, decisions will be made about the impact 
of reform on the Medicare program and whether to include the program in any restructuring 
of the nation's health benefits marketplace. We believe Medicare beneficiaries should have 
a chance to choose among delivery systems. Expansion of the availability of HMO 
membership will be an important aspect of this right to choose. 

GH-AA believes that existing Medicare contracting opportunities for HMOs - although they 
can and should be improved - have created a solid foundation for the future. From this 
experience several elements can be identified that will be important to fostering future 



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HMO participation in the Medicare program, regardless of its treatment in the context of 
health care reform. 

These elements include the followmg: 

• Maintain the opportunity for HMOs to receive capitation, so that care will not be 
compromised and constrained by the inherent limitations of the traditional Medicare 
fee-for-service payment approach. 

• Permit HMOs to offer a broader benefit package than Medicare covered benefits. 
HMOs emphasize preventive care, early intervention, and coordination of care in 
order to provide high-quality, cost-effective services. If they were required to offer 
benefits limited to the Medicare benefit package, they would lose the capability to 
cover services that are essential to meeting these goals. (We, for example, have cut 
the readmission rate for seniors with congestive heart failure in half with a special 
program that involves putting special scales in their homes and having nurses call 
each patient daily to check on their weight and health status. That program has 
significantly improved the health status of the seniors involved, and it reduces costs 
- because it reduces hospitalizations. That program, and others like it. would not 
qualify for reimbursement under traditional Medicare fee-for-service payment. 
Medicare only pays for sick people, not for keeping people well.) 

• Retain HMOs' ability to enroll Medicare beneficiaries outside the risk contracting 
program. It is difficult for HMOs with small numbers of members to absorb the 
random cost of illness for Medicare beneficiaries. For some HMOs, current cost- 
based reimbursement mechanisms provide an opportunity to gain experience in 
meeting the special needs of Medicare beneficiaries without incurring the significant 
financial risk that can accompany risk-based reimbursement. 

• Improve the highly flawed and inconsistent reimbursement mechanism in the current 
Medicare risk contracting program, which is currently based upon the adjusted 
average per capita cost (AAPCC) calculation. 

• Assure Medicare beneficiaries a choice among health care delivery systems, 
including both HMO or other managed care offerings and fee-for-service coverage. 



Improvements in the Medicare Risk Contracting Program 

Despite the overall growth in the number of people in the U.S. who are receiving their 
health care through HMOs, there has not been parallel growth in the number of Medicare 
beneficiaries enrolled in HMOs. This has been primarily due to a relatively low level of 
HMO participation in Medicare — and not due to consumer reluctance to join HMOs. 
Consumers join HMOs where they are offered. Only one-fifth of plans are currently 



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participating in the program. They serve around four percent of Medicare beneficiaries 
nationally. 

Inadequate capitation rates are the major reason for the relatively low participation of 
HMOs in risk contracts, and thus tht low rate of growth in program enrollment. Such 
inadequate rates are a particularly serious barrier to participation in rural areas. Key 
problems are: 

• The rates are unstable from year to year, which makes planning difficult, if not 
nearly impossible, for HMOs. 

• The rates are not sufficiently risk adjusted to reflect the risk mix across different 
contractors. 

• The geographic area on which the rates are based is the county in which the 
beneficiary resides. Counties do not adequately reflect patterns of health care 
services or health plan market areas. Rales in adjacent counties vary significantly 
and haphazardly. The only consistency seems to be an inadvertent discrimination 
against rural counties and areas where the health care providers are cost efficient. 

• The rales are lied to the traditional fee-for-service costs in a given area, and not to 
HMOs' costs of providing health care. One very interesting fact that you should 
consider carefully is that the AAPCC tends to be significantly lower in areas that 
have high HMO enrollment because of the "spillover effect." This makes perfect 
sense. Physicians who have adopted a more efficient practice style, because of 
participating in HMOs are likely to practice the same style of care with their fee-for- 
service patients. Thai change in behavior reduces fee-for-service costs and. because 
of the AAPCC formulas link to fee-for-ser\ice that efficiency reduces AAPCC rates 
as well. In other words, the payment approach creates a penalty for efficiency. It is 
hard to argue that thafs good policy. 

GHAA has developed a list of general principles that should be used to evaluate proposals 
for new or revised Medicare risk payment methodology. The method should: 

• be perceived as being objective and fair, and support efficiently operating delivery 
systems, even when the systems enroll populations ihai consume substantial health 
care resources: 

• result in relatively stable and predictable payments, with appropriate recognition of 
valid year-to-year changes in input costs: 

• reward improvements in the efficiency of the market: 

• adequately adjust for differences in the illness burden of beneficiaries: 



• 



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recognize appropriate variations in local utilization panems and practice style as they 
influence HMO health care practice; 

recognize appropriate and legitimate local variations in local input costs; and 
be relatively easy for the government to administer. 



Comments on Proposed Changes to the Payment Methodology for Risk Contracts 

Several bills have been introduced that would change the current risk contracting payment 
methodology. Our comments today are focussed on Senator Durenberger's Medicare 
Choice Act of 1994, and the Administration's Health Security Act. 

S. 1996, Medicare Choice Act of 1994 

We are pleased that Senator Durenberger has given improvement of the Medicare risk 
contracting program a high priority, and that he has introduced the Medicare Choice Act of 
1994. The bill incorporates important principles of consumer choice among deliven.' 
systems for beneficiaries It also calls attention to the need for comparative information on 
health plan offerings that will permit Medicare beneficiaries to make truly informed 
choices. In addition, it acknowledges that the reimbursement mechanism must be improved 
in order for HMO options for Medicare beneficiaries to expand significantly in the future. 

Important issues addressed by the bill include: 

consideration of a newly defined geographic areas for rate setting purposes. The 
current county basis on which the AAPCC rates are calculated is clearly 
unsatisfactory to all parties -- the seniors, the government, and the health plans -- 
and the Medicare market areas proposed in S. 1996 deserve further examination. 

introduction of a bid process into the rate-sening mechanism also has been 
considered by a GHAA Technical Panel, primarily composed of actuaries. The 
Panel found that a bid process holds promise for improving the reimbursement 
mechanism. 

The bill also proposes that health plans must offer either the Medicare benefit package, 
including the Medicare cost-sharing levels, or "actuarially equivalent Medicare benefits." 
which would include all Medicare covered benefits with cost-sharing actuarially equivalent 
to the Medicare coinsurance and deductibles. This requirement would be difficult to 
calculate and would also have the effect of requiring HMOs to offer benefits less 
comprehensive than those necessar>- for the efficient deliver.' of high-quality care. 
Coverage of preventive services and a coordinated approach to care management that uses 
different settings of care, when appropriate, are critical to HMOs" basic benefit otferings. 



120 



We look forw^ard to continuing to work with Senator Durenberger and his staff to ensure 
that a mechanism is developed that will allow Medicare beneficiaries to compare the value 
of the different options available. 



Administration's Health Care Reform Proposal 

While we find significant areas to support in the Administration's bill, such as 
comprehensive benefits and universal coverage, GHAA opposes the provisions that would 
add an arbitrary ceiling and fioor to the AAPCC payment methodology, and it would drive 
HMOs away from Medicare rather than attracting us to it. There is wide recognition that 
the AAPCC payment mechanism is fiawed. and any efforts to alter HMO risk-based 
Medicare reimbursement should address the underlying problems with the calculation rather 
than Ignoring them. 

The reduction that will result from application of the ceiling particularly inequitable since it 
is proposed in combination with a compounding reduction in the fee-for-service Medicare 
payments that create the AAPCC. In other words, this reduction would unfairly penalize 
risk contracting HMOs since they will already be impacted by Medicare cuts on the fee-for- 
service side. HMOs participating in Medicare risk contracts would thus be affected by fee- 
for-service reductions in several ways. 

GHAA also opposes the proposal in the Administration's bill that would establish an outlier 
pool tor high-cost cases, which would be funded by reducing the AAPCC. This is an 
expensive and unnecessary bureaucratic involvement in the risk process — and it will also 
discourage HMO involvement in Medicare because it will be seen as a mechanism to cut 
Medicare costs. If the pool is not drav\Ti upon by risk contractors with high-cost cases, then 
it will simply be an unfair way of reducmg HMO payments. 

The fact is that the outlier pool is not necessary - commercial reinsurance is already 
available to HMOs who need it, and HMOs with sufficiently large enrollment self insure. 
It would be burdensome for HMOs to justify that they have high cost cases that qualify for 
the outliers, since HMOs that capitate providers may not have data readily available on 
costs tor providing care to individual beneficiaries. It also would be burdensome for HCFA 
to audit the documentation produced by the risk contractors. The primary impact of the 
provision would be to increase administrative costs for the government and the HMOs, and 
to discourage HMOs from working with Medicare. 

GHAA also is concerned about the coordinated open enrollment requirement. Medicare 
beneficiaries must be individually contacted and given a full explanation of the way in 
which HMO services are delivered by providers to ensure that beneficiaries are making an 
informed choice about HMO membership. Although comparative information about health 
plans is important, it is unlikely to be enough by itself 10 communicate the information 
needed by beneficiaries to make the right personal choice about joining an HMO. 

8 



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Currently, many HMOs enroll Medicare beneficiaries on a year-round basis in order to 
permit adequate time for the contact necessary to fully inform prospective members and to 
accommodate the needs of employers for coverage of retirees. Additionally, enrollment of 
large numbers of Medicare beneficiaries at a single time of year could stress both 
administrati%e and delivery systems of HMOs. A more flexible approach to enrollment 
would be beneficial to both health pl£ins and Medicare beneficiaries. 



Conclusion: HMOs and Medicare Under Health Care Reform 

Under health care reform, regardless of how the Medicare program is treated, there should 
be a strong commitment to offering Medicare beneficiaries a choice of delivery systems. 
HMO Medicare beneficiaries should continue to enjoy the same advantages of HMO 
membership as other HMO members -- high quality, affordable, comprehensive health care 
services. 

GHAA and I look forward to working with the Committee. We are pleased that Senator 
Durenberger has focussed attention on the Medicare risk contracting program. We hope to 
be able to add our expertise to further refinements of the proposal. 



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