Opening Statement of Hon. Nancy L. Johnson, a Representative in
Congress from the State of Connecticut, and Chairman, Subcommittee on Health

Hearing on Medicare's Geographic Cost Adjustments

July 23, 2002

Good morning.  Today’s hearing will focus on the important subject of how Medicare payments account for differences in the cost of providing services across regions of the country.  Our goal is to ensure that providers are compensated fairly for costs over which they have no control.  Medicare funding is critical to the Nation’s hospitals, nursing homes, home health agencies and physicians, and it is our obligation to make sure the payments are fair and the system works.

I am pleased to see so many Members here today to talk about how geographic adjustments affect their communities.  It is through evaluating the experiences of your hospitals and doctors that we will be able to determine if we can improve our payment system and its sensitivity to regional variations in cost.  While this is a very complicated area of the law, it is an important one and if we all focus on the facts, we will be able to assure sound policy.

That much said, the witnesses today from the General Accounting Office, the Medicare Payment Advisory Commission, and the Urban Institute will provide information that we must recognize, though for many of you some of their conclusions contradict what you have come to consider conventional wisdom. 

For example, the hard fact is that small rural hospitals are helped by the wage index and large teaching hospitals in the inner cities are disadvantaged.  This is because the wage adjustment process starts with actual hospital wage data and computes both a national average wage and an MSA regional average wage from reported hospital wages.  This process of averaging inherently disadvantages the high-wage institutions of an MSA -- giving the low-wage providers more than their costs and high-wage providers less than their costs for labor.

While this is the underlying foundation of our system, other aspects of the formula, the definition of wage areas, and the reclassification system must all be scrutinized to determine if the system can be made to function more fairly.

Congress has improved and modified the geographic adjustment process several times since 1983.  In OBRA 1989, an appeals process was established so that a hospital could increase its wage index by proving that it should be assigned to a different labor market.  The bar for reclassification to a higher wage area is set low:  the hospital’s wage can be up to 16% lower than the wages in the area it seeks to join.  In addition, the hospital must prove it is disadvantaged by its actual location.  While experts conclude that the appeals process has made the system work a little better, it may need adjustment as the environment in which health care is delivered changes.

Our experts will also tell us that geographic adjusters for physician payments favor rural areas.  The physician fee schedule includes three components:  physician work, practice expense, and professional liability insurance.  Each component has its own geographic adjuster.

When Congress enacted the physician fee schedule in 1989, it limited geographic adjustment of the work component of physician payments:  Instead of accounting for all cost-of-living differences, Congress decided to adjust only one-quarter of the payment for physician work.  This lack of full accounting for cost-of-living differences means that physicians in lower cost-of-living rural areas are paid relatively more, and physicians in higher cost-of-living urban areas are paid relatively less than they would be paid if full geographic adjustment were made to the work component.

In fact, more than half – 55 percent -- of the average Medicare physician fee is a national fee for which no geographic adjustment is made.  Three-quarters of physician work, and all of medical equipment and supplies are paid on a nationwide basis.  

In addition, Medicare has a program to deal with physician shortages.  Medicare provides a 10 percent incentive bonus to physicians who provide care in any rural or urban health professional shortage area.  

In the Medicare Modernization and Prescription Drug Act of 2002, I call for a GAO study of geographic differences in payments for physicians’ services.  This study would assess the validity of the adjusters, and evaluate how they are constructed and used.  Once we have this GAO report, we will be better able to evaluate the need for reform.

I am committed to maintaining access to quality care for all seniors in Medicare in all communities.  As payment policies in both the public and private sectors have changed and each payor has focused more narrowly on the costs of only its own patients, resources to cover uncompensated and under-compensated care have diminished and payments based on averages are having new impacts on care access and quality. 

As we study the issues raised in the hearing, we will be looking for solutions that will treat providers more equitably in this era of bargained-down reimbursements and rising costs.  The answers will not be easy but the signs of serious strain cannot be ignored.