Statement of the Hon. Robert B. Aderholt, a Representative in Congress from the State of Alabama

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

Hearing on Medicare's Geographic Cost Adjustments

July 23, 2002

Because Alabama is a low income state, hiring and keeping workers in any field can be difficult. However, this problem is particularly severe in the field of healthcare.

The reason is simple. The market for healthcare workers is tight. So tight, in fact, that cities and rural areas often compete for the same people. Unfortunately for rural areas, the cities usually win. More and more, districts like mine in north-central Alabama are seeing workers move away to Atlanta or Birmingham, or make the extra hour and more drive to the city for the promise of higher wages.

Rural hospitals provide essential inpatient, outpatient and post-acute care, including skilled nursing, home health and rehabilitation services, to nearly 9 million Medicare beneficiaries. Rural hospitals rely more on Medicare payments, which can be 70 percent or more of their revenue, yet are less able to manage within a prospective payment system, or PPS, because of low financial reserves, thinner margins and significant fluctuations in patient volume. These challenges, coupled with their sparse populations, high levels of poverty, and shortages of critical health professionals, have significantly impacted the ability of many rural hospitals to remain financially viable under Medicare prospective payment policies. In fact, one out of every three rural hospitals is losing money, and 66 percent have negative total Medicare margins.

When federal payment calculations were first designed, there were certain factors used to adjust the payment based on the various geographic locations within the country. One of the factors was an adjustment for the wages paid. Later, the government developed a way to differentiate between payments to large urban facilities and all other hospitals. Once these adjustments were put in place, they were never re-evaluated and have penalized states like Alabama for a number of years.

This differential provides hospitals in large urban areas, like Atlanta, with a larger base rate. The base rate is the starting point upon which all of the other factors are based and can make a significant difference in the rates paid to facilities in these areas. Alabama has no facilities that qualify for this additional payment of "large urban." We would argue that there are not enough differences in the cost of running a large urban hospital when compared to all other hospitals to justify this difference in base rate. We believe that all hospitals should begin with the same base rate for payment, especially since there are other factors that reflect differences.

In addition to the base rate, the government uses a formula to factor in the wages of an area. It established a national average to represent hospitals' labor costs as a percentage of total costs. Today, that average is 71 percent. Then, each year, the government assigns each metropolitan statistical area (MSA) a multiplier that is applied to this national average of 71 percent. Rural areas -- those outside of MSAs - are given another multiplier. These multipliers are supposedly based on the wages paid to persons in a given geographic area and fluctuate each year.

For Alabama's hospitals, there are two main problems associated with the wage calculation. The first is that Alabama's average wages as a percent of total costs are actually about 51 percent. Therefore, when the multipliers for hospitals in Alabama are applied to the national average (71 percent), they are actually applied to about 20 percent of non-labor costs. In practical terms, what this means is that Alabama's hospitals get less even though their labor costs may be as high as urban areas.

The other is that in order to get qualified health care professionals, Alabama's hospitals must compete with all areas including out-of-state locations like Nashville and Atlanta. Therefore, the pay scales cannot be that different. Currently, the national range of wage index factors goes from about 70 percent to a high of 144 percent. There's simply no rationale for having that much of a difference in health care salaries for different parts of the country. In fact, many hospitals in Alabama have to offer competitive salaries in order to attract personnel.

For these reasons, I have given my support to H.R. 1609. This bill establishes a "floor" on the area wage index used to adjust Medicare hospital inpatient and outpatient prospective payments. By setting a floor of 0.925 on the area wage index, this proposal would bring Medicare payments in areas with the lowest wage index up to just below the national average, which is set at 1.00.

H.R. 1609 has universal support among state hospital associations. It is also supported by rural hospital administrators - the ones who live with the day-to-day consequences of what we do here. I know that many good ideas have and will be presented today, but what I am asking for you to look at is something practical and that will provide immediate assistance to America's rural hospitals.