[Senate Hearing 108-268]
[From the U.S. Government Publishing Office]
S. Hrg. 108-268
MEDICARE OUTLIER PAYMENTS TO 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
MARCH 11, 2003--WASHINGTON, DC
__________
Printed for the use of the Committee on Appropriations
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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
ROBERT C. BYRD, West Virginia (Ex
officio)
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.......................... 2
Statement of Thomas A. Scully, Administrator, Centers for
Medicare and Medicaid Services, Department of Health and Human
Services....................................................... 3
Prepared statement........................................... 6
Statement of Joseph W. Marshall, III, chairman and CEO, Temple
University Health System....................................... 17
Prepared statement........................................... 19
Statement of Gail Wolf, senior vice president and chief nursing
officer, University of Pittsburgh Medical Center............... 21
Prepared statement........................................... 23
Statement of Andrew Wigglesworth, president, Delaware Valley
Hospital Association........................................... 24
Prepared statement........................................... 26
Opening statement of Senator Mary L. Landrieu.................... 46
Prepared statement........................................... 46
Prepared statement of the American Hospital Association.......... 48
Prepared statement of the New Jersey Hospital Association........ 50
Questions submitted by Senator Arlen Specter..................... 51
MEDICARE OUTLIER PAYMENTS TO HOSPITALS
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TUESDAY, MARCH 11, 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 9:38 a.m., in room SD-192, Dirksen
Senate Office Building, Hon. Arlen Specter (chairman)
presiding.
Present: Senators Specter, Harkin, and Landrieu.
opening statement of senator arlen specter
Senator Specter. Good morning, ladies and gentlemen. The
Appropriations Subcommittee on Labor, Health and Human
Services, and Education will now proceed to a hearing on a
technical subject known as outlier costs. Medicare pays
hospitals a set amount for each of more than 500 patient
illnesses or procedures, separated into different diagnosis-
related groups called DRGs.
Under that system, hospitals have a financial incentive to
avoid extremely costly patients and to counter that incentive,
Medicare makes additional payments called outlier payments
which compensate hospitals for costs of cases that are far more
expensive than the average for each diagnostic-related group.
In order for a hospital to receive outlier payments, their
costs must exceed a fixed loss amount, yearly set by Medicare.
The outlier payment is 80 percent of the excess over the fixed
loss amount.
Congress has mandated a range of 5 to 6 percent, of total
Medicare DRG payments for outliers, and I just asked Mr. Scully
informally if that was a realistic figure, and he assured me it
was.
There had been a schedule established by CMS to put a rule
into effect immediately, and this subcommittee intervened
because of concerns we heard from many hospitals across the
country that there would be a great hardship on hospitals to
have a new rule put into effect abruptly, especially without
giving the hospitals an opportunity to be heard, and so CMS has
established a procedure where OMB released the regulation on
February 28, and it was made public on March 5, and the comment
period will extend until April 4, and then a date for it to be
put into operation will be set thereafter, so there will be an
opportunity for hospitals to respond and some period to make an
accommodation.
Hospitals are obviously struggling yet under the impact of
the Balanced Budget Act of 1997, and steps have been taken by
Congress to ameliorate the impact. Most recently, on the fiscal
year 2003 omnibus appropriation bill, having found out that a
Medicare payment cut was due to take effect on March 1, we
prevented any reduction until September to give us an
opportunity to review the matter further.
So this is another of the ongoing hearings by this
subcommittee and others to try to come to grips with these very
complex issues, to see to it that hospitals have a fair
opportunity to be adequately paid, an opportunity to adjust to
changing rules and to enable the Department of Health & Human
Services and CMS to stay within the mandates and guidelines
which Congress has expressed.
I now yield to my distinguished colleague, Senator Harkin.
opening statement of senator tom harkin
Senator Harkin. Thank you very much, Mr. Chairman, for
having this hearing. The outlier problem has a broad impact on
the Medicare program, and some hospitals legitimately rely on
these to help offset high-cost payments. However, because the
outlier payments are taken from the base payments to all
hospitals, any misuse of the program ultimately hurts all
hospitals, especially those in low-reimbursement, high-
efficiency States that have little need for outliers--I am
talking about Iowa--so we also have an interest in this issue,
too, Mr. Chairman, and I thank you for having this hearing.
So I look forward to hearing from the administration and
the witnesses about their plans to address this outlier program
problem.
If I might just take a couple of minutes, Mr. Chairman, I
also want to raise another issue that I am sure Mr. Scully
knows I will be raising, and in my first questions I will ask
him about it. Six weeks ago we had a hearing on a number of
Medicare issues. I again raised my concerns at that time about
the geographic disparity in Medicare reimbursements between
rural and urban States. As I mentioned then, my State of Iowa
has had a severe competitive disadvantage, because our
providers and hospitals, as I pointed out then, are number 50
in the Nation, bottom in terms of per-beneficiary reimbursement
for Medicare.
Mr. Scully, you testified at that time that the
administration is aware of our concerns. You even suggested
that you agreed that some rural States like Iowa are
underreimbursed for some services. You indicated that I would
be happy with some of the President's Medicare reform proposals
because his plan would, in addition to creating a drug benefit
for all beneficiaries, provide some assistance to rural States.
Well, I am sure it comes as no surprise to you that I am
anything but happy with the President's Medicare proposal, and
I am sure that that is true across the spectrum of those of us
who represent the State of Iowa, regardless of political party.
First, the plan does nothing to address the geographic
inequity issue. This, despite the fact that the President
personally came to Iowa last year and committed to supporting
efforts to increase Iowa's Medicare reimbursement. But worse
than the fact that the President's plan does nothing to help
address the geographic disparity is that the President's
prescription drug proposal will hurt Iowans--hurt Iowans.
According to the administration's plan, Iowans who elect to
stay in fee-for-service will receive a meager drug benefit.
Seniors with the lowest income and higher drug costs will
receive added protection, but the bottom line is, only seniors
who go into an HMO will receive the drug coverage they need and
deserve.
Now, why is that bad for Iowa? Because we do not have one
Medicare HMO in the entire State of Iowa. That means that all
the money that is going to be used for this program would go to
private HMOs in other States.
Now, the President emphasized that seniors should have
choices, but I hope the President realizes that fewer than 20
percent of rural residents in America have access to Medicare
HMOs, fewer than 20 percent, one out of five, and as I said, in
Iowa, we do not even have one, so not only does the
administration's proposal fail to modernize Medicare for all
seniors in terms of geographic disparity, it actually takes a
step backward for seniors in rural States like Iowa.
So Mr. Scully, I know we are here to talk about outlier,
and I want to make it clear that it is also an important issue
to us in Iowa because of the effect it will have on
reimbursements and on payments--you take away from the base--
but I also wanted to ask you when my time comes to ask
questions about the, again, the geographic disparity and the
prescription drug proposal.
Thank you very much.
Senator Specter. Thank you very much, Senator Harkin.
STATEMENT OF THOMAS A. SCULLY, ADMINISTRATOR, CENTERS
FOR MEDICARE AND MEDICAID SERVICES,
DEPARTMENT OF HEALTH AND HUMAN SERVICES
Senator Specter. We now turn to the distinguished
Administrator of the Centers for Medicare and Medicaid
Services, Mr. Thomas Scully. He has held this position since
May 2001. Prior to the appointment, he served as president and
chief executive officer of the Federation of American
Hospitals. He was a partner at Patton Boggs, and also served as
deputy assistant to the President and counselor to the Director
of the Office of Management and Budget. A law degree from
Catholic University and a bachelor's degree from the University
of Virginia.
Mr. Scully, thank you for joining us here, and we look
forward to your testimony.
Mr. Scully. Thank you Mr. Chairman and Senator Harkin, and
my testimony is all about outliers, but I would be very anxious
to explain the positive impact of the President's plan, which I
was very involved in developing, on the rural areas in Iowa.
Anyway, thank you for inviting me here to discuss the
incredibly complex subject of hospital outlier payments.
Outlier payments, Mr. Chairman, as you mentioned, are available
to hospitals to help ensure that the sickest and most complex
Medicare beneficiaries receive high-quality health care in
hospitals. I know that this issue, and how it works out in
Pennsylvania's hospitals and Iowa's, is important to both of
you, and it is very important to CMS.
Medicare basically, as you mentioned, pays DRG payments for
every hospital payment, a little bit under $100 billion a year,
and we pay additional add-ons for outliers, because, as I
mentioned, they are complex cases. The law requires CMS to set
outlier payment thresholds at between 5 and 6 percent a year.
We take that out of the $100 billion total hospital pot we set
aside. Traditionally in the last 10 years, 5.1 percent has been
the amount that is set aside. The 5.1 percent is required to
meet a budget projection that is supposed to be budget-neutral,
so we set a threshold for outliers that will result in spending
only 5.1 percent of that whole hospital pot on these high-cost
cases.
As I mentioned, this past year the 5.1 percent threshold
was supposed to work out to $3.7 billion for 2002, but instead
we spent $5.3 billion, so we missed the target by $1.6 billion.
We started overshooting the mark without understanding really
why in 1997. In 1997, the outlier payment target was $3.6
billion, but we spent $300 million more than that. In 1998, the
outlier payments were $4.4 billion when the target was supposed
to be $3.4 billion, so we spent $1 billion more than we were
expected to.
In 1999, we spent $5.2 billion, which was $1.8 billion more
than we were supposed to spend under the law. In 2000, we spent
$5.3 billion, again $1.8 billion more than we were supposed to
under the law. In 2001, we spent $5.5 billion, which was $1.9
billion more than expected and, as I mentioned, again last year
we spent $1.6 billion more than the target. So overall from
1997 to 2002 this thing steamrolled and developed without the
Agency understanding why we had spent $8.4 billion more than
Congress had authorized us to spend. We consistently missed the
targets. We did not understand why. We kept raising the bar to
get into this outlier pot on the theory that if we raised the
bar we would actually get closer to the target, and we kept
missing and missing, and really never understood the dynamics.
In 2000, for example, the outlier threshold to get these
extra payments was $14,050 per case, in 2002 we raised it to
$21,025 per case, and last year we raised it to $33,560 per
case, consistently raising the bar, thinking that would result
in us getting closer to our target of 5.1 percent of overall
hospital payments, and obviously we did not understand what the
dynamics here were, and we kept missing.
It was not until the rule finally came out on October 1 for
this year that raised the threshold to $33,560 that this
outlier problem was discovered in two ways. One is, hospitals
that were losing because they were getting less outlier
payments. As Senator Harkin said, I do not believe there is an
outlier hospital in Iowa, but they were getting paid less by
virtue of other people getting paid more. Some hospitals called
me and flagged this and started to essentially tell us how the
dynamics were working for some of their competitors that were
taking advantage of this, and they also called some Wall Street
analysts. On October 27, a Wall Street analyst wrote a fairly
high-profile explanation of this dynamic and it resulted in a
lot of attention, a lot of press attention, on the fact that a
relatively small number of hospitals were getting a hugely
disproportionate share of outlier payments, and that was what
was, in fact, driving up the totals.
As I mentioned, in the last full fiscal year, 2002, we were
supposed to spend 5.1 percent of DRG payments, and we spent 6.9
percent. On average, the average hospital should be getting
about 5.1 percent of their total Medicare payments in outlier
payments. What we found was that 3 percent of hospitals, 123
hospitals out of 5,000, roughly, acute care hospitals in the
country had outlier payments of more than 20 percent.
There were some particularly egregious offenders, and I
listed a few in the testimony in the addendum, but just to
illustrate how badly this problem can get out of hand, how much
some hospitals took advantage of it, Doctors Hospital in
Modesto, California--and Modesto's Doctors Hospital is not a
high-cost teaching hospital, it is a pretty standard community
hospital--received $29 million in 2002 in regular standard
Medicare payments. They received $62.5 million of outlier
payments, so 215 percent. Instead of 5 percent they got 215
percent of outlier payments. If they had gotten the national
average they would have gotten $1.5 million in outlier
payments. Instead, they got $61 million more, more than double
their basic payments, and it is a pretty standard hospital.
Redding Medical Center, which is also a pretty standard
hospital in Redding, California, that has had some other
problems that have been in the press lately, received $47
million in regular Medicare payments and $56 million in outlier
payments, so obviously, again, more than 100 percent. If they
had gotten the standard amount of 5.1 percent, which to be
honest with you, a hospital of that type of structure probably
should get the average because it is not a teaching hospital,
they should have gotten about $2.5 million, so they got $53.5
million more than they should have.
I would note that both of those hospitals are run by Tenet
Healthcare, which probably drew the most press attention on
this. Hospitals, under the regulation and under the law, can
still bill us for this. It is arguable whether it is legal or
not, but arguably, under existing regulations it is. I would
note that Tenet, as a result of repeated contact from CMS, has
voluntarily quit billing for this, and it has cost them $57
million a month, or $750 million a year that they were getting
from this program. As of January 1, they are voluntarily
complying with this regulation and not billing us any more.
But just to show that it is not just Tenet, they were about
a third of the problem nationally. They own about 115
hospitals. Community Medical Center in Toms River, New Jersey,
receives $113 million in regular DRG payments, again, this is a
community hospital, and got $87.6 million in outlier payments.
Again if you looked at the national average, they should have
gotten $4.7 million in outlier payments, so they picked up $83
million this year in outlier payments that to us seem to be way
out of line.
Again, when you look down the line, 3 percent of hospitals,
about 123, have outlier payments that are way, way beyond
anything that is rational or understandable to us.
The impact of this is not just that it helps the hospitals
that figured out the way to game the system. The impact is that
it hurts other people, and on the charts, I attach just one,
Thomas Jefferson Hospital, for instance, in Philadelphia, lost
about $2 million last year compared to what their normal
outliers would have been. In past years, before we started to
raise the bar, it received about 18 percent, which is what you
would expect a big teaching hospital like Thomas Jefferson
would get. But their outlier payments have been dropping,
because as we raised the bar to get into the pool, they got
less for each true high-cost patient. If they had lowered the
outlier threshold through this current year to what last year's
was, they would have gotten, just to be precise, $1.6 million
more this year, if last year's rule was still in effect. But
because of these abuses, we kept raising the bar, and it hurts
all the community hospitals that have not gotten this.
Hershey Medical Center in Pennsylvania, for instance, would
have lost about half a million dollars this year, due to this.
The University of Iowa, if it were under last year's threshold
instead of this year's threshold, would get $1.5 million more.
So the 3 percent of hospitals that have been taking
advantage of the program are basically taking money away from
the other 97 percent that are not, and we do not think that is
fair, and that is why we thought that we should close this,
what we consider to be loophole, immediately.
We sought to do this, after the chairman understandably
inquired about the impact on some Pennsylvania hospitals--and
generally, the disproportionate number of the hospitals are in
New Jersey, California, and Pennsylvania, for reasons we still
do not really understand. Those were where the highest number
were, and we sought to close it immediately, but we obviously,
as you mentioned, turned it into a draft rule to get 30 days'
comment from the hospitals that are going to be affected. We
expect that shortly, after we consider the comments from
hospitals we will put out a final rule. We are certainly
respectful of the concerns of the chairman and ranking member,
but as I mentioned to you earlier, the Ways and Means
Committee, both Mr. Stark and Mr. Thomas in the House have
expressed a strong interest in us fixing this as quickly as we
possibly can.
prepared statement
I would just add, to close, that I ran a hospital
association for 6 or 7 years. I did not understand this
dynamic. I am a little embarrassed that I did not figure this
out for the first 2 years I was on the job and, in fact, that
my agency went for 5 years without understanding this, but we
really believe that the outlier pool is a legitimate way to pay
for high-cost Medicare patients. A lot of the hospitals that
are taking care of these patients have not been paid
appropriately, and we think, with respect to trying to be
sensitive to the community needs that are involved with the
hospitals that have been collecting these extra payments, that
we need to fix this as fast as we reasonably can.
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
inpatient hospital outlier costs. Outlier payments are those Medicare
payments that are available to hospitals to help ensure that Medicare's
sickest beneficiaries continue to have access to high quality health
care. We have an obligation to safeguard this access for Medicare's
sickest patients, and to ensure that we are spending taxpayer funds
appropriately. Medicare generally pays most hospitals a predetermined
amount for a typical patient's stay, based on the average cost of
providing care to a patient in a similar condition. The payment is set
under a diagnostic related group (DRG) that will allow an efficiently
operated hospital to earn a reasonable rate of return overall. However,
Medicare law recognizes that there are some beneficiary cases that are
more complicated--and therefore more costly to treat--and requires that
we pay an additional amount to hospitals for these cases known as
outlier payments.
Outlier payments can be viewed as insurance for hospitals against
the large losses that could result from extremely expensive cases. In
addition to the fixed rate per case, hospitals receive outlier payments
when the estimated costs of the case exceed a fixed-loss threshold.
This fixed-loss threshold operates like the deductible in a typical
insurance policy. When the cost of a case exceeds the fixed-loss
threshold, we pay the hospital an additional amount equal to 80 percent
of the estimated costs beyond that loss threshold--similar to
coinsurance required in most insurance policies. Under the law, CMS
must set outlier payments between 5-6 percent of total inpatient
payments. In recent years, CMS has set the outlier threshold at a level
projected to pay 5.1 percent of total payments for inpatient care for
these outliers--which was projected to result in spending of $3.7
billion in fiscal year 2002. However, in reality, we spent $5.3
billion--a difference of $1.6 billion.
We are particularly concerned about excessive claims for outlier
payments. Each year, when we update the hospital payment rates, we set
a threshold for individual outlier payments designed to keep them at
the overall target of 5.1 percent of total payments. As outlier claims
increased (and the agency had no idea why) the outlier threshold has
skyrocketed--from $14,050 in 2000 to $33,560 in 2003--as the agency
raised the bar to try (very unsuccessfully) to stay within the 5.1
percent target. As a direct result, more hospitals have been forced to
absorb the costs of the complex cases they treat, while a relatively
small number of hospitals that have been aggressively gaming the
current rules benefit by getting a hugely disproportionate share of
outlier payments. As you can see, the behavior of a few hundred
hospitals--those that took advantage of the outlier program--are the
main cause of the sharp increases in the loss threshold.
CMS sets the outlier threshold to reach a target of total outlier
payments equal to 5.1 percent of DRG payments. Moreover, we found that
these hospitals, in order to maintain that level of outlier
reimbursement, significantly exceeded the national average in raising
charges between fiscal year 1999-2001, with Hospital A's charges
increasing by 111 percent, and Hospital B's charges increasing by 126
percent, compared to the national average of 18 percent. For fiscal
year 2002, total outliers exceeded that target and reached 6.9 percent
of total inpatient hospital payments. Hospital A in California received
outlier payments equaling more than 215 percent of its DRG payments in
fiscal year 2002--that's twice the amount of outlier payments to
regular payments. Putting it another way, Hospital A received only
approximately $29 million in regular DRG payments, but $62.5 million in
outlier payments. However, under the target outlier amount of 5.1
percent, Hospital A would have only received $1.5 million in outlier
payments--a difference of $61 million. Hospital B, located in New
Jersey, received outlier payments of 129 percent of its DRG payments.
In dollars, Hospital B received about $113 million in regular DRG
payment and $87.6 million in outlier payments, but under the national
target of 5.1 percent, would have only received about $4.7 million in
outlier payments. Again, the difference is substantial--about $83
million.
To make sure that outlier payments are used as they were intended,
we issued a proposed rule that suggests revising the current outlier
policy to prevent further gaming of the system by the few hospitals
that get the lion's share of these payments. I wanted to close the
loophole immediately, and help the hospitals that need it the most.
Instead, we put out changes for comment, partially due to the
Committee's interest in evaluating the impact of the changes. I would
like to discuss our new proposed rule in greater detail with you today.
However, I think it's important that I first discuss the logistics of
the outlier system so that I may better explain how the new regulations
improve the system, safeguarding access to care for a broader number of
Medicare beneficiaries.
background
The prospective payment system (PPS) was designed to pay hospitals
appropriately while providing an incentive for hospitals to provide
care as efficiently as possible. Under the inpatient PPS, Medicare pays
hospitals a pre-determined, per-discharge rate for 509 patient
categories called diagnosis related groups (DRGs). Each patient
discharge is assigned to a DRG based on diagnosis, surgery, patient
age, discharge destination and sex. Each DRG has a weight established
for it based on charges submitted by hospitals for Medicare patients.
Each weight reflects the relative average charge, across all hospitals,
of treating cases classified in that DRG. In total, Medicare paid
approximately $100 billion in fiscal year 2002 for inpatient hospital
services.
Because the PPS payment is based on an adjusted average payment
rate, Medicare's payment for some beneficiary cases will be higher than
the actual cost of the case while for other cases, payment will be less
than the actual cost of the case. The system is designed to give
hospitals the incentive to manage their operations more efficiently by
evaluating those areas in which increased efficiencies can be
instituted without adversely affecting the quality of care. Under
inpatient hospital PPS, additional payments are made for those cases
that generate extremely high costs when compared to average cases in
the same DRG. These outlier payments are intended to protect hospitals
from large financial losses due to unusually expensive cases.
The Medicare billing form for inpatient stays provides hospitals
with the opportunity to code whether they are requesting an outlier
payment. When such a code is not selected, Medicare's fiscal
intermediaries (FI), the private-sector contractors that process and
pay Medicare hospital claims, identify outlier cases by comparing the
estimated costs for a case to a DRG-specific fixed-loss threshold
amount. The fixed-loss threshold amount is the sum of the DRG payment
for the case, any add-on payments (new technology, indirect medical
education, disproportionate share adjustment), and the fixed-loss
threshold. We set the fixed-loss threshold each year at an amount that
is projected to generate outlier payments equal to 5.1 percent of total
payments under the PPS. Medicare then pays 80 percent of hospitals'
costs above their fixed-loss threshold amounts. However, in the past
few years actual outlier spending has exceeded the projected 5.1
percent. For example, outlier payments totaled 7.6 percent in 1999
($5.2 billion, or $1.8 billion more than projected); 7.6 percent in
2000 ($5.3 billion, or $1.8 billion more than projected); 7.7 percent
in 2001 ($5.5 billion, or $1.9 billion more than projected); and 6.9
percent in 2002 ($5.3 billion, or $1.6 billion more than projected).
The national fixed-loss threshold for 2003 is $33,560, up from $21,025
in 2002. As you can see, as hospitals claim more and more outlier
cases, we have been forced to raise the fixed-loss threshold to remain
close to the 5.1 percent target (and we have not been close). Moreover,
taxpayers spent $7.1 billion more than Congress authorized for these
payments between 1999 and 2002 because of abusive practices and our
inability to track or understand the abuses--until now.
problems with excess outlier payments
The inpatient PPS outlier policy, prior to our publication of the
new proposed rule, had a couple of major problems that allowed
hospitals to claim excessive outlier payments. In order to estimate the
actual costs incurred by a hospital for a given case, Medicare's FIs
use the historical relationship between each hospital's costs and its
charges to estimate the ``true'' cost of individual case. The cost-to-
charge ratio is determined by using the most recently settled cost
report. So long as hospital costs and hospital charges change at
roughly the same rate, this estimate produces a relatively reliable
result. However, if a hospital increases its charges dramatically
relative to costs in its most recently settled cost report, the use of
the historical relationship will yield higher outlier payments than
would be appropriate.
In addition, the longer the lag between the historical data and
current charges, the more likely it is that the cost-to-charge ratio
estimate will be inaccurate. Hospitals must submit their cost reports
within 5 months after the end of their fiscal year. CMS makes a
decision to accept a cost report within 30 days. Once the cost report
is accepted, CMS makes a tentative settlement of the cost report within
60 days. The tentative settlement is a cursory review of the filed cost
report to determine the amount of payment to be paid to the hospital if
an amount is due on the as-filed cost report. After the cost report is
tentatively settled, it can take 12 to 24 months, depending on the type
of review or audit, before the cost report is final-settled. So if a
hospital quickly starts raising its charges, the cost-to-charge ratio
we use to calculate the payment does not immediately reflect that
change. The increase in charges will eventually result in a lower cost-
to-charge ratio; however, during this lag time, hospitals can receive
higher outlier payments than if a more current cost-to-charge ratio was
used. While generally there is a lag period of a little under two
years, over the past several years, the lag has been slightly longer,
providing hospitals with a longer timeframe within which to continue
gaming the system.
For example, let's say that a hospital's cost-to-charge ratio from
the settled 2000 cost report is 0.2 (meaning that the average charges
were five times higher than average costs), and the patient charges for
a particular case were $300,000. The estimated cost for that case would
be $60,000 ($300,000 0.2), and the outlier payment would be based on
that $60,000 cost (the outlier payment is based on 80 percent of the
difference between $60,000 and $33,560). Then, assume that hospital
starts raising its charges for that same type of patient to $320,000.
The cost-to-charge ratio used would not immediately reflect this
increased cost, but would rather remain at 0.2, based on data from the
2000 cost report. So, the estimated cost for this same case would rise
to $64,000 ($320,000 0.2). The hospital would then receive outlier
payments based on $64,000, instead of $60,000.
Another problem with the current outlier policy is hospitals'
ability in certain cases to have the statewide average number
substituted for their own cost-to-charge ratio. If the cost-to-charge
ratio for a particular hospital is more than 3 standard deviations away
from the national mean, the FIs will substitute the statewide average
ratio to calculate costs and determine whether a hospital qualifies for
outlier payments. This policy was initially adopted in 1989 in
regulation to address a concern that cost-to-charge ratios falling
outside such a range were probably because of faulty data reporting.
However, using the statewide average instead of a hospital's cost-to-
charge ratio clearly increased outlier payments for particular
hospitals where there were no errors.
As an example, assume that the cost-to-charge ratio of 0.2, used in
the previous example, is more than three standard deviations below the
national average. The FI would then substitute the statewide average
cost-to-charge ratio (0.4, for example) when calculating outlier
payments. So, for the initial $300,000 procedure, the estimated costs
would rise to $120,000 ($300,000 0.4), and the outlier payment would
be based on the $120,000, not $60,000 ($300,000 0.2).
Let me return to my previous examples for a moment and look at how
these factors affected the cost-to-charge ratios of Hospitals A and B.
The current cost-to-charge ratio we used to calculate payments for
Hospital A is .339. However, we found by using more current data,
Hospital A's actual relationship between cost and charges to be only
.093. So basically, we are paying Hospital A at 3 times the actual rate
of costs to charges. For our New Jersey hospital, Hospital B, we use a
cost-to-charge of .325 to determine payments. However, our analysis
found that Hospital B's actual relationship between costs and charges
is .291. So clearly under the current outlier policy, we are grossly
overpaying these hospital, and likely many more.
cms' initial response
Upon discovering the abuse of the outlier policy, we quickly took
corrective action. Last December, we instructed FIs to take action to
help mitigate any potential vulnerability with outlier payments. First,
FIs were instructed to identify hospitals that received outlier
payments totaling more than 10 percent of their operating and capital
DRG payments for discharges during fiscal year 2002. FIs were also
directed to identify other hospitals where outlier payments might be
problematic. Later that month, we issued a second program memorandum
that initiated a progressive compliance strategy to ensure that
Medicare payments for outliers are appropriate. This was designed to
ensure that the greatest level of scrutiny is placed on hospitals that
appear, through data analysis, to present the greatest risk to the
program. We also instructed FIs to identify those hospitals that: (1)
have outlier payments of 80 percent or more of their operating and
capital DRG payments for discharges during October and November 2002
(excluding outlier, indirect medical education, and disproportionate
share payments); or (2) have estimated outlier payments greater than 20
percent of their operating and capital DRG payments for discharges
during October and November 2002 (excluding outlier, indirect medical
education, and disproportionate share payments) and an increase in
average charges per case (calculated including all Medicare discharges)
of 20 percent or more from 2000 to 2001 and 2001 to 2002. This
comparison may be performed using either hospitals' cost reporting
periods or Federal fiscal years.
For hospitals falling into the first category, FIs were instructed
to perform comprehensive field audits for indirect medical education,
graduate medical education, disproportionate share hospital payments,
bad debts, organ acquisition costs, and any other pass through costs.
FIs are also required to conduct medical reviews of a random sample of
20 hospital outpatient outlier records, and have the state Quality
Improvement Organization (QIO) perform outlier reviews for inpatient
stays. For hospitals falling into the second category, FIs were to
perform uniform charge reviews, medical review and additional reviews
by the state QIO. FIs were instructed to begin the audits by February
1, 2003, and to start all of the audits no later than July 31, 2003.
The entire sample should be completed by July 31, 2004.
proposed rule
In addition to auditing hospitals with potentially problematic
outlier payments, CMS recently issued a rule in the March 5, 2003,
Federal Register proposing revisions to the outlier payments
regulations. In this proposed rule, we suggest changes to the
methodology for determining payments for extraordinarily high-cost
cases (cost outliers) made to Medicare-participating hospitals under
the inpatient hospital prospective payment system. These proposed
changes would be effective for discharges occurring on or after the
date that we issue a final rule following this proposed rule and
comment period.
Currently, we use the most recent settled cost report when
determining cost-to-charge ratios for hospitals. The covered charges on
bills submitted for payment during fiscal year 2003 are converted to
costs by applying a cost-to-charge ratio from cost reports that began
in fiscal year 2000 or, in some cases, fiscal year 1999. These covered
charges reflect all of a hospital's charge increases to date, in
particular those that have occurred since fiscal year 2000 and are not
reflected in the fiscal year 2000 cost-to-charge ratios. If the rate-
of-charge increases since fiscal year 2000 exceeds the rate of the
hospital's cost increases during that time, the hospital's cost-to-
charge ratio based on its fiscal year 2000 cost report will be too
high, and applying it to current charges will overestimate the
hospital's costs per case during fiscal year 2003. Overestimating costs
may result in some cases qualifying for outlier payments that, in
actuality, are not high cost cases. Overestimating costs will also
result in higher outlier payments if a case does qualify for outliers.
Using our Medicare Provider Analysis and Review (MedPAR) file data
from fiscal year 1999 to fiscal year 2001, we found 123 hospitals whose
percentage of outlier payments relative to total DRG payments increased
by at least 5 percentage points over that period, and whose case-mix
adjusted charges increased at or above the 95th percentile rate of
charge increase for all hospitals (46.63 percent) over the same period.
We adjusted for case-mix because a hospital's average charges per case
would be expected to change from one year to the next if the hospital
were treating new or different types of cases. Because we use settled
cost reports to compute hospitals' cost-to-charge ratios, the recent
dramatic increases in charges for these hospitals are not reflected in
their cost-to-charge ratios. For example, among these 123 hospitals,
the mean rate of increase in charges was 70 percent. Meanwhile, cost-
to-charge ratios for these hospitals, which were based on cost reports
from prior periods, declined by only 2 percent.
Because a hospital has the ability to increase its outlier payments
during this time lag through dramatic charge increases, in this
proposed rule we are proposing to allow fiscal intermediaries to use
more up-to-date data when determining the cost-to-charge ratio for each
hospital. We are proposing to specify that fiscal intermediaries will
use either the most recent settled or the most recent tentatively
settled cost report, whichever is from the latest cost reporting
period. Using cost-to-charge ratios from tentative settled cost reports
would reduce the time lag for updating cost-to-charge ratios by a year
or more.
However, even the more recent data calculated from the tentative
settled cost reports would overestimate costs for hospitals that have
continued to increase charges much faster than costs during the time
between the tentative settled cost report period and the time when the
claim is processed. In fact, there would still be a lag of one to two
years during which a hospital's charges may still increase faster than
costs. Therefore, we are proposing to add a new provision to the
regulations that would allow CMS the authority to direct the fiscal
intermediary to change the hospital's operating and capital cost-to-
charge ratios to reflect the high charge increases evidenced by the
later data. In addition, we are proposing to allow a hospital to
contact its fiscal intermediary to request that its cost-to-charge
ratios be changed if it presents substantial evidence that the ratios
are inaccurate. Any such requests would have to be approved by the CMS
Regional Office with jurisdiction over that fiscal intermediary.
Because of hospitals' ability to increase their charges to lower
their cost-to-charge ratios in order to be assigned the statewide
average, we are proposing to remove the current requirement in our
regulations that specify that a fiscal intermediary will assign a
hospital the statewide average cost-to-charge ratio when the hospital
has a cost-to-charge ratio that falls below the floor. After issuing
our December 2002 Program Memorandum instructing fiscal intermediaries
to identify all hospitals receiving the statewide average operating or
capital cost-to-charge ratio because their cost-to-charge ratios fell
below the floor of reasonable parameters, we identified 43 hospitals
that were assigned the statewide average operating cost-to-charge ratio
and 14 hospitals that were receiving the statewide average capital
cost-to-charge ratio. Three hospitals were common to both lists. Prior
to application of the statewide average cost-to-charge ratios, the
average actual operating cost-to-charge ratio for the 43 hospitals was
0.164, and the average actual capital cost-to-charge ratio for the 14
listed hospitals was 0.008. In contrast, the statewide average
operating cost-to-charge ratio for the 43 hospitals was 0.3425 and the
statewide average capital cost-to-charge ratio for the 14 hospitals was
0.035. In the proposed rule, we suggest a revision that would give
hospitals their actual cost-to-charge ratios, no matter how low their
ratios fall.
However, we are proposing that statewide average cost-to-charge
ratios would still apply in those instances in which a hospital's
operating or capital cost-to-charge ratio exceeds the upper threshold.
Cost-to-charge ratios above this range are more likely to be the result
of faulty data reporting or entry, and should not be used to identify
and pay for outliers. In addition, hospitals that have not yet filed
their first Medicare cost reports with their fiscal intermediaries
would still receive the statewide average cost-to-charge ratios.
The proposed rule would greatly reduce the opportunity for
hospitals to manipulate the system to maximize outlier payments by
updating cost-to-charge ratios using the most recent tentative settled
cost reports and using actual rather than statewide average ratios for
hospitals that have cost-to-charge ratios that are more than 3.0
standard deviations below the geometric mean cost-to-charge ratio.
However, these two steps would not completely eliminate all such
opportunity for aggressive gaming. A hospital would still be able to
dramatically increase its charges by far above the rate of increase in
costs during any given year. This possibility is of great concern,
given the recent findings that some hospitals that have been able to
receive large outlier payments by doing just that. Therefore, we are
proposing to add a provision to our regulations to provide that outlier
payments will become subject to adjustment when hospitals' cost reports
are settled. Payments would be processed throughout the year using
operating and capital cost-to-charge ratios based on the best
information available at that time. When the cost report is settled,
any reconciliation of outlier payments by fiscal intermediaries would
be based on operating and capital cost-to-charge ratios calculated
based on a ratio of costs to charges computed from the cost report and
charge data determined at the time the cost report coinciding with the
discharge is settled. The language we propose to add would allow
outlier payments to be adjusted to account for the time value of the
money during the time period it was inappropriately held by the
hospital. This adjustment would also apply in cases where outlier
payments were underpaid to the hospital. In those cases, the adjustment
would result in additional payments to hospitals. Any adjustment would
be based upon a widely available index to be established in advance by
the Secretary, and would be applied from the midpoint of the cost
reporting period to the date of reconciliation (or when additional
payments are issued, in the case of underpayments). This adjustment to
reflect the time value of a hospital's outlier payments would ensure
that the outlier payment received by the hospital at the time its cost
report is settled appropriately reflects the hospital's true costs of
providing the care.
conclusion
Outlier payments are a vital part of the Medicare payment system
because they provide hospitals with insurance against extraordinarily
high patient costs and ensure access to care for Medicare's
beneficiaries. However, Congress intended that outlier payments would
be made only in situations where the cost of care is extraordinarily
high in relation to the average cost of treating comparable conditions
or illnesses. Under the existing outlier methodology some hospitals'
recent rates of charge increases greatly exceed their rates of cost
increases. This disparity results in an overestimation of their current
costs per case. In an effort to ensure that the outlier payments are
used as they were intended, we issued a proposed rule that would
prevent further gaming of the system by a few hospitals that obtain the
majority of these payments. We are anxious to move forward with this
effort as quickly as possible and are eager to receive comments on the
proposed rule so that we can return the outlier policy to its original
legislative purpose, which is to safeguard access to care for a broader
number of Medicare beneficiaries and ensure appropriate use of taxpayer
funds. I'm embarrassed that as a longtime hospital analyst I was not
able to understand this problem and I am embarrassed for the Agency
that we did not catch this sooner. Nevertheless, we firmly believe that
this situation demands and immediate remedy. Thank you for allowing me
to discuss this very important issue with you today. I look forward to
answering your questions.
Senator Specter. Would you call that a transition period,
Mr. Scully, when you do not understand it?
Mr. Scully. I am sorry, Mr. Chairman.
Senator Specter. Would you call that a transition period,
when you do not understand it? It took you 2 years, it took
your agency 5 years to understand the impact.
Mr. Scully. I have to say, Mr. Chairman, I did not
understand what was going on in this. I knew that the outlier
threshold was going up, and I was a little surprised that our
staff did not understand it, but it is a very complicated
program.
Senator Specter. On the question of a phase-in period, I
note that there have been very substantial past phase-ins. For
example, on graduate medical education reimbursement, there was
a 5-year phase-in period for the 1997 change. There was a 5-
year phase-in after 1997 for the change affecting acute
hospital update care, a 4-year phase-in of the 1998 change in
disproportionate share hospital reimbursements, a 10-year
phase-in of capital prospective payments.
With those kind of precedents, would it not seem reasonable
to have some phase-in on a change in outlier payments?
Mr. Scully. Well, Mr. Chairman, I think in those cases, and
I think I was involved in all of them, those were policy
changes that were big changes, but they were phased in as
conscious policy decisions. In this case, I think the
administration's belief is this really was a program abuse and
should never have happened, and the people that are collecting
this extra money are doing it at the expense of their
neighboring hospitals, and it is a totally different situation.
Senator Specter. Is that a no?
Mr. Scully. I think our view is, with respect to you, Mr.
Chairman, that we are trying to balance the fact that our
authorizing committees think we should shut this down
immediately, and the fact that there are hospitals and States
affected, but I think our preference would be to fix it
immediately.
Senator Specter. Well, I do not think it is a matter of
accommodating a House authorizing committee or the Senate
Appropriations subcommittee. It is a matter of what is
reasonable to allow hospitals to adjust to it, and in a context
where there have been substantial phase-in periods, I would
urge you to consider that.
Mr. Scully. Mr. Chairman, I would think if Congress, wanted
to buffer the impact on these hospitals in a Medicare bill, I
think we would probably be happy to work with you on that. But
within the context we have to do it in a budget-neutral
fashion, hospitals that really have legitimate high-cost
patients, I mean, we have to fix this, we have a set pot of
money, and it is hurting hospitals that have legitimate high-
cost patients to have the hospitals that took advantage of what
I consider a major loophole in the program. It is at their
neighbors' expense.
Senator Specter. Mr. Scully, when you have modified the
figure from 2002 of $21,025 on the fixed loss amount threshold,
raising it to $33,565 for 2003, isn't that an excessively sharp
change which again has very, very substantial impact in a
sudden way on the affected hospitals?
Mr. Scully. It has. It has the biggest impact on the
hospitals that have not been excessively billing for outliers,
and that is one of the reasons I feel strongly that, and I have
argued strongly within the administration that we should lower
the threshold back to $22,000 or $23,000, but you can
understand from OMB's point of view--and I used to work there,
as you know, so I agreed with them in the draft rule to leave
it where it was.
Their view is, how could you possibly know what the right
amount is. You have missed every year by $1.5 billion to $2
billion, and as of right now, for this year, we are running way
over even at this current target, if we do not change this
regulation, we are expected to go way beyond the existing $3.8
billion we have set aside, so from OMB's point of view, their
view is, we have been wrong 5 years in a row, how could we be
right?
So we put the rule out for comment. We have encouraged
strong comment from the hospitals. I happen to believe, and our
actuaries believe that the correct number probably is in the
midtwenties, if we fix the program abuses, I really think that
fixing this will provide the other 97 percent of the hospitals
that have not abused more money from it. And so I do think the
outlier threshold--my personal opinion is that it probably, if
we fix the abuses, would be too high, but I can understand the
skepticism from our budget analysts to say we have been wrong 5
years in a row by a couple of billion dollars, how could we
possibly think we are right now?
Senator Specter. The proposed rule change specifies that
some 123 hospitals have outlier payments averaging 24 percent
of their total Medicare income. That seems to me to be a
relatively small number out of the 5,000 hospitals in this
country. What would you consider to be a reasonable transition
period to phase in the new regulations to avoid serious
financial impact on certain hospitals?
Mr. Scully. Well, Mr. Chairman, we made a pretty strong
statement. There has been a lot of communication with the AHA
and all the affected hospitals since October, and I think most
hospitals that have been, we believe, billing excessively and
taking advantage of this program have known since October that
we were going to try to close it down, and they have basically
had 6 months to adjust.
I would also add that the way the outlier payments work,
and I can really bore you with how this has been gamed, if you
would like, but the hospitals, for example--and I explained
this to Crozier Chester, which is my hometown hospital, which
is one of the ones that has higher outliers. I think they are
testifying later today. They are collecting about $30 million a
year from outlier payments, and they are only getting about $40
million of base Medicare payments, so obviously it is a major
problem for them to lose that overnight.
They can, in fact, continue to bill us for outliers. The
way the rule works is that we would come back probably in 3 to
4 to 5 years, maybe as long as 5 years in many cases, to
actually reconcile and get the money back, so theoretically, if
they wanted to finance their way out of this, they could keep
collecting the $30 million a year for 5 years and would not
have to pay it back until we actually closed their cost reports
for 2003. Effectively they would get a Treasury bond rate loan
to finance themselves out of this gradually, so they would not
necessarily have to lose $30 million immediately.
The bottom line is, at some point out in the future, we
will come in and look at their real, true costs for 2003 and
say, we are going to pay you outliers based on your true costs,
not on the inflated costs that have been reported, and they
would have to pay it back, but there is a way for them to
finance their way out of this hole which effectively gives them
a self-financing transition mechanism if that is what they
choose to do.
Senator Specter. My red light is on, so I will now defer to
Senator Harkin.
Senator Harkin. Well, Mr. Scully, this is one of those
cases where on the one hand I agree with you, and on the other
hand, we have a difference here. I mean, I agree with you on
what you are doing on the outliers. That is a distinct problem.
It is something that we have to address.
I believe the administration has correctly set out the
parameters of this and is addressing it correctly. I think you
are right, that some of these people, in the future, as you
look back, and as you see what the real costs were, could have
those costs reimbursed later on, so I do not see any real
problem with that, because it is hurting us and a lot of other
States where we do not have this outlier problem, because it
does take away from the base, as I said earlier, so I hope we
can reach a reasonable agreement on this to move ahead on the
outlier problem.
Now, the part that I am now going to disagree with you on
has to do with the thing that we talked about when you were
here before, and that is the fact that still we have nothing
done about closing this gap in the beneficiary reimbursement by
Medicare.
Now, I am going to take you to task, Mr. Scully, on what
you said. You said that the plan would be helpful to Iowa. How
do you tell Iowans, when we do not have one Medicare HMO in the
State of Iowa, that this prescription drug plan is good for
them? I just do not know how you can say that, especially when
we have not done anything to address the fact that we are still
number 50 in terms of per beneficiary reimbursement.
Mr. Scully. Well, Senator Harkin, first, on the issue of
geographic disparities in the existing Medicare program, I
spent a good bit of the day yesterday working on next year's
hospital regulation, and I think you will find, and I encourage
you to keep talking to Secretary Thompson and me, that we are
going to have a number of proposals out for comment on ways, in
the hospital field and probably in the physician field, to make
up some of the, what we perceive to be historical inequities in
those. It probably will not make you happy, but I think
incrementally we share some of your views, and we are at least
going to put out for your consideration a number of ways that
we can modify some of these geographic inequities.
On the President's plan, I would love to have the
opportunity to come down and explain the details, since I was
very involved in drafting it. There are no HMOs in Iowa, and we
do not expect there to be some. We do think that the Medicare +
Choice program, which we have changed a little bit to call
Medicare Advantage, is great in big cities like Philadelphia,
where it has increasingly disappeared, or Pittsburgh. It does
not work in Iowa. We do not expect there to be any HMOs.
However, the new part of the program, which is Enhanced
Medicare, works very much like the Federal Employee Health
Benefits Plan. It is basically private fee-for-service plans
and PPOs, which 70 percent of the people in the country under
the age of 65 are in those types of plans, so it will be Blue
Cross of Iowa, or Mutual of Omaha, or one of those private
health plans that is not an HMO.
That is exactly what the administration is proposing--it is
a system of new private fee-for-service plans. And, in fact,
there is a huge geographic adjustment, because we split up the
payments by 10 regions, so Iowa would get paid across the board
the same as everybody else in that region, which I believe is
Missouri, Kansas, Nebraska. The Federal subsidy across those
regions would be the same, so----
Senator Harkin. We are talking about prescription drugs
now, are we not?
Mr. Scully. We are talking about, if you went into a
Medicare, enhanced fee-for-service Medicare plan, what we would
envision doing is having people buy all across Iowa, just like
Federal employees do now--and there are Federal Employee
Benefits Plans available all across Iowa, in the most rural
areas.
If you wanted to get into the region that included Iowa,
which is Nebraska, Kansas, Iowa, Missouri, if you were Blue
Cross of Iowa, or Cigna, or United Health Care, you would have
to sell the same plan across that entire region to all-comers,
not county-by-county, like HMOs work. It would be the entire
region. You would have to offer the same Blue Cross plan for
the same premium with the same subsidies, so Iowa is, in fact,
I guess 46th in the country, by some counts 50th by others in
subsidies, but you would basically get exactly the same subsidy
level in Iowa as everybody in St. Louis and Kansas City would.
So, in fact, when you look at the cross-subsidies, the
cross-subsidy disparities to Iowa would be less. You would not
be getting the same as New York, but you would be getting the
same as everyone else in that Midwestern region and, in fact,
if you look at the dollar subsidies to Iowa, it would
significantly buffer the impact on Iowa as far as increasing
the relative level of subsidies in the Medicare program to
Iowans.
I would be happy to come explain whatever detail you would
like. In fact, I would look forward to it, if I could.
Senator Harkin. I would like to know more about it, but I
mean, it just seems to me, I do not mind if we are in with
Kansas, Missouri, or whatever, but I am more concerned about
the individual Medicare recipient in that region, if we are
going to be in that region, compared with what the
reimbursements for prescription drugs would be if they were in
a State that had a Medicare HMO, say, Florida, California or
New York.
The beauty of the Medicare system--this is my own
philosophy--has always been that everyone is treated the same.
No matter where you are in this country, you ought to be
treated the same. You pay the same, you have to treated the
same.
Now, if we are going to set up a system on prescription
drugs where if you are in one State that has a lot of private
HMOs, you get a higher benefit than if you are in States that
do not, even though we might have Blue Cross or something, and
I do not know how this is going to work in terms of the
reimbursement. If you are saying that when this plan is over
with, that a Medicare recipient in the State of Iowa for drug A
will pay the same as a Medicare recipient in Florida, or
Louisiana, or New York, or California, well then, I do not have
a gripe.
Mr. Scully. Eighty-nine percent of the population is on
traditional Medicare, which is the program that CMS runs
directly--we set all the rates. It is where this outlier
problem came up--and 11 percent are in HMOs. The fundamental
principle in our plan is that we believe that if you look at
people under 65, 70 percent of those people are not in HMOs,
they are in PPOs or private fee-for-service plans all through
Iowa, like Mutual of Omaha or Blue Cross, and we tried to mimic
that for seniors to give them another option.
So seniors can stay on the old Medicare, they can go in
HMOs, which we do not believe are going to help--outside urban
areas they are never going to be that popular. But in addition,
they would have the chance to join a private fee-for-service
plan. In many cases they will have provider networks. They have
to take any doctor, they have to take any hospital. They can
have differential networks, but they have to take all
providers, and those are the kinds of plans that have taken
over in the commercial sector and they do not exist in
Medicare, and in that case the beneficiary in Iowa would pay
exactly the same premium as the beneficiary in Philadelphia or
in Miami. It is a national premium, in that it is designed to
be the same way as it is in the existing fee-for-service
program.
Senator Harkin. I understand paying the same premium. I am
not understanding about the benefits.
Mr. Scully. The benefits for drugs, obviously you may have
a slightly different drug benefit between Blue Cross of
Florida, or Blue Cross of Pennsylvania, or Blue Cross of Iowa,
but the drug benefit subsidy is virtually the same. Between the
enhanced fee-for-service, the drug benefit subsidy is
identical.
I mean we did not--to be honest with you, Mr. Harkin, make
the final decision. Obviously, we need lots of input from
Congress. They did not want us to set up every little detail
because Congress wants to legislate, so the President very
consciously set up a framework which did not have an awful lot
of detail, but we left out all but the conceptual design. I can
tell you that the subsidy for drugs is identical in the
enhanced fee-for-service to what it is in the HMO.
Senator Harkin. Thank you. Thank you, Mr. Chairman.
Senator Specter. Thank you very much, Senator Harkin.
One vital question, Mr. Scully, before we go on to the next
panel, in our January 31 hearing, you testified that you did
not intend to use more recent data to calculate Medicare
reimbursement for malpractice expenses. That was despite the
fact that the agency only updates geographic differences in
costs every 3 years.
I am especially concerned about that for Pennsylvania,
where the malpractice costs exceed the national average and
have risen dramatically in the last 2 years. In our 2003
Omnibus Appropriations bill, which we passed after your January
31 testimony, there was a direction for your agency to, quote,
utilize data reflecting the current cost of liability insurance
to determine current Medicare payment rates, including annual
updates to the malpractice, geographic practice cost index,
close quote. Will you comply with that direction?
Mr. Scully. Yes, Mr. Chairman. I have talked to our
actuaries already. We are working on next year's physician
rule, and we are going to use the most recent possible update
information we can.
Senator Specter. Thank you very much. Thank you, Mr.
Scully.
Mr. Scully. Thank you.
STATEMENT OF JOSEPH W. MARSHALL, III, CHAIRMAN AND CEO,
TEMPLE UNIVERSITY HEALTH SYSTEM
Senator Specter. We will call our next panel, Mr. Joseph
Marshall, Dr. Gail Wolf, and Mr. Andrew Wigglesworth.
Joseph W. (Chip) Marshall, III has served as chairman and
chief executive officer of Temple University Health System
since 2001. Previously, he was the chairman of the board.
Before joining Temple's Health System he was a founding
principal at Goldman & Marshall. He holds a law degree from
Temple, and a bachelor's degree also from Temple.
Welcome, Mr. Marshall, and we look forward to your
testimony.
Mr. Marshall. Thank you, Senator. Mr. Chairman, Senator
Harkin, Mr. Scully, thank you for the opportunity to testify
today, and thank you for holding this hearing. Temple
University Health System is a cornerstone of the health care
delivery system in North Philadelphia and the surrounding
region. In 2001, TUHS treated 1.2 million patients through its
hospitals and physicians. To put this in perspective, the
population of Philadelphia and the surrounding five-county area
is approximately 3.85 million people. On any given day,
approximately 500 people utilize the services of TUHS emergency
rooms, and an additional 1,700 people are present for
nonemergency ambulatory services.
Additionally, as one of the largest private employers in
the city of Philadelphia, the health system plays a vital role
in the local economy. In fiscal year 2002, TUHS employed over
7,500 full-time employees and paid over $264 million in
salaries, and an additional $64 million in benefits.
Like many health systems today, Temple faces numerous
pressures threatening the financial viability of our member
institutions. These include steadily rising labor costs and
dramatic increases in costs for liability insurance and medical
supplies, most notably, blood and drugs.
The cost of malpractice liability insurance alone has
nearly doubled since 2001, when we paid $33 million for our
systemwide liability costs to projected funding this year of
$62 million. Temple has also been subjected to pressures from
both private and public payers, including the long-term effects
in the Balanced Budget Act on Medicare payment to hospitals.
In addition, as a system that serves some of Philadelphia's
poorest neighborhoods, Temple is the provider of last resort
for many patients. Consequently, Temple is one of the largest
providers of free and underreimbursed care in the Commonwealth
of Pennsylvania. In fiscal year 2002, Temple provided more than
$80 million in uncompensated care systemwide, which represents
a $12 million increase over the previous year.
In this time of constrained Federal and State budgets, it
is reasonable to expect that there will be little or no
abatement in the need for these services. Make no mistake,
Senator, this is a responsibility that Temple proudly
shoulders, but one that adds significantly to the list of
financial pressures that we face. The bottom line is that the
Temple University Health System showed an operating loss of $50
million in the fiscal year ending June 30, 2002.
In the face of this severe challenge, the health system has
a responsibility to explore every means possible to ensure that
we continue to provide quality health care to our communities.
In recent years, Medicare outlier payments, which help offset
the cost of treating high-cost patients, have become an
increasingly important component in Temple's ability to meet
that obligation. It is important to note that the increased
payments to Temple for outliers were the result of accepted
practices that were completely within the rules of the Medicare
program.
The funding Temple receives from Medicare outlier payments
has become critical to our ability to carry out our mission in
Philadelphia and the region. Last fall, CMS announced its
intention to drastically alter the current outlier
reimbursement formula. Recently, a proposed rule appeared in
the Federal Register announcing the proposed changes and
providing for a 30-day period during which affected parties may
comment on the rule. Temple is grateful that CMS and the
administration have decided to consider input from the hospital
community in developing this policy, and will be submitting its
concerns in writing regarding the rules shortly.
Temple respects the decision of CMS to take these actions,
and will work with CMS and our local fiscal intermediary to
successfully implement the new system. However, we believe that
there are two areas where the rules must be improved. First, we
urge CMS to reconsider its decision not to lower the fixed loss
threshold amount from its current level of $33,560. Lowering
the outlier threshold would allow more hospitals to receive
payments to help offset the cost of treating high-cost
patients, and would help mitigate the effects on many
hospitals, like Temple University Hospital, that will otherwise
see outlier payments drop dramatically.
Further, by maintaining the fixed loss threshold at this
historically high level, the effect of the loss is that CMS is
not merely redistributing the existing funding set aside for
outlier payments, but actually removing money from the system.
Second, and most important, Temple strongly disagrees with
provisions in the proposed rule calling for an immediate
implementation of the new system with no transition period.
To repeat, we do not argue the administrator's right to
change the rules, nor the general tenor of the proposed
changes. However, we strongly urge the inclusion of a
transition period to the new system to preserve the continuity
of services at those hospitals that would be most affected by
the new rules. Temple, like other providers, has budgeted for
and is operating under the current rules of the Medicare
program. A steep drop in an expected payment for outlier cases
could be financially devastating, resulting in an immediate,
unplanned loss of millions of dollars for TUHS in fiscal year
2003, and losses of a similar magnitude in subsequent years.
Additional cutbacks could create access problems in clinics
supported by us and our physicians, and lead to the elimination
of various community outreach efforts. Finally, budget
shortfalls could curb the delivery of care within TUH hospitals
by delaying necessary technology enhancements.
prepared statement
In conclusion, Temple University Health System is committed
to working with CMS to ensure the successful implementation of
a new outlier policy. However, we believe that an immediate
transition to these rules would excessively harm many
hospitals, hospitals that have not violated the law, and
provide indispensable services to key communities around the
country. We ask only for the time to adjust to a new system.
Mr. Chairman, thank you for the opportunity to testify on
this important matter, and for your leadership on this issue.
Thank you.
[The statement follows:]
Prepared Statement of Joseph W. Marshall
Mr. Chairman, Members of the Subcommittee, thank you for the
opportunity to testify today, and thank you for holding this hearing.
Temple University Health System \1\ (TUHS) is a cornerstone of the
health care delivery system in North Philadelphia and the surrounding
region. In 2001, TUHS treated 1.2 million patients through its
hospitals and physicians. To put this in perspective, the population of
Philadelphia and the surrounding five county area is approximately 3.85
million. On any given day, approximately 500 people utilize the
services of TUHS emergency rooms and an additional 1,700 people present
for non-emergent ambulatory services. Additionally, as one of the
largest private employers in the city of Philadelphia, the Health
System plays a vital role in the local economy. In fiscal year 2002,
TUHS employed over 7,500 full-time employees and paid over $264 million
in salaries, and an additional $64 million in benefits.
---------------------------------------------------------------------------
\1\ Temple University Health System consists of: Temple University
Hospital, Temple University Children's Medical Center, Temple
University Hospital--Episcopal Campus, Jeanes Hospital, Northeastern
Hospital, TUHS Physicians primary care network.
---------------------------------------------------------------------------
Like many health systems today, Temple faces numerous pressures
threatening the financial viability of our member institutions. These
include steadily rising labor costs, and dramatic increases in costs
for liability insurance and medical supplies, most notably blood and
drugs. The cost of malpractice liability insurance alone has nearly
doubled since 2001 (from approximately $33 million system-wide to a
projected cost of nearly $62 million in 2003.) Temple has also been
subjected to pressures from both private and public payers, including
the long-term effects of the Balanced Budget Act on Medicare payments
to hospitals.
In addition, as a system that serves some of Philadelphia's poorest
neighborhoods, Temple is the provider of last resort for many patients.
Consequently, Temple is one of the largest providers of free and under-
reimbursed care in the Commonwealth. In fiscal year 2002, Temple
provided more than $80 million in uncompensated care system-wide, which
represents a $12 million increase over the previous year. In this time
of constrained federal and state budgets, it is reasonable to expect
that there will be little or no abatement in the need for these
services. Make no mistake, this is a responsibility that Temple proudly
shoulders, but one that adds significantly to the list of financial
pressures that we face.
The bottom line is that Temple University Health System showed an
operating loss of $50 million for the fiscal year ending June 30, 2002.
tuhs and medicare outlier payments
In the face of this severe financial challenge, the health system
has a responsibility to explore every means possible to ensure that we
continue to provide quality healthcare to our communities. In recent
years, Medicare outlier payments, which help offset the costs of
treating high-cost patients, have become an increasingly important
component in Temple's ability to meet that obligation.
It is important to note that the increased payments to Temple for
outliers were the result of accepted practices that were completely
within the rules of the Medicare program at the time. The funding
Temple receives from Medicare outlier payments has become critical to
our ability to carry out our mission in Philadelphia.
Last fall, the Centers for Medicare and Medicaid Services (CMS)
announced its intention to drastically alter the current outlier
reimbursement formula. Recently, a proposed rule appeared in the
Federal Register announcing the proposed changes and providing for a
30-day period during which affected parties may comment on the rule.
Temple is grateful that CMS and the Administration have decided to
consider input from the hospital community in developing this policy
and will be submitting its concerns in writing regarding the rule
shortly.
Temple respects the decision of CMS to take these actions and will
work with CMS and our local Fiscal Intermediary to successfully
implement the new system. However, Temple believes that there are two
areas where the rules must be improved.
--First, we urge CMS to reconsider its decision not to lower the
fixed-loss threshold amount from its current level of $33,560.
Lowering the outlier threshold would allow more hospitals to
receive payments to help offset the costs of treating high-cost
patients and would help mitigate the effects on many hospitals,
like Temple University Hospital, that will otherwise see
outlier payments drop dramatically. Further, by maintaining the
fixed-loss threshold at this historically high level, the
effect of the rule is that CMS is not merely redistributing the
existing funding set aside for outlier payments, but actually
removing funding from the system.
--Second, and most important, Temple strongly disagrees with
provisions in the proposed rule calling for an immediate
implementation of the new system with no transition period.
To repeat, we do not argue the Administrator's right to change the
rules, nor the general tenor of the proposed changes. However, we
strongly urge the inclusion of a transition period to the new system to
preserve the continuity of services at those hospitals that would be
most affected by the new rules.
Temple, like other providers, has budgeted for, and is operating,
under the current rules of the Medicare program. A steep drop in
expected payment for outlier cases could be financially devastating,
resulting in an immediate, unplanned loss of millions of dollars for
TUHS in fiscal year 2003, and losses of a similar magnitude in
subsequent years.
We believe that this funding is essential to the ability of our
hospital, which is already pushed financially, to deliver high-quality
care. The immediate loss of Medicare dollars on top of substantial cuts
in IME, physician reimbursement, and Medicaid and General Assistance,
coupled with spiraling costs such as malpractice insurance, nursing
salaries, and drugs would require a dramatic rethinking of our mission.
TUHS cannot sustain the immediate loss of Medicare reimbursement of
this magnitude. TUHS strives to provide the highest quality of care,
physician training, and research, in the most difficult financial
environment we have ever faced. The impact of these additional
pressures could be severe. Potentially, TUHS could be forced to cut
staff, and curtail services, particularly in the regional trauma center
and the emergency room setting where TUHS provides the greatest amount
of free care.
Additional cutbacks could create access problems in clinics
supported by TUHS physicians and lead to the elimination of various
community outreach efforts. Finally, budget shortfalls could curb the
delivery of care within TUHS hospitals by delaying necessary technology
enhancements.
Phasing in these changes, preferably over the course of several
fiscal years, would ameliorate the effect on those hospitals that would
be most severely affected by the new rules and prevent possible
disruptions in service.
CMS has a long history of utilizing phase-in periods to implement
changes in payment policy for this very reason; perhaps the most
notable example being the transition from cost-based payment for
inpatient hospital services to the current DRG-based prospective
payment system.
We believe that a similar approach is warranted in this instance.
If a revised outlier policy is implemented without a transition period,
it will have a punitive effect on our system, and ultimately our
patients. Further, because outlier payments are made from a fixed pot
of funds, we would urge that any transition scheme be implemented in a
non-budget neutral manner with an infusion of new Medicare funds to
ensure that the burden for insuring continuity of services does not
fall disproportionately on individual facilities. If CMS is not
prepared to provide for a transition period, we would urge that the
Congress take steps to pass legislation requiring that CMS do so.
conclusion
Temple University Health System is committed to working with CMS to
ensure the successful implementation of a new outlier policy. However,
we believe that an immediate transition to these rules would
excessively harm many hospitals, hospitals that have not violated the
law and provide indispensable services to key communities around the
country. We ask only for the time to adjust to a new system. Mr.
Chairman, thank you for the opportunity to testify on this important
matter and for your leadership on this issue.
Senator Specter. Thank you very much, Mr. Marshall.
STATEMENT OF GAIL WOLF, SENIOR VICE PRESIDENT AND CHIEF
NURSING OFFICER, UNIVERSITY OF PITTSBURGH
MEDICAL CENTER
Senator Specter.We now turn to Dr. Gail Wolf, senior vice
president and chief nursing officer for the University of
Pittsburgh Medical Center. She also serves as executive
director of the Beckwith Institute for Innovation of Patient
Care, which she founded in 1989. Dr. Wolf has her baccalaureate
in nursing from West Virginia University, her master's from
University of Kentucky, and her doctorate in nursing
administration and organizational psychology from Indiana
University.
Thank you for coming today, Dr. Wolf, and we look forward
to your testimony.
Dr. Wolf. Thank you, Senator. Thank you for the invitation
to testify. As you said, I am the senior vice president and
chief nursing officer for the University of Pittsburgh Health
System. The UPMC Health System, located in Pittsburgh, is an
integrated health delivery system comprised of 19 acute care
hospitals. We care for approximately 165,000 hospitalized
patients annually, and are the largest employer in Western
Pennsylvania. My job is to oversee patient care and nursing
practice throughout the entire system. I have been a nurse for
more than 30 years, and it is from that perspective that I
would like to speak with you today on the issue of patient
outliers.
We all know that patients in our hospitals today are
sicker, largely due to advances in medical technology that is
available today. At UPMC Presbyterian, which is our flagship
academic health center, we see patients that are the sickest of
the sick. People come to us from all over the world because
they have medical conditions that cannot be treated elsewhere.
We have currently patients in our intensive care units that
would not have been alive 5 or 10 years ago, many of whom
recover to lead productive lives. Because they are so ill,
however, it often takes them longer to recover than the DRG
time allowed for average cases and, thus, they become outliers,
as we have heard today.
To illustrate the gravity of the problem, however, I would
like to share two examples of patients who are sitting in our
ICUs as we speak. The first is Mr. B, who is a 57-year-old
retired farmer from West Virginia. He came to us for treatment
of advanced heart failure. This is a condition that can be
caused by a heart attack, high blood pressure, or just
weakening of the heart muscle. Heart failure affects over 6
million Americans, and it is the most frequent discharge
diagnosis for Americans aged 65 and older.
In this case, Mr. B's heart failure was so advanced that he
was totally unable to function due to his illness. While he was
hospitalized with us, Mr. B developed ventricular tachycardia,
which is a lethal heart rhythm that is pretty common in heart
failure. He went into cardiac arrest. We successfully
resuscitated him and implanted a permanent internal cardiac
defibrillator and pacemaker so that if his heart failed again
he would not suffer the dire consequences.
The average length of hospitalization for heart failure is
4.2 days, and in many cases that is adequate. However, in this
extreme case, Mr. B had been hospitalized 9 days to undergo
treatment for his condition.
Now, this gentleman was a great patient, in that he learned
and did everything he could possibly do himself to help manage
his disease. He followed all of his instructions, he took all
of his medications, but despite all of his and our efforts, he
continued to deteriorate, and ultimately he needed an
artificial heart device and subsequent heart transplant to stay
alive. He was a fortunate one, in that he received a new heart
after just a few months. Today, he is a new man, full of
energy, up and about, cannot wait to get back to West Virginia
for the snow to melt and get back to his garden.
The second example I want to share with you is Mrs. B, who
is a 32-year-old mother of two young daughters. She is a
college graduate who works with the deaf. At age 13, she had
been diagnosed with cancer of the kidney. Over the years,
complications of her disease left her with liver damage and
only about 30 inches of intestine. She went on disability, and
eventually came to UPMC for a multivisceral transplant, which
includes the stomach, duodenum, pancreas, and small bowel.
While waiting for organ donation, Mrs. B developed acute
liver failure and actually was the sickest patient I have ever
seen. Fortunately, suitable organs were found in time, and she
underwent a successful transplant of multiple organs. The
allowed length of stay for this type of patient is 41\1/2\
days. However, in this extreme situation she was hospitalized
for 60 days, due to the critical nature of her illness. Today,
she is doing well, and ready to return to her children and her
active life.
I use these examples to illustrate how difficult it is for
us to manage diseases by numbers. The proposed outlier policy
penalizes hospitals like UPMC Presbyterian and others, that
take on the toughest cases. Academic medical centers like ours
have high outlier numbers because we are the only true academic
center in western Pennsylvania and see the sickest patients.
These are not average patients, and an arbitrary threshold is
difficult to quantify the cost of their care in advance.
In addition to patient intensity, geographic location will
also determine the percentage of outliers an organization sees.
In some areas such as Boston, or even here in Washington, there
are multiple trauma and transplant centers to share the burden
of outliers, but where there is a sole provider of those
services, one would expect higher outlier percentages.
Both of the patients I have described became outliers.
Their care was not inexpensive, but it was necessary, and it
saved their lives.
Mr. Chairman, in conclusion, I hope that the committee will
work with CMS to take into account these special patients when
commenting on the new CMS outlier rule. Thank you.
[The statement follows:]
Prepared Statement of Gail Wolf
Good morning. My name is Gail Wolf, and I am the Senior Vice
President and Chief Nursing Officer for the University of Pittsburgh
Health System. The UPMC Health System is an integrated health care
delivery system comprised of 19 acute care hospitals. We care for
approximately 165,000 patients annually, and are the largest employer
in Western Pennsylvania.
My job is to oversee patient care and nursing practice throughout
the system. I have been a nurse for more than 30 years, and it is from
that perspective that I would like to speak to you today on the issue
of patient outliers.
At UPMC Presbyterian, which is our flagship academic health center,
we see patients that are the sickest of the sick. People come to us
from all over the world because they have medical conditions that could
not be treated elsewhere. We currently have patients in our intensive
care units that would not have been alive 5 or 10 years ago--many of
whom recover to lead productive lives. Because they are so ill,
however, it often takes them longer to recover than the DRG time
allowed for average cases, and thus they become outliers.
To illustrate, I would like to share two examples of patients
sitting in our ICU today. The first is Mr. B, a 57-year-old retired
farmer from West Virginia. He first came to us for treatment of his
advanced heart failure, a condition caused by heart attacks, high blood
pressure, or just weakening of the heart muscle. Heart Failure affects
over six million Americans and is currently the most frequent discharge
diagnosis for Americans age 65 or older. Mr. B's heart failure was so
advanced that he was unable to function.
While hospitalized, Mr. B developed ventricular tachycardia, which
is a lethal heart rhythm common in heart failure. He went into cardiac
arrest. We successfully resuscitated him and inserted a permanent
internal cardiac defibrillator/pacemaker to prevent it from happening
again. The average length of hospitalization for heart failure is 4.2
days. However, in this extreme case Mr. B had been hospitalized 9 days
to undergo treatment for his condition.
Mr. B was a great patient in that he learned and did everything he
could possibly do to manage his disease. But despite all his and our
efforts, he continued to deteriorate and ultimately needed an
artificial heart device and subsequent heart transplant to stay alive.
Mr. B was fortunate in that he received a new heart after just a few
months. Today he is a new man--full of energy, up and about, and
anxiously waiting for the snow to melt so he can get back to his
garden.
The second example is Mrs. B, a 32-year-old mother of two young
daughters. She is a college graduate who works with the deaf. At age 13
she had been diagnosed with cancer of the kidney. Over the years,
complications of her disease left her with liver damage and only about
30 inches of intestine. She came to UPMC for a multivisceral
transplant, which includes the stomach, duodenum, pancreas and small
bowel.
While waiting for organ donation, Mrs. B developed acute liver
failure and was sicker than any patient I have ever seen. Fortunately
suitable organs were found in time and she underwent a successful
transplant of multiple organs. The allowed length of stay for this type
of patient is 41.5 days; however in this extreme situation Mrs. B. was
hospitalized for 60 days due to the critical nature of her illness.
Today, however, she is doing well and is ready to return to her
children and resume her active life.
I used these examples to illustrate how difficult it is to manage
diseases by numbers. The proposed outlier policy penalizes hospitals,
like UPMC Presbyterian, that take on the toughest cases. Academic
medical centers like UPMC Presbyterian have high outlier numbers
because they see the sickest patients. These are not average patients,
and an arbitrary threshold cannot quantify the cost of their care in
advance.
Both these patients I described became outliers. Their care was not
inexpensive, but it was necessary--and it saved their lives. Mr.
Chairman, I hope that the committee will work with CMS to take into
account these special patients when commenting on the new CMS outlier
rule.
Senator Specter. Thank you very much, Dr. Wolf.
STATEMENT OF ANDREW WIGGLESWORTH, PRESIDENT, DELAWARE
VALLEY HOSPITAL ASSOCIATION
Senator Specter. Our next and final witness is Andrew
Wigglesworth, president of the Delaware Valley Healthcare
Council, which represents and advocates for more than 150
hospitals, health systems, and health-related organizations in
southeastern Pennsylvania, southern New Jersey, and Delaware.
He is also president and CEO of the Philadelphia International
Medicine, received his B.A. in international relations from
American University. Thank you for joining us, Mr.
Wigglesworth. The floor is yours.
Mr. Wigglesworth. Mr. Chairman, members of the
subcommittee, I want to commend you for holding this hearing
and appreciate the opportunity to present our views on the
proposed changes to the outlier payment policies. I have
submitted fairly lengthy testimony which I will try to
summarize in the interest of time.
Senator Specter. That will be made a part of the record,
Mr. Wigglesworth. I have been advised since this hearing began
that there is going to be a vote at 10:30. We are moving ahead
on the nomination of Mr. Miguel Estrada, and the majority
leader is summoning all Senators to the floor for that
proceeding, but we have ample time, so proceed.
Mr. Wigglesworth. Okay. I will be especially fast, Mr.
Chairman.
I think while we all agree on the need to reexamine and
address any unintended consequences of the current outlier
policy, the council and its member organizations are deeply
concerned with respect to the method, timing, and overall
impact of the proposed rule published on March 5, last week, by
the Centers for Medicare and Medicaid Services. In its rush to
judgment, CMS has made serious allegations about the conduct of
community institutions, as well as appeared to initiate it and
then did not wait for the results of its own audit process for
determining whether inappropriate activity has even taken
place, or what specific policies should be developed.
More important, CMS is seeking to implement a remedy that
(1) represents a fundamental shift in payment policies that
Congress ought to be involved in and could, in fact, exceed its
statutory authority, and (2) creates an administratively
burdensome and potentially unworkable process for
retrospectively reconciling payments and (3) will create
immediate and, in some cases, unsustainable financial harm to
certain hospitals that could jeopardize the access to needed
services for Medicare beneficiaries as well as all other
payments. We believe that the policy changes embodied in the
proposed rule should be fully evaluated and any changes that
have adverse financial implications should be phased in over a
reasonable transition period.
In short, Mr. Chairman, the rule as proposed will not only
hurt institutions, it really does not help all others, as Mr.
Harkin was suggesting in his concerns, because of the way it is
constructed in not reducing the outlier threshold level.
As was discussed by Mr. Scully, outlier payments are a
critical component of any payment system based on averages.
This system was established over 20 years ago, as the Medicare
program moved from cost-based reimbursement to prospective
reimbursement. The Congress intended that these additional
payments limit financial risk to hospitals and diminish any
financial incentive for hospitals to avoid treating elderly
patients with serious illness. The outlier payments partially
reimburse hospitals for the losses that they incur in treating
high-cost patients and, as was suggested, are funded by
reducing total PPS payments by 5 to 6 percent.
As Mr. Scully pointed out, over the years, CMS has not been
able to hit the outlier target consistently and, in fact,
mentioned from 1997 onward the payments were over. Well, prior
to 1997, all the payments were generally under, so there is a
consistent track record of not being able to hit the outlier
target, and it is due in part, obviously, to the complexity of
this whole process, which is contributing to some of the
problems that have been discussed here today.
CMS has taken actions over the past several months. One, as
you mentioned earlier, Mr. Chairman, they increased the
threshold to $33,560. That was a 59 percent increase over the
previous year. They also issued several program memoranda and
initiated, as I referenced to earlier, a series of audits that
all the fieldwork will be completed no later than July 1, 2003.
They hope to have the whole process completed by July 31, 2004,
and I guess as such, the principal point we would want to make
here is, in terms of their whole audit process, none of the
results are available that would either support or refute the
allegations of abuse in terms of this program.
I think in terms of moving to the regional impact, as you
know, Mr. Chairman, Philadelphia is home to one of the largest
concentrations of medical and health care expertise in the
world. Life sciences is really the future of the economy of
southeastern Pennsylvania. Hospitals and health systems in that
region, there are over 100, 5 medical schools that train nearly
a quarter of the Nation's physicians. The outlier proposal as
before you, or as before, in the proposed rule, would reduce
payments to hospitals in the Greater Philadelphia area by an
amount in excess of $100 million, and this is coming in the
context of an environment that you mentioned before, where
medical professional liability costs are skyrocketing, the
State budget has just been reduced in a significant way for
Medicaid payments, which will reduce payments to hospitals in
that region by another $120 million.
In short, the institutions in southeastern Pennsylvania are
in no position at this time to absorb a sudden and immediate
reduction in outlier payments. In effect, the agency is,
through the proposal--while there is a 30-day comment period
would, in effect, be like switching a light switch in terms of
cutting off a significant flow of dollars to this region.
In terms of the recommendations, Mr. Chairman, I think,
again, we understand that CMS has legitimate policy concerns
about the unintended consequences. However, the concerns that
CMS was trying to address were identified actually over a
decade ago, and there were comments, and CMS actually--and
included in my testimony is the response to those comments, and
CMS has been following, by increasing the outlier threshold,
the response that they identified as far back as 1989.
Now, the proposed solution that they are proposing I think
may have some equally significant unintended consequences. As I
mentioned, just the manner and timing of the proposed policy
will impact on the ability of hospitals to serve Medicare
beneficiaries and their communities. No one wants this outcome.
We urge the subcommittee to encourage CMS to consider the
following recommendations:
Provide for a transition period. As has been mentioned
before, and as you mentioned, Mr. Chairman, in every other
major policy change, CMS and/or the Congress has provided a
transition period, and as Mr. Scully mentioned before, AHA has
weighed in on this matter. AHA strongly supports, on behalf of
all hospitals across the country, a reasonable transition
period with respect to this proposed change.
Second, we would like to see the proposed rule include a
reduced threshold level. By remaining at $33,560, in effect, it
is unclear as to whether or not the agency will actually spend
the minimum amount, or 5.1 percent, that it is supposed to
spend on outlier payments.
Third, we would also like to see the elimination of the
retrospective, really, reconciliation of cost-to-charge ratios
that is included in the rule, and this is where there is a
major policy change. In effect, they are turning the outlier
payment as part of a prospective payment system in effect into
a retrospective payment system, because hospitals and the
fiscal intermediaries would have to engage in a process where
they would have to reconcile and reprocess claims several times
as the cost reports are finally settled. We believe that this
is an unworkable process that will lead to a very burdensome
administrative process and, again, may, in fact, exceed their
fundamental authority.
prepared statement
Mr. Chairman, in conclusion, again we want to thank you for
the opportunity to testify on this important public policy. The
proposed rule will have a severe impact on the Greater
Philadelphia area, as well as other parts of the Commonwealth
and the Nation. We appreciate your help in trying to ensure the
hospitals in our region are able to continue to provide
services the public expects and deserves.
I would be happy to answer any questions you may have.
[The statement follows:]
Prepared Statement of Andrew B. Wigglesworth
Mr. Chairman and members of the Subcommittee, my name is Andrew
Wigglesworth and I am president of the Delaware Valley Healthcare
Council (DVHC). The DVHC is located in Philadelphia and has 150 member
hospitals, health systems, and other health related organizations in
Southeastern Pennsylvania, Southern New Jersey, and Delaware. The
mission of the Council is to help member organizations improve the
health status of their community and to exercise leadership in
reforming our health care system. Mr. Chairman we commend you for
holding this hearing and appreciate the opportunity to present our
views on the proposed changes to the Medicare outlier payment policies.
While we all agree with the need to re-examine and address any
unintended consequences of the current outlier policy, the Council and
its member organizations are deeply concerned with respect to the
method, timing and overall impact of the Proposed Rule published on
March 5, 2003 by the Center for Medicare and Medicaid Services (CMS).
In its rush to judgment, the CMS has made serious and unsupported
allegations about the conduct of many community institutions as well as
appears to have initiated and then did not want for the results of its
own audit process for determining whether any inappropriate or illegal
activity even has taken place and what specific policies should be
developed.
More important, CMS is seeking to implement a remedy that: (1)
represents a fundamental shift in payment policies that may exceed its
statutory authority; (2) creates an administratively burdensome and
potentially unworkable process for retrospectively reconciling
payments; and (3) will create immediate and in some cases unsustainable
financial harm to certain hospitals that could jeopardize access to
needed services for Medicare beneficiaries as well as all other
patients. We believe the policy changes embodied in the proposed rule
should be fully evaluated and that any changes that have adverse
financial implications should be phased in over a reasonable transition
period.
Outlined below is a detailed discussion of the Medicare Outlier
program, the Proposed Rule and our concerns.
background
The Medicare program provides for payments in addition to the basic
prospective payments for cases involving extraordinarily high costs,
referred to as ``outlier'' cases. Outlier payments are a critical
component of any payment system based on averages. Twenty years ago,
when the Medicare program moved from cost based reimbursement to a
prospective payment system (PPS), Congress created these additional
payments to limit hospitals' financial risk and to diminish any
financial incentive for a hospital to avoid treating elderly patients
with especially serious illness. The outlier payments partially
reimburse hospitals for losses they incur in treating high cost
patients and are funded by reducing total inpatient PPS payments by 5
to 6 percent.
Although the statute requires an outlier pool of between 5.0
percent and 6.0 percent of total estimated DRG payments, it does not
establish any criteria for deciding the pool size within those limits,
and CMS presumably has the authority to adopt any non-arbitrary
policy.\1\ The size of the pool within the permitted range affects the
distribution of payments among hospitals, since some hospitals tend to
have larger numbers of outlier cases than others, larger outlier pools
and their related payments distribute more money to those hospitals
with more complex and costly caseloads, while a smaller outlier pool,
and the resulting larger regular PPS payments, favors those hospitals
with caseloads of average complexity and cost.
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\1\ American National Health Lawyers Association, Medicare Law,
First Edition (March 2001), at pg. 62.
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Initially, the outlier pool was established at 6.0 percent, the
statutory maximum, in order to provide hospitals the greatest possible
insurance against costly cases. For the second year of PPS, however,
the policy was reversed, and the pool was established at the statutory
minimum of 5.0 percent in order to provide greater payments for typical
cases. That pool size was continued until 1988, when the pool was
increased to 5.1 percent to accommodate the statutory amendment that
increased payments for burn case outliers without changing the
thresholds for the other types of cases.\2\ The pool has remained at
5.1 percent since then.
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\2\ SSA Sec. 1886(d)(3)(B), 42 U.S.C. Sec. 1395ww(d)(3)(B), 42
C.F.R Sec. ----------.
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Any case for which costs exceed the PPS payment amount plus an
additional fixed dollar amount, called a ``threshold,'' qualifies as a
cost outlier entitled to extra payment. CMS computes the threshold
based on past experience, seeking to make the outlier payments exactly
equal to the size of the outlier pool that has been set aside. Each
year the PPS Rule states the dollar amount of costs that must be
exceeded to qualify for cost outlier payments. Once the threshold is
set for the year, all cases meeting the criteria receive outlier
payments, with the result that the total amount of the outlier payments
actually made may be greater or less than the size of the pool
depending on the accuracy of the original estimates.
To identify outlier cases, the Medicare Fiscal Intermediary
compares the estimated cost for a case to the DRG specific fixed loss
threshold. Because hospitals cannot calculate costs on a case-by-case
basis, the fiscal intermediary uses Medicare charges the hospital
reported on its claim to estimate the cost of a case. The intermediary
arrives at the cost estimate by multiplying the covered charges by the
hospitals cost-to-charge ratio (CCR) from the most recently settled
cost report, which is often several years old. Under current CMS
policy, if the hospital CCR is more than 3 standard deviations above or
below the statewide average CCR then the statewide average is used. The
policy of substituting the statewide average CCR was adopted in 1989 to
address CMS's concern that ``. . . . ratios falling outside this range
are unreasonable . . . probably due to faulty data reporting or entry.
Therefore, they should not be used to identify or pay cost outliers.''
From an overall perspective, CMS has not estimated the outlier
thresholds correctly since the initial implementation of PPS, and
repeatedly has paid more or less than that which was contemplated. This
outcome has led to requests that the funds not spent from the outlier
pool be distributed in the form of higher payments in following years.
CMS rejected this approach, stating that the statute requires estimates
that are binding whether subsequent events lead to greater or lesser
outlier payments than originally predicted. CMS's position was upheld
in a court challenge.\3\
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\3\ See County of Los Angeles v. Shalala, 192 F.3d. 1005 (D.C. Cir.
1999).
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recent cms outlier related activities.
CMS, through the authority granted it in accordance with Section
1886(d)(3)(B) of the Social Security Act, made revisions to the
methodologies used in establishing outlier thresholds for Federal
fiscal year 2003.\4\ This change increased the fixed cost outlier
eligibility threshold from $21,025 to $33,560, an increase of 59.6
percent. These revisions were expected to address the issue created by
the increases hospital charges and the effect on Medicare outlier
reimbursement.
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\4\ 67 Fed. Reg. 49981 (Aug. 1, 2002).
---------------------------------------------------------------------------
In November 2002, CMS officials made a number public statements
about ``fraud and abuse'' in connection with the existing cost outlier
reimbursement mechanism, and that CMS would be launching a review of
hospitals nationwide.
On December 3, 2002, CMS issued Program Memorandum A-02-122 to
Medicare fiscal intermediaries, which stated CMS' belief that some
hospitals may be attempting to ``game'' the current outlier payment
systems for the purposes of maximizing payment. This Program Memorandum
launched a nationwide review of hospitals to determine whether and to
what extent hospitals have sought to increase Medicare reimbursement
for cost outliers by increasing aggregate charges.
On December 20, 2002, CMS issued Program Memorandum A-02-126 to
Medicare fiscal intermediaries, which provided instructions to perform
data analyses to identify those hospitals that ``appear to present the
greatest risk to the program''. This Program Memorandum sets forth the
scope of claims audit(s) to be performed for those hospitals that meet
or exceed the thresholds established in the data analysis. Engagement
letters for all providers subject to audit were to be issued by January
13, 2003. The audits were required to be scheduled so that fieldwork
for some audits could start by February 1, 2003. Fieldwork for all
audits must be scheduled to start no later than July 31, 2003. The
Program Memorandum further states that CMS anticipates that this work
will be completed on a flow basis with the entire sample being
completed by July 31, 2004.
As such, no results are available at this time that would either
support or refute CMS' allegations of fraud and abuse of the outlier
program.
proposed rule
On March 5, 2003, CMS issued the Proposed Rule that would change
the methodology for determining Medicare cost outlier reimbursement.
Under the Proposed Rule, the outlier policy would change in the
following key ways:
--The cost-to-charge ratios (CCR) from the latest tentative settled
cost reports at the time the claim is processed would be used
instead of the CCR from the most recently settled cost report.
The proposal would also provide for an adjustment to the CCR
for hospitals with high charge increases.
--The statewide average CCR would no longer be used in place of the
hospital's actual CCR when the hospital's actual CCR is more
than three standard deviations below the geometric mean.
However, the statewide average CCRs would still apply in those
cases where a hospital's operating or capital CCR exceeds the
upper threshold or where a hospital has not yet filed its first
Medicare cost report.
--Outlier payments would be subject to retrospective reconciliation
when the cost report corresponding with the outlier cases is
settled, by using the actual CCR calculated from the final
settled cost report rather than the one from the latest
tentative settled cost report at the time the claim is
processed. Importantly, the details of the process required to
implement this retrospective settlement are not specified. At
the time of settlement, any overpayment or underpayment would
be adjusted for the time value of money during the intervening
period.
The proposed rule does not provide a transition for outlier
payments and does not lower the outlier threshold, which remains at
$33,560. In spite of decreased outlier payments to providers, CMS and
the Office of Management and Budget decided not to decrease the outlier
thresholds until data is available to assess actual payments. CMS
indicates that a change might be possible after first quarter 2003 data
is available.
dvhc comments
As you know Mr. Chairman, CMS has asserted that the use of the
statewide average cost-to-charge ratio to calculate outlier payments
for hospitals with cost-to-charge ratios below the statewide average is
the primary concern. Despite the fact that the potential problem with
this methodology was brought to the agency's attention over a decade
ago, CMS has now decided that an abrupt, mid year change in policy is
warranted regardless of the consequences for hospitals.
Mr. Chairman, we believe this is the wrong way to change public
policy and represents a significant departure from the process both
Congress and CMS have used in the past to make major Medicare payment
policy changes that have adverse financial implications for
participating providers or health plans. As the members of the
Subcommittee know, the federal government has very significant
enforcement powers and legal remedies to take immediate action in cases
involving allegations of fraud or other illegal activities. In fact,
according to press accounts the federal government already has filed
suit and entered into a voluntary agreement to suspend certain outlier
payments with a California based organization.
However there is no current evidence to suggest that all hospitals
that benefited from the current outlier methodology engaged in fraud or
other illegal activities. Quite the contrary as the audits conducted by
the agency at a number of hospitals in New England did not result in
any allegations of inappropriate, much less illegal, actions related to
outlier payments. It raises a question as to why the agency has now
decided to proceed with immediate changes over a year before its
nationwide outlier audit process is scheduled to be completed.
It is clear that CMS officials don't like the current outlier
policy and believe it has had unintended consequences. But it is
possible that even greater unintended consequences will occur by making
radical changes to a decade old public policy with little external
input or analysis on an immediate basis--like flipping a light switch--
in the middle of a fiscal year.
As we all know too well, the Medicare program and its payment
methodologies have become incredibly complex. In the past, both
Congress and/or CMS have provided for transition periods to implement
major policy changes. For example, the Medicare program originally
included provisions for ``length-of-stay'' or ``day'' outliers. In
1995, length-of-stay or day outliers were phased out over a three year
period. Similar transitions have been provided for policy changes in
many other areas including medical education payments, outpatient
payments, and changes in the wage index formula.
In another area that perhaps more closely parallels the core issue
today, many in the hospital community have long felt that Medicare Plus
Choice plans are ``overpaid'' when institution specific payments such
as capital, outliers, medical education, and disproportionate share,
are included in the calculation of per beneficiary payments to those
plans. Why should these plans receive Medicare funds intended to help
cover institution specific expenditures for services to the uninsured,
medical education or physical plant improvement? The plans don't serve
the uninsured or train doctors. After a number of years of debate,
Congress changed the policy to exclude medical education payments from
the calculation of the payments to plans. But the change did not occur
overnight in the middle of the fiscal year in a manner that undermined
the fiscal integrity of the plans. While the policy that gives any of
these institution specific payments to the plans results in ``over
payments,'' but it is not fraud . . . it is not illegal . . . rather it
is bad public policy.
To the extent that a hospital has uniformly applied its published
charges to all payors and a decade old Medicare outlier policy results
in what CMS argues are ``overpayments'' to that hospital, it is a
flawed public policy, not fraud or illegal activity. Under Medicare
law, an acute care hospital is not prohibited or otherwise restricted
from increasing its published charges for patient services (as set
forth in the hospital's ``chargemaster''). The Medicare program cannot
dictate to a provider what its charges or charge structure may be,
though the program may determine whether or not the charges are
allowable for use in apportioning costs under the program.\5\ Medicare
law requires hospital charges to be reasonably related to the costs of
the services rendered, and uniformly applied to all patients.\6\
Subject to these conditions being met, there is nothing inherently
unlawful in a hospital's choice to raise its rates/charges.
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\5\ Medicare Provider Reimbursement Manual Sec. 2203 (CMS-Pub.15-
1).
\6\ Medicare Provider Reimbursement Manual Sec. 2202.4 (CMS-Pub.15-
1). 10
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Moreover, CMS has known that there are potential unintended effects
of the outlier formula for years. In comments to the 1989 Medicare PPS
Final Rule, HCFA acknowledged that outlier payments could be affected
by charge increases:
``Although concern . . . is appropriate, we believe that there are
several factors that will mitigate its effects. First, increases in
hospitals' charges relative to costs will be reflected in the cost-to-
charge ratio assigned to the hospital in the future . . . Second, many
hospitals are restricted in their ability to arbitrarily increase their
charges by the fact that they must deal with other third party payers,
some of which based their payments on charges . . . Third, a general
acceleration in hospital charge increases can be incorporated into the
setting of thresholds in future years, which would limit the potential
benefits to hospitals . . .''----(53 Fed.Reg. at 38509 Sept. 30, 1988).
Consistent with those comments from 1989, CMS, through the
authority granted it in accordance with Section 1886(d)(3)(B) of the
Social Security Act, made revisions to the outlier threshold for
Federal fiscal year 2003. (67 Fed. Reg. 49981 (Aug. 1, 2002). This
change increased the fixed cost outlier eligibility threshold from
$21,025 to $33,560, an increase of 59.6 percent. This level is up from
$14,050 just three years ago. These revisions were expected to address
the problem created by the hospital charges increasing at a rate
greater than hospital costs, and the effect on Medicare outlier
reimbursement. To date there has been little analysis of the impact of
increasing the threshold and whether the threshold increase coupled
with the Proposed Rule will result in aggregate outlier payments of the
statutorily required 5.1 percent of program expenditures.
Mr. Chairman, given the history of the Medicare outlier program and
the prior actions of HCFA/CMS, the federal government itself shares
much of the responsibility for the problem that is the subject of
today's hearing and that the Proposed Rule attempts to address.
However, the proposed rule if adopted will have dramatic consequences
for many of DVHC's members and the delivery of health care in the
greater Philadelphia area.
regional impact
The greater Philadelphia area is home to one of the largest
concentrations of medical and health care resources in the world. In
addition to being home to the nation's first hospital and first medical
school, today the region is a global life sciences center.
--The life sciences sector is the largest single component of our
regional economy and health services alone account for over
250,000 employees--one in seven jobs.
--Nearly 100 hospitals and 5 medical schools.
--Over 100 biotechnology companies
--Home to 80 percent of the nation's largest pharmaceutical
companies.
--Nearly one in five physicians in the country receives some portion
of their training in Philadelphia.
--One of the top areas in the country in terms of NIH research.
In short the Philadelphia metropolitan area is more dependent on
health care as a percentage of its economy than any other major
metropolitan area in the country.
Equally important, those impressive statistics do not tell the full
story, particularly as it relates to the financial stress on our
hospitals and health systems. Consider a few other statistics:
--Philadelphia is the largest city in America without a public
hospital system and our hospitals provide nearly a half a
billion dollars in uncompensated care.
--The average hospital operating margin is only 0.2 percent.
--The Philadelphia market is the most highly concentrated payor
market in the country where Moody's Investor Service has said
payors are dictating prices and driving down hospital revenues.
--The cost of medical liability coverage is skyrocketing out of
control with hospitals spending nearly as much on liability
coverage as uncompensated care. The increased cost of liability
coverage has resulted in hospital layoffs, loss of physicians,
and closure of key services ranging from a trauma center and
paramedic units to maternity units.
--In fact, recruitment of physicians in Southeastern Pennsylvania
virtually has been halted due to the liability insurance
crisis. In fact, last year out of all residency programs in the
area in orthopedics, not one of the graduating students resided
in Pennsylvania. Moreover, a recent survey of residents
indicated that 82 percent of residents after they completed
training would not stay in Pennsylvania due to the current
liability environment.
--The state Medicaid program currently only pays 77 cents on the
dollar of care, and in response to the state budget deficit the
Governor just announced the elimination of Medicaid payments
for outpatient disproportionate share, medical education, and
community access funds resulting in the loss of $120 million to
hospitals in Southeastern Pennsylvania.
These are just a few of the stresses on our region's hospitals. And
like hospitals all across the country we are struggling with workforce
shortages, the increased costs of disaster preparedness and the
prospect of further Medicare cuts. It is because of these challenges
that we are here today. The region's hospitals are extremely fragile
and in no position to absorb sudden and dramatic mid year cuts in
Medicare outlier payments.
According to preliminary estimates, the combination of the increase
in the outlier threshold adopted last year and the provisions of the
proposed rule will reduce Medicare payments to our region by over $100
million dollars. Further, we believe this number is conservative as it
is very difficult to model the implications of the retrospective
reconciliation of outlier payments based on cost-to-charge ratios in
subsequently settled cost reports. At some institutions, the loss of
these funds will result in layoffs, reduction in services, and impact
on care for the entire community.
recommendations
Mr. Chairman, we recognize that CMS has legitimate policy concerns
about the unintended consequences of the current outlier policy.
However, the concerns CMS is trying to address were identified over a
decade ago. Now the proposed ``solution'' may have other equally
significant unintended consequences. In fact, just the manner and
timing of the proposed policy will impact on the ability of hospitals
to serve Medicare beneficiaries and their communities. No one wants
that outcome. We urge this Subcommittee to encourage CMS to consider
the following recommendations:
1. Provide for Transition Period.--The CMS should not implement
Medicare policy changes that have significant adverse financial
implications for participating providers in the middle of a fiscal year
with no provision for a reasonable transition period. At the very least
the proposed changes, including the elimination of the statewide
average CCR should be considered in the context of the annual PPS rule
effective October 1, 2003 with provision for a phase out similar to
other major Medicare policy changes.
2. Reduce the Threshold Level.--The proposed rule does not lower
the current outlier threshold. As mentioned previously, the threshold
has risen from $14,050 to $33,560 in just three years. The current
threshold should be reduced in tandem with any orderly change that may
be made to eliminate the use of the statewide average. As proposed, it
is unclear whether combination of provisions will result in the
statutory requirements for spending between 5.1 percent and 6 percent
on outliers will be met.
3. Eliminate the Retrospective Reconciliation of Cost-to-Charge
Ratios.--The proposed rule would require individual claims to be
processed twice over several years as the Medicare cost reports are
settled. This will be very burdensome, if not impossible from an
administrative standpoint for Fiscal Intermediaries as well as
hospitals. Equally important, this policy change will result in further
unpredictability in payments for hospitals and hinder prudent financial
management in an era of extremely constrained resources. In addition to
potentially exceeding the CMS statutory authority, this proposal will
change a significant part of the prospective payment system into a
retrospective system. This is a fundamental policy change. Any change
of this magnitude should be under Congress' purview.
Finally, in public comments and in the Proposed Rule, CMS officials
have repeatedly implied that hospitals that benefited under the current
policy have committed fraud or illegal activity. No one condones fraud.
If there is evidence of illegal activity by individual organizations,
the government should use the options available to it to address the
issue. However, in this instance the vast majority of hospitals did not
have any deliberate policy to take advantage of Medicare. The
unintended consequences of bad public policy should not be equated with
fraud or illegal activities. Moreover this whole issue is indicative of
how badly the Medicare payment system for hospitals is broken and how
complex it has become.
Mr. Chairman, I want to thank you for the opportunity to comment on
this important public policy issue. The Proposed Rule that will have a
severe impact on the greater Philadelphia area as well as other parts
of the Commonwealth and the nation. We appreciate your help in trying
to ensure that hospitals in our region are able to continue to provide
services the public expects and deserves. I would be happy to try to
answer any questions you or the other members of the Subcommittee may
have.
Senator Specter. Mr. Scully, thank you for staying to hear
the testimony. You have heard an impassioned plea, summarized
by Mr. Wigglesworth, on the impact on southeastern
Pennsylvania. I think that the issues relate generally and
nationally, but he makes a pretty strong case about the--
focusing on southeastern Pennsylvania.
You may have a special interest in that area since, as you
have already identified, Chester Crozier is your home area
hospital, notwithstanding the fact that you are a national
officer. I have a special interest in Pennsylvania and the
Southeast, notwithstanding the fact that I am a United States
Senator, and we are concerned about the national policy, but
Mr. Wigglesworth talks about life sciences being key to the
area. Life sciences are key to the whole country, and the $100
billion in loss in revenue is only one facet. The most
important facet is the quality of care, so how about the
recommendations which have come from these three witnesses,
perhaps starting first with the transition period.
I would urge you, this subcommittee would, and I think
there would be a lot of support in the Congress, to establish a
transition period which gives some time to acclimate.
Before you respond to that, we have not had any specificity
from our other witnesses. Mr. Marshall, what would you think to
be an adequate transition period? Let us get the debate
started.
Mr. Marshall. About 30 months. That would take us into 3
fiscal years, that would allow us to readjust.
Senator Specter. What would you settle for?
Mr. Marshall. 29.
Senator Specter. Dr. Wolf.
Dr. Wolf. I do not have a specific period of time in mind,
but I think a transition period of at least several years would
be a good one.
Senator Specter. Mr. Wigglesworth.
Mr. Wigglesworth. In terms of the time frame, I could go
with either one, but at the very least, this whole process
ought to be put into the regular rule that at least would
extend it beyond, not have this policy go into effect in the
middle of a fiscal year, and it should at least go to the next
fiscal year, and there ought to be a period for an orderly
phaseout over a number of months, as both the other witnesses
say.
I would also add this one other point. I am here
representing a large number of institutions, some of which
benefit, some of which are hurt. One thing that everyone is in
agreement with is that there ought to be, where there is severe
financial implications, there ought to be a transition period.
Today, it is outliers. Tomorrow it could be some other major
policy change, and the agency should not do it mid-fiscal year,
in effect like switching a light bulb.
Senator Specter. Well, would each of you submit in writing
what you would like to see by way of a transition period?
Mr. Wigglesworth. Absolutely.
Mr. Marshall. Yes, Senator.
[The information follows:]
UPMC Health System,
200 Lothrop Street, Pittsburgh, PA,
April 1, 2003.
RE CMS-1243-P / Medicare Program; Proposed Changes in Methodology for
Determining Payment for Extraordinary High-Cost Cases (Cost
Outliers) under the Acute Care Hospital Inpatient Prospective
Payment System
Centers for Medicare and Medicaid Services,
Department of Health and Human Services,
ATTN: CMS-1243-P, Baltimore, MD 21244-1850
Dear Sir or Madam: On behalf of the UPMC Health System (UPMC), we
are submitting one original and three (3) copies of our comments
regarding the Centers for Medicare and Medicaid Services (CMS) proposed
rule, ``Medicare Program; Proposed Changes in Methodology for
Determining Payment for Extraordinary High-Cost Cases (Cost Outliers)
under the Acute Care Hospital Inpatient Prospective Payment System''
(FR Vol. 68, No. 43 Page 10420-10429, 3/5/03). We hope these comments/
suggestions will be considered before any final guidelines are
published.
general observations
Even the most modest changes to Medicare payment systems have
profound effects on providers and Fiscal Intermediaries (FIs). Though
the proposed changes in methodology for cost outliers appear simple,
the procedural changes, data requirements, and financial implications
to making such changes are not. Therefore, we believe that before these
rules are finalized, CMS should better define the terms, offer guidance
for different scenarios, add clear explanations for how they should be
addressed, and ensure consistency between these proposed new rules and
those already in place.
Because these changes not only have a financial implication but
also require process changes for compliance, there should be a phased-
in implementation schedule. Reasonable processes should be set-up and
tested among the providers, Fiscal Intermediaries (FIs), and CMS to
make the accounting correct and expeditious. Considering the magnitude
of both the processing implications, and financial implications, CMS
should work together with health care providers nationwide to ensure
that all aspects of Medicare outlier reimbursement are covered. It is
only in this manner that CMS can ensure the integrity of the Medicare
Trust Fund, and providers can be assured that they are being
appropriately compensated for the expense incurred for high cost cases.
With the sweeping changes being proposed in this rule, the most
crucial aspect to providers is the maintenance of the fixed-loss
outlier threshold at the current $33,560 level. Special consideration
should be given to re-evaluating CMS' position to hold the threshold at
that level before it is implemented in the final rule.
specific comments--phase-in of the proposed changes over a transition
period
Eliminate Statewide Averages (Pg. 10424) and Gradually Reduce Fixed-
Loss Outlier Threshold (for Inpatient PPS) from $33,560 Level
(Pg. 10426)
CMS has proposed sweeping changes to the calculation and process
for the payment of Medicare outliers. The proposed changes include:
--Using more current cost-to-ratios (CCRs) to ensure that outlier
payments are made for truly high cost cases.
--Eliminating the use of the statewide average for hospitals that
fall below the range considered reasonable (effective October
1, 2002, the low end of the range was 0.194, per Federal
Register, August 1, 2002, Vol. 67, No. 148, page 50125) under
the current Medicare regulations, using instead the hospital's
own specific cost-to-charge ratio.
--Shifting the Medicare outlier payment from a prospective Medicare
payment to a retrospective or ``settled'' item on the Medicare
cost report to ensure that the outliers paid are reflective of
the high cost cases for that period.
--Maintaining the fixed-loss threshold at the current $33,560 level
to maintain the outlier payments at the estimated 5.1 percent
of total payments.
Comments.--As a Health System, we are in agreement with many of the
provisions outlined in the proposed rule, such as the use of more
current cost-to-charge ratios and the elimination of the statewide
average for hospitals below the range considered reasonable. We are
also in agreement that hospitals that have worked to game the system
should be prevented from continuing to receive outlier payments for
cases that are not high cost cases. The dilemma for the Medicare
Program is how to prevent excessive payments to those hospitals that
aggressively set their charges to maximize their Medicare payments for
outliers, without negatively impacting those hospitals that did not
engage in such practices.
Under Program Memorandum A-02-l22, CMS defined excessive charging
practices as those hospitals that had an increase in average charges
per Medicare case of 20 percent or more from fiscal year 2000 to fiscal
year 2001 and fiscal year 2001 to fiscal year 2002. One of our major
teaching facilities that treats a significant number of high intensity
cases, which is also being paid under the statewide average provision,
did not meet the criteria noted above. Their charge increases were not
excessive as defined by CMS. This facility, as well as all other
facilities in our Health System, will be significantly impacted by the
immediate implementation of all of these provisions. In evaluating our
Health System's financial position, it is projected that our outlier
payments will now approximate 2.68 percent of total payments (defined
as the combination of the base DRG plus outlier payments) under the
proposed provisions. Although we are not in a position to assess the
impact to healthcare providers nationwide, based upon our own
Healthcare System, these provisions will most certainly impact the
financial position of many providers in a similar manner.
Recommendation.--We would propose to allow a transition period for
those hospitals that did not engage in aggressive price setting. This
transition period would entail the following:
--gradual phase-out of the statewide average for those hospitals
below the range considered reasonable.
--gradual reduction of the fixed-loss threshold from the current
$33,560.
--gradual increase of the marginal cost factor from 80 percent to 100
percent as actual costs would be used for the calculations.
In addition to phasing in the revenue reductions certain to come
from these proposed provisions, a transition period would afford CMS
the opportunity to monitor the impacts these provisions would have on
healthcare providers nationwide, as well as allow providers to adjust
their operations accordingly. With the implementation of a transition
period, CMS could then assess the impact these provisions were having
on the Medicare outlier payments representing 5 percent-6 percent of
total payments as mandated in Section 1886 (d)(5)(A)(iv) of the Social
Security Act, giving CMS the opportunity to amend these provisions if
the Medicare outlier payments drop below the 5 percent level.
specific comments--individual propose medicare outlier component
revisions
Regardless of a transition period which we believe is essential, we
believe that CMS should reconsider the following individual provisions
outlined in the proposed rule.
Fixed-loss Outlier Threshold (for Inpatient PPS)--Maintain at $33,560
Level (Pg. 10426)
CMS has indicated that they believe the fixed-loss outlier
threshold should be based on projected payments using the latest
available historical data without retroactive adjustment, either mid-
year or at the end of the year, to ensure that actual outlier payments
are equal to 5.1 percent of the total DRG payments.
Comments.--We are not in agreement with this position and believe
the $33,560 fixed-loss threshold is too high based on the fiscal year
2003 data currently available to providers. CMS indicates that outlier
payments are intended to recognjze the fact that hospitals occasionally
treat cases that are extraordinarily costly and otherwise not
adequately compensated under an average-based payment system. CMS needs
to recognjze that with the limitations established by the proposed
rule, especially maintaining the fixed loss threshold at $33,560, many
high cost cases will not be recognized as outlier cases. In the
treatment of patients, care can't be stopped at a point in time so as
not to exceed the threshold, and as such, providers will incur the cost
of the case and not receive the corresponding outlier payment
compensating them for this cost.
UPMC Health System is comprised of a number of academic teaching,
and community hospitals. Utilizing recent claims data and the proposed
changes in outlier regulations, we estimated our outlier payments as a
percentage of total payments (combination of the base DRG plus outlier
payments). Under the provisions of the proposed regulations, outlier
payments represent 2.68 percent of total payments, significantly below
the legislative number of 5 percent. Section 1886 (d)(5)(A)(iv) of the
Social Security Act states the following: ``The total amount of the
additional payments made under this subparagraph for discharges in a
fiscal year may not be less than 5 percent nor more than 6 percent of
the total payments projected or estimated to be made based on DRG
prospective payment rates for discharges in that year.'' While we
recognize that our analysis may not be indicative of national data, we
believe that since a large discrepancy exists within our specific
system data, CMS should use more current data in assessing the impact
of the proposed regulation.
Recommendation.--We believe that section 1886 (d)(5)(A)(iv) of the
Social Security Act requires CMS to change its fixed loss outlier
threshold when mid-year changes decrease the total projected outlier
payments below the 5 percent minimum level. While we realize CMS cannot
wait for all outlier settlements to be finalized to determine an actual
5 percent payment level, nor can they accurately project a provider's
possible charge increases, they should calculate estimated outlier
recovery projections based upon available federal fiscal 2003 data.
These estimated outlier recoveries should be factored into the
development of a new outlier threshold level.
CMS indicated the data for the first quarter offiscal year 2003
inpatient claims will be available soon, and that this data may allow
CMS to evaluate the current threshold and whether outlier payments to
date appear to be approximately 5.1 percent of the total DRG payment.
Our recommendation would be for CMS to evaluate that data prior to
finalizing the proposed rule so as to adjust the fixedloss threshold
based on current data.
Recalculation of Outlier (Inpatient) Payments at Time of Settlement
(Page 10425)
CMS has proposed a new section Sec. 412.84 (i)(2) which would
require that outlier payments be subject to adjustment when a
hospital's cost report is settled. As part of the proposed settlement
process, the Fiscal Intermediary (FI) would be required to detennine
the actual operating and capital cost-to-charge ratios (CCRs) based on
the ratio of costs and settlement charges used on that fiscal year's
finalized cost report. These audited CCRs would then be applied against
each Medicare discharge claim to re-compute the final outlier
reimbursement amount.
Comments.--While we recognize that this methodology would result in
a cost outlier payment that is more reflective of the time period for
which the cost outlier is being paid, we believe that this process
presents a multitude of issues which need to be addressed.
Specifically, there are five (5) aspects of this proposed provision
that we would like to address.
(1) Historically, since September 1, 1983, the outlier payment
policy applied by CMS has been prospective, with payments made for
outliers considered final payments. CMS has indicated that they believe
that prospective outlier payments are more vulnerable to potential
overpayments, thus necessitating the need for actual cost outlier
settlements. This proposed outlier rule would make the outlier payment
a ``settled'' item on the Medicare cost report. In this regard, we
refer to the Social Security Act, Section 1886(d)(2)(B) and Section
1886(d)(5)(A)(iv) which respectively state:
``Reducing for Value of Outlier Payments.--The Secretary shall
reduce each of the average standardized amounts determined under
subparagraph (A) for hospitals located in an urban area and for
hospitals located in a rural area by a proportion equal to the
proportion of payments under this subsection (as estimated by the
Secretary) based on DRG prospective payment amounts which are
additional payments described in paragraph (5)(A) (relating to outlier
payments) for hospitals located in such respective area'' and ``The
total amount of the additional payments made under this subparagraph
for discharges in a fiscal year may not be less than 5 percent nor more
than 6 percent of the total payments projected or estimated to be made
based on DRG prospective payment rates for discharges in the year''.
Section l886(d)(2)(B) of the Social Security Act points to the fact
that there is a reduction of the base DRG, via the standardized
amounts, for providers based upon the estimate of outlier payments to
providers. By making the outlier a ``settled'' item, the proposed rule
is silent on how the over or under payments of the outlier recouped/
paid at year-end be translated into the base DRG payment, since the
base DRG would continue under the current policy to be handled
prospectively, with the outlier under the proposed policy being handled
retrospectively.
Recommendation.--CMS needs to address how the over or under
payments of the outlier recouped/paid at year-end be handled in
relationship to the base DRG in the final rule. In addition, with the
transition of the outlier from a prospective payment basis to a
retrospective payment basis, we believe CMS should obtain Congressional
approval to make that switch since it departs from what Congress
intended in Section 1886(d)(2)(B) of the Social Security Act.
(2) The proposed rules are silent as to what point in time the
outlier settlement for a given fiscal year becomes final. The Medicare
appeal process and/or re-opening process, available to providers and
Fiscal Intermediaries (FIs), can include issues which affect the
outlier calculation. These issues include fudirect Medicare Education
(IME) and Disproportionate Share (DSH) payments. Both IME and DSH
impact not only the outlier threshold, but also the actual outlier
payment itself. If teaching or disproportionate share providers are
underpaid for either IME or DSH, the outlier payments and the number of
cases that qualify for an outlier are overstated. Conversely, if IME or
DSH is overstated, the outlier payments and the number of cases that
qualify for an outlier are understated. The proposed regulation does
not provide guidance related to this complicated issue.
Recommendation.--In the final rule, CMS needs to address at what
point in time the outlier settlement for a given fiscal year becomes
final.
(3) CMS has indicated in this proposed rule that they are still
evaluating the procedural changes necessary to implement this process
but admitted that this process would have to be done on a claim-by-
claim basis to obtain new and accurate outlier settlement amounts.
Recommendation.--Prior to implementation, CMS should assess the
procedural changes that will be necessary to re-process and validate
100 percent of all claims for all providers nationwide. That assessment
should not only include the necessary procedural changes that need to
be implemented by both the Healthcare providers and the Fiscal
Intermediaries (FI), but it should include the estimated manpower and
cost to the Medicare Program to re-process 100 percent of all Medicare
claims.
(4) CMS indicates that by targeting the outlier to be a ``settled''
item, outlier payments would now be based on the relationship between
the hospital's costs and charges at the time a discharge occurred,
ensuring that when the final outlier payments are made, they would
reflect an accurate assessment of the actual costs the hospital
incurred. However, under the current Medicare outlier payment formula,
that is not the case. The actual Medicare outlier payment represents
only 80 percent of the difference between the actual cost of the case
and the established threshold for that case.
Recommendation.--For Medicare outlier payments to represent actual
cost, we would recommend that the marginal cost factor of 80 percent be
eliminated and valued at 100 percent. The 80 percent marginal cost
factor is reducing the cost outlier payment to 80 percent of the actual
calculated cost.
(5) The adoption of this proposed provision to make the inpatient
acute Medicare outlier payment a retrospective or ``settled'' item as
opposed to a prospective item creates an inconsistency between the
Inpatient Prospective Payment System (IPPS), and both the Outpatient
Prospective Payment System (OPPS) and the Long-Term Acute Care Payment
System. Currently, the outpatient outlier provisions under both the
Social Security Act 1833(t)(5) and OPPS regulation 419.43(d) do not
recognize any further or final settlement of the outpatient outlier
payments. In addition, the Final Rule in Federal Register 67, No. 69,
August 30, 2002, establishing a prospective payment system for Medicare
payment of inpatient hospital services furnished by long-term care
hospitals, does not recognize any further or fmal settlement for the
outlier payments.
Recommendation.--The inconsistency in the treatment of Medicare
outlier payments for prospective payment systems should be addressed by
CMS prior to being implemented in the fmal rule under IPPS.
The Proposed Rule Requests Comments Regarding ``Substantial Evidence''
Requirements by a Provider to Request a Change in the Cost-to-
Charge Ratios. (Proposed Sec. 412.84(i)(1))
The preamble of the proposed rule indicates that CMS would have the
authority (page 10424) to direct the Fiscal Intermediary (FI) to change
the hospital's cost-to-charge ratio (CCR) if a hospital's charges have
been increasing at an excessive rate compared to that of other
hospitals. Provider(s) would be permitted to contact their FI to
request that its CCR be changed if it presents ``substantial evidence''
that the ratios are inaccurate. The CMS regional office, however, would
have to approve these requests.
Comments.--We believe the terms ``substantial evidence'' and
``excessive charges'' are subjective and are open to varying
interpretations. Before the regulations are issued, better definitions
along with clear examples should be provided.
Recommendation.--CMS should provide clear examples of what is
defined as ``substantial evidence'' including guidance on how the
implementation of high cost programs (such as a new heart program) and
the related charging structure should be handled. Another example may
be linking the overall charge increase to the related cost due to the
implementation of better cost accounting methods.
With respect to ``excessive charging practices'' of a provider,
although we agree that no provider should engage in behavior that
jeopardizes the integrity of the Medicare Trust Fund, the current
Medicare regulations are silent with respect to the charge structure
that a provider implements as long as the charge structure is
consistent among payrols. To propose a process that could dissuade a
provider from raising their charge structure could potentially impact
the reimbursement from other payors. Therefore, CMS should define what
type of charge increase is ``excessive''.
The Proposed Rule is Silent on How to Calculate the Iterim (Operating &
Capital) Cost-to-Charge Ratios in a Merger Situation
Recommendation.--CMS should add a provision explaining how the
cost-to-charge ratio (CCR) will be calculated for the situation where
two (2) providers merge under one (1) provider number. The current
regulations as well as the proposed rule are silent with respect to
this issue.
Special Recordkeeping Requirements in Conjunction with the
Recalculation of Outlier Payments at Time of Settlement (Page
10425)
The proposed outlier recalculation settlement process (as proposed
in section Sec. 412.84(i)(2)) includes special record keeping
requirements which would be necessary to implement this procedural
change. Currently CMS has indicated that they are still evaluating
procedural changes necessary to implement this process but admitted
that this process would have to be done on a claim-by-claim basis to
obtain new and accurate outlier settlement amounts.
Comments.--Because the procedural changes have not yet been
defined, and the implementation will undoubtedly place additional
burden on both providers and Fiscal Intermediaries (FIs), consideration
must be given to the information that must be made available to
providers to validate the Medicare outlier payments received.
Recommendation.--We believe that CMS should instruct each FI to
supply each provider with an electronic file listing by claim, showing
the original interim outlier payment and the re-calculated outlier
amount, detailing the specific data elements used in the calculation.
We believe CMS and the FI must incorporate this detailed outlier data
file into their standard routine settlement process so no special
request is required by the provider from the FI.
Without these detailed files from the FI, the provider will be
unable to confinn the accuracy of the FI's outlier re-calculation. As
CMS indicated, this re-calculation cannot be done accurately except on
a claim-by-claim basis, supporting documentation should be availabJe
for the provider's review.
The Establishment of a Time Value Adjustment for Over and Under
Payments of Outliers
CMS has proposed to incorporate a time value adjustment for
possible overpayment or underpayments of outlier payments as detennined
using updated cost-to-charge ratios (CCRs) from the applicable cost
report settlement year. For discharges occurring on or after the
effective date of the final rule, the time value adjustment would be
made for the period the outlier payments were inappropriately held by
the provider. A similar adjustment would be made for underpayments to
the hospital.
Comment.--We are not in agreement with this approach as the
initiation of a time value adjustment on selected line items on the
cost report is not consistent with other ``settled'' items such as
Indirect Medical Education (IME) and Disproportionate Share (DSH). CMS
supports its argument by noting that providers have the opportunity to
manipulate their outlier payments by dramatically increasing charges
during the year in which the discharge occurs. In this situation, the
provider would receive excessive outlier payments, which although the
provider would incur an overpayment and have to pay the money back when
the cost report is settled, would allow the provider to obtain excess
payments from the Medicare Trust Fund on a short-term basis. Other
areas of the cost report that involve ``settled'' items are not
subjected to the assessment of interest.
Recommendation.--CMS should address the consistency of assessing
interest on overpayments of ``settled'' items on the cost report prior
to this provision being implemented in the final rule.
If you have any questions regarding our comments please telephone
me at (412) 647-4820.
Sincerely,
John W. Paul.
______
Delaware Valley Healthcare Council,
March 27, 2003.
Hon. Arlen Specter,
Chairman, Subcommittee on Labor, Health and Human Services and
Education, U.S. Senate, Washington, D.C.
Dear Mr. Chairman: On behalf of the members of the Delaware Valley
Healthcare Council, I am writing, to follow up on the March 11 hearing
before your Subcommittee on Medicare outlier payment policies: In
particular, we would like to respond to your request far a specific
recommendation on the appropriate timeframe for a transition period as
well as to clarify the record related to certain statements made at the
hearing by CMS Administrator Thomas Scully. The Council, along with
many other hospital associations including the AHA, is urging CMS to
amend the proposed regulations to provide at least a 30 month
transition period, reduce in the outlier threshold, and to eliminate
the proposed retrospective reconciliation of outlier payments. Our
position is described in greater detail below.
At the outset, we also want to take this opportunity to thank you
again for holding the March 11 hearing. Your continued commitment to
developing an equitable resolution to this policy matter is of critical
importance to all hospitals in the Delaware Valley and across the
Commonwealth.
While we all agree with the need to re-examine and address any
unintended consequences of the current outlier policy, the Council and
its member organizations are deeply concerned with respect to the
method, timing, and overall impact of the Proposed Rule published on
March 5, 2003 by the Center for Medicare and Medicaid Services (CMS).
The CMS has made serious and unsupported allegations about the conduct
of many community institutions. Further, CMS appears to have initiated
an audit process and then failed to even wait for its outcome in
determining either whether any inappropriate activity has taken place
or what specific policies should be developed.
As drafted, the Proposed, Rule will adversely affect virtually all
hospitals across the United States. CMS is seeking to implement a
``remedy'' that: (1) represents a fundamental shift in payment policies
with no transition; (2) does not lower the current outlier threshold;
(3) creates an administratively burdensome and potentially unworkable
process far retrospectively reconciling payments; and (4) creates
immediate and, in some cases, unsustainable financial harm to certain
hospitals that could jeopardize access to needed services for Medicare
beneficiaries and all other patients. In our region, no hospital would
benefit from the Proposed Rule. In short, the combination of changes
proposed by CMS represents the ``worst of all worlds'' for hospitals.
30 month transition period
After discussions with our members, the American Hospital
Association and other interested parties, we are urging the CMS to
provide at thirty-month transition period (i.e. the remainder of this
fiscal year plus at least two years beginning on October 1). There is
no justification for a policy of this magnitude to be implemented in
the middle of a fiscal year. As noted at the hearing there is amply
precedent for such transition periods. For example, the Medicare
outlier program originally included provisions for ``length-of-stay''
or ``day'' outlies. In 1995, length-of-stay or day outliers were phased
out over a three-year period. We urge the Subcommittee to support a
thirty-month transition period in this case as well.
The CMS suggested that there is a need to act immediately, and
without any transition, based on concern of fraudulent or other illegal
activity. However, there is no current evidence to suggest that
hospitals that benefited from the current outlier methodology actually
engaged in fraud or other illegal activities. In fact, at institutions
where the CMS actually has completed audits, there have been no
allegations of inappropriate, much less illegal, actions related to
outlier payments.
As you know, the federal government has very significant
enforcement powers and legal remedies to take immediate action in cases
involving allegations of fraud or other illegal activities. According
to press accounts, the federal government has already filed suit and
entered in to a voluntary agreement to suspend certain outlier payments
with a California based organization. As a practical matter, it would
appear that a substantial portion of the fiscal impact of the proposed
policy already has been achieved through this voluntary agreement. If
the CMS believes that some institutions have engaged in illegal
conduct, then it can and should take appropriate enforcement action.
However, CMS should not penalize the entire hospital field by not
providing a reasonable transition for implementation of this policy. In
fact, CMS officials now have conceded in various forums that the
primary issue appears to be the result of a flawed public policy, not
illegal actions by hospitals. It is unfortunate that the debate over
this important policy in a sense has been distorted and undermined by
these allegations. The unintended consequences of bad public policy
should not be equated with fraud or illegal activities. Moreover, this
whole issue is indicative of how badly the Medicare payment system for
hospitals is broken and, how complex it has become.
fiscal impact on delaware valley hospitals
At the hearing there may have been some confusion concerning the
fiscal impact of the Proposed Rule on institutions in the Greater
Philadelphia area. Unfortunately, doe to the time constraints it was
not possible to respond to certain points made for the record. First,
as part of his verbal testimony, Mr. Scully suggest that our estimate
of the fiscal implications of the Proposed Rule included Tenet
institutions in Philadelphia. As Tenet has voluntarily given up outlier
payments, our fiscal estimated did not include those institutions.
Second, also as part of his verbal testimony, Mr. Scully suggested
that Thomas Jefferson University Hospital (TJUH) would benefit under
the March 5 Proposed Rule and gain approximately $2 million in Medicare
payments. Based on our review of the rule and discussions with the
administration of TJUH, the hospital lost approximately $2 million when
the outlier threshold was raised from $14,050 to $21,025 several years
ago. TJUH now is losing millions more in Medicare payments as a result
of increasing the outlier threshold to $33,560 in 2002. Perhaps Mr.
Scully was referring to impact of his original hope to reduce the
outlier threshold. As the outlier threshold under the March 5 Proposed
Rule remains unchanged at $33,560, it is unclear how TJUH could benefit
under the CMS proposal. Unfortunately, the material accompanying
proposed rule does not include any financial impact analysis or data to
help further clarify the effect of this rule on TJUH or all other
hospitals.
According to our estimates, the combination of the increase in the
outlier threshold adopted last year and the provisions of the proposed
rule will reduce Medicare payment to hospital in our region by over
$100 million. Further, we believe this number is conservative as it is
very difficult to model the implications of the retrospective
reconciliation of outlier payments based on cost-to-charge ratios in
subsequently settled cost reports. Given the enormous financial stress
and other challenges facing our hospitals, the loss of these outlier
funds will result in layoffs, reduction in services, and impact on care
for the entire community.
Despite the fact that the potential problems with current
methodology were brought to the agency's attention over a decade ago,
CMS is proposing an abrupt, mid year change in policy without regard to
the significant financial consequences for hospitals. We believe this
is the wrong way to change public policy and represents a significant
departure from the process both Congress and CMS have used in the past
to make major Medicare payment policy changes that have adverse
financial implications for participating providers or health plans.
As we testified on March 11, we recognize that CMS has legitimate
policy concerns about the unintended consequences of the current
outlier policy. However, the proposed ``solution'' may have other
equally significant unintended consequences. We urge CMS to: (1)
provide at least a 30 month transition period (i.e. remainder of this
fiscal year and 24 months beginning on October 1); (2) reduce the
outlier threshold; and (3) eliminate the retrospective reconciliation
of outlier payments.
Again, thank you for your continuing leadership to help shape an
appropriate Medicare outlier payment policy. The Proposed Rule will
have a sever impact on the greater Philadelphia area as well as other
parts of the Commonwealth and the nation. We appreciate your help in
try to ensure that hospital in our region are able to continue to
provide health care services that the public expects and deserves.
Sincerely,
Andrew Wigglesworth,
President.
______
Delaware Valley Healthcare Council,
May 12, 2003.
Hon. Arlen Specter,
Chairman, Subcommittee on Labor, Health and Human Services and
Education, U.S. Senate, Washington, DC.
Dear Mr. Chairman: On behalf of the members of the Delaware Valley
Healthcare Council (DVHC), I am writing in further follow up to your
Appropriations Subcommittee's March 11 hearing on Proposed Regulations
changing Medicare outlier payment policies. As you know, in the
proposed regulations the Centers for Medicare and Medicaid Services
(CMS) provided for a 30-day comment period. As the comments received by
CMS demonstrate overwhelming support for core elements of DVHC's
position, we wanted to share a brief summary of those comments for the
Subcommittee's hearing record.
At the March 11 hearing and in a March 27 letter to you, we
outlined DVHC's strong opposition to the Medicare outlier payment
changes proposed by CMS. In our view CMS is seeking to implement a
``remedy'' that (1) represents a fundamental shift in payment policies
with no transition; (2) does not lower the current outlier threshold;
(3) creates an administratively burdensome and potentially unworkable
process for retrospectively reconciling payments; and (4) will create
immediate, and in some cases unsustainable, financial harm to certain
hospitals that could jeopardize access to needed services for Medicare
beneficiaries as well as all other patients. We continue to believe the
combination of changes contained in the CMS Proposed Rule represents
the ``worst of all worlds'' for hospitals in Southeastern Pennsylvania
and across the nation.
My colleagues and I have since examined all of the public comments
submitted to CMS and the results show virtually unanimous support for a
transition period to enable hospitals to adjust in an orderly way to
proposed policy changes. Of the hundreds of letters received by CMS,
nearly 300 specifically ask CMS to include a transition period and only
four expressed outright opposition to a transition period. Importantly,
all the major national hospital associations--the American Hospital
Association, the Association of American Medical Colleges, the National
Association of Public Hospitals, and the Federation of American
Hospitals--supported a reasonable transition period. Attached for your
review is a list of all hospitals and associations that wrote to CMS in
support of a transition period.
As we indicated at the hearing, CMS has a long-standing practice of
providing a transition period for major changes in Medicare payment
policies including previous changes to outlier payment polices. For
example, CMS has provided transition periods ranging from ten years for
modifications to capital payments to three years for phasing out length
of stay outliers. In fact, we are unaware of any major payment policy
change with a negative impact on hospitals for which CMS has provided
less than a full year transition. Hospitals in Southeastern
Pennsylvania, as well as many other parts of the country, are simply in
no financial position to absorb abrupt mid-year changes in payment
policies of the nature proposed by CMS. If the changes proposed by CMS
are adopted immediately; it will adversely affect the delivery of care
not only for Medicare beneficiaries, but for the entire community in
many parts of this country.
Mr. Chairman, we continue to be grateful for your efforts on behalf
of hospitals to secure a reasonable transition period for this major
change in Medicare outlier payment policy. If you or your staff have
any questions or need further clarification of the issues related to
the outlier policy changes or our analysis of the public comments on
the March 5 Proposed Rule, please do not hesitate to call. I can be
reached at 215.735.3295.
Sincerely,
Andrew B. Wigglesworth,
President.
In Support of Transition Period
National
American Hospital Association; Federation of American Hospitals;
National Association of Public Hospitals and Health Systems; and
Associations of American Medical Colleges.
Alabama
Northwest Medical Center (Winfield); Jefferson Health System,
Cooper Green Hospital, Jefferson Outpatient Care (Birmingham); Jackson
Hospital (Montgomery); Alabama Hospital Association; DCH Health System
(West Central Alabama); Wedowee Hospital (Wedowee); Alabama Hospital
Association (Montgomery); and Gasden Regional Medical Center.
Arizona
Arizona Hospital and Healthcare Association (Phoenix); Sierra Vista
Regional Health Center (Sierra Vista); Sun Health (Sun City).
Arkansas
Arkansas Hospital Association; Baptist Memorial Hospital Forrest
City (East Arkansas); Delta Memorial Hospital (Dumas); Ouachita County
Medical Center (Camden); Ouachita Valley Health System (Camden); St.
Vincent Health System (Little Rock); Baptist Health (Little Rock);
Sparks Health System (Fort Smith); Baptist Memorial Hospital
(Blytheville).
California
Mark Twain St. Joseph's Hospital (San Andreas); Sequoia Hospital
(Redwood City); Dominican Hospital (Santa Cruz); Chino Valley Medical
Center (Chino); Oak Valley Hospital (Oakdale); Coalinga Regional
Medical Center (Coalinga); Torrance Memorial Medical Center (Torrance);
Hoag Hospital (Newport Beach); Healthcare Association of Sand Diego and
Imperial Counties (San Diego); Sutter Auburn Faith Hospital (Auburn);
Adventist Health, Feather River Hospital (Paradise); San Clemente
Hospital and Medical Center (San Clemente); University of California
(Oakland); and Catholic Healthcare West (San Francisco).
Colorado
Porter Adventist Hospital (Denver); Parkview Medical Center
(Pueblo); Colorado Health and Hospital Association; and Memorial
Hospital (Colorado Springs).
Connecticut
St. Vincent's Medical Center (Bridgeport); Johnson Memorial
Hospital (Stafford Springs); Saint Mary's Hospital (Waterbury); and
Bristol Hospital (Briston).
Delaware
St. Francis Hospital (Wilmington) and Delaware Healthcare
Association (Dover).
Florida
Kendall Regional Medical Center (Miami); Shands HealthCare
(Gainesville) (2 letters); Munroe Regional Medical Center (Ocala); West
Florida Healthcare (Pensacola); Tampa General Hospital (Tampa);
Memorial Healthcare System (Hollywood); and Bethesda Memorial Hospital
(Boynton Beach).
Georgia
Union General Hospital, Inc. (Blairsville); Central Georgia Health
System (Macon); Southern Regional Health System (Riverdale); Piedmont
Medical Center (Atlanta); Gwinnett Health System (Lawrenceville);
Georgia Hospital Association (Marietta); Memorial Health (Savannah);
and Saint Joseph's Hospital of Atlanta (Atlanta).
Idaho
Portneuf Medical Center (Pocatello); Idaho Hospital Association;
St. Luke's Regional Medical Center (Boise); and Saint Alphonsus
Regional Medical Center (Boise).
Illinois
Louis A. Weiss Memorial Hospital (Chicago); Resurrection Health
Care (Chicago) (2 letters); Adventist Health System (Hinsdale);
Freeport Health Network (Freeport); Katherine Shaw Bethea Hospital
(Dixon); St. Mary's Hospital (East St. Louis); Morris Hospital
(Morris); Proctor Hospital (Peoria); Loyola University Health System
(Maywood); and Illinois Hospital Association (Naperville).
Indiana
Kosciusko Community Hospital (Warsaw); Good Samaritan Hospital
(Vincennes); St. Vincent Health (Indianapolis); St. Vincent Health St.
Joseph Hospital (Kokomo); and Greater Lafayette Health Services
(Lafayette).
Iowa
Trinity Regional Medical Center (Fort Dodge); Mercy Medical Center
(Des Moines); and Spencer Hospital (Spencer).
Kansas
Hospital District No. 5 (Harper); Cushing Memorial Hospital
(Leavenworth); Saint Luke's South Hospital (Overland Park); Kansas
Hospital Association; Salina Regional Health Center (Salina) (2
letters); Anderson County Hospital, Saint Luke's Health System
(Garnett) (6 letters); and Wesley Medical Center (Wichita).
Kentucky
Kentucky Hospital Association; Jewish Hospital HealthCare Services
(Louisville); and Caritas Health Services (Louisville).
Louisiana
North Oaks Health System (Hammond); Tulane University Hospital and
Clinic (New Orleans) (2 letters); Pendleton Memorial Methodist Hospital
(New Orleans); and West Jefferson Medical Center (Marrero).
Massachusetts
Lahey Clinic (Burlington) (2 letters).
Michigan
Henry Ford Health System (Detroit); Botsford General Hospital
(Farmington Hills); Detroit Medical Center (Detroit); and University of
Michigan Health System (Ann Arbor).
Minnesota
St. Francis Regional Medical Center (Shakopee); Minnesota Hospital
Association (St. Paul); and United Hospital (St. Paul).
Mississippi
Grenada Lake Medical Center (Grenada); Baptist Mernorial Hospital
Golden Triangle (Columbus) (11 letters); Baptist Memorial Hospital
Booneville (Booneville) (4 letters); Baptist Memorial Hospital North
Mississippi (Oxford); Baptist Memorial Hospital Union County (New
Albany); Natchez Regional Medical Center (Natchez); St. Dominic/Jackson
Memorial Hospital (Jackson); Mississippi Baptist Health Systems
(Jackson); Baptist Memorial Hospital DeSoto (Southaven); and Gilmore
Memorial Hospital (Amory).
Missouri
Wright Memorial Hospital (Trenton); St. Francis Hospital and Health
Services (Maryville); Bates County Memorial Hospital (Butler); SSM
Health Care (St. Louis) (2 letters); Cass Medical Center
(Harrisonville); Saint Luke's Northland Hospital (Kansas City); St.
Luke's Health System (Smithville); Freeman Health System (Joplin) (42
letters); and St. John's Mercy Health Care (St. Louis).
Montana
An Association of Montana Health Care Providers (Helena).
Nebraska
BryanLGH Medical Center (Lincoln); Good Samaritan Health Systems
(Kearney); and Nebraska Hospital Association.
Nevada
Nevada Hospital Association.
New Hampshire
The Cardiovascular Center at St. Joseph Hospital (Nashua) (2
letters).
New Jersey
Trinitas Hospital (Elizabeth); St. Joseph's Wayne Hospital (Wayne)
(2 letters); and St. Mary's Hospital (Passaic); New Jersey Council of
Teaching Hospitals (Trenton); New Jersey Hospital Association; Saint
Clare's Health System; St. Joseph's Regional Medical Center (Paterson);
Atlantic Health System (Florham Park); The University Hospital,
University of Medicine and Dentistry of New Jersey (Newark); Atlantic
City Medical Center (Atlantic City); and The Cooper Health System.
New Mexico
Memorial Medical Center (Las Cruces) and Sandia Health System
Albuquerque Regional Medical Center and Rehabilitation Hospital of New
Mexico (Albuquerque).
New York
NYU Hospitals Center (New York); Nyack Hospital (Nyack); Lenox Hill
Hospital (Upper East Side); John T. Mather Memorial Hospital (Port
Jefferson); Oswego Hospital (Oswego); Catholic Health System Mercy
Hospital of Buffalo (Buffalo); Catholic Health System Kenmore Mercy
Hospital (Buffalo); Catholic Health System Sisters of Charity Hospital
(Buffalo); Catholic Health System St. Joseph Hospital (Cheektowaga);
Soldiers and Sailors Memorial Hospital (Penn Yan); Saratoga Care
(Saratoga Springs); Hospital for Joint Diseases Orthopaedic Institute
(New York); Long Beach Medical Center (Long Beach); Montefiore Medical
Center (Bronx); Greater New York Hospital Association (New York); New
York-Presbyterian Hospital, New York-Presbyterian Healthcare System
(New York); University of Rochester Medical Center, Strong Memorial
Hospital and Highland Hospital (Rochester); Lenox Hill Hospital (New
York); St. Elizabeth Medical Center (Utica); North Shore--Long Island
Jewish Health System (Westbury); and Nicholas H. Noyes Memorial
Hospital (Dansville).
North Carolina
Wilkes Regional Medical Center (North Wilkesboro); Person Memorial
Hospital (Roxboro); Alleghany Memorial Hospital (Sparta) (5 letters);
Southeastern Regional Medical Center (Lumberton); Carolinas HealthCare
System (Charlotte); Novant Health (Winston-Salem); and Moses Cone
Health System (Greensboro).
North Dakota
Medcenter One (Bismarck) and North Dakota Healthcare Association
(Bismarck).
Ohio
The Center fbr Health Affairs (Cleveland).
Oklahoma
St. John Medical Center (Tulsa).
Oregon
Asante Health System (Medford) (9 letters); Columbia Memorial
Hospital (Northwest Oregon); Oregon Association of Hospitals and Health
Systems; Rogue Valley Medical Center (Medford) (3 letters); Three
Rivers Community Hospital (Grants Pass); Genesis Recovery Center
(Central Point); Silverton Hospital (Silverton); and Mid-Columbia
Medical Center, (The Dalles).
Pennsylvania
Temple University Health System (Philadelphia); Delaware Valley
Healthcare Council; Phoenixville Hospital, University of Pennsylvania
Health System (Phoenixville); Central Montgomery Medical Center
(Lansdale); Memorial Hospital (York); Chestnut Hill Healthcare
(Philadelphia); St. Joseph Medical Center (Reading); Holy Redeemer
Health System; Catholic Health East (Newtown Square); The Hospital and
Healthsystem Association of Pennsylvania (Harrisburg); Geisinger Health
System (Danville); Abington Memorial Hospital (128 letters); Crozer-
Keystone Health System, Delaware County Memorial Hospital (Drexel Hill)
(2 letters); Crozer-Keystone Health System, Crozer-Chester Medical
Center (Upland); UPMC Health System (Pittsburgh); Crozer-Keystone
Health System, Taylor Hospital (Ridley Park); Crozer-Keystone Health
System (Springfield); Holy Redeemer Health System (Huntingdon Valley)
(6 letters); Temple University Health System (Philadelphia); Mercy
Health System (Havertown) (3 letters); and Thomas Jefferson University
Hospital (Philadelphia).
South Carolina
Trident Health System (Charleston); Summerville Medical Center
(Summerville); and Bamberg County Hospital and Nursing Center
(Bamberg).
South Dakota
Avera McKennan Hospital and University Health Center (Sioux Falls).
Tennessee
Baptist Memorial Hospital Collierville (Collierville); Tennessee
Christian (Madison); West Tennessee Healthcare (Jackson); Williamson
Medical Center (Franklin); Gateway Health System (Clarksville); Baptist
Memorial Hospital Union City (Union City); Baptist Memorial Hospital
for Women (Memphis); Baptist Memorial Hospital Tipton (Covington);
Baptist Memorial Hospital Memphis (Memphis); Baptist Memorial Hospital
Lauderdale (Ripley); Baptist Memorial Hospital Huntingdon (Carroll
County); Baptist Rehabilitation Germantown (Germantown); Tennessee
Hospital Association (Nashville); and Maury Regional Hospital
(Columbia).
Texas
East Texas Medical Center Regional Healthcare System (Carthage);
Memorial Hermann Healthcare System (Houston); Christus St. Joseph's
Health System (Northeast Texas) (2 letters); Christus Health Gulf Coast
(Houston); St. Joseph Health System (Bryan); Seton Healthcare Network
(Austin) (2 letters); Dallas Southwest Medical Center (Dallas); Vinson
and Elkins (Houston); Baylor Health Care System (Dallas); St. Luke's
Episcopal Hospital (Houston); Hillcrest Health System (Waco); and St.
Joseph Regional Health Center (Bryan).
Utah
Utah Hospitals and Health Systems Association.
Virginia
Southside Regional Medical Center (Petersburg); Prince William
Health System (Manassas); Tazewell Community Hospital (Tazewell);
Carilion Giles Memorial Hospital (Pearisburg); and Mary Washington
Hospital (Fredericksburg).
Washington
Tri-State Memorial Hospital (Clarkston); Sacred Heart Medical
Center (Spokane); and Empire Health Services (Spokane).
West Virginia
Charleston Area Medical Center Health System (Charleston);
Jefferson Memorial Hospital (Ranson) (2 letters); West Virginia
University Hospitals (Morgantown); and Monongalia Health System
(Morgantown).
Wisconsin
Columbia St. Mary's (Milwaukee) (2 letters) and Aurora Health Care
(Milwaukee).
Wyoming
Wyoming Hospital Association (Cheyenne).
Senator Specter. If you want to be successful in
influencing CMS, you are going to have to be realistic. This
subcommittee urges a realistic transition period, but let us
come to grips with the realities. When you are talking about
the end of the fiscal year, I think that is something that CMS
may well accommodate to, and something beyond that, but put it
in writing, and make it specific.
On the threshold issue, there again I would like to see
something specific. It seems to me that the increase from
$20,000 to $33,000 is a big increase, calculated, according to
the testimony, at some 59 percent, but let us come forward,
aside from the comment and the objection, with something very
specific that you would like to see them undertake.
Mr. Wigglesworth, would you explain a little more of this
concept of the retrospective payment system?
Mr. Wigglesworth. Mr. Chairman, what is being proposed in
the rule is to use the most current cost-to-charge ratio which
is part of the process of calculating outlier payments, and
using it from not, as is the current process, where you use the
final, settled cost report, but using the tentatively settled
cost report, but it would be the most recent one that is
submitted.
Then, 2 to 3 years later, as is in current practice, the
final cost report would be settled, and what the agency is
proposing is that they would pay initially on the basis of the
tentative cost report, and then have a reconciliation process,
where they would reconcile the claims several years later,
based on the final settled cost report.
So what it means is, the FIs would process them once, then
2 years later, when there is a final cost report, they would
have to process it again, rerun it, and there would be a
reconciliation, either with the agency paying potentially more
to the hospital, or the hospital reimbursing the agency. This
creates a whole other level of uncertainty. From a financial
standpoint, while we are still evaluating, I assume they would
have to create reserves on their books in terms of the
hospital. It is an unworkable addition to an already complex
claims processing environment.
Senator Specter. Mr. Scully, would you care to comment
these issues?
Mr. Scully. Yes, I would like to comment on a couple, one
is of the $100 million rough impact on southeast Pennsylvania.
About $60 million of that is on Tenet, and they have already
voluntarily said they are not going to bill us for those any
longer, largely as a result--I have all the detailed numbers
hospital-by-hospital, for every hospital in the country, if you
would like them for the committee, and I do think there is a
problem, obviously with Tenet, with Temple, and we have talked
about that, and Crozier Chester and UPMC probably are three of
the biggest hospitals in Pennsylvania.
But I think when you look at lowering the threshold, which
Andy and I have talked about a lot, back down from $33,560,
which I have personally advocated to the administration, OMB
understandably is skeptical, since we have been $1.6 billion to
$1.9 billion over each of the last 5 years, and their attitude
is, your estimators are never right, and so I think unless we
do something to limit, at least a very, a limited transition in
order to take away the people that have been overbilling for
this, I am going to have a very hard time making the argument
to bring down the threshold, which will affect all of the other
hospitals.
As of right now, OMB's position, which I think is
understandable is, since you have missed by $1.8 billion last
year, maybe we should just leave it where it is until we figure
out whether we are close, and Andy is correct that in several
years in the 1980s and the mid-1990s, we spent less than the
5.1 percent on the outliers, but in the last few years, we have
been way, way off on the high side.
The other argument I would make on the 5-year, on the
retrospective fix, which I came up with because it was the only
way I could think of fixing it, if I could just take 1 minute
to explain how this works. If you have a $10,000 hip
replacement in a hospital, hospitals, even though it is not
relevant for anything but Medicare generally, have charges that
are generally much higher than the costs, so if you have a
$10,000 DRG for hip replacement--it is not what it costs. I am
just making that number up for simplicity--a hospital might
have a $50,000 charge.
We monitor those charges on their cost reports, and if they
had a history 3 or 4 years back where their last cost report
was a $50,000 charge, we give them what is called a cost-to-
charge ratio. In that case it would be .20, or they are
charging five times their true cost. We discount that, so when
their charges came in we would say, you said your charge was
$50,000, but history shows you that it is really not, it is
$10,000, so you do not get an outlier payment.
What the hospitals have done is, they have basically jacked
up their charges from, say, $50,000 to $200,000, and in some
cases much higher, so our cost report data is 3 years old, so
we go back and look at the most recent cost reports we have,
which is 1999, and if a hospital had a cost-to-charge ratio of
.20, we take their $200,000 charge, discount it by one-fifth,
and come up with a $40,000 charge and say, that is your real
true costs, and they get an outlier payment for that. In many
cases, they have jacked it up much more than that.
But essentially we are working on 3-year-old data, so there
is no way for us to really reconcile their true costs, so what
Andrew is concerned about, and there is no other way I can find
to fix this, is that we would say, look, you can charge us for
outliers as much as you want, but at some point when we catch
up on our true cost reports, we are going to come back and see
if you actually charged us true costs.
The two ways people have gamed this is by massively
ratcheting up their cost-to-charge ratio, in some cases 15, 20
times true costs, and the other way is, if you come in below
.20, which means you are charging five times your true charges,
your true costs, we kick automatically through--God knows why
we came up with this--what is called the State-wide average, so
if you came out that you actually charged seven times your
costs, we say that must be a mistake and we are going to bring
you up to the State-wide average, so if your cost-to-charge
ratio is .15 in Philadelphia, which some of the Tenet hospitals
were, we would say that must be a mistake, so we will bring you
up to the State-wide average, which is .35. It is very
confusing.
Senator Specter. Mr. Scully, another Senator has arrived.
Mr. Scully. Yes, sir.
Senator Specter. Let us give her a chance.
OPENING STATEMENT OF SENATOR MARY L. LANDRIEU
Senator Landrieu. Thank you, Mr. Chairman. I wish I could
have been here when you all started, but I had two speeches
this morning and a meeting earlier. I wanted to thank you for
calling this hearing, and say that I am aware of the problem
that exists within Medicare outliers and hope that we can find
a solution that gives the proper kind of guidance to hospitals
as they seek proper reimbursements.
So I thank you for focusing on this. If there are ways that
we can save the system dollars we want to, but we can begin by
giving clear guidance to the hospitals that are using these
very complicated. If anybody can come up with a solution, Mr.
Scully, you with your experience probably can.
So I have a statement to submit to the record. I am just
going to sit and listen for a few minutes.
Senator Specter. It will be made a part of the record,
without objection.
Senator Landrieu. Thank you, Mr. Chairman.
[The statement follows:]
Prepared Statement of Senator Mary L. Landrieu
Thank you, Mr. Chairman. For 38 years, Medicare has provided health
care security to millions of America's seniors and people with
disabilities. This year alone, 38 million people will receive the
medical treatment they need because of Medicare. As successful as it
has been, the Medicare program functions as one would expect a 1965
program to perform in the year 2003. Its rules and regulations are
cumbersome, its reimbursements are too often inadequate, and it has not
always kept pace with decades of dramatic improvements in health care.
In addition, Medicare faces serious financial challenges. Its
current form will not sustain the 77 million baby boomers that will
begin to retire in 2010. Without substantial changes to the program,
the federal government will not have the resources necessary to fulfill
its promise of health care security for all seniors. Congress has
attempted to reform Medicare in the past, but has succeeded only in
making incremental changes to a program in need of overall reform. The
time has come for us to meet this challenge head on.
The main function of the Center for Medicare and Medicaid Services
is to maximize the benefits for current and future participants by
preserving the integrity of the provider payment system. One of the
single most effective ways for them to fulfill this role is to be
cognizant of payment structures that may be open to fraud and abuse and
regulate them in such a way as to ensure fraud and abuse is limited.
That is exactly what CMS has done in the case of Medicare outlier
payments. I commend them for their efforts to increase the level of
scrutiny of these payments and encourage them to continue in this
endeavor.
At the same time, I would recommend to you, Mr. Scully, that CMS
further study the underlying payment formula to assess whether or not
any of its components or assumptions are inherently flawed and as a
result are giving rise to inflated payments. For instance, your own
reports indicate that the lag in time that results from basing the
cost-to-charge ration on the most recently settled cost instead of the
current cost report may increase outlier payments. There may, in fact,
be ways to improve this formula so that it better reflects the actual
cost a hospital incurs in caring for a complicated patient.
In addition, Medicare should also strive to provide detailed and
ongoing guidance to providers on ways to avoid compliance risks. If one
studies the suggested ways that hospitals could manipulate their costs
to generate higher reimbursement, it is clear that many, if not all, of
these situations may be occurring unintentionally or because of billing
errors and outdated accounting procedures. Advising providers of ways
that they may avoid these risks will eliminate the negligent wrongdoers
and allow CMS and OIG to focus only on those engaged in intentional
fraud.
I am looking forward to the opportunity to engage in a discussion
on this issue with our panel here today. I hope that this will be the
first of many opportunities this committee has to engage in the debate
of Medicare reform. The 38 million seniors who depend on this program
need for us to do what is necessary to meet our obligation to fulfill
Medicare's promise of health care security.
I thank the Chair.
Senator Specter. Thank you, Senator Landrieu. Thank you
very much.
Mr. Scully, we hope you can find some way to make an
accommodation on an adjustment period, and that rise from the
20s to $33,000 does seem, at least to me, to be very, very
tough, but to give some accommodation period so that it can be
assimilated.
I think we have made some significant progress, because
there had been an attempt, as you outline it, to put the rule
into effect immediately. It was released on February 28,
published on 5 March, a comment period until April 4, so there
will be a period of time after that, and then there will be
some additional time before a rule is promulgated taking into
account what those comments were, so at least that is some
assistance, but I hope you will work with the hospitals, which
are having these very difficult transition times.
ADDITIONAL PREPARED STATEMENTS
We have received addditional prepared statements that will
be made part of the hearing record.
[The statements follow:]
Prepared Statement of the American Hospital Association
On behalf of our nearly 5,000 member hospitals, health care
systems, networks and other providers of care, the American Hospital
Association (AHA) appreciates the opportunity to submit this statement
on changes to the outlier payment policy proposed by the Centers for
Medicare & Medicaid Services (CMS) and published March 5, 2003 in the
Federal Register.
We have very serious concerns about this proposal's dramatic
revisions to Medicare outlier payment policy. While we agree that
changes need to be made to ensure the accuracy of outlier payments, the
mid-year amendments proposed by CMS are unreasonable. The revisions
will not just affect a small number of hospitals with significant
outlier experience, but rather almost every hospital in the country.
Yet CMS did not publish any data on the financial impact of its
proposed changes or offer a full 60- day comment period so that
hospitals could better analyze, understand, and comment on the dramatic
mid-year changes in the proposed rule. Moreover, cost settlement of
outlier payments for all hospitals is unnecessary and unjustified, the
outlier threshold must be lowered to reflect savings achieved by its
proposed policy changes, and a transition period is necessary for those
hospitals harmed.
background
Twenty years ago, when the Medicare program moved from cost-based
reimbursement to an inpatient prospective payment system (PPS),
Congress mandated that additional payments be provided to limit
hospitals' financial risk when treating elderly patients with
especially serious illnesses. These so-called ``outlier'' payments are
critical for hospitals because they are designed to alleviate the
financial burden of unusually costly cases that otherwise would be
significantly under-reimbursed in a PPS that pays on the basis of
averages. The system is budget neutral--meaning that the PPS
standardized amount is reduced to fund outlier payments.
The outlier system and its payment formula are very complex. In
general, a hospital's costs must exceed a specified dollar amount, or
threshold, in order to qualify for the additional payments. But CMS
cannot determine actual hospital costs for each and every patient seen
in a hospital, so the agency uses hospital charges and converts them to
estimated costs, using a hospital's cost-to-charge ratio. Even when
compensated for outlier payments, however, hospitals are not reimbursed
the full cost of care for these patients.
cost settlement
Currently, CMS uses the cost-to-charge ratio from a hospital's most
current final settled cost report to estimate hospital costs in the
current year. Because there is a significant time lag in settling
Medicare cost reports, this cost-to-charge ratio may be three to five
years old. During this time, it is likely that a hospital's charges as
well as its costs will have changed, making that cost-to-charge ratio
outdated, and no longer reflective of hospitals' costs.
Under the proposed rule, CMS would use more up-to-date data when
determining the cost-to-charge ratio for each hospital. Rather than
relying on the most recent final settled cost report, CMS proposes to
use the most recent tentatively settled cost report. The AHA supports
this initiative, which would decrease the lag time in cost-to-charge
ratios from the three-to-five-year period to potentially eight months
after the close of a hospital's cost reporting period. In addition, CMS
has proposed to allow hospitals to request changes to their cost-to-
charge ratio if they present data that the current ratio used by fiscal
intermediaries is inaccurate. And, CMS would be able to change a
hospital's cost-to-charge ratio if, within the past two years, its data
show dramatic hospital charge increases. These changes will ensure that
outlier costs are calculated using accurate and timely data, and this
will dramatically improve outlier payments in the inpatient prospective
payment system. The AHA strongly believes that these measures are
sufficient to ensure both accountability of the system, and appropriate
outlier payments. Proceeding further with cost-settlement is not
necessary.
In addition to changing the calculation of a hospital's cost-to-
charge ratios, CMS would require that outlier payments be adjusted and
reconciled upon final settlement of a hospital's Medicare cost report.
This would be implemented by using hospitals' final settled cost-to-
charge ratio to re-calculate outlier payments. This incredibly
burdensome proposal is duplicative and inefficient, as it would require
the re-processing of hundreds of thousands of claims to determine both
if a claim qualifies for an outlier payment given a hospital's final-
settled cost-to-charge ratio, and if so, how much the payment should
be. This would create more volatility in Medicare payment and
hospitals' planning, budgeting and operations. Under such a scenario,
cost settlement would result in outlier payments that are no longer
part of a prospective payment system, but rather they would be cost-
based--the direct opposite of the intent of Medicare legislation.
This complex process is unwarranted and unnecessary. The use of
tentatively settled cost reports should be more than adequate to
determine appropriate outlier payments in a prospective payment system.
We urge you to strongly encourage CMS not to move forward with cost
settlement. The agency's other proposed changes will achieve the
desired improvements in the system to protect access to care for the
most costly and ill Medicare patients, protect the integrity of outlier
payments, and protect Medicare Part A Trust Fund payments to hospitals.
statewide average
In addition to using more recent cost-to-charge ratios, the rule
proposes to eliminate use of the statewide average cost-to-charge
ratio. Currently, hospitals with cost-to-charge ratios that fall
outside of an acceptable range have their hospital-specific cost-to-
charge ratio changed to the average urban or rural cost-to-charge ratio
for their state. This policy, adopted in 1989, resulted in significant
changes in the cost-to-charge ratios for certain hospitals. The
American Hospital Association agrees that use of the statewide average
should be eliminated.
threshold
Given the significant policy changes in the rule, the outlier
threshold needs to be recalculated. Using more updated cost-to-charge
ratios and eliminating the use of statewide average cost-to-charge
ratio would substantially lower overall outlier payments to hospitals
in 2003. And thus, the outlier threshold must be lowered to allow more
hospitals and more high-cost cases to qualify for these payments. If
these two changes were adopted it is our belief that the threshold
should decline in order to ensure hospitals are reimbursed at the
targeted amount of 5.1 percent of total inpatient PPS payments. These
funds have already been carved out of base Medicare payments for 2003,
necessitating that the threshold be recalculated to ensure that
Medicare outlier payments in aggregate are received in full by the
nation's hospitals. We're extremely disappointed that CMS has ignored
the premise that elimination of the statewide average should, by
definition, result in a lowering of the outlier threshold. We ask the
subcommittee to insist that CMS adapt this policy change. In addition,
AHA is conducting an analysis to determine how much the outlier
threshold should be lowered and we will include the findings of this
analysis in our comment letter to CMS.
transition
In the proposed rule, CMS indicated that it was ``unable to
quantify the likely impacts of these proposed changes.'' AHA's initial
data analysis indicates that the adoption of these policies would have
a significant impact on many providers. Three out of four hospitals
receive outlier payments. These providers have budgeted for and are
operating under the current rules of the Medicare program. A steep drop
in expected payments for outlier cases could be financially
devastating, especially given the increased financial pressures of
workforce shortages and skyrocketing labor costs, rising pharmaceutical
and technology costs, and soaring medical liability premiums.
CMS frequently provides transition periods to help ameliorate the
impact of major policy changes that reduce Medicare payments to
hospitals and other providers. For example, CMS recently completed a
10-year phase-in of capital PPS payments, and a four-year phase-in of
the removal of salaries related to graduate medical education and
certified registered nurse anesthetists in the calculation of the area
wage index. Hospitals were also provided transitional corridor payments
and hold harmless payments when the outpatient hospital prospective
payment system was implemented. We urge the subcommittee to ensure that
a transition period is made available for those hospitals significantly
harmed by any change in the outlier regulation.
conclusion
Mr. Chairman, America's hospitals are experiencing total margins
that are at their lowest level in 10 years, and the majority of
hospitals continue to be reimbursed less than what it costs them to
provide the services that Medicare patients need. Still, even as they
face dwindling federal resources, hospitals are committed to continue
providing top-notch care . . . including the care needed by those most
extremely ill of America's seniors.
But the proposed outlier rule, as it currently is written, stands
to jeopardize our ability to deliver on that commitment. While we
support CMS' proposal to use the most current cost-to-charge ratio in
calculating outlier payments, we ask you to urge CMS to abandon the
additional requirement that outlier payments be reconciled upon cost
settlement. In addition, CMS must reexamine and lower the outlier
threshold, and ensure that protections are put in place that allow a
transition period for those hospitals affected by this mid-year change
in policy.
______
Prepared Statement of the New Jersey Hospital Association
The New Jersey Hospital Association has reviewed the proposed rule,
published by the Centers for Medicare and Medicaid Services on March 5,
2003 related to Medicare cost outliers. We are currently in the process
of formulating our comments associated with this proposed rule for
submission to CMS. Prior to the completion of those comments we would
like to take the opportunity to outline our initial thoughts in the
form of this statement.
While CMS has provided a general outline for how Medicare cost
outlier payments to hospitals will be calculated in the future, there
are a number of ambiguities in the proposed rule. Further, we are
currently reviewing several aspects of the proposal. The following is a
list of those issues:
the outlier threshold
The proposed rule calls for a change to use of a more recent ratio
of cost to charges (RCC), and ultimate settlement to a hospital's
actual RCC. Making these changes without a significant downward
adjustment to the cost outlier threshold will cause CMS to make cost
outlier payments at a level significantly below the required 5 percent
and therefore over-correct for any excess payments in this payment
pool. We are concerned that the proposed rule as presented will not
adequately reimburse hospitals their cost, as prescribed, for outlier
cases.
transition period
With the strong likelihood that outlier payments to many hospitals
will be significantly reduced, it would be appropriate for CMS to
include a transition period that would allow hospitals to adjust to
these changes over a multi-year period.
implementation
A mid-year change to an issue of this magnitude will be problematic
for hospitals. CMS should consider implementing this rule for hospital
cost reporting periods beginning on or after the effective date of the
rule.
the settlement process
In the proposed rule, CMS indicates its intent to reconcile
outliers retrospectively to hospital's actual RCC from their final
settled cost report. CMS has not clearly described whether this
reconciliation will occur in all cases. Further, CMS has not explained
how it will account for IME and DSH components of outlier payments and
the outcome of hospital appeals that occur post settlement. Since post-
payment reconciliation based on audited costs undermines the
prospectivity of PPS, CMS should limit the cases to which this is
applied.
intermediary adjustments to tentative rccs
The proposed rule allows intermediaries to adjust hospital specific
RCCs from the tentative settled cost report subsequent to a review
relative to other hospitals. CMS should provide the intermediaries with
corridors or other guidelines to minimize the potential for uneven
application of this component across intermediaries.
interest assessments
Interest assessments under the Medicare program are statutory. CMS
should not impose interest assessments on outliers without specific
statutory to do so.
Again, NJHA will be providing more comprehensive comments to CMS on
the proposed rule prior to the April 4, 2003 deadline. We appreciate
this opportunity to inform the Subcommittee of out initial concerns
related to this rule.
If the Subcommittee has any questions about these comments, please
contact Sean Hopkins, Senior Vice President, Health Economics at 609
275-4022 or [email protected].
ADDITIONAL COMMITTEE QUESTIONS
Senator Specter. There will be some additional questions
which will be submitted for your response in the record.
[The following questions were not asked at the hearing, but
were submitted to the Department for response subsequent to the
hearing:]
Questions Submitted by Senator Arlen Specter
Question. The new outlier payment policies, if implemented, will
cause significant payment reductions for many hospitals. Consistent
with prior Medicare practice when payment policies are changed
abruptly, wouldn't it be fair to transition these payment reductions
over a multi-year period?
Answer. Outlier payments are uniquely susceptible to manipulation
because hospitals set their own level of charges and are able to change
their charges without notification to, or review by, their fiscal
intermediary. Such changes by a hospital directly affect its level of
outlier payments, unlike IME or DSH where the fiscal intermediary must
agree to a change to the underlying data. Therefore, an extended
transition period would allow the effects of inappropriate
redistribution of outlier payments to continue into the future. We
believe it is essential to ensuring that outlier payments are made for
truly high-cost cases to eliminate those effects as soon as possible.
Question. Don't the current outlier thresholds take into account
the projected 2003 charge increases that would be reversed by the
reconciliation of outlier payments to the final, audited 2003 cost
reports under the proposed rule? Shouldn't the outlier thresholds be
reduced to reflect these new policies?
Answer. We are examining the appropriate level of the threshold in
conjunction with preparing the final outlier rule, and will address the
issue of whether the threshold should be reduced in that final rule
that is expected to be published later this year.
Question. Isn't it true that CMS has never issued any clear
guidance on hospital charging levels? Didn't CMS's historic outlier
policies require hospitals to raise charges dramatically even to
receive the appropriate level of outlier payments they were due
(because of substantial annual increases in the outlier thresholds)?
Answer. It is true the Federal government has never directly
regulated hospitals' charging practices. It is not true that CMS
policies regarding the outlier threshold have required hospitals to
increase charges dramatically. Outlier thresholds are determined based
on hospitals' historical charge data, and the dramatic increase in the
threshold is a reflection, not a cause, of some hospitals' rapidly
rising charges.
Question. Isn't it true that the failure of the Medicare Program to
timely settle cost reports often caused hospitals to receive excessive
outlier payments?
Answer. It is true that extended delays in settling cost reports
increases the time lag between the data used to process claims and the
contemporaneous data. However, the excessive outlier payments we are
addressing are primarily attributable to small groups of hospitals
increasing their charges by 30 percent or more annually the last couple
of years.
Question. Isn't it true that the failure of the Medicare Program to
properly update cost-to-charge ratios also often caused hospitals to
receive excessive outlier payments?
Answer. It is true that extended delays in settling cost reports
increases the time lag between the data used to process claims and the
contemporaneous data. However, the excessive outlier payments we are
addressing are primarily attributable to small groups of hospitals
increasing their charges by 30 percent or more annually the last couple
of years.
Question. These new policies would impose interest charges on a
hospital that receives outlier payments that are later reduced upon
audit. Can the Medicare Program impose interest charges without
explicit statutory authority?
Answer. We are imposing an adjustment to account for the time value
of the excess outlier payments the hospitals have received. This
adjustment is consistent with the statutory requirement at section
1886(d)(5)(A)(iii) that outlier payments approximate the marginal cost
of care beyond the threshold. That is, because hospitals are uniquely
able to manipulate outlier payments by increasing charges, it is
necessary to establish a mechanism whereby an adjustment can be made to
ensure payments appropriately reflect the marginal costs of care for
outlier cases.
Question. Isn't it true that the cost-to-charge ratio of outlier
cases differs from that of regular cases because outliers are the
highest cost cases? If yes, how can outlier payments be determined
accurately using cost-to-charge ratios based principally on non-outlier
cases?
Answer. Hospitals' charge structures are consistent across
patients. Therefore, the cost-to-charge ratio should not vary based
upon whether a case incurs high costs. The charges will be higher, but
the ratio will be the same, and, thus, the costs will be
correspondingly higher.
Question. When your proposal went to OMB the threshold was $22,000
and you claimed it would affect a small number of hospitals and when it
came out of OMB it was $33,000 and affects nearly every hospital. If
this fix is so urgent, how could you send a proposal to OMB that was
completely rewritten?
Answer. It was revised as part of the necessary review and
clearance process applicable for every Federal regulation, no matter
how urgent.
Question. What was the result of your October 2002 adjustment in
the threshold? What was the result of the national program review
initiated December 3, 2002? If you believed a national review was
necessary how can you move forward with a precise and accurate proposed
reform when you don't have the results of your national program review?
Answer. In fiscal year 2002, we now project we will actually have
paid 7.9 percent of total DRG payments in outliers. The adjustment we
made October 2002 appears to have brought the fiscal year 2003
percentage down significantly below that level. The national review
helped us to identify the scope of the problem, and the changes we are
making reflect our findings from that review.
Question. Why are you opposed to a 60-day comment period, followed
by a 180-day rulemaking period and working with all hospitals on a fair
and seamless transition period to account for significant impacts and
changes?
Answer. Outlier payments are uniquely susceptible to manipulation
because hospitals set their own level of charges and are able to change
their charges without notification to, or review by, their fiscal
intermediary. Such changes by a hospital directly affect its level of
outlier payments, unlike IME or DSH where the fiscal intermediary must
agree to a change to the underlying data. Therefore, an extended
transition period would allow the effects of inappropriate
redistribution of outlier payments to continue into the future. We
believe it is essential to ensuring that outlier payments are made for
truly high-cost cases to eliminate those effects as soon as possible.
Question. Mr. Scully what would you do if you were a hospital
administrator and CMS told you that in the middle of your fiscal year
you were going to lose $2 million per month? How can you say hospital
administrators should not be in the position when CMS only now has
figured out there is a ``problem'' and it's your system and
administration under which they all operate?
Answer. In just fiscal year 2001 and fiscal year 2002 alone,
Medicare has paid hospitals $4.4 billion more than budgeted for outlier
payments. We now know that much of that excess amount was directly
attributable to hospitals deliberately taking advantage of a loophole
in the system. For example, one hospital in Brownsville, Texas, had
outlier payments in 2003 approximately 110 percent of its DRG payments,
and, under current rules, is projected to receive outlier payments in
fiscal year 2004 equal to 134 percent of its 2004 DRG payments.
Furthermore, this hospital increased its charges by 40 percent from
fiscal year 2001 to fiscal year 2002. Those are the hospital
administrators this change is targeting.
CONCLUSION OF HEARING
Senator Specter. Thank you all very much for being here.
That concludes our hearing.
[Whereupon, at 10:46 a.m., Tuesday, March 11, the hearing
was concluded, and the subcommittee was recessed, to reconvene
subject to the call of the Chair.]
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