Statement of the Hon. Nick Smith, a Representative in Congress from the State of Michigan

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

Hearing on Medicare's Geographic Cost Adjustments

July 23, 2002

Madam Chairperson and members of the Subcommittee, thank you for the opportunity to testify before you today.

I wish to speak with you today about a shortcoming of the geographic reclassification system, which has directly and adversely affected hospitals within my district.

W.A. Foote Memorial Hospital, a 359-bed non-profit general hospital located in Jackson, Michigan employs 2,500 persons, making it the second largest employer in the Jackson Metropolitan Statistical Area (MSA). The only other hospital in Jackson County serving Jackson residents is Doctors Hospital. Doctors is a 65 bed hospital that employs 300 people. They are a significant provider of health care county-wide.

The Jackson MSA is surrounded by seven counties, with eleven hospitals, all receiving higher reimbursement. The wage indices in those other MSAs are consistently and significantly higher than the wage index applicable to Jackson. As you see by this chart the Jackson wage index is between 6 and 20 percent below the eleven surrounding hospitals.

The reasons why these wage reimbursement indices are higher and stay higher are complicated, but are due in large part to the fact that wage indices tend to be self-perpetuating. The hospitals in surrounding areas receive higher than average reimbursements from Medicare, and so can offer higher than average salaries to more hospital staff. The more labor costs these hospitals incur, the higher the resulting wage index, and the higher the resulting Medicare reimbursements. The more Medicare reimbursement they receive, the more they can pay their staff.

The inverse is true for Foote and Doctors. These hospitals receive lower than average Medicare reimbursements. Like any business, hospitals must operate within a budget, which means costs must try to be held to projected revenues. Because Foote receives a low wage index and low Medicare reimbursements as a result, Foote must constrain its labor costs. Constrained labor costs lead to lower wage indices, and lower Medicare reimbursements, which again lead to constrained labor costs. Foote ends up at a competitive disadvantage for reimbursement and ultimately for survival.

Because of its proximity to these other hospitals with higher reimbursement rates, Foote and Doctors compete with hospitals in those areas for clinical personnel, such as nurses and technicians. They must and do offer wages at least commensurate with, perhaps even greater than, those paid by hospitals in those neighboring cities to induce highly skilled clinical personnel to remain in Jackson, rather than seek jobs elsewhere. However, Foote, for example suppresses its labor costs by adjusting its skill mix, for example. Whereas the University of Michigan Hospital might staff a nursing unit with three registered nurses, Foote would staff a similar unit with one registered nurse and two licensed practical nurses, or other clinicians with lesser skills, therefore requiring lower average wages.

Congress established the geographic reclassification process to address exactly the kind of situation confronted by Foote. Foote is located in close proximity to three MSAs. Its labor costs are higher for a particular skill level than the other hospitals in its area, and comparable to hospitals in the Ann Arbor, Lansing, and Kalamazoo MSAs. Yet, Foote is unable to qualify for geographic reclassification because of a flaw in the criteria that hospitals must satisfy. A hospital seeking wage index geographic reclassification must satisfy three tests, one of which requires that the applying hospital's wages are 108 percent higher than hospitals in the area in which the hospital is physically located. Foote cannot satisfy this 108 percent test.

There are only two hospitals in the Jackson MSA. Foote is the larger of the two, and pays the majority of hospital-related wages. Given the dominance of Foote's own wage data, over 75 percent of the MSA wages, Foote cannot satisfy the 108 percent threshold.

There is a special reclassification opportunity put in by some members of Congress called the" Special Dominating Hospital Exception," that permits an eligible hospital to remove its wage data from the calculation of the 108 percent test. However, to limit the future application of that amendment, the hospital must also have qualified for reclassification in each of the fiscal years 1992 through 1997, making this exception closed to many hospitals who are today confronted with this situation.

In addition to Foote and Doctors, there are approximately 100 similarly situated hospitals, (that is hospitals that are in MSAs with only one or two other hospitals), which pay more than 40 percent of the wages in their MSA, but which cannot qualify for reclassification, because of the 108 percent test. I suggest the committee consider modifying the "Special Dominating Hospital Exception" to allow any hospital paying over 75 percent of wages and do away with the 92-97 restrictions.

Hillsdale Community Health Center, also located in my district, is dealing with similar problems. Hillsdale, while providing vital services to the people of Hillsdale County, is struggling to survive, because of the level of Medicare payments made to it, particularly in comparison with other hospitals in southern Michigan. There are twenty-eight counties in the lower third of Michigan. In twenty-seven of those counties, hospitals are paid Medicare rates as urban hospitals. Hillsdale is the only hospital in the lower third of Michigan paid on the basis of rural hospital Medicare rates. Hillsdale has received limited administrative reclassification for the next two years, however this classification is again temporary. It's important for long term planning that Hillsdale, and other hospitals disadvantaged by a rural designation, receive a permanent legislative reclassification.

The geographic reclassification process works for many hospitals. However, it should be fixed. Because of the low reimbursement rate, Doctors Hospital in Jackson County, the only other hospital in the county besides Foote, reportedly might close. To have a reimbursement system that, because of technicalities, forces some hospitals into insolvency and out of business is not good public policy, is unfair and reduces available health care for particular communities. Congress should remedy the situation that I described by enacting legislation that would amend the "Special Dominating Hospital Exception" to enable Foote and other similarly situated hospitals to qualify for reclassification. And, Congress should consider broader legislation that would allow hospitals, which are struggling with geographic reclassification issues, to permanently reclassify once and for all. Distance between hospitals is no longer the factor it once was. Most hospitals should have similar reimbursement rates.

Thank you for your time and consideration of this request.