C O N T E N T S

Advisories announcing the hearing

WITNESSES

Congressional Budget Office, Dan L. Crippen, Director

Medicare Payment Advisory Commission, Glenn M. Hackbarth, Chairman

American Association for Thoracic Surgery, Society of Thoracic Surgeons, Children's Hospital Boston, and Harvard Medical School, John E. Mayer, Jr., M.D.

American Medical Association, Donald J. Palmisano, M.D.

American Physical Therapy Association, and Spine and Sports Rehabilitation Center, Stephen M. Levine

Center for Studying Health System Change, Paul B. Ginsburg

American Academy of Family Physicians, statement

PHYSICIAN PAYMENTS

Thursday, February 28, 2002

House of Representatives,
Committee on Ways and Means,
Subcommittee on Health,
Washington, DC.

The Subcommittee met, pursuant to notice, at 9:41 a.m., in room 1100 Longworth House Office Building, Hon. Nancy L. Johnson (Chairman of the Subcommittee) presiding.

[The advisory and revised advisory announcing the hearing follow:]

Chairman JOHNSON. Good morning, everyone, and welcome to our witnesses and the panels that will follow. We appreciate your input on what we consider to be a very important hearing.

Last year we held over a dozen hearings on why Medicare must be reformed and modernized. We unanimously reported and passed a bill to reduce the regulatory burden on our providers and to modernize Medicare's contracting system. Yet, the Senate has failed to even hold a hearing on that issue.

Medicare's erratic and unpredictable payments to physicians clearly epitomize just one more reason why we cannot wait any longer to fundamentally modernize Medicare. When payments oscillate from 4.8 percent in 2001 to a negative 5.4 percent in 2002 and actuaries project additional payment cuts in the future, something is wrong.

The cost of practicing medicine will not get cheaper, it will get more expensive. If we do not reform the so-called sustainable growth rate payment formula, I fear our seniors may suffer access problems and our physicians will only become more demoralized in dealing with Medicare. I am committed to fixing this irrational payment formula as part of a larger Medicare modernization and prescription drug bill this year.

Driven by high growth in payments for physician services in the 1980s, the Medicare Volume Performance Standard (MVPS) was developed to give physicians an incentive to control volume and to limit the growth in Medicare expenditures for physician services. In 1997, the Sustainable Growth Rate (SGR) replaced the MVPS, based on the recommendations of Medicare Payment Advisory Commission (MedPAC) and with the support of physician groups. The SGR formula is linked to projected Gross Domestic Product (GDP), so when the economy slows, the update is reduced accordingly. It is also tied to the difference between actual expenditures and target expenditures. The SGR is used in combination with the Medical Economic Index (MEI), a measure of the increase in physician office and salary costs. Therefore, the SGR is not a direct limit on expenditures. Payments are not withheld if the target is exceeded, but if the update is increased or decreased accordingly.

Today we will hear from MedPAC, who has recommended scrapping the SGR and linking payments to the Medicare Economic Index. Secondly, the Congressional Budget Office (CBO)will testify why payments to physicians and related providers are projected to be cut in the future and the fiscal implications of reforming the SGR. Finally, we will hear from an academic and several physician and provider groups about their ideas on reforming Medicare's payments to physicians and providers.

We look forward to your input during this hearing. I personally am extremely concerned about the volatility of our payment formula and its interaction with Medicaid reimbursements, particularly out there in the urban communities. So, it is important that we understand not only the problems in our payment formula, but also what is happening to reimbursements to physicians out there in different types of communities. Because only then can we assure that there will be doctors there to provide the quality care that seniors need and deserve throughout the cities and hamlets of our Nation.

So I welcome our witnesses and would yield to my Ranking Member and colleague, Mr. Stark.

[The opening statement of Chairman Johnson follows:]

Mr. STARK. Thank you, Madam Chair, and thank you for holding this important hearing. I agree in part with MedPAC that we should revisit the formula of the system under which we reimburse physicians. I think it is important to note, however, that while it is proper to be concerned about cost containment or fair reimbursement for services that we take this in context of what this Committee has to do.

We have had 2 years of record increases in payments to physicians. In 2000, surgeons' median income in this country was well over $200,000. Even the poor GPs, general practitioners, and pediatricians were making about between $100,000 and $120,000 median, which means that half of them were making a lot more. The tax cuts that we have so generously bestowed on the richest Americans, which would include these physicians, further increases their take-home pay and we have done nothing to help the lowest income seniors in the program, so that I would like to see us perhaps, as we think about fair reimbursement for people making $2, $3, $4, $600,000 -- we have given them huge tax cuts. I hope we will be as quick and as concerned about the 70 percent of the 40 million Medicare beneficiaries whose incomes are below $40,000 and who have no access to pharmaceutical benefits and to the 12 million children in this country who have no health insurance at all and therefore no health care. And so let us take care of the top and hope that we set a standard for helping the less fortunate in this country.

Chairman JOHNSON. Thank you. It is my privilege and pleasure to welcome our first panel. Mr. Crippen.

STATEMENT OF DAN L. CRIPPEN, DIRECTOR, CONGRESSIONAL BUDGET OFFICE

Mr. CRIPPEN. Thank you, Madam Chairwoman and--

Mr. STARK. Use the microphone.

Mr. CRIPPEN. Does that work?

Mr. STARK. Yes. Pull it up, swallow it. There you go.

Mr. CRIPPEN. The issue before us today, as I understand it, is the adequacy of recent and future updates for physician payments under Medicare and ultimately the acceptability of the formula that produces those updates. More pointedly, we are here to discuss the price taxpayers and Medicare patients pay each year to physicians. But this discussion, this question, cannot, I would argue, be addressed in isolation. Physician fees, or prices, are only one part of the equation. We need to examine payments and payment policy in the context of both the history and the future of this program.

With the indulgence of the Committee, I would therefore like to take a little temporal jig and try to address how we got here, address where we go from here, and then, ultimately, get to here and see if that enlightens us any.

As the Committee is painfully aware, price controls or administered prices are difficult to establish and seemingly impossible to enforce. History is replete with the failure of price controls, in this case, on physician services to manage or control spending. That failure has a unique aspect in this case because physicians are able to adjust the volume of services they provide.

This chart shows the perpetual, if you will, increase since the beginning of the program in total spending for physicians. There is a discontinuity because the physician services definition has changed, but nevertheless it is almost a straight line up. Throughout the 1980s, despite fee schedules and regulation, Medicare spending for physicians per beneficiary, per beneficiary, rose at an average annual rate of 12 percent.

Virtually no matter what price controls have been employed, spending for physician services has almost always gone up. Even in those years after enactment of the Balanced Budget Act (BBA) of 1997 when hospital and total spending declined, physician payments went up. Total spending was targeted, beginning in 1992, as you all know, and that approach was revised in 1997 along with fee schedules to rein in what appeared to be an ever-increasing amount that taxpayers were contributing to this aspect of Medicare.

I will return to that point in time -- the near past -- in a moment, but against this backdrop of apparently inexorable increases in spending for physician fees, I want to turn to the period that is our near future. The Committee has seen me present this chart in many and varied circumstances, but I think it is always important to establish a backdrop when we are considering these programs.

As we see, current spending on Medicare, Medicaid, Social Security, much of which spending for retirees, is running at about 7 percent of GDP. When my generation retires, we will literally double the number of recipients from something like 39 million today to about 80 million, come 2030. So it is not surprising that this chart suggests we will at least double and probably more than double the amount of the economy consumed by these programs.

Of course, the single biggest increases that the chart shows - just graphically, let alone numerically -- are for Medicare -- which, again, is not surprising. The Congressional Budget Office assumes that Medicare costs are going to rise even faster than the economy in this projection, and that is probably a conservative estimate given the program's spending history.

The point here is that we have a future before us -- that is a good redundant statement -- we have a future that suggests that the total federal budget itself, which is now only about 18 percent of GDP, is going to be consumed largely by these three programs or else we are going to have to increase taxes dramatically or increase government debt dramatically. Anything we tend to add to these payments, whether it is higher fees for physicians or whether it is pharmaceutical benefits, will only exacerbate that outcome.

This is not to say -- and I certainly don't want to say -- that there is any crisis here that needs to be addressed today; or maybe the Congress this year and in the future will not consider this to be a problem, in which case one would go about fixing up the program's finances to accommodate a physician payment increase. But I want to remind the Committee, as I have in the past, that the fiscal pressures of this demographic bulge are almost upon us, and anything we do to add to Medicare spending will certainly make them worse.

Returning to the present, the Committee is faced with the prospect of a reduction in the prices for physician services for last year, this year, and possibly several more years. The reasons for that are several. As we see from this rather complicated, or apparently complicated, chart, the single largest reason is an error that was made a few years ago and that resulted in price increases -- large price increases -- that it turned out were not warranted under the formula.

So a large piece of your current dilemma -- the volatility of the increases and the fact that we have negative updates -- is that physicians were overpaid according to the formula in 2000 and 2001. In fact, if the correct data had been used, the updates would have been much less volatile, with a 2.1 percent reduction in 2002, a 4.9 percent reduction next year, and positive updates thereafter. Of course, the updates of more than 5 percent that were paid in 2001 and 2002 would have been smaller, but positive nonetheless.

Some of the rest of the adjustment is due to volume increases, which put total spending somewhat above the target, and the slowing economy. There are at least two other pieces of information of which I think the Committee should be aware. Not all physicians have been hit equally over the past several years, primarily because of other changes taking place in the Medicare fee schedule. For example, in the past 4 years, family practice physicians experienced a 3 percent reduction in fees this year but an overall increase of 19 percent in the prior 3 years.

Volatility, Madam Chairwoman, while undesirable, certainly has characterized the structure of this program virtually from the beginning, and a big piece of the current volatility is due to the data error, or correction, that needed to be made. The current sustainable growth mechanism rate I suggest, can probably be modified to further reduce volatility.

What are we to make of all this? First, physicians' revenues from Medicare are not declining. Spending for physicians' services will go up even with the past and projected reductions we have in physician fees. Indeed, CBO projects -- as we say in our written statement, Madam Chairwoman -- that total spending for physicians will go up by 5.9 percent in fiscal year 2002, despite the fact that the fee schedule will be reduced. By the way, some of you may have a copy of the testimony that has the increase occurring in 2003. The first paragraph should read "2002." I just note that correction.

Second, even if the Congress does not change current law and does not increase physician compensation or anything else, even holding total physician spending to per capita growth in GDP will still ultimately lead to what are probably unsustainable costs for taxpayers, mostly our children.

Third, the lion's share of the negative updates is attributable to unjustifiably large increases in total spending for physicians' services in 2000 and 2001.

Fourth, not all physicians' fees have been reduced by even as much as the updates.

In closing, I want to reiterate that it is the responsibility of the Medicare Payment Advisory Commission and my colleague on this panel to give you their best advice about appropriate payment of providers. However, it is the responsibility of this Committee and the rest of government to balance the various competing interests of present and future providers, beneficiaries, and taxpayers. Eliminating spending targets will only increase the burden on other providers, other government programs, and, ultimately, on our kids.

Thank you.

[The prepared statement of Mr. Crippen follows:]

Chairman JOHNSON. Thank you very much, Mr. Crippen.

Mr. Hackbarth of the MedPAC, very glad to have you.

STATEMENT OF GLENN M. HACKBARTH, J.D., CHAIRMAN, MEDICARE PAYMENT ADVISORY COMMISSION

Mr. HACKBARTH. Thank you.

As you know, MedPAC recommends that we repeal SGR and replace it with a system under which the Secretary would update fees annually based on estimated change in the prices that physicians need to pay for their inputs minus an adjustment for improved productivity.

This is not a recommendation that we arrive at lightly. Controlling spending is obviously an important issue for the Medicare program for all of the reasons that Mr. Crippen has outlined. Controlling spending, however, is not the only goal that we need to keep in mind. Here are some of the other goals that we at MedPAC think are important for the Medicare program.

One of course is to assure access to quality care for seniors. This is the overriding purpose of the Medicare program. At MedPAC we believe that the best way to do that is to try to match payments for individual provider groups, including physicians, to the cost of efficient providers of those services, and that is what our recommendation would do. So that is another goal.

A third goal is fairness to providers, and one type of fairness is rewarding good behavior and reserving punishment, if you will, for poor performers, and this is a critical area where we believe the current system, the SGR system, fails. If spending increases above the target, the punishment is distributed across all providers without regard to who contributed to the excess spending.

A fourth goal, from our perspective, is to assure that clinical considerations, not payment policy, guides decisions about where particular services should be provided. Here again the current system falls short because SGR only applies to certain services. It could influence where to provide a particular service. If it is provided in the physician's office, it is subject to the constraint. If it is moved to an ambulatory surgical center or hospital outpatient department, it is not.

Finally, we think that it is important for the Medicare program, for the government to be a reliable and trustworthy partner to people who serve the Medicare population, and here again we think the current system falls short. The unpredictable and highly variable increases undermine confidence in the program. Yes, SGR controls spending, but only by compromising each of these other five important goals that we think should be included in the Medicare program, and in our judgment that is a very high price to pay.

The CBO and Centers for Medicare and Medicaid Services (CMS) estimate that the cost of repealing SGR will be quite large. We have not had the opportunity to review those estimates in detail, the underlying assumptions, so I have no specific comment on the estimate. But we think it is important to keep in mind why the projected cost is large. The projected cost is large because the underlying baseline is so low.

The underlying baseline is based on the assumption that we will cut physician fees over the next several years by 17 percent. The underlying baseline assumes that the conversion factor for physicians, basically the price per unit of service, will be lower in the year 2005 than in 1993. It is because of this unrealistically low baseline that there is a large price tag for the policy that MedPAC recommends.

That cannot be a reason to avoid doing the right thing. The issue of volume in the Medicare program is a critical issue. We think it is very important for the Committee to understand that the SGR system does not constrain volume per se.

The Sustained Growth Rate system controls total spending, but it fails to provide appropriate incentives at the level of the individual physician. Fees again are cut across the board as spending targets are exceeded. The individual physician is not rewarded in any way for exercising restraint in decisions about what to prescribe. The individual physician is not rewarded for being a conservative practitioner. That conservative practitioner of medicine is punished under the system just the same as the person that increases volume inappropriately. That is a fundamental flaw in the system.

What will happen if SGR is not fixed? We think the initial signs may of trouble may be subtle. Initially we may see shorter, more rushed office visits for our seniors. Perhaps there will be an incentive to increase return visits or prescribe more procedures or tests. Eventually we might see a move to relocate certain services out of the physician office to other locations. If fees continue to remain very low or fall even further, we could begin to see access problems for Medicare beneficiaries. In the long run if Medicare fees stay out of whack, we could begin to see a fewer number of applicants to medical school, certainly fewer from our best or brightest young people or a shift away from specialties that are heavily dependent on Medicare.

All of these problems are serious problems and if they occur they will be difficult and costly to reverse in the future.

[The prepared statement of Mr. Hackbarth follows:]

Chairman JOHNSON. Thank you very much, Mr. Hackbarth. That was a very thorough explanation, I think, of the multiple goals that we have in our effort to reimburse physicians and of the depth of concern that we ought to have about the SGR formula and the impact it is having.

There are a couple of things I would like to bring up. The first one is a very brief question to Mr. Crippen. You say that spending on entitlement services Social Security, Medicare, and Medicaid will increase from 7 to 14 percent of the GDP. Do you have any idea what percentage of expected revenues that will be?

Mr. CRIPPEN. At the moment, we believe revenues will average about 19 percent of GDP during this decade and in the foreseeable future, given the way the Tax Code is constructed. Revenues can creep up over time, as they did in the recent past, to a little over 20 percent of GDP. The reduction in taxes that you all enacted last year will reduce that share to 19 percent over the current decade. So revenues will fluctuate somewhere between 19 percent and 20 percent of GDP for the very long term.

Chairman JOHNSON. So if this goes from 7 percent to 14 percent of GDP, what percentage of the expected revenues do you imagine that would be?

Mr. CRIPPEN. It would take 14 or 15 percentage points of 19 percent. So it would be taking the lion's share, or three-quarters.

Chairman JOHNSON. So it would be taking 15 percent of the 19 percent of expected revenues?

Mr. CRIPPEN. Yes. About three-quarters.

Chairman JOHNSON. Leaving less than 25 percent for all other functions by the year 2030?

Mr. CRIPPEN. Right, if taxes were not raised or debt did not go up dramatically.

Chairman JOHNSON. Thank you.

Second, I wanted to ask whoever cares to comment on the following question. First of all, we do see that this formula has very different impacts on different physician groups, that some are receiving quite generous increases over time and some are receiving very steep reductions. The second thing that I see eclectically out there, and I wonder if you can look at this in your data, is that I see a very disparate impact on senior access to service, depending on how Medicare reimbursements interact with Medicaid policy and State decisions about whether or not to replace the 20 percent copayment, which is now a voluntary choice that States are making.

Let me be a little clearer. In some of the urban areas of Connecticut where the State is not replacing the 20 percent, urban physicians have large patient load being paid at the Medicaid rate, which is low, and then they have an unusually large number of Medicare patients now associated with a 5 percent cut in reimbursement rate and next year an additional cut. Most of these same physicians also have a suburban office. In their suburban office they are not seeing nearly as many Medicare patients and not nearly as many Medicaid patients.

So I am literally seeing before my very eyes public reimbursement policy driving care out of our inner cities, and I wonder whether any of your research into the impact of reimbursement rates is beginning to pick up this kind of data. I consider it probably the most serious impact of our reimbursement formulas on access to care for seniors and poor people, and yet I don't see it emerging from the materials that I am reading. Mr. Hackbarth.

Mr. HACKBARTH. None of the data I have seen is that refined that it would detect the sort of problem you have identified. The access data that we have reviewed at the Commission is at a higher level and shows in general good access to care for Medicare beneficiaries as of 1999. 

Those are the most recent data we have available. We will shortly be getting more up-to-date information, but in general access has been good.

Chairman JOHNSON. My understanding of that data that you have from 1999 is that there is a factor in it that shows that 45 percent of the physicians in 1999 are not happy with Medicare. Now, on average it is good but when you have 45 percent 2 years ago, unhappy, and now we are cutting their reimbursements in an environment in which their malpractice premiums are soaring, their nursing costs are going up and other factors affecting practice costs, including the need to invest in new technology for just office management, never mind for diagnosis. Do we have any way of getting at more current data about the real impact of the 5 percent cost on physicians and particularly on the physician decision as to where to practice?

Mr. HACKBARTH. Well, dissatisfaction among physicians about Medicare is certainly widespread, in particular in certain specialties. As you indicated, the impact of moving to the Resource Based Relative Value Scale (RBRVS) system has been differential across specialties. That was intentional, and certain specialties have experienced significant economic losses.

By the same token, though, many physicians are also dissatisfied with other payers. So Medicare is not unique in this regard by any stretch. The decision not to participate, not to see Medicare patients or not to accept new patients is different, though, from a decision whether to be dissatisfied or not. So there is not necessarily a direct correlation between that 45 percent or even an increase in dissatisfaction levels with an immediate decision not to see Medicare patients. There are two separate issues.

Chairman JOHNSON. Does your data allow us to look at the physician situation in those specialties that are most likely to serve elderly because it is not even across the specialties and of course there is going to be less dissatisfaction? If you are in a specialty that has a relatively modest Medicare load, it is going to be different in not only a specialty that has a high Medicare load but for an older physician whose patient base has probably aged with him? Do we have the ability to look at the variable impact from those points of view?

Mr. HACKBARTH. We can look at it more specifically by specialty, and I would be happy to work with our staff on that. I think that is a legitimate and important question, but one of the dilemmas that you face if you are a physician practicing in a specialty dependent on Medicare is, well, where do I go if I don't see Medicare patients? If in fact it is a specialty that disproportionately cares for elements of the elderly, it is not like they can start seeing children as their alternative.

And so they are in a bit of a box in that sense, and that is a reason why we don't necessarily think the first order effect of these constraints will be for physicians to say, well, I am not going to see a Medicare patient. The first response might be in fact to say, well, to make up for lost income, I am going to have them come back more frequently or I am going to do an extra procedure or test, and again that is one of the critical failings of the SGR system.

All of the constraints are in the aggregate, not for the individual physician, and so perversely we could see that one of the indications that this series of cuts is doing real harm is an increase in volume for return visits, more procedures, more tests. The proponents of SGR will say, look, we told you so, we need this volume constraint, but in fact the increasing volume is a sign of distress.

Chairman JOHNSON. Thank you. I think that is a very important point. I think also we do need to pursue this issue of more detailed data because increasingly physicians are choosing to go to some other specialty or leave medicine at a remarkably young age, and while the data is small yet, depending on the specialty, that could have an enormous impact on senior access to critical physician services.

So we need to know a lot more about this because it is beginning to invade, in my estimation, senior access, and we are right on a point where we are going to see the interaction of the payment systems, the two publicly funded payment systems, really affect senior access. But I will not pursue this because my time has expired. Mr. Stark.

Mr. STARK. Dan, CBO estimated that the MedPAC recommendation would cost us $126 billion over 10 years, and did that include spending increases driven by volume? In other words, can you elaborate on that? When you did the $126 billion, did you just take the suggested increase and put it out or did you make any estimate as to change in aggregate spending?

Mr. CRIPPEN. I think we included volume increases. Let me consult my colleague. Yes, we did.

Mr. STARK. Okay. Any idea of how much of that $126 billion would be due to volume and intensity as opposed to...?

Mr. CRIPPEN. It looks like what we added was about 1 percentage point-of-increase for each year, on average, as a result of volume and intensity.

Mr. STARK. And how much through --

Mr. CRIPPEN. The price increase?

Mr. STARK. The price increase?

Mr. CRIPPEN. Well, the total increase would have been the MEI. So we took the MEI plus 1 percent.

Mr. STARK. What is MEI averaging?

Mr. CRIPPEN. I am going to defer to my colleague here.

Mr. STARK. That is all right.

Mr. CRIPPEN. You have MEI data on

Mr. HACKBARTH. For what period?

Mr. CRIPPEN. The next 10 years. It has got to be 2.5 percent or 3 -- 

Mr. HACKBARTH. Two to three percent.

Mr. STARK. Two to three percent. So you are talking maybe two for MEI and maybe another point on top for volume, and really isn't that what we have averaged over the last 10 years or so? Albeit we had a chart here somewhere, but it seems to me over the last 10 years we have paid 33 percent in increases, so the average annual in physician updates from 1992 up has been 2.6 percent. So I guess you guys are both talking, Mr. Hackbarth and Mr. Crippen, the same amount whether we pay it as we are currently doing it or whether we change it. Is that a fair assumption, that we are really not talking about great changes, although you suggest, Mr. Crippen, that it would be $126 billion more; so when you are dealing in these small percentages, a 10th of a percent here or there makes a major difference at least in your--

Mr. CRIPPEN. And part of the dilemma is that the current system -- the SGR mechanism -- would reduce payments for the next 2 or 3 years to catch up for the overpayments in 2000 and 2001. So if you just removed that effect of the current system and went back to roughly the increase in the MEI, then of course you would have something similar, but you would not recoup those payments that were made earlier.

Mr. STARK. Now, the President has proposed making these payment changes, whatever payment changes we make, on a budget neutral basis, so what I would call a zero sum game, as it were, and each year you give us savings options. Have you analyzed the options that we could use to provide this extra $126 billion? Quickly what are the -- where would you tell us to go?

Mr. CRIPPEN. The physicians' fees are a component of Medicare Part B Supplementary Medical Insurance, and there aren't many places to go here unless you change the underlying differential fee structure. In Part B, 25 percent of costs will be paid by beneficiaries and 75 percent by general revenues, which leaves you Part A if you are going to glean savings inside Medicare. You could in theory, cut hospital payments, but that hasn't been very successful either, so then you have to go outside of Medicare, into other entitlement programs. Presumably, under the current pay-as-you-go rules, you would go to other entitlement programs or raise taxes.

Mr. STARK. Just one question. I noticed in your testimony, Mr. Hackbarth, you got into the idea of incentives and not wanting a fee schedule to encourage one to use a procedure or not use a procedure. Now, I presume you practiced law at some point and shouldn't a lawyer, it may not always happen this way but at least according to the theory that you learned in law school, who takes a pro bono case, say, for the environment or criminal defense do just as good a job as somebody who is getting a hundred bucks an hour for that same type of work?

Mr. HACKBARTH. Yes, sir.

Mr. STARK. And I have always felt it cuts both ways, that for a long time we tried to hold down overutilization. Now we have got managed care plans and we are sort of trying to prevent underutilization, where the pendulum swings. Don't you think that whatever we do, and I am taking issue with this idea of incentivizing, and I will just finish my question and then shut up, Madam Chair, that we ought to be sure there is no incentive one way or the other for a physician to make clinical decisions based on reimbursement, that that ought to be our goal, that the reimbursement ought to try to be as separated as possible from the clinical decisions the physician makes relative to his or her patients?

Mr. HACKBARTH. Yes, that should be the goal and it is one of the failures of SGR as we see it because it only applies to part of the system.

Mr. STARK. It is also a failure of the fee for service system in general, isn't it?

Chairman JOHNSON. Very important point.

Mr. HACKBARTH. It is an elusive goal.

Chairman JOHNSON. Mr. McCrery.

Mr. MCCRERY. Thank you. Mr. Crippen, in your data concerning the amount of GDP that we will consume with Medicare, Medicaid, and Social Security in 2030, you don't mention what percentage of GDP will be consumed by interest on the debt. Do you have some idea what that would be in 2030?

Mr. CRIPPEN. In our 10-year baseline, it would be pretty small because we don't increase debt by much; we have the current level of debt and then come 2005 or 2006, we start paying it down. So by 2010 -- again, in our baseline -- we would have virtually no debt outstanding, so there would be no interest at that point and no interest payments.

Mr. MCCRERY. You have no debt outstanding in 2030?

Mr. CRIPPEN. Our baseline only goes for 10 years and as you well know, the precision of even that is questionable. But over that 10-year period, we return in the baseline to an era of surpluses, unified-budget surpluses, that will pay down debt held by the public. So sometime not long after 2010 in our baseline most of the debt held by the public will be redeemed.

Mr. MCCRERY. And you told Mrs. Johnson that we are spending about 19 percent of GDP. Actually that is down probably now to closer to 18 percent, isn't it, with the recession and --

Mr. CRIPPEN. It could well be. My guess is that we are going to end up collecting revenues and outlays equaling about 18.5 percent to 19 percent of GDP this year. It is going to be very close to balance, as you know. So the revenues are going to about equal what we are spending.

Mr. MCCRERY. And historically spending has been around  18 percent of GDP, hasn't it?

Mr. CRIPPEN. Revenues have been, since World War II, about 18 percent of GDP. Spending has fluctuated around that level in the past few years -- sometimes up above it but then, in our most recent history of surpluses, slightly below revenues. But revenue collections since World War II have averaged about 18 percent of GDP.

Mr. MCCRERY. So in 2030 we will have precious little left to spend on national defense, on roads, highways, transportation, environmental protection, justice, courts?

Mr. CRIPPEN. Exactly.

Mr. MCCRERY. Can you foresee a time when Congress would allow that to happen?

Mr. CRIPPEN. I don't know, Mr. McCrery.

Mr. MCCRERY. Can you foresee the Congress only spending about 3 or 4 percent of GDP on all the other priorities of the Federal Government?

Mr. CRIPPEN. No.

Mr. MCCRERY. No, of course not. So something is going to have to give.

Mr. CRIPPEN. Exactly.

Mr. MCCRERY. As you pointed out, we will either have to raise taxes or go into debt or I think more likely we will ration health care to control spending. I think that is where we are headed, is explicit rationing of health care, and it won't be just Medicare by the way. We will have a payroll tax for everybody's health care. Everybody will be on Medicare, I think, and we will limit explicitly the health care that people can receive. I think that that is where we are headed clearly and your numbers underscore that. Therefore, I am somewhat troubled by your statement that you don't mean to say there is a crisis and nothing that needs to be addressed today. Isn't it a fact that the sooner we impose some kind of solution to the ever growing increases for Medicare, the better off or the better chance we will have to control those costs over the long term?

Mr. CRIPPEN. Absolutely. What I was trying to do was not characterize this picture as in any way my opinion, but rather as a view of the facts as we understand them at this point. I also want to make sure that it is understood, and I know you understand -- the Committee does, that there is no peril here for Medicare recipients in your consideration of changes to current benefits. Benefits of current beneficiaries -- my parents' benefits -- are not what we are talking about. We are talking about my benefits, paid by my children, so I don't want to leave anyone with the impression that there is a pending crisis that we need to solve today. Certainly, any action we take now will help much more than action we delay.

Mr. MCCRERY. Exactly. I mean I would hope we would look beyond the ends of our noses and consider the burden that our children will bear for us and their children for them if we don't do something today. So I think there is a crisis. I believe that we are fiddling while Rome is burning not only for Medicare but for Medicaid and for Social Security. We know it and shame on us for not proceeding with a solution that will give us some hope for controlling these costs in the future and continuing to provide the array of services the Federal Government always has and always will provide.

Chairman JOHNSON. Thank you, Mr. McCrery. Mr. Kleczka.

Mr. KLECZKA. Thank you, Madam Chairman. Madam Chair, I have a series of questions for Chairman Hackbarth and some are specific, coming from physicians from Wisconsin, the district I represent. So if it is possible, what I would like to do is submit these in writing to you 

Mr. HACKBARTH. Sure.

Mr. KLECZKA. And if you could review them and send back a response. Thank you very much. Thank you, Madam Chair.

Chairman JOHNSON. Would you like that response shared with the Committee?

Mr. KLECZKA. I will share it.

[The information follows:]

Medicare Payment Advisory Commission
Washington, DC 20006
March 18, 2002

Honorable Jerry Kleczka
U.S. House of Representatives
2301 Rayburn House Office Building
Washington, DC 20515-4572

Dear Congressman Kleczka:

Thank you for your letter concerning Medicare’s payments for physician services. You asked us about payments for practice expense and professional liability insurance under the physician fee schedule. You also asked us about expenditure targets, the frequency of physician encounters, and the productivity adjustment in payment updates.

Medicare reimbursement for practice expense and malpractice insurance may be below the real costs physicians incur.  For example, at St. Luke’s Hospital in Wisconsin, heart surgeons often employ staff who assist them in the hospital.  These local surgeons have told me that most of these costs are not reimbursed.  Are you concerned that the reductions in practice expense payment will hurt quality as surgeons cut back on staff they can no longer afford?  Why aren’t hospitals providing this staff?  Is this included in the hospital reimbursement rate?  Or, is it reimbursed separately to the surgeon?

Your practice expense questions address the issue of whether payments for practice expense should account for the cost of support staff that surgeons bring to the hospital. These staff prepare patients for surgery, assist during procedures, and provide post-operative care.

The position of the Centers for Medicare and Medicaid Services (CMS) is that Medicare should not pay for the cost of these staff under the physician fee schedule because:

• Payments for the cost of these staff are included in payments to hospitals under the inpatient prospective payment system, and Medicare should not pay twice for these costs.
• It is not typical for most physicians to use their own staff in facility settings.
• Payment for these costs is inconsistent with the Medicare statute and regulations.

As you know, cardiothoracic and other surgeons contend that practice expense payments should cover the cost of support staff, when used in a facility, because hospitals are perceived as no longer providing the staff that are necessary.

It appears that this issue will be resolved soon. CMS has asked the Office of the Inspector General (OIG) to assess the staffing arrangements between cardiothoracic surgeons and hospitals, and the OIG is finishing its report now. We anticipate that CMS will use the report’s findings to change current policy, if necessary.

Question:

Is MedPAC tracking the changes in costs of liability insurance that appear to be escalating this year (for at least some specialties)?  How do you think the fee schedule should be adjusted in light of these changes in total costs and relative costs among specialties?

MedPAC agrees that the physician fee schedule should account for changes in input prices, including increases in professional liability insurance (PLI) premiums. That does not occur under the current method for updating payment rates, however. Instead, the sustainable growth rate (SGR) system overrides changes in input prices to achieve an expenditure target. To solve this problem, the Commission recommends that the Congress repeal the SGR system. In its place, we recommend an update method based on the estimated change in input prices for the coming year, less an adjustment for growth in multifactor productivity

Question:

In the past, there has been a presumption that expenditure targets would somehow influence individual physician behavior, and therefore, outlays.  Does MedPAC believe that individual physician decisions can be affected by total expenditure targets?

Your question about expenditure targets and physician behavior addresses one reason why MedPAC recommends that the Congress replace the SGR system. The Commission believes that expenditure targets can influence the behavior of individual physicians but not in the way that those designing the targets intended. It was hoped that the targets would give physicians an incentive to control the volume of services. Instead, we believe that the reverse occurs. With expenditure targets, physicians have an incentive to increase volume, in the short run, to make up for lost income when payment rates are reduced. In fact, CMS makes exactly that assumption when it estimates the so-called behavioral response of physicians to lower payments—which is an increase in the volume of services provided. Over a longer period, expenditure targets can have other undesirable consequences. If payments fall below costs, we might see physicians cut back on their Medicare practice and focus on other patients. Alternatively, they could devote more time to other professional or leisure activities, or leave practice altogether.

Question:

Does MedPAC intend to analyze changes in frequency of physician encounters between specialties?  Would these trends be important? 

On your question about whether MedPAC intends to analyze changes in the frequency of physician encounters among physician specialties, we will continue to assess the adequacy of Medicare’s payment rates for physician services with whatever data are available. Analyzing changes in the volume of services, including changes in volume by physician specialty, is one way to assess payment adequacy. In our March 2002 report to the Congress, we considered other factors—beneficiaries’ access to care, physician willingness to furnish services to beneficiaries, and entry or exit of physicians from participation in the Medicare program.

Question:

In regards to productivity, does the MedPAC recommendation assume that productivity changes are the same, or close to it, among all types of physicians, including surgeons, medical specialists, and primary care physicians? 

You are correct that the productivity adjustment in payment updates applies to all services uniformly and, therefore, to all physician specialties. This is true of the current productivity adjustment for physician services and the adjustment that MedPAC recommends. The question is whether payment rates can account for any changes in productivity that are unique to specific specialties. We believe the answer to this question is yes because payment updates are not the only way that payment rates change. Payment rates also change when the fee schedule’s relative weights are recalibrated. This occurs every year, if billing codes are revised, and every 5 years, when CMS reviews the accuracy of the relative weights. As long as recalibration is sensitive to changes in cost due to productivity growth, it accounts for changes in productivity that are unique to specific specialties. It is likely that recalibration is this sensitive because, by law, the process considers changes in medical practice, coding changes, new data, and the addition of new procedures.

If we can be of further assistance, please do not hesitate to contact us.

Sincerely,

Glenn M. Hackbarth, J.D.
Chairman

Chairman JOHNSON. Thank you. Mr. Crane.

Mr. CRANE. Thank you, Madam Chairman.

Mr. Crippen, the CBO projects nearly 20 percent in payment cuts over 4 years, a number that is greater if you count inflation, and I am sure I am not alone when I say that I have been hearing from numerous providers in my district who are upset about the recent payment cuts in the physician fee schedule. I am hearing that many of them can no longer afford to participate in the program and are considering leaving if something isn't done. In fact, I just saw a recent survey released by the North American Spine Society that says 48 percent of physicians will be accepting fewer new Medicare patients, 35 percent will see fewer Medicare patients, and 6 percent will leave the Medicare program altogether.

Does the CBO model cited in your prepared statement make any adjustments for the possibility that, as with Medicaid, many physicians will not continue to accept Medicare patients?

Mr. CRIPPEN. I think the answer, Mr. Crane, is no, or not to any great extent. Let me refer to Appendix D in your Committee's Green Book which has a lot of information on Medicare; as I recall it is Table D-121. The only reason I have a sense of which table it is because I looked at it over the last day or two. It shows assignment rates -- both the number of physicians or percentage of physicians accepting assignment but also equally important, the number of dollars spent by Medicare Part B under assignment. And those numbers, of course, as my colleague said earlier, were quite high in 1999, and one would expect they might go down.

But the point that this table makes is that we had much lower levels of assignment and participation even as recently as 5 years ago, or a few years ago, when payment rates were being cut. I don't know what to make of all of this other than to say that we had 99 percent assignment and in 1999 or thereabouts -- or rather, 98 percent -- and we have had 80 percent participation in the recent past.

I don't know what the right standard is. Do we want to shoot for 99 percent participation? That may be a little high, frankly, if you have to resort to the highest common denominator to pay for these services.

But I am not here to suggest what the right standard is. Rather, I am suggesting that these data and recent history say that at least for the next few years, we wouldn't anticipate that a fall-off in physician participation would change Medicare spending by much. That is, we don't think that patients, or beneficiaries, are going to be denied care because of the lack of physician participation. That is a long answer to your question.

The short answer is that CBO assumes that a sufficient number of physicians for all Medicare recipients will participate over the 10-year budget period and our projections will be based on that.

Mr. CRANE. Thank you. I yield back the balance of my time.

Chairman JOHNSON. Thank you, Mr. Crane. Congresswoman Thurman.

Mrs. THURMAN. Thank you, Madam Chairwoman. Let me follow up on his question, because that would generally be across the country and not necessarily State specific.

Mr. CRIPPEN. Right. As I recall, your tables also have State-by-State numbers on assignment rates and on assigned costs.

Mrs. THURMAN. But access.

Mr. CRIPPEN. Sure; it varies.

Mrs. THURMAN. That is one of the areas that, being from Florida, that I am getting very, very concerned about. And I had an opportunity similar to other Members who have talked to physicians as to what is going to happen in States like Florida. We are already understanding that we have got problems with even bringing people into Florida.

Their first question to a practice might be what is your percentage of Medicare? Because if they say it is high, then they are concerned that with these failing numbers for them, that what good is it to go there? We would rather go someplace,  compete in Georgia or someplace else on the Sun Coast. What is the question to them? What do you say to them? What am I going to say to these constituents?

Many of us are on the bill that Mr. Dingell and Mr. Tauzin and others have put out there, but we are seeing long waits. We can't get people to come into Florida.

And then the second question that I would ask really has to do with the Medicare+Choice issue, too, because Dr. Ginsburg is going to testify, and he actually mentions now that doctors have an opportunity to negotiate with some of these Medicare+Choice programs, and in fact are getting higher or being able to get more dollars out of there. Are we then putting an imbalance into our Medicare program where some may just gravitate to those programs and may leave more other areas uncovered in some of our rural areas or areas where there are no Medicare+Choice programs? Either one of you.

Mr. CRIPPEN. I can start with the second one. At least by our lights and looking at future payments for Medicare+Choice, CBO anticipates, frankly, that there is going to be a fall-off in enrollment in those plans. Payment rates are going to be quite limited in most areas for the foreseeable future. So our projections certainly don't anticipate that we will have a migration from the fee-for-service program to Medicare+Choice. In fact, we assume quite the opposite.

Mr. HACKBARTH. On that particular issue, it is our belief that Medicare+Choice is not going to be a large and important part of the program in rural areas. The efforts to make it so through floor payments and the like have not succeeded and in our view will not succeed. In fact, managed care is not prevalent in rural areas in the non-Medicare population, and so there is little we can do in Medicare to alter that basic reality.

As for the overall Medicare+Choice program, whether it grows or not, certainly the recent trend, as Dan said, is down. Whether that reverses, in my view, will depend a lot on whether managed care organizations change how they do business. One of the reasons, in my view, that they are struggling is that they have stripped away a lot of their cost controls, expanded choice, and reduced the utilization controls to become more like fee for service. It is not surprising that they can't compete with Medicare.

Mrs. THURMAN. So let me just say this, then. If the $126 billion is what you said would bring us up to the right rates or at least bring us into line so we can actually take the dollars that we have put into the Medicare+Choice programs over the last couple of years to prop them up and move them over into the system, that would actually make us somewhat neutral in this budget, at least for this first year.

Mr. CRIPPEN. I think that we are still paying -- and I say "think" because we have to look at the current formulations -- but I think we are still paying Medicare+Choice less than we would pay under the equivalent fee-for-service program in a lot of areas in the country. So it may be a net cost from actually moving people from managed care 

Mrs. THURMAN. Not necessarily moving them, but obviously that number has decreased. It went from 15 to 12 percent. We gave an additional amount of dollars over the last couple of years. I think there is some idea that we might do some more again this year. It just seems to me that we might be better off to keep physicians who are in Medicare fee for service at a level that they can continue to do their practices, not cutting off services, not have waiting lines for 3 months being able to bring people in, as versus putting it into Medicare+ Choice.

Mr. CRIPPEN. One of the ways in which you and the country have tried to grapple with this incentive question for physicians on payment versus volume -- how you get the incentives right -- has been capitation, or something like the approach that you see inside some managed care systems, in which the decision to treat or not to treat is not based on physician income, or at least not on the price of that particular service; rather, the payment is for a year of "unlimited" service. So by raising more fee-for-service payments, you may exacerbate the dilemma that you are facing in the overall question here.

Chairman JOHNSON. Thank you, Congressman Camp? Congresswoman Dunn.

Ms. DUNN. Thank you very much, Madam Chairman. Gentlemen, I bring to the table the same complaints that I bring in all of these hearings that we have, and it is about the incentives in this program that result in a State like my State, Washington State, which is very efficient in the delivery of health care being penalized because of its strong history. So I have physicians at home not only worried about the 5.4 percent reduction in their reimbursements but in the reimbursement system as a whole.

So my question to both of you is, as we develop a new system, a new SGR, whatever we are going to call it, how are we going to begin to balance States like Washington, with States like New York?

Mr. HACKBARTH. Well, the reasons for different levels of spending in different parts of the country are quite complicated and, frankly, not all that well understood. Some are obvious. Some have to do with a different standard of living, different wage levels. And in the Medicare program, as you know, we adjust using a wage index for all the different services to varying degrees. So if you happen to be in a State where wage levels tend to be lower than, say, New York, the Medicare payment formulas result in lower spending. But that is only part of the issue.

Perhaps an even bigger part of the problem might be differences in utilization patterns, which could be because of greater efficiency or could be because of differences in the underlying health status of the population, differences in tastes about medical care, different attitudes towards risk, and the like. It is a really complicated problem that has not been disentangled to this point.

If our goal were to equalize spending across States, across cities, whatever geographic unit you describe, we would need a very different health care system to produce that uniformity. One of the virtues of our system, at least in the eyes of many people, is the degree of freedom that gives both patients and providers, the autonomy it gives them. Such a system is very unlikely to produce uniform results. So if you want uniform results, you need a much more controlled, centrally controlled system than we have, and that brings with it its own potential problems.

Mr. CRIPPEN. I think, Congresswoman, you are absolutely right that there are some States that historically have had lower per capita costs -- for example, in the Northwest, in Minnesota, and in others that in some sense early on had managed care. And so because we have no better basis, we have established payments based on historical expenditures. And those historical expenditures were lower in some States than in others.

Until we switch from a system that pays for inputs, based obviously on historical costs, to something that might pay for outcomes, or results, it is going to be hard and -- and this is not a political matter -- hard to figure out a system that would pay more to those States that have already established a more efficient delivery system without cracking down considerably on other States.

So all I can suggest is that because you were efficient in the past, you are being penalized now, as my colleague just said, because your cost structure is lower. So there is some basis for the sense of unfairness. It may not be "fair," but until we start paying for services differently -- don't update payments inputs but rather on the basis of outputs or some other method -- I don't see any magic in these formulas that will help.

Ms. DUNN. I will be waiting for such a system, hoping to take part in the development of such a system, and I appreciate your expressing the reality. Thanks.

Chairman JOHNSON. Just to conclude, I think your answer on those issues is inadequate. No offense. It is just that the historic base on which some of the States' payment systems were based and we have this problem in Iowa and a number of other States was very low. But those physicians are still having to buy the new technology and pay the higher malpractice cost. So, the disparity is declining, and the old differential is no longer as relevant.

And I am very concerned about their ability to attract physicians out of residency, because now our physicians coming out of residency have much higher debt loads. So it is a very hard decision to go to a State with lower reimbursement rates, because the cost of living isn't necessarily that much lower anymore. The original cost basis that was the foundation of this system is now not as relevant, because we have much more of a national system.

You talked to the hospitals. They are buying through national combines. So this whole issue, and I know Mr. Hackbarth and I talked about trying to review this. This Committee will be holding hearings on the whole wage area issue. But we have to evaluate these past fundamentals because they are no longer as relevant as they once were and they are going to create very disparate access to care in a decade or so if we don't do something about it.

It is like the baseline issue. The fact that you estimate your baseline to us on the basis of law will not prevail. Means that we have to raise lots more money just to stay where we are. So there are some things about the way that Congress has functioned in the past that make it hard to function in the future. This issue of the low paid States, I think, is going to be a much more significant problem for us as we go forward.

And in closing, I wanted to just remind you, and I know some of the next panel might help us on this issue of the differential impact of the 5 percent cut according to specialty and also place of care, which I think actually nobody has very good data on. And on your five goals, Mr. Hackbarth, one of the ones you didn't mention is how do we meet a future in which we need to encourage physicians to participate in disease management programs? Our whole reimbursement system doesn't look at care coordination. It looks at isolated care decisions. And that is not going to serve us as a Nation as we move into an era where there are going to be people living much longer with multiple illnesses to manage. So our payment system is not only inadequate to next year and the year after, it is inadequate to the future of medicine. Mr. Stark.

Mr. STARK. Could I ask one brief question of Mr. Hackbarth, who may or may not have looked at this, but there has developed recently a phenomenon that I would refer to as boutique clinics or practices, wherein a primary care physician will charge somebody $1,500. There are some of us who are concerned that that may be extra billing or classified as that. Have you looked into that issue?

Mr. HACKBARTH. We have not, sir.

Mr. STARK. But you can understand how that might. When you charge a Medicare beneficiary an annual fee, do you spread that over some of the Medicare charges that that physician would collect from that patient? And if so, does that constitute extra billing? And you might -- I would urge you to look into it because it is a question that will come up.

Mr. HACKBARTH. Thank you.

Mr. STARK. Thank you, Madam Chair.

Chairman JOHNSON. I thank the panel for their input and call forward the second panel. I welcome the panel. And I also want to acknowledge the presence of my colleague, Ben Cardin, a Member of the Committee on Ways and Means, one very, very interested in health. He often does join us, although not a Member of the Health Subcommittee, and works with us closely on much of the health care legislation that comes out of the Committee.

Chairman JOHNSON. Dr. Ginsburg.

STATEMENT OF PAUL B. GINSBURG, PH.D., PRESIDENT, CENTER FOR STUDYING HEALTH SYSTEM CHANGE

Dr. GINSBURG. It is really a privilege to be invited to talk on this topic. The Center for Studying Health System Change is an independent nonpartisan research organization funded by the Robert Wood Johnson Foundation. It conducts research on how the health system is changing and the impact of those changes on people. Our research includes surveys and site visits that provide unique perspectives on health care in communities. We seek to inform policy with timely and objective analysis, but the Center does not advocate particular policy positions.

When the issue of the Medicare physician payment update developed late last year, I recognized that trend data from our surveys and data from our site visits could contribute to the debates.

We have information from household survey respondents about their experience in obtaining care in a timely fashion. We have information from physician respondents about their acceptance of new patients and the time spent in patient care. And we have information from site interviews with health plan executives about how much they pay physicians in relation to Medicare payment rates.

My testimony contains a lot of charts with data, but I would like to take you right to the bottom line. Many of the trends in the testimony point to a tightening of physician capacity in relation to demand that is leading to declines in peoples' ability to access care without delay. We see that more people are reporting delays in getting care. The time to get an appointment with a physician is increasing. Doctors are spending more hours per week in patient care and fewer doctors are accepting all new patients. A likely factor behind these trends is the recent growth in demand associated with the loosening of restrictions of managed care throughout the medical care system.

These trends are affecting Medicare beneficiaries, but they are also affecting those with private insurance. The relative financial attractiveness between Medicare and private insurance has probably not changed much in the last few years. Physician willingness to accept all Medicare patients is declining, but so is physician willingness to accept all new privately insured patients.

But this parallelism in trends could change over the next few years. The current law formula is expected to reduce Medicare payment rates a lot more. Also, physicians, particularly specialists, have been exerting greater leverage with managed care plans and are likely to get higher payment rates. The bottom line is that there are greater risks of deterioration and access to care from sharp cuts in Medicare physician payment rates today than in the past because of the stresses on physician capacity.

Thank you.

[The prepared statement of Dr. Ginsburg follows:]

Chairman JOHNSON. Thank you very much, Dr. Ginsburg. Dr. Mayer.

STATEMENT OF JOHN E. MAYER, JR., M.D., PROFESSOR OF SURGERY, HARVARD MEDICAL SCHOOL, BOSTON, MASSACHUSETTS; PEDIATRIC HEART SURGEON, CHILDREN'S HOSPITAL BOSTON, BOSTON, MASSACHUSETTS; CHAIRMAN, COUNCIL ON HEALTH POLICY, SOCIETY OF THORACIC SURGEONS, CHICAGO, ILLINOIS; ON BEHALF OF THE AMERICAN ASSOCIATION FOR THORACIC SURGERY, MANCHESTER, MASSACHUSETTS

Dr. MAYER. Thank you, Madam Chairwoman. I am Dr. John Mayer. I am a Pediatric Heart Surgeon at the Children's Hospital in Boston and a Professor of Surgery at Harvard Medical School. I am also Chairman of the Council on Health Policy for the Society of Thoracic Surgeons (STS), and I represent both the STS and the American Association for Thoracic Surgery. We are among the Charter Members of the Coalition for Fair Medicare Payment and we support, as does this coalition, H.R. 3351 which would moderate the 2002 reductions in the physician fee schedule, as you have heard about previously.

We want to leave you with three basic points. First, we think this bill, H.R. 3551, has to come to the floor and that the SGR formula has to be revised along the lines recommended by MedPAC. Second we would also want you to recognize that the RBRVS system, the relative value system, is in our opinion on the verge of breaking down, and that will have an inevitable impact on the quality of the care that Medicare beneficiaries receive.

In announcing these hearings, Chairman Johnson said that Medicare's formula for paying physicians is completely irrational and must be reformed this year, and we 100 percent agree. This Congress should recognize that the 5.4 reduction this year in physician fee schedule across the board has been compounded for many specialties by inequities in reimbursement for practice expenses. More specifically in our case and other surgical subspecialties, CMS has refused to recognize the cost that cardio-thoracic surgeons incur for staff who are on their payroll and who are essential to patient care in the hospital.

I really want to focus on some of the ways that this arcane system that has been devised for practice expense in particular has worked or not worked, and let me give you a few examples.

I also represent the Society of Thoracic Surgeons on the Relative Value Update Committee of the American Medical Association (AMA) which recommends physician work values but also reviews all the practice expense relative values. I believe we have gotten ourselves into an absurd reductionist approach trying to estimate the resources needed for each phase of each physician service. As a committee, we actually had to make a recommendation on whether 21 minutes or 23 minutes of clinical staff time were typical for a standard mid-level office visit. We were told that our decision would shift $100 million in the Medicare fee schedule. That is almost half as much as Medicare spends for the most common coronary artery bypass procedure that is done.

I have personally and perhaps this is as a scientist relatively little confidence in the ability of a committee of physicians sitting in a room to reliably distinguish between 21 minutes and 23 minutes. As I said, the reductions in allowed charges for cardiac surgery are not 5.4 percent but, on average, are 10 percent; and for some of the procedures they are as high as 15 percent.

Since 1994, for cardiac surgery, reductions in practice expense component of the fee schedule have been 47 percent. There are in the written materials submitted to you graphs that demonstrate the overall impact of this system over the last 10 to 15 years and I think they are self-explanatory.

Congress in 1997 instructed Health Care Financing Administration (HCFA) in revising the practice expense system to recognize all staff, equipment, supplies and expenses. And subsequently under section 212 of the BBRA, Congress instructed the U.S. Department of Health and Human Services (HHS) to utilize valid data from outside organizations in addition to HHS itself. We have submitted that data, but HCFA has nonetheless deleted from practice expense all costs our members incur for clinical staff who actually help provide services in the hospital.

In some States, some of these costs can be partially offset, but only for certain kinds of staff and only for certain kinds of activities. There is no reimbursement for any of the clinical staff for their services in intensive care units or on the wards postoperatively.

You may ask, why it is that cardiothoracic surgeons employ these staff? Very simply, cardiothoracic surgeons have, at their local community levels found that these staff are essential to improving quality. The Institute of Medicine, IOM, report very clearly noted that in complicated situations like cardiac surgery, that a well-functioning consistent team is essential to quality. Our overall mortality rates for coronary surgery in the United  States are down 40 percent in the last 10 years and we think that these teams are essential to that improvement.

I actually gave a talk last week in Florida to a group of 75 cardiothoracic surgeons, and I asked them how many of them employed clinical staff that they took with them to the hospital. Essentially everyone raised their hand. We don't want to go backwards. And I think that the current course that we are on is one that will progressively deteriorate the quality of care that cardiac patients will receive in this country.

I can tell you that for the last several years we have failed to fill cardiothoracic surgery training positions in this country with American medical school graduates, and this year we did not fill the positions at all. That is, there were positions that were left unfilled. I think this bodes poorly for the future, and if the baby boomers don't have some other health catastrophe befall them, we are going to need more and more cardiac surgical procedures in the future. And if the shortages continue in applicants, it will take years to turn this around.

The decisions that are made this year will have an impact, and the impact is going to be felt not only tomorrow but in the future. We hope that we are looking ahead.

Thank you.

Chairman JOHNSON. Thank you very much for your excellent testimony. Anyone speaking out there with thoracic surgeons knows that this has been a specialty that has not been able to survive the automatic formula that governs reimbursement. 
Dr. Palmisano.

[The prepared statement of Dr. Mayer follows:]

STATEMENT OF DONALD J. PALMISANO, M.D., J.D., SECRETARY-TREASURER, AMERICAN MEDICAL ASSOCIATION

Dr. PALMISANO. My name is Dr. Donald Palmisano. I serve as Secretary-Treasurer of the American Medical Association and am a Member of the AMA Board of Trustees. I am a practicing General and Vascular Surgeon from New Orleans.

We thank Madam Chairman Johnson and the Subcommittee for your leadership efforts in the commitment to providing a remedy for the 5.4 percent Medicare payments to physicians and other health care professionals. This deep cut is threatening access for all Medicare beneficiaries. We urge this Subcommittee and Congress to immediately halt this cut and replace the Medicare payment update system.

Last June, MedPAC warned that a significant cut in the payment update could raise concerns about beneficiary access to care. Clearly, 5.4 percent is significant and it comes on top of sharp increases in professional liability premiums as well as a host of costly regulatory burdens. Many physicians as a result are being forced to make difficult choices, such as stop accepting new Medicare patients, discontinue the provision of some medical services, limit or discontinue investments in new technology, lay off staff or leave the practice of medicine. These are not choices that physicians want to make. In each case, our patients lose.

In response to these access concerns, MedPAC recommended a new framework for Medicare physician updates. We support the MedPAC general framework and look forward to working with the Committee on the specific details of a new update system.

The current system does not work for several reasons. First, the sustainable growth rate, SGR, requires the use of estimates that are nearly impossible to predict accurately. Chart 2 shows that inaccurate SGR predictions have shortchanged physicians and other health professionals by over $20 billion since fiscal 1998. Inaccurate enrollment projections mean that every year physicians care for nearly 1 million Medicare patients whose costs are not counted in the update. Under the formula, these errors are compounded annually.

Further, physician updates, unlike any other category of providers, are linked to changes in the GDP, even though the medical needs of Medicare patients do not wane when the American economy falls into a recession.

Chart No. 1 clearly illustrates the growing gap between the Medicare Economic Index and annual physician updates. Since 1991, physicians have received an average annual increase of 1.1 percent, as shown in the red line, versus the 2.4 percent increase in practice costs, as shown in the blue line. This trend cannot be sustained. Finally, the SGR is highly unpredictable and allows severe payment cuts to be imposed without any warning or opportunity for action by Congress.

In March 2001, CMS predicted a 1.8 percent increase in the 2002 payment update, and 10 days later predicted that the update would be a negative 0.1 percent. Not until November, with only a few weeks left in the congressional session, did CMS announce the 5.4 percent cut in the update. Like any small business, medical practices need to plan their expenses in order to remain financially sound. If practices continue to lose money due to low Medicare payments, patient access is threatened.

In conclusion, we strongly urge Congress to enact an immediate halt to the 5.4 percent cut and repeal the SGR system. We also ask the full Committee to ensure that its views and estimates submitted to the House Budget Committee include necessary funds to implement the MedPAC recommendations. Again, we thank the Subcommittee for your strong efforts on this important matter, and I am happy to answer any questions.

Chairman JOHNSON. Thank you. I am going to have to suspend a hearing while we complete the vote. I will run over and be back quick as we can. I will suspend for 5 minutes.

[The prepared statement of Dr. Palmisano follows:]

[Recess.]

Chairman JOHNSON. We will resume with the presentations. Mr. Levine.

STATEMENT OF STEPHEN M. LEVINE, CO-OWNER AND ADMINISTRATOR, SPINE AND SPORTS REHABILITATION CENTER, TIMONIUM, MARYLAND, ON BEHALF OF THE AMERICAN PHYSICAL THERAPY ASSOCIATION

Mr. LEVINE. Thank you, Madam Chairwoman and the Members of the Subcommittee on Health. The American Physical Therapy Association (ATPA) is grateful for the opportunity to provide testimony today concerning the need to reform the update formula of the resource based relative value fee schedule. This issue is of great significance to physical therapists who bill their services to the Medicare program under Part B.

My name is Steve Levine and I am a practicing Physical Therapist and owner of Spine and Sports Rehabilitation Center in Timonium and Falston, Maryland. My practice specializes in the evaluation and management of the musculoskeletal dysfunction involving the spine. Physical therapists provide services to patients who have impairments, functional limitations, disabilities, or changes in health status resulting from injury, disease, or other causes. As clinicians, physical therapists are involved in the evaluation, diagnosis, prognosis, intervention, and prevention of musculoskeletal and neuromuscular disorders in the acute chronic and rehabilitative settings.

Please allow me to express my appreciation for the commitment of the Members of the Committee and Madam Chairwoman to address the problems that exist in the update formula for the Part B fee schedule. The APTA is hopeful that Congress can work to ensure the fee schedule is modified appropriately before the end of this year.

Many health professionals, including physical therapists, utilize the RBRVS fee schedule to bill for their services. By inviting APTA to testify today, you are helping to dispel the myth that this is solely a physician concern. The APTA urges the Committee to consider the following immediate actions to address the problem.

First, immediately stop implementation of the 5.4 percent cut to the Medicare fee schedule; and second, adopt MedPAC's recommendations which would eliminate the SGR and replace it with a system that would more appropriately account for the changes in the cost of providing services. It is important that Congress acts this year, as CMS has projected that the formula will produce further significant negative fee schedule updates in the aggregate of 19.6 percent by 2005. Should Congress fail to act, physical therapists and other health care professionals will experience Draconian cuts in reimbursement over the next 4 years. We are concerned that this downward projection will hinder the ability of physical therapists to care for Medicare beneficiaries needing rehabilitative services.

Because the SGR system is flawed, updates under the system do not reflect the cost of providing services. Our recommendation is to eliminate the SGR methodology. Furthermore, the MEI, which accounts only for growth in labor productivity, overstates productivity gains in services and should be revised.

The APTA takes issue with the Administration's assertion that reform of the update formula must happen in a budget-neutral environment. Clearly, additional financial resources are necessary to address this fundamental problem. APTA feels strongly that to correctly remedy this situation, the Committee should seek appropriate resources through the Budget Committee to meet this and other challenges. A short-term fix is nothing more than simply moving the furniture around on the deck of a ship that continues to speed toward an iceberg. The ship must change its course to avoid certain disaster. The impact of the Medicare cuts needs to be viewed in the context of significant legislative and regulatory changes affecting physical therapists.

As you know, the BBA also imposed a $1,500 cap on outpatient therapy services in all settings except for hospitals. In 1999, and again in 2000, due to concerns raced by beneficiaries, Congress placed a moratorium on enforcement of the $1,500 cap. The present moratorium will expire at the end of this year unless Congress acts. If the cap goes back into effect, it will compound the Medicare payment cuts.

In addition to the cap, physical therapists continue to deal with increased documentation requirements, conflicting Medicare rules, nonuniform application of Medicare requirements among its contractors and impending privacy requirements under the Health Insurance Portability and Accountability Act of 1996 or HIPAA. These issues further compound an already alarming problem.

During the past few months, The APTA has heard numerous reports from its Members concerned about the impact of the 2002 cut and future CMS projections. As an illustration, this year, for a typical 45- to 60-minute skilled visit with a physical therapist, Medicare will allow approximately $85.78. Currently my cost to provide this visit is $79.57. Next year for the same visit and using the current formula, Medicare's allowable rate will drop to $80.89. Considering a cost-of-living adjustment to both salaries and expenses, my cost to provide this visit is projected to increase to $81.95 in 2003. Therefore, next year if Congress does not act to change this formula, my practice will lose over a dollar on each physical therapy visit under Medicare. The only choice for survival is to reduce my cost, which will ultimately reduce the quality of services that can be provided to Medicare beneficiaries.

In conclusion, as the older adult population continues to rapidly grow, prompt and coordinated quality health care services will be necessary to avoid hospitalization, decrease the length of institutional stay, reduce the amount of care required after discharge, prevent complications, and improve the individual's level of function. The health of older Americans will be at risk if access to and appropriate payment for health care services does not keep pace with the growing number of Medicare beneficiaries.

Madam Chairwoman, I would like to thank you for submitting this testimony before the Subcommittee.

[The prepared statement of Mr. Levine follows:]

Chairman JOHNSON. I thank you very much for your testimony. It was very interesting.

I wonder if any of the practicing physicians at the table have seen any effect on their practices of payment issues driving access? In other words, have you seen any referrals from people that normally would have provided care but for the payment structures, and are there any ways in which you are seeing any impact on access of the payment system. Dr. Mayer?

Dr. MAYER. Well, you know, I don't spend any time taking care of Medicare patients, since I am a pediatric heart surgeon. But I can tell you that similar sorts of things that are affecting Medicare are also affecting both private insurers who are now using the Medicare fee schedule to a large extent, and also affects Medicaid. I can certainly tell you that there have been patients covered under Medicaid programs and referred to our center who have essentially been told that they can't come to a center like ours and that they have to stay locally. So these are children with complicated forms of congenital heart disease who are basically being told they have to stay closer to home and perhaps be cared for in centers that don't have as much experience as we do. So it is having an effect even in a non-Medicare population.

Chairman JOHNSON. Thank you. Do any of you have any comment or information about  Dr. Ginsburg, I think there was a chart in your testimony that really went to the heart of the matter of the impact of our reimbursement policies on different types of practices. Would you go through that a little bit more?

Dr. GINSBURG. Yes, certainly. There was a chart in my testimony on trends of the proportion of physicians who accept all Medicare patients by specialty. Whereas for all physicians, the percent that are accepting all the new Medicare patients declined from 71.8 percent to 67.5 percent over this 4-year period, the decline was steepest among surgeons, from 81.3 percent to 73.4 percent. In contrast, medical specialists actually slightly increased the proportion that are accepting all new Medicare patients over this period. The differences in these trends probably are related to Medicare payment policy; in going to a common conversion factor, it reduced payments to surgeons, and increased payments to medical specialists.

Chairman JOHNSON. Thank you very much. Dr. Palmisano?

Dr. PALMISANO. Thank you, Madam Chairperson. If I may, I would like to respond to your first question. We have gathered information from around the country in the area where I am of New Orleans. I will give you an example. A group of clinic-based colon and rectal surgeons in New Orleans, Louisiana, first reduced from four to one the number of days each month that they would test and treat elderly women with fecal incontinence. Later they scaled back these services to once every 3 months. Now they have reached the point where they will no longer accept new patients who need these services.

Colon and rectal surgery is a very small specialty. There are only about 1,250 who are board-certified and in active practice nationwide. It makes a difference to a community when one of them ceases to provide a service. There are few others to meet that need.

And we have other examples around the country that we will be glad to submit to you, again, from New Orleans and Pine Bluff, Arkansas, Pensacola, Florida. Physicians report to us they are having a difficult time identifying primary care physicians to provide follow-up care for elderly surgical patients who do not have a regular doctor. They are hearing that these practices simply are not accepting new Medicare patients.

We have other stories that we can put into evidence. Thank you.

Chairman JOHNSON. Thank you. I hope you will  all of you who have any access to contemporary data that reflects the difficulty of access for seniors to care, share that information with us, because anecdotally I am seeing that in a way that I have never seen it, being out there in the real world, and I don't know to what degree it is driven by the Medicare reimbursement problems, both administrative and cuts, and to what degree it is an interactive consequence of the problems in Medicaid.

And if you could begin also to help us identify where these problems are the most acute, we can begin to look at those interactions.

The other thing that we need to know is how are these cuts affecting physicians of different ages? And are we going -- do we see an increase in early retirement amongst physicians because of the complexity of the reimbursement problems and this erratic cut. Dr. Mayer?

Dr. MAYER. I would like to speak, I think, to two points. One is I think it is important to recognize that the access problem is not just a straight numeric one. It also has embedded in it quality. Certainly what we are hearing, and I don't mean to beat this practice expense issue to death, but what is happening is that surgeons are laying off the clinical staff that are part of their teams that are taking care of these cardio patients. I think that is inevitably going to have an impact on quality. So I would expand the access issue, and I would say it is an access to quality care issue, not just fundamental access to get in the door.

Chairman JOHNSON. The other thing I would be interested in hearing is, more and more physicians are actually involved in care management. They are using their nurses. We don't give any reimbursement for that. How do we get physicians into disease management protocols and using them with the reimbursement structure we have, or what reimbursement structure -- what adjustments need to be made to the reimbursement structure so we can help physicians through their practices actually follow patients? Because it is having a very significant impact on the reuse of appointments and reuse use of hospital facilities. And while we had hoped that the Medicare+Choice plans would lead us in this direction more rapidly, clearly if it is going to lead in this direction, it is going to be slowly, so we cannot have a physician reimbursement that is blind to the need for disease management.

Dr. GINSBURG. Yes, I agree very strongly with you, Madam Chair, about the importance of changing our payment system so that it can be supportive rather than discouraging towards physicians engaging in disease management. I believe you are right that we realize that the fee-for-service Medicare program is going to be responsible for the overwhelming majority of beneficiaries for some time.

It was very encouraging that in the past week the CMS announced a large demonstration of  to encourage disease management. We need a lot more initiatives to experiment with this within our fee-for-service system.

In Medicare, we have a fee-for-service system. It has some strengths, but it has limitations as far as ability to control volume. A key weakness is that when the services of professionals other than physicians are very important to disease management, we need to quickly find a way where the system can through payment, if not encourage disease management, at least avoid discouraging it.

Dr. MAYER. We actually have a group in the State of Virginia, all of the cardiothoracic surgeons and all the hospitals that provide cardiac surgical care in the State of Virginia, and they have actually given to CMS a proposal in which all of them would get together, globally contract, and there would be global pricing. So one would include hospital services as well as physician, surgeon, anesthesiologist, cardiologist as well as cardiac surgeon fees all together. The CMS has said they can't do it somehow, which we found particularly disappointing, because one of the things that our sort of an approach allows is an alignment of incentives. It then becomes to everyone's advantage to make the care both more cost effective and efficient.

Chairman JOHNSON. I would like to have copies of that information, if I may. I do think that at this time when we are clearly going to rewrite the way we pay physicians, we can simply ill afford to be blind to the most promising approach to reducing overuse of extensive services and at the same time improving quality of care. So I look forward to working with you on that.

That was my amendment in the last bill on the disease management, and I am pleased to see it going forward. But as is often the case, the real world is far ahead of us, and a demonstration at this point is almost pathetic. We can't afford this opportunity to think about it either.

Let me recognize my colleague, Mr. McCrery.

Mr. MCCRERY. Go ahead, Dr. Palmisano. You had a comment?

Dr. PALMISANO. Thank you, Representative McCrery. I just wanted to make one point. Thank you very much for that courtesy. Two things I also wanted to add on the record. the physician's ethical obligation to do the very best for the patient. Last week my partner, Jim Brown, and I operated on a patient who had a very difficult problem with his thyroid. He had a mass. He previously had hyperthyroidism. The operation took 5 hours using magnification to make sure we didn't cut the nerves of the voice box, to make sure we kept the parathyroid gland so he wouldn't go into tetani at the operation. And we weren't thinking of whether or not we were going to stop the operation after 3 hours because we weren't paid beyond 3 hours or whatever. We are going to do the very best for the patient.

But as my partner tells me repeatedly, and told me again this morning, when I called to check on the practice, he said, just remember you can't make it up on volume if everything else escalates and the fees for your services continue to decrease.

And I think going back to the disease management question, there is the old Louisiana saying about it is hard to remember you came here to drain the swamp when you had so many different alligators, and the different alligators biting at you are the unfunded mandates or the decreasing payment for your services and just the increased burdens of the Emergency Medical Treatment and Active Labor Act, EMTALA, and all of these things I know you are working on and have done a wonderful job to get that out of the House to ease the burden.

There are so many factors here that this really is the perfect storm, to use that analogy, and we are going to act like the weather person and say there will be an access problem if we don't fix these things. Regardless of how we do the long-term fix, right now we have to stop the 5.4-percent cut.

Mr. MCCRERY. One of the other elements of your perfect storm that you mention in your testimony was medical malpractice premiums going up. You know what causes those premiums to go up?

Dr. PALMISANO. Well, yes, sir. I am quite familiar with how premiums go up. In an ideal world, it is based on severity and frequency; frequency of claims and severity. And it is outrageous awards that have no relationship to the damages.

And before you ask me the next question, is that in your State, my State, beloved State of Louisiana, we have one of the best tort reform laws in the Nation. And we think it is equal to California and Indiana and New Mexico. We think ours is really perhaps a little better. The AMA has the California model. So those are increases, and yet we are seeing physicians retiring early in New Orleans even though we have a very effective tort reform compared to West Virginia, Florida, Pennsylvania, and Nevada and all of these places that are in severe distress.

Mr. MCCRERY. We do have a good tort reform or medical malpractice reform in Louisiana and have had for a number of years. Do you think it would be helpful to the Nation's health care system if we had a nationwide medical malpractice reform that would model, or that would go after the model in Louisiana?

Dr. PALMISANO. The AMA's position for many years has been that we need effective tort reform. The particular model that we picked was the model in California, which is the micromodel, and it is a cap of $250,000, periodic payments, collateral source and those types of issues.

So we do definitely believe that it would be good to have that nationwide, at the same time protecting States like Louisiana and Indiana, who might have substantially similar laws but slightly different so as not to upset their jurisprudence that has accumulated over the years. Our act has been upheld by the Louisiana Supreme Court, and the U.S. Supreme Court says there is no Federal question on it.

Mr. MCCRERY. So the AMA supports nationwide medical malpractice?

Dr. PALMISANO. Yes, sir. The AMA supports, and in our December meeting, the AMA said this is a top priority for the Association to get nationwide tort reform and help States if we are not able to get it effectively because that is another access problem, physicians going out of practice.

Mr. MCCRERY. So you would now support having medical malpractice reform passed as a part of the Patients' Bill of Rights?

Dr. PALMISANO. Well, that question comes up all the time but we have said, we will always look. We certainly want to sit down and reason and would love to be at the table on the Patients' Bill of Rights issue and the tort reform issue. AMA's position in the past, we think these are both an effective Patients' Bill of Rights is an important issue. Tort reform is an important issue. And we think that they can stand alone. If you want to put them together in a bill, let us look at it together. But what we don't want to do is have everything get killed based on those two being put together. We would like to get one thing out that is effective and then continue to work on the other than get nothing.

Mr. MCCRERY. Perhaps if you would help us underscore the importance of medical malpractice reform, we could attach it to some vehicle like the Patient's Bill of Rights that is popular in the element that doesn't like medical malpractice reform, and we might get them both done. I would submit that the AMA  ought to--

Dr. PALMISANO. Mr. McCrery, I am sorry. Just repeat that a little bit. I lost one of my hearing aids coming up here and I am having a little trouble with it, I am sorry. 

Mr. MCCRERY. My point is that we may never pass medical malpractice reform if the AMA doesn't stand squarely behind it on any vehicle that we might get through the Congress, and if we could get solid support from the AMA for what to many of us seems to be a commonsense reform for the benefit of our society and for the preservation our private health care system, we could maybe get it done. But if we get mixed signals like don't put it on this vehicle or that vehicle, it is not that important, go ahead and pass this, then it is going to be impossible to pass medical malpractice reform.

Dr. PALMISANO. Sure. And if I might respond to that for the record, the AMA would like to see any language in any bill that would give us nationwide tort reform because it is a top priority of the American Medical Association.

Mr. MCCRERY. Thank you. The only other thing I would add to the list that Mrs. Johnson asked you to provide some evidence for is medical school applications. Is there any evidence that medical school applications are going down because of the best and the brightest changing their minds as to what career path to pursue because of all these problems?

Chairman JOHNSON. Dr. Mayer, did you want to  respond?

Dr. MAYER. Yes. I think there are data now that the number of applicants is going down. The applications are still in excess of the number of positions available. I would only reemphasize when you weren't here to point out, though, that in cardiothoracic surgery we had fewer applicants than we had available positions. It has never happened in our specialty before. It was sort of the creme de la creme who made it through general surgery and then went on to cardiothoracic surgery. For the last 3 or 4 years, we have not filled with American medical school graduates. Those applicant positions are going to overseas folks, and many of them are high-quality people, but I think it is symptomatic of the problem. And this year, even with the non-U.S. medical school graduates, we didn't fill the programs.

So, you know, I think these things are all having an impact, and, you know, as I said in my formal comments, I think once this train goes off the edge of the cliff, it is going to take 10 years to turn it around, because that is how long it takes, post medical school, to mint a new cardiothoracic surgeon.

Chairman JOHNSON. Mr. Levine.

Mr. LEVINE. Madam Chair, if I may just regress for one minute and go back to your comment on disease management and access, I think that is a very significant concern. Physical therapists focus on functional restoration with patients, and prevention is a key to disease management. One of the other things that I hope the Committee will look at is not only the impact of the fee schedule cuts but the other regulatory restrictions that limit Medicare beneficiaries' access to those health care providers that do impact disease management.

In my practice in the State of Maryland, physical therapists have had direct access for physical therapy services since 1979. However, the Medicare beneficiary does not have that ability to seek physical therapists and oftentimes it is the physician who is not familiar with the fact that the physical therapist can be an integral component of the disease management process.

So I would only urge the Committee to look at the other regulatory issues in combination as you look to navigate this.

Chairman JOHNSON. I would just like to add to Mr. McCrery's comments that it is truly bizarre for Congress to consider capping the liability of plans without capping the liability, at least at those same levels, of physicians. So I consider it imperative to have some malpractice reform in the Patient's Bill of Rights in order to simply have a level playing field, and was very disappointed with the lukewarm support we got on that issue. And I recently sat down with insurance companies in my district, physician-owned insurance companies, where the issues of utilization and quality have been rigorously addressed, and they had a 20-percent cost increase last year, they will have a 25-percent cost increase this year. It is not because there are more cases being brought. It is specifically because the awards have gone absolutely through the ceiling. So this is a very big issue, and you can't talk about cost control in Medicare or anywhere else unless you are willing to confront it. Congresswoman Thurman.

Mrs. THURMAN. Thank you, Madam Chairman. Although, Madam Chairman, I would also say that in some of the instances with the insurance and I don't want us to get too caught up in all of this it is also the interest payments that they are receiving on their investments which is also not helping them. And for some of those doctors who are doing their own insurance, and through the reinsurance because of September 11, they are also having an increase in their reinsurance which is also creating  a part of the problem.

Chairman JOHNSON. If the gentlelady will yield, I asked those questions of this particular company. They do not use reinsurance and they are invested in ways that are not affected by Wall Street. So we need to get into this in a way that demonstrates, because here is kind of a creme de la creme plan and it is strictly award size.

Mrs. THURMAN. And I have talked to others that say differently. So I would agree with you that we probably need to sit down and talk about that overall, so that we have a better idea of what is going on here.

I just want to tell you all thank you very much for being here. I am sorry I missed your testimony, and so at this time I don't have any questions, but we certainly appreciate it and hopefully we will be able to help our constituents by making sure they have access to physicians without long waits and without the loss of physicians in areas that are underserved today. So we thank you for being here.

Chairman JOHNSON. Mr. McDermott.

Mr. MCDERMOTT. Thank you, Madam Chair. I am sorry that the Congress is trying to do everything in 2 days a week, so that some of us are running between committees. I was just up listening to Secretary Thompson talk about all of this, and I had to kind of decide whether I would go there or stay here. What he is saying up there isn't going to make you folks very happy, I am sure.

But let me ask you a question, first of all. I think, Dr. Ginsburg, you were here when we put in the RBRVS system?

Dr. GINSBURG. Yes.

Mr. MCDERMOTT. And I had just come to the Congress. That was in 1989, so I wasn't on this Committee yet. And I thought there was a lot of discussion at the time that one of the goals of putting in the RBRVS system was to increase payments to primary care people and to make additional access, to actually increase the volume of things; is that correct?

Dr. GINSBURG. Certainly we felt, and many people felt at that time, that Medicare had an imbalance, that we were paying too little for primary care and really were concerned that this would discourage the use of primary care in the Medicare program -- and encourage too much specialty care. When this fee schedule, RBRVS, was put in, there also were concerns about the total volume and about the trends in total volume of Medicare physician services; although recognizing that this is a fee-for-service payment system, the incentives to the individual physicians are to increase volume, and this is what led to the Volume Performance Standards. This mechanism was attempting to engage the medical profession as a whole in professional attempts to limit volume through better information about effectiveness of care.

Mr. MCDERMOTT. How did that fail? I mean, we have gotten better payments for primary care physicians. And why is it that we can't control volume? I mean, we knew it. There was all this discussion about it. It should be no big surprise to anybody around here that the volume has gone up.

Dr. GINSBURG. I don't know that we should say we failed, because  actually--

Mr. MCDERMOTT. I don't think we did. We hit the goal.

Dr. GINSBURG. Volume trends in the 1990s were far more benign than they were in the 1980s, although I am not sure that it was Medicare policy that was driving this, you know. Throughout the 1990s we had a dramatic change in our system towards managed care. Most people in private insurance went from traditional plans to managed care plans. The managed care plans I suspect did have some effects on volume, and I believe that the effects of managed care on physician behavior, such as from requiring authorizations for admission to a hospital or referral to a specialist, probably spilled over into the fee-for-service Medicare program. When physicians learn how to treat some of their patients differently, it is going to spill over to how they treat other patients.

So it is really hard to say whether the mechanism to control volume succeeded or failed, but the 1990s were a period of low cost trends both for privately insured patients and for Medicare patients; but you know, I wouldn't -- attribute it to the policy that the Congress passed in 1989.

Mr. MCDERMOTT. Now, I know you can't make recommendations, but I would like to ask you an option. We are not going to pass a bill for $126 billion, like MedPAC suggests, but how about letting the Secretary make a volume adjustment each year in the fee update, maybe 1 or 2 percent, and just give them a little flexibility? How would you feel about that as a public policy?

Dr. GINSBURG. Yes. Drawing on the research, my biggest concern is with a formula that locks us into a very large decrease in rates over time. So to the degree to which people would make better judgments making annual decisions as opposed to having a lockstep formula, I would say that would be a positive. Policymakers would be in a better position to respond to the various data on physicians' costs and access to care for Medicare beneficiaries.

Mr. MCDERMOTT. I have one final question for the panel and I am sorry I also didn't hear all the testimony. We decided we are going to save a lot of money by turning the U.S. Department of Justice (DOJ) loose on medical providers, and I would like to know how many places you know about, or if you can provide a list to me after the hearing or whatever of those places where the DOJ has gone in on criminal charges on doctors and hospitals for their forums.

Where is that happening? I happen to know it is going on in Seattle, and I don't know where else it is going on, but what I know about it there; makes me really concerned about what you are doing to the health care and the practice of medicine. So I would like to know where else; so I have got to figure out which of my colleagues is having this same thing that is going on in Seattle.

Does anybody know the answer to that or have a list?

Dr. MAYER. Well, I think the University of Pennsylvania certainly was affected. The University of Pennsylvania hospitals took a significant financial hit based on a Department of Justice investigation. I know in Boston there was the threat of a Department of Justice inquiry at the Beth Israel Medical Center.

Mr. MCDERMOTT. How did they abort it?

Dr. MAYER. I am not sure that I know the answer to that. But it may be that the Beth Israel is sort of teetering financially, and maybe they didn't want to to be honest with you, I just don't know, but I do know  that this threat existed.

Mr. MCDERMOTT. Were those both criminal? Pennsylvania was criminal and Beth Israel was criminal?

Dr. MAYER. I don't know the answer to whether it was criminal or civil. I know that the University of Pennsylvania had to pay $30 million and, you know, the method they used is actually quite interesting. You know, they will take 200 charts and find some percentage rate of failure to comply or something, and then they will extrapolate it to the entire volume at that institution and then come up with a number times 3, because it is treble damages sort of thing, and it can add up to a lot of money in a big hurry. And I think that is exactly what is going on in Seattle, too, at least from what I read on my e-mail.

Mr. MCDERMOTT. Is there anybody else that has any information about this? My colleague say the University of Florida has been going through is there anybody else?

Chairman JOHNSON. If the gentleman would yield, this is a very big issue. We have worked on this a little bit in the regulatory reform bill to deal with some of the extrapolation problems. But one of the big problems in the Pennsylvania situation was that originally the Inspector General was completely ignoring HCFA's own directives to that institution about how to pay, and they were ignoring the portion of the law that allowed indirect supervision of residents, and a number of us got into that and suspended that whole process for a number of months, but when the Secretary allowed it to go ahead, there was not clarity on those issues.

Since that time we have had some better compliance by the Inspector General's Office, with the fundamental principle of recognizing the law and the directives that these organizations must comply with under other provisions of the law, because too often the Inspector General was not acknowledging the orders from HCFA themselves but was interpreting the law according to their own judgment and leaving the providers in a terrible bind. So we do have work to do on that issue, and I appreciate the gentleman from Washington bringing up, as he always does, very difficult but extremely important issues.

Mr. MCDERMOTT. Madam Chair, just for a second, I would hope that we could have a hearing on this issue so that we could understand what actually is going on because what I know about the Seattle situation is that they are crushing either the number one or number two neurosurgery program in the United States by this criminal investigation, and I think there is a real question about whether or not what is happening there is what we intended. And it has happened to me first, but I think other people are going to get the same treatment .

Chairman JOHNSON. I will be very happy to explore this with you, because I thought after the Pennsylvania thing that we had brought some greater rationality to the process. But we have seen in many parts of the Medicare system a total lack of respect for the law and justice, in my estimation, and we will, Mr. McDermott, look into this and see if we can put it into our schedule.

We do have a very tight schedule on some portions of our work, but there will be lots of opportunity to fold in things learned, perhaps even after floor action, so we will look into this.

Thank you very much. I thank the panel for their input, and I thank the Members for their attendance. The hearing is adjourned.

[Whereupon, at 11:46 a.m., the hearing was adjourned.]
[Submissions for the record follow:]

American Academy of Family Physicians, statement