Thursday, May 8th 2003

The Honorable William M. Thomas
Committee on Ways and Means
U.S. House of Representatives
Washington, D.C. 20515

Dear Mr. Chairman:

Thank you for your letter regarding the recommendations that the Medicare Payment Advisory Committee (MedPAC) issued in March.  As you know, Congress established MedPAC in order to provide independent analyses and recommendations on the Medicare Program.  We know you share the Administration's dedication to better meeting the health care needs of elderly Americans and people with disabilities, and we appreciate your longstanding interest in, and untiring dedication, to these important issues.

As you know, the President has submitted a framework to Congress to modernize and improve the Medicare program. This framework would give all Medicare beneficiaries access to prescription drug coverage, without the government dictating their drug choices.  It also would give seniors and people with disabilities the same sorts of choices among health coverage options that federal employees enjoy today.

We are pleased that you plan to propose legislation incorporating key elements of the President's proposal, and we look forward to working together with you in developing the details of this legislation.

We believe it is essential that the Medicare program pay providers adequately and appropriately.  MedPAC sets forth a number of recommendations with respect to these payments and we generally concur with these recommendations.  Below are more specific comments on these recommendations.

Physicians' Services
On February 13, 2003, Congress enacted the Consolidated Appropriations Resolution of 2003 (CAR), which the President signed into law on February 20, 2003.  Consequently, on February 28, 2003, we published a final rule that replaced a planned 4.4 percent reduction in physician payments, with a 1.6 percent increase in the 2003 physician fee schedule conversion factor for March 1 to December 31, 2003.  Our rule revised the estimates used to establish the sustainable growth rates for fiscal years 1998 and 1999 for the purposes of determining future updates to the physician fee schedule.

According to Congressional Budget Office estimates, this action resulted in an increase in Medicare spending for physicians' services of $50 billion over 10 years.  In addition, the 2003 physician fee schedule included a change in the way the Medicare Economic Index (MEI) is calculated.  This change added $15 billion to physician payments over 10 years, for a net increase of $65 billion. We consider the physician situation to be a unique, one-time only occurrence that we intend to offset as much as possible.  Despite the recent fluctuations in physician payments, Medicare spending on physicians’ services grew at almost 7 percent in 2002.

As you know, we have forecasted the FY 2003 market basket to be 3.5 percent.  BIPA established an update of market basket minus 0.55 percentage points for FY 2003 and a full market basket for FY 2004 and subsequent years.  Since the inception of Inpatient Prospective Payment System, hospitals have only once received a full market basket update (FY 2001), and on average, the actual market basket increase has been approximately forty percent lower than the forecasted market basket increase.

Inpatient hospital margins have remained very high.  In fact, since the early 1990's, there has been a significant drop in the number of hospitals with negative inpatient margins.  For example, 61 percent of hospitals had negative inpatient margins in 1991, compared to approximately 25 percent in 1999.  In 1997, the inpatient PPS margin rose to an historical high of 16 percent, according to the CMS actuaries.  Based on the March MedPAC recommendations, we believe that hospitals are reimbursed adequately under current rates, but we need to continue to monitor their payments.

Finally, we believe that Congress should consider MedPAC’s specific recommendation with regard to rural hospitals.

Skilled Nursing Facilities (SNFs)
The Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999, and the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA), required three Medicare payment "add-ons:" a 4 percent increase in per diem rates; a 16.66 percent increase in the nursing component of each Resource Utilization Group; and, a 20 percent increase for certain categories of high-cost, medically complex patients.  The first two add-ons expired on October 1, 2002.  The third will expire when the Secretary implements a case-mix refinement rule, which the Administration currently is developing.

By allowing this third add-on to continue, SNFs receive an additional $1 billion in payments annually.  Last year, we released an industry market analysis stating that Medicare reimbursement is more than sufficient for nursing facilities.  We still believe this to be the case, even accounting for the expiration of the two add-ons last year; but, we will continue to monitor SNF payment rates for all payors to ensure their fairness and accuracy.

Medicare+Choice is a valuable option to the 4.6 million beneficiaries who choose it, many of whom have low incomes and do not have additional coverage from a former employer or cannot afford Medigap.  It is important to preserve and strengthen this option for beneficiaries.  Due to changes in payments made in 1997, in many areas of the country, payments to Medicare+Choice plans have not kept up with the rising costs of providing health care. Thus, many health plans have withdrawn from Medicare+Choice, and enrollment has declined from 6.3 million beneficiaries in 1999 to 4.6 million in 2003.

Beneficiaries consistently tell us that they value the options given to them through Medicare+Choice and, as you know, they are frustrated and unhappy when their plans leave the program.  To address the inadequate level of funding in Medicare+Choice, we believe that payment to plans must be linked to the costs of the range of health care services they provide, including prescription drugs.  As part of the President's Framework for Medicare Modernization, the FY 2004 Budget envisions modifying the Medicare+Choice system to better link payments to health care costs facing plans.

Paying physicians and providers appropriately for Medicare services is an ever-evolving challenge — one that we are working hard to meet.  While we have not developed a position on the specifics of the MedPAC report, we believe that MedPAC's recommendations, in total, have a great deal of merit.  We look forward to working with the Committee to carefully evaluate how savings from provider payment adjustments could support Medicare modernization.  I want to emphasize that enacting Medicare modernization is the highest priority for this year.

From giving Medicare beneficiaries the prescription drug coverage they have needed for years, to simply giving them more control over their health benefits, we ought to focus on providing them with the options they need so they can choose the health care that best meets their individual needs.  Please let me know if you have any questions.  I look forward to working with you to improve the Medicare program for all beneficiaries.


Thomas A. Scully


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