C O N T E N T S

Advisory of June 5, 2001, announcing the hearing

WITNESSES

Medicare Payment Advisory Commission, Glenn M. Hackbarth, Chairman

American Association of Homes and Services for the Aging, statement

Federation of American Hospitals, statement

Nussle, Hon. Jim, a Representative in Congress from the State of Iowa, statement

Volcano Press, Ruth Gottstein, letter and attachments

RURAL HEALTH CARE IN MEDICARE

Tuesday, June 12, 2001

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

The Subcommittee met, pursuant to notice, at 10:10 a.m., in room 1100 Longworth House Office Building, Hon. Nancy L. Johnson (Chairwoman of the Subcommittee) presiding.

[The advisory announcing the hearing follows:]

Chairwoman JOHNSON. Good morning, everyone.

Today will be our first Subcommittee hearing this session on rural health care. In earlier hearings, we looked for new ideas on Medicare reform. We asked hospitals and physicians and other providers how to reduce the regulatory burden. We examined the adequacy and usefulness of the current definition of Medicare solvency. We laid the groundwork for a prescription drug benefit and examined ideas to modernize the fee-for-service program's beneficiary cost-sharing.

As I read through today's testimony, it is clear that the earlier hearings were also about the issues that are critical to rural seniors. For example, in our hearing on cost sharing, we reported that the design of Medicare beneficiary cost sharing in the fee-for-service program reflects outdated 1965 insurance practices. As such, more than 35 years later, beneficiaries are confronted with irrational and confusing cost sharing which does not reflect the current delivery of health care. Today, we will hear that as a result of this rural beneficiaries spend less but have higher cost sharing.

Similarly, at our prescription drug hearing, we found that many of the current supplemental prescription drug plans, such as Medigap, are expensive and generally inadequate. We also found that those without coverage have the least bargaining power and are therefore often paying the highest prescription drug prices. At the hearing today, we will hear that too many of those individuals with the least protection live in rural America.

Finally, we learned that health care providers spend a great deal of their time and energy on complying with Medicare rules. This Subcommittee will continue to work on easing these requirements so that these providers can once again focus on what is important to rural and urban beneficiaries alike, and that is patient care.

To protect rural beneficiaries, we have acted to solidify access to services in isolated areas. In the Balanced Budget Act of 1997, Congress created a new class of providers, critical access hospitals, to ensure that emergency services are protected in the most isolated rural areas while retaining a limited capacity for in-patient care. Recently, we have made the qualifications for critical access hospital designation more flexible. And last year this Subcommittee acted in the Beneficiary Improvement and Protection Act to strengthen access to ambulance services and cover the costs of retaining physicians to provide on-call emergency services in the remote communities served by critical access providers.

There is also a need to make sure that rural seniors have access to hospital services when needed. In the Balanced Budget Refinement Act and the Beneficiary Improvement and Protection Act, we increased Medicare payments for rural hospitals. Sole community hospitals will be able to be paid on their more recent information on cost, the first significant change in the program since 1989.

Most important, by equalizing the eligibility for Medicare disproportionate share payments between urban and rural hospitals, we were able to pump more than a billion dollars over 5 years into rural hospitals, which were legally being discriminated against under the law. Yet the payment formulas still-for Disproportionate Share Hospital (DSH) payments still are not fully equalized, and more needs to be done.

Additionally, rural hospitals are often dependent on outpatient skilled nursing and home health revenues. We added significant protections and additions to these services so that these services will continue to be available for seniors and rural hospitals are better shielded from any negative impact of the outpatient prospective payment system (PPS) until we can determine how they are affected by the PPS.

Skilled nursing units in rural hospitals benefit from the add-on payments to the resource utilization groups and from the 17 percent increase for the nursing component of the rate. The 15 percent reduction in home health services has also been delayed. These changes equally aided free-standing home health agencies and skilled nursing facilities in rural areas.

Finally, Congress made significant progress in eliminating the payment disparities in Medicare+Choice by enacting two payment floors, $475 for rural counties and $525 for counties with populations greater than 250,000.

Our goal is to ensure that Medicare beneficiaries get the care they need. The dust has far from settled from the positive changes we have made. In fact, most of these policies are only beginning to go into effect, starting into effect in April, and the impact of most are yet to be realized.

While we can count the dollars, it is too early to measure the differences we have made for rural providers. And while we have done much, I am still extremely concerned about the future of small providers in general and small rural providers in particular. In a joint letter to the Health Care Financing Administration, Mr.  Stark and I have recommended a number of changes that should reduce the regulatory burden and put in place the technical assistance that small providers need to assure smooth cash flow in an extremely complicated billing system.

Then, of course, there is the senior citizen needing care. As long as it will take us to evaluate the effects of the changes that we have made in the last year and the year before that to law and regulatory law, it is going to be even more difficult to evaluate its impact on rural beneficiaries, the senior citizens who live in rural areas. I am concerned that seniors in these areas will still find cost barriers and receive less preventive care for flu shots, pap smears, screening mammographies and so on. Clearly, we must act to modernize Medicare so that the inequities faced by rural beneficiaries do not continue.

Today, we begin our examination of how rural beneficiaries as well as providers are surviving in the current distorted and complex Medicare program. I am happy to host the first hearing in which our new chairman of MedPAC, the Medicare Payment Advisory Commission, will testify, Mr.  Hackbarth; and I thank you for accepting this important job and being with us today. We are eager to hear what MedPAC's recommendations are to strengthen rural health care.

I would also like to at the same time note for the record my thanks to Gail Wilensky for her long and distinguished service to MedPAC and in the many ways in which she has served both the House and Senate over many years. I am sure that we will not lose access to her experience and balanced analysis of problems, but I do here now recognize her extraordinary service to MedPAC.

Thank you, Mr. Hackbarth; and before I recognize you, I will recognize my colleague, Mr.  Stark.

[The opening statement of Chairwoman Johnson follows:]

Mr. STARK. Thank you, Madam Chair; and thank you for today's hearing.

Addressing the concerns of rural communities is an important part of the Medicare system, and I think MedPAC's recent very good analysis of rural issues makes a contribution to understanding the Medicare payment system. Unfortunately, most of the legislation that we have passed for rural health care has been highly political and rarely evidenced-based. I look forward to hearing the findings and recommendations in the new MedPAC report.

A brief review of the report confirms what I have always thought to be the case, and MedPAC has reported this in the past, that there is no systemic access problem in rural areas. In fact, the report released today shows that there is no real difference in access to Medicare services between urban and rural populations.

We do, however, continue to hear anecdotal evidence of rural area providers holding on by the skin of their teeth; and to the extent there are access problems, in particular rural areas, we will need to refine the payment system to target these areas. But, it is very expensive to do across-the-board increases that boost all rural providers or all providers in general, if we are just trying to deal with a very small percentage of the smallest providers.

The results of this MedPAC report also reinforce the reality that some areas are unlikely to ever be able to sustain managed care. I hope that Mr. Hackbarth will provide this information to the Health Care Finance Administration (HCFA) so that HCFA can take a careful look at this report when they develop their plans to increase the Medicare+Choice enrollment to 30 percent. I have trouble understanding why we would want to pour more money into managed care in rural areas, when there is little evidence that Medicare+Choice can even be sustained there.

According to the report, in more than 300 rural counties, the 2001 floor payment rate exceeds the fee for service spending for the average beneficiary by 130 bucks a month or about 40 percent. There are simply not enough beneficiaries to spread risk and not enough providers to build up a sufficient network for these plans to realize profits in isolated rural areas.

The plight of rural providers is not solely a function of Medicare and Medicaid payments. There are market forces that disproportionately affect rural areas, and rural areas must work harder to recruit and retain providers. Medicare payments are only a small piece of the puzzle in creating an efficient health infrastructure, and I hope the speakers on the second panel will help us better understand the problems of rural communities and how Federal programs can be refined and coordinated with local programs to help those communities in need.

I think that we should address, for example, the Medicare payment reforms as part of an overall strategy rather than in isolated area changes. MedPAC, I think, has advocated that Medicare payment policies be site neutral so that decisions on where a service is provided could be based on clinical factors rather than payment, and I hope the recommendations in this report further that policy approach.

At some point, there is a major concern. I don't know whether it is at 10 beds or 20 beds, but it must be a matter of medical practice to suggest that at some small minimum--it just isn't practical or efficient to try and maintain acute care service. It is probably a lot cheaper to have a helicopter pilot and a heliport to replace that kind of a facility.

And I think, politically, that is a terrible problem for us. Nobody on their watch wants to see the hospital in their hometown closed, particularly when it is named after your most substantial contributor to your campaign. It just is a very difficult thing. We have known that for years, and I hope that we can work together to find some way to build a statue to the contributors, convert the hospital to a useful purpose and perhaps make our whole system more efficient. I look forward to the witnesses' testimony to help us on that course. Thank you.

[The opening statement of Mr. Stark follows:]

Chairwoman JOHNSON. I also want to welcome Jim Nussle especially to our Subcommittee hearing. He has long been very active in rural coalition and, of course, is the chairman of the budget committee; and we appreciate his being here.

Chairwoman JOHNSON. Mr. Hackbarth, would you like to proceed?

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

Mr. HACKBARTH. Chairwoman Johnson, Mr.  Stark, members of the Subcommittee, thanks for the opportunity to discuss the Medicare Payment Advisory Commission recommendations.

Our starting point in evaluating rural health care for Medicare beneficiaries was to look at the most important objective, which is to assure access to quality care. We did that by reviewing a number of different measures, including beneficiary satisfaction, performance on certain clinical quality indicators in use of services. Overall, we have found that the services used in volume and quality are very similar to those used by urban Medicare beneficiaries. There are some important exceptions to that that I would be glad to go into later on, but, overall, the numbers are quite comparable.

Preserving access to quality care for the long run requires that we pay attention to the delivery system, including its financial needs. Here there is some reason for concern. As you well know, a substantial gap has opened between the financial performance of rural hospitals under the Medicare program and the financial performance of urban hospitals. That is a relatively new development. It has happened over the last 10 years, but now the gap is quite substantial. On average, rural hospitals are losing money on their overall Medicare business, inpatient and outpatient.

As the chairman alluded to, Congress has already taken some steps to improve the financial performance of rural providers. For example, in the case of hospitals, a number of special payment categories have been adopted--rural referral centers, sole community hospitals, Medicare dependent hospitals and critical access hospitals.

We do see some indications that these special categories may be having a desired effect. For example, totally rural hospitals, that is, hospitals far-removed from urban areas, have higher Medicare margins on average than any other category of rural hospitals at this point; and, also, fewer of them have negative margins.

In addition, the critical access program, which is relatively new, appears to be restoring access to some communities that had lost it. In other words, hospitals had closed and now have reopened under the critical access program.

We do have some concerns about the targeting of these special payment categories. In some cases, we think that the money is spread too broadly, benefiting hospitals that don't need the special assistance. Despite those concerns about targeting, though, we would continue the special payment categories until more targeted adjustments in the rates are developed and implemented and evaluated.

As has been true in the past, the standard that MedPAC uses in evaluating payment systems is to try to get Medicare payments to match the cost of efficient providers. We believe that Medicare can and should do a better job of targeting than it has in the past in the case of rural hospitals. We believe there are four factors that can contribute significantly to the poorer financial performance of rural hospitals. They are small size, a longer average length of stay, inaccuracies in the wage index, and unequal access to disproportionate share payments.

In developing the report to Congress, we examined 20 different options for dealing with these four issues. In this report, we make a number of recommendations that will address them in the short run. We also reiterate our support for some measures that cannot be implemented immediately but are crucial to the well-being of rural providers. For example, fixing the occupational mix in the wage index and equalizing access to disproportionate share payments.

Finally, we continue to study some other possible steps that could address the needs of rural providers, including an expanded transfer policy.

Our recommendations as we see it are not designed as aid to rural hospitals in particular. Rather, they are designed to improve the payment system and better match Medicare payments to the cost of efficient providers, for urban and rural hospitals alike.

As for the new prospective payment systems, those for outpatient services, home health services and skilled nursing services, there are a great many unanswered questions. As discussed in an earlier MedPAC report, this SNF, skilled nursing facility system, has troubling flaws for urban and rural providers alike.

We believe that the new outpatient and home health systems can be made to work effectively for rural providers, but it may take some refinement. There are some meaningful differences between the situation of rural providers and urban providers in these areas. Unfortunately, right now we simply don't have the data to either evaluate the impact or develop new refinements.

Fortunately, Congress included provisions in legislation that we think will buy us some time to do a proper evaluation. The outpatient system, as you know, includes a hold-harmless provision; and the home health system includes a special 10 percent add-on for rural providers.

Moving on now to the Medicare+Choice program, we believe that there are fundamental differences between urban and rural markets that make it unlikely that Medicare+Choice will work as well in rural areas as in urban areas. Moreover, we see some risk in the current efforts to try to make the Medicare+Choice program work in rural areas.

One final point on rural health. Rural America is really very, very diverse. Generalizations are, therefore, risky. In order to have a reasonable discussion, we talk a lot about averages in the report, recognizing that there are always exceptions to those averages. So if we make a statement about an average or a typical hospital that may not match exactly what happens in your district, please bear with us.

Finally, before closing, I would like to mention a non-rural issue. We are required by statute to review HCFA's estimate of the update to physician payments for 2002. We have reviewed HCFA's estimate and found it reasonable based on the information currently available. We do note, however, that the actual update could prove to be substantially different and possibly lower than the current estimate of a negative 1/10th of 1 percent change; and that difference could be significant. It depends on what happens with the growth in the economy and expenditures in the past year under the Medicare program for physician services.

As you know, those are both factors in determining the Sustainable Growth Rate (SGR) cap. MedPAC has recommended eliminating the SGR system in the past out of concern that it could lead to a gap between the increase in cost that physicians experience and the payments they receive from Medicare. If that gap becomes large enough, it could threaten access to care.

In addition, since the system applies only to physician payments and not to outpatient department services, for example, there could become an incentive to switch services from physician offices to outpatient departments solely for payment reasons, which we think would be highly undesirable.

So that is my brief summary, and I would be happy to answer questions.

[The prepared statement of Mr. Hackbarth follows:]

Chairwoman JOHNSON. Thank you very much, Mr. Hackbarth.

I thought your testimony was very useful in the way it went through kind of the unique aspects of reimbursing rural hospitals and the way common factors don't play out as clearly or as accurately for small hospitals that tend to have lower usage.

You comment that patient volume, particularly in small and isolated communities, is largely beyond hospitals' control and may cause their per-unit costs to be higher than average. The current PPS rates do not account directly for the relationship between cost and volume, potentially putting smaller providers at a financial disadvantage relative to other facilities. I think that is a very significant problem. I don't know how we deal with it, but it is an equally significant problem at the other end.

When you visit some of the big medical centers in the urban areas where they are running at a hundred percent of capacity and sometimes over a hundred percent and their hospitals are under this constant pressure of full usage and their staff are under that strain and their rest rooms and everything, we don't account well for that either. In fact, I am wondering if you are giving any thought at MedPAC to the fact that the PPS system worked very well when we brought the system of the 1970s into the 1980s and 1990s but may not be working so well right now. In other words, it works well when there is fat in the system and there is flexibility. Now that we have pressed down on length of stay and that can't change much and costs stay about the same, I am finding that this concept of average payment is not as valid a concept as it was when we first adopted it in the 1980s.

I agree that it seems to work very directly against rural hospitals, because you allocate the overhead over fewer patients. So it works equally badly against the really hundred-percent capacity hospitals, too.

I would like you to comment on that, but also I would like you to take just a few minutes and go into a little further explanation of how the factors vary, that rural hospitals almost inevitably have a longer length of stay because of the dearth of other facilities and so on with the input prices. I thought that was very interesting, and I think you need to be on the record a little bit more specific about how the very formula that we rely on doesn't work when you apply it to the rural institutions.

Mr. HACKBARTH. Okay.

Chairwoman JOHNSON. Thank you.

Mr. HACKBARTH. Well, let me begin with the low volume issue. One of our recommendations is that we add a low volume adjustment to the prospective payment system, and it would apply to hospitals with fewer than 500 total discharges. We arrived at that figure by looking at the data and looking at the relationship between average cost per case and volume and found that, below the 500 level, there were significant increases in the cost per case.

We think that volume is an issue that can be outside the control of a provider. I say "can be" because you wouldn't want to make payment adjustments for multiple low volume hospitals that are in close geographic proximity to one another. So, our proposal is to make an adjustment for hospitals that are further than some reasonable distance from other providers.

Chairwoman JOHNSON. I do think the distance consideration is very important. Otherwise, we will be funding lots of little hospitals--

Mr. HACKBARTH. Exactly.

Chairwoman JOHNSON. In every little town.

Mr. HACKBARTH. So, in our report, we did not choose a particular mileage figure. We have recommended that the Secretary look at that. The analysis that we did was based on the 15-mile distance. There obviously is no right answer to the exact distance, but that was how we did the analysis.

Chairwoman JOHNSON. But when you say 10 percent of the hospitals, fewer than 500 discharges, that 10 percent was derived from hospitals that are--were less than 15 miles apart?

Mr. HACKBARTH. About 11 percent of the hospitals have fewer than 500 discharges. The number that are more than 15 miles apart will be somewhat lower than that. I don't know that number off the top of my head. Because we are talking about very small hospitals, the overall financial affect of this adjustment to Medicare as a whole is quite small, but for the individual hospital, it could be quite important.

Chairwoman JOHNSON. And how much do we know about those hospitals in the sense that do they provide sort of a community clinic capability? Many of the small hospitals in my part of the country have done that. Where there are emergency rooms, they provide emergency care. But they also provide just sort of--like a general practice office.

Mr. HACKBARTH. Well, there is a fair amount of variability in terms of the services they provide. Obviously, a concern is that a very small hospital like that not try to provide services that are beyond the scope of what can be done well in a small institution.

Chairwoman JOHNSON. How much of the reimbursement problem that we are seeing in rural America results from the fact that rural providers experienced only a 25 percent drop in length of stay, whereas on average in the Medicare system there was a 33 percent drop since 1989? Certainly if you had a very much lower drop of length of stay, you would have higher costs for the same PPS.

Mr. HACKBARTH. Yes. In 1992, the average Medicare margins of rural hospitals were just about the same as urban hospitals. So the gap that exists today has opened up over the last 10 years. A principal factor in the development of that gap is the fact that rural hospitals have not been able to reduce the average length of stay by the same amount as urban hospitals, and their cost per case increases have therefore been larger. We think that one factor of that is a lack of alternatives for post acute care and for sophisticated ambulatory care. And, therefore, since those factors are beyond the control of the individual rural hospital, we think that those are factors that ought to be taken into account.

Chairwoman JOHNSON. Have you done any looking to see whether or not we could provide step-down beds, allow step-down beds in those rural facilities so we could reimburse them less, the patients would cost us less and the institution would be reimbursed more fairly in their acute bed section?

Mr. HACKBARTH. We did not look at step-down beds as a particular option, at least not since I have been on the Commission. That is something that we could take a look at.

Chairwoman JOHNSON. Well, I just--I am going to move on, because I don't--there are plenty of questions that could be asked, but we have a lot of members here really interested in rural health.

I would just say that I know there are a lot of barriers in looking at step-down beds. On the other hand, the whole world is looking at continuity of care and those issues much differently. So, that is one thing that I think we do need to look at with MedPAC. In some areas they have done it by integrating home health agencies in nursing homes with hospitals. But in rural areas we should be looking I think more seriously at what these relationships are and what they could provide us with. Mr. Stark?

Mr. STARK. Thank you, Mr. Hackbarth, and congratulations.

Mr. HACKBARTH. Thank you.

Mr. STARK. I hope you find this an exciting, challenging job.

Firstly, on this question of extra days, my guess would be that an extra day, if it is a 3-day Diagnosis Related Group (DRG), would have a lower marginal cost than the first couple of days. Is that a reasonable assumption?

Mr. HACKBARTH. Typically, the services provided on the later days are somewhat less expensive than the early days.

Mr. STARK. And, secondly, most of these hospitals have swing beds?

Mr. HACKBARTH. Yes.

Mr. STARK. So, they could move the beneficiaries within the hospital to a swing bed and get a second cut at the apple, couldn't they? I mean, they not only get the full DRG, but then they could hop over and get some money for transferring the patient into a swing bed. It would be in the hospital's interest to keep them and move them into swing bed status. It seems to me there is almost an incentive for the hospitals to keep them there, because they make a little extra money, but maybe I misread that.

Mr. HACKBARTH. Well, there is an opportunity to move patients from inpatient into swing beds.

Mr. STARK. And get a second fee, which you wouldn't get if you just kept them in the extra day of the DRG.

Mr. HACKBARTH. That is correct. They have an incentive in the same sense that any provider has an incentive to use the facilities.

Mr. STARK. And in a 10-bed hospital, that isn't a very big move. I mean, that is from one end of the hall to the other?

Mr. HACKBARTH. Right.

Mr. STARK. A couple of things in your report. You recommend that the Secretary identify strategies to increase the enrollment of rural beneficiaries for Qualified Medicare Beneficiaries (QMB) and Specified Low-Income Medicare Beneficiary (SLMB) cost sharing.

Mr. HACKBARTH. Right.

Mr. STARK. Would you have any objection or would you think it is a good idea for us to do that for all low-income beneficiaries everwhere? Would that be a fair request to ask about suggesting that?

Mr. HACKBARTH. Well, we certainly think that all beneficiaries ought to have access to what they are entitled to under the law.

We focused on rural beneficiaries here for a couple reasons. One, we found that an important issue in rural beneficiaries is the cost of care. I say that at the outset that rural beneficiaries were generally as satisfied with their care as urban beneficiaries. One of the exceptions to that is around the cost of care.

Mr. STARK. What about--

Mr. HACKBARTH. Oh, I am sorry--

Mr. STARK. What about having the providers quality people, particularly in rural communities where they may be farther away from the welfare office to provide information on QMB and SLMB, than they are from the hospital. Would you see anything wrong with letting the providers have a qualification programs?

Mr. HACKBARTH. Mr.  Stark, that is really beyond my personal knowledge and expertise.

Mr. STARK. One other problem that I see coming up here, just recently the Secretary announced that HCFA would discontinue collecting encounter data from the Medicare+Choice plans. And I wonder about your thoughts on that. My thought is that MedPac has always supported risk adjustment, and I presume MedPAC still does. It would seem to me that you need to have that encounter data to begin to get at any kind of basis for risk adjustment. Would you feel that it would be in the best interest of HCFA to continue collecting that encounter data, or do we have something that we can substitute for it?

Mr. HACKBARTH. Well, we believe that risk adjustment is critically important for the Medicare+Choice program, and the tool that has been under development for several years depends on that data. I have not had a chance to talk to Mr.  Scully about what alternatives he sees, so I am not sure what his thinking is about.

Mr. STARK. Would you have any source for data? I mean, wouldn't that hurt your studies if you didn't have this encounter data?

Mr. HACKBARTH. It is those data that allow us to evaluate what is going on. You may have an alternative I am not privy to at this point.

Mr. STARK. I wanted to commend you. I know of nobody else in this town, except myself, who is diplomatic and gentle enough suggest that the fee-for-service Medicare+Choice plans are like stealing money from Medicare. That is the kind of phrase I like. And how are you going to know if they are stealing money if you don't have the encounter data? So, thank you, and we will help you get the data.

Mr. HACKBARTH. Okay. Could I just address that for a second?

Chairwoman JOHNSON. If you could address that, Mr. Hackbarth.

Mr. HACKBARTH. I have real concerns about the use of floors in the Medicare+Choice program. The Medicare Payment Advisory Commission as a whole has concerns about that. And what I said in the comment that you referred to, Mr.  Stark, is that by creating these floors--I fear we have given a license for people to steal from the Medicare program. The problem is not with the insurers that are moving in, but I think with the policy--the underlying policy.

For reasons that have to do with the nature of rural health care, I don't think managed care is going to work very well in rural America for Medicare. It hasn't on the private side. There isn't a lot of private managed care in rural America. And by artificially increasing the payment rates by the underlying fee-for-service costs, we create a substantial gap that could be used for higher profit, higher administrative costs, higher payment for providers, and I think it could be a very expensive way to try to get added benefits to rural beneficiaries. And that is my concern about it. Thank you.

Mr. STARK. Thank you.

Chairwoman JOHNSON. Just on the issue of the data, would you care to comment on MedPAC's position on aggregate data versus encounter data?

Mr. HACKBARTH. For Medicare+Choice?

Chairwoman JOHNSON. Well, for risk adjusting.

Mr. HACKBARTH. Yes. For risk adjusting, we have not looked extensively at a proposal for use of aggregate data. Our analysis has been based on and favored the use of beneficiary-specific data. I don't want to rule out that Mr.  Scully has a better idea until I learn more about it, but all of our focus has been on beneficiary-specific adjustment.

Chairwoman JOHNSON. We will be looking at that, because there are areas--there is some seasoned experience with aggregate data. Mr.  Camp?

Mr. CAMP. Thank you, Madam Chairman. I have a couple of questions.

I think most of the hospitals in my district are over 10 beds but probably under a hundred and so would fit into a category of hospital that I think is essential in a rural area, and I have a question particularly about the financial performance. You mentioned the gap in your report, rural hospitals having about a 3.4 percent Medicare in-patient margin compared with 13.4 percent for urban hospitals; and you testified today that that gap has opened up over the last 10 years, I believe. And one of the causes being length of stay. But my question is, do you think that rural hospitals then are being paid too little and that urban hospital margins are too high?

Mr. HACKBARTH. Well, the focus of this report has been on the adequacy of payment to rural hospitals, and we see areas where we don't think the payments are adequate. Specifically, we haven't adjusted for factors that are beyond the control of rural hospitals. So, yes, we think that that needs to be changed and would result, on average, in increased payments.

Mr. CAMP. Do you think the fact that rural hospitals are losing money overall in the Medicare system, and given your background at HCFA over the last few years, what do you think the intent of Congress was in creating the prospective payment system in relation to that problem?

Mr. HACKBARTH. Well, certainly the intent was not for any large category of hospitals to lose money continuously. That is a sign that we haven't properly matched payments to efficient costs. So that needs to be addressed.

When the PPS system was developed in the early 1980s, there was not a specific target rate of profitability that was set as a guide. That has always been a much looser discussion. There is not a specific number.

Mr. CAMP. On the disproportionate share payment issue, you know, it was created by Medicare to--by care of some uncompensated areas and the financial pressure that results from that. In your testimony you mention there is a couple of problems, one being that the specific hospital groups' ratings really gives the least favorable rate to rural hospitals.

Mr. HACKBARTH. Right.

Mr. CAMP. And how do you think--with fewer than a hundred beds. How do you think that could be improved?

Mr. HACKBARTH. Well, disproportionate share we believe should be equally available to urban and rural hospitals alike. It was initially developed with an eye towards inner city hospitals with a high share of low-income patients and often relatively low shares of Medicare patients. Now the rationale has been expanded, and we advocate taking into account all types of uncompensated care and expanding the eligibility equally to hospitals.

In order to do that completely, we need to get some additional data, which is now being collected on uncompensated care burdens, and the information to make a uniform adjustment and recalculate the formula will be available in about 2 years. So what we have advocated as an interim step is to lift the cap that was imposed last year from 5.25 percent up to 10 percent, and that would substantially help many rural hospitals. We do not advocate removing the cap at this point, because using the old formula that was developed for urban hospitals, it would result in windfall payments for many rural hospitals. And rather than have a windfall that then has to be taken back when we have the right formula, we want to take an interim step and then implement the new formula.

Mr. CAMP. Okay. Thank you very much. Thank you, Madam Chairman.

Chairwoman JOHNSON. Thank you. Congresswoman Thurman.

Mrs. THURMAN. Thank you, Madam Chairman.

I want to go into a little bit of the disproportionate share, too, because that seems to be a real issue for some of our rural hospitals, and I think that something that--I would like to know if we have looked at any of this data. Since the welfare reform took place and as people got into the system and started coming off of the system, have you seen any increases, particularly in the rural areas where unemployment is higher, less opportunity for jobs, probably, you know, sort of issues going on there? Has that taken place when you look at the disproportionate share and why maybe some of this has gone up in these areas and why rural hospitals are concerned with it?

Mr. HACKBARTH. Well, certainly the overall economic conditions in rural communities are a factor in the financial problems facing rural hospitals. The nature of the problems vary a little bit as you move across the country, but there clearly are areas where there is just general economic distress that has an adverse impact.

As to its effect specifically on the disproportionate share adjustment, I don't have any specific numbers to share with you there. But to the extent that there are more people without insurance and more uncompensated care, it would mean higher disproportionate share payments once we go to a new formula that is now under development.

Mrs. THURMAN. With that--I mean, in your recommendations you talked about there should be a 10 percent add-on for disproportionate share, if I read and understood that correctly. How did you get to that? What kind of data and what kind of analysis was done, or is it just kind of this is what we ought to do? I mean, why would we not put the same system in rural areas as we have in urban areas?

Mr. HACKBARTH. Right now the problem is that we don't have the data necessary to revamp the whole disproportionate share system. We strongly advocate that. The data to allow a revamping of the system are now being collected, and we hope that the new system can be in place in a couple years.

Mrs. THURMAN. But based on that recommendation, then, it is just kind of arbitrary 10 percent--

Mr. HACKBARTH. Yes. Elevating the cap from 5 and a quarter to 10 percent, there is no magic about 10 percent, but we wanted to take a meaningful step in the right direction without getting in a situation where we would have payments that have to be taken back when we have the new formula in place.

Mrs. THURMAN. Okay. And then the standardized payment issue, because that is another issue that has been brought up with our rural hospitals about the base payment, at those over one million population would receive about 1.3 percent. Why wouldn't we equalize that for everybody?

Mr. HACKBARTH. When we analyzed that--again, what we try to do is compare payment rates to costs, and in fact the costs of rural providers on average are lower than urban providers. So increasing the payments by 1.6 percent across the board would not be a very targeted solution. It would go to hospitals that need it and don't need it alike. Our preference is always to identify particular problems with the payment system and address those through targeted adjustments, like low volume, for example.

Mrs. THURMAN. We are going to hear some testimony from rural hospitals in a little while, and one of my concerns in all of this and one of the things that they point out is that, you know, we keep talking about making these changes and these things are going to happen and this is what we did in BBA and this is what we did in 1999 and this is what we did in 2000, but the fact of the matter is money of this has been put in place, and so we have got some real lag time here. At the same time, as you have mentioned, we have got the disparity between the urban and rurals now. I mean, what comfort can you give to some of our rural institutions that these things absolutely are going to happen? Because they live from day-to-day thinking this is going to happen, and this is going to be put into place, and it is a real concern for them.

Mr. HACKBARTH. Yeah. Well, we share your sense of urgency about this. It is not enough to talk about possible solutions or future solutions. They need to come quickly.

Some things have happened. For example, last year making rural hospitals eligible for disproportionate share payments even with the cap is a major step in the right direction. It will increase payments on average to rural hospitals by about 1.4 percent. That is meaningful money.

The steps that we advocate in this report, the low volume adjustment, lifting the cap on disproportionate share and so on, would on average increase payments to rural hospitals about 1.8 percent on top of last year's.

Mrs. THURMAN. Because they have a larger indigent population?

Mr. HACKBARTH. Right, in terms of--not necessarily a larger but certainly they do have an indigent population that needs to be recognized. Then changes that are now under development having to do with disproportionate share still again and with the wage index would still further improve payments to rural hospitals and tend to increase their average margins. We absolutely share your sense of urgency and urge the Secretary to work as quickly as possible on these issues.

Mrs. THURMAN. Madam Chairman, will we have another round?

Chairwoman JOHNSON. Probably not with Mr. Hackbarth, because we need to get to the next panel.

Mrs. THURMAN. Can I ask one more question, just based on a little of the conversation that was going on here as to access outside of the hospital setting? Because, as noted, we have this problem with the fact that we don't have potentially home health care as readily accessible. We don't have critical nursing, skilled nursing needs. And yet one of the things that is going to happen in October is we are actually going to lose this 15 percent that we have been given. We are going to actually lose that.

Can you offer any suggestions? I mean, my feeling is that we should not do this until we get everything in place, because I think it is just going to exascerbate some of the situations that we have been talking about.

Mr. HACKBARTH. Well, the new prospective payment systems for home health and outpatient services are tricky. There are some differences--meaningful differences between rural providers and urban providers that need to be taken into account. We would not advocate a 15 percent reduction at this point in the home health payments. We think it is wise to keep that on hold.

We also support the 10 percent add-ons for rural home health providers that were included in the legislation. We think that money buys us some time to evaluate the impact of the system and make appropriate adjustments. It is time that we need.

Mrs. THURMAN. Thank you.

Chairwoman JOHNSON. Then to just clarify for the record from your earlier statements, that you do not support wage floors as a policy and you do not support the sort of arbitrary increase in the wage index that some are looking to strengthen rural providers but that you do support some adjustments that retain the relationship between costs and reimbursement--

Mr. HACKBARTH. Yes.

Chairwoman JOHNSON. But will result in higher payments?

Mr. HACKBARTH. Yes.

Chairwoman JOHNSON. Thank you.

Mr. HACKBARTH. On the wage index, what we support in this report is looking at the so-called labor share of the prospective payment rate. Currently, about 71 percent of the rate is adjusted for local wages. There has been concern among rural providers that that number is too high, and since their wage indexes are less than one, they lose money in the process.

Chairwoman JOHNSON. In other words, many things that they buy that are called inputs they have to buy from the same general market that everybody buys.

Mr. HACKBARTH. Exactly.

Chairwoman JOHNSON. And so they get penalized, I guess? Thank you.

Mr. HACKBARTH. Yeah. So the issue is, is 71 percent the right number or is it 69 or some other figure?

Chairwoman JOHNSON. I do think that your testimony was very useful in going into some of those specifics. Let me move on to Mr. Nussle.

Mr. NUSSLE. Thank you, Madam Chairwoman; and let me compliment you on calling this hearing and talking about this very important subject. I appreciate that. My constituents who live in very rural area appreciate that.

I wanted to start off, Mr. Hackbarth. I am fascinated by your testimony in the way you begin on Page 1, and this is just--let me read this, and then I want to discuss this. It is fascinating.

"Medicare's most important objective is to ensure that beneficiaries have access to high-quality care. Because some rural communities face adverse economic conditions that may limit the ability of local providers to furnish the broad array of needed services, policymakers have been concerned that rural beneficiaries may not get the care they need."

Because some rural communities face adverse economic conditions that limit the ability to provide these services--what economic conditions are you talking about?

Mr. HACKBARTH. There are two levels. One is that the general economic situation, which may be high rates of unemployment, a lot of people without health insurance, factors that are not specific to the Medicare program, that can cause some financial distress for providers.

Then there are factors obviously specific to the Medicare payment formulas and the like that we have been talking about that we have concerns are not appropriate for rural providers.

Mr. NUSSLE. In your first part, you talk about many rural communities face these market conditions--this is on Page 4--that may depress demand or supply, a small population, declining and disproportionately older population, low household incomes, high proportion lacking health insurance, physical isolation, weak and restrictive State policies, et cetera, et cetera.

Basically, what I see you saying there are two things. One is that--and you said this--I believe you have said it a couple of times, although I can't find the quote--that there is an inadequacy between the payments to rural and urban areas. That is number one. And, number two, because of that they can't transfer those costs to anyplace else, which is really number two. Isn't that what you are getting at here, that Medicare payments are inadequate, number one? And because they are inadequate and they are inadequate for many hospitals, what they do is they look around and they say, where can I put these costs. And urban areas have the ability to transfer those costs to other places, but rural areas don't? Isn't that what you are basically saying?

Mr. HACKBARTH. Well, we are concerned about specific failures in the Medicare system, failures to account for differences in the situation that rural providers face.

I would note, though, that if you look not just at the Medicare margins but the overall financial performance of rural hospitals versus urban hospitals, the average total margin--which includes not just Medicare but all payers--is higher among rural hospitals on average than among urban hospitals. The reason for that, we believe, is that, yes, there are some specific rural hospitals in economically depressed communities that have problems. But in many rural communities there are relatively high levels of insurance, relatively good economic conditions, and there is not as much competition for those rural providers. Unlike an urban institution that faces lots of close-by competitors and has to deal with managed care plans trying to negotiate them all down, the rural providers have much more leverage in dealing with private payers. And so, as a result of that, we have this seemingly anomalous situation where rural providers have lower Medicare margins but higher total margins than urban providers.

Mr. NUSSLE. Well, I don't know what hospitals you are talking about. I mean, I have gone and looked at the books in my district, in my rural area. And I know that you may be trapped in what you told me not to do, and that is, don't generalize. So, I am not going to hold you to that. But I will just tell you, I don't know what you are talking about. I don't know what hospitals you are looking at.

Because the bottom line--I mean, how can you have on the one instance low health care coverage, high unemployment, all of those things you said and these hospitals are still able to provide a much higher margin? Now, part of it may be that they are more efficient. And if that is the case, that flies in the face of the other argument that was made, and that is that really you didn't see a difference between the efficiencies.

Mr. HACKBARTH. Well, Mr. Nussle, I really do think that the reconciliation of these statements is in the diversity. I happen to come from a rural community. I live in a rural community in Oregon, Bend Oregon. Our--

Mr. NUSSLE. How many people?

Mr. HACKBARTH. Fifty thousand people.

Mr. NUSSLE. Fifty thousand?

Mr. HACKBARTH. But we are rural.

Mr. NUSSLE. Let me just share with you, Mr. Hackbarth, that that ain't rural--with all due respect. There are places that we are talking about that are rural, that 50,000 people--well, let me just close with something, because I--there is never enough time to discuss this. And I just--I am very frustrated about this. But I will ask you one thing that I think you can probably answer.

The people in the rural areas pay the same taxes as the people in the urban areas. So people in your 50,000 town pay the same as my 5,000 town, don't they? I mean, why is it that one size does not fit all when you are talking about it from the analysis standpoint, but from the policy standpoint, we constantly try and find a one-size-fits-all solution to the Medicare reforms that we put in line, and it never treats any of these providers that you say is the--you know, the front line of providing high-quality care. But we don't provide them the kind of fairness in the system that they deserve so that these taxpaying beneficiaries who have paid taxes into Medicare their entire life get the same kind of opportunities throughout the country. And let the market decide. If they want to buy a helicopter, buy a helicopter. If they don't, then name it after a big contributor and, yeah, build a hospital if that is what they want to do.

But the folks--I will just tell you, and, you know, you can analyze this all you want, but the folks in my area are starting to see this as an issue of clout and who has had the clout to be able to get their voice across. And if it is a matter of clout, the rural areas will stand up and fight for it. We can do that. We have been trying to deal with it as best we can.

But I am very frustrated that we are getting nickeled and dimed over this issue, and in your very first statement you say that they face adverse economic conditions. I will tell you, the mother of all adverse economic conditions in this is the fact that they don't get the same reimbursement. They don't even get anywhere close. That is totally and completely unfair, and we are going to have to change that system if we are going to get the kind of care that you say we deserve.

I would be glad to have you come out to a rural area, which has a lot less than 50,000 people, so you can see what some of those bottom lines are all about.

Mr. HACKBARTH. Chairman Johnson, could I just spend one minute on this? Because I think this is a really critical point in the discussion.

Chairwoman JOHNSON. Yes, sir.

Mr. HACKBARTH. I recognize that the community that I live in is atypical, atypical in a lot of ways, and my point is not to hold it out as a typical rural community but in fact to emphasize that it is different. Yet the categories that we use in Medicare are so broad that my town is categorized as rural, just like some very small town in Iowa with very different economic resources and health care resources.

To the extent that we use these big categories and say that we want to increase the base rate for every rural hospital, hospitals like the one in my community that may not need it are going to get money, just like everybody else. That is why we so strongly advocate targeted solutions and not across-the-board solutions. We want to identify particular problems and address those and not just spread money across the board to all rural hospitals. Rural America is too diverse for that to be a proper solution.

Mr. NUSSLE. Well, I will just tell you, we will take the opposite deal. We will let you target the urban areas, and we will take the opposite deal. From a tax fairness, from a beneficiary standpoint, I don't know how you can advocate--I mean, I appreciate the fact that the news you have made today is that there is an inadequacy between urban and rural. I appreciate that. I am glad that MedPAC has finally come forward and made that kind a very grandiose statement. But I would suggest to you that your solutions lack a basis in reality that need to be there in order for us to solve this problem, and I would invite you out to real rural areas so that you can examine this further.

Chairwoman JOHNSON. Mr. Hackbarth, I think that MedPAC needs to help us on this issue.

Your testimony, I would point out to Mr. Nussle--I am going to recognize Mr.  Pomeroy in a minute. But this issue of the impact of low volume on rates, the issue of the impact of the longer length of stay on costs in the face of rates, the impact of input prices are very significant, honest differences in the relationship between cost and payment, between cost--just a minute, Pete, let me just--very important and honest differences between the way our payment formula and the real cost of these small institutions that are interfaced--we need to look at that, and we need to look at how much of that--how much of correcting that problem so we have a more honest relationship between cost and payment, which is what Medicare ought to be able to do, and how much of the problem is the fact that the bigger issue that you mentioned under disproportionate share, that has to do with the fact that Medicare as matter of policy does not reimburse for disproportionate share for uncompensated care, unless it is an uncompensated care Medicaid person or Medicare.

So there is a whole group of uncompensated care people, the uninsured, that tend to be a very big group. They are not as poor as Medicaid, and they are not in a public program, and they are not seniors. So to what extent are they the cause of the problems in the rural group?

When you look at averages, I am glad to hear that, on average, totally, they are doing pretty well, but I face this in the urban area, too. You know, on average doesn't help your hospital that is failing and it is failing because you are not reimbursing the costs.

So we do need to look at the specific things, see how much of the problem that absorbs, that will address, and then we need to look at how much is the burden of uncompensated care that in the past the government hasn't paid for. Because you do recommend and you are collecting the data so that next year we would be able to make some specific response to that burden? In the urban areas we make a very, very small partial response under the medical education reimbursement rates, but even that really doesn't recognize the same problem in urban areas.

So, I think if we can still continue to pursue costs and payments but also look at what is causing the disparities beyond that. So if you can give us back some better information about who is in that hundred-bed hospital group. You know, how many of the rural hospitals that are not showing healthy margins are in that hundred-bed group? How many are we not going to reach if we don't address that issue?

So, we need more detailed data to see who is not doing well, what kind of institution they are and how much they would be affected by the specific cost items that you address. Mr.--

Mr. NUSSLE. Would the chairwoman yield?

Chairwoman JOHNSON. Yes, I would be happy.

Mr. NUSSLE. You were much more eloquent in saying what I was trying to say.

Chairwoman JOHNSON.  No, I appreciate your--

Mr. NUSSLE. What I was trying to say is I don't see myself--I don't see my district or any of my facilities in the averages that are being discussed here. I just don't see it. And that is what concerns me, is that I don't know what you are describing as rural, because it ain't here. And when I don't see it, then I am worried about the results of the report. When you say there is a discrepancy or a disparity or whatever, irregularity, amen. Thank you.

Mr. NUSSLE. But I don't see myself in the averages, and that is what really concerns me.

Chairwoman JOHNSON. That is why I am very pleased that actually you do go into some of the specific ways in which the formula doesn't work in rural areas, because years ago in the 1980s I went through this very same problem with hospitals in my district that are rural. You know, two-thirds of my towns have less than 3,000 population, so I have what are rural hospitals, but because of the nature of New England, they designated themselves as urban because they have to pay the same wages as the urban areas. Now they are suffering the problems of the rural hospital under an inappropriate payment system, and we did make some adjustment, very modest. There is a formula, and when you put this formula across the country, it was all in New England, Tennessee and southern Illinois.

But the problem with a national formula is that it is very hard to make a national one-size-fits-all policy actually fit the extraordinary variety of institutions that not only our seniors depend on, but, remember, every age group depends on these institutions. So the--on average the policy-making process is a problem, which is exactly why we need to strengthen Managed Care+Choice because it has a different ability to negotiate with every single plan.

But, I want to recognize Mr.  Pomeroy. He has a deadline and wants to make a brief statement.

Mr. POMEROY. Madam Chair, thank you, and thank you for allowing me to sit in on part of this hearing. For 8  years I was the State's insurance commissioner and tracked the health of our rural hospitals very closely. For the last 8 years I have been in Congress, and I have continued to track. Over this period of time, I have seen substantial decline in the financial condition of these facilities.

I guess I ascribe myself closely with the frustration voiced by Congressman Nussle, who has done excellent work in trying to get some of these reimbursement issues addressed, but we are not there yet.

I am pleased with the forthright acknowledgment of some of the issues in the MedPAC report, but have concern that the prescription doesn't match the diagnosis. I mean, you diagnose, for example, relative to rural hospitals in the West. Where I come from, the main risk factors affecting Western hospital markets are small populations, declining populations, disproportionate numbers of residents age 65 and older. I would add to that two conditions that are really threatening facilities, and that is the ability to staff and ability to recover cost of providing services, as the Chairwoman just referenced.

Again, back to this, you said that is the diagnosis, but your prescriptions in terms of a little more tinkering here and a little more tinkering there I am not sure is going to be aggressive enough without having the face of health care delivery change very significantly. You indicate that right now we are able to match services, and Medicare recipients are reasonably satisfied. I think you don't have to look forward very far and see a very different situation. It is kind of like someone with an internal hemorrhage have a doctor say, well, you look good now; your situation is about to change very significantly based on things that maybe aren't readily apparent or captured in a patient safety.

That concludes my observation, Madam Chair, and I appreciate--

Chairwoman JOHNSON. Well, I am appreciative of your attendance.

Earl is a new member of the Way and Means Committee. He is not a member of this Subcommittee, but he and I have worked on a lot of issues together, and his experience in insurance will help us.

But I do want you to go back in the detail of the testimony so that you can see how the factors in the formula just don't fit, and if we adjust that, we should at least be able to deal with it honestly, you know, and we need to try to stick to a formula that has a fact-based structure, the problem your hospitals face with getting properly reimbursed.

I am very concerned about this nursing issue and the fact that it is going to hit very hard, very fast, and earlier in Mr. Hackbarth's testimony he mentioned that one of the problems in the wage area was that the data is 4 years old.

So we will be working on those issues, but I hope we will have the benefit of your expertise in the details. Mrs.  Thurman.

Mrs. THURMAN. Madam Chairman, just to the nursing issue and to some of the whole health care provider issues in rural, and something I know you and I have worked on, and certainly something we probably, and hopefully States, are working on as well, but what my students are telling me at the University of Florida is part of this is the whole issue on loans and what it costs them. They can't afford to go in many of these rural areas.

Chairwoman JOHNSON. We do hope to get into another hearing on the nursing issue.

Mrs. THURMAN. And we have hospitals now going overseas looking for nurses.

Chairwoman JOHNSON. Right, in large numbers.

Thank you very much, Mr. Hackbarth. I didn't get a chance to ask you to comment on the presence of Sterling, which is a fee-for-service service Choice plan out there now in the rural communities. Just in a word, do you know much about it, and do you think it is doing well?

Mr. HACKBARTH. Well, I don't know much about Sterling in particular. I do have the concerns that I described earlier about the system of floors and Medicare+Choice and the opportunities they present.

Chairwoman JOHNSON. We will be talking with you more about that because it is the first Choice plan that has penetrated the rural areas, and we need to know more about how it is doing and whether it is impacting some of these problems. Thank you very much, appreciate it.

And would then the panel come forward. Kathleen Dalton and Curt Mueller and Keith Mueller. Kathleen Dalton is a Fellow at the Cecil Sheps Center for Health Services Research, University of North Carolina at Chapel Hill. Curt Mueller is with Project HOPE, the Walsh Center for Rural Health Analysis. And Keith Mueller is the director of RUPRI Center for Rural Health Policy Analysis in Omaha, Nebraska.

We welcome you and appreciate your presence here and your help in understanding these issues. Dr.  Dalton, if you will proceed.

STATEMENT OF KATHLEEN DALTON, PH.D., RESEARCH FACULTY MEMBER, CECIL G. SHEPS CENTER FOR HEALTH SERVICES RESEARCH, UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL

Dr. DALTON. Madam Chairman and members of the Committee, my name is Kathleen Dalton. I am a faculty member at the University of North Carolina where my field is health care finance. I have been asked to report on our research regarding specific Medicare prospective payment issues as they affect the rural hospitals.

Medicare's inpatient payments historically have been more generous to urban than to rural hospitals. This is evident in the long-standing differences in their respective average payment-to-cost ratios. We find, however, that these differences are due primarily to the disproportionate share and the indirect medical education add-ons to the prospective payment rates rather than problems in the underlying rate structure. Among hospitals not eligible for either of these special adjustments, Medicare's inpatient payments average about 5 percent above cost for both the rural and the urban facilities.

The wage index has often been identified as one of the chief problems facing rural hospitals under prospective payment, but our research thus far has found little evidence that the index is a contributing factor in poor rural margins. We have concluded that while the index is not perfect, it has improved over time, and it is an adequate instrument to accomplish the purpose for which it is designed. The rural labor markets as now defined actually serve to protect the margins of hospitals in the very smallest and most rural communities by grouping them with higher-wage facilities.

The gap in the urban and rural PPS margins appears to be more a reflection of Federal policy, in this case one of directing additional resources to safety net and teaching providers, than an indication that rural hospitals as a group are unable to compete under the discipline of the prospective payment system.

The disproportionate share adjustment, or DSH, is now recognized as the vehicle through which the Medicare program shares in the cost of indigent care, just as other payers share when uncompensated care costs are factored into hospital price structures. DSH adjustments are an add-on to the payment rates. They are proportional to the hospital's share of low-income payments, but the formulas, as you have heard, are not equally applied across rural and urban hospitals. If we want to close the gap between rural and urban Medicare margins, then parity in the DSH formulas is the first change that should be considered rather than changes in the wage index or in the base payment rates.

MedPAC has already recommended reducing the differences in the DSH formulas across hospitals. If their recommendations were implemented, the rural and urban Medicare margins would be closer, though the rurals margins would always be somewhat lower because the overall indigent care burden is not as high in rural areas. But if the objective of the DSH adjustment really is to allow Medicare to shoulder its share of indigent care costs, then the DSH adjustment should be made available to all safety net providers, including critical access hospitals and other hospitals outside of the PPS system, and it should be made available for outpatient care.

Our research does not show that special payment considerations need to be given to all small rural hospitals. Nevertheless, there are some groups of rural facilities, particularly very small, low-volume or isolated facilities, that struggle to cover their costs under the inpatient payment rates. Many of these already qualify for a variety of special payment exceptions or have opted for cost-based reimbursement as critical access hospitals. The newly converted cost-based hospitals are generally receiving much-needed increases to their reimbursement, but only at a price, by giving up a possibility that Medicare services will ever contribute to their needed reserves.

An expanded disproportionate share adjustment will help many of these same hospitals by targeting assistance to rural safety net providers, but there may still be a class of vulnerable hospitals that are essential to their communities and that will need extra help if Congress wants to assure continued and stable access to services for all rural beneficiaries. For this class, perhaps a simpler and more effective way to address their payment problems might be by retaining their participation in prospective payment, but offering a cost-based payment floor. This would be a commitment that the Medicare program would never pay less than the essential providers' cost of delivering services.

These hospitals have very small operations to begin with, so even if many facilities were deemed to be essential, the total budget impact would probably be very small. A cost floor, we believe, would be better suited than the current proliferation of special add-ons and permanent cost-based alternatives to target help only to those institutions that need it and only during those years when they need it, without losing the inherently beneficial incentives of a prospective payment system.

This concludes my remarks. Thank you very much.

Chairwoman JOHNSON. Thank you very much, Dr.  Dalton.

[The prepared statement of Dr. Dalton follows:]

Chairwoman JOHNSON. Dr. Mueller.

STATEMENT OF CURT D. MUELLER, PH.D., DIRECTOR, PROJECT HOPE WALSH CENTER FOR RURAL HEALTH ANALYSIS, BETHESDA, MARYLAND

Dr. CURT MUELLER. Good morning, Madam Chairwoman Johnson and other members of the Subcommittee. I am Curt Mueller, and I direct the Project HOPE Walsh Center for Rural Health Analysis. I am very pleased to be here to discuss access to care issues pertaining to rural Medicare beneficiaries.

My bottom line is that although there is some good news to report, recent evidence suggests that rural beneficiaries do face access problems, and equity of the Medicare program is compromised. At the same time, there are policy approaches that would help address these problems.

I will briefly summarize the written statement I have submitted. First let's turn to the evidence.

The good news is that the access to care among rural and urban Medicare beneficiaries is comparable in many respects. This is true if you look both at a number of the traditional measures of access, and it is also true if you look at more sophisticated measures of access. Evidence from a recent analysis of more than a quarter of a million program beneficiaries indicates that rural residents are just as likely to receive much of the necessary care also received by urban beneficiaries.

No important rural versus urban differences were found for 27 of 46 necessary care indicators, but there are some differences between rural and urban areas. Some rural beneficiaries do face access problems as there were real deficiencies for 19 of the 46 necessary care indicators in the study I just referred to. According to the study, rural populations are significantly less likely to receive timely EKGs for congestive heart failure, follow-up care after hospitalization for diabetes, timely gall bladder removal for symptomatic gall stones, and screening mammography. It is also important to note that these access deficiencies are most severe in the most rural of rural areas.

Rural access deficiencies are also important from the perspective of program equity. In spite of these access differences, medical care expenditures by urban beneficiaries are considerably greater than for rural beneficiaries. In 1996, per capita expenditures for the noninstitutionalized Medicare beneficiary without any supplemental coverage was 37 percent greater in urban areas than in rural areas. This difference is larger than what could be explained by differences in geographic--geographic differences in the cost of care alone.

It is important to emphasize that equity with respect to rural versus urban residents does not necessarily require that per capita program expenditures be equal. Some of the expenditure differences may reflect differences in taste, differences in provider style, but there are program actions that--policy actions that could, by helping to eliminate these differentials, improve equity of the program.

First, policies that increase the supply of health care resources in rural areas should improve access. I believe that access would be improved by work force policies that provide additional incentives for physicians to locate and maintain practices in rural areas and by payment policies that assist rural providers and help ensure their financial viability. An example is the new Rural Hospital Flexibility Program, which appears to be helping small rural hospitals overcome financial problems associated with low volume. In the same way, payments to physicians under traditional Medicare in historically low-cost, underserved areas could be increased. This might be accomplished, for example, either through the current bonus payment mechanism or by increasing the work component of the Medicare fee schedule for these physicians. Over time such adjustments should improve access by helping to direct physicians to the areas of greatest need.

Second, policies that improve rural beneficiaries' access to expanded benefits should help improve access in rural areas. Currently rural residents are less likely than their urban counterparts to have drug coverage, for example, because they have less access to employer-sponsored supplemental coverage, Medicare HMOs and Medicare Choice plans. I support additional attempts to improve choice in rural areas.

In the short run cost-sharing under Medicare could be tied to the level of program expenditures per capita. For example, the Medicare premium could be reduced in areas with lower per capita program expenditures. Beneficiaries would be expected to pay a premium equal to 25 percent of program expenditures in rural areas of the State or region, for example. The difference between the national and local premiums could then be applied to subsidize the purchase of more benefits through a supplemental plan that offers additional benefits.

One final note, although the primary focus of this statement is on access to care among rural beneficiaries, monetary barriers of access for the nonelderly are more severe in rural areas than in urban areas because of a lack of insurance. There is no Medicare for these people. Because the Medicare population is relatively larger in rural than in urban areas, policies designed to improve access to care among the elderly are likely to strengthen the rural health infrastructure as a whole, which in turn should improve access for the entire rural population. Thank you.

Chairwoman JOHNSON. Thank you very much, Dr. Mueller.

[The prepared statement of Dr. Curt Mueller follows:]

Chairwoman JOHNSON. Dr. Mueller.

Dr. KEITH MUELLER. Also Dr. Mueller.

Chairwoman JOHNSON. Oh, is it also Dr.  Mueller.

STATEMENT OF KEITH J. MUELLER, PH.D., DIRECTOR, RURAL POLICY RESEARCH INSTITUTE CENTER FOR RURAL HEALTH POLICY ANALYSIS, UNIVERSITY OF NEBRASKA MEDICAL CENTER, OMAHA, NEBRASKA

Dr. KEITH MUELLER. Thank you, Madam Chairwoman.

The Rural Policy Research Institute Center for Rural Health Policy Analysis that I direct focuses its attention, analysis and research on the special circumstances of sustaining service delivery in rural communities. Why then the focus on Medicare policy?

The current Medicare policies and payment are creating financial stress for many small rural hospitals. In 1998, the total Medicare margin for rural hospitals was a negative 2.1 percent and in 1999 a negative 2.9 percent. In 1999, the small rural hospitals under 50 beds who were not already part of some special payment category experienced negative margins aggregating the 5.6 percent negative, and 54-1/2 percent of them had negative margins.

How do we change that situation in current Medicare policies? Medicare payment policies are designed for Medicare to be an efficient payer of efficient providers, as you heard earlier. Therefore, trying to address the needs, special needs, of small rural providers requires adjustments to formulas to try to increase the bottom line or maybe wrinkles in the system, such as a low-volume cost adjuster or perhaps what I call policies by exceptions, creating categories that would be deemed eligible for cost-based reimbursement.

What are the results of that kind of an approach? One result is imperfect targeting. As you have heard throughout this morning's discussion already, each attempt to do this by adjusting a formula creates a payment bonus, if you will, for a broad category of providers, not necessarily those located in those small, isolated communities most in need of assistance. To reach them we end up reaching many. We also create a system of administrative complexity, because one has to turn, then, attention to, well, how do I adjust my cost reporting system to comply with the new payment system intended to benefit me.

We also create a system with constantly changing regulations and all of the time lines that are associated with changing regulations, the publication of proposed rules, final rules, then the implementation of those rules. That combination of administrative complexity and constantly changing regulations can overwhelm the systems that we have in place. It certainly overwhelms those small rural hospitals like the critical access hospital I visited recently in northern California that is doing its best to take advantage of every single opportunity to enhance its bottom line, but has to add on administrative personnel in order to do that.

It also overwhelms our own government administrative system, an issue that I know this Subcommittee has addressed in the recent letter Chairwoman Johnson mentioned earlier to the Health Care Financing Administration. Now, all of that can mean cash flow crises for the small rural hospitals that can't adjust quickly enough or have experienced regulations that aren't adjusted quickly enough to deal with changes that we intend to do in 1 month, but don't actually occur until 9 or 12 months later.

What is a better way out of this? What we are looking at now at the RUPRI Center as a way of identifying communities rather than focusing on providers. By using demographic, economic and geographic data, we are working on identifying those communities in which it would be nearly or absolutely impossible to sustain service delivery based on operating revenues alone, that some additional flow of dollars would be needed in those communities.

If communities are identified, then we can look, as Representative Stark said earlier, a holistic view of what is the package of policies that we would use to help providers in those communities: National policies, including payment policies, but also including targeted technical assistance in grant programs; State policies, including the same combination; and local policies, including local tax revenues, local foundations. We could be looking at other provider-based and population-based programs to be serving those small communities. If we engage in that kind of a dialogue, we may do a better job of sustaining those services in the rural communities where today they are experiencing a great deal of difficulty.

Thank you.

Chairwoman JOHNSON. Thank you very much, Dr. Mueller. I guess is it Mueller, or is it Mueller?

Dr. KEITH MUELLER. Mueller.

[The prepared statement of Dr. Keith Mueller follows:]

Chairwoman JOHNSON. Okay. Two questions, Dr.  Mueller on my right. Do you support the wage base, just the arbitrary increase in the wage adjustment for rural hospitals?

Dr. KEITH MUELLER. You are speaking about creating the floor payment of .9 or whatever it might be?

Chairwoman JOHNSON. Yeah.

Dr. KEITH MUELLER. That would be inconsistent with the idea of looking at a more holistic change. So, no, in an analytical sense, no, that can't be supported.

Chairwoman JOHNSON. I do think your comments about a more holistic approach are very, very interesting. You heard the questions that I asked Mr. Hackbarth earlier, and any comments you may have in looking at those hundred-bed or, you know, the different categories of rural hospitals, which does go to the point you are raising about let's look at the community, would certainly be of interest to us. I would remark that it isn't just the small hospitals that are now having cash flow crises because the banking institutions are seeing the health providers as poor risks, and even larger hospitals are having great difficulty if the payment system breaks down, which it is now quite frequently.

I did want to just ask Dr.  Mueller in the center, your comment about reducing premiums where costs are lower and the barrier that income places on access to care in rural areas, is that an idea that you have developed to any degree?

Dr. CURT MUELLER. There is a considerable amount of health services research which indicates that income and insurance are significant determinants of access to care, both among--well, among the population in general, but also among Medicare beneficiaries.

Chairwoman JOHNSON. Certainly access, those with Medigap insurance that covers much of the co-pay and deductible responsibility of seniors does make access much easier, and it is more difficult--is it difficult for seniors in rural areas to get because it is not available or because they can't afford it?

Dr. CURT MUELLER. My suspicion is that, well, fewer rural beneficiaries have Medicare supplemental coverage than beneficiaries that live in urban areas, and it is actually a combination of both. You can either obtain privately purchased supplemental coverage, which I think in rural areas it is about the percentage covered with privately purchased. It is about the same as in urban areas. The big differences, though, are that employer-subsidized supplemental insurance is much more common in urban areas than in rural areas.

Chairwoman JOHNSON. And have you given any thought to going to a single deductible, a more sort of modern structure of Medicare, and whether that would increase access in rural areas?

Dr. CURT MUELLER. A single deductible?

Chairwoman JOHNSON. Yes.

Dr. CURT MUELLER. Well, there has been a lot of interest in reforming the nature of supplemental insurance coverage. Right now the supplemental insurance--some of the supplemental insurance plans provide first dollar coverage, which has been criticized as encouraging more use than might otherwise be appropriate.

Chairwoman JOHNSON. I guess let me take it from a little different angle. MedPAC testified that rural beneficiary cost-sharing is higher, and you have testified that costs are an impediment to access. Could you walk us through policies--and you can all contribute to this if you want. What policies contribute to high cost-sharing, and what are the implications for cross-subsidies from the rural elderly to the urban elderly? Is there any difference? Is the urban elderly person with no Medigap insurance in exactly the same position as the rural elderly person with no Medigap insurance?

Dr. CURT MUELLER. No. Expenditures for the urban elderly with no Medigap, it is on a per capita basis, total expenditures are higher. In fact, in 1996, one of the statistics in my statement is that among those with no supplemental insurance at all, the urban expenditure per capita is 37 percent higher than in rural areas.

Chairwoman JOHNSON. For the same income elderly?

Dr. CURT MUELLER. Well, for persons with Medicare only, with no supplemental coverage. I don't know what their income level is. My suspicion is it is lower since in general incomes tend to be lower in rural areas.

Chairwoman JOHNSON. It would be helpful if you could look at that for us, because while certainly incomes tend to be lower in rural areas, the group that have no supplemental in the cities are often just above the Medicaid income levels also. So, I don't know whether they are getting more services because the urban institutions are more accustomed to providing services for uncompensated care, or they have access to a community health center that can provide those services at an income-related cost.

So what I hear you saying, and I assume that you all agree on this, is that we don't know much about why seniors with no auxiliary insurance experience a 37 percent higher utilization rate than rural seniors. So we don't know how much of that is lack of availability of services and how much of that is availability of services at lower cost in the urban structure.

Dr. CURT MUELLER. Yes. It is important to emphasize you raise a very good point, that there are a number of factors that could explain parts of that difference. Income is certainly one of them.

Chairwoman JOHNSON. Congresswoman Thurman.

Mrs. THURMAN. Thank you, Madam Chairman.

Dr.  Curt Mueller, something else in your testimony, especially with the debate that is going on in Congress right now, that was kind of alarming to me, and I am just--maybe you can expand on it. Maybe I shouldn't ask this question because I may not know the answer, but you talked about the idea that Federal subsidization of drug benefit based on income will likely improve access in rural relative to urban areas. I mean, there is a large--high debate going on here about whether it should be under a helping hand or rather it should just be a Medicaid benefit, but just based on this exchange, with a lack of ability for insurance, the lack of Medicare+Choice programs, the lack of, you know, all of these things that rural areas can't get, why would you just do it to low-income and not to look at that whole population out there?

Dr. CURT MUELLER. I wouldn't necessarily limit it just to low-income Medicare beneficiaries, but that certainly is one of the options that is being considered. I personally--my personal view is that it should be offered to all Medicare beneficiaries.

Mrs. THURMAN. Thank you.

And Dr.  Keith Mueller then, let me--you know, we sometimes go into our districts, we bring our staffs, we have them go through the hospital, situation very similar to what you did in your study, and I was interested in your comment particularly on the administrative part of it because you talked about the lack of administration to handle some of the complicated issues, or even keeping up with what is going on. What we found in a small rural area of ours, there was about three people in the whole--two were consultants and one was actually staff--in trying to do this.

What I am curious about is that as you know, our Chairwoman and Mr.  Stark submitted to HCFA a letter that looked at some administrative procedures that could be put in place to try to get rid of some of this paperwork and cumbersome issues, and I am curious to know if you have had an opportunity to look at that, and if so, do you have any comment; and if not, I would love to give you a copy of it so that you could have an opportunity to review it and see if in any way that helps us in the rural areas.

Dr. KEITH MUELLER. No. I have not had the opportunity to look at that letter and would welcome the opportunity to do so. I would like to comment, though, that it is a--when you talk about the administrative complexity and the burden that it imposes, it is a combination of two factors. One that you mentioned is trying to simplify the administrative rules that we have in place now and procedures that we have in place, but the other that I was also addressing in my testimony is that by trying to continue to resolve issues of payment and sustaining services by tweaking and changing payment formulas, we are structurally contributing to administrative complexities. So that is not under the control just of the administrative agency itself.

Mrs. THURMAN. Dr.  Dalton, on the last page, on page 5 in your very last bullet point, you talk about DSH adjustments and saying that that would be certainly something that would be helpful to the rural health community. I understood that. But particularly after MedPAC testified, you actually talk about targeted help in those urban or those rural areas. Can you give us some idea of how you would target so that it didn't become unbalanced then or imbalanced with the rest of the community in the rural health? I am just interested in what kinds of things you would look at to make those targeted areas receive additional dollars.

Dr. DALTON. Well, with respect to the disproportionate share expansion, I think by itself it targets it appropriately because it is related to indigent care, or should be. My thought about offering a cost floor was that this sort of arrangement would automatically target hospitals in bad years that are having difficulty if they qualify as an essential provider on the assumption that that definition of essential provider is something like Dr. Mueller's community-based characteristic. It is a community at risk for one reason or another.

Not all hospitals in these communities at risk need the help. My thought was that a cost floor is able automatically to target the hospitals to help only those hospitals that do. We have also noticed that these very small hospitals are very--their financial position is unstable. Some years they actually can do all right on a prospective payment, and then in other years they won't. It usually has to do with rapid changes in utilization. When you only have 10 beds, the difference between 6 and 12 patients is rather large. The advantage of a cost floor would be that in a bad year it is there to help you, but in a good year you don't need any--you might not need any extra money, and in a good year you might be able to accumulate some surplus, put it away to your reserve, and be able the use that for the purposes to which all organizations need their reserves.

Mrs. THURMAN. Thank you.

Chairwoman JOHNSON. Actually that is a very interesting point you made, Dr.  Dalton, that even if we create new categories within those categories, there may not be a--sort of in a sense a stable demand. So what you are really suggesting is that we need--because we have tried to do this with sole providers, and we have categories that have gone directly to the issue we are discussing here, and what you are really suggesting is that we need a sort of a loose category through which hospitals can be heard.

And we know this flies in the face of Dr.  Keith Mueller's comments about the need for stability and predictability and simplicity, but I don't know how we match this need of small rural providers for exceptional consideration and communities that need an exceptional view with the need for the system to stop churning change.

I did want to ask any of you if you know how the small providers deal with some of the--particularly the small hospitals--some of the extraordinarily complex changes we have sent down. I had one person who had a lot of experience in the rural areas say they just put the pile of the regulations in the corner, and, you know, when there is a hitch in their payment system, somebody tries to explain to them what the problem is, but they literally don't have the technical capability to review all that stuff, nor the time, nor the resources, nor the programs.

What percentage of the situation--of the facilities deal with some of these--at least some of these administrative directives that way, or do they take everything we say to heart?

Dr. KEITH MUELLER. The percentage that deal with it in the way you describe, Ms. Johnson, is probably higher than we would like to admit. A lot of the small rural hospitals, though, turn to either their association at the State level, especially if it is responsive in particular to rural hospitals, or to consultants, the accounting firm that may handle their books, other consultants that come out. That kind of technical assistance, though, doesn't take care of how do I maintain my records on a daily basis so that when the accountant comes in, the records are ready for he or she to deal with appropriately. And I think that is the level at which we have a real problem.

Chairwoman JOHNSON. You will notice in the letter that Karen referred to is that one of the recommendations is that we be able to provide technical assistance. We do that in other sectors of the economy, and if you will look at that section, all three of you, and see if you have any suggestions for us, we will be interested in that.

The goal is provide better tools to the small providers so that they aren't just trying to make it up as they go along, both in terms of technical advice on equipment and technical advice on systems management.

Mr. English. No questions, okay.

The last point I want to raise that--incidentally, I appreciate how detailed your testimony is and how much good information it does give us, and while we can't bring all of that out at the hearing, it will be very useful to us.

On this last issue about the prescription drug bill, you know, the access--and that is why anything you can do to help us shed light on how much of the utilization rate, the very utilization rate between the urban uninsured that is to be on Medicare and the rural uninsured be on Medicare, would be very helpful, because if the barrier is primarily cost and the lack of available, you know, sort of subsidized facilities like community health centers, we need to know that. But also the prescription drug bills, and this is a nonpartisan statement, all of the prescription drug bills on the table involve an additional premium, and 50 percent of the cost of prescriptions. Now, they also are almost likely to be involved this year because of the increased projections in costs for a deductible. So how useful is this going to be to these rural seniors? Again, how do we look at that from a sort of community systems point of view?

We need as much information as you can get us about the access issue, and try to break it down a little bit more and think it through as to whether we can even deal with it through a reimbursement mechanism that is institution-specific and cost-specific, or whether we really need to try to find a way to look more holistically.

Well, thank you very much for your testimony here and for the thought and care you put into writing it, and if you have follow-up information you want to provide us with, we are always happy to receive it.

Chairwoman JOHNSON. Thank you very much. The hearing is adjourned.

[Whereupon, at 11:55 a.m., the hearing was adjourned.]
[Submissions for the record follows:]

American Association of Homes and Services for the Aging, statement

Federation of American Hospitals, statement

Nussle, Hon. Jim, a Representative in Congress from the State of Iowa, statement

Volcano Press, Ruth Gottstein, letter and attachments