PROSPECTIVE PAYMENT ASSESSMENT COMMISSION

STATEMENT OF RICHARD BERMAN, MEMBER

ACCOMPANIED BY DONALD YOUNG, M.D., EXECUTIVE DIRECTOR

BUDGET REQUEST

Senator HARKIN. Our next witness is Dr. Stuart Altman, Director, Prospective Payment Assessment Commission. I am sorry. I am told it is Mr. Richard Berman.

The fiscal year request for the Commission is $4.2 million, an increase of $355,000 over last year's level.

I am sure I speak for all Members of Congress when I say that ProPAC's ongoing work on the prospective payment system has proven quite valuable these past 8 years. However, we are still struggling to balance the rising costs of health care with the need for improved individual access to medical care and treatment.

Mr. Berman, we still have, as you know, a lot of problems here with hospital closures, equitable reimbursement policies for hospitals across the Nation. So, I look forward to hearing your thoughts on these issues today.

Your statement will be made a part of the record in its entirety, and I will ask you to please proceed and introduce Donald Young. Why did I have Dr. Stuart Altman? Oh, he is the Chairman. I see. And Dr. Young is the Executive Director.

Dr. YOUNG. That's right.

Senator HARKIN. Now I have all the players straight.

Mr. Berman, thank you very much for being here and please proceed.

INTRODUCTION OF ASSOCIATE

Mr. BERMAN. I am Richard Berman, a Member of the Prospective Payment Assessment Commission, and accompanying me is Dr. Donald Young, the Commission's Executive Director.

I will spare you reading through my testimony and just try to hit a couple of the highlights and allow you to probe in areas where you are most interested.

Recently Congress has expanded ProPAC's responsibilities, and now our mandates include all inpatient hospital services, as well as facility components of the outpatient areas, skilled nursing, home health, freestanding units, and end-stage renal disease facilities.

In addition, we have responsibilities related to Medicare's interaction with the entire health care system and its cost. It becomes clear that some of the interactive forces are other payors, and that is why Congress asked us to take a look at Medicaid and uncompensated care. And so, we will report on that.

You have received our March 1991 report to Congress on time again. And I think it is again a mixed story that we are reporting on. Expenditures and payments for Medicare have been reduced since the introduction of the prospective payment system [PPS]. Where there were double digits increases before, there are single digits now. On the other hand, we have not necessarily fundamentally changed the cost structure of hospitals. Hospital expenses continue to go up 10 percent a year, and I think that is still troublesome for a lot of us. However, the total financial condition of hospitals in general is about the same as immediately pre-PPS and better than in the good old days of the 1970's.

RURAL HOSPITALS

Let me spend a little time on some of the rural hospital issues and focus on those.

We will be putting together, as you have asked us to, probably in the July-August timeframe a report targeted at issues of rural health care delivery. The report will be broader than just the payment issues. It will also address access and quality issues which have also been on your mind, Mr. Chairman.

A couple of early findings are that where we used to think of uncompensated care as only being a big city issue, it turns out to be a very significant issue for the rural hospitals. And in the last 10 years, the costs of uncompensated care has been increasing at about 12 percent a year, and the proportion and the share of it turns out to be very similar between rural and urban institutions. As I said, we will report on Medicaid, as requested by Congress, in October. As you know, we have looked at the issue of differential payments between urban and rural hospitals. We recommended that the differentiation in the standardized amounts be eliminated over 3 years, and OBRA has done it over a 5-year period. But I think we are making great progress in dealing with what was an inequity.

WAGE INDEX

The area wage index has been addressed in our March 1991 report where we recommended improvements by eliminating skill mix as a variable which will have a significant impact to the rural――

Senator HARKIN. I haven't seen that. I am interested in that. I will take a look. I will find out what the variable was you took out. Dr. YOUNG. The wage index that was structured measured the price of labor, but also the complexity of the types of personnel so that more complex personnel required to do more complex procedures was measured in the wage index. The end result is that hospitals in cities, hospitals that did complex technologic kinds of things, were being over-compensated for their care.

The effects of our recommendation would be to remove that occupational mix component. The end result will be that the wage index in rural areas will go up, and the wage index in urban areas will come down. The urban hospitals are already receiving payments through the DRG's for the more complex mix of patients. So, it will be a better measure of the actual price of labor faced both in

urban and rural areas, but it will be to the advantage of rural hospitals.

Senator HARKIN. Thank you very much.

Mr. BERMAN. And it was specifically the way you raised the question 2 years ago and last year again that was addressed by ProPAC.

OUTPATIENT PAYMENT

Senator HARKIN. I appreciate that. Thank you.

Mr. BERMAN. The only other two or three areas I was going to address quickly, Senator, were in your committee report language where you raised questions with respect to the outpatient rate. The Commission, after deliberations, said there ought not to be separate urban and rural rates. Our approach includes freestanding rates. Since most of these facilities are in the urban areas, this would give a boost, if you will, when you give that average to rural hospitals. And that was our recommendation.

Recently there is more pressure as payment for outpatient care for everybody got cut back. And we will have to take a look at that because rural hospitals have a larger share of their total revenue related to outpatients. So, I think the cuts may have had a greater impact in the rural areas, and we will be looking at that. Senator HARKIN. It's not in this report, though.

Mr. BERMAN. It is not in this report.

Dr. YOUNG. The point is that OBRA90 further cut payments for outpatient hospital services, urban as well as rural.

Senator HARKIN. I see.

Dr. YOUNG. Since rural hospitals have a larger share of their revenue as outpatient, compared to inpatient, they will feel the squeeze of that cut even more than urban hospitals will. Our recommendation in our initial report did not separate out urban and rural payments; that is, it didn't create two payment amounts as PPS had done. However, that recommendation would still be difficult for rural hospitals because of the OBRA89 and OBRA90 cuts which affect all hospitals. Now, that is a balancing act of how to keep Medicare spending under control and yet meet the needs of hospitals.

Mr. BERMAN. So, that is the problem, and we will highlight that problem again in the rural report that we are doing.

The other topic that you asked us to look at was nonphysician practitioners, and we will include that in the June report.

So, I just wanted you to know that we were responsive and listening.

Senator HARKIN. Well, I certainly appreciate that. Thank you. I do appreciate your looking at those and addressing those issues so expeditiously. Thank you.

RURAL TRANSITION GRANTS

Two years ago we started a new program called the Rural Hospital Transition Grant Program. And actually this is the second year really that it is being funded. And the input that we are getting from a lot of rural hospitals is they really like is because it gives them some wherewithal to expand some services and to try to refo

cus from just acute care to other things. That's about the only way you're going to save it.

The theory behind it is that some of these small rural hospitals cannot just exist as acute care facilities. They just don't have the patient load. But they can exist as some primary care facility, as some acute care for limited things, emergency care before they have to go on to a major hospital someplace. But if they close up, they will not even have that. So, the rural transition grants get them to look in and do other things, provide other kinds of health services to keep their doors open so that they wouldn't have to just be acute care. All right.

We have had some experience with that now for a couple of years. They seem to be doing well with it. They have expanded services. The input that we are getting is that it has been well-received and they are using that to do just what we intended.

Well, now here comes the other side of it. Not that we hadn't thought of it. We thought, well, we would address it later on. And that is when they start doing that, what impact does that have on their payment system if they start getting into these other areas. Here we give with one hand and take away with the other. And they are saying wait 1 minute. In good faith we are going ahead and doing these things, but it may be impacting our payment system. You probably have not looked at it, but again I am in the position of asking you again to take a look at that and let us know what is happening.

Dr. YOUNG. Yes; I very much share your concerns, Senator.

There are two separate programs that are being run as partial demonstration and partial operating programs. The rural_transition grant is one. The other one is known by its acronyms, EACH's and RPCH's, the Essential Access Community Hospital Program. They are supposed to be in conjunction. The rural hospital groups that I have spoken to generally, as you stated, support the transition grant program, but they have a lot of concerns about the EACH's and the RPCH's program and the way that the legislation was drafted and the way that it has been implemented.

Now, the Commission did discuss this at their last meeting. We are waiting now for the regulations from HCFA on the EACH's and the RPCH's side. That is a very important component to address what you are asking.

The second component, though, is even more important. And I answered a question on this to you 3 years ago when the program first asked for funding. And that is my concern that we have defined a hospital and put on it a number of requirements. As you are implying, in a rural area, you need something that doesn't fit the mind set of a hospital.

Senator HARKIN. Right.

Dr. YOUNG. And yet, we are asking people to move that direction, but our financing system, both Medicare and Medicaid, and private insurance is scared about the potential abuse of people coming in and therefore is very reluctant to fund it. So, we are creating a paradox for the poor people in the rural areas trying to respond, by saying respond and trust us and maybe we will pay you later, but maybe we won't pay you later. And I think that is the essence of the problem.

And there is the chicken and an egg part to that. What comes first? The funding through third parties for care or the structural change? Now, the transition grant program is supposed to provide that. If it is going to provide that, though, for our whole Nation, it would certainly require a great deal of expansion over where the program is now. It is reasonable to gain some experience with it, but at some point you may need to operationalize it and that will undoubtedly require more funding.

But to answer your question, we have been concerned about it, and it is something that we are following.

Senator HARKIN. Good, as long as you are following it. You say you have to wait on the EACH's and RPCH's program.

Mr. BERMAN. We haven't even seen the regulations from HHS yet.

Dr. YOUNG. There will be an evaluation panel of the applicants for the EACH's and the RPCH's, and HCFA is funding this, but several of the ProPAC staff will be involved in the evaluation of that as well as the rural transition grant program. We have been involved in the evaluation of the applications.

Senator HARKIN. Just one more, but I have some more I will just submit to you in writing.

HOSPITAL VOLUME DECLINES

Your annual report states that a per-case payment system like PPS puts small hospitals and hospitals experiencing large volume declines at substantial risk.

We requested last year that you include in your report the impact of less than average patient volume on overhead costs and reimbursement, especially in small hospitals. Staff was telling me the 1991 report did not appear to focus explicitly on this issue. Could you tell me about that?

Dr. YOUNG. Yes; we read the committee report language to indicate that that requirement was in the special report we are submitting to you on rural hospitals. You asked us to look at the issue of fixed and variable costs, which were are looking at. We're looking at an automatic volume adjustment. We have just completed with our research dollars a survey of State Medicaid programs some of whom use volume adjustments. So, all of that work will be in the special report that you requested, and we read that language to apply to the report on rural hospitals, not our general report. Senator HARKIN. Very good.

Mr. BERMAN. And that report we are shooting for summer, July, August, after our June report.

Dr. YOUNG. Yes; it will be submitted to you probably in July.
Senator HARKIN. Good.

Mr. BERMAN. So, that's the timeframe.

Senator HARKIN. Well, that's good. I appreciate that very much. Thank you both very much, and I look forward to working with you in the months ahead. We will look at this and also the June report and also the special-

Mr. BERMAN. You will get the June report. You will get the capital report in the middle of May. Then you have the rural report. Then you have the staff——