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Friday, March 1st 2002

Dear Member of Congress:

On behalf of the nation's 5,000 hospitals - who provide essential health care services 24 hours a day, seven days a week - we are writing to outline our grave concerns about the direction that Medicare and Medicaid payment policy is taking. Addressing these concerns is critical to ensuring that hospitals have the resources they need to continue meeting patient demand and community expectations.

Without congressional action, hospitals will suffer substantial federal payment cuts between now and October 1 of this year. For example:

  • On March 19, final regulations issued by the Centers for Medicare and Medicaid Services (CMS) will be implemented that will cut payments for Medicaid services, according to CMS, by $9 billion over five years through a reduction in upper payment limits. These cuts will have the most direct impact on hospitals that provide substantial amounts of care for poor people.
  • On April 1, final regulations issued by CMS will be implemented that will cut Medicare hospital outpatient payments by $1.4 billion. This occurs at a time when hospitals are already paid 17 percent less than the cost of care provided in the outpatient setting.
  • On October 1, under current law, the following five-year payment reductions will also be implemented:
    • the annual update to Medicare inpatient hospital rates will be less than inflation, resulting in a payment shortfall of $2.2 billion;
    • Medicare's indirect medical education adjustment will be reduced from 6.5 percent to 5.5 percent, resulting in a payment reduction to teaching hospitals of $4.0 billion;
    • Medicaid's disproportionate share adjustment for hospitals serving high volumes of the uninsured will be reduced by $1.3 billion in FY 2003 alone;
    • payments to hospital-based skilled nursing facilities for Medicare beneficiaries will be reduced by $1.5 billion; and
    • payments to hospital-based home health agencies for Medicare beneficiaries will be reduced by $1.5 billion.

It is important to keep in mind that these reductions are occurring at a unique time in our history, when hospitals are bearing the cumulative impact of a series of forces that are beginning to erode the foundation of the essential public services we provide.  For example:

  • Hospitals are experiencing severe workforce shortages. There are more than 168,000 unfilled positions, of which 75 percent are for registered nurses. This has resulted in an inability to fully staff services, contributing to emergency room over-crowding in many areas of the nation. Partly as a result of these shortages, full-time nurse salaries rose by as much as 10 percent across the country from 2000 to 2001; pharmacist salaries rose by as much as 13 percent. It is estimated that hospitals will have spent $71 million in 2001 using agency and traveling nurses to fill slots left vacant by the shortage of staff nurses.
  • As front-line responders in the event of disasters, hospitals are working to upgrade their readiness to respond to nuclear, biological and chemical emergencies. This requires an investment of more than $11 billion to meet public expectations.
  • New federal regulatory mandates will impose additional administrative and paperwork burdens. Compliance with the Health Insurance Portability and Accountability Act's privacy regulations alone are expected to cost hospitals between $4 billion and $22 billion.
  • Providing the highest quality services on the cutting-edge of scientific development, including the introduction of new patient safety technologies, requires substantial resources. For example, the traditional X-ray machine, which typically costs $175,000, is rapidly being replaced by more contemporary CAT scan machines that can cost $1 million … and the next round of technology, PET imaging machines, cost well over $2 million.
  • The cost of pharmaceuticals continues to skyrocket. Prescription drug costs rose 17.3 percent in 2000 alone, the sixth consecutive year of double-digit increases. In addition, the cost of a pint of blood increased an average of 31 percent last year; in some states, blood costs increased by 100 percent.
  • A crisis is rapidly developing in the area of professional liability insurance, where hospitals and physicians are finding it difficult to purchase coverage and premiums. Some of the biggest insurers are raising rates more than 30 percent in many states.
  • Millions of Americans have no health insurance coverage. Hospitals - by their own mission and under federal law - serve as America's health care safety net, and provided $21.6 billion of uncompensated care in 2000 alone.
  • Demand for hospital services is soaring, especially as the "Baby Boom" generation begins to age. At the same time, the average age of our hospitals continues to increase, resulting in the need for capital to maintain and update physical plants. But, hospitals are having difficulty accessing capital, experiencing almost five times as many bond downgrades vs. upgrades in 2000. At a time when the aggregate total margin of hospitals is 4.6 percent, tax-exempt financing markets demand margins of 7 percent to receive the highest rating.
  • The bottom line: One in two hospitals loses money on every Medicare patient they treat. At the same time, one in three hospitals is operating in the red overall - losing money on every patient they treat.

Consequently, we ask you to take the following actions to prevent further erosion of the nation's public health foundation. Funding for each of these actions should be included in the FY 2003 budget resolution:

First, even as we are faced with these additional payment reductions and the powerful confluence of trends, the President's budget for FY 2003 suggests that provider payment improvements should be accomplished in a budget neutral manner. This is totally unacceptable. We urge you to reject any proposal that seeks to cut one provider to address the needs of another.

Second, pass the American Hospital Preservation Act (H.R.1556/S.839). This bipartisan legislation would provide hospitals with at least an inflationary adjustment to their rates, as well as prevent implementation of reductions to teaching hospitals.

Third, pass the Medicaid Safety Net Hospital Continued Preservation Act (H.R.854/S.572). This bipartisan legislation would prevent further cuts to hospitals that serve our most vulnerable populations, such as the poor, disabled and children.

Fourth, pass the Area Wage and Standardized Rate bill (H.R.1609/S.885). This bipartisan legislation improves payments so that hospitals are better able to attract and retain health care workers.

Fifth, pass the Medicaid Upper Payment Limit Moratorium bill (H.R.3360/S.1745). This bipartisan legislation would delay changes in regulations that modify Medicaid payments for locally owned public hospitals.

All of these issues must be addressed this year if we are to ensure that hospitals have the resources necessary to continue providing the essential public services that are critical to their communities' needs.

We appreciate your timely consideration of this critical matter.


Rick Pollack
Executive Vice President


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