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HEALTH CARE FINANCING ADMINISTRATION
STATEMENT OF CAROLYNE K. DAVIS, ADMINISTRATOR ACCOMPANIED BY: JAMES L. SCOTT, ACTING DEPUTY ADMINISTRATOR AND ADMINISTRATIVE SYSTEMS DENNIS P. WILLIAMS, ACTING DEPUTY ASSISTANT SECRETARY, BUDGET
Senator WEICKER. Our final witness this morning is Dr. Carolyne Davis, Administrator of the Health Care Financing Administration. Dr. Davis, why don't you introduce your colleagues and then proceed with your statement. Your entire statement will be inserted in the record at this point in its entirety. [The statement follows:] (1225)
STATEMENT OF CAROLYNE K. Davis
I am pleased to be with you today to present our FY 1986 budget request for the Health Care Financing Administration (HCFA). This budget plays a crucial role in serving the 51 million elderly, disabled and poor who depend on Medicare and Medicaid to help meet their health care needs. At the same time, the need to discipline spending while assuring continued access to health care by the elderly and disabled remains a delicate and pressing issue for the nation.
Before I highlight the specific appropriation items of interest to this Subcommittee, I want to outline our philosophy and overall approach in developing these budget request proposals. When this Administration took office, Medicare costs were rising at 18.7 percent a year. In FY 1986 that increase is projected to decline to 4.6 percent. This has been accomplished through reforms that have maintained access to quality care by a growing number of beneficiaries. The Prospective Payment System (PPS) for hospital reimbursement (paying all acute-care hospitals a fixed amount according to diagnosis) diagnosis) appears to be a major factor in slowing the rate of increase for the Medicare program.
While maintaining the quality of health care, our 1986 budget reflects the Administration's continued commitment to holding the line on health care costs, doing our part to reduce the deficit, and maintaining the Medicare trust funds' solvency. This budget may be viewed as an integral part of a governmentwide policy to limit Federal outlays while continuing to carry out the mission of our programs. In order to insure continued moderation of cost increases, this budget proposes a number of legislative and regulatory initiatives aimed at reducing the growth rate of expenditures. Even with these proposals, overall spending for Medicare and Medicaid will increase by $2.2 billion from FY 1985 to FY 1986.
In Medicare, plan to achieve spending control maintaining current hospital prospective payment rates and reimbursement rates to most other providers at FY 1985 levels while continuing to encourage competition in the health care sector. In Medicaid, we would provide States with incentives to structure their programs in the most cost-effective manner by providing limits on both program and administrative costs combined with increased flexibility to manage their programs. Together, proposals will reduce Federal health expenditures by $5 billion in 1986 and by $49 billion over the next five years.
I would now like to proceed with appropriations request.
Grants to State for Medicaid
The Medicaid program provides grant funding to all States and the territories for medical care for approximately 23 million low income persons. Our FY 1986 request of $23.7 billion reflects the following legislative proposals:
1) To limit FY 1986 Federal expenditures for medical assistance payments (other than Puerto Rico and the territories) to $22.2 billion and to constrain future years' growth to the medical care component in the consumer price index; and
To limit Federal expenditures for FY 1986 Medicaid administration costs, including funding for State certification and fraud control units, to FY 1985 levels.
Although it has been significantly reduced the last several years, medical price inflation continues to increase at a rate in excess of the general economy. Price inflation alone accounts for nearly two-thirds of the States' projected Medicaid increases for FY 1986. Our budget request seeks to stem the rate of program growth by inducing States to adopt further cost containment efforts which we believe they can make. For example, we estimate that the current Medicaid eligibility error rate of 2.7 percent represents erroneous Federal expenditures of $400 million, and the General Accounting Office reports that Medicaid still approximately $500 million annually in uncollected third-party payments. To facilitate implementation of efforts to achieve additional cost effectiveness, the Administration will propose number of measures to give States additional program flexibility. In addition, a hardship pool of $300 million will be available in FY 1986 to provide relief to those States which, despite aggressive cost containment efforts, experience uncontrollable increases beyond their funding limit.
Payments to Health Care Trust Funds
The payments account contains monies appropriated to the Medicare trust funds. Federal matching funds supporting the Supplementary Medical Insurance program make up the bulk of this account. In addition, the account includes funds to support benefits under the Hospital Insurance program for those beneficiaries grandfathered into entitlement, and military service credit payments enacted by the Social Security Amendments of 1983.
Our FY 1986 request for this account is $19.7 billion increase of less than $1 billion 4.8 percent. It composed of the following elements:
Federal payment for Supplementary Medical Insurance (SMI) -$19.0 billion;
Hospital Insurance for the Uninsured $554.0 million;
Hospital Insurance for Uninsured Federal Annuitants $12.0 million.
One of our legislative proposals would gradually increase the proportion of estimated expenses covered by the SMI premium revenues to 35 percent by 1990. This proposal, if enacted, could reduce our appropriation request by $736 million for FY 1986, while representing only a small increase per beneficiary.
This account provides funding for management activities related to Medicare and Medicaid. The total FY 1986 request of $1.2 billion is broken down into $82.4 million appropriated from general funds, and $1.1 billion authorized to be transferred from the Medicare trust funds. Overall, we have worked to reduce ongoing operating costs and to shift resources to enhance the recovery of trust fund dollars and to develop new information as a basis for future reforms of the system.
The FY 1985 budget for Program Management includes a recission of $5.8 million as provided by Section 2901 of the Deficit Reduction Act of 1984. of this account, $1.4 million has been taken from the Research, Demonstrations and Evaluation budget, $100,000 from the State Certification budget, and $4.3 million from the Administration Costs budget.
The Program Management request for FY 1986 covers the following program activities:
Results gained from research, demonstrations and evaluations produce knowledge about ways to more effectively manage the Medicare and Medicaid programs. Previous investments in this area have produced information critical to the development of legislation and program changes such the prospective payment system, and expansion of HMOs. We are requesting $22 million for research in FY 1986. This budget reflects the Administration's commitment to improve targeting of limited Federal research resources and reflects:
Phaseout of the efforts that have been completed (for example, selected long-term and hospice demonstrations);
Continuation of high priority projects, including Congressionally mandated studies, that require Federal funding in FY 1986 ; and
Selected new projects which are consistent with the Administration's priorities and would provide essential information for further reform of reimbursement systems and improve efficiency in service delivery.
This budget activity provides funding for operating costs incurred by our fiscal agents, primarily insurance companies, in administering the Medicare program. Key functions for which Medicare contractors responsible claims processing, payment safeguards and service to Medicare beneficiaries. We are requesting $935 million for this budget activity in FY 1986. This amount represents approximately 1 percent of Medicare benefits paid by contractors. We are also submitting two legislative proposals which which would improve contractor operations and would save $5 million in FY 1986. The first would allow us to process Part A claims on a flow basis; and the second, to eliminate the separate carrier for Railroad Retirement Board claims.
The FY 1986 budget reflects continued emphasis strengthening payment safeguards, including audit and medical review activities. The successful implementation of the new Prospective Payment System has made these critical activities more cost beneficial. The budget also reflects the strengthening of Medicare secondary payer efforts by contractors to ensure appropriate payment by third parties where they are primary payer. Funding increases to strengthen these efforts are offset by continuing decreases in claims processing costs.
3. State Certification (Medicare)
The State Certification program is responsible for ensuring that both institutional and non-institutional providers and suppliers rendering health care services to Medicare patients meet acceptable quality and safety standards. Annual agreements are negotiated with State agencies to perform surveys of health care facilities in accordance with explicit criteria.
The FY 1986 request for Medicare certification activities and program support services is $49.8 million. This is in addition to the resources required for Medicaid survey and certification which are included in the Grants to States for Medicaid appropriation request. Our FY 1986 request remains at approximately the same level as in FY 1985 and provides for overall survey coverage of approximately 65 percent of the providers and suppliers participating in Medicare. Within that total level of funding, we will continue to survey 100 percent of long term care facilities and hospices. Page 3
lutely atrocious conditions in institutions for retarded persons. Those conditions were documented 1 year ago in a general overview. The Secretary's survey confirmed those conditions and next week's hearings on the institutions will show they are continuing. We find people living in filth, in risk of physical abuse, drugs, sexually abused. It is a shame of the Nation. So I want to know why you are circumventing a clear intent of Congress that you hire 57 additional personnel? Is this your decision, or is it an OMB decision? Dr. Davis. It was my decision, Senator, to redirect 12 people from other survey activities to this effort. It is true that we were given 57 positions, but I was also given an FTE target requiring a reduction of 75 FTE's in order to live with my total Senator WEICKER (interposing). Who gave you this? Dr. Davis. That was an administrative decision not made by us. We now have hired 33 staff and are still advertising for an additional 12. In the face of having to downsize by 75 FTE's, it was my decision to redirect the efforts of 12 individuals involved in other activities to this survey effort. We are committed to devoting 57 staff to address conditions in ICF's/MR. We have been working very vigorously this year, and I think our record will testify to that, Mr. Chairman. We have been out to inspect conditions. I have personally been out to several sites, including, particularly, some of the most egregious facilities in New York State. I have met several times with individuals in the Governor's office in several States and indicated to them our serious intent to continue to survey. In one or two cases, we have been monitoring facilities on a monthly basis. So I believe the record indicates we are, indeed, not only aware of your concern, but share equally that concern. We are monitoring and will continue to do so. Senator WEICKER. I have a feeling by the time the hearings on institutions, which will take place on Monday, Tuesday, and Wednesday of next week, are over, the Nation is going to be pounding on your doors, and I think that you better come up with a good answer; indeed, all of us better come up with a good answer. The testimony at least that I have seen that will be presented is absolutely shocking. Nobody is going to listen to what David Stockman's argument is when they hear that testimony. No human being anywhere in the world, much less in the United States of America, should have to live under those conditions.
PROPOSED ICFMR REGULATIONS I received a letter from Secretary Heckler dated March 4 in which she stated that the proposed ICF/MR regulations, which have been in the works for several years now, "have entered the departmental clearance process." Do you have an estimate of when these regulations will be issued, and can you give us any indication of how the regulations will deal with the issue of active-active treatment for residents of ICF/MR's? Page 4
ADJUSTMENTS TO THE AREA WAGE INDEX
Senator HARKIN. Can you tell us if the audits have shown that there still will be significant adjustments? Dr. Davis. There will be some significant adjustments, not quite as drastic as there would have been had we not gone out and corrected some of the data reported. I think any time when you have a budget neutral situation, as we do have, and you are going to make adjustments, taking money away from some, giving it to others, those who have it taken away will certainly view it as a significant adjustment. Senator Harkin. Again, I want to ask you, will the data you collected be available to us, the backup data? Dr. Davis. I certainly would be happy to check with the Secretary and would recommend it. We have no reason not to share it. Senator HARKIN. I would like to have the first budget data come in, and I would like to see the results of the audits, too. The American Medical Association News, February 22, 1985, reported that this “Area Wage Index Report” would provide very favorable findings to rural hospitals in the country. According to the article, about one-half of the Nation's rural hospitals will be getting more money under the Medicare prospective payment, while the other onehalf will be getting the same or perhaps a little less than they now do. Moreover, these findings have been validated by HHS audits of 64 hospitals. Or is it 164 audits? Mr. Scot. Two levels, Senator. We did the initial group of audits, and then, based upon the information that came in, the Secretary decided she wanted to do a second group of audits. Senator HARKIN. It is more than 64? Senator HarkIN. Can you say whether or not this finding by the American Medical Association News is correct or not? Dr. Davis (interposing). I cannot truly say because they were looking at the report before the second audit sample had been done. It is always dangerous to deal with documents that are not totally verifiable. Senator HARKIN. Another thing that is dangerous is for us to accept the report without seeing what the initial findings were and what the audits were. Dr. Davis. I do not have any problem with sharing that material with you. Senator HARKIN. I would like to see it. Dr. Davis. That is fine. We are not trying to hide anything. You will find that, where there was significant misunderstanding in terms of reporting, the situation has been clarified. Some changes have been made, primarily in some of the wider ranges.
IMPACT OF THE REVISED AREA WAGE INDEX
Senator Harkin. My understanding is you did the second audit of the findings in the initial area of wage index report, in which you examined the data from 110 hospitals, in which DRG's were changed by 10 percent or more. Again, can you tell us what the finding of the second audits were: will changes in the data of the 110 hospitals affect the rest of the hospitals in the country? Page 5
ing in a national rate because it makes more sense to pay one rais nationwide than to have the variations that are around the country. B.' this year, as we move to the third year of the phase-in, 75 percent the PPS payment will be based on the Federal portion, composed 37.5 percent of the regional rate and 37.5 percent of the national race The remaining 25 percent of the PPS payment will still be based on the hospital's own historic costs. In addition, as you mention, Senator Harkin, hospitals can bulk pur chase and, indeed, many do, not only in the large urban centers, but I think increasingly large numbers of rural hospitals are banding together in consortiums to take advantage of group purchasing and group service contracts. I should also note that 80 percent of the Federal rate is modified b. the area wage index which reflects a significant differential between urban and rural costs in some areas. That, too, makes a difference. Senator ANDREWS. Doctor, we beat that old dog to death. You cor: up and tell me in Minot, ND, there is a different wage index than there is in Bismarck, ND. The Federal Government says there is. But if you go out and you talk to the nurses and you talk to the mechanics are you talk to the people who work in the pharmacy, they get paid exact. the same wage in Bismarck, ND, as they are paid in Minot, ND. Yel the Federal Government has this magic figure, and that is why we war to cross-examine you after you come in on this because what you say k simply not true. The wages of people in the one town are precisely the same as people in the other. As a matter of fact, a little higher in Minot because Minot has got . Strategic Air Command base 5 miles out of town and has 5,000 militar there. Dr. Davis. Senator, I will be happy to walk you through all the jus tifications, and I think it is a complicated process. We used actual cos data. I have no problems regarding its justification. I will be happy to have my technical people and myself walk you through any Senator Andrews (interposing). We have walked through them before. We would like, as a matter of fact in preparation for the hearing, and I don't want to take any more time of my colleagues on this issue here show us the specifics where you got the figures from the actual towns involved rather than someplace else, and that would be most helpful. I could not be happier that you are moving toward a national rate or a procedure, but is it not, indeed, and, in fact, true that a procedure in Hettinger, ND, may well be paid one-third as much for the same procedure in Chicago at this time? Dr. Davis. In fiscal year 1985 the PPS payment is based on 50 per cent of the hospital's own historical cost base and 50 percent of the combined regional/national rate. Senator ANDREWS. But what you have done is picked up, as you said 1 minute ago, the average cost in the past, and if the rural hospital out of concern for the patient because of the rural work ethic was charging less for a procedure some time ago, and the big city, because of the Page 6
Dr. Davis. I think those rates need to be validated, as to the timeframe they reflect and where they occurred. Our data does not look exactly like that. It is true that problems sometime occur in the initial start-up phase of any HMO. Particularly, in some of the demonstrations in Florida, when they first started several years ago, we learned that you must not only give written instructions but must also verbally explain to the enrolled beneficiaries that they cannot seek usual care under the fee-for-service routine. We very quickly established new guidelines and each of our HMO's must provide verbal explantions of the process and follow through with written instructions so that, before beneficiaries enroll or at the time of enrollment, they can read the material and understand the limitation. Senator CHILES. I wish you would look into it and let me know how you relate to that. I want to know exactly how you are set up to evaluate standards of care and protect the beneficiary interest. Dr. Davis. There is a quality control system being developed. We worked this last weekend with the HMO industry and some of the peer review organizations to establish some new guidelines. Senator CHILES. I want to see the program work. I support the concept, and the department seems to have an even bigger stake since you continue to propose to turn the Medicare Program into a voucher program. But as the Florida situation shows, it is a big leap from providing Medicare beneficiaries with opportunities for participation in well-established HMO's to a full-scale program without knowing what you are doing. I can just see all the storefront clinics applying for new status as HMO's under Medicare. It is a good deal. I can get hundreds of dollars per month, guaranteed, for everyone I sign up. And right now it sure looks to me the message is that I would not even have to worry about anyone looking over my shoulder to make sure that I took care of patients the way I said I would. Dr. Davis. No, Senator Chiles, we take our responsibility regarding quality of care very seriously. I think the whole HMO growth movement would fail if we did not ascertain they delivered high-quality care. That has been one of our major concerns. We do have a review process in place. Indeed, each of our demonstrations must be re-reviewed before they go live as an actual HMO under the new regulations. They have just been through this review process and as of April 1, the majority of our demonstrations will be converted to actual status, at which time they go through another review process. Mr. Scott. In addition, we put a number of things into the regulation we hope would help prevent the creation of a storefront HMO. We have confidence in the marketplace and consumers. We are requiring the HMO's not to be strictly Medicare and Medicaid HMO's. We think that, in order to qualify to take care of our patients, HMO's are going to have to prove in the market with the regular health in Page 7
Senator CHILES. Congress has provided specifically to the Director of ORR the responsibility for consultations between your agency, voluntary resettlement agencies and State and local governments before resettlement of refugees. Have you established an appropriate system for these consultations, and how many have occurred? Mr. Hawkes. That directive came in the amendments to the 1982 reauthorization of the Refugee Act. The refugee program is primarily a State-administered and federally funded program. For instance, the Director of ORR is also required by the Refugee Act to provide assistance to refugees all over the country, but we use state welfare agencies and State social service agencies to do that. The requirement in the law calls for consultations, not less often than quarterly, between voluntary agencies and local governments and other interested parties, so that they may plan their programs and project social service and other needs based on anticipated refugee arrivals in their areas. That was done particularly because of the large number of refugees who came into the country in 1980 and 1981. We published a requirement in the Federal Register that States set up at least quarterly meetings between those parties. In addition, ORR has paid the costs of those meetings. Recently, however, about 20 States have asked to have the requirement waived, saying they have in place mechanisms that ensure the transfer from organization to organization of enough information to do the necessary planning, and thus have met the intent of the law. I believe that by requiring those meetings to be held, by participating in some and funding them, we have, in fact, met the intent of the law. Senator CHILES. I understand you directed this responsibility, you delegated it to the State refugee coordinators. It seems to me if Congress told you they wanted coordination, I don't know why you are delegating it. Maybe we ought to transfer this responsibility to the State Department. Mr. Hawkes. That would be interesting, Senator. Senator CHILES. I have another question that I will submit for the record, if I might, Mr. Chairman, having to do with the systems modernization on computer capacities in the future.
Senator PROXMIRE. Dr. Davis, a January article in the New York Times reporting on an AMA malpractice claim study indicated that the total cost of additional tests and treatments that would not have been ordered except for fear of a malpractice suit was between $15 billion and $40 billion-not millions but billions of dollars. First, can you narrow that range? From $15 billion to $40 billion is a pretty broad range. Page 8
QUESTIONS SUBMITTED BY THE SUBCOMMITTEE
ICF/MR AND DEVELOPMENTAL DISABILITY SPECIALIST POSITIONS
Dr. Davis, Congress provided $1.9 million in the FY 1985 HHS appropriations bill to fund 45 new ICF/MR surveyors and 12 developmental disability specialists for a total of 57 new staff. sure you recall, those 45 new surveyors were determined by Secretary Heckler to be the number necessary in order to increase enforcement of health and safety standards in the ICF s/MR.
I am now told that you will only be filling 45 of the 57 positions with new staff, and will "redirect" the remaining staff from other survey functions.
Question. Why are you circumventing the clear intent of Congress that you hire 57 additional personnel? Were you unable to get approval from OMB to hire that number?
Answer. It was my decision to redirect 12 people from other survey activities to this effort. It is true that we given 57 positions, however, it was more expeditious to redirect 12 experienced surveyors to this activity. In addition, as HCFA streamlines its organization, staff will continue to be redirected to high priority initiatives.
PROPOSED ICF/MR REGULATIONS
Dr. Davis, I received a letter from Secretary Heckler dated March 4 in which she stated that the proposed ICF/MR regulations which have been in the works for several years now "Have entered the Departmental clearance process".
Question, Do you have an estimate of when these regulations will be issued?
Answer. The draft ICF/MR regulations recently underwent review by components of the Department. Comments that resulted from this review are now being evaluated by staff of the Health Care Financing Administration to determine which should be incorporated and to identify and resolve divergent opinions. Although it is difficult to predict precisely when a Notice of Proposed Rulemaking will be published, please be assured that we are aware of the strong support for modification of the existing rules by members of your subcommittee and within the professions that serve the developmentally disabled.
Question. Can you give us any indication of how these regulations will deal with the issue of "Active Treatment" for residents of ICF/MRS?
Answer. The concept of "active treatment" 13 scattered throughout the existing standards rather than being presented as separate requirement. While the "active treatment" approach was useful in describing the
involved in the treatment of the developmentally disabled, it has been difficult for facilities to clearly understand our requirements or for surveyors to evaluate their performance against them. The draft proposed ICF/MR regulations would consolidate "active treatment" requirements and would clearly define "active treatment" as including those interventions that enable the client to acquire developmental, behavioral, and social skills necessary for the maximum possible independence. The proposed rule would specify that all ICF/MR clients must be in need of, and receive, active treatment.
PROTECTION AND ADVOCACY TECHNICAL ASSISTANCE
Last fall Congress reauthorized the Developmental Disabilities Act (P.L. 98-527). Among other things, this Act mandated that protection and advocacy groups within each State are to receive the ICF/MR survey reports and plans of corrections for deficiencies within 30 days after completion of those reports and plans. Since this is the first opportunity that these groups have had to review these documents, I believe they could benefit from technical assistance from the Health Care Financing Administration (HCFA) in interpreting their contents.
Question. Would you be willing to have each of the HCFA Regional Offices conduct a one-day technical assistance session with these groups for this purpose?
Answer. HCFA would be glad to provide technical assistance to the protection and Advocacy agencies in States. We will coordinate this effort with the Administration on Developmental Disabilities.
FEDERAL MONITORING OF CERTIFIED PSYCHIATRIC HOSPITALS
Dr. Davis, in our hearing with Secretary Heckler a few weeks ago, I raised the 1ssue of the Federal role in monitoring psychiatric hospitals certified for participation in the Medicare and Medicaid programs. In order to become certified, facilities must demonstrate first, that they comply with health and safety standards, and second, that they are providing active treatment. The Federal Government has the authority to ensure these requirements are being met through monitoring surveys.
Specifically, with regard to active treatment, in 264 hospitals, consultants employed by the Federal Government conduct surveys to measure compliance with active treatment requirements, while in 189 certified hospitals, the States conduct these surveys. In other words, there is no Federal presence in 189 hospitals, save for the monitoring surveys HCFA may conduct. However, last year only 9 of these 189 facilities were inspected, or about 5 percent.
Question, Do you believe this is an adequate percentage, in view of the high levels of inactivity and apparent lack of therapeutic programming on the wards of many of these facilities?
Answer. HCFA believes it is. HCFA consultants survey directly 264 psychiatric hospitals for the two special psychiatric conditions of participation. This is almost 60 percent of the total. We also conduct a 5 percent sample of the remaining 189 psychiatric hospitals that have their two special conditions reviewed by the States. In addition, regions have authority to shift additional staff effort to psychiatric hospital oversight if necessary.
This is a higher level of Federal involvement than for any other facility type. We must recognize the fact that problems will in psychiatric hospitals--even in excellent facilities. However, we believe this level of Federal involvement is sufficient to carry out our responsibilities.
Question. Is it appropriate to rely the State's judgment the majority of facilities that won't receive monitoring survey, when there is a strong financial disincentive for States to decertify the facilities they operate?
Answer. Section 1864(a) of the Social Security Act provides, "The Secretary shall make an agreement with any State health agency which is able and willing to do 30," to make determinations whether a facility meets the conditions specified for participation provider under the Medicare program. However, the HCFA Regional Offices review the certification survey packages before exercising final determinations regarding certification decisions. We provide periodic survey and certification education workshops appropriate applications of Federal requirements. Federal direct surveys are also conducted in all cases where questionable findings occur. It is important to note that HCFA consultants survey almost 60 percent of all psychiatric hospitals to ensure compliance within the two special psychiatric conditions of participation. In addition, HCFA monitors 5 percent of the remaining psychiatric hospitals to check compliance status against the State agency decisions.
Question. Finally, since I was unable to obtain a response from Secretary Heckler the procedure for referring cases of abuse and neglect in psychiatric hospitals the Justice Department, could you respond to that question? Also, how often has this occurred?
Answer. First, let me point out that although both the Department of Health and Human Services and the Department of Justice concerned about the individuals residing in these institutions, our authorities are separate and distinct under the law. Our authorities, of course, primarily relate to compliance with conditions and standards facilities must meet to participate in Medicare and Medicaid. Within this context, there two primary ways these Departments coordinate their activities.
When the Department of Justice investigates a facility, it routinely advises both when it is about to undertake the investigation and before it issues the final report. Similarly, we have established a mechanism by which we provide the Department of Justice with notice of the termination of a facility. We do not routinely inform the Department of Justice of our routine surveys because the magnitude of this information would make any practical use virtually impossible.
I cannot provide explicit information on numbers of facilities because we do not maintain detailed records of the information. I can, however, reassure you that there is contact between our General Counsel's office and officials at the Department of Justice whereby information about findings for our Medicare/Medicaid facilities is shared.
PROPOSED EXTENSION OF PHYSICIANS' FEE FREEZE
The Administration's Budget proposes to extend the current Medicare physicians' fee freeze for participating physicians for an additional year, resulting in an estimated savings of $500 million in FY 1986.
Question. Do you believe that the extension of the freeze would remove the incentives offered by the Deficit Reduction Act for doctors who became participating physicians last October ?
Answer. The participating physician program enacted as part of the Deficit Reduction Act contained incentives for physicians to sign participation agreements. These include exemption from the freeze on the physicians' actual charges, publication of names of participating physicians in a directory, dissemination of names of participating physicians to beneficiaries via toll-free telephone lines at the Medicare carriers, decals and other indications of participation status and direct lines at the carriers for the electronic receipt of claims. These incentives to participate will be continued. The Administration's proposal to extend the freeze delays the timing of when participating physicians will have their fee screens updated.
In this time of fiscal crisis and enormous budget deficits, must ask all sectors of the economy to do their part toward reducing the Federal deficit. Close to three-quarters of income to the Part B trust fund, which covers physicians' services, come from general revenues. Continued increases in general consumption for Part B exacerbate the Federal deficit. Physicians' services the second largest component of Medicare accounting for 24 percent in FY 1986. Extension of the freeze on physicians is appropriate as part of an across-the-board freeze on spending for Federal programs and for other reasons. Even with the provisions of the Deficit Reduction Act, Medicare spending for physicians' services is expected to increase by 12 percent between FY 1985 and FY making it of the fastest growing activities in the Federal budget. Moreover, all physicians were largely unaffected by expenditure reductions in OBRA, TEFRA and the 1983 Social Security Amendments. Finally, only 27 percent of the three-year savings from the Deficit Reduction Act fell upon physicians.
Question. What percentage of physicians are "participating physicians" and what
Answer. The chart below summarizes participants in one or more practice setting.
The latest data we have available indicates that 36.6 percent of all covered physician charges are associated with participating physicians. This is based on a report of 29 carriers out of a total of 50.
STATUS OF THE MEDICARE HOSPITAL INSURANCE TRUST FUND
Recent estimates by the Department and CBO indicate that the Hospital Insurance (HI) Trust Fund will likely not be exhausted before 1994. Although the imminent depletion of the trust fund has been avoided, long-term estimates show that the trust fund deficits will grow steadily worse over the next 25 years.
Question. What policy options are you considering to eliminate the long-term deficits of the HI Trust Fund?
Answer. Long-term deficits in the HI Trust Fund are important reason for the proposals in the President's FY 1986 budget to be enacted. By dealing with the health care financing issues now, long-term deficits may be made more manageable. We are continuing to work various competitive solutions, such as vouchers and capitation, which could bring more cost-efficiency to Medicare and the delivery system. These have the potential to moderate health care costs and Medicare outlays. The April 1 Trustees report now indicates the Trust Fund will be solvent through 1998.
DIAGNOSIS RELATED GROUPS (DRGs) AND PAYMENT FREEZE
Nationally-based payment rates to hospitals for diagnosis related groups currently being phased in 3-year transition period. As a result, a given hospital's payment rate is based upon an evolving blend of that hospital's historical costs, its regional rate, and the national rate,
Question. Isn't freeze payments to hospitals participating in the Medicare prospective payment system without a simultaneous freeze in the pace of the transition to a nationallybased system likely to create inequities among these hospitals?
No. In constructing a prospective payment system, that the transition from hospital-specific Page 9
reimbursement to nationally-based system would necessarily encourage changes in hospitals' production behaviors, Consequently, hospitals with cost experience closer to the national average would experience less dislocation from the transition to national rates than those with higher costs; more efficient providers would be able to retain the difference between their costs and the payments under PPS. To halt the phase-in to a national rate would penalize those hospitals which are achieving the greatest efficiency. (of course, we will continue to maintain special payment approaches for hospitals with unique costs, such as sole community providers.)
PROPOSED FREEZE IN MEDICARE PAYMENTS TO HOSPITALS
Your FY 1986 budget proposes freeze in Medicare reimbursement rates to hospitals at their FY 1985 levels, for an estimated savings of $1.8 billion next year.
Question. What impact would the payment freeze have on Medicare beneficiaries in terms of access to services and quality of care?
Answer. We do not anticipate any limitations on access to services or lessening of quality of care. Recent reports indicate that efficient hospitals will be able to operate under the freeze without suffering losses. Therefore, there should be no increased reluctance to accept Medicare patients.
Our Peer Review Organization (PRO) program is actively monitoring care provided in hospitals to assure that appropriate services being provided to Medicare beneficiaries. This includes review of the range of services received by patients and other activities designed assure that patients not discharged prematurely. As the PRO program completes its implementation phase, we anticipate that such continuing reviews will assure maintenance of high quality care for our program beneficiaries and will have a positive effect on quality of care.
How will you monitor the impact of the freeze?
Answer. HCFA already has in place extensive PPS monitoring system. Data concerning admissions, length of stay, type of diagnosis and discharge destination are routinely collected from all hospitals. During the freeze, these data can be compared with earlier PPS experience to identify any changes in patterns of Similarly, data concerning amounts of payments made, including outlier payments, are also collected regularly and can be compared to an earlier period. Peer Review Organizations (PROS) will continue to monitor quality of care to assure that patients received appropriate services in-the appropriate settings.
Question. How would your freeze proposal financial viability of the nation's hospitals?
We do not anticipate any significant adverse financial viability of efficiently operated
hospitals. Several recent trends in the delivery of hospital services should facilitate their ability to live within the frozen rates. Length of stay has fallen dramatically since the advent of the prospective payment system (PPS). In FY 1984, length of stay for all short stay hospitals decreased by a full day. Preliminary data from PPS hospitals indicated even greater reduction in length of stay. This will lead to reduced use of resources to provide room, board, and routine nursing services.
Productivity in the economy as a whole increased 3 percent in each of the last two years. With the incentives for economy built into PPS, it can be assumed that hospital productivity would increase at a rate at least as high as the economy in general. Finally, recent economic data indicate that the actual rate of increase in the cost of goods and services purchased by hospitals is not high had been projected when the rates established.
Question. What alterations in services provided by hospitals do you believe will occur as a result of the freeze?
Answer. Since there is substantial evidence that hospitals will not have substantial financial difficulties as a result of the freeze, we do not foresee significant changes in the types and amounts of services provided by hospitals. To the extent that hospitals might begin to place emphasis on these services which they can provide most effectively, patient care may be enhanced. Studies have shown that, the more often a specialized procedure is performed, the more likely the final outcome will be favorable. Similarly, patients may be more comfortable if duplicative unnecessary tests are reduced. Our Peer Review Organizations are carefully monitoring patterns of care, not only to reduce overutilization, but to identify and correct situations where insufficient or inappropriate services are being provided, should such situations arise.
GAO STUDY OF PROSPECTIVE PAYMENT SYSTEM
Dr. Davis, a preliminary GAO report indicates that the Medicare Prospective Payment System may be forcing patients out of the hospital too soon and in poorer health than before the system was instituted. At the same time, your FY 1986 budget proposes a freeze on hospital reimbursement rates at their FY 1985 level.
Question. What is your response to the GAO report, and wouldn't the proposed freeze risk eroding the quality of care provided to Medicare beneficiaries by increasing the incentive to discharge patients earlier?
Answer. We have no evidence that there is a significant pattern of problems with premature discharges under PPS.
HCFA requires Peer Review Organizations to report all cases of hospital readmissions that, while medically necessary, appear to reflect premature discharge from a previous hospital stay. HCFA is aware of several hundred such alleged cases, nationwide. These cases represent an extremely small fraction of Medicare discharges. In addition, we are developing new policies designed to financially disadvantage hospitals that seek to discharge Medicare patients too
RESTRUCTURING OF HOME HEALTH BENEFITS
The Administration's budget req st envisions a $70 million savings through a revision in the methodology for calculating limits on reimbursement for medicare home health services.
What are the elements of this proposal?
Answer. We currently considering number of refinements to the HHA limits methodology. The data now available is of sufficient accuracy to allow us to apply the limits by type of service, as the Congress recommended in the Conference Committee Report accompanying the Omnibus Budget Reconciliation Act of 1981. In addition, we considering other improvements such refinements to the methodology used to identify and exclude aberrantly high and low per visit costs from the data used to calculate the limits. The refined system will be in place July 1, 1985.
Question. How have average costs per visit changed over the past five years?
Answer. The following ch presents the average per visit costs of a sample of urban freestanding HHAS participating in the Medicare program. These sample data have been used to establish HHA cost limits in each of the years indicated.
Initial year of data based on a single method of cost reporting implemented October 1, 1980. This uniform method has significantly improved accuracy of cost by type of service (e.g., skilled nursing, aide)
1984 and 1985 based on market basket inflation factors.
Question. How many Home Health Agencies (HHA) are currently "bumping" the existing limits, and how many more do you expect to reach the limits as a result of your proposal?
Answer. We estimate that 26 percent, or 1,350 of the approximately 5,300 participating HHAs will have costs in excess of the present aggregate limits. Were the present limits applied by type of service, the number of agencies with cost per visit for one or more services in excess of the limits would probably increase. However, we anticipate that, with the incentive given them by per service application of the limits, most of the affected agencies will initiate improved management, recordkeeping, and cost reporting techniques. With these improvements being implemented during the first year, agencies are subject to limits by type of service, We anticipate that the actual end of year increase in affected agencies would not exceed 8 to 10 percent.
The other refinements to the limits methodology, discussed above, may also increase the number of agencies with costs in excess of the limits. The impact of each change will be discussed once final decisions have been made on all of the refinements under consideration.
Question. Won't this change have the effect of reducing the availability of these services to individual beneficiaries?
Answer. While we expect an increased number of HHAs to exceed the proposed limits, we do not believe there will be a significant impact the availability of services. Since providers have the capability to control costs and modify behavior to avoid disallowances of cost, we expect these limits to eliminate inefficiency and promote cost conscious behavior in many agencies.
Moreover, the rapid growth of new HHAS since 1979 has greatly increased the availability services Medicare beneficiaries. Between 1979 and 1984, the number of participating agencies increased from 2,500 to over 5,000. The average annual rate of growth of participating HHAS between 1981 and 1984 (14 percent) was twice that experienced between 1979 and 1981 (7 percent). In addition, more agencies are now providing a wider range of specialized services (1.e., therapies, medical social service). For these reasons, we believe the change in limits will encourage improved management and more accurate cost reporting without adversely affecting beneficiary access home services.
Along with your proposal to cap Medicaid expenditures, a "Hardship Fund" of $300 million would be available in FY 1986 only for States that experience extraordinary costs above their limit.
How did you arrive at this $300 million for the
Answer. The $300 million level was determined to be the appropriate level because it was sufficiently large to provide relief to those States having difficulties adjusting to the new Federal financing limits, while not so large as to provide the wrong incentives to States in their efforts to control their rates of increase in Medicaid spending. It was determined that this amount would cover "excessive" cost increases above and beyond the level at which States could be expected to achieve savings through implementation of cost control and efficiency measures.
What criteria would States have to meet in order
Question. to tap this fund?
Answer. The precise details have not yet been finalized. In general, the basic concept is to provide funds to States who are significantly above their Federal limit despite sincere efforts to control costs within the constraints of their existing programs.
Your budget proposes to limit Federal Medicaid expenditures for medical assistance payments to $22.2 billion in FY 1986. This limit represents a reduction of approximately $1.3 billion below the current spending projections made by the Department.
Question. Do you feel that some States could be penalized unfairly because all future Federal payments would be linked to payments in FY 1984?
Answer. We gave the allocation procedures for the Medicaid cap considerable thought before we selected the option of using the latest actual expenditure data for allocating funds in FY 1986. This choice avoids the substantial uncertainties involved in attempting to estimate future demand and the numerous variables that may affect it. To account for factors that might arguably be important in such projections--such as tax bases and the share of indigent population--would require development of consistent estimates of the effects of each of these factors on a State-byState basis. In many cases, the data needed to develop such estimates are not reliable or not even collected at a State revel. Therefore, using data that reflects the most recent actual experience of the States is preferable. The $300 million hardship fund would be available to States with costs gnificantly above their grant despite vigorous cost-control efforts. We realize, however, that after 1986, there may be a need to reapportion funds based on changing State circumstances, and we will be examining various criteria which might be used in making reapportionments.
Question. How would States with worsening conditions be able to adjust to the proposed ceiling?
Answer. This proposal is being introduced at a time that the Federal government is facing continued deficits of unacceptable magnitude. The relative financial health of the States indicates that it is time for them to increase their share in paying for the health care of their citizens. A State facing worsening conditions will have to make the same decisions it has always had to make: to shift monies from different programs, to reduce over-all spending, and/or to increase revenues. Further, we believe that under a limited Medicaid program, States would have the incentive to organize cost-effective systems of care and explore innovative ways of financing and delivery services. For Page 10
example, GAO reports that Medicaid pays for more than $500 million annually in uncollected third party payments, and HCFA estimates that eligibility errors result in erroneous expenditures in excess of $400 million. Aggressive action in these areas should assist States in achieving savings and adjust to the proposed ceilings.
Question. Do States which have recently implemented major program changes have the ability to institute significant additional program efficiencies without affecting the quality and accessibility of services?
Answer. We expect that the "cap" on Medicaid will be implemented by the States in a variety of ways depending on choices that the States make. We intend to remove a number of requirements that now restrict the States' flexibility to tailor their programs to their individual needs. The resulting increase in flexibility should permit the States greater opportunity for improving the cost-effectiveness of their programs. It is our opinion that the FY 1986 funding level, which is approximately 5 percent less than the current law estimates, will not require the States to make significant reductions to those beneficiaries who currently eligible for Medicaid.
The States have demonstrated great creativity adapting to the reductions in the Federal Medicaid payments between 1982 and 1984. The FY 1986 budget request would give the States strong incentives to continue efforts to manage their programs costeffectively. For example, we estimate that the current Medicaid eligibility error rate of 2.7 percent represents over $400 million a year in erroneous expenditures and that uncollected payments from third-parties total $500 million a year. More determined efforts by States in these areas, for instance, could afford substantial savings.
MEDICARE HOME HEALTH COPAYMENTS
Your Medicare budget proposes to establish copayment equal to one percent of the inpatient hospital deductible on all home health visits after the 20th visit in a calendar year. You estimate that the copayment amount would be $4.80 in FY 1986, and would result in savings of up to $65 million next year.
Question. persons would be proposed copayment on home health visits?
Answer. In 1982 about 450,000 Medicare beneficiaries received more than 20 home health visits. We estimate that roughly 500,000 beneficiaries would receive more than 20 visits a year and thus would be affected by the proposed home health copayment. If this proposal were in effect in FY 1985, beneficiaries who use home health services would, on average, face copayments of $20.00 per year.
Question. What do you anticipate the impact of this proposal on utilization of home health services?
Answer. This proposal is intended to impose a modest copayment on home health services to give beneficiaries and their physicians the same financial incentive that exists for hospital and SNF benefits to consider whether services are needed. This modest copayment should bring home health utilization in alignment with the rest of Part A. The amount was set at a modest level so that persons in need of services would continue to receive such services.
Question. ' Is it appropriate to discourage the utilization of home health services at the same time patients may need such services because of earlier discharges from hospitals?
Answer. Persons who need no more than 20 visits after a hospital stay would not be affected by the copayment. The modest level of the copayment should serve only to discourage unnecessary utilization. Beneficiaries who need services should not be discouraged by a modest copayment.
RESEARCH AND DEMONSTRATIONS
Your FY 1986 research budget is proposed for a one-third reduction, down from $33 million in FY 1985 to $22 million. At the same time, there are several Congressionally mandated reports on Medicare policy and implementation issues that are already overdue, and approximately 17 more which are due over the next three years.
Question: What impact will this reduction have on the adequacy and timeliness of the reports due to Congress on these issues?
Answer. We have carefully targeted our resources to assure continued funding of research addressing the priorities that have been expressed by both Congress and the Administration. The proposed budget also permits us to target additional resources on those new initiatives of highest priority to the Administration and the Congress. We will continue to be responsive to the concerns of Congress in our agenda-setting process.
SKILLED NURSING FACILITIES
Your budget proposes to freeze Medicare reimbursement rates to Skilled Nursing Facilities (SNFs) at the prior years' level for accounting periods beginning July 1, 1985.
Question, How many skilled nursing facilities have reached the payment limits? How many more facilities do you expect to bump the limits as a result of your proposal?
Answer. As of July 1, 1984, the DEFRA 50 percent add-on to the freestanding SNF limits for hospital-based Medicare SNFs went into effect. HCFA data indicate that under these limits, 48 percent of urban hospital-based facilities and 36 percent of rural hospital-based facilities have costs exceeding these limits.
Twenty-three percent of freestanding urban facilities and 23 percent of freestanding rural facilities have costs exceeding the limits applicable to freestanding SNFs. We have estimates available as to how many facilities would reach the limits as a result of the SNF limits freeze proposal. It is important to note that since facilities would know about the limits freeze in advance, they would have the opportunity to institute cost containment measures to mitigate adverse impacts.
Question. Is it true that savings resulting from institutions exceeding limits for SNFs come from facilities which accept large numbers of Medicare patients?
Answer. Hospital-based facilities, which also the facilities with higher costs and those currently most likely to exceed the SNF cost limits, do tend to serve greater proportions of Medicare patients. Thus, the 10 percent of Medicare SNF beds that are in hospital-based facilities provide 20 percent of Medicare SNF patient days. Note, however, that 80 percent of Medicare patient days are being provided in beds in freestanding facilities which, on average, bave lower costs.
Question. If 90, wouldn't this proposal create disincentives for facilities to accept Medicare beneficiaries?
Answer. Analyses of cost variations among Medicare SNF s indicate that only some of the costs in higher cost facilities can be explained by such case-mix variables as higher proportions of Medicare patients. DEFRA sought to recognize only those higher costs attributable to case-mix differences in hospital-based facilities by allowing these facilities a 50 percent add-on to the freestanding facility cost limits. To the extent that other factorg--such higher wage rates, more staff, and lower efficiency--account for the remainder of the differences in costs between hospital-based and freestanding facilities, the high cost facilities could institute cost containment measures to control the effects of these factors without necessarily rejecting Medicare patients.
The Administration proposes to establish voluntary Medicare voucher program under which beneficiaries could elect coverage under a private health benefits plan rather than Medicare. Under this approach, a beneficiary choosing to do 80 would "opt out" of the Medicare program and receive a voucher toward the purchase of private insurance or a health maintenance organization plan.
Question. If the HMO experience 18 a model for your voucher plan, what evidence do you have that the voucher system would be more efficient than the HMO system?
Answer. The voucher proposal expands on the HM system now in place. It is intended to give beneficiaries a broader range of options by permitting a wider range of health insurers to contract with Medicare to cover a benefit package at least equivalent to Medicare,
Under this proposal, the Medicare program would give the plan payment related to Medicare's average payment for beneficiary, adjusted by actuarial categories such as age. In return, the plan would the risk of covering the beneficiary's services. While plans would have some flexibility in adjusting the structure of Medicare benefits, they would have to offer a package at least equal in value to Medicare. Beneficiaries would be free to return to Medicare should they so choose.
Plans would have to meet certain requirements, for example, standards regarding their financial stability to assure that they viable business operations and that they ensure continued access to quality services.
There would be greater program efficiencies because more plans would be able to offer an integrated package of Medicare coverage combined with "Medigap" benefits, as HMOs can now do. These insurers would have incentives to be more efficient and to develop reasonable utilization controls because they would be at risk for both Medicare and Medigap benefits. At the national level, the health care sector would benefit from the increased competition and efficiency among plans that would be generated by opening up the Medicare market to wider array of health car insurers.
Question. Has the private insurance industry given you any indication that they will be able to provide the elderly with insurance benefits equivalent to those offered under Medicare at a rate which will result in savings to the Federal Government?
Answer. Since the voucher bill was introduced in 1983 we have had feedback from several sources, some indicating interest in the concept. Other insurers have indicated that they might not be interested in being at risk for covering a Medicare-equivalent package of benefits. However, these plans could change their position if they see their competitors entering into agreements with HCFA. The proposal provides that the Federal Government will pay 95 percent of the amount it otherwise would have, resulting in federal savings.
MEDICARE AND PREPAID HEALTH PLANS
Premiums paid by Med care to prepaid health plans participating in Medicare are equal to 95 percent of the Adjusted Average Per Capita Cost (AAPCC). The AAPCC is an estimate of the cost Medicare would have paid providers in the Fee-For-Service System to care for the prepaid plans' Medicare beneficiaries.
Question. How may prepaid health plans have expressed an interest in participating in Medicare? How many contracts have been signed with these plans?
Answer. Ninety-four organizations have applied for contracts under the new prepaid health plan provisions. of this number 27 (formerly demonstration contracts) have signed contracts and are operational.
Question. How many Medicare beneficiaries do you expect to enroll in these prepaid plans in the next year? What share of all Medicare beneficiaries do you expect will ultimately enroll in these plans?
Answer. We expect enrollment to increase by 100,000 to 200,000 in the next year as new prepaid health plan contracts are implemented. Over the long run, we believe enrollment by Medicare beneficiaries in HMOs will match the proportion of the general population in HMOs. This presently stands at 6 percent.
Question. Do you expect this system to result in additional costs or achieve net savings to Medicare over the long term?
Answer. We expect the system to achieve net savings to Medicare in the long term. Our data shows that program savings for Medicare enrollees for 1984 $20.9 million and estimated savings for 1985 will exceed $34 million. We expect continued growth in savings the number of contractors and enrollees increases.
MEDICARE PAYMENT FOR MEDICAL EDUCATION COSTS
Your FY 1986 budget proposes to freeze Medicare payments for direct medical education costs and to halve payments for indirect medical education costs.
Question. How would these proposals affect the financial stability of teaching hospitals?
Answer. Since the beginning of Medicare, we have paid for direct medical education using an open-ended cost-based methodology. These costs have increased at rate above the overall rate of inflation. We do not believe that the entire increase is necessary for the efficient delivery of patient care. We do believe that the proposed limitation will result in appropriate payments for these direct costs.
While we recognize that this change will temporarily have adverse impact affected hospitals, believe that this policy offers hospitals an opportunity to be more efficient and flexible in their approach to managing their education programs. For example, some hospitals may choose to specialize in certain residency programs.
In regard to Indirect medical education, the proposal is to return to the initial factor used by HCFA to estimate these costs. We will still pay for these costs but we will not pay based on an arbitrary doubling of the factor. In addition, since the indirect Page 11
teaching adjustment is applied to only one-half of the hospital's DRG payment in FY 1985, the impact on teaching hospitals is reduced on average by 25% from 5.79% of the total DRG payment in FY 1985 to 4.35% of the total DRG payment in FY 1986.
Question. What effect would these proposals have on the size and scope of their teaching programs?
Answer. We do not anticipate that the changes to indirect medical education will affect the size and scope of teaching programs since these payments do not directly support medical education. Our proposal to limit direct medical education could lead to changes in the number of programs, their size or their specialty make-up, however, we are unable to predict what specific actions affected hospitals will take in response to the proposed payment limitation.
Question. How would any negative impacts resulting from these proposals, compounded by a freeze in prospective payments rates, be addressed?
Answer. Any time that reimbursement is reduced, adjustment period follows. However, do not anticipate any permanent adverse impact from our proposals. Once the changes are implemented, we will continue to monitor the status of teaching hospitals and consider any further actions that may be warranted.
PROPOSED MEDICARE PART B PREMIUM INCREASE
Your budget proposes to gradually increase the Medicare Part B premium over a 5-year period beginning in FY 1986. This would increase the premium next year from $16.10 under current law to $16.80.
Question. What would be the effect of this premium increase on beneficiaries who are already at or near the poverty line?
Answer. State Medicaid programs currently pay the Medicare Part B premium for 2.8 million cash assistance recipients. These individuals will not be affected by the proposal since the State will pick up the increased cost.
In addition, the proposal contains hold-harmless provision to protect beneficiaries with low Social Security payments. Under this provision, beneficiaries who have their part B premium deducted from their monthly Social Security benefits check will not see a reduction in their Social Security check as a result of the proposed change. That is, if the dollar amount of the premium increase is greater than the dollar amount of their Social Security cost of living adjustment, the beneficiary's premium increase is reduced to equal the Social Security Cost of Living Adjustment.
PROPOSAL TO INDEX MEDICARE DEDUCTIBLE FOR MEDICARE PART B
Current law requires enrollees in the Part B (doctor bill) portion of Medicare to pay a $75 annual deductible. Your proposal would index that deductible to the Medicare Economic Index beginning in 1987, for an estimated savings of $75 million that year.
Question. What effect would this change have on Medicare Part B beneficiaries?
Answer. The 1981 Reconciliation Act increased the Part B deductible 25 percent from $60 to $75. Prior to this amendment, the deductible had remained at $60 since 1973 despite a more than 500 percent increase in total program benefits (more than 300 percent per aged enrollee) between 1973 and 1982. Current law does not provide for future increases in the deductible despite projected 121 percent increase in Part B reimbursements between 1981 and 1985. As a result, the initial beneficiary liability for medical services will decrease in real terms and these costs will be shifted to the Federal government.
The Administration's proposal would raise the Part B deductible by $3 on January 1, 1987 from $75 to $78. Under current assumptions, the deductible would increase to $81 in 1988, $85 in 1989 and $89 in 1990, relatively modest amounts which beneficiaries can bear. Beneficiaries most in need would be protected since increased deductible amounts would be picked up by State Medicaid programs. Moreover, many Medigap policies cover Part B deductible expenses for beneficiaries.
PROPOSED DELAY IN INITIAL ELIGIBILITY DATE FOR MEDICARE ENTITLEMENT
Current law states that eligibility for Medicare begins at the beginning of the month in which an individual turns 65 years old. The Administration's budget proposal would delay eligibility until the first day of the month following the individual's 65th birthday, for an estimated savings of $225 million in FY 1986. As you know, Congress considered, and rejected, this proposal last year.
Question. What assurance do you have that employer-based health insurance plans would extend private coverage for additional month if the program's initial eligibility date delayed?
Answer. Many private plans periods until Medicare begins. Further, if Medicare eligibility were extended to the first full month following the 65th birthday it would create a demand for private coverage for that period. It is reasonable to expect that private insurers would seek to meet the demand, especially since it would be an administratively simpler matter for them to extend existing coverage to the beginning of a month for all persons turning 65 in the previous month.
Question. Do you have an estimate of the number of persons who lack employer-based or private health insurance at age 64 and would therefore be without coverage for an additional month?
Answer. About 16 percent of persons aged 64 have employer-based or private health insurance coverage. Half of these people have public coverage, 1.e., Medicaid, CHAMPUS, or Medicare (entitled because of disability). The remainder have no coverage. About two million people will become newly entitled to Medicare at age 65 in 1986. About eight percent of this group, or roughly 160,000 persons, would be without coverage for an additional month if this proposal were enacted.
PEER REVIEW ORGANIZATIONS (PROS)
Hospitals receiving payment under the Medicare prospective payment system were required to enter into agreements with a Peer Review Organization by November 15, 1984, which would conduct reviews of: (1) the validity of the diagnostic Information provided by the hospitals; (2) the completeness, adequacy, and quality of care provided; and (3) the appropriateness of admissions and discharges.
Question. What are your criteria and procedures for monitoring and evaluating the performance of individual PROS?
Answer. In order to effectively monitor and evaluate the performance of PROs, several steps will be taken:
the status of utilization
1. Quarterly progress reports objectives will be required.
Routine visits by contractors with medical expertise will be made to monitor the progress of PROs' quality objectives.
On-site visits by project officers to validate reports, identify problems, and to discuss probable solutions with the PRO.
4. The accuracy of medical determinations made in the course of admissions review and DRG validations will be verified by an Independent, nationally recognized organization of physicians, and records administrators (Super PRO contract).
The activities listed above will take place within the first 15 months of a PRO contract. Problems identified will require the submission of corrective action plans which will be monitored by the project officer and/or medical contractor group. These two entities will also be available to provide technical assistance to PROS.
Further, a comprehensive evaluation of the PROg' overall performance will be conducted during the 18th month of the contract. Minimum criteria sets will be established for cost effectiveness, quality, coordination with Fiscal Intermediaries and investigative agencies, reporting requirements and private review. Failure by a PRO to meet any of the minimum standards creates a basis for termination, nonrenewal, or modifications of the PRO's contract.
Question. What have been the major problem areas identified by PROs in the course of conducting hospital reviews? Answer. The major problem area in implementing and conducting hospital review has been the lack of acceptable Part B bill tapes, including delayed receipt of claims, high error rates, problems with new system as well as the data exchange between PROS and Fiscal Intermediaries. Edits have been put into place to resolve many of these problems. Another problem area has been the requirement that physician and provider contact be made prior to the issuance of denial. A directive was issued in early February to stress this requirement and to make available to the PRO additional time to complete review, if needed to facilitate physician/provider contact. Several PROs experienced problems with data processors and evaluations and terminated their services, replacing them making decision to perform the services themselves.
Backlogs of reviews that needed to be completed before performing correct review was a major problem to a number of PROS until they were able to catch up. Several PROs had problems hiring personnel with needed expertise to perform all the review requirements.
Question. What recourse do patients and their physicians have in the case of an individual who has received an initial PRO denial determination during preadmission review?
Answer. If a Medicare beneficiary is refused admission by a PRO to a hospital, he or she must be notified in writing of the reasons for the denial. The beneficiary may request that the PRO reconsider its findings by submitting such a request within 60 days of the denial to 1) the PRO; 2) any Social Security Office; or 3) any Railroad Retirement Board Office. If the PRO upholds its original determination and the amount in controversy is over $200, the beneficiary may obtain a hearing by an Administrative Law Judge of the Social Security Administration. If the amount in controversy is over $2,000 the beneficiary may obtain judicial review of the case. If a beneficiary suspects that he or she was discharged too early, or transferred inappropriately or in other way did not receive quality care, he or she may contact the PRO or HCFA or the Office of the Inspector General and request an investigation.
END-STAGE RENAL DISEASE NETWORK COORDINATING COUNCILS
Your budget once again proposes elimination of the ESRD Network Coordinating councils, which were funded at $4,837,000 in FY 1985.
Question. How will the new responsibilities of Councils added by the Deficit Reduction Act be carried out if the Councils are eliminated?
Answer. The Congress has directed the Administration to address the following concerns.
Consider consolidating existing network areas.
The Administration has determined that the activities whicb the Councils perform can be assumed by other programs ECFI manages. With regard to network areas, HCFA is developing a plan to reduce the number of network areas from the current 32.
Strengthen the networks' data collection capability.
Collection of program data currently performed by Councils will be accomplished by Medicare fiscal intermediaries, HCFA regional offices, or Independent contractors. HCFA will ensure that these entities will have sound data collection capability.
Examine the composition of network organizations to see 11 facility representation could be reduced and representation of the beneficiary's interest could be increased.
HCFA will require Patient Advisory Committee in all establishment of a composite reimbursement rate for ESRD facilities encouraged home-based dialysis?
Answer. The ESRD composite rate is paid to a facility for its Method I patients who dialyze at home. Because the composite rate payment exceeds the cost incurred by a facility for these patients, it is anticipated that the number of home-based dialysis patients will gradually increase. Since the introduction of the composite rate system on August 1, 1983, the percent of Method I home dialysis patients has increased from 17 to 19.2.
WAGE INDEX FOR PROSPECTIVE PAYMENT RATES
The wage index used to develop the FY 1984 and 1985 prospective payment system rates is based on data from the Bureau of Labor Statistics that does not distinguish between full-time and part-time workers. The wage index therefore understates vage levels in areas that rely more heavily on part-time workers, such as rural areas. We understand that HCFA is attempting to develop a revised wage index.
What is that status of this effort?
Answer. I am pleased to report that on March 29, 1985, Secretary Heckler submitted to the Congress the wage index study Page 12
required by the Deficit Reduction Act. The report contains two alternative wage Indexes developed from a survey of hospitals subject to the PPS. The survey was especially designed to address the principal limitation of the present index, its inability to measure regional variation in hospital part-time employment. The report contains recommendation with respect to which index should be adopted. Before an index is adopted, we want to have the benefit of comments from the Congress, the hospital industry, and other interested parties.
EXPIRATION OF MEDICARE HOSPICE BENEFIT
Dr. Davis, your budget assumes that the Medicare hospice benefit will expire at the end of FY 1986, as the law currently dictates.
Question. Why is the Department not proposing legislation to extend the benefit? Has it been shown to result in higher costs to the Medicare program?
Answer. When the hospice benefit was enacted in 1982, Congress directed that we study our experience under the benefit and provide a report by January 1, 1986. We are now in the process of collecting data and information to develop that report and believe it would be premature to make any legislative proposals until it is completed. We do not presently have cost data to determine the financial impact of the bospice benefit the Medicare program. However, our actuaries have previously estimated that the hospice benefit will increase Medicare program costs.
Question. Do the preliminary results of the Medicare benefit indicate that the majority of hospice patients are cared for in home-based or hospital-based hospices?
Answer. Seventy-seven of the 171 hospices currently approved for Medicare participation are home health agency-based organizations. The remaining hospices fall into the following categories:
42 Hospital Based 9 Skilled Nursing Facility Based 43 Freestanding
Question, When we expect to receive the HCFA evaluation of the hospice demonstration project, which was due in September 1983?
Answer. The final hospice report is currently being reviewed within the Department. We expect the Secretary to officially transmit the document to Congress by the summer of 1985. An interim hospice report was shared with the Congressional staff in April 1984.
Last year you indicated that HCFA projected that of the 1,500 hospices nationwide, approximately 400-500 hospices would become certified for participation in the Medicare program. Yet only about 100 have actually become participants in Medicare.
Question. On what did you base your initial projections that approximately 400-500 hospices would become certified for participation in the Medicare program and why do you think more hospices have not chosen to become Medicare certified?
Answer. Prior to publication of final hospice regulations, HCFA canvassed 1500 potential hospices to determine their interest in the Medicare hospice benefit. Over the next several months, 500 responses received from the hospices and most of then indicated that they intended to wait until the regulations were published in final before considering applying to the Medicare program. upon publication of the final hospice regulations a smaller than expected number of hospices actually applied for Medicare approval.
In a report issued by the Department of Health and Human Services' Inspector General, the major disincentives in the current reg ations focused cost and reimbursement factors. These include:
Reimbursement rates viewed as insufficient by hospices.
$6,500 reimbursement cap per patient.
Required care services plus new recordkeeping and reporting obligations would add appreciably to administrative overhead and operating costs.
Some hospices may view specific hospice "model" laid out in TEFRA as inconsistent with their goals and philosophies.
HCFA RESEARCH, DEMONSTRATION AND EVALUATION
You are proposing a 33 percent cut in the Health Care Financing Administration's budget for research, demonstration and evaluation (RD&E) activities, from $33 million in FY 1985 to $22 million in FY 1986. These RD&E efforts directed toward developing and testing alternatives for administering the Medicare and Medicaid programs more cost effectively.
At the same time you are proposing this reduction, your budget justification acknowledges that "there is little likellhood that other organizations would carry out the necessary RD&E activities to help contain HCFA program costs."
Question. How do you justify a reduction of this magnitude in view of the serious financing problems facing the Medicare and Medicaid programs?
Answer. In view of the overall need to do everything possible to reduce the deficit, we have carefully reviewed the needs of our RD&E activities for FY 1986. This level of funding will provide the resources to assure continued funding of research addressing the priorities that have been expressed by both Congress and the Administration. The proposed budget also permits us to target additional resources to those new initiatives of highest priority to the Administration. We will continue to be responsive to the concerns of Congress as we develop our research agenda.
Question. What specific projects will be foregone as result of this reduction?
Answer. As in any research and demonstration program, there are always more worthy projects than available resources. However, we believe that the funding level of $22 million in FY 1986 will enable the Health Care Financing Administration (HCFA) to fund all current Congressionally-mandated studies, all priority continuations as well as high priority new starts. Much of HCFA'S effort the last several years has focused the implementation of the Prospective Payment System and the Health Maintenance Organization Program, which are now in place. We will now be shifting our focus to more long-term reforms and refining the research agenda in FY 1986.
I understand that HCFA has requested that HHS seek approval from OMB for release of the $20 million FY 1985 contingency fund for the Medicare contractors,
Question. What is the status of this request? need the entire $20 million? If so, will even that amount be sufficient?
Answer. Possible of HCFA'S contingency currently under review within the Department.
Question. Will you be using any of the contingency funds to cover claims processing?
Answer. Possible of HCFA's contingency currently under review within the Department.
Question, Do you anticipate a similar problem in FY 1986, since your budget request of $935 million is basically a straight line budget, while contractor workloads are expected to rise between 6-10%?
Answer. The FY 1986 Medicare contractor budget does take into account workload growth, inflation, and other demands on the contractors. The budget also takes into account economies and efficiencies which contractors, particularly high cost contractors, are expected to achieve.
Question. Is it true that your request to OMB for Medicare contractors was $957 million in FY 1986?
Answer. Our submission to OMB for the Medicare contractors was $935 million. HCFA's request to the Office of the Secretary was $957 million.
Question. If your FY inadequate, what would be beneficiaries and contractors?
1986 budget request proves to be the consequences to Medicare
Answer. The funding level requested for FY 1986 for the Medicare contractors is sufficient. HCFA's goal is to increase the efficiency and productivity of the Medicare contractors while not reducing the quality of their operation.
The beneficiary and provider services portion of the FY 1986 Medicare contractors' budget has been increased by $13.3 million. This increase will assure that contractors maintain adequate communications with beneficiaries, and affords beneficiaries the opportunity for reconsiderations and fair hearings concerning adjudication of their claims.
"SUPER" PEER REVIEW ORGANIZATION CONTRACT
I understand that HCFA is planning to contract with organization to review the work of the Peer Review Organizations (PROS), hopefully within the next few months.
Question. Since the PRO contracts coming up for renewal during the summer of 1986, will awarding of this contract in late spring of 1985 allow sufficient time for review of the PRO's activities? If not, will you rely on the HCFA regional offices' evaluations of the PROS?
Answer. We expect to award a "Super-PRO" contract in June 1985. The first significant point in the PRO contracting process occurs at the 15th month of each contract, i.e., September 1985 for contracts effective July 1984; October 1985 for contracts effective August 1984, etc. The first set of contract deliverables for the Super-PRO contract have been scheduled to coincide with the 15th month of each PRO contract and we intend to use those reports as part of our overall assessment of PROS. However, it is not our intention for the Super-PRO contract to replace HCFA regional office evaluations but rather to supplement HCFA regional monitoring activities.
It should also be pointed out that the Super-PRO contract period extends beyond the existing PRO contract periods. This will enable us to monitor the second set of PRO contracts from the start of the contract period.
ICF /MR AND DEVELOPMENTAL DISABILITY SPECIALIST POSITIONS
Question. From what survey activities. will the 12 staff be directed, and how did you determine that these survey activities were of lower priority?
Answer. The 12 staff will be directed from monitoring those providers and suppliers that historically experience a small percentage of deficiency citations. These facilities include comprehensive outpatient rehabilitation facilities (CORFs), ambulatory surgical centers, portable x-ray units and rural health care units. HCFA has determined that these staff will have greater impact on Its monitoring responsibility by focusing on ICF s/MR.
Question. What will be done with the remainder of the $1.9 million that will now not be needed.
Answer. The majority of the remaining funds were used to pay the FY 1985 3.5 percent payraise.
Question, Please provide for the record a breakout of the proposed FY 1985 rescission by category (1.e., travel, consultants, publications) and its effect on Program Management Projects. In particular, please include any research or demonstration projects that would be reduced or foregone if this rescission were to be enacted.
Answer. HCFA plans to reduce the Program Management Account in the following manner:
Category Travel Transportation of Things Printing Public Affairs Consultants
515 2901 Savings Withbolding Amount Amount 163 4 1,244 63 4,337 1,432 5,811 1,432
Total $ 163 4 1,244 63 5,769 37,243
The rescission will result in:
Travel and Transportation o A slight reduction in travel and transportation with no adverse impact.
Printing other types of Agency printing material. Page 13
The cancellation of a contract to distribute Medicare pamphlets.
Consultants o Spending reduced below the 1984 level. The proposed reduction would decrease consultant expenditures by 41% as follows:
A 45% decrese in PRISM funding which will extend, at the most, Emergency Preparedeness Claims Processing - State Audits State Agency Performance Evaluation System Research Contracts ($1.3M Rescission, $1.0M Lapse). Physician/Hospital DRG Demonstration Hospice Evaluation
FEDERAL MONITORING OF PSYCHIATRIC HOSPITALS
Question. In the case of the 80 percent of certified psychiatric hospitals that also accredited by the Joint Comission on Accreditation of Hospitals, is it true that you rely largely on State agencies to perform surveys validating JCAH standards are being met?
Answer. First, let us point out that hospitals accredited by the Joint Commission on Accreditation of Hospitals are deemed to meet only the general hospital conditions; they are not deemed to meet the special psychiatric requirements. Therefore, with regard to validations, accredited psychiatric hospitals are treated no differently from accredited general hospitals. That is, we rely primarily on the State agencies to verify that accredited hospitals do meet the Medicare general hospital conditions.
For the two special psychiatric conditions, in both accredited and unaccredited hospitals, we also rely heavily on the State agencies to certify compliance. However, most States (all but 12), instead of using their own surveyors, use HCFA psychiatric clinical consultants. (In over half of the psychiatric hospitals surveyed in FY 1984, HCFA psychiatric clinical consultants were used to evaluate compliance with the two special conditions). Those States that do not consultants are strongly encouraged to do so.
Question. When a complaint is made to HCFA of substandard conditions in these facilities, does your agency investigate or do you contact the States to have them follow up on complaints?
Answer. Generally the States perform complaint investigation surveys for us. For complaints against psychiatric facilities, HCFA consultants are frequently used, especially in those States where consultants perform the routine certification surveys. In almost all cases, 1f the complaint is serious enough (e.g., patient deaths) or requires an extremely high level of expertise to investigate active treatment), ВСТІ consultants, are used in lieu of State Agency surveyors.
CONGRESSIONALLY-MANDATED STUDIES
Question. Please provide for the record a list of all the Congressionally-mandated studies since 1980 and their due dates, as well as their current status.
Answer. Due to its length, this information is being sent to the subcommittee under separate cover.
Date established by legislation.
HCFA projected completion date.
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The bulk of federal funds expenditures is in two areas: health and human services and education.
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