[Senate Hearing 108-223]
[From the U.S. Government Publishing Office]
S. Hrg. 108-223
MEDICARE REIMBURSEMENT FOR PHYSICIANS AND HOSPITALS
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HEARING
before a
SUBCOMMITTEE OF THE
COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
SPECIAL HEARING
JANUARY 30, 2003--WASHINGTON, DC
__________
Printed for the use of the Committee on Appropriations
Available via the World Wide Web: http://www.access.gpo.gov/congress/
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COMMITTEE ON APPROPRIATIONS
TED STEVENS, Alaska, Chairman
THAD COCHRAN, Mississippi ROBERT C. BYRD, West Virginia
ARLEN SPECTER, Pennsylvania DANIEL K. INOUYE, Hawaii
PETE V. DOMENICI, New Mexico ERNEST F. HOLLINGS, South Carolina
CHRISTOPHER S. BOND, Missouri PATRICK J. LEAHY, Vermont
MITCH McCONNELL, Kentucky TOM HARKIN, Iowa
CONRAD BURNS, Montana BARBARA A. MIKULSKI, Maryland
RICHARD C. SHELBY, Alabama HARRY REID, Nevada
JUDD GREGG, New Hampshire HERB KOHL, Wisconsin
ROBERT F. BENNETT, Utah PATTY MURRAY, Washington
BEN NIGHTHORSE CAMPBELL, Colorado BYRON L. DORGAN, North Dakota
LARRY CRAIG, Idaho DIANNE FEINSTEIN, California
KAY BAILEY HUTCHISON, Texas RICHARD J. DURBIN, Illinois
MIKE DeWINE, Ohio TIM JOHNSON, South Dakota
SAM BROWNBACK, Kansas MARY L. LANDRIEU, Louisiana
James W. Morhard, Staff Director
Lisa Sutherland, Deputy Staff Director
Terrence E. Sauvain, Minority Staff Director
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Subcommittee on Departments of Labor, Health and Human Services, and
Education, and Related Agencies
ARLEN SPECTER, Pennsylvania, Chairman
THAD COCHRAN, Mississippi TOM HARKIN, Iowa
JUDD GREGG, New Hampshire ERNEST F. HOLLINGS, South Carolina
LARRY CRAIG, Idaho DANIEL K. INOUYE, Hawaii
KAY BAILEY HUTCHISON, Texas HARRY REID, Nevada
TED STEVENS, Alaska HERB KOHL, Wisconsin
MIKE DeWINE, Ohio PATTY MURRAY, Washington
RICHARD C. SHELBY, Alabama MARY L. LANDRIEU, Louisiana
Professional Staff
Bettilou Taylor
Jim Sourwine
Mark Laisch
Sudip Shrikant Parikh
Candice Rogers
Ellen Murray (Minority)
Erik Fatemi (Minority)
Adrienne Hallett (Minority)
Administrative Support
Carole Geagley
C O N T E N T S
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Page
Opening statement of Senator Arlen Specter....................... 1
Opening statement of Senator Tom Harkin.......................... 3
Opening statement of Senator Thad Cochran........................ 4
Opening statement of Senator Herbert H. Kohl..................... 5
Opening statement of Senator Patty Murray........................ 6
Prepared statement........................................... 6
Opening statement of Senator Mary L. Landrieu.................... 7
Statement of Thomas A. Scully, Administrator, Centers for
Medicare and Medicaid Services, Department of Health and Human
Services....................................................... 8
Prepared statement........................................... 12
Opening statement of Senator Ted Stevens......................... 19
Statement of Loren H. Roth, M.D., M.P.H., senior vice president,
Medical Services, UPMC Health System, associate senior vice
chancellor, Schools of the Health Sciences, University of
Pittsburgh..................................................... 30
Prepared statement........................................... 33
Statement of Jitendra Desai, M.D., president-elect, Pennsylvania
Medical Society................................................ 39
Prepared statement........................................... 41
Statement of Rich Anderson, chief executive offficer, St. Luke's
Hospital....................................................... 43
Prepared statement........................................... 44
Statement of Kirk Norris, president, Iowa Hospital Association... 49
Prepared statement........................................... 52
Statement of Jay Kleiman, M.D., M.P.A., fellow, American College
of Cardiology, clinical assistant professor of medicine,
Northwestern University Medical School......................... 53
Prepared statement........................................... 55
Statement of Eric W. Blomain, M.D., past president, Pennsylvania
Plastic Surgeons Society....................................... 57
Prepared statement........................................... 59
Statement of Richard E. D'Alberto, chief executive officer, J.C.
Blair Memorial Hospital........................................ 60
Prepared statement........................................... 62
Statement of Richard F. Pops, chief executive officer, Alkermes,
Inc............................................................ 66
Prepared statement........................................... 69
Prepared statement of the American Association for Geriatric
Psychiatry..................................................... 83
Prepared statement of the American College of Physicians--
American Society of Internal Medicine.......................... 85
Questions submitted by Senator Mary L. Landrieu.................. 89
MEDICARE REIMBURSEMENT FOR PHYSICIANS AND HOSPITALS
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THURSDAY, JANUARY 30, 2003
U.S. Senate,
Subcommittee on Labor, Health and Human
Services, and Education, and Related Agencies,
Committee on Appropriations,
Washington, DC.
The subcommittee met at 9:30 a.m., in room SD-192, Dirksen
Senate Office Building, Hon. Arlen Specter (chairman)
presiding.
Present: Senators Specter, Stevens, Cochran, Harkin, Kohl,
Murray, and Landrieu.
opening statement of senator arlen specter
Senator Specter. Ladies and gentlemen, the hearing of the
Appropriations Subcommittee on Labor, Health and Human
Services, and Education will now proceed.
This morning's hearing will take up the issue of doctors'
reimbursements, hospitals' reimbursements, and the overall
grave difficulties which are confronting the delivery of health
services in America today. The Balanced Budget Act of 1997 has
taken a very heavy toll in many, many directions, and the
Congress has moved in a number of ways to try to ameliorate
that impact.
Another cut in physicians' payments is scheduled for March
1 of this year, 4.4 percent, and as I have traveled the State
of Pennsylvania and elsewhere, I have heard many complaints,
which are very justifiable. Therefore, the Appropriations
Committee took the lead, and the Senate has now passed an
omnibus appropriation bill which will freeze those cuts. Now we
have to go through the conference to get the agreement of the
House. It is such a controversial issue that we originally
scheduled this hearing early, for January 13, but we could not
get the Senate reorganized at that time. Nobody knew who the
chairman of the subcommittee was, although in the particular
case of this subcommittee it does not matter much, because
Senator Harkin and I have had what we call a seamless exchange
of the gavel on these very, very important public matters. The
testimony today from a number of experts will be very important
in presenting the case in the conference to try to freeze the
current physician payments and to avoid, at least for the time
being, the 4.4 percent cut.
We have taken up the issue of rural hospitals, which have
been compensated under Medicare at a lower rate than urban
hospitals, a 1.6 percent difference, and that has been altered
as well. We are raising Medicare reimbursement for rural
hospitals to give them some relief. As I travel the 67 counties
of my State, I hear that concern and complaint over and over
again.
We are also going to take up the issue of the compensation
of doctors for medical malpractice insurance, and that is one
strand of a very, very complex issue. Some States have been hit
harder than others, and as you know, the Congress is
considering legislation on that subject. It is an issue which
has quite a number of parts. Reimbursement to doctors for
rising malpractice rates is behind the curve. I have a very
extensive letter from the Administrator, of the Centers for
Medicare and Medicaid Services, Mr. Scully. I wrote him a
letter back on November 21 of last year, after I had heard
complaints around the State, and I got a very complicated
letter dated yesterday, and I----
Mr. Scully. Sorry about that.
Senator Specter. Excuse me?
Mr. Scully. I am sorry about that.
Senator Specter. Oh, you have not heard the last of it.
We will come to that, Mr. Scully, when your turn comes to
testify, but I started to read the letter as soon as I received
it, and I read it right along in the intervening time, but I
have not finished it yet. It is that long, and it is that
complicated. On a serious note, Mr. Scully, we know how busy
you are, and we appreciate what you are doing, and we thank you
for your services. It is not the first time that we have
received a letter the day before a hearing. In fact, I think it
is practically a violation of executive ethics to get it to us
any sooner than that.
On the malpractice issue, there are many strands. There are
issues involving the insurance industry, which will have to be
taken up by appropriate committees. There are the issues of
medical errors. We had extensive hearings on the Institute of
Medicine some time ago, and we have appropriated funds in the
past to try to deal with that, and the issue will be before the
Congress as to caps on malpractice claims. I have said publicly
that I am prepared to try to avoid the so-called lottery on
caps, providing we exclude so-called catastrophic injuries.
There are ways to deal with that issue on sanctions under Rule
11, or State rules, if there are frivolous lawsuits brought,
and ways of dealing with venue, as it has been dealt with in
Pennsylvania. There are ways of dealing with the certification
by experts before suit is brought, so that there is a basis in
advance of a filing.
We will be taking up a number of these key issues today,
and I want to yield to my distinguished colleague, Senator
Harkin, who I was pleased to compliment a few moments ago in
absentia.
Senator Harkin. Oh, well, say it again.
Senator Specter. I said we could not figure out, Tom, on
January 13, when this hearing was originally scheduled, who the
chairman was.
Senator Harkin. That is right.
Senator Specter. And I said it did not much matter between
you and me because we had a seamless passing of the gavel.
Senator Harkin. That is true.
Senator Specter. But now we are ready to proceed.
Senator Harkin. It has happened quite a few times. I thank
you, Mr. Chairman.
Senator Specter. Yes, it has. Senator Harkin.
opening statement of senator tom harkin
Senator Harkin. Thank you for your leadership, Mr.
Chairman, and for bringing us this hearing today.
There are going to be a variety of things discussed today.
Two things that I want to focus on. During his State of the
Union speech, President Bush announced a new plan to infuse the
Medicare program with $400 billion over the next 10 years to
modernize the system. He admitted to a Medicare crisis that
must be addressed to save the system for current and future
generations.
I think first of all we have to be clear, while many
providers are struggling to meet their commitment to
beneficiaries, especially in States like Iowa, which lose money
providing health care to seniors on Medicare, the solvency of
the program is not in crisis. The solvency of the program is
not in crisis. In fact, the most recent Medicare actuary report
indicates that the Medicare program will be solvent for the
next 28 years, the rosiest projection since 1970.
That is not to suggest there are not serious problems that
need to be addressed, two that I want to point to today,
reimbursement equity for health care providers in rural States
like Iowa, and the overwhelming need for a prescription drug
benefit that is affordable and available to all in every State.
I was greatly encouraged by a couple of words that were in
the President's State of the Union message, Mr. Scully, when
the President said something about seniors, prescription drugs,
and preventative health care. Most important, and I hope that
we are going to be focusing on that also.
This is not a new issue about the reimbursement rate for
Medicare in rural areas, Mr. Scully. You and I have talked
about it many times in the past. Secretary Thompson and I have
spoken about it. In fact, Secretary Thompson testified before
this committee last year, and he said the existing
reimbursement formula for rural areas is nonsensical and
unfair, yet, as best as I can tell, the administration has done
nothing to reverse the payment gap.
I had a chart, it is on its way here, that would show, for
example, in the Medicare program benefits on the reimbursements
to beneficiaries, Iowa is dead last. My State is dead last,
with a per-beneficiary payment of about $3,053 per beneficiary.
The top State is Louisiana, with $7,336. Well, again, the
discrepancy of two-fold--I can understand there might be
discrepancies, that there might be some variance because of
labor conditions, high rent, different things like that that
might come into play, but to say that there is a 2-to-1
difference is ridiculous.
For example, if you look at our neighbor, Nebraska, from
Iowa, they received $4,856 per beneficiary. What could possibly
be the reason that Nebraska, next door to Iowa, should receive
63 percent more per beneficiary than the State of Iowa? Please,
someone explain that. If anything, the cost of living and
providing services might even be higher in Iowa than it is in
Nebraska.
From my perspective, and from the perspective of all the
Medicare providers throughout my State, this variation in
payments is unjustifiable and unacceptable. As I said, while
some differences might be arguable, depending upon where you
are--I can understand New York, high cost of living maybe, and
other parts of the country, but 2 to 1? Inexcusable.
So we have to get something done about this. Everyone
agrees that the reimbursement variance is inappropriate, but
what we have today is a result of this flawed system, and is
exacerbated by inaction. No one is doing anything. I can tell
you, and you might take it from my tone of voice, and I am
reflecting what I am hearing in Iowa, it has reached the
boiling point in my State. Nurses are going across, out of
Iowa, to work in Minnesota, driving, getting buses to go to
Minnesota to work, going to Omaha, going across the river. It
is like they are just fleeing, like off a sinking ship, and I
am telling you, it is getting bad.
Now, people say, well, we are going to fix it. Well, there
is something in the omnibus bill. Yeah, a little Band-aid, $8
million. We have got a billion-dollar problem. $8 million is
laughable, to say that somehow that is going to fix it.
There is that chart I was talking about, Tom. I am sure you
have seen it before. You know that chart. As I said, some
variance might be acceptable, but you look at the U.S. average,
it is $5,490. There are 30-some States below that national
average, Mississippi, North Carolina, South Carolina, Kentucky,
and on down the list, Montana, Wyoming, Oregon, New Hampshire,
New Mexico, Washington, way down there. Something has got to be
done about this, and as I said, in my State, it has reached the
boiling point, and a little Band-aid, $8 million, is not going
to do it, that is in the omnibus bill.
So we have got to get this thing changed, Mr. Scully. I
know you and I have talked about it. I know I am preaching to
the choir, but we have got to get something done about it, and
I look forward to this hearing and discussing a little bit more
with you on this issue.
I wanted to say a little bit more about prescription drugs,
but I have taken much of my time already. Thank you, Mr.
Chairman.
Senator Specter. Thank you, Senator Harkin.
Senator Cochran, would you care to make an opening
statement?
opening statement of senator thad cochran
Senator Cochran. Thank you very much. I came by the hearing
today to compliment Tom Scully and to thank him for taking on
this tough job. It is one of the most difficult jobs in this
town, in my opinion, but he has shown a willingness to travel
around the country. I know he has come to our State and gone to
some of the small-town hospitals, and met with officials in our
State who are responsible for the Medicaid program, and for
trying to make sure that we provide access to health care to
the greatest number of people we can in our State at affordable
costs.
I am encouraged that the administration is moving forward
to modernize Medicare, to make specific recommendations for
doing that, to include a prescription drug benefit. I admire
the leadership that is being shown in that area.
There are a lot of unmet needs, and there are a lot of
other problems to be solved, but I think the administration is
on the right track, and if we continue to work together, the
Senate and the House and the administration, we can solve these
problems and make a difference in the lives of a lot of
Americans.
I am pleased, Mr. Chairman, with your leadership in getting
the changes in the omnibus appropriations bill that were
included, and I hope we can preserve those in conference with
the House and can see the effect that they will have in making
things better in this area, and I appreciate your holding the
hearing, and I appreciate the leadership that you and Senator
Harkin are giving to these issues that are under the
jurisdiction of this subcommittee.
Senator Specter. Thank you very much, Senator Cochran.
In order of arrival, Senator Kohl, would you care to make
an opening statement?
opening statement of senator herbert h. kohl
Senator Kohl. Briefly, Mr. Chairman. We have all heard from
doctors, hospitals, nursing homes, and home health agencies in
our States about Medicare cuts that they are facing. These cuts
have real effects on our seniors and jeopardize our access to
care.
I believe we must address these cuts immediately, and I
hope the administration will come to the table as a partner in
this effort, but while many of us agree that we need to stop
these cuts, the reality, as Senator Harkin has said, is that
the cuts hit providers in some States much harder. That is
because the reimbursement formulas, as we know, that Medicare
uses are flawed and outdated. They penalize efficient providers
in many States, and my State of Wisconsin is a prime example,
by paying them much less than other States, and they penalize
Wisconsin seniors by delivering fewer benefits that seniors in
other States enjoy.
This system, of course, is indefensible. All of our
constituents pay the same Medicare payroll taxes. They suffer
from the same illnesses, they need the same treatments, they
receive the same types of health providers. Seniors in some
States should not be treated like second-class citizens when it
comes to health care. They should have the same access to
treatments and benefits that seniors in other States receive,
but today, too many States lose under Medicare.
For example, Wisconsin Medicare beneficiaries receive on
average $3,800 in Medicare benefits per year, the eighth-
lowest, by my calculation, in the country. That is more than 25
percent below the national average of $5,500. Studies show this
costs Wisconsin nearly a billion dollars every year in Medicare
dollars lost.
Those costs do not just disappear. Businesses and employees
in the private sector pay higher costs to make the Medicare
shortfall, so there is simply no logical reason why doctors,
hospitals, nursing homes, and ultimately our seniors and the
disabled should get less in some States than in others. The
formulas Medicare uses are outdated and flawed, and they must
be fixed if we are to have true Medicare reform.
I have co-sponsored legislation that would begin to address
the inequities in Medicare formulas. I hope the administration
will work with me and Senator Harkin and others that have been
pushing this issue so that we can once and for all fix this
system so that it is fair for all of our seniors, no matter
where they live.
Thank you, Mr. Chairman.
Senator Specter. Thank you, Senator Kohl.
Senator Murray.
opening statement of senator patty murray
Senator Murray. Well, thank you very much, Mr. Chairman,
for having this hearing, and I really appreciate Mr. Scully
being here, and I guess I will submit my statement for the
record and just simply say to Senator Harkin and Senator Kohl,
me, too. My constituents are furious about the reimbursement
rate and the fact that they pay the same into Medicare, but we
rank 42nd on the chart that Senator Harkin put up there. I have
introduced legislation, my MediFair Act, to make sure that no
State receives below the national average.
But this has reached a crisis point. It is no longer just
the fact that our hospitals are screaming about it. It is the
fact that we are losing access. Just as Senator Harkin said,
our doctors, our nurses, our health care providers are leaving
and going to higher reimbursement States. This means that
doctors and hospitals are not taking Medicare patients in my
State, and they are saying directly as a result of this
reimbursing issue they are losing doctors to other States.
We have to deal with this issue. It is an access issue and,
as Senator Kohl said, it is not fair that we are rewarding
States that encourage inefficiency and high health care cost,
and I do not want to see my good friend Mary Landrieu reduce
the reimbursement rate to her State, but I think that she can
understand in my State when seniors are not getting access
because we are 42nd, 42 States behind her in reimbursement. It
is not fair to people in our State, either.
prepared statement
We have to deal with this issue, and I will continue to
work with my colleagues, and Mr. Scully, I am very interested
in what your agency is going to be doing to help us deal with
this issue.
[The statement follows:]
Prepared Statement of Senator Patty Murray
Mr. Chairman, I am very grateful for the Chairman's willingness to
schedule this hearing. I recognize that Medicare is not under the
jurisdiction of this Subcommittee, however, as many of us know we often
have to deal with the reimbursement problems.
Many hospitals come to us for increased funding on the
discretionary side or for earmarks to make up for the shortfalls in
Medicare reimbursement.
My state faces a particularly difficult situation when it comes to
Medicare reimbursement for physicians and hospitals. While all doctors
experienced a 5.4 percent reduction in their fee schedule for 2002 and
may face additional reductions, doctors in Washington state have been
treated unfairly for years.
Doctors and hospitals in my state get far less per beneficiary than
most states. In fact, Washington state ranks 42nd in the nation in
Medicare payments per beneficiary.
Despite these lower payments, my providers still have to compete in
a highly competitive health care arena.
Hospitals in Washington state have the same technology costs as
hospitals in Florida or Louisiana, yet they receive significantly less
in reimbursements.
I have been working for several years with Senator Harkin to
address this inequity. I have introduced the Medifair Act, which would
guarantee that no state receives less than the national average per
beneficiary cost.
My legislation also includes a mechanism for the Secretary to
evaluate outcomes and work with those states that have some of the
highest costs. My intent is not to reduce payments for those higher
cost states but rather to work to implement healthy, cost-effective
practices.
I am pleased that the Senate-passed Omnibus Appropriations bill
begins to address the rural/urban inequity. However, much more needs to
be done. Seniors in Washington state simply do not have access to the
same Medicare program or benefits as seniors in Florida or New York.
It's especially frustrating for my state--because the reason we're
at the bottom of the list is because we've done the right things and
are highly efficient.
We have lower utilization rates and higher rates of efficiency than
other states. Washington's seniors and health care providers have done
the right things, yet every year they are penalized.
The incentives are backwards. This has to change. We should not be
rewarding and encouraging inefficiency and costly health care
decisions.
I will continue to work to eliminate the inequities that are having
serious economic and health care impacts in my state.
Hospitals and physicians have little choice but to pass the
shortfall in Medicare on to private insurance--driving up the cost for
employers and workers.
I can tell you that there is little flexibility remaining to shift
costs to private insurance plans. This shift only increases the cost of
health insurance pushing more people into the ranks of the uninsured.
Senior citizens in Washington state deserve access to the same
Medicare program and benefits as seniors in any other state.
Senator Specter. Senator Landrieu.
OPENING STATEMENT OF SENATOR MARY L. LANDRIEU
Senator Landrieu. Thank you, Mr. Chairman. I appreciate the
opportunity just to make a few brief remarks, and Mr. Scully,
thank you for the job that you do. You have a great many
challenges before you.
Unfortunately, Mr. Chairman, I am not going to be able to
stay. Senator Breaux and I are hosting a major conference of
thousands of people from our State that are up here today and
tomorrow, so I am going to have to slip out, but I came to make
just one brief comment about one of the aspects of the proposed
new rule, but before I do, I want to make a comment about the
issue being raised by Senator Harkin.
I agree that probably some changes need to be made, and I
most certainly appreciate the frustration expressed by the
chairman and the other Members about the discrepancy, but there
are some good aspects to the formula, and as Louisiana is the
highest beneficiary, the current formula is based, in large
part, as you know, Mr. Scully, the rate of wages in a State, as
well as the frequency of use, both of which give rise to States
like Louisiana being on top. The fact is people in Louisiana
are paid much less, are poorer, not as healthy, and therefore
access the system in greater numbers than a healthier
population, so those are some of the contributing factors which
I think are very worthy of consideration when trying to provide
health care in a Nation as diverse as ours. I would hope to
work with the chairman and the ranking member on this issue so
that we can reach a solution that serves all of our States.
I wanted to, Mr. Scully, come here for the specific purpose
of stating strong objections to one change that you are
recommending that has doctors and medical professionals in my
State quite concerned, and that is the change in the Medicare
pass-through regulations. I have been contacted by several
oncology practices in Louisiana specifically expressing a
growing concern about the use of functional equivalent
standards by CMS. As you know, the standard was introduced in
the context of the recently promulgated rules for hospital
outpatients, which I am sure you are familiar with.
It is my understanding the new concept was not raised in
proposed regulations, not subject to comment from interested
parties. Had it been properly introduced, the following
stringent objections would have been raised by many
practitioners in Louisiana. First, I want to say on the record
this is a subjective standard. It is a dangerous precedent
which interferes with the physician's ability to prescribe the
best care for patients.
Second, the discretionary nature of the standard will
stifle innovation, in my opinion, especially among
biotechnology firms which lack the resources to roll the dice
on whether the new products will be covered, as is the current
situation, and I am afraid, Mr. Scully, the effect of the final
rule will be to delay faster treatments of highly effective new
therapies that we are all very encouraged by, and that are
administered less frequently than competing therapies. The
result will be dramatically reduced reimbursement rates that
make new therapies not a viable option.
Finally, let me just say, in a rural State, which many of
us represent, the options of people to have to receive
treatment once a week, or twice a week, or three times a week,
can have a direct impact on whether they are able to hold down
a job or not, having to travel great distances for health care.
So this change, I really want you to look very intently on,
and I register my strong objection to the proposed change on
behalf of many physicians in Louisiana, and say thank you for
your time and attention.
STATEMENT OF THOMAS A. SCULLY, ADMINISTRATOR, CENTERS
FOR MEDICARE AND MEDICAID SERVICES,
DEPARTMENT OF HEALTH AND HUMAN SERVICES
Senator Specter. Thank you, Senator Landrieu. We now turn
to our first witness, Mr. Thomas A. Scully. Since May 2001, he
has served as Administrator for the Centers for Medicare and
Medicaid Services. Prior to that appointment, he served as
president and chief executive office of the Federation of
American Hospitals. He was a partner at Patton, Boggs, and also
served as Deputy Assistant to the President and Counselor and
Director of the Office of Management and Budget. He has a law
degree from Catholic University and a bachelor's degree from
the University of Virginia.
Mr. Scully, we are going to ask you to observe our general
rule of a 5-minute opening statement. As I said at our initial
hearing yesterday, I attended memorial services for Ambassador
Annenberg recently, and the speeches were limited to 3 minutes.
That applied to former President Gerald Ford, and Secretary of
State Colin Powell, and to me, and to the 15 other speakers, so
I want you to know that the 5-minute allocation is generous.
Please proceed.
Mr. Scully. Mr. Chairman, I am going to talk as quickly as
I can.
Thank you, Mr. Chairman, Senator Harkin and other Senators
for inviting me today. Obviously, there are a lot of complex
issues about geographic differences, and I will try to get into
those questions, because the primary focus this morning is
going to be on the physician payments.
I have worked on physician payments since the first Bush
administration. I was very involved in passing the RBRVS
reforms in 1989, so I have a strong personal feeling about
this, and a great level of disappointment about how mixed-up
our physician payment formula has become.
We paid about $44 billion for physician services in 2002,
and processed about 600 million physician claims for 7,000
different services, but the system for Medicare physician
payments has basically imploded. There are some very big flaws
in the formula, and I would say that basically, we have had the
perfect storm in all these different factors coming together to
essentially cause the physician payment formula to just not
work. It badly needs to be fixed, and we appreciate the efforts
that have been made in both Houses, the House and the Senate--
slightly different approaches to fixing this--and we strongly
advocate fixing it as fast as we possibly can, and, certainly,
hopefully before March 1.
There are a number of reasons that this has happened. The
first is that the law, which was rewritten in 1997, is
extremely specific, very limiting in the way we are allowed to
make changes. The projections, essentially when we did the SGR
calculations, the law required us to use projections for actual
physician growth, spending growth, and for economic growth in
1998 and 1999, and did not allow us to come back and adjust it
for real data later.
After 2000, we could use real numbers, but the law requires
us to use projections in 1998 and 1999. That was the first
thing that threw off the formula. We are using, by statute,
incorrect numbers for 1998 and 1999.
The second is that when the law was changed in 1997, the
new measurement for physician payments is directly reflective
of the change in GDP, so as the economy has obviously taken
turns for the worse, the reduction in GDP growth has had a
drastic impact on the physician payment formula. Again, that is
set in the statute.
The third is that physician payments have grown pretty
rapidly in recent years, and that also is reflected in the
downturn in the formula, and one additional factor of that is
that we have, as I mentioned, about 7,000 different payments
for physicians. In 1998, 1999, and 2000, my agency added a
couple of hundred codes, which we do in cooperation with the
AMA and physician groups.
We work them all year long to figure out what new things we
should pay for, but inadvertently, believe it or not, we added
300 codes and forgot to count them, so we spent $5 billion in
1998, 1999, and 2000 that we did not know we spent until much
later, and the statute is very strict, and requires us to
recapture that, and I can explain also, if you like, the actual
formula works exactly as it was designed, but there have been a
bunch of mistakes made, inadvertent mistakes, that have
basically caused it to blow up, which is why we had a negative
5.4 percent reduction for physicians last year in the base
fees, and a negative 4.4 percent coming March 1.
We have fixed some of these within my discretion. The
original cut was supposed to happen January 1. The
administration for a variety of reasons has delayed the rule
for 2 months. The original cut would have been negative 5.1
percent. We worked with the physicians in the physician
community, and we have buffered it to the limited amount we can
under the statute from negative 5.1 to negative 4.4. We
certainly don't expect them to be happy about that, but I have
probably spent a quarter of my time since I have been in this
job working with the AMA, physician groups, everybody at the
highest level of the Justice Department and the White House to
try to fix this. Unfortunately the statute is so tightly
crafted that there is basically no way for us to do it
administratively, or believe me, we would have tried to.
We clearly believe the physician payment formula, while
extremely well-intentioned, is broken. The numbers are flawed.
The cumulative impact has clearly resulted in physician
payments that clearly were never intended, and are not
appropriate for physicians.
By February 12, we have discretion to change the way
contractors pay physicians. There will be a negative update--or
downdate--for doctors on March 1, and the latest that I can
actually change that is February 12. I bring that up because I
would certainly hope that whatever the process brings, that
Congress can fix this before February 12, because that is the
date I have to actually send the instructors to our contractors
around the country to actually fix this before this thing
actually blows up.
Unfortunately, this is not just a short-term problem, it is
a long-term problem. The appropriations bill fixes it for 1
year, and this is a top legislative priority for the
administration to fix it. We had lots of discussions, which we
will get into this morning, about provider give-backs, or
different adjustments. There are lots of merits for rural
hospitals and other things. We don't believe that this is a
give-back. This is a mistake and it needs to be fixed.
Negative 4.4 percent update on top of the negative 5.4
percent update would be comparable for hospitals, for instance,
to something like market basket minus 8 percent 2 years in a
row. It just is not sustainable, it is not right, and if you
want the physicians in this country to be good partners with
the Government in providing services, we strongly believe it
has to be fixed.
One additional factor that the chairman asked me to get
into that causes additional stress for physicians on top of
this mistake is the cost of malpractice liability insurance.
Obviously, as you know, the President has a strong program that
we are pushing aggressively to reform malpractice. We hope to
get that through Congress this year, but a factor for most
physicians in what they get paid is how Medicare allocates for
their costs of malpractice.
Now, there are a number of different ways we measure it,
three different ways, which I will try to run through quickly,
and basically, malpractice is a very small component, 3.2
percent, of what we pay physicians in Medicare. There are three
basic rates that we pay physicians, and malpractice is about
3.2 percent of that. There are three different factors that go
into that calculation.
One is the relative value for services, which is the
relative payment rates. That is updated, as the chairman
pointed out, using 1996 to 1998 data. I am working on trying to
find a way to adjust that in real time.
There is an inflation update, which is the only real source
of new money into the system every year, which actually is used
on 1-year-old data, 2001 and 2002, and that calculation last
year was increased by 11 percent, but because it is such a
small piece of the Medicare calculation, you can imagine that
an 11 percent increase on a base of 3.2 percent does not have a
real big impact for physicians and communities that are
affected.
Then finally there is a geographic allocation, so we do
allocate differently for different costs. For example,
Pennsylvania has had a relative meltdown in malpractice costs
this year, and we do allocate differently for different areas.
The country is broken up into 89 geographic practice cost
areas, and those 89 areas all do get paid quite differently for
physicians, which is similar to what I am sure it sounds like
we are going to get into on hospitals in a few minutes.
We are working on a policy--I am working on one to try to
find a way to get more real time data into the system, but it
is extremely complicated to collect, it is difficult to get
right. Historically, we have collected it for two of the three
categories on basically 5-year-old data, and I think the
chairman raised that point in this opening remarks.
I will just wrap up, since it looks like I am through my 5
minutes, by saying that we are working very hard to try to fix
this. We are very aware of the issues.
Senator Specter. Mr. Scully, we are going to hold the other
people to the limits, but you are the Administrator. Take a
little more time if you need it.
Mr. Scully. Okay. I would just say that in respect to some
of the earlier comments about geographic distribution, as
Senator Kohl would be aware, my boss, Secretary Thompson, who
is also from Wisconsin, is equally concerned about Wisconsin. I
spend a lot of time working on rural issues. I believe that in
the 2 years we have been there, almost every time we have had
the ability in the regulation to try to adjust them--and on the
margins it is not always very big--towards helping rural areas,
we have done that. We did that this year on the wage index. We
have done that across the board. Secretary Thompson is very
focused on it. Our ability under the current laws to do that is
somewhat limited, but we are very, very focused on it and very
aware of that.
There are a lot of reasons, I would say, Iowa may be
underpaid, but having gone through a lot of this the last few
days, I would also say Iowa has extremely high costs, extremely
efficient health care, as does Washington State, by the way. I
was out there last year going through the same issue, and to
some degree that is a good model. You do get paid about 91
percent on the national average, for instance, in Iowa of your
cost, and you get about 71 percent per capita. Part of that is
you have a much more efficient, much better quality of care for
a lower cost, which is in many ways admirable, and Washington
State has the same qualities.
But we are working to make sure that the system is fair.
There is a great difference in the way we calculate,
historically, physician payments by region versus hospitals,
something we can clearly look at, and we are very focused on
trying to make sure that these formulas are fair and more
equitable State-by-State.
prepared statement
But there is no question, getting back to the primary focus
of what I was asked to testify this morning, that we have many
flaws in the Medicare program, there are many, many things that
obviously, if I had the power, I would love to fix. We would be
happy to work with the committee to fix all of them, but as far
as the number 1 clear inequity in the program right now, that
clearly is not right or fair for seniors or their physicians,
the physician payment system is broken. If there was any way we
could fix it administratively, we would have done it already,
and we are extremely anxious to work with both the Senate and
the House to try and get this resolved before March 1.
Thank you, Mr. Chairman.
[The statement follows:]
Prepared Statement of Thomas A. Scully
Chairman Specter, Senator Harkin, distinguished Subcommittee
members, thank you for inviting me to discuss how Medicare pays for
physicians' services. I have worked on Medicare physician payment
issues since 1989 when I was one of the primary people in the previous
Bush Administration negotiating the creation of the resource based
relative value physician payment system, sometimes referred to as
RBRVS. I personally think that, over the years, this has been the most
stable payment system in Medicare, and historically there has been far
less controversy in physician payments than we have witnessed with
other health care providers. In fact, the resource based relative value
system has worked reasonably well and often is used by private payers.
A number of factors have combined to cause the formula, as set in law,
to produce negative updates for 2002 and 2003 as well as projected
negative updates for future years.
Over the past 15 months, I personally have devoted about a quarter
of my time, working with every group imaginable--lawyers, physicians,
and the highest levels of the Administration--to fix the fee schedule
administratively. The Agency explored every legal option possible to
try to fix the negative update, but unfortunately, the statute is too
prescriptive to allow an administrative fix. We, however, were able to
modify the methodology used to calculate the Medicare Economic Index
(MEI), which measures inflation for the cost of providing physicians'
services used in the fee schedule formula. The change we made resulted
in a 0.7 percentage point increase in the 2003 MEI update, from 2.3
percent to 3.0 percent, and is expected to increase the MEI in all
future years by roughly 0.5 percentage points per year. This change
will increase Medicare spending for physicians by about $15 billion
over the next 10 years. While the 2003 update is a negative 4.4
percent, without this technical modification, the update for 2003 would
have been negative 5.1 percent. This does not resolve the fee schedule
update problems, but it is a step in the right direction. We point out
that Medicare expenditures for physicians' services increased by 5
percent in 2002, and are expected to increase by 2 percent in 2003,
despite the negative update.
We believe that the physician update formula is broken and can only
be corrected by legislation. The physician update has both short-term
and long-term problems. The short-term problem is that the negative 4.4
percent update will go into effect on March 1 without a change in law.
The long-term problem is that there will be negative updates for future
years under current law. No one ever intended that the physician
formula have this result. Working with Congress to find a legislative
fix is a top legislative priority of the Administration. We believe
that fixing the physician update would be a technical correction to a
broken system, not a ``giveback'' that other providers have been
seeking. We believe it is important that Congress takes immediate
action to prevent the 4.4 percent reduction scheduled to go into effect
on March 1. Such an action is the only equitable solution that will
stop physicians from experiencing payment reductions that result from
this flawed formula.
history
Let me explain the origins and logistics of the physician fee
schedule so that we can all understand how the system works. In 2002,
Medicare paid about $44 billion for physician fee schedule services.
Between 1997 and 2002, Medicare physician spending increased from 17.6
percent to 19.8 percent of total Medicare fee-for-service spending.
Each year, Medicare processes about 600,000,000 physician claims. The
fee schedule reflects the relative value of the resources involved in
furnishing each of 7,000 different physicians' services. By law, we
actually establish three components of relative values--physician work,
practice expenses, and professional liability insurance--for each of
these 7,000 services. The actual fee for a particular service is
determined by multiplying the relative values by a dollar-based
conversion factor. And the payment for each of the services is adjusted
further for geographic cost differences among 89 different payment
areas across the nation.
Payment rates for physicians' services are updated annually by a
formula specified in law. The annual update is calculated based on
inflation in physicians' costs to provide care (the MEI), then adjusted
up or down by how ``actual'' national Medicare spending totals for
physicians' services compare to a ``target'' rate of growth. If
spending is less than the target, the physician payment update is
increased, and if spending exceeds the target, the update is reduced.
The system was designed to constrain the rate of growth in Medicare
physician spending and link it to growth in the overall economy, as
well as to take into account the physician role in the volume and
intensity of services. Until 2000, in large part, the formula has been
working as designed.
The law that sets this formula is extremely prescriptive. It does
not give the Centers for Medicare & Medicaid Services (CMS) the
administrative flexibility to adjust physicians' payments when the
formula produces unexpected payment updates, as we witnessed in 2002
and 2003. The size of the negative update for 2002 was a surprise when
it first became apparent in September 2001. As we looked at the actual
numbers going into the formula, we explored every issue and every
alternative that could have produced a different update, but we
concluded that we did not have any flexibility. We made sure that every
part of the update was accurate and fully in accord with the law.
Several factors lead to the negative updates. First, there were
differences between estimates and after-the-fact actual data for
components of the fiscal year 1998 and fiscal year 1999 Sustainable
Growth Rates (SGRs). As I explain below, this means that the cumulative
target was lower than it should have been. Second, there has been a
downturn in the economy in recent years, which affected the SGR because
it is tied to the growth in the country's Gross Domestic Product.
Third, spending for physicians' services has grown very rapidly in
recent years. The combination of lower targets and higher expenditures
accounts for negative updates. In addition, in 2002, our measure of
actual expenditures had to be adjusted to capture spending information
on services that were not previously captured in the measurement of
actual expenditures. Counting these previously uncounted actual
expenses, as required by law, also increased cumulative actual
expenditures--driving down the update.
While there are significant differences between the Medicare Volume
Performance Standard (or MVPS, the predecessor to the SGR) and SGR,
both use the same general concept that expenditures for physicians'
services should grow by a limited percentage amount of allowed
expenditures each year. One important feature of both the MVPS and the
SGRs for fiscal years 1998 and 1999 was that the percentage increase
was based on estimates of the four component factors specified in the
law, made before the beginning of the year. Under the MVPS and the SGRs
for fiscal years 1998 and 1999, the statute did not permit us to revise
the estimates used to set the annual percentage increase. Beginning
with the fiscal year 2000 SGR, the statute specifically requires us to
use actual, after-the-fact data to revise the estimates used to set the
SGR. For some of the component factors of both the MVPS and the SGR,
there have been differences between the estimates used to set the
annual MVPS and SGR and the actual increase based on actual, after-the-
fact data. For instance, under both the MVPS and SGR, we are required
to account for increases in Medicare beneficiary fee-for-service
enrollment. Because it is difficult before the beginning of the year to
predict beneficiary enrollment in Medicare+Choice (or Medicare managed
care, as they were known under the MVPS) plans, there have been
differences between our estimates of the increase in fee-for-service
enrollment and the actual increase. Under the MVPS, we generally
estimated higher growth in beneficiary fee-for-service enrollment than
actually occurred, although the statute has required us to revise our
estimates for subsequent years.
Because the physician fee schedule conversion factor has been
affected by a comparison of the actual increase in expenditures to the
level of allowed expenditures calculated using the MVPS and the SGRs
for fiscal years 1998-1999, revision of our estimates would have
resulted in different conversion factors than those we actually
determined. The 4.4 percent reduction to the physician fee schedule
conversion factor is occurring, in part, because of a flawed statute
that does not allow us to revise estimates for previous years.
Physicians argue that these negative payment updates will hinder their
ability to care for beneficiaries, and may result in some physicians
not accepting new Medicare patients. We take these statements
seriously, and are taking steps to monitor beneficiary access to care
to ensure that our nation's most vulnerable citizens continue to
receive the care they need. As we consider how to improve the Medicare
physician payment formula, I think it's important to understand, from a
historical perspective, how and why the formula operates the way it
does today. It is, in fact, operating precisely as it was designed in
1997--but we recognize that this has produced some large short-term
adjustments.
physicians' payment before 1997
As the Medicare program has grown and the practice of medicine has
changed, Congress and the Administration have worked together in an
effort to ensure that Medicare's payments for physicians' services
reflect these changes. As a result, the physician payment system has
changed significantly in the past two decades. For many years, Medicare
paid for physicians' services according to each doctor's actual or
customary charge for a service, or the prevailing charge in the
physician's area, whichever was less. From 1970 through the 1980's,
spending for physicians' services grew at an unaffordable and
unsustainable average annual rate of more than 14 percent. And, because
the system was based on historical charges, it produced wide
discrepancies in payments among different localities, medical
specialties, and services. These payment differences did not
necessarily reflect actual differences in the cost of furnishing
services. As a result, the system was roundly criticized in the 1980's
as overvaluing specialty services and undervaluing primary care
services.
To address these criticisms, Congress directed the Physician
Payment Review Commission, an advisory body established by Congress and
one of the predecessor organizations of the Medicare Payment Advisory
Commission (MedPAC), to examine different ways of paying physicians
while protecting beneficiary access to care, as well as slowing the
rate of growth in Medicare physician spending. On a bipartisan basis,
and with the support of the first Bush administration, Congress
accepted these recommendations and passed these and other reforms in
the Omnibus Budget Reconciliation Act (OBRA) of 1989, and the new fee
schedule was implemented beginning January 1, 1992. The resource-based
work component of the fee schedule was phased in between 1992 and 1996.
Specifically, in its 1989 Annual Report, the Commission recommended
a number of ways to change how Medicare pays physicians. The Commission
first recommended instituting a fee schedule for physicians' payments
based on the resources involved with furnishing each physician's
service, rather than on historical charges. The Commission also
recommended that the relative value of three separate components of
each service--physician work, practice expense and professional
liability insurance--be calculated, as discussed above.
Under the Commission's recommendations, once the relative values
were established, they were adjusted for cost differences, such as in
staff wages and supply costs, based on the area of the country where
the service was performed. Then the actual fee for a particular service
for a year was determined by multiplying the relative value units by a
dollar-based conversion factor. The Relative-Value Update Committee
(RUC), a multi-specialty panel of physicians that is supported by the
American Medical Association (AMA), plays an important role in making
recommendations so that the relative values we assign reflect the
resources involved with both new and existing services. We generally
accept more than 90 percent of the RUC's recommendations, and our
relationship is cooperative and extremely productive. The Physician
Payment Review Commission also recommended that HHS provide financial
protection to beneficiaries by limiting the amount that a physician
could charge beneficiaries for each service.
The Commission's third major recommendation was to establish a
target rate of growth for Medicare physician expenditures, called the
Medicare Volume Performance Standard (MVPS). The MVPS target growth
rate was based on physicians' fees, beneficiary enrollment in Medicare,
legal and regulatory changes, and historical measures of the volume and
intensity of the services that physicians performed. The MVPS was set
by combining these factors and reducing that figure by 2 percentage
points, in order to control to growth rate for physicians' services.
OBRA 1993 later changed this to minus 4 percentage points. Actual
Medicare spending was compared to the MVPS target, which led to an
adjustment, up or down, to the MEI to determine the update for a future
year. The law provided for a maximum reduction of 3 percentage points,
which OBRA 1993 lowered to 5 percentage points.
physicians' payment since 1997
The Balanced Budget Act of 1997 (BBA) further changed the physician
payment system based on subsequent Commission recommendations. In BBA,
the SGR replaced the MVPS. Like the MVPS, the SGR is calculated based
on factors including changes in physicians' fees, beneficiary
enrollment, and legal and regulatory changes. However, the BBA did away
with using the historical volume and intensity of physicians' services
as the factor in the target for growth in the volume and intensity of
services. Instead, the real per capita Gross Domestic Product, which
measures real economic growth in the overall economy per capita, was
instituted as a replacement.
One other important difference between the old and the new growth
targets is that the old method compared target and actual expenditures
in a single year while the SGR added a cumulative comparison. Under the
MVPS, if expenditures exceeded the target in the previous year, the
update was adjusted for the amount of the excess in the current year,
but there was no recoupment of excess expenditures from the previous
year. Under the new SGR, the base period for the growth target was
locked in at the 12 months ending March 31, 1997. This is the base
period and remains set for all future years. Annual target expenditures
for each following year equal the base period expenditures increased by
a percentage amount that reflects a formula specified in the law, and
they are added to base period expenditures to determine the cumulative
target. This process continues year after year, adding a new year of
expenditures to the cumulative target. A comparison of actual
cumulative expenditures is made to cumulative allowed or target
expenditures. Under a cumulative system, if expenditures in a prior
year exceed the target, the current year update is adjusted to make
annual and target expenditures equal in the current year and to recoup
excess expenditures from a prior year. While the BBRA made some further
technical changes to allow these adjustments to occur over multiple
years, that is the general way the formula was established in law. The
SGR is working the way it was designed.
BBA also increased the amount that the update could be reduced in
any year if expenditures exceeded the target. The maximum reduction was
increased by 2 percentage points, to 7 percentage points. Thus, for
example, inflation updates in the range of 2 percent, reduced by the 7
percentage point maximum reduction, would yield a negative update in
the range of 5 percent. BBA also established a limit of 3 percentage
points on how much the annual inflation update could be increased if
spending was less than the target. For example, an inflation update of
2 percent increased by the 3 percentage point maximum increase would
yield an update of 5 percent.
Additionally, BBA created a single conversion factor (previously
there were three separate ones for different types of services). BBA
also required that the practice expense component of the relative value
calculation, which reflects a physician's overhead costs, be based on
the relative resources involved with performing the service, rather
than the physicians' historical charges. This change made the practice
expense component of the calculation similar to the physician work
component, and reflected actual resources. The change was phased in
over four years, and was fully implemented in 2002. BBA further
required that the professional liability insurance expense component of
the relative value calculation also be resource-based. The law required
that the resource-based practice expense and professional liability
relative value systems be implemented in a budget-neutral manner. The
BBA provisions affecting physicians accounted for about 3 percent of
total BBA 10-year Medicare savings. Because physician payment accounts
for about 17.6 percent of program payments in 1997, the physician
savings in the BBA represented by these changes were relatively modest.
The Balanced Budget Refinement Act of 1999 (BBRA) made further
revisions to the SGR in an attempt to help smooth out annual changes to
physician payments such as blending cumulative and annual comparisons
of target and actual spending. Beginning with the 2000 SGR, the law
required us to revise previous SGR estimates based on actual data that
became available after the previous estimates. BBRA also required us to
make an annual estimate of the expected physician payment update for
the succeeding year available to MedPAC and the public. This estimate
is due on March 1 of each year, and is very difficult to make, because
none of the claims used to determine actual spending are available by
the time we are required to make the estimate. In 2001, we estimated
that the 2002 update would be around negative 0.1 percent. However,
when we determined the actual update, which was published 7 months
later--on November 1, 2001, revised figures lowered the Gross Domestic
Product figures for 2000 and predicted a slower growing economy for
2001 than was previously estimated. Further, 2001 physician spending
was higher than our March estimate.
Additionally, in making updates to the list of codes for specific
procedures that are included in the SGR, we discovered that a number of
codes for new procedures were inadvertently not included in the
measurement of actual expenditures beginning in 1998. Therefore, the
previous measurements of actual expenditures for 1998, 1999, and 2000
were lower than they should have been. As a result, the physician fee
schedule updates for 2000 and 2001 (5.5 percent and 5.0 percent,
respectively) were higher than they should have been had those codes
been included. The downward adjustment to the 2002 physician fee
schedule was due, in part, to recoup the higher than intended
expenditures in 2000 and 2001. The combination of these factors led to
the large negative update for 2002.
As you can see, the process for calculating payments for
physicians' services is highly complex. It is the result of years of
efforts by Congress, previous Administrations, the Physician Payment
Review Commission, and MedPAC to ensure that Medicare pays physicians
as appropriately as possible. Today, while the underlying fee schedule
and relative value system have been successful, we recognize that the
update calculation has produced large short-term adjustments and
instability in year-to-year updates. I know that you, Mr. Chairman, and
others on this Subcommittee and elsewhere in Congress, are involved
with legislative efforts to improve the formula. I want to work with
you and the physician community to smooth out the yearly adjustments to
the fee schedule in a way that is budget-neutral across all providers
while ensuring that Medicare beneficiaries continue to get the care
they need.
professional liability costs
We are very disappointed that, despite our best efforts to find an
administrative fix, physicians will face a negative 4.4 percent update
this year, particularly because we understand the financial pressures
that doctors face and want to ensure that Medicare beneficiaries
continue to receive the care they need. One contributing factor is the
cost of professional liability insurance. CMS' Office of the Actuary
(OACT) considers this cost as it develops and maintains input price
indexes, or market baskets for the major medical sectors (hospitals,
physicians, nursing homes, home health agencies, and the like) that are
used to annually update Medicare payments. These market baskets reflect
what it would cost in a future period to purchase the same mix of goods
and services purchased in a base period. The mix of goods and services
that providers purchase include labor (wages and benefits), utilities,
pharmaceuticals, food, equipment, capital, and the like. One of these
inputs is professional liability insurance, which we want to
appropriately reflect in our market baskets.
In fact, Medicare physician payments for malpractice are determined
partly by relative value units and partly by other elements of
Medicare's physician fee schedule. Payments for each of over 7,000
services under the fee schedule are based upon three factors:
--Relative value units (RVUs) for each service, reflecting the
relative amount of physician work effort, practice expenses,
and malpractice insurance expenses involved with furnishing
each service;
--A dollar conversion factor that translates these RVUs into monetary
payment amounts, and;
--Geographic practice cost indexes (GPCIs) for physician work,
practice expenses, and malpractice insurance expenses to
reflect differences in physician practice costs among
geographic areas.
All three of these factors affect the total payment amount for a
service. There is a malpractice element in each of these factors.
The first way that malpractice is reflected in the Medicare
physician payment system is through a specific component of RVUs for
each service for malpractice expenses. Since January 1, 2000, the
statute has required that the RVUs for malpractice be based on the
resources physicians actually expend to acquire professional liability
insurance. We established resource-based malpractice RVUs through
notice and comment using a methodology that incorporates actual
malpractice premium data and weighting by specialty and frequency of
each service. The law requires that we revise the malpractice expense
RVUs no less than every 5 years. If malpractice insurance premiums rise
for some specialties more than for others, the higher expenses would be
reflected in the periodic revisions we make to the malpractice expense
RVUs. Subsequently, malpractice expense RVUs for services typically
performed by these specialties would increase. We most recently revised
these relative values for 2001. By law, we must make these revisions to
relative values in a budget neutral manner, which means that if we
increase the payment for a service then we are required to reduce the
payments for other services. Because malpractice represents 3.2 percent
of the average physician fee (physician work is 54.5 percent and
practice expenses are 42.3 percent), even relatively large changes in
premiums for some specialties would have relatively modest effects on
Medicare payments.
The second way that malpractice is reflected in the physician
payment system is through the annual update to the fee schedule
conversion factor. The statute specifies a formula for the update based
on the MEI adjusted by performance under the SGR system. The MEI is an
inflation index measuring year-to-year changes in physician practice
costs. One component of the MEI is specifically designed to recognize
national year-to-year changes in the costs of malpractice insurance. If
malpractice insurance premiums increase nationally, then these higher
costs are incorporated into a higher MEI, which subsequently raises all
payments under the fee schedule. These calculations are made each year
by the Office of the Actuary based on data collected from major
insurers. For 2003, the malpractice expense component of the MEI, which
represents about 3.2 percent of the total index, was increased by 11.3
percent to reflect the recent liability insurance premium increases
that have occurred nationwide. Thus, increases in malpractice insurance
costs are reflected in Medicare physician payments relatively quickly.
The third way that malpractice is reflected in the physician
payment system is through the geographic adjustment among areas. The
statute requires a separate geographic adjustment for the malpractice
RVU component to reflect the relative costs of malpractice expenses in
different fee schedule geographic areas compared to the national
average of such costs. There are 89 physician fee schedule geographic
areas. Thirty-four of these areas represent one state apiece, while the
other areas represent portions of the remaining 16 states. If
malpractice insurance premiums increase more in some geographic areas
than others, these higher geographic-level expenses are reflected in
the periodic revisions that are made to the geographic practice costs
indexes for malpractice expenses. These revisions are made in a budget
neutral manner, no less than every three years, as required by law. The
next revision will take effect in 2004; these changes will be proposed
in the notice of proposed rulemaking for the annual update, which we
plan to publish in Spring 2003.
To make these changes, we must gather data from the Insurance
Commissioners in each State, which is an involved undertaking that
requires the cooperation of 50 State offices. To make adjustments for
89 geographic areas covering the entire country requires much more
detailed data than the data used to measure year-to-year national
changes in costs for the MEI calculation. I am personally following up
to ensure we have the best and most recent data possible for this
revision. We have examined whether we should make these updates more
frequently in the future. Our experience has been that the changes in
the malpractice geographic practice cost indexes from revision to
revision have been relatively small, and the effects on physician
payments, given only 3.2 percent of these payments are affected by
these index values, are also small. For example, a 10 percent increase
in malpractice costs in a geographic area would result in only a 0.32
percent increase in Medicare payments in that area, and very small
reductions in payments in all other areas. Collecting this data is not
trivial and involves time and resources for both Federal and State
governments. On balance, given that the annual changes in the Medicare
Economic Index capture overall increases in malpractice costs, we do
not believe that making revisions in the malpractice geographic
practice cost index more often than every 3 years would be a efficient
use of resources.
In short, Medicare revises physician payments to reflect changes in
malpractice premiums on an annual basis. We do this through changes in
the Medicare Economic Index, and thus the update to the physician fee
schedule. Changes in malpractice relative value units, which reflect
any changes that may have arisen across physician specialties, have
been accomplished relatively recently. The malpractice geographic
practice cost index in the next update will incorporate the latest
available data. While I believe we need to address increases in
malpractice premiums forthrightly, I also believe the Medicare
physician fee schedule already does a reasonable job in this respect.
hospitals' payment
I also know that this Subcommittee is concerned about how we update
hospital payments. Medicare paid approximately $100 billion in fiscal
year 2003 for Medicare inpatient hospital services. Medicare's
approximately 6,000 inpatient hospitals are paid under a prospective
payment system (PPS), which is updated annually. This update factor is
set in law and determined primarily by the projected increase in the
hospital market basket index, which measures the costs of goods and
services purchased by hospitals.
CMS has forecasted the fiscal year 2003 market basket to be 3.5
percent. However, the Medicare, Medicaid, and SCHIP Benefits
Improvement and Protection Act of 2000 (BIPA) established an update of
market basket minus 0.55 percentage points for fiscal year 2003.
Therefore, the actual fiscal year 2003 hospital market basket update is
3.5 percent minus 0.55, or 2.95 percent. Since the inception of
inpatient PPS, hospitals have only once received a full market basket
update (fiscal year 2001), and on average, the actual update has been
approximately 40 percent lower than the market basket increase.
Despite the difference between the payment update and the market
basket increase, inpatient hospital margins have remained very high. In
fact, since the early 1990's, there has been a significant drop in the
number of hospitals with negative inpatient margins. For example, 61
percent of hospitals had negative inpatient margins in 1991 compared to
approximately 25 percent in 1999. Moving forward, we need to continue
to ensure that hospitals are paid adequately. In the meantime, we will
continue to work hard to do what we can to help physicians and other
providers in a variety of ways.
helping providers outside of payments
I worked in the hospital industry for years, and I know how
frustrating it can be for physicians and providers to work with
Medicare. We know that in order to ensure beneficiaries continue to
receive the highest quality care, we must streamline Medicare's
requirements, bring openness and responsiveness into the regulatory
process, and make certain that regulatory and paperwork changes are
sensible and predictable. This effort is a priority for me personally,
as well as for Secretary Thompson and President Bush. And we have a lot
of activities underway to make Medicare a more physician- and provider-
friendly program.
To promote improved responsiveness, we created eleven ``Open Door
Policy Forums'' to interact directly with physicians, as well as
beneficiary groups, plans, providers, and suppliers, to strengthen
communication and information sharing between stakeholders and the
Agency. All of these Open Door Policy Forums facilitate information
sharing and enhance communication between the Agency and its partners
and beneficiaries. My goal is to make CMS an open agency--one that
explains its policies to the beneficiaries and providers who rely on
us.
Furthermore, our Physicians' Regulatory Issues Team (PRIT), chaired
by an emergency room physician, Dr. Bill Rogers, integrates practicing
physicians into our decision making process, allowing us to develop
policies that will better serve beneficiaries and physicians.
Specifically, PRIT members work within the Agency to serve as catalysts
and advisors to policy staff as changes and decisions are discussed.
These outreach efforts allow us to hear from physicians and all other
Americans who deal with our programs. We are listening and we are
learning. I am committed to making lots of common-sense changes and
ensuring that the regulations governing our program not only make
sense, but also are in plain and understandable language. This will go
a long way in alleviating physicians' fears and reducing the amount of
paperwork that, in the past, has all too often been an unnecessary
burden on physicians.
conclusion
I took this job because I know how important Medicare, Medicaid,
and SCHIP are to Americans, and because I want to make a difference in
improving our health care system. I am just as frustrated as you and
all of the physicians that you hear from when it comes to how confusing
and complex these programs are, and I am working hard to improve them.
I also am working hard to monitor beneficiary access to care, and
ensuring that America's elderly and disabled can receive the high
quality care they need and deserve.
The Administration understands that the physician payment system is
complex and will continue to work with Congress to smooth out the
physician update system. I completely support legislative efforts to
fix the short-term and long-term problems with the physician update. We
owe it to America's physicians to fix the system so that they can
continue to provide Medicare beneficiaries with the vital care they
need. Thank you for the opportunity to discuss this important topic
with you today. I hope that I have helped to explain the issues, and I
look forward to answering your questions.
Senator Specter. Thank you very much, Mr. Scully.
We have been joined by the chairman of the full committee,
Senator Stevens, and let me say publicly what I have said
privately, what an extraordinary job he did last week on the
omnibus bill. They said it could not be done, and nobody yet is
quite sure how he did it, but it was the manager's amendment
which froze the cut in physician payments and increased rural
hospitals, and he is the manager.
Mr. Chairman.
OPENING STATEMENT OF SENATOR TED STEVENS
Senator Stevens. Thank you very much. I am sorry to be
late. We had other committee meetings, and I have others to go
after this, but I did want to make a short statement, and I do
thank you for holding this hearing.
I have great concerns over the effects that continuing to
ratchet down Medicare payments to doctors, especially primary
care doctors, is having on access to basic health care for our
seniors. I find I am one of them. As a matter of fact, my
doctor told me to go to see someone else.
It is affecting Alaska even more seriously, because Alaska
has no HMO's or managed care plans. Our dispersed and
relatively small population is not suitable for those
arrangements, so Alaska's seniors must go to solo or group
practices to get their medical care or they must overburden
hospital emergency rooms at a much greater cost to the system
as a whole.
I am told by Alaska family doctors that Medicare pays them
only around $32 for an office visit, compared to around $75 or
$80 paid by other insurers or health plans. These doctors tell
me that the $32 payment does not cover the cost of seeing the
patient, so they lose money every time a Medicare patient walks
through the door. Most of our Alaska doctors have felt a
commitment to care for Medicare patients, but the low rate of
payment means the doctors can afford to only take a limited
amount of those patients.
The latest round of cuts in Medicare payments to doctors
has been the final straw for some of our doctors, and some have
announced that they will no longer see seniors at all. Clearly,
this is creating an access problem and, as I said before,
seniors in Alaska cannot turn to HMO's as an alternative
because we do not have any.
I am also concerned at the lower payment rates to run
hospitals, rural hospitals than those located in communities
over 1 million people. Alaska does not have one community that
fits that urban requirement, so every one of our hospitals gets
paid less than those located in the larger cities throughout
our country, and I do not understand that discrimination
against us at all.
Mr. Chairman, it takes more to provide health care in
Alaska and rural areas than it does in the big cities. I do not
understand why the payment schedule is turned around. Congress
must address this, ensuring fair payment rates to Medicare
providers who care for our seniors wherever they are located.
As the chairman said, as part of H.J. Res. 2, the omnibus
appropriations legislation for fiscal year 2003, the 4.4
percent payment cuts schedule for March 1 will be delayed until
September 30 to give the Finance Committee and Ways and Means
Committee time to fashion a more permanent solution and suggest
it to the Congress.
But Mr. Scully, we want to work with you and other
colleagues, including Senators Specter, Grassley, Gregg, and
our majority leader, who have been working with us on this
problem, to come up with a creative solution to fix these
problems for Alaska and other rural areas of the country. I
make that commitment to you that we are going to work with you.
I hope we have a commitment that you will work with me and my
colleagues from the rural parts of our country to make sure
that American seniors have access to first-class health care no
matter where they live.
My only question is, and I hope you will answer it after I
leave--I must leave, I am sorry--is how did that discrimination
take place? Why are we paying more for people who live in big
cities than we are paying for people who live in the rural
areas, when everyone knows the cost of health care delivery in
rural areas costs more? Why did Medicare decide on that type of
discrimination, based upon the number of people in the area.
I am sorry I cannot get the answer, but I will certainly
read it on the record, and I do sincerely want to know. My
people in Alaska want to know.
Thank you very much, Mr. Chairman.
Senator Specter. Thank you, Mr. Chairman. Thank you,
Senator Stevens.
Senator Harkin has other commitments and has to leave for a
time and will return, and has asked leave to ask one question.
He has done this on a number of occasions. I have never heard
it limited to one question, but he has the floor----
Senator Harkin. Bifurcating.
Senator Specter [continuing]. For however many subparts
this one question has.
Senator Harkin. Mr. Chairman, thank you very much, again,
for your indulgence. I appreciate that.
Again, Mr. Scully, I thank you again for being so available
to my staff and to me over your tenure here and even before in
past administrations.
Mr. Scully. Sure.
Senator Harkin. You know these issues well. You know them
better than anyone that I know of that has it all together, and
you understand them. You understand our frustration in Iowa on
this Medicare reimbursement.
There is one thing I just wanted to add to this. If you
took a hospital in Des Moines, and if you assumed the
following, same volume of Medicare cases, same Medicare case
mix, same staff, same services, assume all of the same, a
hospital located in Cincinnati, Ohio, would get $5.3 million
more a year. In Lincoln, Nebraska, they would get $8.8 million
more a year, Denver, Colorado, $11 million more a year, Ann
Arbor, Michigan, $14.6 million more a year, and these are sort
of comparable type of cities to Des Moines, Iowa. And so you
can see why our hospitals in Iowa are just at wit's end on this
thing.
So again, I am just asking you, will the President's
proposed $400-billion Medicare modernization package include a
provision to more fairly reimburse providers in rural States
like Iowa, and can you show us any light at the end of the
tunnel on this?
Mr. Scully. Senator, I cannot tell you--I could quit my job
and I can tell you what is in our Medicare plan. I think it
might have to wait another week or two until the President's
ready to get into details. We are still working on it. I will
say one thing, we are not pushing people into HMO's, regardless
of what you read in the paper, and I will tell you that I think
you are going to find that some of our proposals will have a
significant buffering effect on some of the geographic
disparities in the program.
Senator Harkin. Well, I am glad to hear that, too. I did
not mention that, but as you know, we do not have one in Iowa.
Mr. Scully. Yes.
Senator Harkin. Why?
Mr. Scully. Well, we will clearly make prescription drugs
available to everybody in Iowa through our plan.
Senator Harkin. Tom, I hope it will be an equivalent. I
hope that people who go into HMO's will get more benefit than
those who stay in fee-for-service. Do you see what I am saying?
Mr. Scully. At the risk of having to quit, I do not want to
get too far into this, but I will tell you that I think that we
are not pushing people into HMO's. We are going to get
prescription drug coverage across the country, certainly in
rural areas, and I think you are going to find that some of the
geographic disparities that exist in the Medicare--Medicare is
a wonderful program, but it is very regulated, very tightly
wound, very tight structure, and I think you are going to find
some of the impacts will probably help get rid of some of the
disparities, but beyond that I probably--unless I want to go
back to my law firm, I probably should stop there.
Let me just answer some of the other questions about Iowa,
and again, I know the frustration with Iowa, and I know the
Iowa Hospital Association, who I have talked to a lot, is
testifying after this, so if I could just go through a couple
of facts with Iowa.
Iowa should be commended for being very efficient. I went
through some of these facts late last night, when I was
learning a lot more about Iowa's reimbursement. You get about
92 percent of the national average of cost per service, and you
are about 43rd there, and that is about, arguably--this is all
about the data, and we do pay--we have a different formula.
We have 89 regions of the country for physicians, and 250
for hospitals, and for example, you get paid 91 percent, or 92
percent of the national average for physicians, and about 88
for hospitals, so clearly there is a difference that has
evolved over the years, and it is all legislative. We have very
little discretion, but you get paid differently between
hospitals and docs.
But you get--even though you get about 92 percent of the
costs, on average, you only get 71 percent of the payment,
which is 46th, basically, on average, and it depends on how you
calculate it. I can explain that.
Your doctors, for instance, are 72 percent of the national
average, and they are 40th in the country, but part of it is
really, the cost per service is 92 percent, but your health
care in Iowa is very high-quality, and very low-utilization,
and to some degree, you should be congratulated for that.
I have looked through all the charts, and essentially when
you look at who is really doing the best job in the country, it
is really North Dakota, Iowa, Oregon, Wisconsin, Wyoming, and a
large reason why you are looking at the per capita costs is
that your hospitals have shorter lengths of stay, your nursing
homes have shorter lengths of stay, your doctors do fewer
procedures, and it is not necessarily the payment per
procedure, you are doing a lot fewer procedures on average.
For example, your nursing homes spend about 68 percent of
the national average on Medicare admissions, $3,000 versus a
national average of $5,000. Your actual costs per day are 96
percent of the national average, but the average stay in a
nursing home in Iowa, for instance, is 14 days, and nationally,
it is 22 days, so when you look at the practice behaviors all
through Iowa, you do have a geographic disparity, but also,
Iowa should be congratulated for having terrifically efficient
health care--I mean, it is a model for the rest of the country.
I am not sure it is going to make you feel any better, but
I guess one of my arguments, and I got in a little trouble in
Washington State for making the same argument out there last
year, was, we are certainly concerned about the geographic
disparities, and we are working on fixing them, but to some
degree Washington State and Iowa are a model for health care
for other States, and I know you are worried about the
geographic discrepancies, and we are trying to fix them, but I
also think it is worthwhile to use them as models for how
health care should be practiced as well, because there are a
lot of good things that are going on in Iowa and Washington
State and some other low-cost States.
So I do not mean to get myself in trouble there. We clearly
have a problem with geographic disparity, but to a large
degree, a lot of the things that are going on in Iowa and
Washington State and Wyoming, Oregon, are very good health care
practices and should be a model for other people.
Senator Harkin. Well, Mr. Scully, commendations are nice,
but it does not put bread and butter on the table.
Mr. Scully. I understand.
Senator Harkin. And it does not help the hospitals.
Now, you are getting into a chicken-and-egg argument here.
You are pointing out the efficiency of the hospitals, their
shortness of stays. Kirk Norris is here, who is the head of our
hospital association, who will be testifying. You know why that
is happening, because they cannot afford to keep them there any
longer, because the reimbursement rates are so low they have
got to get them out, and so now, you look at that and say, that
is a wonderful thing.
It is not wonderful when you are forced to do things
against the best interest of your patients, and it is not a
good thing when these hospitals cannot afford to keep doctors
and nurses on board because the reimbursement rates are so low.
So you may look at that as efficiency. We look upon it as a
penalty, and it keeps getting worse, because as we ratchet
down, as we become more efficient, you say, oh, wonderful, we
can cut you even more, so it is a never-ending spiral that we
are on, and you know that.
Mr. Scully. I agree with you. It is just, unfortunately,
for me it is a statutory spiral, and I would urge you--I mean,
we are happy to work on the formulas, but they have been there
for years. There are historical reasons for--the people that
wrote them 15 years ago generally were not from rural States,
and that is just the way they work.
Now, I am just pointing out that I think that the cost per
service in Iowa, which is on average about 91 percent, does
arguably reflect some of the costs, but there are reasons why
it is lower. I agree with you, and I spent a lot of time in
Iowa this year, as you know. I drove 2 days through most of at
least the eastern half of the State earlier this year. I went
to seven different hospitals, and I think the fact is, once you
get into the spiral of wage indexes for hospitals, if you have
a lower wage index, you get reimbursed less, your nurses get
less, and it is a death spiral, but it is a statutory death
spiral----
Senator Harkin. Exactly.
Mr. Scully [continuing]. And I agree with you that there
are inequities in the system, and we are anxious to fix them.
Senator Harkin. Again, you cannot--I mean, you might be
able to explain an Iowa compared to New York City. I can
understand that, or a Miami, Florida, maybe, or different high-
cost areas. You cannot explain it with regard to Lincoln,
Nebraska. You just cannot explain it. $8 million more to the
same hospital, same mix of cases and everything, for Lincoln,
Nebraska compared to a hospital in Des Moines. There is no
explanation for that, other than, well, that is the historical
way we have done things.
Well, I just--okay, let us change it. We have got to change
it, and with all respect, Mr. Scully, you are a great friend of
mine, I have a great deal of respect for you professionally and
personally, we need some help from the administration to start
moving and changing these formulas and helping us out here and
getting something done, and a little bit, a couple of million
here, a couple of million there is not going to do it.
I know we cannot do it overnight. I do not think there is
any hospital, any health provider in my State that would say,
we have got to change it tomorrow. We know we cannot do that.
But for crying out loud, to get us on a path that over, say, 4
or 5 or 6 years would get us to a more equitable system, people
could live with that if they knew there was, as I said, that
light at the end of the tunnel, not 20 years from now but 4, 5
or 6 years we could get on that pathway, we could do it.
Mr. Scully. Well, sir, to be honest, as you know, Medicare
is growing rather rapidly, and hospital reimbursement is still
growing at a rather healthy rate. Nationally, we spent $100
billion for inpatient hospital services this year, and this is
a big geographic issue. When I was in the hospital business,
AHA did a very good job of representing everybody, getting the
rurals and the urbans into the room trying to work this out
over a very long period of time, but obviously, unless you add
more money in, which you know, we are already growing at 7 or 8
percent a year, that is a redistribution from urbans to rurals,
and even in your own State that probably causes some
sensitivity, and I am sure in Pennsylvania, which is my home
State, I know it does.
So as you level these inequities out, you are taking money
from some of the higher-cost, traditionally, reimbursed urban
areas and putting them out in the rural areas. Then--I used to
work in the Washington State delegation--whether it is, you
know, Seattle too--it is very painful and difficult. But we are
all for you. We will help you.
Senator Harkin. No one wants to take money away, but the
rate of growth, if you could just say to those really high
reimbursed States that over the next 4 or 5 years your rate of
growth will be less than the States who are at the bottom, you
could pull those together.
Mr. Scully. I think we would be happy to discuss that, but
they are legislative formulas, and I think we have said
repeatedly that we think if you are looking at a place in
Medicare this year, and we have been hesitant outside of
physicians to look at other provider give-backs, we have pretty
much said that we think the place where there is the most--
beyond fixing the docs--the second best most equitable argument
is probably rural hospitals.
Senator Harkin. I would reverse them, but that is all
right, the order of priority.
Mr. Scully. Yes, I think the docs should get fixed first--
thank you.
Senator Harkin. Thank you very much, Mr. Scully. I will be
back. I just have to leave. Thank you very much, Mr. Chairman,
I appreciate that.
Senator Specter. Thank you for your question, Senator
Harkin.
Mr. Scully, when you were talking about the reimbursement
on malpractice rates, I believe you referred to some 1996 to
1998 data. Would you amplify that, please?
Mr. Scully. Mr. Chairman, there is basically three
different components that we use to account for malpractice
costs.
Senator Specter. I recall the three components. Could you
focus on 1996 to 1998?
Mr. Scully. Yes. When we figure in the relative values for
what we pay a doctor, let us say an internist in Philadelphia,
roughly 42 percent of that is their practice expenses, about 54
percent is their work, and----
Senator Specter. I noted that part. How about 1996 and
1998?
Mr. Scully. The data we have used for payments in 2001-2003
has been based on 1996 to 1998 data that we collect across the
country in a survey every 5 years from large malpractice
insurers.
Senator Specter. Well, when the rates go up substantially,
isn't data from 1996 very badly outdated?
Mr. Scully. It probably is.
Senator Specter. What do you mean, probably? Any chance
that it is not?
Mr. Scully. Well, the last--if we actually looked at it,
the impact, even if you put, for instance, in Philadelphia the
40 percent increase in malpractice premiums, even if you put
that into the formula it would have a very small impact on the
results.
Senator Specter. Well, you emphasized the small impact in
your letter repeatedly, but no impact is too small if you are a
doctor paying the rates.
Mr. Scully. I totally agree with you, Senator, and I am
trying to fix this. We do--the major development that adds
money----
Senator Specter. Why do you use 1996 statistics?
Mr. Scully. Senator, to be honest with you, it is difficult
to collect. We use 2001 and 2002 statistics for the more
variable component, which is the MEI, the inflation----
Senator Specter. I know you have some statistics from 2001,
and 2002, but I go back to 1996 statistics, and I am asking you
if there is any, any conceivable justification for that.
Mr. Scully. Well, to be honest I spent a large part of
yesterday, and that is because I anticipated this might come
up----
Senator Specter. I am sorry, I cannot understand you. You
have to start off to be honest with me. We are going to assume
everything you say is honest. Just tell us why you are using
1996 statistics.
Mr. Scully. Because it is very difficult to collect this
data. It is extremely expensive, and we basically do not have
the staff resources to do it more regularly.
I believe, and I pushed my staff for the last week to
essentially factor in a more informal polling which we do in
other places through our contractors on an annual basis, to
supplement the massive data collection we do every 5 years,
with the more informal polling of our 23 contractors around the
country that pay doctors' claims to see if our data that we
collect every 5 years actually reflects things like the 40
percent increases in malpractice premiums in Philadelphia,
which it obviously does not, when it is 5 years old.
Senator Specter. Well, we are going to put a direction in
our conference report, Mr. Scully, not to use 1996 statistics,
to update the statistics.
You refer repeatedly, and I know this is a matter of
statute, that wherever you make the decisions on increases,
they have to be in a budget-neutral manner, so if you take away
a little from Peter, you deduct it from Paul. Is there some
reasonable likelihood that the administration will come up with
a proposal to use some of the $400 million that the President
talked about in his State of the Union Tuesday so that we add
in some here instead of making them all budget-neutral?
Mr. Scully. Well, again Mr. Chairman, at the risk of
involuntarily returning to the private sector, I will not get
into the details of the plan, but I will say our plan is going
to be much more reflective of what is going on in the real
world, and that if you have high malpractice costs in
Philadelphia or Pittsburgh or any place in your State they will
be much more directly and much more quickly reflected in the
Medicare program. So I think yes, I think the Medicare program
is a wonderful program, but it is very restrictive in the way
it reacts to changes in the markets as you have right now in
malpractice in Pennsylvania.
Senator Specter. I take that to be a yes.
Mr. Scully. I think that is a yes.
Senator Specter. Okay. The MSA's are very, very
problemsome, especially in some areas of Pennsylvania in the
northeast, in the Scranton area, Wilkes-Barre, where the
surrounding areas have preferential costing factors, medical
personnel moves. What can be done about that, Mr. Scully, so
that we do not have that inequity continued?
Mr. Scully. Mr. Chairman, I think the whole Scranton,
Wilkes-Barre MSA, as I am sure you are aware, has a real
geographic equity problem, and I have spent a lot of time
working with them, and it is a legitimate issue.
The problem they have, essentially, though, is that--I have
their wage indexes here somewhere, but roughly their wage index
I believe is about .85 off the wage index.
Senator Specter. Most of the counties in Pennsylvania have
the same problem.
Mr. Scully. Yes.
Senator Specter. And there are other areas across the
country which do. What can be done about that?
Mr. Scully. Well, I believe that their wage index actually
roughly approximates their actual cost. The problem you have in
Scranton is that legislatively the northern counties in New
York, west of New York, a 2-hour drive west of New York, have
been legislated in New York City, so they actually have a wage
index of like 1.2, and Philadelphia has been legislated so far
north of Philadelphia over the years their index is 1.1, so
Scranton, for instance, is stuck in a little pocket.
Senator Specter. You are articulating the problem expertly.
What is the answer?
Mr. Scully. Well, my own personal view, Senator, would be,
the answer would be to get rid of all the previous legislative
adjustments and go back and rebase the system more accurately,
because what has happened over the years is some of these
counties that had their neighbors legislatively increased are
now surrounded, where they are actually getting paid 30, 40
percent less than the surrounding counties and they cannot
recruit nurses. I think to raise them----
Senator Specter. Could your Department come up with a
proposal on that to submit to this subcommittee?
Mr. Scully. Sure. We would be absolutely happy to.
Senator Specter. My red light went on, so I want to observe
the time limits, since we have so many witnesses.
On Senator Stevens' time, I think you ought to answer his
question so he will not miss it in the record as to why the
rural reimbursements are so much lower than the urban
reimbursements.
Mr. Scully. In Alaska, actually, the issue in Alaska is
actually Alaska's--for the doctors, which their reimbursement
per service is actually rather high. It is actually, their
weighted average across the country is about 1.115, the average
being 1 percent, and that actually does reflect the higher cost
of practicing medicine in Alaska. I think the issue in Alaska
is that again their volume of services is lower, their behavior
is better, and per capita they get paid less, but per service,
I believe they are actually one of the higher cost areas in the
country, and that is reflected.
On the hospitals, it is probably not reflected as well, and
again I would argue that the hospital formula is probably more
flawed in many ways than the physician formula, and I think
that is something arguably Congress should look into, is making
sure that the physician practice geographic adjustments and the
hospital practice geographic adjustments are more parallel.
They have grown over the years very independently, and
completely disconnected from each other, so I think that, I
would guess that in Alaska they probably have more problems
with the hospital index than the physician index.
Senator Specter. Senator Murray.
Senator Murray. Thank you, Mr. Chairman, and before I ask
you a question I just wanted to follow up on what Senator
Landrieu spoke to you about on the outpatient prospective
payment pass-through, and really urge you to strike the
functional equivalent standard from the final rule, and I agree
with what she said and hope we hear from you on that soon.
On the whole issue that Senator Harkin has raised in terms
of the Medicare reimbursement, I know we have talked about this
many times. I just think it is grossly inadequate to say you
are really efficient, therefore, you know, we are just going to
leave you where you are, because this is affecting access in
our States. It is affecting our ability to provide health care.
It is not fair to our seniors, who pay the same as seniors
in other States, to not get the same kind of health care. Our
hospitals have the same costs, and Senator Harkin is correct,
the reason we are becoming more efficient is because we are
having to put people out on the streets before they should be,
and we should not be penalizing people for that.
I would just really urge you--I know you keep saying this
is a legislative fix. That is fine, but it would be extremely
helpful if you would come to us with a proposal, and I think
you would find bipartisan support to help move that through,
but with your agency just keeping a hands-off approach it is
very difficult for us to move something through Congress, so I
hope we can get that commitment from you.
I did want to ask you about the changes in Medicare that
you are going to be proposing, and I know you do not want to
lose your job, but I am going to make some points anyway,
because I think we all understand that the intent is to save
money and to integrate market forces into Medicare, and that is
where the administration is coming, and we have not seen the
specifics, but I just want to share with you that I am very
concerned about what I am hearing, and that is because seniors
in my home State of Washington have seen what happens when
market forces come into play. They end up with less access to
benefits and less access to doctors.
Because of the inequities in Medicare reimbursement there
is no open Medicare plus choice plan in Washington State that
provides prescription drug coverage today, and many seniors are
seeing increased premiums and copayments in Medicare plus
choice plans for prescription drugs. Seniors in my State do not
even have that option.
We do have a limited number of Medicare plus choice plans
that provide additional benefits for our seniors, but most of
those plans are closed, or have seen dramatic increases in
premiums, and frankly, I am not sure that these plans are going
to remain open very much longer in my State. That is what we
are hearing, so I am concerned that the administration is
planning on building on this inequitable formula and designing
a program that provides vastly different levels of benefits to
seniors depending on where they live, and I wondered if you
would comment on that.
Senator Specter. Senator, Murray, if I could, just a
moment. I have to go to another committee very, very briefly,
so would you continue your questioning, and when you conclude
we will be in a very, very brief recess. I shall return
momentarily. Pardon the interruption.
Mr. Scully. Well, Senator, my wife probably wants me to
totally answer the question so that I could quit and go get a
job again. I will try to answer it as thoroughly as I can. I
will just say that, as you may know, I worked in the Washington
State delegation for 5 years. I am very familiar with
Washington State health care.
We are clearly not building a reform package on the
Medicare plus choice program. I cannot tell you all the
details, but I can tell you that, you know, there are a lot of
great things about Medicare plus choice.
I happen to be a very big defender of it, because I think
for especially low-income seniors and minority seniors who are
disproportionately signed up for those managed care plans, they
do it because they cannot afford Medigap premiums, which are
frequently $150 to $300 a month, and the only way for them to
get drugs in many cases, even though it is now limited is to
sign up for Medicare plus----
Senator Murray. Very limited.
Mr. Scully. Well, very limited, but the fact is it is
frequently the only place to get any drugs, and to cover your
extremely high deductibles in Medicare, so most--you know, the
disproportionate number of people that sign up for
Medicare+Choice across the country, even as the reimbursement
has dropped and plans have dropped out, it is
disproportionately minorities and low-income people, and they
do it because they cannot afford Medigap and it is the best
coverage that they can get.
So I am a big defender of the Medicare+Choice program,
despite the fact that it has many flaws, and we are interested
in fixing that as well, but that is not what our proposal is
built on. We have zero desire to push people into HMO's. That
is not what the proposal is.
I think you will find when it comes out that while there is
absolutely no doubt that many people will criticize it, I hope
that you will be open-minded and let me come explain it to you
and at least help your discussion with us, because I think the
President, who is very involved in this, has really committed
to making the Medicare program work better, and I hope that,
while I have no doubt that you will have some concerns, I hope
you will spend the time to at least give us a chance to talk
about it.
I was stunned, actually, to read the Washington Post this
morning. I would say that their editorial reflects kind of
where I hope you will think we are when we come out with this
plan, and not that I always love everything the Washington Post
writes, but that was the most constructive editorial I have
seen in a long time. So I hope--I think you will find it is not
based on the Medicare+Choice program.
Senator Murray. Well, I look forward to having that
conversation with you, because we have some real concerns about
that, and I want to make sure----
Mr. Scully. Just to be clear, we still have a little work
to do. Whether it is 1 week or 2 weeks, it is extremely
complicated stuff that is very sensitive, and my guess is that
we are not going to be rolling it out until we are sure
everything is final.
Senator Murray. Well, knowing that, I hope you take my
comments into consideration as you work through the final
details on this.
Mr. Scully. Sure. Thank you.
Senator Murray. One other question, and that has to do with
the administration not supporting increasing provider payments
beyond fixing the physician fee schedule. I think you know
hospitals in my State are in really tough shape, as I assume
they are Nationwide.
There are a lot of reasons, the historically low Medicare,
Medicaid reimbursements, it is the increasing cost of
technology, it is the health care professional shortage, we
have bioterrorism procedures that they are asking to be
limited, there are more and more people uninsured--the
financial outlook is pretty grim right now, so I was surprised
by the recent recommendations from MedPAC that proposed no new
payment increases for hospitals or other health care providers
like home health and skilled nursing care, and wanted to find
out from you today if the administration is going to accept
those recommendations from MedPAC.
Mr. Scully. Well, the budget, Senator, comes out Monday, so
once again I cannot tell you what is in there on hospitals. I
will tell you, I used to have a lot of friends in the hospital
business, since I ran a hospital for 6 years. I am not sure I
do anymore, but my view as a regulator is that we have to
identify the trouble spots.
The number one trouble spot for us is the financing
mechanism for doctors, which is broken. We have not supported
other--we have talked a little more favorably about rural
hospitals. We think there are some hospitals that have
problems, but we have a big, global Medicare program that pays
roughly, we fix the same rate for virtually all hospitals, or
the same payments. Some are doing better than others. In some
spots we think there are problems, and when you look at, on
average, the Medicare margins on average for hospitals are
almost exactly at their historical average for 35 years.
If you looked at the average Medicare reimbursement since
1992, it would be market basket minus 1.4. If you look back at
the average of what Congress has done since 1992, it would be
market basket minus 1.4. MedPAC has recommended market basket
minus .4, which would make it probably the third best
reimbursement year hospitals have had since the beginning of
the program, so I understand because I used to argue as a
hospital lobbyist that that is a cut.
From the hospital's point of view it is relatively better
than they have done in almost any other year, and I cannot tell
you whether we are going to support it or not, but I think
MedPAC's recommendation was responsible.
There are always going to be--in 1991 61 percent of the
hospitals in the country had negative margins. Right now, we
are looking at about 32 percent of the hospitals. That is about
the historical average. Is it good that 32 percent of the
hospitals are losing money? I would say no.
Many of the hospitals have got mad at me for saying this,
but generally when you have 40 percent of the hospitals losing
money you have a problem, and when you have 25 percent of
hospitals losing money, you have historically high averages for
margins which we had in 1996. The reason Congress whacked
hospitals, and I would argue far too hard, in 1997, was because
margins were very high, and even in that year we had 25 percent
of hospitals losing money.
So there are clearly trouble spots that we need to focus
on. I would say rural hospitals is probably one, but overall,
my argument to my former friends and, I hope, current friends
in the hospital sector is that when things are going relatively
well, you should--you know, if Congress gives too much money
back, they are going to come back and take it away in a couple
of years, and you are going to get these big roller coasters.
My personal view right now is, hospitals are about where
they should be on a national average, and there are clearly
trouble spots, and the best thing we can do in Congress is keep
them on the existing glide path without big cuts or big add-
backs, and I would say that if you look at the historical
trends, the MedPAC recommendations are extremely responsible.
That does not mean that I know or could say what is in the
budget next Monday.
Senator Murray. Well, we will be looking at the budget, and
I am sure hospitals will have a lot to say about that as well,
but I know my time is up, and the committee will take a short
recess until the chairman returns.
Mr. Scully. Thank you.
Senator Specter. Mr. Scully, thank you very much. We are
going to move on to panel 2. You are on panel 3. I hope you
will be able to stay and hear what our witnesses on panel 2
have to say about this very important issue.
We will now proceed with Dr. Roth, Dr. Desai, Mr. Anderson,
Mr. Norris, Dr. Kleiman, Dr. Blomain, and Mr. D'Alberto.
I might give you just a little insight for the very brief
interruption. The schedules here are very involved. I was
committed to introduce a distinguished Pennsylvanian, Paul
McHale, who is having a hearing before Armed Services, and I
abbreviated my lengthy introduction to 4 minutes under the 5-
minute rule to make it as brief as possible. I am due in the
Judiciary Committee for the Estrada vote briefly, but that is
part of my problems, not yours. You have your own problems, and
I thank all of you for coming to present testimony on this very
important subject.
STATEMENT OF LOREN H. ROTH, M.D., M.P.H., SENIOR VICE
PRESIDENT, MEDICAL SERVICES, UPMC HEALTH
SYSTEM, ASSOCIATE SENIOR VICE CHANCELLOR,
SCHOOLS OF THE HEALTH SCIENCES, UNIVERSITY
OF PITTSBURGH
Senator Specter. Our first witness will be Dr. Loren Roth,
senior vice president for medical services at the University of
Pittsburgh Medical Center Health Systems, also serves as
associate senior vice chancellor for health sciences and
professor of medicine at the University of Pittsburgh, a B.A.
from Cornell, an M.D. from Harvard, and a master's in public
health of the Harvard School of Public Health.
Thank you for joining us, Dr. Roth, and the red light goes
on at zero, you have a green for 4 minutes, and a yellow to sum
up at 1 minute. Thank you for joining us, and on a personal
note, may I say that I have known Loren Roth for a couple of
decades, really an outstanding physician and public servant.
Dr. Roth.
Dr. Roth. Thank you very much, Senator, and thank you for
having this hearing. These are critical issues. In my role as
the chief medical officer of the UPMC, I represent the medical
interests and concerns of the more than 4,500 physicians who
are affiliates or employees of our largest health care system.
The UPMC today has 20 hospitals. We employ more than 25 percent
of the physicians in Allegheny County.
As you are hearing today, there is a crisis in health care
delivery in Pennsylvania and nationally. I recommend for your
review and have given you the paper from the New England
Journal of Medicine, which echoes what you are hearing today.
The paper is entitled, ``Homeostasis without Reserves, the
Risk of Health System Collapse.'' Dr. Sandy notes three deep
forces at work, steady increases in real health care costs,
unabated demand for health care services, and dispirited
providers, in part on the basis of malpractice and their
decreasing reimbursement.
Medical school applications have decreased 15 percent over
the last 4 years. Although, Senators, you have heard a good
deal about physicians moving from State to State, I would
suggest that these statistics may predict a future in which not
only that physicians go from State to State, but that we have
less physicians, or less competent competitive physicians. This
is truly a crisis.
Furthermore, I have emphasized the UPMC employs physicians.
A large number of physicians today are not in private practice,
but are employed by organizations such as hospitals and what-
have-you. The interests of physicians and hospitals today
largely run together. What is economic damage to one is
economic damage to the other. Therefore, even though we are
focusing mainly on physician reimbursement, which is a real
problem, as you heard from Mr. Scully, this effect spreads
throughout the entire health care system.
Given my time limits I will not review the malpractice
crisis in Pennsylvania, with which you are very aware. I will
add that malpractice is only one of the several costs of
business that physicians and hospitals are coping with as our
operating costs rise, as you have heard from the various other
Senators. New technology, pharmaceutical costs, workforce
issues, securing payments, all the money we spend with denials
from insurance companies, managed care companies, regulatory
requirements, HIPAA, bioterrorism. The hospitals are called
upon to spend a tremendous amount of money, et cetera, et
cetera.
I have been involved with the UPMC for about 10 years,
helping to build our network. Overhead costs have risen from 45
percent to 60 percent. These are serious matters, and we and
the hospitals are not being reimbursed for them.
You are aware, of course, of the Code Blue emergency in
Pennsylvania. I will not comment in depth on that. However, I
will note from 1999 to 2003 the cost of malpractice premiums
paid by our University of Pittsburgh academic clinical
physicians escalated from more than $5 million to $23 million a
year, an increase of 200 percent per faculty member. In no way
is that represented, as you have heard, in the calculation of
the malpractice costs that go into the Medicare formula.
However, Senators, this malpractice crisis and, I would say
paradoxically, physician Medicare reimbursement cuts have the
very same effect. No one to date has noted the extent to which
these problems of decreased reimbursement and rising costs
fundamentally affect the practice and pattern of how medicine
is delivered.
If physicians must meet their costs in the office and they
are receiving less reimbursement, how can they stay in business
unless, one, they see more patients, and I think this is
actually the experience of many consumers and patients, so they
attempt to see more patients, possibly, or in the Medicare
example, because they cannot afford it, see less of those and
more of others, but when you go into a doctor's office, you
want that physician to have sufficient time to be able to take
a clinical history and not simply to order a lab test or a very
fancy test.
This is a most complex economic problem of the relationship
between resource utilization and what-have-you, versus what
really should be done, and the patterns of medicine are being
negatively affected by the patterns that I am saying here.
I will not review in depth data, then. In my written
testimony there is extensive discussion of the same issues that
Mr. Scully discussed about the problems in the malpractice
calculations, which simply do not keep up with the costs that
the physicians and hospitals are experiencing, and so I will
just refer you to my written testimony there.
Senator Specter. All of the written testimony will be made
a part of the record, so we would appreciate it if you would
stay within the time limits of the oral presentation.
Dr. Roth. Okay. How much time do I have left?
Senator Specter. You are now almost a minute over. The
timing is right before you. The red light is on.
Dr. Roth. Oh, I am sorry. I will summarize, then, with your
indulgence, with too major points.
Senator Specter. Thank you.
Dr. Roth. You have heard that the formula is inaccurate. It
is extremely frustrating to physicians to know that there is a
known inaccuracy which cannot seemingly be fixed by the
legislative process, with all of the decrements coming.
My second major point, and for you, Senator, I think this
is of particular interest, you have been a wonderful supporter
of the NIH and research. We are talking here not only about
physician decrements in reimbursement. We are talking about
complete impact on the academic medical center.
prepared statement
Every amount of money that must be paid to a greater extent
for malpractice, 90 percent of our clinical doctors survive in
good part by their clinical income. When their clinical income
goes down, there is less time for research, there is less time
for education, so what I am trying to do is give you a holistic
picture that this is a generic problem, and the tradeoffs here,
as you have heard previously, when one takes from the other, is
that you and we want to preserve the academic mission, and this
is directly impacting in a negative way upon it.
Thank you for asking me to testify.
[The statement follows:]
Prepared Statement of Dr. Loren H. Roth
Greetings to the Subcommittee. Thank you for giving me the
opportunity to testify before you today on the need to address problems
with Medicare's reimbursement and its negative impact on physicians and
academic medical centers such as ours.
I am Dr. Loren H. Roth, Senior Vice President, Medical Services and
Chief Medical Officer of the University of Pittsburgh Medical Center
(UPMC). I am also the Associate Senior Vice Chancellor, Health
Sciences, of the University of Pittsburgh and Professor of Health
Policy and Management at the University.
The University of Pittsburgh Medical Center and the University of
Pittsburgh School of Medicine are each nationally highly ranked
institutions. They are recognized for their role in supporting and
performing medical research, education of medical students and
residents, and for their delivery of innovative tertiary/quaternary and
community-based care. The UPMC is committed to system wide quality
improvement efforts, patient safety, and the elimination of medical
errors. We have well-established programs in all these areas of
critical importance for patient well-being and the practice of
medicine.
In my role as Chief Medical Officer of the UPMC, I represent the
medical interests and concerns of more than 4,500 physicians who are
affiliates or employed physicians of one of the largest academic health
care systems in the nation. The UPMC today includes 20 hospitals, a
large number of University of Pittsburgh full time clinical faculty
physicians (more than 1,300), a large number of community-based
physicians (350 employed by the System) as well as other community-
based private practice physicians who are members of UPMC hospitals'
medical staffs.
Almost one in every two people in Allegheny County and one of every
four people in the region who need hospital care obtain it in a UPMC
hospital. The University of Pittsburgh Medical Center employs more than
25 percent of the physicians in Allegheny County, Pennsylvania. The
important issues that this hearing addresses affect many parties and
institutions, academic and community-based physicians, our School of
Medicine, its academic mission, many hospitals, and our patients.
Western Pennsylvania has a comparative national overrepresentation
of Medicare eligible citizens, who number 19 percent of our population
base. ``On average, hospitals in this region receive nearly half of
their patient revenue from Medicare, while nationwide the average is
about 38 percent.'' \1\ Community and teaching hospitals are
particularly dependent upon Medicare reimbursement. With the exception
of South Florida, Western Pennsylvania has the highest percentage of
elderly population in the country. Medicare policies, payments, and
procedures greatly affect the healthcare status of our community.
---------------------------------------------------------------------------
\1\ Gaynor, P., Pittsburgh Post Gazette, page E-2, January 5, 2003.
---------------------------------------------------------------------------
The issues we confront today are critical to the survival and well
being of Southwestern Pennsylvania physicians and patients, as well to
the educational/research mission of the University of Pittsburgh and
the UPMC.
Senators, I regret to inform you that there is a crisis in
healthcare delivery in Southwestern Pennsylvania and nationally. I
recommend for your review a recent New England Joumal of Medicine
article by Dr. Lewis G. Sandy entitled ``Homeostasis without Reserve--
the Risk of Health System Collapse,''--I have brought several copies
for you.\2\
---------------------------------------------------------------------------
\2\ Sandy, L.G., New England Journal of Medicine, Volume 347, pp
1971-75, December 12, 2002.
---------------------------------------------------------------------------
See also the recent statement of the National Academy of Sciences,
Institute of Medicine, ``The health care delivery system is incapable
of meeting the present, let alone the future needs of the American
Public--For the first time in nearly 20 years--the United States is
facing a broad-based crisis in the availability and affordability of
malpractice liability insurance for physicians, hospitals, and other
health care providers.'' \3\
---------------------------------------------------------------------------
\3\ Pear R., ``Panel Citing Healthcare Crisis, Presses Bush to
Act'', New York Times, November 21, 2002.
---------------------------------------------------------------------------
To substantiate his case, Dr. Sandy (from the Robert Wood Johnson
Foundation) notes three ``deep'' forces at work: (1) Steady Increases
in Real Healthcare Costs; (2) Unabated Demand for Healthcare Services;
and (3) Dispirited Providers. Dr. Sandy notes that ``Dissatisfaction is
widespread among physicians and medical school applications have
decreased 15 percent over the past 4 years.'' \4\ These are but some of
the facts and trends that relate to this hearing.
---------------------------------------------------------------------------
\4\ Sandy, ibid.
---------------------------------------------------------------------------
Let me turn then to the subject of ``dispirited providers'' and
specifically the impact that recent trends in escalating medical
malpractice costs, as well as repetitive, severe reductions in Medicare
and other reimbursements are having on both physicians and hospitals.
Recall that a great number of physicians are presently employed by
hospitals and healthcare systems. The subject for today is vital to the
health of the entire provider community and the patients it serves.
liability crisis and concerns
Senator Specter, you are well acquainted with the current
malpractice crisis in Pennsylvania and the negative impact it is having
on hospitals, physicians, and patients with respect to the provision of
and access to specialty and other care. The total cost of medical
professional liability insurance coverage for Pennsylvania's hospitals
increased 86 percent over the past 12 months.\5\ Meanwhile hospital and
physician operating costs continue to rise as a result of new
technology, pharmaceutical costs, work force issues, securing payments
due them from insurance and managed care companies, regulatory
requirements (such as HIPAA implementation), and other administrative
costs. In the last several years office overhead for most physicians
has risen from 40/45 percent to 60/65 percent.
---------------------------------------------------------------------------
\5\ HAP Update, ``HAP survey shows continuing liability crisis'',
page 1, November 15, 2002.
---------------------------------------------------------------------------
The cost of malpractice insurance for physicians has escalated
dramatically, placing physicians in impossible dilemmas with respect to
obtaining and paying for adequate malpractice coverage from either
private insurers or the state.
Pennsylvania is not alone. We are one of 12 states identified by
the AMA as now in a liability (cost/availability) crisis. The similar
crisis and its impact upon physicians in West Virginia have made the
national news. More than two dozen surgeons who operate at four West
Virginia hospitals have recently taken leaves of absence and pledged
that they won't return until the government and legislators address the
malpractice problem.
As noted by the Hospital Association of Pennsylvania in a recent
survey of 150 Pennsylvania hospitals and health systems, ``Nearly two
thirds of hospitals report that some physicians are retiring early,
curtailing practices, or relocating as a result of increasing liability
costs.\6\ In the last three years, nine insurance companies have
stopped writing medical malpractice policies in Pennsylvania.\7\
---------------------------------------------------------------------------
\6\ HAP Healthcare Outlook, page 1, November 2002.
\7\ Bull, J., Pittyburgh Post Gazette, page D2, December 25, 2002.
---------------------------------------------------------------------------
Because of progressive loss of specialists in rural and urban
areas, increasing costs of coverage for high risk specialists such as
neurosurgeons, orthopedists and obstetricians, and the shutting or
threatened shutting of vital services such as trauma centers, this fall
the Pennsylvania Medical Society declared a ``Code-Blue Emergency''.
This could have culminated in physicians electively declining to pay
state mandated surcharges to the State Catastrophic Fund (CAT Fund--now
called MCare Fund) thereby taking a vacation from their vital
professional work beginning January 1, 2003. Only last minute action by
Pennsylvania Governor Elect Rendell prevented such a negative outcome.
``We have to go back to the drawing board to keep all these physicians
from leaving the state.'' \8\
---------------------------------------------------------------------------
\8\ HAP Update, page 3, December 13, 2002.
---------------------------------------------------------------------------
The proposed Pennsylvania plan is by no means certain to occur
because of opposition from private insurance companies. The plan is for
these companies to ``foot the bill'' ($220 million additional) for the
necessary CAT Fund dollar infusion. This would waive certain high-risk
specialty physicians from this surcharge and provide a 50 percent
discount for other physician specialists in CY 2003. The outcome for
the physicians and their patients is still uncertain. The problem is
far from solved because this plan is a ``quick fix'' and does not
resolve the underlying problems faced by Pennsylvania physicians and
hospitals.
These issues have very negatively impacted our medical center, its
physicians and the academic mission. For example, between fiscal years
1999 and 2003 the cost of malpractice premiums paid by our University
of Pittsburgh academic clinical physicians escalated from more than $5
million to more than $23 million per year, an increase of more than 200
percent per faculty member. The increase for fiscal year 2003 alone is
23 percent. At the University of Pittsburgh Medical Center (UPMC) our
cost for ``excess coverage'' for physicians (beyond state requirements
and desirable because of the proliferation of very large verdicts,
especially in the eastern part of the state) has increased 500 percent
from 2000 to 2002. As a result, we are having progressive difficulty in
retaining graduating residents in certain specialties to remain in
Pennsylvania. A recent HAP survey found that nearly two-thirds of
medical teaching programs in Pennsylvania report that their medical
residents are choosing to continue their practices outside of
Pennsylvania.\9\
---------------------------------------------------------------------------
\9\ HAP Healthcare Outlook, page 1, November 2002.
---------------------------------------------------------------------------
The impact on other Pennsylvania physicians, some faced with
individual malpractice payments in the hundreds of thousands of
dollars, has been even more dramatic. For example, three obstetricians
in Uniontown, Pennsylvania ``stopped delivering babies this fall
because the physicians, all in their thirties, couldn't afford the
insurance, $400,000 this year compared with $150,000 last year.'' \10\
---------------------------------------------------------------------------
\10\ Albert T., ``Pennsylvania Faces Liability Meltdown,'' AMA
News, page 4, December 9, 2002.
---------------------------------------------------------------------------
The announcement of dramatic and extremely high malpractice awards
has a very negative effect on physicians, provokes defensive medicine,
poor patterns of healthcare delivery, excess resource utilization, and
escalating healthcare costs. For example, announcement of a recent very
large malpractice verdict immediately raised the bar on malpractice
settlements throughout Southwestern Pennsylvania. This significantly
drives up premiums and decreases our academic health center's ability
to invest in new technology, quality improvement programs, recruit and
maintain physician talent, and invest in biomedical research.
Our experience parallels that summarized by U.S. Government
experts. See, for example, the Report from the U.S. Department of
Health and Human Services, ``Confronting the New Healthcare Crisis:
Improving Healthcare Quality and Lowering Costs by Fixing our Medical
Liability System'', July 24, 2002. The report estimates that limiting
unreasonable awards for non-economic damages (caps on pain and
suffering) could reduce healthcare costs by 5-9 percent without
adversely affecting quality of care.
For the purposes of today's hearing we must relate the above facts
and problems that I have thus far highlighted, to the formulas used by
CMS, and mandated by Congress, to reimburse physicians. There is a
great deal of technical complexity here. However, it is my belief
supported by the following observations that the present approach to
Medicare physician reimbursement is deficient in this respect. The
formulas by no means keep up with the current costly malpractice
premium and settlement expense trends discussed above.
For example, there is an opportunity in the RBRVS system (Resource
Based Relative Value Scale), which computes the number of RVU's
(Relative Value Units) to be paid for a specific piece of physician
work (CPT Codes, levels) to take malpractice costs into account. The
total number of RVU's awarded include ``Work RVU's''; ``Practice
expense RVU's'' and ``Malpractice RVU's''. However, in CY 2002, and
despite the trends above, ``Malpractice RVU's'' did not change
significantly in the Federal calculation of physician resources
involved in a particular piece of medical work.
Another opportunity for including malpractice expenses in
determining physician Medicare fees comes in the calculation of the
Conversion Factor, which changes administratively on an annual basis as
set forth by the Balanced Budget Act, BBA, of 1997. Presently for 2003,
physicians must (we hope not) once again endure an additional reduction
of 4.4 percent in the Conversion Factor, which when multiplied times
geographically corrected RVU's for a particular piece of work results
in a specific payment. The Conversion Factor is determined by factors
related to the Medicare Economic Index (MEI), Medicare Sustainable
Growth Rate (SGR) and by the Statutory Adjustment Factor. As you are
aware, during 2002, the reduction was 5.4 percent.
Again this is a very complex matter. In fact, this approach to
physician Medicare reimbursement has been repetitively criticized by
the American Medical Association, the Association of American Medical
Colleges (AAMC)--representing academic interests, the Medical Group
Management Association (MGMA), as well as by highly regarded
independent commissions such as MedPAC (Medicare Payment Advisory
Commission). The present approach needs to have an immediate overhaul.
It is misleading and not structured to reflect true increases in
practice costs. (See below)
For our purposes today, however, the relevant fact is that the
recently released data concerning the federal computation of the
Conversion Factor for CY 2003 reflects only an 11.3 percent increase
(2002 to 2003) in the Professional Liability Insurance Factor (as
relates to the calculation of the MEI). This is inadequate from any
realistic account of what is actually happening to physicians and
hospitals ``in the field'' (see above). The 2002 MEI PLI factor of only
3 percent increase was also clearly inadequate. Furthermore, the MEI/
SGR systems approach to Medicare physician payments does not yield an
actual 11 percent increase in payments.
The conclusion is that physicians and hospitals are not paid
sufficiently by Medicare in light of these malpractice costs trends and
computations. This requires immediate correction.
From our perspective in the field (both academic and community), an
important first step to halting the dramatic increases in liability
premiums would be for the the Senate to immediately consider, pass and
adopt the approach of the House HEALTH Act, H.R. 4600 (Help Efficient,
Accessible, Low-Cost, Timely Health Care Act) passed in 2002. This
approach would offer a more definitive solution for physicians,
hospitals, and their patients to the national liability crisis
discussed above.
medicare cy 2003 physician reimbursement
The above discussion of escalating liability insurance costs is but
one blow to physicians and hospitals. The next blow, likely to occur
unless you and your fellow Senators act immediately, is the CY 2003
physician fee schedule and the 4.4 percent reduction in the Conversion
Factor. This blow cannot be sustained by American medicine and its
patients. As previously mentioned, this will be the second year of such
reductions.
This reduction is particularly aggravating to physicians and
hospitals. Responsible government officials such as Mr. Thomas A.
Scully, the Medicare Administrator who has just testified, has himself
recently indicated that the concepts and facts propelling this
``mandated'' reduction are not accurate. In fact, the inaccuracy is 6
percent, to the present detriment of physicians and the hospitals that
employ them.
According to Mr. Scully, the correct Conversion Factor for CY 2003
should be a 1.6 percent increase, not a 4.4 percent decrease in
physician reimbursement. As noted by Mr. Scully and reported in The BNA
Health Care Daily Report dated December 18, 2002, ``If you go back to
1992 and take all of the errors up and down and fix the fee schedule
the way it should be fixed, that's our calculation.'' Mr. Scully also
notes in a CMS Public Affairs announcement dated December 20, 2002,
that ``The reduction in physician fee schedule rates results from a
formula specified in the Medicare law and we believe that formula is
flawed and must be fixed.''
The reasons for these inaccuracies and unfairness are well known.
Here I quote from a recent public plea directed by more than 4,500
University of Pittsburgh Medical Center physicians to the Pennsylvania
Congressional delegation: ``The current update formula ignores
erroneous past projected targets of gross domestic product growth and
(Medicare) fee-for-service enrollment, fails to reflect the actual cost
of providing physician services, and contributes to payment volatility.
If such flaws are ignored (more cuts are coming) in just three years,
Medicare physician payment rates are expected to fall below 1991
levels, despite an estimated 40 percent increase in medical practice
costs over the same period.'' There are other reasons for this
inaccuracy, such as the growth of medical technology.
Because of Medicare cuts already made in 2002 (5.4 percent) and
cuts reflecting other pay factors in the Conversion Factor, the percent
change in average payments by Medicare Specialty Physician Fee Schedule
for CY 2002 and 2003 reflects a 10 percent average decrement for all
physicians.
There is also variation for CY 2002 and 2003 by specialty, from a
total cut of 4 percent (OB/GYN) to higher cuts for Cardiac Surgery (16
percent), neurosurgery (14 percent), Orthopedic Surgery (13 percent),
and Family Practice (8 percent).
I note with great concern the differential negative effect of the
already discussed liability insurance increases and these Medicare
payment cuts upon specialties such as neurosurgery and orthopedics.
These are the very specialties needed in advanced trauma centers,
essential for producing ``best patient'' treatment outcomes in tertiary
medical centers such as ours in Pittsburgh.
Can such cuts and continuing problems in the unaffordable costs of
liability insurance be accomplished without negative consequences for
patients? I doubt it and so does CMS.
As noted in the CMS Public Affairs Office Announcement on December
20, 2002: ``Almost 90 percent of physicians accept Medicare assignment
today and as yet CMS has not seen access problems. However, CMS expects
that may change after these rules take effect.'' There is much to
suggest that this is so. For example, the American Medical Association
reported on September 16, 2002 that the American Academy of Family
Physicians has released survey data showing that nearly 22 percent of
family physicians are no longer taking new Medicare patients, a
significant increase from the same survey data one year earlier.\11\
More than 40 percent of physicians surveyed in a recent AMA poll said
they wouldn't sign Medicare participation agreements if pay cuts
continued.\12\
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\11\ Maves, M., MD, MBA, ``AMA Letter to Entire U.S. Senate Urging
Medicare Payment Update Increase of 3 percent,'' September 16, 2002.
\12\ Albert, A., ``Delegates rally to knock out cuts in Medicare
payments'', AMA News, page 2, January 6, 2003.
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A similar concern has been expressed by John C. Rother, Policy
Director of AARP and a well-known advocate for senior citizens. He
notes with respect to the Medicare payment formula that ``Congress
should correct it as soon as possible. . . . We are getting complaints
that it is becoming difficult for Medicare beneficiaries to find a
doctor willing to accept them in some parts of the country. We don't
want that problem to spread.'' \13\
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\13\ New York Tmes, page A14, December 21, 2002.
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impact of medicare physican cuts upon the academic medical centers and
its patients/students
What do these clearly unwarranted cuts mean for academic healthcare
centers such as the University of Pittsburgh Medical Center? Some local
statistic are of interest:
Medicare physician fee cuts from fiscal year 2002, compounded with
those to occur in fiscal year 2003, have or will result in a loss of
$6.4 million to our University of Pittsburgh Medical Center academic
clinical faculty physicians. Medicare cuts have or will result in an
additional loss of $2.3 million for UPMC community based physicians
over this same time period.
Medicare payments are the ``standard'' upon which other insurance
payers base their payments. A drop in Medicare payments will mean a
commensurate drop in physician reimbursement for both academic clinical
faculty and community physicians, damaging their ability to provide
care for both Medicare beneficiaries and their other patients.
These cuts in physician reimbursement can ``only possibly and very
painfully'' be restored by the University of Pittsburgh Medical Center
which will then have many less dollars to spend for support of academic
medicine, research and investment in young, promising physician/
scientists or otherwise we risk losing key faculty clinical and
community based physicians. This is a Hobson's choice.
Academic success and vitality are dependent upon physician earned
clinical income and the economic well being of the parent teaching
hospital. For example, at the University of Pittsburgh Medical Center,
more than 90 percent of clinical faculty salaries are paid by their
clinical earnings or by the hospital. At academic healthcare centers,
clinical faculty provide innovative expert care. They teach and perform
research and clinical trials. They require financial support. If we are
to retain clinical faculty and profit from their experience and
longstanding ``value commitments''; then these unwarranted Medicare
cuts in physician reimbursement must stop.
The same is true for the University of Pittsburgh Medical Center
physicians who practice in the community. Patient access to their
outstanding care is vital to Southwestern Pennsylvania.
Clinical faculty and University of Pittsburgh Medical Center
community based physicians also do much for which they are not paid at
all or paid very poorly. Society is dependent upon them for clinical
care that is otherwise not available to disadvantaged persons. There is
a crisis in American medicine. This crisis includes how best to provide
care for the uninsured and disadvantaged. Presently, almost 42 million
Americans have no health insurance. The AAMC's member teaching
hospitals, which are 6 percent of all hospitals, provide nearly 50
percent of all hospital charity care.
As recently noted by Senator Bill Frist (R-Tennessee), ``We need to
focus on the uninsured and those who suffer from healthcare disparities
that we so inadequately addressed in the past, but which I saw every
day working at a hospital for eight or nine years just several blocks
from here.'' \14\ Unless the formula is fixed and Medicare
reimbursement can be stabilized, many problems will be coming for
medical innovation, teaching, and patient care. As noted by the AAMC,
``Medical schools finance up to 46 percent of their operating budgets
from income generated by their clinical faculty and relationships with
teaching hospitals.'' \15\ Such clinical income also affects medical
student support and scholarships. In today's economic climate, 85
percent of medical students presently graduate with debts averaging
about $125,000 per student. This debt compounds during their residency
and later.
---------------------------------------------------------------------------
\14\ ``Republicans Pick Frist as Senate Leader; He vows to `Heal
Wounds of Division''', New York Times, page A18, December 24, 2002.
\15\ Cohen, J., ``AAMC Letter to Congress on Fixing the Sustainable
Growth Rate'', AAMC, 1999.
---------------------------------------------------------------------------
medicare hospital reimbursements
To fully understand the impact of Medicare physician reimbursement
cuts on the academic healthcare center, we must also keep in mind cuts
that have and are occurring with Medicare hospital reimbursements.
Hospital operating margins in Western Pennsylvania are at the
lowest they have been in decades. In the last five years, Pittsburgh
has experienced two major hospital system de facto bankruptcies and one
of these systems, St. Francis Medical Center, has recently closed.
Given declines in investment income secondary to the poor economy,
hospital total operating income is barely positive and not positive at
all for many hospitals.
In the case of the University of Pittsburgh Medical Center, as a
consequence of the 1997 BBA, we have experienced Medicare related
reductions in reimbursements compounding the economic and academic
effects noted above. Mandated market basket reductions over the last
five years have totaled $52.7 million to our medical center's bottom
line.
Additionally, IME reductions (Indirect Medical Education payments)
consequent to the BBA of 1997 (Balanced Budget Act) and BIPA of 2000
(Benefits Improvement and Protection Act) for the medical center have
totaled $55.9 million over the last five years. In fact, the last phase
of the IME reductions--a 15 percent cut--were effective on October 1,
2002.
These combined hospital and Medicare-related reductions now
constitute a continuing reduction to medical center income of about
$30.1 million per year, with attendant negative consequences for the
academic and clinical mission as discussed above.
I urge you to work towards maintaining the IME at fiscal year 2002
levels as well as ensuring full inflation or market basket updates to
hospital inpatient and outpatient rates.
conclusion
(1) The Senate should consider and pass legislation to address the
current malpractice crisis. The HEALTH Act, H.R. 4600 endorsed last
year (2002) by the House, is model legislation for this purpose. That
approach deserves your support.
Just 2 weeks ago, President Bush (January 16, 2003 speech at the
University of Scranton, Pennsylvania on the national malpractice
crisis) appealed for medical liability reform along these lines.
(2) As documented above, multiple negative consequences to
physicians, hospitals, nursing homes, academic health care centers,
medical schools, and patients will ensue if CY 2003 Medicare physician
payment reductions are implemented. Patient access to medical care will
be jeopardized and innovative medical research and education will be
compromised.
The physician community, and the hospitals that help support them,
cannot sustain unwarranted cuts of 18 percent of physician pay over a
four year period combined with increased medical liability burdens,
escalating regulatory and insurance based administrative practice
costs, and other escalating operating costs that are impacting all U.S.
businesses.
A mistake has been made. It has been clearly acknowledged by those
most expert in this field. It is time to fix the mistake. I urge this
committee and the full Senate to immediately debate and bring an end to
this plan.
(3) The Senate fiscal year 2003 omnibus appropriations bill
includes a temporary freeze in the CY 2003 cut to physician payments
and I support this temporary fix. However, a long term solution to the
reductions and the overall false Medicare formula must be addressed.
Last year, over three-quarters of the Senate cosponsored legislation
(the ``Medicare Physician Payment Fairness Act,'' S. 1707) that would
halt the scheduled reductions and call for a more equitable alternative
to the current payment methodology. Despite the indicated of strong
bipartisan support, no action has been taken.\16\
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\16\ ``Letter on Medicare Physician Payment Relief Signed by (106)
Medical School Deans, Sent to Senate Finance Committee and Full
Senate,'' AAMC Government Affairs and Advocacy, September 19, 2002.
---------------------------------------------------------------------------
(4) Halt the current IME reductions and maintain IME payments at
6.5 percent (fiscal year 2002 levels);
(5) My experience and reading convince me that the Congress should
also initiate and debate how better to pay for the future medical
treatment of Medicare patients. We need to devise a much better system
for assessing justified physician and hospital payment that will take
into account escalating health care costs from every quarter.
Senator Specter. Thank you, Dr. Roth.
Gentlemen, we are going to have to observe the time limits.
We have another panel. I have to get to the Judiciary
Committee, and there is floor action coming up this afternoon,
so take a look at the timer, and please observe the time
limits.
STATEMENT OF JITENDRA DESAI, M.D., PRESIDENT-ELECT,
PENNSYLVANIA MEDICAL SOCIETY
ACCOMPANIED BY DENIS OLMSTEAD, ECONOMIST, PENNSYLVANIA MEDICAL SOCIETY
Senator Specter. Dr. Jitendra Desai is president of the
Allegheny County Medical Society, senior attending physician at
Allegheny General Hospital. He is accompanied by Mr. Denis
Olmstead, senior economist and vice president of the Division
of Representation for the Pennsylvania Medical Society. Thank
you for joining us, Dr. Desai, and the floor is yours.
Dr. Desai. Good morning, Senator, and members of the
Appropriations Committee. I am Jitendra Desai. I am president-
elect also of the Pennsylvania Medical Society, a solo
practitioning urologist from Alaquippa Hospital, a low income,
medically underserved community near Pittsburgh. With me is
Denis Olmstead. We are here on behalf of Pennsylvania
physicians and their patients to comment on the current
Medicare payment system and professional liability system and
their increasingly adverse effect on the availability of
quality health care for our citizens.
Let me start by reinforcing what you already know, that the
current formula used by Medicare physician reimbursement is
dangerously flawed. This fact has been openly recognized by the
administration and must be fixed legislatively by the U.S.
Congress. Pennsylvania physicians, the backbone of
Pennsylvania's health care delivery system, cannot afford any
additional payment cuts. Without a doubt, the latest scheduled
Medicare cuts could not have come at a worse time. Pennsylvania
physicians are caught in a vise. We have a very low health
insurance reimbursement, national commercial insurance payments
40 to 50 percent higher than Pennsylvania's commercial
insurance payment levels. We also have extremely high physician
practicing cost, driven in large part by runaway professional
liability premiums.
With such low commercial health, Medicaid and Medicare plus
choice payments, reduced Medicare fee for service payments may
be the last straw.
In addition to the reduction in Medicare conversion
factors, other important elements of the formula work against
Pennsylvania physicians. As mandated by Congress, the Medicare
payment formula is resource-based. In other words, relative
other units for work costs, practice costs, and professional
liability costs ought to deflect physicians' true expense of
delivering service to the Medicare beneficiary. This is not
what is happening. The payment formula does not account for the
actual cost of delivering care. For example, from January 1997
to September 2001, the major professional liability carriers in
Pennsylvania increased their liability insurance rates between
80 percent to 147 percent.
Even before the horrible terrorist attacks on September 11,
rates were already climbing at a significant rate. Since then,
medical liability insurance rates have increased further. In
2002, major carriers increased rates between 40 to 50 percent,
followed by similar increases in 2003.
The Medicare payment formula, on the other hand, has not
kept up. Professional liability relative value units and its
associated geographic adjuster designated to differentiate
costs to practice of medicine in a defined geographic locality
are based on data collected from the period 1996 to 1998, as
you mentioned.
Our present liability cost increases will not work their
way into the formula until 2007 and 2009. It is just
inconceivable that in the age of computers data reflecting the
current cost of liability insurance is not being used to
determine current payment rates, so you can see not only does
the current formula short-change physicians from the
professional liability perspective, but also continue to short-
change physicians for many years.
To exacerbate this situation further for many clinical
physicians, the current payment formula would have you believe
that the cost of professional liability insurance and other
practice costs are less than the national average costs
incurred by physicians in other Medicare carrier payment
jurisdictions. If one is the national average geographic
adjuster, most of Pennsylvania falls under the average. That
is, .989 for the work relative value units, .929 for the
practice value units, and .774 for the professional liability
values.
Again, this is the ultimate outcome of further reducing
Medicare payments in Pennsylvania.
In addition to the Medicare payment formula problem,
Pennsylvania physicians are also faced with other specific
circumstances which act to dissuade physicians from
participating in Medicare. First, our State does not allow for
balance billing of Medicare beneficiaries. We are one of the
only few States that do not permit Medicare nonparticipating
physicians to balance bill the patients. This limits the
choices physicians can make regarding the billing of Medicare
beneficiaries with higher income.
Second, because of the dual eligible exclusion in
Pennsylvania, Pennsylvania Medicaid has opted not to pay for
Medicare beneficiary deductibles and coinsurances. Dual
eligibles are the poorest and the sickest Medicare
beneficiaries, and there are many in my poor community where I
work.
Senator Specter. Dr. Desai, your time has expired. Your
full statement will be in the record.
prepared statement
Dr. Desai. Thank you very much. All I want to stress at
this point is that the professional liability insurance has
been a problem with us, and unless it is corrected something
will happen.
Thank you very much.
[The statement follows:]
Prepared Statement of Dr. Jitendra M. Desai
Chairman Specter and members of the U.S. Senate Appropriations
Committee's Subcommittee on Labor, Health & Human Services: Good
morning and thank you for hosting this important hearing to further
address the serious physician Medicare payment and professional
liability problems facing our country and Pennsylvania.
I am Jitendra M. Desai, MD, President Elect of the Pennsylvania
Medical Society and a urologist from Pittsburgh. With me is Dennis
Olmstead, chief economist for the Pennsylvania Medical Society. We are
here on behalf of Pennsylvania physicians and their patients to comment
on the current Medicare payment system and professional liability
system and their increasingly adverse effect on the availability of
quality healthcare for our citizens.
Let me start by reinforcing what you already know, that the current
formula used for Medicare physician reimbursement is dangerously
flawed. This fact has been openly recognized by the Administration and
must be fixed legislatively by the U.S. Congress.
Pennsylvania physicians, the backbone of Pennsylvania's health care
delivery system cannot afford any additional payment cuts. Without a
doubt, the latest scheduled Medicare reimbursement cuts couldn't have
come at a worse time.
Pennsylvania physicians are caught in a vice. We have very low
health insurance reimbursement. National commercial insurance payment
norms are 40 percent to 50 percent higher than Pennsylvania's
commercial insurance payment levels. We also have extremely high
physician practice costs driven in large part by runaway professional
liability premiums. With such low commercial health, Medicaid and
Medicare+Choice payments, reduced Medicare fee-for-service payments may
be the last straw.
The latest round of payment cuts will make Pennsylvania's Medicare
practice climate untenable. With 17 percent of its population eligible
for Medicare one of the highest in the nation, Pennsylvania's
physicians have already suffered a $128.6 million hit, or $4,074 per
physician, as a result of the 2002 Medicare payment reduction. If not
corrected, the flawed formula will cost Pennsylvania physicians another
$553 million or $17,396 per physician for the period 2003-2005. They
simply cannot afford these payment cuts.
In addition to the reduction in the Medicare conversion factor
other important elements of the formula work against Pennsylvania
physicians. As mandated by Congress, the Medicare payment formula is
resource based. In other words relative value units for work costs,
practice costs and professional liability costs are to reflect the
physician's true expense of delivering a service to a Medicare
beneficiary. This is not what is happening. The payment formula does
not account for the actual costs of delivering care.
For example, from January 1997 to September 2001, major
professional liability carriers in Pennsylvania increased their
liability insurance rates between 80.7 percent and 147.8 percent. Even
before the horrible terrorist attacks on September 11, rates were
already climbing at a significant rate. Since then, medical liability
insurance rates have increased further. In 2002 major carriers
increased rates between 40 and 50 percent, followed by similar
increases for 2003.
The Medicare payment formula on the other hand has not kept pace.
Professional liability relative value units and its associated
geographic adjuster (which is designed to differentiate costs to
practice medicine in a defined geographic locality) are based on data
collected for the period 1996 through 1998. In 2004 when relative value
units and the geographic adjusters are to be updated as mandated by
Congress, the data collection period will run from 1999 through 2001.
Our present liability cost increases will not work their way into the
formula until 2007 and 2009. It is just inconceivable that in an age of
computers, data reflecting the current cost of liability insurance is
not being used to determine current payment rates. So as you can see
not only does the current formula short change physicians from a
professional liability perspective, but also will continue to short
change physicians for many years. Additionally, for the 2001-2003-
payment period the weight of the geographic adjuster as a percent of
the total geographic adjuster weight has been reduced from 5.6 percent
to 3.2 percent. As professional liability costs continue drive practice
costs this trend should be going the other way.
To exacerbate this situation further for many Pennsylvania
physicians, the current payment formula would have you believe that the
costs of professional liability insurance and other practice costs are
less than the national average costs incurred by physicians in other
Medicare carrier payment jurisdictions. If one is the national average
geographic adjuster, most of Pennsylvania falls under the average i.e.
.989 for work relative value units, .929 for practice relative value
units, and .774 for professional liability relative value units. Again,
this has the ultimate outcome of further reducing Medicare payment in
Pennsylvania.
In addition to the Medicare payment formula problems, Pennsylvania
physicians are also faced with other specific circumstances that act to
dissuade physicians from participating in Medicare.
First, our state does not allow for balance billing of Medicare
beneficiaries. We are one of only a few states that do not permit
Medicare non-participating physicians to balance bill patients. This
limits the choices physicians can make regarding the billing of
Medicare beneficiaries with higher incomes.
Second, because of a dual eligible exclusion in Pennsylvania,
Pennsylvania Medicaid has opted not to pay for Medicare beneficiary
deductibles and co-insurance. Dual eligibles are the poorest and
sickest Medicare beneficiaries. This creates several problems including
non-payment to the physician community for the 20 percent co-insurance
and the $100 deductible as well as increasing the number of dual
eligibles who seek care in the hospital emergency room rather than
through a physician's office.
And third, the rates paid by a number of commercial payers
(including automobile insurance) in Pennsylvania are tied either
directly or indirectly to the payment rates paid by Medicare. If
Medicare fees are decreased these other insurers will follow suit,
exacerbating even more the health care reimbursement crisis in
Pennsylvania and the resulting exodus of even more physicians from the
Commonwealth. Pennsylvania already has 729 boroughs and townships
designated by the federal government as ``medically underserved.''
Exodus of additional physicians will serve to create more medically
underserved areas in the Commonwealth.
But, the Medicare cuts alone did not create such a disastrous
situation that nearly shut down health care in numerous pockets of
Pennsylvania. Instead, the litigious climate in Pennsylvania has made
our great Commonwealth the second worst in the country in terms of
medical liability insurance payouts. According to the National
Practitioner Databank, Pennsylvania's total payout for medical
liability claims in 2000 was more than $352 million. That's nearly 10
percent of the national total, yet our state's population makes up less
than five percent of the national population.
In Philadelphia alone, the median jury verdict from January 1994
through August 2001 was $972,909. Excluding Philadelphia statistics,
the median jury verdict for the rest of the state was $410,000.
Chairman Specter, while I understand that the liability insurance
crisis is complex, in order to preserve the fragile doctor-patient
relationship, we must evaluate the need for reasonable tort reforms
much like California adopted in the 1970s.
California's landmark medical liability law, known as the Medical
Injury Compensation Reform Act (MICRA) of 1975, proved that fair and
equitable compensation for those negligently injured, within reasonable
limits, could stabilize the insurance marketplace while maintaining
access to quality health care.
After more than a quarter of a century, MICRA has proven itself as
an effective tool for limiting runaway litigation costs while
maintaining access to health care for all. It also has enabled health
care professionals to focus on providing high quality care without
engaging in costly defensive medicine.
In 2001, when the Pennsylvania Medical Society commissioned a study
comparing the cost of liability insurance in California's highest rated
area compared to Pennsylvania's highest rated area, it was clear that
MICRA was working. At that time, a Pennsylvania orthopedic surgeon
could expect to pay on average $96,199, while the same doctor in
California could expect to pay $36,310. A neurosurgeon in Pennsylvania
at that time would have expected to pay $111,296, while the same
neurosurgeon in California would have spent $58,164 for coverage.
Similar results could be shown for other specialties.
The time has come to adopt the California MICRA model on a national
level. We must find a way to adopt a reasonable ceiling on non-economic
damage awards and a sliding scale on attorney fees to bring a degree of
certainty and predictability to the insurance market, as well as to
ultimately preserve the fundamental doctor-patient relationship.
Chairman Specter, I commend you for your continued interest in
addressing the flawed Medicare formula at a time when health care can
scarcely afford cuts anywhere. As you investigate this further, I would
hope that you would also play a significant role in fixing the
liability insurance crisis as well.
Thank you for your time. I would be happy to answer any question
you might have.
STATEMENT OF RICH ANDERSON, CHIEF EXECUTIVE OFFICER,
ST. LUKE'S HOSPITAL
Senator Specter. Thank you very much. We turn now to Mr.
Rick Anderson with St. Luke's Hospital and Health Network. He
has been there for 17 years, has been president and CEO since
1986. He has a master of public health from the University of
Pittsburgh, and an undergraduate degree from the University of
Illinois.
Mr. Anderson, thank you for joining us, and we look forward
to your testimony.
Mr. Anderson. Good morning, Senator. Good morning members
of the committee. I appreciate the opportunity to be here. Just
a brief background about St. Luke's. We are a nationally
recognized organization. In the past 5 years we have received
11 national awards. We have five hospitals, soon to be six. We
are in eight counties in Pennsylvania, one in New Jersey.
We have been recognized in U.S. News and World Report for
consecutive times for our open heart surgery program. We have
strategic partnerships at the University of Pennsylvania Health
System, programs in trauma and medical education and cancer. We
are certainly a major teaching hospital, over 110 residents. We
have had growth in market share over the last 15 years,
consecutive years, and significantly for us, our cost structure
is over 95 percent, so by any measure, what I am trying to
establish for you and your committee is that we are a very
successful organization.
Yet despite the success that we are having right now, we
are struggling hard to maintain margins, and we certainly need
these margins for investments and other essential services and
labor issues that we are facing.
In 2001, 40 percent of our patient revenues came from
Medicare, and that certainly is a significant number, and when
you consider the fact that in our State of Pennsylvania,
populationwise we are the second oldest State, that puts the
hospitals, all the hospitals in a very difficult position when
you consider the reimbursement issues.
In our State, it is a matter of fact, it is a matter of
record that physicians are leaving our State because of our
high Medicare population to practice in other States where
there is a more favorable payer mix, and that is an issue that
certainly needs to be addressed, and respectfully to Mr.
Scully's testimony about the $1\1/2\ billion that was raised at
the hospitals, I do not know the exact context, probably a
billion of that money that he speaks about was lost in
inappropriate outlier payments, and certainly that is an issue
that needs to be addressed.
The average margin in our State of Pennsylvania is minus 3
percent. Seven out of 10 hospitals have negative patient care
margins, so I do not know what the country's averages are, but
in our State, we are hurting. St. Luke's margins, despite our
success, we have about a 3.68 percent plus margin, so that puts
us in a nice position.
So imagine, if we are doing what we are doing and we are
doing it very well, what are some of these other hospitals, not
only in our State but in our country, facing? What I am
afraid--I mean, this is our health care world. It is not meant
to be whining, but the financial plight of our Nation's
hospitals is real, and it is serious, and I am afraid in the
next few years we are going to have a sign, and this is
hospital jargon, put on our doctors' offices, our hospitals,
DNR, do not resuscitate.
We need to get this fixed. I am certain this is going to
occur, but nonetheless, it needs to happen quickly. We had a
certain significant issue with the Balanced Budget Act, I will
not dwell on that, and we got some relief through the
Refinement Act, but it was not enough. It was only a 25 percent
relief.
If I do not communicate one other issue today to this
committee, I think it is essential that you understand that
with the reimbursement the way it is, and the way it is going,
despite all the ratios and how we hide behind formulas and what
the general numbers are, and the extremely high expenses--I
mean, we are in the midst, and it was used earlier, of a
perfect storm. We are out there on the ocean. We do not see it
coming, but it is happening, and it is coming, and we need to
fix it.
The extraordinary expenses that we have, for example--I
have got 1 minute--medical liability costs. I will not go into
that. We all know what it is, but we all want to be number 1 in
everything we do, and we want Pennsylvania to be number 1.
Well, we are number 1. We are the worst State in the Union for
the malpractice situation that we are in, and that has to be
fixed.
President Bush has spoken about it. He is on target. I
applaud him. We have labor shortages, nurses. We have a gap
between what we are paid for Medicare and what we receive in
terms of--what we have to pay our nurses. We have drug costs,
and we all understand about the pharmaceutical business and the
industry.
prepared statement
I want to summarize by saying that in the last year--I am
sorry, 13 years, we have only received one full market basket
increase in 13 years. That is not fair. That needs to be fixed,
and it needs to be fixed as soon as we are able to talk through
the issues.
Thank you, Senator. I appreciate the opportunity to come
here. I am honored.
[The statement follows:]
Prepared Statement of Richard A. Anderson
Mr. Chairman and Members of the Subcommittee: I am pleased and
honored to be here today to discuss various aspects of Medicare
reimbursement. My name is Richard A. Anderson and for almost 18 years I
have served as President and Chief Executive Officer of St. Luke's
Hospital & Health Network. To begin my remarks, and to provide you with
background that will help you to understand my perspective, I would
like to take a few moments to describe our organization.
St. Luke's Hospital & Health Network is a fully integrated,
nationally recognized, health care network based in Bethlehem,
Pennsylvania. In the next few weeks, we expect to sign an agreement
with a neighboring hospital that will make us the largest health care
network in the Greater Lehigh Valley. Our Network is presently
comprised of five, soon to be six, acute care, non-profit hospitals.
The Network encompasses more than 1,400 physicians, 1,020 licensed
beds, more than 6,200 employees and 40,000 annual patient admissions
and is the second largest employer in Lehigh County. Offering 72
medical specialties, the Network also includes a home health agency, an
ambulatory surgery center, numerous outpatient facilities and various
other related health organizations. St. Luke's provides direct services
in Lehigh, Northampton, Carbon, Schuylkill, upper Bucks, eastern Berks,
upper Montgomery and Monroe counties in Pennsylvania and Warren County
in New Jersey. St. Luke's Hospital--Bethlehem Campus is the Network's
tertiary hub and has been recognized in 1997 and 2001 in the highly
coveted 100 Top Hospitals: Benchmarks for Success studies. These
studies objectively measure, among other criteria, quality care and
efficient management.
Areas of special expertise available in the Network include:
trauma, open-heart surgery, high-risk pregnancy, oncology,
interventional radiology, robotic surgery, geriatrics and community
health. Our open-heart surgery program has been recognized four
consecutive times, beginning in 1999, in U.S. News & World Report's
annual America's Best Hospitals rankings and recently four times by the
100 Top Cardiovascular Hospitals: Benchmarks for Success studies. In
addition, our Intensive Care Unit has also received national
recognition for superior care.
St. Luke's developed the first, and only, strategic partnership in
the Greater Lehigh Valley with the University of Pennsylvania Health
System (UPHS). St. Luke's and UPHS have successful cooperative
agreements in trauma, cancer and medical education. Pediatric
specialists from St. Christopher's Hospital for Children in
Philadelphia also work in cooperation with St. Luke's specialists to
provide a full range of specialty pediatric services in Bethlehem. Both
UPHS and St. Christopher's have also been recognized in U.S. News &
World Report's annual listings of America's Best Hospitals.
St. Luke's is a major teaching institution and offers 10 fully
accredited residencies in multiple specialties. St. Luke's has both
allopathic and osteopathic residencies in family practice, emergency
medicine and obstetrics and gynecology. We also have residencies in
general surgery, internal medicine and podiatry; plus a transitional
year and an osteopathic internship.
St. Luke's is one of only 400 members of the prestigious Council of
Teaching Hospitals and Health Systems. Residents who complete their
training at St. Luke's routinely achieve a 100 percent pass rate on
post-residency national board examinations.
By all accounts, St. Luke's is a very successful organization. We
have experienced growth in market share for more than 15 consecutive
years and, by independent measure, our cost structure nationally ranks
well above the 95th percentile. Simply stated, we are an efficient,
cost-effective health care network that provides our patients and the
citizens of the Greater Lehigh Valley with excellent medical outcomes.
Yet, we are struggling to maintain a sufficient margin to enable us to
make investments required to remain a nationally recognized health care
provider.
In 2001, 46 percent of St. Luke's net patient revenue came from the
Medicare program. This is not surprising, since Pennsylvania has the
nation's second oldest population. When Medicare reimbursement is
inadequate physicians leave states with high Medicare populations to
practice in states with a more favorable payer mix. Currently, we are
seeing an increasing number of physicians in our region moving to other
states. The strength and security of the Medicare program is not only
essential to the beneficiaries in our region, but to the hospitals and
physicians providing care.
Let me now further address the issue of Medicare reimbursement. It
probably has not escaped your notice that hospitals throughout
Pennsylvania are continuing to experience severe financial pressures.
According to 2001 data collected by the Pennsylvania Health Care Cost
Containment Council (PHC4), the average patient care margin in the
state stands at a negative 3 percent. Seven in ten Pennsylvania
hospitals--or 192 of the state's 274 hospitals--have a negative patient
care margin.
Thankfully, St. Luke's, due to its extremely low cost structure, is
more fortunate. Our margin for the 2001 fiscal year, as published in
this report, was 2.83 and averaged 3.68 for the three-year period
covered in the document. While this certainly is better than
experiencing a loss, one can readily see that these margins, from a
business perspective, are razor thin. Most of us, if given the choice
to invest in a business venture with these slim margins, would politely
decline the opportunity. Nonetheless, this is the health care world in
which St. Luke's and other health care systems must function. At a
minimum, we must have even these slim margins to buy new equipment,
upgrade our facilities, bring new and advanced technology to our
community--investments that are so important if St. Luke's and others
in the not-for-profit world are to meet its communities' health care
needs.
The financial plight of our nation's hospitals is real. We are not
crying wolf. The wolf is no longer at the door, he is in our living
room and he is eating our dinner. Will we be his next meal?
The Balanced Budget Act of 1997 cut Medicare payments to our
nation's hospitals by nearly $4 billion over the past five years. St.
Luke's reduction was projected at $16.5 million through fiscal year
2000 and $33.8 million through fiscal year 2002. Fortunately, as I
previously mentioned, St. Luke's operates well above the 95th
percentile for efficiency. If one of the nation's most efficient
hospitals is so drastically and so negatively impacted by this
legislation, what then are other hospitals experiencing?
The subsequent Balanced Budget Refinement Act of 1999 and the
Benefits Improvement and Protection Act of 2000 thankfully restored 25
percent of the cuts across the nation. At St. Luke's, after this
legislative relief, we saw our reimbursement reduced by $13.6 million,
rather than $16.5 million, through fiscal year 2000. Through fiscal
year 2002, St. Luke's BBA-related reduction totaled $24.6 million, down
from $33.8 million. One can conclude that these are still rather
substantial reimbursement losses for St. Luke's, which was previously
noted as operating on a razor-thin margin.
Medicare reimbursement reductions, extraordinary expense pressures
and other significant factors are converging to threaten our nation's
hospitals. I cannot over emphasize the significance of these issues as
they relate to St. Luke's and other health systems' futures.
These issues include:
Medical Liability Costs
Professional medical liability costs at St. Luke's have risen 133
percent, or more than $4 million, in just two years, bringing the total
annual premium to $8 million.
As I speak, 14 of our 22 active, private practice obstetricians are
telling us they have to either leave Pennsylvania or seek financial
security through hospital employment. We can not afford to employ them
due to the previous factors I have been discussing.
Anesthesiologists' medical professional liability insurance rates
are rising faster than those of any other physician group. Not only are
anesthesiologists impacted by a 46 percent increase in malpractice
premiums, their plight is further compounded by the exodus of other
physician specialists from Pennsylvania due to the drastic reduction in
Medicare reimbursement rates. Fewer physicians result in fewer
procedures for anesthesiologists. In the last two years,
anesthesiologists' Medicare reimbursement rates have also been reduced
by 6 percent, while their expenses continue to escalate at a
unreasonable rate.
Pennsylvania's horrific malpractice insurance climate has
effectively eliminated the ability of hospitals and physicians to
recruit new physicians. Eighty-five percent of the graduate orthopedic
surgery residents who completed training programs last year in
Pennsylvania hospitals would not even consider applying for a permanent
position in our state.
Most recently, general practitioners and pediatricians say
professional medical liability insurance is getting more difficult to
obtain while premium costs are increasing 25 to 50 percent per year on
average. This rate of increase is also consistent with what St. Luke's
has experienced.
The largest pediatric group in a community near St. Luke's
Quakertown Hospital has spent more than a year trying to recruit new
doctors without success. Last summer the practice stopped accepting new
patients even though it is located in an area with significant
population growth. Several weeks ago, the practice informed parents it
would no longer be able to schedule well-baby visits for children over
the age of 2 since the doctors needed to devote full time to caring for
sick children and administering immunizations for children under the
age of 2.
Yet another financial ramification of the medical liability and
Medicare reimbursement crisis, and what is generally an unspoken
consequence, is that individual hospitals are being forced to subsidize
certain hospital-based specialists to the tune of millions of dollars a
year. This is also a fact of life for St. Luke's. Radiologists,
pathologists, emergency room physicians and anesthesiologists,
specialists our patients depend on, can no longer afford to practice in
Pennsylvania because of the combination of financial pressures of
Medicare reimbursement and medical malpractice premiums.
The past year, three of six neurosurgeons serving our hospital left
to practice in other states. The three remaining neurosurgeons who
practice at our hospital and our trauma center came to us and requested
that we either employ them or they would be forced to leave the state.
They simply could not cover their expenses in Pennsylvania because of
insufficient Medicare reimbursement and escalating malpractice coverage
costs. We employed them in order to keep our trauma center open. This
last event was the most recent untoward event not anticipated in our
budget and the financial consequences of this are yet to be realized.
Lest you not fully comprehend the gravity of the exodus of
neurosurgeons, there are only seven neurosurgeons to serve our region's
1.5 million citizens. Limited access to care is escalating for many
people, and is increasing as a real threat to our citizens' health.
Our President's recent speech in Scranton, Pennsylvania on January
16 was right on target relative to the major issues I have just
discussed. He pointed out that, ``There are too many lawsuits in
America, and there are too many lawsuits filed against doctors and
hospitals without merit.'' He went on to caution the American people
that they must understand that, even though many lawsuits are, in his
words, ``junk lawsuits'' and ``they have no basis,'' they are still
expensive to our health care system.
President Bush further observed that, ``The direct cost of
malpractice insurance and the indirect cost from defensive medicine
raises the federal government's health care cost by at least $28
billion a year.'' He also warned that, ``When a physician can not pay
insurance premiums and, therefore, can not practice, somebody is going
without health care.'' Mr. President, I could not agree with you more.
Labor Shortages
In the current Medicare reimbursement climate, escalating salary
expenses are especially onerous. Labor shortages are forcing hospitals
to raise salaries to retain existing workers and to attract new
employees. For example, St. Luke's average hourly wage increased 9.4
percent in the last two years. During this same period, the actual
payment rate increase received from Medicare was only 5.7 percent. This
3.7 percent gap translates into a $4,300,000 annual shortfall for St.
Luke's.
In 2000, the supply of RNs in Pennsylvania was estimated at 104,000
nurses while the demand was for nearly 110,000 nurses. This reflects a
5 percent shortage that is anticipated to grow to 30 percent by 2020.
With this shortage comes increased upward pressure on nursing salary
expenses, while factors such as compressed Medicare reimbursement
continue to strain our resources.
Thankfully, St. Luke's has been able to maintain a low vacancy rate
because of our competitive salaries and because we run a cost-effective
hospital. St. Luke's 8 percent vacancy rate for registered nurses is
well below the 13 percent national average reported by the American
Hospital Association.
Our low vacancy rate can also be attributed to our ability to
recruit nurses from St. Luke's School of Nursing, the nation's oldest,
hospital-based, continuously operating, fully accredited diploma
program. In addition, St. Luke's School of Nursing at Moravian College
in Bethlehem offers a baccalaureate degree in nursing. More than 800
students have made inquiries about our nursing education programs in
the last few months.
Pharmaceutical Costs
St. Luke's and other hospitals have experienced significant
increases in pharmaceutical costs--while trying to recover from the
reductions of the Balanced Budget Act and inadequate Medicare
reimbursement. The increase in pharmaceutical expenses has cost
Pennsylvania hospitals nearly $400 million over the past four years.
St. Luke's has experienced a 38 percent increase in pharmaceutical
costs during this period, increasing expenses from $9.5 million to $13
million a year.
Medical Technology
It is no secret that health care is, in large part, driven by
technology. We all expect hospitals to have the latest medical
technology. Patients at St. Luke's are no exception. In the last five
years, St. Luke's has invested more than $121 million in capital
projects across our Network. This represents 10 percent of our Network
operating budget.
Bioterrorism Readiness
In the wake of September 11, every hospital in the country is
assessing its ability to care for patients in the aftermath of a
bioterrorism attack. Our world has certainly changed since that ghastly
September day. While it is painful and creates a sense of frustration
to even contemplate a bioterrorism attack, as responsible health care
providers we must be prepared for this eventuality. This preparation
further strains hospital budgets already at a breaking point. Please, I
implore you to consider allowing hospitals to play a responsible role
through the private sector in assisting our government in this
endeavor. It is essential, therefore, that adequate funding be provided
for this effort.
Insufficient Medicare reimbursement and the lack of recognition of
additional expenses I have just listed, force providers to shift the
burden of increasing Medicare shortfalls to non-governmental payers.
Inadequate Medicare reimbursement is really nothing more than a hidden
tax.
Now, let us cover the issue of how Medicare reimbursement is
calculated. On October 1, 2002, at the start of the current federal
fiscal year, providers saw additional reductions in the inpatient
market basket. The inpatient market basket is intended to measure the
various cost components of goods and services related to the health
care industry.
We have only received one full market basket update in the last 13
years. Further compounding the problem is the simple fact that the
market basket does not reflect true increases in health care costs. It
is absolutely essential, given these factors, that Medicare provide
hospitals with Medicare increases equal to the true market basket.
Medical inflation, as measured by the Medicare market basket during
the last five years, was 16.3 percent on a compound basis. The Medicare
increase during the same five-year period was only 11 percent,
resulting in a compound deficit of 5.3 percent. Had St. Luke's received
a full market basket increase during this period, Medicare
reimbursement in just the current year would have increased by
$4,000,000.
Our hospitals are in financial crisis.--We simply can not continue
to survive, to offer full access to care, to provide a full continuum
of services in this oppressive financial environment. We need to
strengthen the bridge between Medicare reimbursement and hospitals'
actual expenses before it collapses and our nation's hospitals are
swept away in a raging current of financial chaos. To restate the
obvious, insufficient Medicare reimbursement results in a hidden tax.
Certainly, long-term solutions to achieve equitable Medicare
reimbursement and to address the medical liability crisis will require
ongoing discussions. There is no easy fix. Meaningful reform will take
time, patience, understanding and continuing education. In our country,
consequential change takes place not by revolution, but by evolution.
However, in the interim, we must stop the hemorrhaging occurring in our
American health care system caused by the convergence of the
professional liability crisis, the expense pressures that I have
outlined and insufficient Medicare reimbursement.
While I understand this subcommittee does not directly deal with
medical malpractice insurance rates, it is imperative that you
understand how the current premium crisis exacerbates the effects of
insufficient Medicare reimbursement. Let me further address the medical
malpractice crisis, an issue that invokes great passion for me with
very good cause. Anyone who reads a newspaper is aware that
Pennsylvania has the nation's worst malpractice insurance climate.
Having a malpractice case tried in the Philadelphia court system is
often akin to the lawyers and plaintiffs winning the lottery or, worse
yet, an economic death sentence for hospitals and physicians. Runaway
jury verdicts and multi-million dollar awards have become the norm. We
desperately need reform to balance the rights of those who have
legitimately been harmed with the rights of those who are unfairly,
excessively and frivolously sued.
I speak with authority on this subject. In October 2000, a
Philadelphia jury returned a verdict in the amount of $100 million
against multiple defendants including St. Luke's Hospital. Previous to
this time St. Luke's had an exemplary track record in malpractice
actions. Our hospital was a part of this suit only because of alleged
``ostensible agency.'' A patient's mother perceived that one of the
private-practice physicians who treated her infant was employed by the
hospital.
The patient had been cared for in our Neonatal Intensive Care Unit
for 90 days and none of this care was faulted in any respect. Although
we would have preferred to challenge this award in the court system,
our insurance carrier took the matter from our hands and settled the
claim for a far lesser, but substantial, amount. In Pennsylvania, 53
cents of every malpractice settlement goes to the lawyers and to pay
administrative costs. Other than the attorney, I have no idea how the
remainder of the settlement was dispersed. The child's biological
mother, who had no contact with the child, did not bring the suit and
who did not receive any payment from the settlement, is incarcerated
for drug-related offenses. The adoptive parents of the minor plaintiff
were also not part of the legal action and wanted no part of the
settlement.
It is no exaggeration to say that if we had been required to pay
the full award, our 130-year-old hospital would have ceased to exist.
We would have been bankrupt. This misplaced attempt at social
reengineering is corrupt and utterly wrong. It allows for an excessive
redistribution of resources from the medical care system to a few
individuals. If this system is allowed to continue, access to quality
health care will become very limited for thousands and thousands of our
citizens.
The fallout from this travesty of justice continues to haunt our
organization in that we have been unable to secure affordable excess
malpractice insurance. We were also forced to establish our own captive
insurance company in order to obtain primary liability coverage. Prior
to the jury's $100 million award, St. Luke's annually paid $280,000 for
a $25 million excess coverage policy. At present, St. Luke's pays its
captive insurance company $3 million for a $3 million excess policy. In
the current climate, no insurance company will provide St. Luke's with
excess coverage.
The medical liability crisis is not just a financial issue, it is
also a moral and ethical issue that we must address. We must ask
ourselves, it is right to take $100 million out of the health care
system and give it to one family--after the lawyers receive their 40 or
more percent?
This social injustice and inequity in the system must be changed.
This system, if allowed to continue unchallenged, is creating all of
the elements of the ``perfect storm'' which our American health system
may not survive.
In closing, I am asking Congress to reverse the inpatient market
basket cuts that went into place on October 1, 2002 and to provide
adequate reimbursement to hospitals. There is the need for full market
basket updates that accurately reflect the current costs hospitals are
facing. It is my understanding that The Hospital and Health System
Association of Pennsylvania has written to the Centers for Medicare and
Medicaid (CMS) asking for changes to the current market basket
methodology. I am pleased that CMS implemented the recommendation to
use a re-based market basket, updating from 1992 data to 1997 data and
revising the calculation by replacing some of the proxies that are used
to measure cost changes. While the new market basket is an improvement,
I am still concerned that the market basket does not reflect the true
increases in costs for technology, recruitment, professional liability
and other items.
I would urge CMS to reconsider the proxy used for professional
liability insurance cost growth. As I mentioned earlier, hospitals,
particularly those in Pennsylvania, have experienced significant
increases in the cost of medical malpractice insurance. It is my
understanding that CMS has contracted with the economic information
firm, DRI-WEFA to collect malpractice insurance premium data from a
sample of hospitals and plans to combine this information with their
current proxy source once the data is collected. This potentially
flawed methodology could be catastrophic for American health care. It
has been recommended by The Hospital and Health System Association of
Pennsylvania that DRI-WEFA collect data from Pennsylvania hospitals
including those with trauma centers. These numbers will be far higher
than those selected at random across the United States. I support this
recommendation. Premium increases for hospitals in Pennsylvania with
trauma centers have skyrocketed and it is essential these numbers be
reflected in the data.
It is important to note that, according to a 2001 study by the
Pennsylvania Legislative Budget and Finance Committee, Pennsylvania's
acute care hospitals are the second most cost-efficient in the nation
based on Medicare inpatient costs per discharge. The fat is out of the
Pennsylvania health care system. We are now experiencing cuts to muscle
and bone and it hurts, it really hurts. Something has got to give and
we need your help. We are trying hard to contain costs but, many of
these expenses are out of our control.
My final comments would be to ask the members of the subcommittee
to consider enacting legislation that would result in the following
outcomes:
--More timely increases in Medicare reimbursement
--especially those related to the introduction of new technology.
Presently, Medicare's long delays in adding new technology
to its reimbursement formulas ``punishes'' hospitals that
are financially able to provide patients with leading-edge
technology to improve outcomes.
--Full Medicare reimbursement for true health care inflation.
--Timely increases in Medicare payments that reflect increases in the
costs of malpractice insurance
--these costs should be geographically adjusted and state specific.
I appreciate the subcommittee's focus on issues affecting our
nation's hospitals. In particular, I'd like to thank Senator Specter
for his years of understanding and support for the Medicare program and
the beneficiaries who rely so heavily on the Medicare program.
It is only through further cooperation in an atmosphere of mutual
respect, that our hospitals and our elected officials can work together
to solve the challenges before us. Thank you.
Senator Specter. Thank you, Mr. Anderson. Thank you very
much.
STATEMENT OF KIRK NORRIS, PRESIDENT, IOWA HOSPITAL
ASSOCIATION
Senator Specter. We now turn to Mr. Kirk Norris, president
and CEO of the Iowa Hospital Association. Mr. Norris served as
a director of the Southeast Full Community School District,
1979 graduate of Simpson College, and a 1984 graduate of the
Drake University School of Law.
Thank you for joining us, Mr. Norris, and we look forward
to your testimony.
Mr. Norris. Good morning, Mr. Chairman, and also I want to
give my thanks and appreciation for your invitation and for
Senator Harkin's invitation to speak here today on the critical
subject of Medicare payment policy.
In various professional positions for the past 16 years at
the Iowa Hospital Association it has been my privilege to
represent 116----
Senator Specter. I am sorry, but I am going to have to
interrupt you. We will start the clock again. They are about to
go to a vote on Miguel Estrada, and I am going to have to
excuse myself for a few minutes. I will be back as soon as I
can. I am sorry for the interruption, but I just have to do
that. We will stand in recess for a few minutes.
We will resume the hearing. Again, my regrets, but in the
interim Senator Harkin has joined us, so he will be in a
position to hear your testimony, Mr. Norris.
Mr. Norris. Thank you.
Senator Specter. You were in mid-sentence. Can you pick it
right up there?
Mr. Norris. That is why it is written down.
Thanks again for starting the clock over, and thanks for
the invitation of both you and Senator Harkin to come today and
speak.
In various professional positions for the past 16 years
with the Iowa Hospital Association, it has been my privilege to
represent 116 private nonprofit and publicly governed community
institutions in a variety of legislative, judicial, and other
public forums. It is my pleasure to come before you this
morning to address the impending health care crisis in Iowa
that is being driven by payment policy for the Medicare
program.
The premise of my presentation today is that no policy
difference exists between the necessary Medicare payment
corrections for physicians and the necessary payment
corrections for hospitals. In consideration of the time
limitations for presenting this morning, I am focusing on the
fact that bad payment policy is just that, bad payment policy,
regardless of the recipient of the policy.
In the circumstance at hand, the primary recipients of this
bad policy are the hospitals and physicians of Iowa.
Ultimately, the impact of any payment policy decision in
Medicare is borne by Iowa's 475,000 Medicare beneficiaries. It
impacts Iowa seniors every time a hospital is unable to staff a
physician at a rural clinic, when 32 out of 36 hospital school
nursing graduates choose to leave the State for better starting
salaries, and every time a clinic or hospital fails to recruit
a needed physician specialist to replace a retiring physician
as medical recruits examine Medicare payments in Iowa and
determine that Iowa is not a place they want to practice when
50 percent of all revenues come from Medicare.
These issues are not new or without previous discussion in
various Medicare payment policy forums, as was recognized in
previous comments today. In fact, the details of these issues
have all been discussed in a series of Medicare Payment
Advisory Commission reports to Congress since 1999.
I am also aware that Congress, and particularly the U.S.
Senate, understands these issues. Evidence of this fact is
found in the fiscal year 2003 omnibus budget bill currently
headed to conference committee. Both the hospital and physician
payment corrections inserted in the fiscal year 2003 omnibus
bill by Senate finance chair Grassley and supported by Senator
Harkin and the rest of the U.S. Senate are an acknowledgement
that these payment policy issues coexist and need further
discussion and address in the 108th Congress. The Iowa Hospital
Association supports Senator Grassley's and Senator Harkin's
approach to these issues.
MedPAC and the Director of CMS have evaluated the need and
called for change in the methodology for physician payment.
MedPAC has also considered the need for change in the
methodology for hospital payment and recognizes its potential
for positive impact in States like Iowa.
The predominant policy issue affecting hospital payment in
Iowa and other similar states is the wage index. As you know,
the wage index is the major determinant for the amount of
payment a hospital receives for its services. Policy
corrections for the wage index are apparent, and should be
acted on by Congress. Medicare reform should encompass payment
policy reform to assure that high quality, efficient care is
not jeopardized but, rather, is rewarded.
Iowa's efficient health care system, which also ranks in
the top 10 in quality, is in serious jeopardy of sustaining
itself without correction of Medicare payment policy for both
physicians and hospitals. Iowa hospitals currently subsidize
the Medicare program in excess of $80 million per year. This
number is growing, and will leap in disproportionate amounts as
payment shortfalls mount for skilled nursing services, home
help, and outpatient care.
As with the payment methodology for inpatient care,
Congress has moved these other services to fixed payments, and
only the time-limited payment safety measures of the Benefit
Improvement and Protection Act are preventing the geometric
accumulation of losses for certain services in specific sizes
of hospitals. For other hospitals with these same services,
significant losses are mounting.
The action of Congress in these other areas reinforces the
need to immediately address policy mistakes in mature patient
methodologies like inpatient care. These payment flaws are
apparent and have long been identified, but CMS needs direction
from Congress on the appropriate solutions, otherwise immediate
potential for significant curtailment of access to services for
Medicare beneficiaries exists in Iowa and many other States.
This potential for seniors exists at a time when Iowa has the
fifth highest percentage of citizens over age 65, and the
highest percentage of population over 85 in the country.
prepared statement
The Iowa Hospital Association appreciates the additional
focus that this subcommittee brings to the topic of necessary
payment corrections in the Medicare fee for service system for
the interrelated services provided by hospitals and physicians.
I am pleased to provide background information for any
testimony I have given today, and answer any questions related
to the same.
Thank you for the committee's time, Mr. Chairman.
[The statement follows:]
Prepared Statement of J. Kirk Norris
Good Morning Mr. Chairman, Ranking member Mr. Harkin and members of
the committee and thank you for providing me an opportunity to speak on
the critical subject of Medicare payment policy.
In various professional positions for the past sixteen years at the
Iowa Hospital Association, it has been my privilege to represent 116
private non-profit and publicly governed community institutions in a
variety of legislative, judicial and other public forums. It is my
pleasure to come before you this morning to address the impending
healthcare crisis in Iowa that is being driven by payment policy for
the Medicare Program. The premise of my presentation today is that no
policy difference exists between the necessary Medicare payment
corrections for physicians and the necessary payment corrections for
hospitals.
In consideration of the time limitations for presenting this
morning, I am focusing on the fact that bad payment policy is just
that, bad payment policy, regardless of the recipient of the policy. In
the circumstance at hand, the primary recipients of this bad policy are
the hospitals and physicians of Iowa. Ultimately, the impact of any
payment policy decision in Medicare is borne by Iowa's 475,000 Medicare
beneficiaries. It impacts Iowa seniors every time a hospital is unable
to staff a physician at a rural clinic, when 32 of 36 hospital school
nursing graduates choose to leave the state for better starting
salaries and every time a clinic or hospital fails to recruit a needed
physician specialist to replace a retiring physician as medical
recruits examine Medicare payments in Iowa and determine that Iowa is
not a place they want to practice when 50 percent of all revenues come
from Medicare.\1\ These issues are not new or without previous
discussion in various Medicare payment policy forums. In fact, the
details of these issues have all been discussed in a series of Medicare
Payment Advisory Commission Reports to Congress since 1999. I am also
aware that Congress and particularly, the United States Senate,
understands these issues.
---------------------------------------------------------------------------
\1\ Iowa Hospital Association Profiles/Databank Program, August
2002.
---------------------------------------------------------------------------
Evidence of this fact is found in the fiscal year 2003 omnibus
budget bill currently headed to conference committee. Both the hospital
and physician payment corrections inserted in the fiscal year 2003
omnibus bill by Senate Finance Chair Grassley and supported by Senator
Harkin and the rest of the U.S. Senate, are an acknowledgement that
these payment policy issues co-exist and need further discussion and
address in the context of the 108th Congress. The Iowa Hospital
Association supports Senator Grassley's and Senator Harkin's approach
to these issues.
Med PAC and the Director of CMS have evaluated the need and called
for change in the methodology for physician payment. Med PAC has also
considered the need for change in the methodology for hospital payment
and recognizes its potential for positive impact in states like
Iowa.\2\ The predominant policy issue affecting hospital payment in
Iowa and other similar states is the wage index. As you know, the wage
index is the major determinant for the amount of payment a hospital
receives for its services. Policy corrections for the wage index are
apparent and should be acted on by Congress. Medicare reform should
encompass payment policy reform to assure that high quality, efficient
care is not jeopardized, but rather is rewarded.\3\
---------------------------------------------------------------------------
\2\ Med PAC Report to Congress, March 2002.
\3\ Med PAC Reports to Congress, March 1999, 2000, 2001, 2002.
---------------------------------------------------------------------------
Iowa's efficient healthcare system,\4\ which also ranks in the top
ten in quality, is in serious jeopardy of sustaining itself without
correction of Medicare payment policy for both physicians and
hospitals. Iowa hospitals currently subsidize the Medicare program in
excess of eighty million dollars per year.\5\ This number is growing
and will leap in disproportionate amounts as payment shortfalls mount
for skilled nursing services, home health and outpatient care.\6\ As
with the payment methodology for inpatient care, Congress has moved
these other services to fixed payments and only the time-limited
payment safety measures of the Benefits Improvement and Protection Act
are preventing the geometric accumulation of losses for certain
services in specific sizes of hospitals. For other hospitals with the
same services, significant losses are mounting. The action of Congress
in these other areas reinforces the need to immediately address policy
mistakes in mature payment methodologies like inpatient care. These
payment flaws are apparent and have long been identified, but CMS needs
direction from Congress on the appropriate solutions. Otherwise,
immediate potential for significant curtailment of access to services
for Medicare beneficiaries exists in Iowa and many other states. This
potential for seniors exists at a time when Iowa has the 5th highest
percentage of citizens over age 65 and the highest percentage of
population over 85 in the country.\7\ The Iowa Hospital Association
appreciates the additional focus that this subcommittee brings to the
topic of necessary payment corrections in the Medicare fee for service
system for the inter-related services provided by hospitals and
physicians. I'm pleased to provide back-up information for any of the
testimony I've given today and answer any question related to the same.
Thank you for the committee's time Mr. Chair.
---------------------------------------------------------------------------
\4\ Healthcare Financial Management Association, Iowa Chapter,
October 2002.
\5\ Med PAC Report to Congress, March 2001.
\6\ Audited Cost Report Data Files, CMS, 1998-2000.
\7\ U.S. Bureau of Census.
Senator Specter. Thank you very much, Mr. Norris, for your
testimony, and for yielding back 17 seconds.
STATEMENT OF JAY KLEIMAN, M.D., M.P.A., FELLOW,
AMERICAN COLLEGE OF CARDIOLOGY, CLINICAL
ASSISTANT PROFESSOR OF MEDICINE,
NORTHWESTERN UNIVERSITY MEDICAL SCHOOL
Senator Specter. Our next witness is Dr. Jay Kleiman, M.D.,
M.P.A., clinical assistant professor of medicine at
Northwestern University Medical School, medical director for
cardiovascular research and development for Pharmacia
Corporation, and a Fellow at the American College of
Cardiology.
He holds a master's degree in public administration from
Harvard University's Kennedy School of Government, received his
M.D. from the University of Michigan, did his post-graduate
medical training at the University of Chicago, National
Institutes of Health, and Georgetown University, and he has
achieved this spectacular resume notwithstanding the
disadvantage of being my first cousin.
He and I are sons of sisters, and I can tell you, he is an
extraordinary doctor and an extraordinary man. Dr. Kleiman, we
are deducting that introduction from your time.
Thank you for coming, Jay, and the floor is yours.
Dr. Kleiman. Thank you, Senator Specter, Senator Harkin,
members of the subcommittee. I am Dr. Jay Kleiman, a
cardiovascular specialist, research scientist, and member of
the American College of Cardiology. I am honored to testify
today on behalf of the American College of Cardiology, and on
behalf of the Alliance of Specialty Medicine, an organization
representing more than 160,000 specialty care physicians.
Mr. Chairman, members of the subcommittee, we have reached
a critical juncture in the evolution of our health care system.
At a time when life-saving scientific advances are being made
in every area of medical care, basic access to quality care is
in jeopardy. This situation has been precipitated by several
factors, one of the most important of which is cuts in Medicare
reimbursement to physicians.
These cuts in reimbursement threaten access to care and
access to quality for our senior citizens, but the impact goes
well beyond Medicare. Most private payers link their fee to the
Medicare fee schedule. When Medicare cuts, so do nearly all
forms of reimbursement, yet the costs of running a practice
continue to increase faster than the rate of general inflation.
As the Medicare population becomes a larger portion of a
practice, the viability of the practice is itself threatened.
As you are aware, last year physicians and other health
care professionals received a 5.4 percent across-the-board cut
in Medicare reimbursement. On March 1, a second cut of 4.4
percent is scheduled. The American College of Cardiology and
Alliance of Specialty Medicine greatly appreciate the language
passed by the Senate last week as part of the fiscal year 2003
appropriations bill which will stave off further cuts for at
least 7 months. We hope the House will act swiftly, before the
additional cut takes place on March 1. This is an important
step toward the solution we seek.
You are well aware of the flaws in the Medicare schedule. I
will not reiterate them here, in the interests of time, but
even if Congress stops the 4.4 percent decrease from taking
effect this year, steep cuts are in store for 2004-2005. By
midway through this decade, Medicare reimbursement could be at
1991 levels and, although today's hearing is focused on
Medicare reimbursement, it is impossible to separate this issue
from the precipitous nationwide increase in medical liability
insurance premiums.
Skyrocketing premiums have created a crisis that is
evidenced by reduced access to orthopaedic surgeons,
neurosurgeons, and trauma centers, by the exodus of physicians
from Pennsylvania, Mississippi, West Virginia, and Iowa, by
increased reliance on already strained emergency departments.
Steep reductions in Medicare and third-party payments,
coupled with the spiraling cost of medical liability insurance,
are coalescing towards a catastrophe that threatens our health
care system. The ultimate victims of this brewing calamity will
be patients.
Many practices are reaching the breaking point. According
to a recent survey of physician practices, more than half will
limit the number of Medicare patients they treat in 2003.
Approximately two-thirds postpone investments in new
technology, and two-thirds will limit practice services or
expansion.
For example, in Chicago, a large cardiology practice
severely limited hours at a free clinic that counsels patients
on managing high cholesterol and lipids, and at a second clinic
that helps patients manage their blood-thinning Coumadin doses.
In Kansas City, cardiology practice delayed a new program
to treat patients with heart rhythm disorders like the one that
afflicted Vice President Cheney last year. Orthopaedic surgery
is in jeopardy in a growing number of States. Fifty-five
percent of orthopaedic surgeons have reduced the scope of
operative procedures due to liability exposure, and 39 percent
avoid performing spinal surgery.
Pennsylvania, as you know, has been particularly hard hit.
Bedford County's only orthopaedic surgeon left the State last
year, and Huntingdon County has just one orthopaedic surgeon to
take trauma calls at two hospitals. In the case of
neurosurgery, an alarming 10 percent of the neurosurgeons in
the United States retired in 2001.
There is impact, too, on the pipeline of physicians.
Applications for medical schools have decreased for 6 years
running, threatening the future supply of physicians.
The American College of Cardiology and Alliance of
Specialty Medicine are heartened that short-term relief from
further Medicare cuts may be on the horizon, but fixing the
flaws in Medicare reimbursement will require an act of
Congress. If CMS does not have the authority to change the
payment formula, then only Congress can solve this issue for
the long term. The Congress must recognize the unacceptable
costs to the health care system if it does not do so. Above
all, quality of care must be protected, and access to care must
be assured for Medicare beneficiaries and for all patients as
well.
prepared statement
Mr. Chairman, your leadership in health care is widely
recognized within the physician community. I greatly appreciate
and thank you for the opportunity to speak before this
subcommittee today.
[The statement follows:]
Prepared Statement of Dr. Jay Kleiman
Mr. Chairman and members of the subcommittee, I am Jay Kleiman, a
cardiovascular specialist from Evanston, Illinois, and a member of the
American College of Cardiology. As a practicing cardiologist for 25
years and now a full-time clinical research scientist, I am honored to
testify today on behalf of the Alliance of Specialty Medicine, an
organization of 13 national medical societies representing more than
160,000 specialty care physicians.
We have reached a very important juncture in the evolution of the
U.S. health care system. At a time when lifesaving scientific advances
are being made in nearly every area of health care, patients are facing
a situation in which basic access to quality health care is in serious
jeopardy. This situation has been brought about by several factors, one
of the most important of which we are here to discuss today: cuts in
Medicare reimbursement for physicians.
background
As you are aware, last year, physicians, as well as nonphysician
health care professionals, received a 5.4 percent across-the-board cut
in their Medicare reimbursement. On March 1, physicians are scheduled
to receive an additional 4.4 percent cut.
The American College of Cardiology as well as the Alliance of
Specialty Medicine greatly appreciates the language passed by the
Senate last week as part of the fiscal year 2003 omnibus appropriations
bill that would stave off another round of cuts in physicians' Medicare
reimbursement for at least seven months. It is our hope that the House
will act swiftly and send legislation to the president's desk before
the 4.4 percent cut takes effect on March 1. This is an important step
toward the solution we seek.
The primary cause of these cuts are errors made by Medicare in
calculating the 1998 and 1999 expenditure targets, including
underestimates of the gross domestic product and failure to account for
the enrollment of one million beneficiaries in Medicare fee-for-
service. The formula used to determine annual physician payment updates
is inappropriately tied to the gross domestic product (GDP). Linking
physician payments to the GDP causes volatile swings in payment updates
from year-to-year and fails to accurately measure the costs of
providing medical services to Medicare beneficiaries. This formula
penalizes physicians when there is a decline in the nation's economy,
even as Medicare utilization and practice costs continue to increase.
The current formula also ignores the expense of new technology--from
new, cutting-edge devices to electronic medical records--which
physician practices must absorb. Finally, the cost of outpatient drugs
has been inappropriately included in the physician expenditure target.
Even if Congress stops the 4.4 percent cut from taking effect this
year, physicians still face steep cuts in 2004 and 2005. If this does
in fact happen, by midway through this decade, physicians' Medicare
reimbursement will be at 1991 levels.
These reductions in Medicare reimbursement are extremely
troublesome because they threaten access to care and quality of care
for our senior citizens. The impact of these cuts, however, goes well
beyond Medicare. Most private payers--including the large managed care
plans--link their fee schedules to the Medicare fee schedule, as does
the military Tricare system. So when Medicare reimbursement is reduced,
so are nearly all other forms of reimbursement.
In short, physicians have been experiencing significant decreases
in reimbursement from nearly all payers, while the costs of running a
practice and caring for patients continue to increase faster than the
rate of general inflation. As the Medicare population becomes a larger
portion of the patients a practice serves, the viability of the
practice itself is threatened.
Although today's hearing is focused on Medicare reimbursement, it
is impossible to separate this issue from the precipitous nationwide
increase in physicians' medical liability insurance premiums. Many have
rightfully called the medical liability situation a ``crisis,'' and its
impact has become visible all across the country. This crisis is
evidenced:
--by reduced access to orthopaedic surgeons, neurosurgeons, and
trauma centers;
--by the exodus of physicians from states like Pennsylvania,
Mississippi, and West Virginia;
--by increased reliance on already strained emergency departments;
and
--in the growing practice of defensive medicine, which drives up the
cost of care and further strains an already fragile health care
budget.
Yet this is just the beginning. The expected steep reductions in
Medicare and third-party payer reimbursement over the next several
years and the spiraling costs of medical liability insurance are
coalescing toward a ``perfect storm'' that threatens to dismantle our
health care system.
consequences
This leads me to the most important point of my testimony today.
The ultimate victims of mistakes in the Medicare reimbursement system
and a medical liability system that is out of control are patients.
Many practices are reaching the breaking point. Both quality and access
to care now suffer from the combined burden of Medicare miscalculations
and the liability crisis.
A worst-case scenario for Medicare patients is developing. It is
starting to cost physicians more to treat Medicare patients than the
physician is reimbursed. According to a survey of physician practices
released by the Medical Group Management Association last week, for
example, more than half of the practices surveyed will be forced to
limit the number of Medicare beneficiaries they treat in 2003. Sixty-
eight percent of respondents said they will postpone investments in new
technology and 62 percent said that they would limit expansion of their
practice.
Examples of these kinds of alterations in practice abound.
A large cardiology practice in Chicago has had to severely limit
hours at two clinics that provided free services to Medicare patients:
one clinic counsels patients on managing lipid disorders such as
elevated cholesterol, and the other assists patients in managing their
blood thinning Coumadin doses.
A small cardiology practice in Kansas City, Missouri, recently
postponed the launch of a new program to treat the growing number of
patients with heart rhythm disorders like the one that afflicted Vice
President Cheney last year.
Likewise, orthopaedic care is in jeopardy in a growing number of
states. A recent survey by the American Association of Orthopaedic
Surgeons found that 55 percent of orthopaedic surgeons have reduced the
range of operative procedures they perform. Thirty-nine percent avoid
performing spine surgery and 48 percent limited other surgical
procedures. Pennsylvania has been particularly hard hit. Bedford
County's only orthopaedic surgeon left the state last year, and
Huntingdon County has just one orthopaedic surgeon to take trauma calls
at two hospitals.
In the case of neurosurgery, in 2001 alone, 327 neurosurgeons
retired, representing an alarming 10 percent of the neurosurgical
workforce in the United States. This, coupled with the fact that it
takes seven years to complete a neurosurgical residency training
program, will create a supply pool that is simply inadequate to meet
the growing aging population and its corresponding health care needs.
Likewise, the Society of Thoracic Surgeons announced this past
summer that the number of applicants for the 7-8 year postgraduate
cardiothoracic surgery residency programs dropped to only 145 in 2002,
and that 21 of the 144 available positions went unfilled.
This climate has also had a noticeable impact on the pipeline of
physicians. Applications for medical school have decreased six years in
a row. The best and brightest are beginning to eschew medical school--
which requires 12 years of rigorous schooling and training. The medical
trainees I teach each week tell me they will enter practice with
between $75,000 and $200,000 in educational loan debt. Simply put, the
population is aging, baby boomers are approaching Medicare eligibility,
and there are serious questions about whether the supply of physicians
will be adequate to meet the demand.
action
The American College of Cardiology and the Alliance of Specialty
Medicine are heartened that short-term relief from further Medicare
reimbursement reductions appears to be on the horizon. But we know that
the biggest challenge is yet to come.
It is clear, however, that fixing the flaws in the Medicare
reimbursement formula will require an act of Congress. The Centers for
Medicare and Medicaid Services has steadfastly maintained that it does
not have the authority under current law to make changes to the payment
formula. While there is the continuing debate about the cost of passing
legislation to permanently fix the problems with this formula, the
question before Congress right now should not be whether we can afford
to address this issue for the longer term, but the cost to the health
care system if Congress fails to act?
The answer is clear: quality of care must be protected for all
patients. Access to care must be assured--not just for Medicare
beneficiaries, but for all patients.
Mr. Chairman, your leadership in health care is widely recognized
within the physician community. I greatly appreciate and thank you for
the opportunity to speak before the subcommittee today. Thank you.
STATEMENT OF ERIC W. BLOMAIN, M.D., PAST PRESIDENT,
PENNSYLVANIA PLASTIC SURGEONS SOCIETY
Senator Specter. Your timing was perfect, Dr. Kleiman. Our
next witness is Dr. Eric Blomain, past president of the
Pennsylvania Plastic Surgeons Society, chief of plastic surgery
at Community Medical Center, staff member at Moses, Taylor, and
Mercy Hospitals, all located in Scranton. He received his A.B.
from Cornell and his M.D. from Thomas Jefferson University.
Thank you for joining us, Dr. Blomain, and we look forward
to your testimony.
Dr. Blomain. Thank you, Senator. Senator Specter, members
of the committee, and members of the audience, I would like to
thank you for the opportunity to testify before you. I am Eric
Blomain, past president of Pennsylvania Plastic Surgeons
Society, and a practicing plastic surgeon in Northeastern
Pennsylvania.
It is with deep humility that I speak on behalf of the
patients and physicians of Northeastern Pennsylvania. I come to
express my opposition to the proposed Medicare cuts, since they
will curtail the care rendered to Medicare recipients. I am not
speaking as a Medicare expert, but as a practicing physician
observing a failing system.
Medicare is a good institution, but it must be brought into
the 21st Century. Medicare reimburses physicians with rules
designed in the mid-1960s. These rules were flawed.
Reimbursement differs from region to region, and is based upon
a complex formula which is supposed to accurately represent
costs and the effort in providing care. A number of assumptions
are wrong, causing the process to be inaccurate.
For instance, it is assumed that the cost of providing
medical care in a low wage or rural area is considerably
cheaper than in an affluent area. Costs in low wage areas can
equal or exceed those in affluent areas. Malpractice costs and
other expenses can be higher in low wage areas, as is evident
in my region in northeastern Pennsylvania.
Physician costs continue to escalate. Malpractice
insurance, supplies, equipment, wages, rents, management fees
continue to increase. Compounding the problem, the Federal
Government increases costs by implementing new rules such as
compliance guidelines, HIPAA guidelines, and OSHA regulations.
Complying with these needed and important regulations is
expensive.
In Pennsylvania, there is a crisis in the availability of
affordable malpractice insurance. Philadelphia pays out more in
malpractice payments than the entire State of California. In
the fifties, a family physician paid $19 for malpractice
insurance. In the sixties, that same physician paid $49. Here,
a typical family physician in Pennsylvania with no malpractice
claims may pay in excess of $10,000.
The cost of malpractice insurance in Pennsylvania compared
to other States with documented effective tort reform are
considerably higher for all types of physicians, causing many
doctors to leave the State. The real solution is to implement
the system started in California 25 years ago, which has a
proven track record.
Declining reimbursement is a reality. Cardiologists in
Northeastern Pennsylvania are paid approximately $164 for
cardiac catheterization. Compare this to Roto Rooter charging
$150 to fix a blocked drainage pipe. Cardiologists who do
catheterizations are then charged an additional $10,000 in
malpractice.
Medicare cuts greatly affect Pennsylvania physicians, since
approximately 17 percent of the population is covered by
Medicare. Additionally, other insurances such as Workman's
Comp, automobile insurance and most managed care plans are
linked to the Medicare fee schedule. Because of this fee
linkage, Medicare costs automatically lower the reimbursement
for physicians, involving as much as 60 percent of the
marketplace in Northeastern Pennsylvania.
The declining reimbursement caused by previous Medicare
cuts, the flawed reimbursement formula, and the catastrophic
rise in medical malpractice premiums have created a perfect
storm, where some physicians cannot practice because their
expenses exceed their income. Recently, in Northeastern
Pennsylvania more than 40 surgeons faced this dilemma, causing
them to make the painful decision to close their practices.
This was a devastating blow to our region, threatening to
reduce the availability of care to the community, particularly
the elderly, the poor, and the disabled, who find it difficult
to travel to alternative sources of care.
Pennsylvania medical schools turn out numerous specialists.
Last year, only 14 percent of surgical specialists trained in
Pennsylvania stayed in Pennsylvania because of the situation of
rising malpractice costs and declining reimbursement. These two
adverse facts create a hostile practice environment and make it
impossible to offer fair and competitive salaries to recruit
new graduates, many of whom are carrying large educational
debts.
Recently, a disturbing trend has emerged where some
attorneys and accountants and practice management specialists
are advising physicians to avoid treating Medicare recipients
because of low reimbursement. Thankfully, this advice is
generally ignored.
prepared statement
In conclusion, the current Medicare reimbursement formulas
are flawed and are hurting low wage areas. The proposed cuts
may cause low wage areas to be unable to attract new
physicians, get adequate support staff, buy new equipment, and
make capital improvements. This system will eventually implode,
where the quality and availability of care will decrease. The
elderly, the poor, and the disabled will be the first to
experience this phenomenon. This phenomenon could spread to
other parts of the Nation. I would humbly ask this committee to
prevent further Medicare cuts, revise the flawed formulas,
increase Medicare funding, and to resolve the medical liability
crisis.
Thank you for your concern, and for the privilege of being
allowed to address you.
[The statement follows:]
Prepared Statement of Dr. Eric W. Blomain
Senator Specter, members of the Committee and members of the
audience: I would like to thank you for the opportunity to testify
before you. I am Eric Blomain, M.D., Past President of the Pennsylvania
Plastic Surgical Society and a practicing plastic surgeon in
Northeastern Pennsylvania.
It is with deep humility I speak on behalf of the patients and
physicians in Northeastern Pennsylvania. I come to express my
opposition to the proposed Medicare and Medicaid recipients. I am not
speaking as a Medicare reimbursement expert with detailed fact and
figures, but as a practicing physician observing a failing system.
Medicare is a good institution, but it must be brought into the
21st Century. Medicare reimburses physicians with rules designed in the
mid 1960's. These rules were flawed then and have had severe unforeseen
adverse consequences. Reimbursement differs from region to region and
is based upon a complex formula which is supposed to accurately
represent the cost of overhead, the cost of malpractice, the cost of
living, the cost of rendering the care and the effort expended in
providing the care. A number of assumptions are wrong, causing the
process to be inaccurate. For instance, it is assumed that the cost of
providing Medicare care in a low wage or rural area is considerably
cheaper than in an affluent area. Costs in low wage areas can equal or
exceed those in affluent areas. Malpractice costs can be higher in low
wage areas, as is evident in my region of Northeastern Pennsylvania and
it is frequently not accurately represented in the Medicare
reimbursement formula. The costs of surgical equipment and supplies
purchased from national vendors can be the same or higher because of
inability of small practices to get substantial discounts.
Physician costs continue to escalate. Malpractice insurance,
supplies, equipment, wages, rents and management fees continue to
increase. Compounding the problem, the Federal Government increases
costs by implementing new rules as a Compliance Guidelines, Evaluation
and Management Guidelines, HIPPA guidelines and new OSHA regulations.
Complying with these needed and important regulations is expensive.
Declining reimbursement and rising expenses are beginning to threaten
the ability of many physicians to practice.
In Pennsylvania there is a crisis of availability of affordable
malpractice insurance. Philadelphia pays out more in malpractice
payments than the entire state of California. In the 1950's a family
physician paid $19.00 for malpractice insurance. In the 1960's $49.00.
This year's typical family physician with no malpractice suits may be
in excess of $10,000. The costs of malpractice insurance in
Pennsylvania compared to other states with documented effective tort
reform are considerably higher for all types of physicians. The real
solution is to implement the system started in California 25 years ago,
which has an established and proven rack record of reducing costs and
being fair to all parties.
Declining reimbursement is a reality. Cardiologists in Northeastern
Pennsylvania are paid approximately $164 for a cardiac catheterization.
Compare this to Roto Rooter charging $150 to fix a blocked drain pipe.
Cardiologists who do catheterizations are charged an additional $10,000
in malpractice surcharges. The average cardiologist does 75 cardiac
catheterizations a year. Forty of these catheterizations are used to
pay for this one single practice expense of malpractice insurance
surcharge. Orthopedic surgeons, neurosurgeons, general surgeons,
vascular surgeons, radiologists and most medical and surgical
subspecialties have experienced rising malpractice premiums and
practice overhead costs with declining reimbursement. Family doctors in
the past few years have seen their reimbursement fall, causing them to
see more patients and to spend less time with patients to maintain
practice expenses. Some family physicians are beginning to leave the
state, particularly in the under served areas.
Medicare cuts greatly affect Pennsylvania physicians, since
approximately 17 percent of the population is covered by Medicare.
Additionally, other insurances such as Workmen's comp, auto insurance
and most of the managed surgical care plans are linked to Medicare fee
schedules. Medicare cuts automatically lower reimbursement for
physicians involving as much as 60 percent of the market in
Northeastern Pennsylvania.
The declining reimbursement caused by previous Medicare cuts, the
flawed reimbursement formula and the catastrophic rise in medical
malpractice premiums have created a ``perfect storm'' where some
physicians cannot practice because their expenses exceed their income.
Recently in Northeastern Pennsylvania more than 40 surgeons faced this
dilemma. They made the painful decision to close their practices. This
was a devastating blow to our entire region threatening to reduce the
availability of care to the community, particularly the elderly, the
poor and the disabled, who found it difficult to travel to alternative
sources of care. This catastrophe has been temporarily averted, but the
situation remains critical. Medicare has historically underestimated
the impact of malpractice problems and practice costs in Pennsylvania,
as is evidenced by testimony of other members of this panel. Because of
all of these problems, the recruitment of physicians has suffered with
most surgical subspecialties reporting problems. Pennsylvania has a
number of fine medical schools which turns out numerous specialists.
Last year approximately 14 percent of the surgical specialists trained
in Pennsylvania stayed in Pennsylvania because of the situation of
rising malpractice costs and declining reimbursement. These two adverse
facts create a hostile practice environment and make it impossible to
offer fair and competitive salaries to new graduates, many of whom are
carrying large educational debts. In my home county in Pennsylvania
(Lackawanna County) the number of general surgeons, vascular surgeons
and neurosurgeons has declined in the last five years. New surgeons are
not replacing those who die, retire or leave the area.
Recently a disturbing trend has emerged where some attorneys,
accountants and practice management specialists are advising physicians
to avoid treating Medicare and Medicaid recipients because of the low
reimbursement. Thankfully this advice in general is not heeded in
Pennsylvania and throughout the nation.
In conclusion, the current Medicare reimbursement formulas are
flawed and are hurting low wage areas. They must be revised. The
proposed 4.4 percent additional cuts may cause low wage areas to be
unable to attract new physicians, get adequate support staff, buy new
equipment and make capital improvements. This system will eventually
implode, where the quality and availability of care will decrease. The
elderly, the poor, the disabled and the under served in low wage areas
will be the first to experience this and be further deprived. This
phenomenon can spread to other areas of the nation. I would humbly ask
the Committee to prevent further Medicare cuts, revise the flowed
reimbursement formulas so that they would be more fair, to increase
Medicare funding if possible and to resolve the medical liability
crisis facing the nation.
Thank you for your concern and for the privilege granted to me to
address you.
STATEMENT OF RICHARD E. D'ALBERTO, CHIEF EXECUTIVE
OFFICER, J.C. BLAIR MEMORIAL HOSPITAL
Senator Specter. Thank you very much for your testimony,
Dr. Blomain. Our final witness from this panel is Mr. Richard
D'Alberto, president and CEO of J.C. Blair Memorial Hospital in
Huntingdon, Pennsylvania, bachelor's degree in health services
administration from the Russell State College in Troy, New
York. Thank you for joining us today, Mr. D'Alberto. We look
forward to your testimony.
Mr. D'Alberto. Good morning, Mr. Chairman, and members of
the subcommittee. I thank you for the opportunity to come
before you today to talk about Medicare.
Let me tell you about J.C. Blair Memorial Hospital first.
We are a 104-bed full-service community hospital. We recently
celebrated our 92nd year. We are located in Huntingdon County.
Huntingdon County is an 800 square mile area with 46,000
population. We are 45 minutes to 1 hour away from any other
hospital in all directions, sometimes over treacherous roads
and over mountainous terrain.
Our county has the second highest unemployment rate in
Pennsylvania, leading to a high number of underinsured and
uninsured individuals, and leads to $1.4 million worth of
uncompensated care at our hospital. In addition, 75 percent of
our patients' revenue is from Medicare and Medicaid.
Senators, we are it in the County of Huntingdon,
Pennsylvania.
I will discuss three major points for your information
today. First, I know it is a popular opinion in Washington for
people to think that hospitals are inefficient. The fact of the
matter is, we have worked over the last 5 years at our hospital
to adjust our cost structure to become one of the most
efficient hospitals in Pennsylvania, and yet we continue to
lose in operations over $1 million in each of the last 3 years.
Simply put, our costs have risen significantly faster than
reimbursement. Some examples of the costs are recent increases
of 10 percent for salaries for RN's. Our drug budget has
doubled in 5 years, from $500,000 to $1 million a year. There
are regulatory requirements, disaster planning, malpractice,
and medical technology that often contribute to the rising
costs. There are no more areas for us to cut our costs. The
only thing left is to attack some of our programs.
Second, there have been a number of well-intentioned
programs implemented to assist small and rural hospitals over
the past few years, sole community hospital, Medicare
dependency, critical access are some examples. All of these
programs have arbitrary cutoffs for qualification. For various
reasons we have come very close to qualifying, and yet we are
not qualified.
Like most of our small hospital colleagues in Pennsylvania,
we have the same problems, but with significant more population
to serve than those hospitals that have benefitted from these
programs. For us, the life preserver is only at arm's length.
We still cannot seem to reach it.
Third, the medical malpractice issue. We were able to avoid
a four times increase in our malpractice insurance in the past
year by forming a risk retention group with 31 other hospitals,
so for the time being, the issue for us is not cost, the issue
for us is access to care.
Let me share a story with regard to our pathologists, one
of the finest group of pathologists in the State of
Pennsylvania, in practice for 17 years. They were dropped by
their insurance carrier at the end of June, and at the eleventh
hour, literally on a Friday night at 11 p.m., that I heard from
them that they were picked up by the joint underwriters.
Without a pathologist, you cannot run a laboratory, you cannot
run an ER. Without a pathologist, you cannot run a laboratory,
you cannot do OR surgery. We were on the verge of closing our
hospital unless those pathologists got their insurance, and
that occurred less than 1 hour before midnight.
In closing, financial relief for us is what was recently
included in the fiscal year 2003 omnibus appropriations, and
that is an increase in the Medicare standard amount to the
urban classification for all hospitals. In addition, a full
market basket update, and I emphasize what was said earlier,
that there has not been a full market basket adjustment in the
past 13 years.
Our biggest concern is that the Medicare reform package of
2004 will further cut hospitals' reimbursements in order to pay
for other programs. Senators, please do not cut hospitals again
and, in particular, small and rural.
prepared statement
We sincerely appreciate the committee's concern about the
pressures rural hospitals are facing and your willingness to
learn more, and we also thank you, Senator Specter, for your
longstanding support for the Medicare program in your hospitals
in Pennsylvania.
Thank you.
[The statement follows:]
Prepared Statement of Richard E. D'Alberto
Mr. Chairman and Members of the Subcommittee: I thank you for the
opportunity to come before you today to discuss the Medicare Program.
Allow me to first tell you about my hospital. J.C. Blair Memorial
Hospital is a full service community hospital of 104 beds serving as
the only hospital in a county of 46,000 population spanning 800 square
miles. Huntingdon County has the unfortunate distinction of having the
second highest unemployment rate in the state, which has resulted in
the hospital serving a significant number of underinsured and uninsured
leading to $1.4 million worth of bad debt and charity care. Our
operating revenue of $28 million consists of 75 percent Medicare and
Medicaid. The remainder is from Blue Cross, HMOs, PPOs and
approximately $1.4 million self pay. Since the full impact of the
Balanced Budget Act of 1997, J.C. Blair has suffered deficits of $1.4
million in 2000, $1.5 million in 2001, $1.7 million in 2002, and we are
heading for another sizable loss in this fiscal year. Medicare
reimbursement has simply not kept up with the continuing cost of
providing service to our community.
Over the last 5 years we have adjusted our cost structure and
become one of the most efficient hospitals in Pennsylvania. We are
managed by Quorum Health Resources. As a result, we consistently
compare our operating indicators to several like hospitals in
Pennsylvania and across the country. Let me share some of those
indicators with you.
------------------------------------------------------------------------
Indicator Standard J.C. Blair
------------------------------------------------------------------------
Man hours per adjusted admission............ 90 84
Full Time Equivalents per Adjusted Occupied 4.6 3.2
Bed........................................
Supply Expense as a percent of Net Revenue.. 16.5 16.1
Salaries as a percent of Net Revenue \1\.... 40 43
------------------------------------------------------------------------
\1\ This number is higher because we have to pay competitive wages while
our reimbursement is shrinking.
There have been a number of other cost drivers contributing to this
situation:
--Shortages of nurses and other key personnel have driven up our
salary costs--10 percent for RN's alone this past year.
--Our drug budget in 1996 was $500,000. This year it is $1,000,000
--Blood and blood products increased in price 50 percent this past
year.
--Regulatory burdens such as HIPAA, EMTALA, and compliance have
increased our costs of doing business.
--Disaster planning and smallpox vaccination will cost us tens of
thousands more over the next year.
--The rising cost of malpractice insurance is crippling us in many
ways. We escaped a four times increase by joining a captive.
--New medical technology, if we ever have a positive operating
margin, will continue to drain our capital reserves.
Over the past several years there have been specific programs
implemented to assist small and rural hospitals with their financial
crisis in managing the Medicare population. Some of them are: Sole
Community Hospital status, Medicare Dependency status, and Critical
Access Hospital status. All of these programs have arbitrary cut-offs
for qualification. These programs have been designed to give relief to
some small and rural hospitals, but many, like ours, ``fall through the
cracks.'' We have tested our qualification for all of them and we fall
short in every case, yet we are a small and rural hospital like many
others across the mid-west and west that have benefited. We, like most
of our small hospital colleagues in Pennsylvania, have the same
problems, but with significantly more population to serve. Pennsylvania
has the third highest rural population and second highest elderly
population--this translates into small, rural hospitals that need to be
larger to effectively serve their communities than the cut-offs that
have been established for the rural relief programs, but are no less
vital to their communities and no less in need of financial relief than
their smaller counterparts in other states.
Probably the most significant inequity is the Medicare Wage Index
Factor, which is .84 for J.C. Blair Memorial Hospital. In order to
remain competitive regarding wages we must pay the same or more for
professional staff as the urban areas. Equalizing our rate with other
areas would bring us at least an additional $600,000 of Medicare
reimbursement next year.
Just yesterday morning, I had to recommend to the hospital's
Finance Committee that we begin serious deliberations regarding the
elimination of basic and vital services. We are at the point where we
have no other choice. Decreasing these vital services would result in
many of our patients in most need traveling 35 or more miles away, with
mountainous terrain in all directions and treacherous roads during the
winter months, to receive care. We also have no public transportation
system.
Over the years we have formed very successful relationships with
other providers in our region to keep many specialty services in our
service area. Those relationships will be seriously jeopardized.
In my mind we are a ``Sole Community Provider'' and our county
would be devastated if we provide any less than full service to our
community. The following statistics show that we are a vital service to
this community:
--380 deliveries per year 18,500 patient days per year of which
11,000 are Medicare days and 2681 are Medicaid days
--4,100 admissions per year of which 1,850 are Medicare and 750 are
Medicaid
--93,000 out patient visits per year
--13,800 emergency department visits per year
We are asking Congress to reverse the cuts that went into effect on
October 1, 2002, expand upon rural hospital provisions, provide more
flexibility in qualifying for special designations, equalize the Wage
Index across the board, lessen the regulatory burdens, and provide full
market basket updates that accurately reflect the current cost
pressures hospitals are facing.
We sincerely appreciate the Committee's concern about the pressures
rural hospitals are facing, and your willingness to learn more. We also
thank you, Senator Specter, for your longstanding support of the
Medicare Program and your hospitals in Pennsylvania. One size does not
fit all. Please do what you can to keep more of us from ``falling
through the cracks.''
Senator Specter. Thank you very much, Mr. D'Alberto.
The testimony has been very, very impressive, and
especially since we have had a partially captive audience in
Mr. Scully.
In light of the time, I am not going to ask for any oral
responses, but I would ask two questions. Mr. Anderson raised
the issue of more problems caused by the Balanced Budget Act,
and I would appreciate it if you gentlemen would respond in
writing to what changes you think ought to be made in that act.
We would like to have your inputs as to what ought to be done.
The other question which I would like in writing, to save
time, relates to whether the Federal restriction on hospitals
covering doctors who practice at the hospitals--Mr. Scully,
will you confirm that under existing regulations--what are the
regulations with respect to hospitals including doctors who
practice there in their malpractice coverage?
Well, I believe the answer to that is that hospitals are
precluded at the present time from covering doctors who
practice there. I am not sure about the employee status, or
those that just have practicing rights. If a change were made
in the Federal restrictions it would lower malpractice rates
for the doctors who would be in a pool basis. It would not
impose--I am not suggesting imposing an obligation on the
hospitals to cover the doctors, but I am suggesting a change
which would eliminate the prohibition against hospitals
covering the doctors.
In conversations I have had informally, I have had a
negative response from hospitals on the ground that if the
prohibition is removed there would be pressure to include the
doctors, but in light of the very severe problems on medical
malpractice, I would like your answers in writing.
I wish we had time to do a great deal more. This is already
an exceptionally long hearing for this subcommittee, and now I
am going to yield to my colleague, Senator Harkin.
Senator Harkin. Well, again, thank you, Mr. Chairman, for
holding this hearing and bringing all of these very intelligent
and well-informed witnesses before us, and I have appreciated
it. I did not hear all of the testimony. I have been sitting
here reading them and catching up, but it is vital to our
deliberations, what we are going to be doing here.
Again, I just--you will excuse me if I want to just get
back to the idea of the Medicare reimbursements to our
providers, to our hospitals. You have heard a lot of talk today
about the wage index, and how that wage index works and
everything. I just ask Kirk Norris from Iowa, who I know very
well, if you would just sort of--specifically, what is the
payment flaw in the wage index, and can you give us some idea
of how you think Congress ought to correct it?
Mr. Norris. Specifically, the flaw in the wage index is the
portion which is attributed to labor, which are your salaries
and benefits costs. For hospitals in Iowa, salaries and
benefits account for 50 percent of all of their expenses.
The wage index has a proxy that says 71 percent of hospital
expenses are salaries and benefits. That discriminates against
States like Iowa, where you have lower wage expenses. That does
not necessarily--as I think Mr. Scully indicated, that was an
issue that was addressed, we thought wrongly, in the proposed
rules last year, and he did as well, by taking that percentage
upward.
We would say it needs to go downward, but to move it
downward, Congress would have to provide money so that there
was not a reallocation of dollars within that framework,
because once you--for example, if the policy was--let us say
the sound policy is to attribute that percentage to what
actually are the salary and benefits expenses in that
particular region, or State. That is good policy.
To do that, if you did it today in a budget-neutral
context, you are going to reallocate money between hospitals,
which is a problem, at least, it is a problem politically. So
what Congress would need to do is get the policy changed so
that States like Iowa were no longer discriminated against, and
that is a rule that Mr. Scully can promulgate. The money would
have to be there to fund that differential, because there would
be additional moneys that would have to go to those low wage
States.
Senator Harkin. So the Medicare reimbursement rate based on
71 percent of these costs you say is wrong, and we have good
data in our State that can show that it is really 50 percent
rather than----
Mr. Norris. We have excellent data. CMS has excellent data.
Senator Harkin. CMS has that data?
Mr. Norris. Yes. We do as well.
Senator Harkin. I guess my question, Mr Scully, if I might
just ask you, why would not CMS then just look at each State
and say, rather than 71 percent, if it is 50 percent in Iowa,
then use that as a factor, or if it is--what is it in
Pennsylvania? Does anyone know what it is in Pennsylvania?
Mr. Scully. It is around 72 percent, pretty close to the
national average, almost 72 percent.
Senator Harkin. In Pennsylvania. But Iowa seems to be much
lower than that, so why can we just not take each State
separately and say, okay, if that is what the proportion is of
your costs, then that is what we are going to reimburse on?
Mr. Scully. Do you want me to answer?
Senator Harkin. Yes, please, Mr. Scully, if you could.
Mr. Scully. I would just say that something that we have
looked at, as Kirk mentioned. The traditional way we have
measured this, it was supposed to go up from 71 to 72 percent
last year. The Secretary decided to freeze it at 71 percent,
and we looked at doing exactly what you describe. The issue is,
it would cause very big redistributions, for example, out of
Pennsylvania and into Iowa, out of New York and into Kansas.
Senator Harkin. But if it is honest, I mean, if our
proportion is only 50 percent, why are we getting penalized by
having it put at 71 percent?
Mr. Scully. Well, we have looked at that and discussed it
at great length with the AHA and others. It has always been a
national blended rate, going backwards 30 years, where we took
the national average of what wages are. In some States, wages
are 80 percent of costs, in some States--Iowa I believe may be
the lowest--it is in the low 50s as a percentage of the real
costs, and there are many, many variations of how to do it,
county by county, MSA by MSA, State-by-State, and we would be
happy to look at all of them, but as he accurately mentioned,
it causes fairly significant redistributions, and not always--
sometimes it is actually out of rural areas.
It is very specific to each State and each county.
Actually, in some cases, rural hospitals actually lose. As a
general matter, urbans generally lose and rurals win, but it is
not always the case. I have looked at it a lot, and it has
hugely different impacts around the country, but we are
certainly happy to get into the weeds with you if you like and
go through it.
Senator Harkin. It was Dr. Blomain, I think--I think it
was, that testified about how--maybe it was you. I have heard
so much testimony here--about how hospitals in small and rural
areas actually pay higher costs. I forget who it was that was
talking about that.
Dr. Blomain. Yes.
Senator Harkin. Because they cannot buy in volume, but
sometimes they have to actually pay higher wages to get someone
to come to a rural area because, let us face it, they maybe do
not want to go there, so to entice them there they have to
actually pay more than what they would pay in an urban area.
Dr. Blomain. That is true, Senator.
Senator Harkin. That is why this thing has got to be--we
have got to address this, because it is hurting rural areas I
am sure in Pennsylvania, as well as it is in Iowa.
Now, God bless Philadelphia and Pittsburgh, but how about
the rural areas of Pennsylvania and other States out there that
are getting hurt by this, that is my only point, is that we
have got to make some changes in this thing.
Well, my time is up. Thank you very much, Mr. Chairman.
Senator Specter. Thank you, Senator Harkin.
Thank you very, very much, gentlemen. I think it has been
very informative, and I predict it will have an impact. Thank
you.
STATEMENT OF RICHARD F. POPS, CHIEF EXECUTIVE OFFICER,
ALKERMES, INC.
Senator Specter. Our final panel, finally, is Mr. Richard
Pops and Thomas Scully. Mr. Pops is the chief executive officer
of Alkermes, Inc., located in Cambridge, Massachusetts, and he
is on the board of directors of Biotechnology Industry
Organization.
The issue which we are taking up here involves the newly
created concept of functional equivalence. Under this standard,
different drugs and biologicals could be reimbursed based on
the lowest applicable rate if CMS chooses to designate them as
functional equivalents. This modifies the heretofore
traditional practice of CMS utilizing the pass-through
payments.
Thank you very much for joining us, gentlemen. I hope the
differences between the witnesses are not as extreme as the
distances between the chairs, and we will start with you, Mr.
Pops.
Mr. Pops. Thank you very much. It is a pleasure to be here,
and thanks for allowing us to address this committee.
As you said, I am the CEO of a biotechnology company called
Alkermes. I am also the vice chairman of BIO, and BIO, as you
may know, is the largest trade organization in the world for
biotechnology companies, and it represents over 1,000
biotechnology companies.
Senator Specter. Pull the microphone up, Mr. Pops.
Mr. Pops. Can you hear better now?
Senator Specter. Yes. Go ahead.
Mr. Pops. I was saying that BIO represents about 1,000
biotechnology companies, academic institutions, and state
biotechnology centers and, as such, it spans 50 States and
actually across the globe, so I am here both as the CEO of
Alkermes and as a representative of BIO.
It is interesting, our company, like most of these
biotechnology companies, is dedicated to developing important
new drugs, and this is, as some would say, an inherently
optimistic strategy for a couple of reasons; number one, how
long it takes to do so, generally measured on the order of 10
plus years to develop a new medicine, and also the cost. In the
12 years that I have been the CEO of Alkermes, we have raised
now just on the threshold of $1 billion, and we are not alone
in this process.
Senator Specter. You say $1 billion for what?
Mr. Pops. $1 billion that we have raised from investors in
order to fund the expensive R&D and prior development that we
do to develop our first drugs, so it is a daunting economic
prospect, and some would say----
Senator Specter. So you are saying that it takes $1 billion
to develop a new drug?
Mr. Pops. I think the data from Tufts and other places show
that a new drug costs on the order of $200 to $400 million to
develop, and about 5 to 10 years.
Senator Specter. What was the $1 billion figure?
Mr. Pops. That is what we spent to build our company, build
our buildings, build our manufacturing plants, pay our
employees, and stay in business for the last 12 years.
Senator Specter. Okay.
Mr. Pops. These companies are fueled essentially by two
things. Number one is by a culture within these companies which
is based on a strong intellectual commitment to developing new
drugs based on new science, applying new science to develop
drugs that the large pharmaceutical companies either choose not
to develop because they are for orphan indications, or
indications they are not particularly economically interested
in, or they do not have the technology to do, because we tend
to employ the youngest, brightest, cutting edge technologies
that are available in the medical sciences.
The second thing that fuels these companies is capital, as
we were just saying, tremendous amounts of capital, and that
capital is raised from venture capitalists and also from the
public equity markets. We have done both. We have been a public
company for about 11 years now, and most of our money is raised
through the public equity markets.
So for this reason you can think of the biotech industry as
essentially being almost an early warning alarm for policies or
legislation that has the impact or the potential impact of
restricting the flow of new medicines into the marketplace.
Faced with the prospect of reduced access to important
medicines, our investors very quickly shift funds into other
sectors, and your investment dollars--without the investment
dollars, the expected outcome occurs.
So today's hearing essentially addresses, as you said in
the preamble, one of these potential situations. On January 1,
a new and what we think is a flawed payment scheme went into
effect for medicines covered under Medicare's hospital
outpatient prospective payment system, or OPPS. This covers
innovative medicines used in hospital outpatient centers such
as cancer chemotherapies, kidney failure drugs, and medicines
for autoimmune diseases. Often, many of these drugs are
developed by biotechnology companies.
Senator Specter. Mr. Pops, your voice drops off when you
move away from the microphone. Would you please speak into the
microphone?
Mr. Pops. I will try to do that.
Senator Specter. We are missing a fair amount of what you
are saying.
Mr. Pops. All right. Can you hear now?
Senator Specter. Yes.
Mr. Pops. Okay. These are critical medicines for the
Nation's senior citizens and the disabled population, who are
covered under Medicare. Unfortunately, CMS has now slashed the
reimbursement by an average of about 35 percent to below what
the drugs cost hospitals, and has introduced a series of
precedents that we do not think should be allowed to stand,
such as arbitrarily deciding that drugs known as
radiopharmaceuticals are not drugs, choosing to exclude only
four orphan drugs from the OPPS, and creating out of whole
cloth the concept of functional equivalence.
Let me start by sharing with you just a simple data that
show the OPPS methodology.
Senator Specter. How do you define a functional equivalent,
Mr. Pops?
Mr. Pops. Well, I think it is essentially an arbitrary
standard, and that is the problem. Beauty is in the eye of the
beholder, so at the moment, it is currently limited to two
particular drugs, but our concern is that it may be expanded to
interpretations of functional equivalence between all kinds of
different classes of drugs, and therein lies the risk, because
for us to develop medicines over a decade and several hundred
million dollars and then, post hoc, to have it determined to be
functionally equivalent by some type of a bureaucratic
determination is inherently not in the best interest of the
public health, and also I think it will have the unintended
effect of stopping this innovation from occurring.
Senator Specter. How does this definition compare with the
so-called pass-through payments?
Mr. Pops. Well, the pass-through payments, and I am far
from an expert on these specific issues, but generally the
pass-through payments were put in place by Congress to allow
certain drugs like chemotherapy and radiopharmaceuticals and
orphan drugs to bypass this process of arbitrarily determining
their price and allowing them to flow into the community and to
allow patients access to these drugs on a more unimpeded basis.
What has happened now is that these drugs are being folded
back into this method that I can describe, and that the chart
describes to some extent, showing how these relatively
expensive drugs, these innovative drugs for smaller patient
populations often get affected in the same way that a common
aspirin would be affected in the way it is reimbursed.
If you want to look at the chart, it will show you that to
reflect overhead costs--and this is in your package as well--
the hospital may charge $10 for a 10-cent aspirin, an increase
of 10,000 percent, while charging $1,000 for an $800
biological, or biotech product, an increase of only 25 percent.
In 2001, the average hospital pharmacy cost-to-charge ratio
was about .3. In the end, according to CMS, the aspirin would
end up costing $3, and the biological would end up costing
$300. This is a dramatic underreimbursement, and it provides a
clear incentive, we feel, for hospitals to stop providing
higher cost, innovative drugs and biologicals in their
outpatient departments. Unless CMS recalculates OPPS rates for
these products, we fear that patients will be denied access to
these types of medicines, so that is one important issue that
we are worried about.
Second, we believe that the agency's arbitrary
determination that FDA-approved radiopharmaceutical products
are not drugs or biologicals and therefore not eligible for
pass-through status contradicts the clear intention of Congress
to protect Medicare patients' access to these types of drugs.
Third, CMS decided to reimburse only four orphan drugs at
actual hospital cost, leaving dozens of other products for
orphan conditions inadequately reimbursed.
Fourth, in the final rule establishing hospital outpatient
department rates for 2003, CMS completed this entirely new
concept of functional equivalence in order to avoid covering a
new drug under the traditional pass-through payment system, so
we are troubled by that as well.
In part, we are troubled by the disregard in our view of
due process. CMS implemented this new functional equivalent
standard without any mention of it at all within the proposed
rule, and interested parties like BIO and my company and others
had no notice and no opportunity to voice our opposition to
that standard.
Second, we believe that the functional equivalent standard
is bad policy in a country that values medical innovation.
Manufacturers simply will not devote years of clinical
development and hundreds of millions of dollars of research
toward improving current therapies or developing brand new
therapies if that at the end of the day could be seen as,
quote-unquote, functionally equivalent to another product, and
I think that has real potential ramifications for patients.
Finally, we believe that this functionally equivalent
standard will harm Medicare beneficiaries' access to advanced
new therapies. Advancements such as less frequent dosing, fewer
side effects, recombinant DNA production methods, or more
convenient modes of administration often improve safety and in
many cases increase compliance and tolerance of these
medications for patients, and therefore they increase the odds
that the therapy will succeed.
My company's products, for example, are heavily oriented
towards this notion. For example, we have a drug that we are
developing that replaces the need for schizophrenic patients to
take their oral medication every day. It replaces that with a
single injection that lasts 2 weeks, so the patient, the
caregiver, the families do not have to worry about compliance,
because these medications often are only as good as the
compliance regimen that supports them.
prepared statement
So because the exact benefits of our advances vary patient
by patient, we really firmly believe that the physicians, not
CMS, should determine on a patient-by-patient basis whether one
drug is a suitable substitute for another one.
So I will stop there. We really appreciate the opportunity
to address you, and I would be happy to answer any questions.
[The statement follows:]
Prepared Statement of Richard F. Pops
The Biotechnology Industry Organization (``BIO'') sincerely
appreciates this opportunity to express our deep concerns about the
Medicare hospital outpatient department prospective payment system
(``OPPS'') and 2003 payment rates. My name is Richard Pops, and I am
the CEO of Alkermes, Inc. and Vice-Chairman of the Board of BIO. My
company is a leader in the development of products based on
sophisticated drug delivery technologies and a member of BIO. BIO is
the largest trade organization to serve and represent the biotechnology
industry in the United States and around the globe. BIO represents more
than 1,000 biotechnology companies, academic institutions, state
biotechnology centers, and related organizations in all 50 states. BIO
members are involved in the research and development of health-care,
agricultural, industrial and environmental biotechnology products.
Representing an industry that is devoted to discovering new cures
and ensuring patient access to them, BIO consistently has expressed
concerns that the OPPS could create substantial access and quality of
care issues for Medicare beneficiaries. Our concerns fall into four
categories:
1. CMS' creation of a new ``functionally equivalent'' standard;
2. The agency's determination that FDA-approved
radiopharmaceuticals are not drugs or biologicals and therefore are not
eligible for pass-through status;
3. CMS' decision to exclude only four orphan drugs from the OPPS,
leaving dozens of other products for orphan conditions inadequately
reimbursed; and
4. CMS' use of a fundamentally flawed rate-setting methodology for
higher cost drug and biological therapies.
cms' new ``functionally equivalent'' standard
CMS has for the first time in the final rule developed the concept
of ``functional equivalence'' in making payment determinations for
erythropoietic products.\1\ The use of the term ``functionally
equivalent'' as a concept raises numerous concerns for our industry.
Had BIO been notified of the use of such a standard, we would have
presented our comments and vigorous objections. A practice that allows
CMS to arbitrarily set standards such as ``functionally equivalent''
creates uncertainty in the industry. In addition, it has substantial
legal implications and, as a policy matter, clearly discourages
innovation--the foundation of the biotechnology industry. The decision
to remove pass-through payments for a new drug also is beyond the scope
of authority granted to CMS under the statute. At a minimum, it is
inappropriate for CMS to impose this dramatic departure from prior
policy for the first time in a final rule without notice and,
therefore, without the opportunity for the public to respond. BIO fears
that the application of CMS' new ``functionally equivalent'' standard
will deny patients access to innovative therapies on the horizon that
offer them fewer side effects, more convenient dosing and modes of
administration, and even new hope for survival.
---------------------------------------------------------------------------
\1\ 67 Fed. Reg. 66718, 66757-59 (Nov. 1, 2002).
---------------------------------------------------------------------------
BIO's first concern is CMS' clear failure to heed the
Administrative Procedure Act's (``APA'') requirements for rulemaking.
CMS implemented its new ``functionally equivalent'' standard without
any mention whatsoever in the proposed rule. Interested parties, such
as BIO, had no notice and opportunity to comment on this deeply
troubling new policy. Had it been discussed in the proposed rule, we
would have vigorously voiced our opposition. CMS' implementation of
this brand new standard in the final rule sets a dangerous precedent
and makes a mockery of the notice and comment process.
Second, BIO fears that this new ``functionally equivalent''
standard will harm the future development of new drugs and biologicals
by creating uncertainty in the industry. Without the assurance of
adequate payment rates, innovation--the foundation of the biotechnology
industry--will be stifled. CMS has sent the message that even if a
company develops an improved drug and even if the improvement saves
money elsewhere in the healthcare system, the drug nonetheless may be
reimbursed based on the agency's calculation of a comparable dose of
another drug. Changing the rules after a company has invested hundreds
of millions of dollars in a new product will make the next company
think twice about making a similar investment. Manufacturers simply
will not devote precious resources toward improving current therapies
or in developing new therapies that could be seen as ``functionally
equivalent'' to another product. This will have unfortunate long-term
ramifications for all patients who truly could benefit from
improvements to existing therapies.
Finally, and most important, we believe that the ``functionally
equivalent'' standard will harm Medicare beneficiaries' access to
advanced, new therapies. In creating this standard, CMS ignores the
incremental nature of many pharmaceutical and biological developments.
Many advancements in drugs and biologicals improve existing therapies,
rather than create entirely new treatments. Existing therapies have
been improved to require less frequent dosing, cause fewer side
effects, offer recombinant versions, or more convenient modes of
administration. Advancements such as these often increase compliance
and allow patients to tolerate the most effective treatment available,
especially when patients are elderly or live in rural areas without
convenient access to hospital outpatient departments. For example,
therapies with fewer side effects increase the probability that
patients can tolerate the full dosage of chemotherapeutic regimens.
Cures and longer remissions are more likely as a result of this
increased compliance. Likewise, the development of a recombinant
version of a drug may make it safer and enable more patients to
tolerate it.
Moreover, a drug or biological that is only incrementally
beneficial to one patient could be significantly beneficial to another.
This is why physicians should be the only ones to make the decision of
whether one drug is a suitable substitute for another. This point was
raised in President Bush's State of the Union Address when he said,
``Instead of bureaucrats . . ., we must put doctors and nurses and
patients back in charge of American medicine.'' This determination
should only be made on an individual patient basis, rather than for the
entire Medicare population.
Medicine is constantly evolving. When a new drug or biological is
approved, it often is difficult to predict who will benefit from it and
how it should most effectively be therapeutically utilized. This is
precisely why Congress created the transitional pass-through system.
Through this system, CMS can collect data on new therapies as clinical
experts actually use them for a few years before establishing payment
rates. Unfortunately, darboepoetin alfa and any other new drug to which
CMS decides to apply its ``functionally equivalent'' standard will be
illegally deprived of this critical data collection period.
Congress already has attempted to protect Medicare beneficiaries'
access to modern therapies. Now we ask that you ensure that CMS adheres
to those statutory protections and abolish the agency's ``functionally
equivalent'' standard immediately.
cms' failure to recognize radiopharmaceuticals as drugs or biologicals
for purposes of pass-through status
In addition to the new ``functionally equivalent'' standard, CMS
announced a new policy in the final rule regarding diagnostic and
therapeutic radiopharmaceuticals. In a decision that prevents current,
as well as future FDA approved radiopharmaceuticals, from qualifying
for pass-through payments, CMS also has determined for the first time
in the final rule that diagnostic or therapeutic radiopharmaceuticals
are not ``drugs'' or ``biologicals.'' \2\ Specifically, the agency
stated that Zevalin--, that has been approved by the FDA as a
biological and is listed as such in the USPDI, is not a drug or
biological for purposes of Medicare.\3\ Accordingly, this therapy--as
well as other radiopharmaceuticals in the future--no longer will be
eligible for pass-through payments, even though Congress clearly
intended to include them in this system. CMS' redefinition of these
longstanding terms is outrageous and clearly contradicts the statute as
well as FDA policy. This substantial change in reimbursement policy for
radiopharmaceuticals also was not mentioned at all in the proposed
rule. Once again, CMS has blatantly ignored the notice and comment
rulemaking requirements of the APA.\4\ BIO asks Congress to work with
us to reverse this troubling policy and continue pass-through payments
for new radiopharmaceuticals as Congress intended, ensuring patient
access to these important therapies.
---------------------------------------------------------------------------
\2\ 67 Fed. Reg. at 66757.
\3\ Id.
\4\ 5 U.S.C. Sec. 553.
---------------------------------------------------------------------------
Section 1833(t)(6)(A)(iv) of the Social Security Act (``SSA'')
establishes pass-through payments for new medical devices, drugs, and
biologicals for which payment as a outpatient hospital service was not
being made as of December 31, 1996, and for which cost is not
insignificant in relation to the outpatient department fee schedule
amount. In addition to current orphan and cancer therapy drugs and
biologicals, the statute also specifies that pass-through payments
would be made for ``current radiopharmaceutical drugs and biological
products,'' defined as a ``radiopharmaceutical drug or biological
product used in diagnostic, monitoring, and therapeutic nuclear
medicine procedures.'' \5\ Obviously, Congress considered
radiopharmaceuticals to be ``drug or biological products'' and intended
patient access to them to be protected through the transitional pass-
through system. It is inconceivable that Congress meant to exclude
these therapies from the definition of drugs and biologicals under
section 1833(t)(6)(A)(iv) of the SSA, and no theory of statutory
construction would support CMS' interpretation on this point.
---------------------------------------------------------------------------
\5\ 42 U.S.C. Sec. 1395l(t)(6)(A)(iii).
---------------------------------------------------------------------------
The treatment of radiopharmaceuticals as ``drugs or biologicals''
also is consistent with other provisions of the SSA as well as
longstanding CMS policy. Section 1861(t)(1) of the SSA defines the
terms ``drugs'' and ``biologicals'' for Medicare purposes to include
only such drugs or biologicals as are included (or approved for
inclusion) in the United States Pharmacopoeia, the National Formulary,
or the United States Homeopathic Pharmacopoeia, or in New Drugs or
Accepted Dental Remedies, or as are approved by a hospital pharmacy and
drug therapeutics committee (or equivalent committee). Historically,
CMS has considered a product approved by the FDA as a drug or biologic
and that is included or approved for inclusion in one of the listed
compendia to be a ``drug'' or ``biological'' for Medicare purposes. In
July 1997, the Health Care Financing Administration issued a
transmittal that instructed hospitals to use revenue code 636--drugs
requiring detailed coding--for radiopharmaceuticals.\6\ Clearly, the
agency has characterized radiopharmaceuticals as drugs in the past and
should not be permitted to arbitrarily change that classification now.
---------------------------------------------------------------------------
\6\ Medicare Intermediary Manual, Part 3 (CMS-Pub. 13-3),
Transmittal No. 1717, July 1, 1997.
---------------------------------------------------------------------------
In any event, such a dramatic departure from the plain language of
the statute as well as CMS policy should not have occurred for the
first time in a final rule. Section 553(b)(3) of the APA requires an
agency proposing a new rule to include in the notice of proposed
rulemaking ``either the terms or the substance of the proposed rule or
a description of the subjects and issues involved.'' CMS gave no
indication in its proposed rule that it intended to reclassify
radiopharmaceuticals. In fact, the proposed rule indicates that CMS
fully intended to continue pass-through payments for both Y-90 Zevalin
and IN111-Zevalin in calendar year 2003 by publishing anticipated pass-
through payments for 2003.\7\ Because CMS published rates for Zevalin .
. ., it is incomprehensible that interested parties could have
concluded that CMS intended to reclassify radiopharmaceuticals and
discontinue the existing policy of providing pass-through payments for
them.
---------------------------------------------------------------------------
\7\ 67 Fed. Reg. 52092, 52119 (Aug. 9, 2002).
---------------------------------------------------------------------------
Zevalin became the first radioimmunotherapy approved by the FDA in
February of 2002. It consists of monoclonal antibodies that are
chemically bonded with a radionuclide. Manufacturers increasingly are
using biological agents such as monoclonal antibodies, which are
disease-fighting proteins that seek out and bind with specific tissues
or cells. Radioimmunotherapies are made by linking monoclonal
antibodies--engineered in a laboratory to recognize and attach to
substances on the surface of certain cells--to radioactive isotopes.
When the drug is administered to the patient through infusion,
``radiation-carrying antibodies circulate in the body until they locate
and bind to the surface of specific cells, and then deliver their
cytotoxic radiation directly to malignant cells.'' \8\
---------------------------------------------------------------------------
\8\ http://www.idecpharm.com/site/science/zevalin.htm
---------------------------------------------------------------------------
Radioimmunotherapies provide new hope for patients battling cancer.
It is essential that these radiopharmaceuticals be treated as what they
are and always have been--drugs and biologicals. Congress clearly
intended for Medicare beneficiaries to continue to have access to these
important radiopharmaceuticals by including them in the pass-through
system. Congress now must ensure that therapies approved by the FDA as
``drugs'' and ``biologicals'' and listed as such in the USPDI as drugs
and biologicals are eligible for pass-through payments. Not only is
this treatment consistent with the plain language and intent of the
statute, but it also protects patient access to these critical
medicines.
exclusion of all orphan drugs used for orphan indications
BIO applauds CMS for recognizing that certain orphan drugs are
generally expensive and, by definition, rarely used, and as a result,
should not be included in the OPPS.\9\ Rather than carving out all
drugs and biologicals designated by the FDA as orphan and used for
their orphan indications, however, CMS instead has decided to exclude
only those that the current USPDI shows have neither an approved use
for other than an orphan condition nor an off-label use for conditions
other than the orphan condition. As a result, only four orphan products
are excluded. The agency's approach fails to do what is necessary to
ensure that patients suffering from rare diseases continue to have
access to the treatments they need. Instead, BIO believes that all
drugs and biologicals designated as orphan by the FDA and used for
their orphan indications should be excluded from the OPPS.
---------------------------------------------------------------------------
\9\ 67 Fed. Reg. at 66772.
---------------------------------------------------------------------------
In the August 9, 2002, proposed rule, CMS created two categories of
``orphan drugs:'' orphan drugs used solely for orphan conditions and
orphan drugs that are used for other conditions. CMS ``recognize [d]
that orphan drugs that are used solely for an orphan indication or
conditions are generally expensive, and by definition, are rarely
used.'' \10\ Rather than packaging the costs of these drugs into
procedure APCs, which might not be sufficient to compensate a hospital
for the costs of the drug, CMS proposed to ``establish separate APCs to
pay for those orphan drugs that are used solely for orphan
conditions.'' \11\ Payment for all other orphan drugs would be packaged
into the procedure or service for which the drug is integral and
directly related, unless they were considered to be ``higher cost
drugs.''
---------------------------------------------------------------------------
\10\ 67 Fed. Reg. at 52124.
\11\ Id.
---------------------------------------------------------------------------
CMS proposed new criteria for identifying orphan drugs that would
be paid separately under the OPPS. First, the drug must be ``designated
as an orphan drug by FDA and approved by FDA for the orphan
indication.'' Second, the entry for the drug in the USPDI must show
that the drug has neither an approved use nor an off-label use for a
condition other than the orphan condition.\12\ Thus, separate payment
would be provided only for orphan drugs that are used only by patients
suffering from rare diseases. Using these criteria, CMS identified only
three orphan drugs that are eligible for separate payment under the
OPPS: alglucerase injection (J0205), alpha 1 proteinase inhibitor
(J0256), and gemtuzumab ozogamicin (J9300).\13\ In a recent program
memorandum, CMS added injection imiglucerase (J1785) to this carve-
out.\14\
---------------------------------------------------------------------------
\12\ Id.
\13\ Id.
\14\ Medicare Program Memorandum to Intermediaries, Transmittal No.
A-02-129, January 3, 2003.
---------------------------------------------------------------------------
When CMS adopted the proposed criteria for identifying orphan drugs
in the November 1, 2002, final rule, however, it also announced an
entirely new payment policy for orphan products. Instead of placing
orphan drugs into separate APCs, CMS excluded them entirely from the
OPPS.\15\ These products now will be paid on a reasonable cost basis.
Thus, CMS introduced a new payment policy in the final rule that had
not been discussed in the proposed rule. The parties affected by this
policy change did not have notice that such a change would be made and
therefore may not have commented on it. In particular, some of the
manufacturers of orphan drugs that CMS failed to recognize in the
proposed rule may not have identified their products to CMS as orphan
products because the payment rates for their products would have been
the same under either the orphan drug or higher cost drug criteria in
the proposed rule. These organizations may have commented about other
orphan products that met CMS' criteria had they known about the final
rule's new payment policy for these orphan drugs and biologicals.
---------------------------------------------------------------------------
\15\ 67 Fed. Reg. at 66772.
---------------------------------------------------------------------------
In addition to failing to give notice of a change in the payment
policy, CMS failed to identify all the drugs and biologicals that met
its criteria. In the final rule, CMS recognized only the same three
drugs identified in the proposed rule as meeting its criteria for
orphan status.\16\ As some organizations discussed in their comments to
CMS, however, these three products are not the only drugs that meet
CMS' standard. We know of several other products that meet CMS' orphan
criteria: amphotericin B lipid complex (J0286), oprelvekin (J2355),
thyrotropin alfa (J3240), daclizumab (J7513), aldesleukin (J9015),
denileukin difitox (J9160), interferon gamma 1-b (J9216), rituximab
(J9310), coagulation factor VIIa (Q0187), and basiliximab (Q2019). At
least one other product, interferon beta 1-a (J1825), meets the spirit
of CMS' criteria, but the USPDI includes one off-label use that is
extremely rarely used. In fact, in examining the 1,691 claims in
Medicare database, the company knows of no claims for the off-label
indication. Similarly, other drugs and biologicals essentially meet
CMS' new standard by having FDA-approved uses and USPDI accepted uses
that nearly all are recognized as rare diseases by the National
Institutes of Health. Botulinum toxin type A (J0585) is an example of
an orphan biological that fits under this ``essentially meets''
standard.
---------------------------------------------------------------------------
\16\ Id.
---------------------------------------------------------------------------
Although we appreciate CMS' attempt to exclude certain orphan
products from the OPPS entirely, we are concerned that CMS' eligibility
criteria were too rigid and the agency failed to recognize many true
orphan drugs and biologicals as a result. The CMS criteria attempt to
distinguish rarely used orphan drugs from drugs with an orphan
indication that are frequently used for other conditions. As CMS
explained in the final rule, drugs meeting its criteria can be
distinguished from other drugs ``because of their low volume of patient
use and their lack of other indications, which means that they can rely
on no other source of payment.'' \17\ The agency recognized that
treating these products like most other drugs under the OPPS could
produce payment levels that would be ``insufficient to compensate a
hospital for the typically high cost of this special type of drug.''
\18\
---------------------------------------------------------------------------
\17\ Id.
\18\ Id.
---------------------------------------------------------------------------
Simply having alternate indications in the USPDI does not mean that
the drug has other, sufficient sources of payment, however. Many orphan
products are rarely used, even though they have approved or off-label
non-orphan indications. These products have ``low volume of patient
use'' and very few, if any, other sources of payment. Including them in
the OPPS system is just as likely to produce insufficient payment
levels as including the drugs that meet CMS' limited criteria. We
believe that nearly all orphan-designated drugs are low volume drugs
and biologicals used for chronic diseases and generally are provided by
specialists who may be available only in the hospital outpatient
department setting. Low-volume drugs and biologicals with payment rates
below hospital costs are unlikely to be stocked by hospitals--
regardless of whether they have non-orphan uses or not. Congress needs
to ensure patient access to all low-volume orphan-designated products
is protected by excluding them from the OPPS.
Although BIO recognizes that CMS may be hesitant to use the FDA's
orphan drug designation as the sole determinant for drugs and
biologicals to be excluded from the OPPS, we firmly believe that CMS'
standard is too narrow and does not go far enough to protect patient
access. A true orphan product, under the Orphan Drug Act, is used to
treat a small population or has no reasonable expectation of recovering
the costs of research and development.\19\ BIO strongly believes
Congress should expand the orphan drug exclusion criteria to include
all FDA-designated orphan drugs when they are used for their orphan
indications. This solution will further the same policy goals as the
Orphan Drug Act itself by encouraging manufacturers to engage in the
research and development necessary to obtain FDA approval for orphan
indications, even when the drug or biological has other more widely-
used indications.
---------------------------------------------------------------------------
\19\ See 21 U.S.C. Sec. 360ee.
---------------------------------------------------------------------------
Ideally, CMS would be able to determine when an FDA-designated
orphan drug is used for an orphan condition and reimburse hospitals for
the drug or biological accordingly. We realize, though, that CMS'
current system is not set up to make these distinctions and that this
solution may take some time to implement. Alternatively, CMS could use
the number of claims submitted for a drug to determine whether it is a
true orphan product. By looking at the number of claims filed for a
product, CMS should be able to distinguish the rarely used orphans from
the products with common non-orphan indications. CMS' current narrow
criteria clearly will deny adequate payment for many deserving orphan
drugs, threatening their availability for patients without any other
treatment options. Broadening CMS' orphan exclusion criteria to include
other worthy orphan drugs and biologicals will help to ensure that
these therapies remain available for patients who suffer from rare
diseases. At a minimum, Congress should ensure that the 10 additional
drugs and biologicals BIO has identified as meeting the agency's
restrictive criteria are excluded from the OPPS.
cms' fundamentally flawed methodology for rate-setting
Finally, BIO is deeply concerned that CMS is using a fundamentally
flawed methodology for setting payment rates that are biased against
higher cost drugs and biologicals. Unless this methodology is revamped
immediately, patient access to critical drug and biological therapies
in hospital outpatient departments will be compromised substantially.
Specifically, CMS has used a single ratio to derive all pharmacy
costs within a hospital, without regard for hospitals' actual practices
in setting charges for drugs. When hospitals set their charge levels to
reflect overhead costs, they raise the charge levels much less for
higher cost drugs than they do for low-cost products. As shown in the
diagram below, an aspirin, for example, may have a cost-to-charge ratio
of .01 (charging $10 for a $0.10 pill), while a higher cost biological
could have a cost-to-charge ratio of .80 (charging $1,000 for an $800
injection). The outpatient methodology ignores this difference and uses
a single cost-to-charge ratio for all products in a hospital's pharmacy
department. This produces substantial over-reimbursement for low-cost
products and substantial under-reimbursement for higher cost products.
Using the 2001 average cost-to-charge ratio of .30 produces a $3.00
payment for the aspirin and a $300 payment for the biological--less
than half of its acquisition cost. This methodological bias results in
payment rates that provide a clear incentive for hospitals to stop
providing higher cost drug and biological therapies.
CMS attempted to defend its methodology in the final rule by saying
that, in the inpatient setting, its assumption that cost-to-charge
ratios are constant across all services has worked for almost 20
years.\20\ CMS asserted that, in the inpatient setting, ``any
deviations [between costs and charges] should largely cancel out.''
\21\ At the same time, CMS admitted that if hospitals do not mark-up
costs uniformly, the payment rates resulting from CMS' methodology
``would create incentives for hospitals to avoid (or favor) particular
services.'' \22\ Yet, CMS claimed that it had neither enough
information nor enough time to revise the methodology for 2003.
---------------------------------------------------------------------------
\20\ 67 Fed. Reg. at 66752.
\21\ Id.
\22\ Id.
---------------------------------------------------------------------------
In the final rule, CMS applied a ``dampening option'' to ``lessen
the impact of the dramatic reduction in the proposed payment rates for
many of the drugs and biologicals from 2002 to 2003.'' \23\ Although
well-intentioned, the dampening option does not go far enough to
address the most egregious under-reimbursements for higher cost drugs.
In fact, the dampening option actually produced lower payment rates for
all APCs because of the budget neutrality adjustments required to
compensate for its cost.
---------------------------------------------------------------------------
\23\ 67 Fed. Reg. at 66769.
---------------------------------------------------------------------------
Once again, we believe that CMS must correct this fundamentally
flawed methodology before it produces grave consequences for patients.
Unlike the inpatient PPS, where CMS believes that over and under-
reimbursements will be cancelled out, the OPPS bundles few items and
services together. Often the only service the hospital provides to the
patient is administration of the drug or biological. In these cases,
the hospital does not provide other services with over-reimbursements
that can average out the under-reimbursements for higher cost
therapies. In a cancer center, for example, the $2.90 over-
reimbursement in our hypothetical example for each aspirin cannot
compensate for oncology drug reimbursements that fall hundreds of
dollars below their costs. Unless CMS calculates OPPS rates to
acknowledge that this charge compression occurs, its methodology and
payment rates will discourage hospitals from providing the most
appropriate care for patients.
Although we understand that CMS needs time to study problems
associated with charge compression and to determine how best to
respond, BIO does not believe that patients should suffer during this
time. Therefore, we believe Congress should adopt an interim solution
to ensure that hospitals are adequately reimbursed during the period
before a permanent correction can be achieved. This solution should be
adopted immediately. It should encompass not only hospital acquisition
costs, but also pharmacy service and other hospital overhead and
handling costs involved in delivering safe and appropriate pharmacy
therapy.
conclusion
BIO is deeply concerned that patient access to critical drug and
biological therapies in hospital outpatient departments will be impeded
substantially after January 1, 2003 as a result of the final rule. We
believe that Congress must act quickly to revamp this fundamentally
flawed rate-setting methodology and to adopt an interim solution in the
meantime. We also believe that Congress should exclude all FDA-
designated orphan drugs from the OPPS when they are used for their
orphan indications. Finally, we believe Congress should act now to
require CMS to abandon its new policies with respect to
radiopharmaceuticals and the ``functionally equivalent'' standard. BIO
appreciates this opportunity to testify and looks forward to working
with you to ensure that patients continue to have access to critical
therapies in hospital outpatient departments--both now and in the
future.
Senator Specter. Thank you very much, Mr. Pops.
Mr. Scully.
Mr. Scully. I was asked to respond, so I was trying to--so
I am not prepared to testify. I will just respond to the BIO
testimony.
Let me digress for one second on the malpractice issue. You
mentioned Pennsylvania. Just for your future interest,
physicians are allowed to be on a hospital's malpractice plan
if they are employees, and it is an antikickback rule that
comes through the Inspector General, Janet Rehnquist. She did
give an exemption for that, and a temporary waiver for a while,
and we are working on that, but the bottom line is, your point
about trying to save money for physicians by folding them into
the malpractice for the hospital is a legitimate one, and we
are working on it, but traditionally that has been looked at as
a kickback from the hospital to the doctor and it violated the
Stark antikickback rules.
Senator Specter. Where was the kickback?
Mr. Scully. Well, the argument is, if the hospital goes in
and subsidizes the doctor's insurance premium, that that is,
you know--there is a long legislative history about
inappropriate incentives for----
Senator Specter. If you have the doctor on your insurance
policy so he gets a group rate, that that is a kickback to the
doctor?
Mr. Scully. There is long case law that is involved--it is
Justice Department and Inspector General, not CMS, where
theoretically----
Senator Specter. You say there is case law on that?
Mr. Scully. Oh, there are many, many, many cases in the
Justice Department about if hospitals inappropriately subsidize
physicians' office rents or anything else, that that is an
inappropriate incentive for them to refer doctors to their
hospitals, and subsidizing malpractice premiums have been part
of----
Senator Specter. These are doctors who practice at the
hospital? If a doctor is an employee of the hospital, is there
any problem in being covered?
Mr. Scully. No. If they are an employee, they can be on the
plan.
Senator Specter. If a doctor practices at the hospital, you
are saying that that would be regarded as a kickback?
Mr. Scully. In the past, it has been by the Inspector
General under these antikickback statutes, and I believe they
have given a waiver while they try to work out some exclusions
to this.
Senator Specter. They have given a waiver, you say?
Mr. Scully. I was just informed by some hospital folks that
there is a temporary waiver while they look at adjusting that
rule for this purpose, but your point--I just brought it up to
say that you are very much on point. If you are an employee,
you can be an employee doctor, which is very rare. Most doctors
are not employees of hospitals. You can be in a pooled
malpractice plan.
Generically, you cannot, if you are not an employee, be
pooled into the hospital's malpractice plan because it is
perceived to be an inappropriate kickback. That has nothing to
do with CMS. That is a longstanding Inspector General rule that
I believe Janet Rehnquist has given some temporary exemptions
to.
Senator Specter. Curious rule. I used to deal in kickbacks
all the time as a district attorney. It does not sound like a
kickback to me.
Mr. Scully. Well, generally those are left to Justice and
the IG. I was just--you were interested, so I thought I would
pass along the most I knew about it.
Senator Specter. Now, Mr. Scully, you are the
administrator. You have got to deal with what they recommend to
you and make an evaluation, and I would ask you to take a look
at that. That does not make any sense.
Mr. Scully. Well, I have been working with Janet Rehnquist
and the Inspector General on a lot of areas of the antikickback
rule to make it more realistic, and I think this is certainly
one of them.
Senator Specter. Okay. On to functional equivalence.
Mr. Scully. I have spent hundreds of hours on this issue,
and Secretary Thompson I can tell you has spent probably many
dozens.
Senator Specter. Try to summarize.
Mr. Scully. It is just a very complicated issue, but I
would say that we did not create a new functional equivalence
rule. We have always had the authority. I will just give you a
quick summary.
We pay for outpatient drugs in two settings. We have the
outpatient prospective payment rule, which brought this up,
arguably one of the more complex reimbursement tools of the
Medicare program. We are capped at $19 billion a year in
spending this year on outpatient PPS. That pays for all
outpatient payments, including hospital payments. We pay for
drugs, outpatient drugs in that setting and in the physician
setting.
The way this issue came up is, the most expensive pair of
drugs in the Medicare program are two drugs that are similar
called Aranesp and Procrit. Procrit has been around for many
years, a great drug for cancer patients, also used very heavily
for dialysis. In the cancer area we spend a couple of million
dollars--billion dollars a year, excuse me, on both.
The way this new payment mechanism came up 2 years ago,
Congress created a new outpatient payment mechanism, and for 2
years existing cancer and certain other drugs were put on there
and were paid at 95 percent of average wholesale price, which
by all accounts, including every congressional committee, is a
ridiculously overpaid price. But temporarily in 2000 for
certain drugs and for new drugs that come out--for patients to
have access to them--they are paid at that price.
Senator Specter. That is a ridiculous overpayment that
Congress has authorized?
Mr. Scully. I have testified before the Finance Committee,
the Ways & Means Committee, and the Commerce Committee in the
last year, and on a bipartisan basis I would say there is
extremely strong support for fixing it, and that by all
accounts we are overpaying by about $1 billion a year due to an
existing formula.
Senator Specter. So there is a strong reason, you say, for
having Congress make a modification of that?
Mr. Scully. Yes, but there are two pots that are going on
here. One is the 20 percent of the payments in the outpatient--
--
Senator Specter. If it is so clearcut, why hasn't the
Finance Committee acted on it?
Mr. Scully. The Finance Committee has acted, as has the
Commerce Committee, as has the Ways & Means Committee. They
just happen to have three different fixes, and they have not
quite worked it out, but I would say if you talk to Chairman
Grassley or Senator Baucus you would find they have very strong
feelings about fixing this, as does Chairman Tauzin and Mr.
Dingell and Chairman Thomas and Mr. Stark, and the
administration has not acted, and we said we would, largely to
allow Congress to act so that hopefully they can get----
Senator Specter. But at the present time there is this
pass-through rule.
Mr. Scully. There is a pass-through rule.
Senator Specter. And would you define what that pass-
through rule is?
Mr. Scully. The pass-through rule says that new drugs for 2
years after they are determined to be new drugs, that we should
pay them at 95 percent of average wholesale price.
Senator Specter. 95 percent of average wholesale price?
Mr. Scully. Of average wholesale price, which is an
industry-listed book, but my agency has the discretion to----
Senator Specter. And the average wholesale price you think
is exorbitant?
Mr. Scully. Is clearly exorbitant in most cases, not all.
Some companies list legitimate prices. It is an industry--by
reference, CMS has adopted an industry document called the Red
book. Some companies report accurately, some do not. We have
the discretion to use anything we like under the law.
Also, because it is capped at $19 billion, this pot, the
Secretary also has clear discretion under the law to make
equitable adjustments in payment. So the standard we came up
with, that functionally equivalent, is not a new standard. It
was an explanation of a longstanding legal authority that we
clearly have to adjust payments in either one of the two
methods, either to say----
Senator Specter. When you say the average wholesale price
is absurdly high, that really touches on a much broader issue.
Mr. Scully. Yes.
Senator Specter. That is pricing of pharmaceuticals.
Average wholesale price. On its face you would think that a
wholesale price would be low.
Mr. Scully. Well, average wholesale price is reported by
the companies, and by virtually all accounts they report
exceptionally high ones, and by tradition, and we are looking
at changing it, my agency has paid 95 percent of whatever the
price is the company makes up. I will give you an example.
Senator Specter. What does wholesale mean? Wholesale means,
before you get to retail.
Mr. Scully. But it is not--we are required under the
Medicaid statute, for Medicaid remits to collect what is called
average manufacturer price, which is the real price that people
actually pay.
Senator Specter. What is that definition again?
Mr. Scully. Average manufacturer price.
Senator Specter. Average manufacturing price?
Mr. Scully. Which is substantially lower, we collect for
Medicaid, but by statute we are not allowed to use that.
Senator Specter. How do you determine an average
manufacturing price? Does that include the research costs?
Mr. Scully. The average manufacturer's price for Medicaid,
which we are not allowed to use for Medicare, manufacturers
actually have to report the average manufacturer's price that
they charge all customers. It is an audited number. It is also
secret, only for use in Medicaid, believe it or not. Half of my
agency can use it, the other half cannot.
Senator Specter. You can use it for Medicaid, but not for
Medicare? Why that distinction?
Mr. Scully. That is what the statute reads. We have
proposed changing it in the last two budgets, and I would
suggest it may well be in the Monday budget.
The average wholesale price, on the other hand, is just
whatever the manufacturer wants to report to this industry
book, called the Red book, and that is usually much, much, much
higher.
I will give you an example of how this came up.
Senator Specter. When you define an average manufacturing
price, is that what it costs to manufacture the last pill?
Mr. Scully. It is an average of all the prices you charge,
and we have not advocated that is what we should pay in
Medicare, but it arguably does not create enough margin for
oncologists and others to acquire the drug. It factors in sales
to large hospitals, large buyers. We would not argue that is
appropriate for Medicare, but it is clearly a much lower price
than average wholesale price, which is essentially whatever the
manufacturer wants to report, and it is obviously to their
incentive to make up the highest price that they can credibly
put in the book.
But I can give you the functional way this works, which I
think will show you the problem we have, and why this has
become controversial, if you would like. In the average
wholesale price for the 80 percent of the market that is
physicians, we currently, including right now, pay about $1,422
every 2 weeks for Aranesp, and we pay about $1,200 for Procrit.
Procrit got paid that in the outpatient setting for 2 years.
Senator Specter. How much are those again?
Mr. Scully. For Procrit it is about $1,200, and for
Aranesp, similar drug, with slightly different chemical makeup,
about $1,422, and in the outpatient setting for 2 years----
Senator Specter. $1,422 for one?
Mr. Scully. Every 2 weeks for one patient.
Senator Specter. And $400 for the other?
Mr. Scully. $1,200 for the other.
Senator Specter. $1,200.
Mr. Scully. Procrit is made by Johnson & Johnson, Aranesp
is made by Amgen, and believe me, Secretary Thompson and I
spent many hundreds of hours on this. For nearly 2 years, when
this new system was created, Procrit was the only drug on the
market for oncology. We paid them at about $1,200 every 2
weeks. At the end of the 2 years, we basically, within this
finite pot of $19 billion, we used 90 million hospital claims,
which is what some of the dispute is about, is how we set the
price, to figure out what the appropriate price is. It is not
AWP.
We determined, and I do not believe that J&J argued with
this, that the appropriate price for Procrit was about $700
every 2 weeks, so we lowered their price from about $1,200 to
about $720 every 2 weeks in the 20 percent of the market that
is hospital outpatient. We are still paying them $1,200 every 2
weeks on the physician side, okay.
The argument for Aranesp is, it is a new drug, and it came
on the market. Were we to pay Aranesp $1,422, we would have
spent a couple of hundred million dollars a year, which would
have required me, in that finite pot of money, to cut
mammographies, colonoscopies, pro rata cut all other drugs,
because it is a finite pot of money. We only have a finite pool
of money to spend on the outpatient side.
This 20 percent that Congress created is capped, and so if
I were to say that Aranesp and Procrit were different drugs,
and that Aranesp was, in fact, a new drug, we would have paid
it double the rate of Procrit, and we would have paid a few
hundred million dollars a year in extra payments.
The Secretary has the ability to make sure he does not have
to cut other services under the current statute to make
equitable adjustments. We have determined the AWP is a
different price, so when they make the argument that, under the
rule, this is a new concept, all this was is an explanation of
two statutory authorities which we have always had, which is on
the outpatient side to adjust the payment. We made the decision
that these drugs, and believe me, I have--this has been a very
unpleasant experience.
I have people that I have worked with at both companies for
a long time. I hired--in fact, Secretary Thompson was very
involved in this--I hired the most credible, well-known doctor
in this area that I know, who has had years of experience with
both drugs, asked him to write a study, and Secretary Thompson
and I followed his guidance, and he said that these drugs were
functionally the same. The impact of paying Aranesp at twice as
much, on the other drugs would be, we would have had to cut
many other drugs and devices, and we would have had to cut
mammographies, emergency room visits, and everything else in
this $19 billion pot to pay more for it. We made the decision
in that 20 percent pot to pay the two drugs the same because we
believe they are functionally equivalent, but we clearly had
the statutory authority to do that.
Senator Specter. Mr. Pops, do you disagree that they are
functional equivalents?
Mr. Pops. I completely disagree with the whole notion that
Mr. Scully and his consultant can make that determination.
Mr. Scully. Well, there is no question we have the legal
authority to do that.
Mr. Pops. Oh, I am not questioning--I am not a lawyer, so I
do not know whether you had the legal standing to do it----
Mr. Scully. I would point out, on the other 80 percent,
which is the much bigger pot of money, $4 billion, which should
be their much bigger concern, where we have not done this--
because in the $19 billion pot that exists, had we paid the one
drug more and not made this determination we would have cut
emergency room visits, colonoscopies, mammographies, and other
drugs.
On the other pot, which is much bigger, the 80 percent on
the physicians side, we have not made the determination yet
until we get more information, because we are still paying the
one drug at $1,400 every 2 weeks, and Procrit at $1,200 every 2
weeks, arguably maybe the taxpayer is overpaying, but until we
get more information, we made the decision not to do that.
The Secretary and many other people thought that we should
have lowered both prices, which we have the authority to do as
well, down to $700 every 2 weeks. We have not yet done that,
subject to doing some studies with the National Cancer
Institute and others, but we clearly--we did not create a new
standard with functional equivalence. We basically explained
why we did it under existing legal authority, which we believe
protected many, many other patient payments in the outpatient
setting.
Senator Specter. Let us give Mr. Pops an opportunity to
comment here. I had asked him as to whether he thought these
two items were functional equivalents, and your response was
that you challenge their entire system, but dealing with the
narrower question of functional equivalency, are they
functional equivalents?
Mr. Pops. These two particular drugs?
Senator Specter. Yes.
Mr. Pops. I think it is very difficult to make that
determination. There are literally millions of pages of data
from extensive clinical trials and clinical use of these two
drugs. I am not an expert on both of them. I know them both
generally. They are administered under different regimens. They
have different molecular compositions. They have different
patents covering them. They are very different things.
Senator Specter. So your point is, they are different
drugs. Well, do they function differently, or can a patient
take either one and get the same result?
Mr. Pops. I think a physician should make that
determination. I do not think either I should or Mr. Scully
should make that determination.
Mr. Scully. Well, my understanding----
Senator Specter. Wait just a minute. Wait just a minute,
Mr. Scully. Let me pursue this with Mr. Pops.
You think it is a matter that each individual prescribing
physician should evaluate these two drugs and make that
decision?
Mr. Pops. I think the answer to that is yes. Again, I want
to try to make sure that I am clear that I really do not have a
particular point of view with respect to Procrit versus
Aranesp. What I am worried about is the general principle of
somebody making that determination based on a single consultant
or 10 consultants in a closed room.
Senator Specter. On this issue of the average wholesale
price, do you disagree with Mr. Scully's comment that it is
exorbitant?
Mr. Pops. Our drugs right now, we have one approved drug
that is sold through our partners at Genentech, so they make
that determination. Our next drug will be sold through a major
pharmaceutical company, so we will not make that--I do not have
personal direct experience with that.
Senator Specter. You are not able to comment on the average
wholesale price.
Mr. Pops. I cannot comment, but what I do sense, though, is
this----
Senator Specter. Are you able to comment on his statement--
--
Mr. Pops. No. No.
Senator Specter [continuing]. That the average wholesale
price is exorbitant?
Mr. Pops. No, because I have no direct experience myself on
that. We can get that data for you, though, through BIO and
through our member companies. We would be happy to respond to
that.
Senator Specter. I would be interested to have a written
response from your company.
Mr. Pops. We would be happy to do that.
Senator Specter. Anything you want to add, Mr. Pops?
Mr. Pops. No.
Senator Specter. Mr. Scully.
Mr. Scully. I would just like to add, I would clearly defer
to doctors on this. I am a lawyer, not a doctor. I have a large
staff of doctors. I did not have one that was particularly
expert in this area. I hired the former head of policy at HHS,
who is a physician and has long experience in this area. He was
the head of it in the Reagan administration. He had absolutely
no interest in this. In fact, he did it as a favor to me. He
had no desire to get into this quagmire.
I believe, and Secretary Thompson strongly believes after
many hours of working on this we made the right decision on a
scientific basis, and the issue, I believe, if you look--this
is a very tense issue involving billions of dollars for two
very large companies. It was on the front page of the Wall
Street Journal yesterday, and it is very difficult. It has a
big impact on people, and we believe we have done absolutely
the right thing scientifically.
Mr. Pops. A final comment I would make, Senator, is that--
--
Senator Specter. Go ahead, Mr. Pops.
Mr. Pops. I would just be worried of detecting a certain
inherent bias toward drugs being expensive, and sometimes drugs
nominally are expensive, but sometimes they deliver tremendous
amounts of economic and medical value to people, and when one
views the world through the prism of cost, which is a
legitimate way to view the world, particularly when you are
facing the pressures that Mr. Scully is facing--I completely
understand the logic--at the end of the day I do not want to
lose sight of the fact that we are talking about patients'
lives and their well-being, and I think that the dollar
denomination is only one of the many variables that should be
considered.
Mr. Scully. May I make one more comment?
Senator Specter. Sure.
Mr. Scully. Drugs cost a lot. Gleevec, a drug that was also
mentioned yesterday, is a wonderful new leukemia drug that cost
$50,000 a year. It is a great drug. We pay for several drugs,
and there are other examples in their testimony. They brought
up one called Zevalin, that I was also involved in for hundreds
of hours.
The Congresswoman, Democratic Congresswoman from California
called me up and said, could you check on this drug's approval,
and I called over my staff and they said, yes, we are about to
give it a new code. I said, well, just out of curiosity, what
does it cost? $28,000 a dose, and the tradition on these
programs was, nobody asked any questions, and they were about
to just give it a new code.
We looked at it in great detail. It is an interesting drug,
a very good drug. It is not another issue that is--it is an
add-on to an existing drug. The VA pays $12,000. $28,000 is a
price they made up. After significant involvement with the
company, who is very cooperative, we worked out a price which,
not through the pass-through, of $21,000. It is going to be
available to patients. It is a great drug.
But the tradition in these programs is, whatever the
companies come in and say the number is in their Red book, the
Government pays, and in the use of taxpayer dollars, we are
determined to give patients the right drugs, access to the
right drugs and pay a reasonable price, but we should not just
say, well, list the price and we will write you a check. It is
crazy.
Senator Specter. Well, it is obviously a very complicated
approach here. Where you talk about average wholesale price
being exorbitant, and you talk about an average manufacturing
price, I am going to pursue that further to see how you make
that determination, and some of these prices apply for
Medicare, there is a difference in application for Medicare and
Medicaid, which I am going to pursue to see what the
rationality is of that basis.
We face this on the Veterans Committee, which buys in
enormous bulk, we face it on HHS, we are now facing it on
Homeland Security, and this subcommittee and the Veterans
Committee are going to be pursuing this question as to how
pharmaceuticals are priced, because it is very, very hard to
figure out exactly what is going on here.
We appreciate your testimony. Anything either of you wishes
to add?
Mr. Pops. No.
Mr. Scully. Thank you, Mr. Chairman.
PREPARED STATEMENTS AND ADDITIONAL COMMITTEE QUESTIONS
Senator Specter. We have received the statements of the
American Association for Geriatric Psychiatry and the American
College of Physicians--American Society of Internal Medicine.
They will be made part of the record at this time, along with
other statements we receive. Senator Landrieu's question for
the record will also be included at this point.
[The information follows:]
Prepared Statement of the American Association for Geriatric Psychiatry
Mr. Chairman, the American Association for Geriatric Psychiatry
(AAGP) appreciates the opportunity to share our concerns, with the
Members of the Subcommittee on Labor, Health and Human Services,
Education, and Related Agencies, on the problems facing physicians who
treat older Americans enrolled in Medicare. AAGP is a professional
membership organization dedicated to promoting the mental health and
well-being of older people and improving the care of those with late-
life mental disorders. Our membership consists of more than 2,000
geriatric psychiatrists as well as other health care professionals who
focus on the mental health problems faced by senior citizens.
Physicians who treat Medicare beneficiaries, as Medicare providers,
accept a fee schedule that is, at baseline, often significantly lower
than their ``usual and customary'' fee schedule for providing services
to their self-paying patients. As you are aware, these physicians now
face a second consecutive year of across-the-board reductions in the
fees paid by the program. Unlike many other payment ``cuts'' in
Washington, these reductions are not simply reductions in a rate of
increase, but are absolute reductions in fee levels. In 2002, fees were
cut by 5.4 percent below 2001 levels. Unless the 108th Congress acts
early in the new year to prevent it, fees for 2003 are scheduled to be
reduced by another 4.4 percent below 2002 levels on March 1. Moreover,
Medicare actuaries project that--without any further changes in law--
annual fee reductions of a similar magnitude are likely to continue at
least through 2005. At this rate, the conversion factor--the dollar
multiplier used to compute Medicare physician fees--will fall in 2005
to a level that is close to its level in 1993.
This issue is most important because of the effect it will have on
access to care for Medicare beneficiaries, especially for the
vulnerable among them--those elderly and disabled persons who have
multiple, complex medical conditions and limited financial resources.
As a result of the recent reductions, many physicians are having to
reevaluate their willingness to treat Medicare patients, as well as
their willingness to be ``participating physicians'' who accept
Medicare payment as payment-in-full for their services. Consequently,
many Medicare patients are already having trouble finding physicians to
treat them. A recent survey by the American Medical Association found
that because of the recent cuts (5.4 percent in 2002) in Medicare
payments, 24 percent of physicians have either placed limits on the
number of Medicare patients they treat or plan to institute limits
soon. In the case of geriatric psychiatrists--most of whose patients
are enrolled in Medicare--the impact of these reductions is
particularly severe and is causing at least some in our profession to
consider leaving clinical practice altogether to enter other fields
where their experience and expertise are valued more appropriately.
The impact on geriatric psychiatrists--and their patients--is
compounded by the discriminatory reimbursement policies Medicare
already imposes on consumers of mental health services. Under current
law, Medicare requires beneficiaries to pay a 20 percent copayment for
Part B services with the single exception of a requirement of a 50
percent copayment for outpatient mental health services. The lack of
parity for mental health treatment is unconscionable--and of great
consequence to older adults who feel more stigmatized by psychiatric
illness than any other group. Despite widespread need, many seniors
decline, delay, or drop out of treatment because of the high copayment.
In addition, current law discriminates against the non-elderly disabled
Medicare population, many of whom have severe mental disorders.
The result of these factors--declining reimbursement rates,
existing discriminatory reimbursement for mental health care, and
stigma--will undoubtedly compound the existing serious access problems
for Medicare beneficiaries in need of mental health treatment--either
in finding a physician to treat them or in ``balance billing'' charges
by physicians who previously accepted assignment.\1\ Shifting costs to
beneficiaries--many of whom are low income--can make essential mental
health care unaffordable.
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\1\ Although ``balance billing'' may provide a short-term safety
valve that allows some physicians to continue treating Medicare
patients, the additional 9.25 percent that Medicare permits physicians
to collect from beneficiaries under its balance billing limits will not
fully offset the cumulative reductions in program payments for 2002 and
2003. Moreover, some States prohibit balance billing Medicare
beneficiaries as a condition of licensure in the State, which leaves
those physicians without this option.
---------------------------------------------------------------------------
The fee reductions that are forcing these choices stem from the
mechanism for automatic annual fee ``updates'' that is currently part
of the Medicare statute. For most types of providers, Medicare law
incorporates a mechanism by which payment rates are automatically
updated annually for inflation, in much the same way that Social
Security and other Federal cash benefits are automatically increased by
the cost of living adjustment (COLA) each year.
However, since the inception of Medicare physician payment reform
in the early 1990s, updating physician fees has been handled somewhat
differently from those of other providers. The payment reform law
established a mechanism under which the annual inflation update for
physicians' services is automatically adjusted--above or below the rate
of inflation--based on how actual Medicare spending for physicians'
services compares to an annual spending target computed by the Centers
for Medicare and Medicaid Services (CMS) based on a formula set out in
the law.
Until recently, this mechanism resulted in some relatively modest
reductions below full inflation--as well as some ``bonuses'' above
inflation. However, changes made in the ``Balanced Budget Act of 1997''
(BBA) tightened the annual spending targets, making it substantially
more difficult for physicians to meet them.
Before the BBA, the annual spending target was based on a formula
that included a reasonable allowance for spending increases due to
changes in technology and other related factors affecting the ``volume
and intensity'' of services provided by physicians. The BBA replaced
this allowance with a much less generous proxy--the estimated increase
in the gross domestic product (GDP)--which bears no relationship to the
factors affecting volume and intensity of services provided. The impact
of this change can be demonstrated quite simply. Where the volume and
intensity allowances for 1992 and 1993 were 6.8 percent and 6.0
percent, respectively, the corresponding GDP allowances for 1999 and
2000 were 1.3 percent and 2.7 percent.
Furthermore, because the BBA made the new targets cumulative--so
that a breach in one year's target would have to be fully offset by
corresponding expenditure reductions in later years--inaccurate CMS
estimates of several components of the formula used to compute the
spending targets for 1998 and 1999 have been carried forward, producing
inappropriately low targets in each subsequent year.
For example, actual growth in the GDP for 1998 and 1999 was greater
than the estimates on which CMS based its targets. Growth in the
beneficiary population is another component of the target. CMS
overestimated beneficiary migration from traditional Medicare into
managed care plans during 1998, which had the effect of understating
beneficiary enrollment growth in the traditional program.
All of these forecasting errors resulted in lower targets than
would have occurred if better data had been available. Correction of
them would eliminate the fee reductions scheduled for 2003 and
significantly improve the outlook for future years as well.
Unfortunately, CMS interprets the law as precluding it from
correcting these errors. Although AAGP takes no position on this arcane
legal issue, we do think that it is fundamentally unfair to make
physicians--and Medicare beneficiaries--pay for estimates that everyone
agrees in hindsight were wrong.
Physicians want to serve all Americans. However, they simply cannot
afford to accept an unlimited number of Medicare patients into their
practices when they are facing continued payment reductions. These
drastic cuts must be stopped before they devastate Medicare
beneficiaries' access to health care.
We commend the Senate for its recent action on legislation to avert
the impending 4.4 percent reduction in Medicare physician fees and urge
it to work out its differences with the House of Representatives at the
earliest possible date.
We note, however, that neither the legislation recently passed by
the Senate nor that passed by the House of Representatives in the 107th
Congress on the issue addresses the fundamental defects in the formula
for setting annual Medicare spending targets for physicians' services.
We urge Congress to revisit this issue in the near future and--at a
minimum--to replace the GDP component of the formula with a more
realistic proxy for changes technology and other factors affecting the
volume and intensity of the services furnished to Medicare
beneficiaries.
Thank you again for the opportunity to share our views on this
important issue. We look forward to working with you as you craft a
correction to the Medicare physician payment formula.
______
Prepared Statement of the American College of Physicians--American
Society of Internal Medicine
The American College of Physicians-American Society of Internal
Medicine (ACP-ASIM)--representing 115,000 physicians and medical
students--is the largest medical specialty society and the second
largest medical organization in the United States. Internists provide
care for more Medicare patients than any other medical specialty. We
congratulate the Appropriations Subcommittee on Labor, Health and Human
Services, and Education for holding this important hearing. Of the
College's top priorities for 2003, addressing the inadequacies of
physician payment by the Medicare program is the most critical to our
members. ACP-ASIM thanks Senator Arlen Specter, chair of the
Subcommittee, and Senator Tom Harkin, ranking member of the
Subcommittee, and other members, for their commitment to a strong and
stable Medicare program. We also want to extend special appreciation to
Senator Specter for his extensive efforts to improve health care for
all Americans, including his leadership on biomedical and health
services research and patient safety.
In spite of efforts in both the House and Senate in the last
Congress, Medicare payments were cut by 5.4 percent on January 1, 2002.
Unless Congress acts immediately, Medicare payments will be cut by
another 4.4 percent on March 1, 2003 under a final rule promulgated by
the Center for Medicare and Medicaid Services (CMS) in December 2002.
The effect of the cut was felt immediately in physician offices across
the country, prompting difficult decisions about the level of services
that could be provided and concerns about the future.
The Omnibus Appropriations Bill recently passed by the Senate
includes language to halt the 4.4 percent cut. A bill has been
introduced in the House of Representatives (H. Con. Res. 3) that would
halt implementation of the final rule, including the 4.4 percent cut,
through the authority given to Congress under the Congressional Review
Act. As the conference committee begins the difficult work of resolving
differences between the House and Senate versions, ACP-ASIM urges
Congress to enact legislation to halt the 4.4. percent cut as a
necessary first step toward developing a long-term solution.
Whatever approach is taken, the House and Senate must agree on a
bill that the President will sign before the cut goes into effect on
March 1. By freezing payments until September 30, the Senate
appropriations provisions create a reprieve that will allow the
Congress to address a long-term solution to physician reimbursement
problems. Congress will have to immediately find a way to guarantee
adequate and predictable payments that will keep pace with increases in
the costs of providing services.
background
The Centers for Medicare and Medicaid Services (CMS) has projected
that Medicare payments will decline by a grand total of 17 percent from
2002-2005. This is an absolute reduction in payments; it does not take
into account the impact of inflation in the costs of providing
services. Using a very conservative inflation assumption of 3 percent
per year, Medicare payments per service in constant dollars will be cut
by 28.1 percent over the 2002-2005 period.
This is not a problem that was created overnight. Congress adopted
the current physician payment methodology (known as the Sustainable
Growth Rate or SGR) in the Balanced Budget Act of 1997. Even then, ACP-
ASIM recognized the serious flaws inherent in the SGR payment system
and voiced our concern. Congress attempted to make corrections to the
payment formula in 1999 with the Balanced Budget Refinement Act,
however, it was not sufficient to correct the intrinsic problems. The
recent economic downturn the country is now facing has only exacerbated
the problem.
Recognizing the unfairness of the SGR methodology and the
tremendous hardship it has placed on physicians across the country, a
super-majority of members of the 107th Congress cosponsored
legislation, (the Medicare Physician Payment Fairness Act of 2001, H.R.
3351 and S. 1707) which would have reduced the magnitude of the 5.4
percent cut. Unfortunately, Congress failed to act prior to adjournment
and physicians suffered the effects of the across-the-board reduction
in their medical practices throughout 2002. A delay in the
implementation of the Medicare Fee Schedule Regulation has provided a
window of opportunity to stop the scheduled 4.4 percent decrease from
going into effect
flawed data used in formula
The 5.4 percent across-the-board reduction in Medicare payment is
primarily due to the flawed SGR system that governs the annual payment
for physician services. The SGR system errantly ties physician payment
to the Gross Domestic Product (GDP). There is no other segment of the
health care industry that uses such a methodology to update payment.
What is most unfortunate is that this method of tying physician payment
to the health of the overall economy bears absolutely no relation to
the cost of providing actual physician services. In the years where the
economy is facing a downturn, such as has been the case in the recent
past, a reduction in physician payment is significant.
SGR system may even cause payments to deviate from physician costs
because it does not fully account for factors affecting the actual cost
of providing services. Specifically, while the current SGR payment
system accounts for input price inflation and productivity growth, it
provides no opportunity to account for other factors, such as an
increase in the regulatory burden of the Medicare program.
In addition to the flawed SGR payment system, physicians have
repeatedly been penalized for inaccurate estimates in the past. Since
the SGR payment formula was first utilized in 1998 and 1999, Medicare
officials have consistently relied upon flawed data for the annual
update. Because the SGR formula is cumulative (i.e., it relies on
previous years' estimates), these errors that were never corrected are
compounded, further exacerbating the problem year after year. Due to
these successive errors, the spending target is about $15 billion lower
than it actually should be.
effect on physicians and their patients
As physician compensation falls below costs, fewer doctors are
willing to see new Medicare patients, at least in part due to Medicare
payment cuts. The percentage of physicians saying they accept all new
Medicare fee-for-service patients declined by 7.2 percent from 1999 to
2002, according to a preliminary survey by the Medicare Payment
Advisory Commission released in September, 2002. Surveys by ACP-ASIM,
the American Medical Association, the American Academy of Family
Physicians, and other medical organizations show an even more
pronounced deterioration in access since the 5.4 percent payment cut
went into effect on January 1, 2002. Large numbers of physicians are
reporting that it will be necessary for them to further restrict the
number of Medicare patients they will see if they are subjected to
another scheduled cut of 4.4 percent on March 1, 2003.
Research by the Center for the Study of Health System Change
attributes Medicare-beneficiary access problems to a number of factors,
including Medicare cuts. According to the Center's director, Paul
Ginsburg, PhD, ``Additional Medicare cuts of the magnitude expected
over the next few years are likely to increase beneficiaries' access
problems, especially in markets where private insurers pay
significantly more than Medicare for physician services.'' Availability
of care for Medicare patients has already deteriorated over the past
four years. Dr. Ginsburg reports that the percentage of Medicare
patients who did not receive or delayed needed care increased from 9.27
percent in 1997 to 11.1 percent in 2001. The percentage of primary care
physicians accepting all new Medicare patients declined steadily over
the 1997-2001 period before the 5.4 percent cut went into effect.
Members of ACP-ASIM who responded to a recent online questionnaire
received by January 10, 2003 reported major changes in their ability to
provide services to Medicare patients as continued cuts in
reimbursement take effect:
--The number of physicians who will no longer accept new Medicare
patients in 2003 increased by 78 percent over the previous
year.
--Less than two-thirds of participating physicians have decided to
renew their Medicare contracts for 2003.
--Of those physicians who currently accept all new Medicare patients,
only one in five will continue to do so.
--Only one-third of physicians plan to maintain their current policy
towards accepting new Medicare patients.
--Of those implementing or undecided on changes, 88 percent plan to
limit the number of new Medicare patients, close their
practices to new Medicare patients, or close their practice to
all Medicare patients. 38 percent will completely close their
practice to new Medicare patients.
--Of those implementing or undecided on changes, only 12 percent
report that they will accept all new Medicare patients.
--Nearly 50 percent of physicians report considering early retirement
or a career change. Of those physicians, 80 percent report
being concerned that their patients would be unable to find
another participating Medicare provider.
--More than 70 percent of physicians have already taken cost cutting
measures to absorb previous cuts including reducing their
staff, putting off the purchase of new medical equipment and
technology, or postponing raises and decreasing staff salaries.
Reductions in Medicare reimbursement are exacerbated by increases
in medical liability insurance premiums and the expense of complying
with government regulations. Rising medical liability insurance
premiums are forcing many doctors to limit services, relocate their
practices, or retire early. The adverse results for patients who are
unable to find the care they need are unacceptable. In addition,
physician concerns about the billing paperwork and administration
required by Medicare are leading many to limit their acceptance of
Medicare patients. According to a recent MedPac survey of physicians,
almost 75 percent were concerned about this ``hassle factor'' and 16
percent said that they had limited their acceptance of Medicare
patients because of this factor.
These financial burdens--cuts in reimbursement, increases in
liability premiums and unfunded mandates--are converging to stress the
health care system to the breaking point. The impact is being felt now
but will also affect generations to come. Without health care providers
little health care can be provided. Compensation for providers must be
adequate if the system is to remain viable and open to a broad range of
patients. Inadequate compensation undermines the foundation of the
current system and severely handicaps its capacity to meet future
needs. Even the most altruistic students will think twice before
choosing medicine as a career.
Physicians have a strong sense of commitment to their Medicare
patients. They will do everything within reason to continue to provide
their Medicare patients with high quality, accessible health care, even
in the face of rising costs and declining reimbursement. However, there
is a point where the economics of running a practice will force
physicians to institute changes to limit the damage from continued
Medicare payment cuts. Like any small business, revenue must exceed the
costs of providing services in order for a practice to remain
financially viable. For practices that are heavily dependent on
Medicare revenue, such as a typical internal medicine practice, the
reduction of 5.4 percent in 2002 and the additional reductions that are
planned through 2005 force primary care providers to take preventive
steps to cut their losses from seeing large numbers of Medicare
patients.
Physicians will have essentially only four options available to
them to offset the losses from declining Medicare payments and rising
costs. They can reduce their reliance on Medicare revenue by decreasing
the share of practice revenue that comes from Medicare while increasing
the share that comes from more reliable (non-Medicare) payers. This
would be accomplished by putting limits on how many Medicare patients
will be seen while marketing the practice to non-Medicare populations.
They can cut costs--eliminating beneficial services and technology.
They can do both: cut beneficial services and reduce their reliance on
Medicare. Or they can go out of business, by closing their practices
entirely.
We believe that it is very likely that physicians will be forced to
limit the number of Medicare patients in their practice; lay off staff
that help Medicare patients with appointments or medications; relocate
to areas with a younger, non-Medicare eligible patients; spend less
time with Medicare patients; discontinue participation in the Medicare
program; limit or discontinue investment in new technology; limit or
discontinue charitable care; or in some cases, retire or close their
practices. Physicians will make such changes reluctantly, but the laws
of economics will leave them no choice but to do so.
The effects of the most recent and projected cuts in reimbursement
will most likely be hardest felt in rural and other areas that are
already underserved. The problems that we see today will certainly only
get worse unless the severely flawed methodology utilized by Medicare
to compute physician payments is immediately addressed.
Physicians' efforts to reduce their reliance on an unstable and
unreliable Medicare payment system will make it even more difficult for
patients to gain access to an increasingly under-funded health care
system, particularly as the number of Medicare patients increases from
34 million today, to 40 million in 2010, to 60 million in 2030. More
Medicare beneficiaries will be seeking care, yet fewer and fewer
physicians will be able and willing to provide care to Medicare
patients. As Medicare is increasingly viewed as an unreliable payer
whose reimbursement does not cover the costs of providing services,
young physicians will be disinclined to go into specialties that are
viewed as being heavily dependent on Medicare--particularly internal
medicine and geriatrics--at the time when those specialties should be
most in demand to provide care to an aging population.
conclusion
ACP-ASIM urges members of the Subcommittee to help retain in the
final conference report the Senate provisions in the Omnibus
Appropriations bill to halt the 4.4 percent decrease in Medicare
reimbursement. Our organization stands ready to work with Congress to
make constructive and lasting improvements to the Medicare program.
______
Amgen Aranesp Data Submissions to CMS
In July of 2002 the FDA granted approval to Aranesp (darbepoetin
alfa) when used for the treatment of anemia in patients with non-
myeloid malignancies where anemia is due to the effect of concomitantly
administered chemotherapy.\1\ The label recognized 2.25 mcg/kg/week as
the starting dose for this indication, and the clinical studies section
of the label recognized the minimum effective starting dose as 1.5 mcg/
kg/week. The label also states that ``Due to the longer serum half-
life, Aranesp should be dosed less frequently than Epoetin alfa.'' In
addition, the USP-DI updated the monograph for Aranesp at this same
time to indicate that the 1.5 mcg/week to 3.0 mcg/kg every other week
(Q2W) is an effective dosing paradigm.
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\1\ This indication is in addition to the indication of chronic
renal failure, including patients on dialysis and patient not on
dialysis, which was the indication Aranesp was originally approved for
in 2001.
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Based upon the newly approved label for Aranesp for the treatment
of chemotherapy induced anemia (CIA), and the fact that Amgen learned
that CMS had questions regarding the cost of Aranesp as compared to
Epoetin alfa, Amgen initiated a series of meetings with CMS.
The information provided to CMS as part of these meetings refutes
specific sections of Tom Scully's testimony provided to Senator Specter
during the Medicare hearing on January 30. Specifically, Amgen provided
data substantiating that Aranesp dosed at 200 meg Q2W is less
expensive than Epoetin alfa and represents a cost savings to the
Medicare program.
Aranesp Dosed at 200 mm Q2W is less expensive than Epoetin Alfa at
40,000 units weekly.--At the hearing on January 30, Tom Scully stated
that CMS pays more for Aranesp than it does for Epoetin alfa in the
physician office setting. The quote is as follows: ``We [CMS] right now
pay about $1422 every two weeks for Aranesp and we pay about $1,200
every two weeks for Procrit.'' Amgen disagrees with this statement.
From September of 2002 through and including February of 2003,
Amgen has provided consistent data to CMS supporting the fact that the
dose of Aranesp most commonly used for the treatment of CIA is 200 mcg
Q2W, and that this dosing paradigm is cost effective as compared to
Epoetin alfa. The wealth of evidence supporting the fact that Aranesp
is a cost effective alternative to Epoetin alfa has increased
significantly each month and has been supplied to CMS.
The data supplied to CMS includes:
--USP-DI monograph supporting 1.5 mcg/kg/week-3.0 mcg/kg Q2W.
--SDI claims data \2\ demonstrating that in a review of over 6,000
claims, 89 percent of providers dose Aranesp in CIA at 200 mcg
Q2W.
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\2\ Surveillance Data Inc. (SDI) claims consist of claims from U.S.
physician offices.
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--Clinical trial data for Aranesp demonstrating that the 200 mcg Q2W
dose of Aranesp is efficacious as compared to 40,000 units of
Epoetin alfa.\3\
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\3\ Mirtching et al, Oncology 2002.
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--Clinical data invited to be presented at ASH 2002 demonstrating
that Aranesp 3.0 mcg/kg (200 mcg) administered Q2W is cost-
effective compared to Epoetin alfa administered weekly
(40,000U/week). The authors conclude that Aranesp is 11-13
percent less expensive than Epoetin alfa while providing
similar efficacy.\4\
---------------------------------------------------------------------------
\4\ Blood 2002 (Supplement), abstract #3447.
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Hospital
Physician outpatient
Office department
------------------------------------------------------------------------
Aranesp:
Reimbursement....................... $4.74 $2.37
Common Dose (mcg Q2W)............... 200 200
Weekly Reimbursement................ $948/2=$474 $474/2=$237
Epoetin alfa:
Reimbursement....................... $12.69 $9.10
Common dose (units QW).............. 40,000 40,000
Weekly Reimbursement................ $507.60 $364
Savings (percent)....................... 7 35
------------------------------------------------------------------------
Questions Submitted by Senator Mary L. Landrieu
Question. Was the term ``functional equivalence'' introduced in the
proposed rulemaking? If so, would you please highlight the appropriate
reference from the notice of proposed rulemaking?
Answer. Functional equivalence is a term CMS developed as a result
of comments received during the comment period on the notice of
proposed rulemaking on the 2003 update for Medicare's outpatient
prospective payment system to describe the relationship between Aranesp
and Procrit. As we explain in the final rule, it became apparent that
darbepoetin alfa, while not structurally identical to epoetin alfa,
uses the same biological mechanism to create the same clinical effect
in the body. To encapsulate this phenomenon, we used the term
``functional equivalence.''
Question. What, if any, opportunity did interested parties have to
comment of the new standard?
Answer. First, we would note that the term ``functional
equivalence'' is not a standard, but a descriptive term used to capture
a relationship between two drugs. As you may know, the comment period
is a vital part of the process we use to issue every regulation. We
place high value on all comments we received from interested parties.
In fact, it was through comments received during the comment period on
the proposed rule regarding the relationship between Aranesp and
Procrit that led us to employ the term ``functional equivalence.''
Question. Do you believe the ``functional equivalence'' standard
requires any consideration of ``quality-of-life'' issues such as
frequency of administration?
Answer. We would remain open to the possibility that quality-of-
life issues may affect how we address payments for similar drugs in the
future. However, as to these two drugs and the circumstances in which
they are administered, we believe there is not a significant impact
with regard to quality of life. As we noted in the final rule, the
relationship between darbepoetin alfa and epoetin alfa is unusual in
the strong similarity of the two drugs.
Question. What assurances can you give biotechnology firms that the
ill-defined ``functional equivalence'' standard won't be used to deny
``pass-through'' status for their new product?
Answer. We consider the situation of darbepoetin alfa and epoetin
alfa to be unusual. In the final rule we note that the situation
related to darbepoetin alfa and epoetin alfa is distinguished by the
very strong similarity of the two products and by the potential effects
on the Medicare program. Thus, if a similar situation arises in the
future, we might consider whether to determine two drugs to be
functionally equivalent, but we do not anticipate such a situation
would be at all common.
CONCLUSION OF HEARING
Senator Specter. Thank you all very much for being here.
That concludes our hearing.
[Whereupon, at 12:21 p.m., Thursday, January 30, the
hearing was concluded, and the subcommittee was recessed, to
reconvene subject to the call of the Chair.]
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