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Friday, March 15th 2002

The Honorable Tommy G. Thompson
U.S. Department of Health and Human Services
200 Independence Avenue SW
Washington, DC 20201
Mitchell E. Daniels, Jr.
Office of Management and Budget
17th Street and Pennsylvania Avenue NW
Washington, DC 20503

Dear Secretary Thompson and Director Daniels:

With great disappointment, we reviewed your response to Chairman Thomas and Chairman Johnson on Medicare payment issues. You state, "President Bush believes that the Nation has a moral obligation to fulfill Medicare's promise of health care for America's seniors and people with disabilities." But your call for a "comprehensive package" of budget neutral changes across providers suggests just the opposite. Cutting Medicare payments for one type of caregiver to give to another is an unnecessary and dangerous financial shell game that could break Medicare's promise to the American people.

The Administration's view runs counter to the recommendations of the Medicare Payment Advisory Commission, the budget resolution recently approved by the House Budget Committee, and a majority of the House of Representatives who support legislation to provide additional funding for hospitals. Most policymakers understand that the cornerstone of care for our nation's seniors is in jeopardy.

You suggest that there is "no compelling problem" with the overall adequacy of Medicare provider payments. For America's hospitals, that is simply not the case. Medicare is not paying adequately for the hospital care needs of our nation's seniors. In 2000, Medicare paid hospitals one percent less than the cost of treating Medicare patients. In addition:

  • 58 % of hospitals lose money treating Medicare patients.
  • 34% of hospitals lose money meeting just the inpatient hospital care needs of Medicare patients.
  • 42% of hospitals have negative operating margins.
  • 32% of hospitals - one in three - have negative total margins and lose money on every single patient that walks through their doors.

And this is the state of hospitals' financial health before an additional $21 billion cut - already in current law - takes effect in October 2002, further reducing Medicare and Medicaid payments to hospitals.

Moreover, you state that hospital margins have stabilized and suggest that limits on hospital market basket updates "would appear to provide adequate reimbursement for hospitals." This view ignores today's economic reality as well as the published opinions from Wall Street.

  • Today, hospitals are facing severe workforce shortages with more than 168,000 unfilled positions - primarily nursing positions - bidding up wages, raising temporary staff costs and raising total labor costs for hospitals.
  • The cost of pharmaceuticals continues to skyrocket - 17.3% in 2000 alone - adding to the cost of caring.
  • A crisis in health care liability insurance is rapidly developing, where rates have increased in some cases by more than 100 percent.
  • According to Standard and Poor's, hospitals had six times as many bond downgrades as upgrades in 2001.
  • According to the most recent January 2002 report from Moody's Investor Service, "We caution, however, that the depth and breadth of the current economic recession could upset this stable industry outlook, particularly if a shrinking federal deficit were to result in a material cutback in Medicare reimbursement."

Finally, to suggest that hospital payments could be cut to pay for increases in physician payments does nothing more than shortchange Medicare beneficiaries. The Medicare hospital payment update compensates hospitals for price increases - due only to inflation - of the bandages, sponges, scalpels, gloves and nurse wages needed to provide care. Without this update, the government is simply devaluing the Medicare dollar. Even apparently small-sounding reductions in this update amount translate into billions of dollars either paid to or withheld from America's hospitals. Surely the Administration would not want to suggest that seniors' hospital care is any less important than their physician care. There is room in the over $2 trillion federal budget of the United States for both.


Rick Pollack
Executive Vice President


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