Committee on Ways and Means, Subcommittee on Health, 7-25-00 Testimony

Statement of Michael R. Walker, Chairman and Chief Executive Officer,
Genesis Health Ventures, Inc., Kennett Square, Pennsylvania,
on behalf of the American Health Care Association

Testimony Before the Subcommittee on Health
of the House Committee on Ways and Means

Hearing on Additional Medicare Refinements to the Balanced Budget Act of 1997

July 25, 2000

My name is Michael Walker, and I am the Chairman and CEO of Genesis Health Ventures, one of the largest eldercare providers in the United States. Today I speak on behalf of the American Health Care Association -- a federation of affiliated associations representing over 12,000 non-profit and for-profit assisted living, nursing facility and subacute care providers, nationwide.

Before I testify, Mr. Chairman, I'd like to thank you and members of the committee for recognizing the eldercare funding crisis caused by the flawed implementation of the 1997 Balanced Budget Act. We are most appreciative of the leadership you provided last year in attempting to rectify these problems through the Balanced Budget Refinement Act.

The skilled nursing home sector continues to struggle with the implementation of the Balanced Budget Act of 1997. These are very tough times for providers. Companies, such as Genesis Health Ventures, that are attempting to pioneer creative strategies for improving both the efficiencies and effectiveness of delivery are confronting a hostile policy environment and threatening economics.

Importance of Medicare:

The rise of skilled nursing facility Medicare utilization during the past decade reflects legitimate clinical efforts by providers to meet beneficiary needs. As envisioned by the Congress in OBRA 87, skilled nursing facilities have become centers for post-hospital rehabilitation and restorative services. Meeting the needs of higher acuity, post-hospital discharge admissions have transformed facility roles and functions and cost structures. As facilities stepped up to these challenges, the number of patients qualifying for Medicare coverage grew. Today, more than half of skilled nursing admissions - nearly 2 million beneficiaries annually - are Medicare qualified. In our case at Genesis, nearly nine out of ten skilled nursing admissions are Medicare qualified.

Medicare Skilled Nursing Facility (SNF) Spending Spiraling Down:

Earlier this year, the Lewin Group, a leading national policy research organization, released an analysis of the effect of the Balanced Budget Act of 1997 (BBA) and the Balanced Budget Refinement Act of 1999 (BBRA) on Medicare payments to skilled nursing facilities.⁽¹⁾ The analysis documents that Medicare spending projections for SNF patients, inclusive of the changes enacted last fall by Congress, will be $15.8 billion less than Congress intended during the seven year budget period (1998-2004).

Put in perspective, Congress targeted to reduce Medicare SNF spending by $1 for every $6 forecast to be spent (1998-2004). As managed by the Health Care Financing Administration, aggregate Medicare SNF spending will fall by nearly twice the original estimate - - nearly $1 out of every $3 expended.

Although Congress passed the BBRA to restore vital Medicare spending, Medicare SNF outlays continue to spiral down. The BBRA budgeted an increase of SNF spending in FY2000 to $13.3 billion, but the Congressional Budget Office reports SNF care spending will actually come in $2 billion below estimates ($11 billion in this fiscal year).

Impact:

The unintended consequences of these changes have been dramatic on the provider sector -- access to capital has been undermined (87% reduction in market capitalization between January 1998 and March 2000); providers have been thrust into bankruptcies - - one in four (25%) of freestanding, proprietary, Medicare participating facilities are in financial restructuring. In turn, as providers struggle to adjust, beneficiary services have been put at risk.

Rather than the rate of Medicare growth being slowed - - as envisioned by this Committee and by Congress -- actual cuts have affected care giving. For Genesis Health Ventures, the final SNF PPS rates translated into a reduction of 25% of our Medicare per diem rates. Medicare revenues account for approximately 25% of our total revenues. More importantly, the rate reduction affected the payments for 90% of our inpatient admissions. Virtually no business could survive with cuts that drastic.

My company made a commitment to admit all patients regardless of reduced Medicare payments for services which averages about $100 a day reduction from our pre-SNF PPS rates. We are the most recent provider to succumb to bankruptcy. Bankruptcy is not just financial restructuring. Bankruptcy directly affects employee morale, recruitment and retention, care services available and investments toward future care and services. In reality it is a major distraction from care giving.

These financial challenges raise the most critical question before this committee--who will take care of this most vulnerable population if we continue to lose the infrastructure of our skilled nursing facilities at a time when demographics create an increased demand for care? The consequences will be devastating. Patients will not be able to receive the care they need -- if and when they need it. In no area do we feel this more strongly than in labor. We dedicate a tremendous amount of time and resources into recruiting high quality caregivers - the type of workers that you would trust with a loved one. Yet, in the current marketplace, they leave their nursing home jobs all too often for other employment that is not only much more lucrative but also less demanding.

Three out of four skilled nursing facility patients' care is paid for by Medicare or Medicaid, both government programs. The financial consequences many of us are faced with are beyond our control. Cost of care is rising, costs associated with labor are rising, people are living longer - with impairments that require professional intervention -- yet payments are going down. With average Medicaid rates of approximately $4 an hour and Medicare paying slightly more than $10 an hour for care on average, our hands are tied. Decisions made by government entities have a profound effect on patient care.

If SNF PPS were implemented by HCFA to achieve the cost reductions originally targeted by the Congress, we wouldn't be here today. The GAO and others have recently testified that there is no crisis in long term care. This flies in the face of sound research and reality and is an irresponsible and questionable claim to make. The OMB's mid-summer review, the Lewin Group's independent study, 2000 SNF bankruptcies in less than a year, and concerns expressed by hundreds of thousands of caregivers on the front lines simply cannot be disregarded.

While providers manage to continue providing the best possible quality of care to their patients -- and while we've done our best to adjust to unexpected budgetary constrictions -- there is no doubt that the overall under-spending has wreaked unwarranted havoc on skilled care providers and patients alike.

Recommendations

The American Health Care Association recently submitted to you four specific recommendations to address the Medicare under-spending crisis, Mr. Chairman, I will summarize them for the full subcommittee:

First: Adjust the SNF PPS base to account for the flawed update factor between 1995 and 1998. Specifically, we have documented the need for a one-time upward adjustment of 13.5% to the SNF PPS base to account for forecast errors between 1995 and 1998.

We have spent the last several months analyzing this data with Muse and Associates, and Guy King, the former chief actuary at HCFA. The actual rates of cost changes incurred by Medicare participating skilled nursing facilities are substantially higher (affirmed by audited cost report, BLS labor data and independent wage and compensation studies) than those forecast by the current market basket. The resulting payment rates are artificially suppressed.

Guy King reviewed real increases in the cost of delivering skilled care between 1995 and 1998. In his review he compared closed and audited HCFA cost reports against the SNF market basket update factor. The HCFA update factor raised Medicare SNF per diem rates by 8.2% between 1995 and 1998. King's review of research of audited SNF cost reports filed with HCFA shows that actual per diem costs incurred by SNFs increased by 27.4%. In other words, 19.2% should be added to HCFA's 8.2% increase. This 19.2% should be reduced to account for expectant increases in case-mix between 1995 - 1998. This is how we empirically arrive at a one-time 13.5% upward adjustment.

Translated into per diem calculations, the Muse/King analysis documents that skilled nursing facility costs - - driven primarily by changes in labor costs and routine operating expenses - - increased by about $25 per day, per annum. The SNF Medicare market basket reduced by the BBA formula of market basket minus 1% adjusted average rates only $5.30 per day, per annum, or a meager $.22 per hour.

We urge Congress to correct these forecast errors and compensate for the imprecision of its measurement of cost changes between base year FY1995 and the beginning of SNF PPS for cost report periods on or after July 1,1998.

Second: Delay the implementation of proposed RUG Refinement Rules until HCFA can correct deficiencies and reissue the proposals for public comment.

The proposed rules should be withdrawn and reissued for comment only after HCFA has completed its analysis of the current national PPS data base and completed the recalculation of the observed weights and distributions based upon current beneficiary population. It would be an absolute disaster for participating providers if HCFA proceeds with this rule making on the basis of interim final rules while it tinkers with its calculations.

These proposed rules are illustrative of how our hardships are being exacerbated by the actions of the Health Care Financing Administration. Congress mandated HCFA to fix the inadequate payment for non-therapy ancillaries. HCFA responded with these incomplete and flawed proposals.

An independent analysis just completed by the Lewin Group, "Evaluation of the Proposed Refinements to RUG-III Classification System: Comments on the Abt Study and HCFA Proposed Regulation," documents HCFA has not learned from its past mistakes. The report concludes: "…However well-executed, the Abt study and resulting refinement models are not sufficiently comprehensive for the design and/or calibration of a final payment system."⁽²⁾

The litany of methodological flaws parallel those observed in the initial rule-making process.

Third: Develop a process for revising the SNF market basket.

The current skilled nursing facility market basket index is an imprecise measure; it is seriously flawed. It is not a specific measure of skilled nursing cost changes, nor is it an accurate predictor of cost changes in a dynamically changing care environment. The market basket model used by HCFA offers a limited snapshot of cost changes, year-to-year, based upon historic patterns of spending across a broad array of long-term care setting. Over time, the inaccuracies of the market basket are amplified (compound effect), and the rate structures erode. The actual rates of cost changes incurred by Medicare participating skilled nursing facilities are substantially higher than those forecast by the current market basket.

We strongly support a formal process by the Administration to review the SNF market basket to ensure it keeps pace with and fully accounts for the actual increases in costs incurred and reflects changes that will affect costs in the delivery of skilled nursing care.

Fourth: Medicare reforms should include an updating of the SNF benefit.

We look forward to the opportunity in the coming Congress to sit down with this committee to consider policies to ensure the skilled nursing benefit provides the most effective and efficient service to the Medicare beneficiary. We believe Congress must act to protect beneficiaries from excessive co-payments, must act to eliminate outdated controls on access to the benefit and must act to remove barriers to care management. Today, only 2% of beneficiaries who enter a skilled nursing facility actually receive the 100 days of coverage promised by Medicare. To get the 100 days of SNF coverage a beneficiary must pay nearly $8,000 out-of-pocket (approximately a day after the 20^th day).

Summary

In closing, Mr. Chairman, there are two key points that I emphasize.

First, dollars spent on caring for patients on the front-end help to reduce their reliance on institutional care. Admissions and discharge statistics for the past decade demonstrate that nursing homes are returning a larger percentage of their patients to the community. Medicare fueled this transformation. That investment in intense skilled nursing facility services is a win-win. Beneficiaries win - they are returned to their home setting; government wins - the burden of care costs are reduced, and the health system wins - - care is given in the most appropriate settings. The BBA and BBRA as being implemented by HCFA, are unraveling that win-win, making it a lose-lose. Unless quickly addressed, the burden of care costs will rise, there will be a backlog of patients inappropriately placed, and Medicaid and Medicare costs will explode.

Second, demographic projections indicate that once the baby-boom generation begins retiring en masse -- in just a few years -- the burgeoning demand for skilled nursing care and related health services will exceed the available supply. Unless we as a nation are willing to assume the full burden of caring for our grandparents, parents, and siblings, we need to fix the eldercare funding crisis immediately. If we don't, quality long-term care will not be there when you and your loved ones need it - - no matter who pays for it. The federal government should provide a favorable environment encouraging providers to invest now to meet future needs -- not wait until the level of problems threatens to overtake our ability to solve them.

Thank you very much, Mr. Chairman, for this opportunity to express our deep concerns and frustrations with the current PPS system and its flawed implementation by the Health Care Financing Administration.

1. Lewin Group, "Briefing Chartbook on the Effect of the Balanced Budget Act of 1997 and the Balanced Budget Refinement Act of 1999 on Medicare Payments to Skilled Nursing Facilities," May, 2000.

2. Lewin Group, "Evaluation of the Proposed Refinements to RUG-III Classification System: Comments on the Abt Study and HCFA Proposed Regulations, June 7, 2000, p. 4.