Tuesday, March 26th 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:

America's hospitals and health systems are dismayed at certain statements in your March 15 response to Chairman Thomas and Chairwoman Johnson on Medicare payment issues. Despite many challenges, hospitals and health systems provide health care services to all who need them, regardless of their ability to pay. Unfortunately, your letter reflects a lack of commitment to that effort.

Cutting Medicare payments for one type of caregiver to increase them for another is not a move that is supported by data. In fact, independent experts, including your own Medicare Payment Advisory Commission, recommend improving payments for hospitals and physicians alike. Your March 15 letter was particularly unexpected considering that the President's budget, and both the House and Senate budget resolutions have rejected such cuts.

For hospitals, our bottom line directly affects our top priority: taking care of people. But America's hospitals are in financial distress. More than half lose money treating Medicare patients. Fully one-third are losing money overall. And, without corrective action, $21 billion in additional reductions will be implemented by October 1 of this year. For example:

  • The Centers for Medicare and Medicaid Services (CMS) is scheduled to cut payments for Medicaid services by, according to CMS, $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 $4.2 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.

Clearly, hospitals and health systems are in no position to absorb the reductions that your letter recommends and we oppose cutting hospital payments to fund physician improvements. We strongly urge you to reconsider the statements in your letter, and support desperately needed improvements in Medicare as well as Medicaid payments to hospitals and health systems.


American Hospital Association
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Catholic Health Association of the United States
Federation of American Hospitals
National Association of Children's Hospitals
National Association of Public Hospitals and Health Systems
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