SPEAKERS CONTENTS INSERTS Tables
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43–165 CC
1997
TEACHING HOSPITALS AND MEDICARE DISPROPORTIONATE SHARE HOSPITAL PAYMENTS
HEARING
before the
SUBCOMMITTEE ON HEALTH
of the
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTH CONGRESS
FIRST SESSION
MARCH 11, 1997
Serial 105–7
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Printed for the use of the Committee on Ways and Means
COMMITTEE ON WAYS AND MEANS
BILL ARCHER, Texas, Chairman
PHILIP M. CRANE, Illinois
BILL THOMAS, California
E. CLAY SHAW, Jr., Florida
NANCY L. JOHNSON, Connecticut
JIM BUNNING, Kentucky
AMO HOUGHTON, New York
WALLY HERGER, California
JIM McCRERY, Louisiana
DAVE CAMP, Michigan
JIM RAMSTAD, Minnesota
JIM NUSSLE, Iowa
SAM JOHNSON, Texas
JENNIFER DUNN, Washington
MAC COLLINS, Georgia
ROB PORTMAN, Ohio
PHILIP S. ENGLISH, Pennsylvania
JOHN ENSIGN, Nevada
JON CHRISTENSEN, Nebraska
WES WATKINS, Oklahoma
J.D. HAYWORTH, Arizona
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JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
CHARLES B. RANGEL, New York
FORTNEY PETE STARK, California
ROBERT T. MATSUI, California
BARBARA B. KENNELLY, Connecticut
WILLIAM J. COYNE, Pennsylvania
SANDER M. LEVIN, Michigan
BENJAMIN L. CARDIN, Maryland
JIM McDERMOTT, Washington
GERALD D. KLECZKA, Wisconsin
JOHN LEWIS, Georgia
RICHARD E. NEAL, Massachusetts
MICHAEL R. McNULTY, New York
WILLIAM J. JEFFERSON, Louisiana
JOHN S. TANNER, Tennessee
XAVIER BECERRA, California
KAREN L. THURMAN, Florida
A.L. Singleton, Chief of Staff
Janice Mays, Minority Chief Counsel
Subcommittee on Health
BILL THOMAS, California, Chairman
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NANCY L. JOHNSON, Connecticut
JIM McCRERY, Louisiana
JOHN ENSIGN, Nevada
JON CHRISTENSEN, Nebraska
PHILIP M. CRANE, Illinois
AMO HOUGHTON, New York
SAM JOHNSON, Texas
FORTNEY PETE STARK, California
BENJAMIN L. CARDIN, Maryland
GERALD D. KLECZKA, Wisconsin
JOHN LEWIS, Georgia
XAVIER BECERRA, California
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records of the Committee on Ways and Means are published in electronic form. The printed hearing record remains the official version. Because electronic submissions are used to prepare both printed and electronic versions of the hearing record, the process of converting between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process is further refined. The electronic version of the hearing record does not include materials which were not submitted in an electronic format. These materials are kept on file in the official Committee records.
C O N T E N T S
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Advisories announcing the hearing
WITNESSES
Prospective Payment Assessment Commission, Joseph P. Newhouse, Ph.D., Chairman; accompanied by Donald A. Young, M.D., Executive Director
Physician Payment Review Commission, Gail R. Wilensky, Ph.D., Chair; accompanied by Anne Schwartz, Ph.D., Special Assistant to the Executive Director
Harborview Medical Center, Seattle, Washington, and American Hospital Association, David Jaffe
Hopper, Cornelius L., M.D., University of California
Kern Medical Center, Bakersfield, California, and National Association of Public Hospitals & Health Systems, Gerald Starr
Montefiore Medical Center, Bronx, New York, and Greater New York Hospital Association, Spencer Foreman, M.D
Saint Francis Hospital and Medical Center, Hartford, Connecticut, and Association of American Medical Colleges, David D'Eramo
SUBMISSIONS FOR THE RECORD
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American College of Preventive Medicine, statement
Integrated Healthcare Association, Pleasanton, CA, statement and attachment
TEACHING HOSPITALS AND MEDICARE DISPROPORTIONATE SHARE HOSPITAL PAYMENTS
TUESDAY, MARCH 11, 1997
House of Representatives,
Committee on Ways and Means,
Subcommittee on Health,
Washington, DC.
The Subcommittee met, pursuant to notice, at 12:35 p.m., in room 1310, Longworth House Office Building, Hon. Bill Thomas (Chairman of the Subcommittee) presiding.
[The advisories announcing the hearing follow:]
ADVISORY
FROM THE COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON HEALTH
CONTACT: (202) 225–3943
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FOR IMMEDIATE RELEASE
February 27, 1997
No. HL–5
Thomas Announces Hearing on Teaching
Hospitals and Medicare Disproportionate Share
Hospital Payments
Congressman Bill Thomas (R–CA), Chairman, Subcommittee on Health of the Committee on Ways and Means, today announced that the Subcommittee will hold a hearing on teaching hospitals and Medicare disproportionate share hospital payments. The hearing will take place on Tuesday, March 11, 1997, in 1310 Longworth House Office Building, beginning at 1:00 p.m.
In view of the limited time available to hear witnesses, oral testimony at this hearing will be heard from invited witnesses only. However, any individual or organization not scheduled for an oral appearance may submit a written statement for consideration by the Committee and for inclusion in the printed record of the hearing.
BACKGROUND:
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Teaching hospitals provide critical services to Medicare beneficiaries and others as well as training health care providers and producing state of the art medical research. Costs of operating teaching hospitals tend to be higher than those in other hospitals, in large part due to their multiple missions related of patient care, education, and research. Medicare recognizes these higher costs through graduate medical education (GME) payments: direct GME and an indirect medical education (IME) adjustment. For fiscal year 1996, Medicare payments to teaching hospitals for direct GME were $2.2 billion and IME payments were $4.3 billion.
The Balanced Budget Act of 1995 would have reformed Medicare payment for teaching hospitals and GME through the establishment of a trust fund to support these activities. Despite President Clinton's veto of the Balanced Budget Act of 1995, the Subcommittee remains committed to reforming Federal support for teaching hospitals and will examine the President's fiscal year 1998 budget proposals regarding GME in this context.
In addition to GME payments, Medicare makes payments to hospitals that tend to serve a larger proportion of indigent Medicare beneficiaries. Referred to as the Medicare disproportionate share hospital (DSH) adjustment, payment is made through a percentage add-on to the hospital rate using Medicaid and Supplemental Security Income as a proxy. Because of changes in both Medicaid and welfare, the use of these factors to compute the disproportionate share payment requires reexamination. In recent years, Medicare DSH payments have increased nearly 400 percent, from $1.1 billion in fiscal year 1989 to $4.3 billion in 1996.
In announcing the hearing, Chairman Thomas stated: ''Across the country, teaching hospitals have assumed an important role in the communities they serve. These institutions are currently being challenged by a changing health care system. They are rightly concerned over Medicare spending proposals. It is time to take a close look at the Federal contribution to these hospitals, and decide how that contribution can be better focused to maintain the best of what these institutions have to offer.''
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FOCUS OF THE HEARING:
This hearing will focus on special payments to teaching hospitals for GME and Medicare DSH payments.
DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:
Any person or organization wishing to submit a written statement for the printed record of the hearing should submit at least six (6) copies of their statement and a 3.5-inch diskette in WordPerfect or ASCII format, with their address and date of hearing noted, by the close of business, Tuesday, March 25, 1997, to A.L. Singleton, Chief of Staff, Committee on Ways and Means, U.S. House of Representatives, 1102 Longworth House Office Building, Washington, D.C. 20515. If those filing written statements wish to have their statements distributed to the press and interested public at the hearing, they may deliver 200 additional copies for this purpose to the Subcommittee on Health office, room 1136 Longworth House Office Building, at least one hour before the hearing begins.
FORMATTING REQUIREMENTS:
Each statement presented for printing to the Committee by a witness, any written statement or exhibit submitted for the printed record or any written comments in response to a request for written comments must conform to the guidelines listed below. Any statement or exhibit not in compliance with these guidelines will not be printed, but will be maintained in the Committee files for review and use by the Committee.
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1. All statements and any accompanying exhibits for printing must be typed in single space on legal-size paper and may not exceed a total of 10 pages including attachments. At the same time written statements are submitted to the Committee, witnesses are now requested to submit their statements on a 3.5-inch diskette in WordPerfect or ASCII format.
2. Copies of whole documents submitted as exhibit material will not be accepted for printing. Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material not meeting these specifications will be maintained in the Committee files for review and use by the Committee.
3. A witness appearing at a public hearing, or submitting a statement for the record of a public hearing, or submitting written comments in response to a published request for comments by the Committee, must include on his statement or submission a list of all clients, persons, or organizations on whose behalf the witness appears.
4. A supplemental sheet must accompany each statement listing the name, full address, a telephone number where the witness or the designated representative may be reached and a topical outline or summary of the comments and recommendations in the full statement. This supplemental sheet will not be included in the printed record.
The above restrictions and limitations apply only to material being submitted for printing. Statements and exhibits or supplementary material submitted solely for distribution to the Members, the press and the public during the course of a public hearing may be submitted in other forms.
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Note: All Committee advisories and news releases are available on the World Wide Web at 'HTTP://WWW.HOUSE.GOV/WAYS_MEANS/'.
The Committee seeks to make its facilities accessible to persons with disabilities. If you are in need of special accommodations, please call 202–225–1721 or 202–225–1904 TTD/TTY in advance of the event (four business days notice is requested). Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed to the Committee as noted above.
—————
NOTICE—CHANGE IN TIME
ADVISORY
FROM THE COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON HEALTH
CONTACT: (202) 225–3943
FOR IMMEDIATE RELEASE
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March 6, 1997
No. HL–5-Revised
Time Change for Subcommittee Hearing on
Tuesday, March 11, 1997,
on Teaching Hospitals and Medicare
Disproportionate Share Hospital Payments
Congressman Bill Thomas (R–CA), Chairman of the Subcommittee on Health, Committee on Ways and Means, today announced that the Subcommittee hearing on Teaching Hospitals and Medicare Disproportionate Share Hospital Payments previously scheduled for Tuesday, March 11, 1997, at 1:00 p.m., in 1310 Longworth House Office Building, will begin instead at 12:30 p.m.
All other details for the hearing remain the same. (See Subcommittee press release No. HL–5, dated February 27, 1997.)
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NOTICE—CHANGE IN ROOM
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ADVISORY
FROM THE COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON HEALTH
CONTACT: (202) 225–3943
FOR IMMEDIATE RELEASE
March 6, 1997
No. HL–5-Revised
Room Change for Subcommittee Hearing on
Tuesday, March 11, 1997,
on Teaching Hospitals and Medicare
Disproportionate Share Hospital Payments
Congressman Bill Thomas, (R–CA), Chairman of the Subcommittee on Health, Committee on Ways and Means, today announced that the Subcommittee hearing on Teaching Hospitals and Medicare Disproportionate Share Hospital Payments previously scheduled for Tuesday, March 11, 1997, at 12:30 p.m., in 1310 Longworth House Office Building, will be held instead in B–318 Rayburn House Office Building.
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All other details for the hearing remain the same. (See Subcommittee press release No. HL–5, dated February 27, 1997.)
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Chairman THOMAS. The Subcommittee will come to order. I want to welcome you to the Health Subcommittee's fifth hearing this year.
Today we'll hear from witnesses about Medicare special payments to teaching hospitals and to those hospitals that treat a large share of poorer Americans. As you heard during the Subcommittee's two hearings on this topic last year, teaching hospitals obviously serve an important role in our health care delivery system in terms of developing technological innovations, pioneering medical research, and delivering care to Medicare beneficiaries and the less fortunate, besides the final training of our Nation's doctors and other health care providers.
Since its inception, Medicare has assumed a substantial role in subsidizing teaching hospitals and, in turn, over the years these institutions have become quite dependent on the Medicare Program.
Recently, ProPAC, the Prospective Payment Assessment Commission, reported that in 1995, Medicare payments to major teaching hospitals for inpatient services were nearly 20 percent higher than costs, the largest Medicare margin in nearly a decade. However, during the same period, total major teaching hospital revenues for all services and all payers were only 3.7 percent higher than hospital expenses.
Today the Subcommittee will examine to what extent Medicare is subsidizing costs which benefit all of society, not simply those who participate in the Medicare Program.
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The Congressional Budget Office's analysis indicates that Medicare is projected to subsidize hospitals that treat a larger share of indigent care by $26.4 billion over the next 5 years. The Subcommittee will explore recommended changes to the Medicare disproportionate share hospital payment and the impact of implementing those recommendations on hospitals in both urban and rural areas.
The BBA, Balanced Budget Act of 1995, included what we consider to be bold changes in teaching hospital payment policies. It established a new financing structure which, in addition to Medicare funding, started at $17.5 billion and, leaving conference, was at $13.5 billion from general revenues.
This year, Congress is reexamining Medicare's payment to teaching hospitals in the context of the BBA and the growing market pressures on both these institutions and the Medicare Program. I might add, parenthetically, a number of our colleagues have examined other methods of payment, including a so-called all-payers system, as well.
While our discussions today will focus on the President's fiscal year 1998 budget proposal to reduce payments to teaching hospitals, I would ask the witnesses to be as creative as possible in their testimony so that the Subcommittee benefits from a broad policy discussion. And I believe you should lead, for example, ''Therefore.''
The President has proposed a shift in home health services from part A to general revenues to extend the life of the trust fund. I won't go into the characterizations by prominent economists and others, but it was an attempt to extend the life of the trust fund by shifting specific costs from part A to the general fund.
If we were to entertain such a shift, instead of specific Medicare benefits, wouldn't it make more sense to transfer the portion of Medicare part A that actually subsidizes a broad-based societal benefit, such as teaching hospitals and disproportionate share payments, from part A to general revenues so that we could not only extend the life of the trust fund with the transfer, but transfer broad-based societal benefit payments rather than specific benefit payments.
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I look forward to an open discussion in this important area. I would particularly like to welcome one of our second panel members—I didn't see him earlier; Jerry Starr? There he is. Only because he represents a 270-bed county hospital in my hometown and he's going to get back home before I do—yes, if they still are in business when we get back. That's a comment from the gentleman from California, but you ain't far off the mark, unfortunately.
Thank you for being here. I understand the size of this hearing room—I still believe it's better than B–318. We may do a rotation on the seating periodically or something that will allow everybody to sit for a portion of the hearing.
And with that, I'll yield to my colleague from California, Mr. Stark, for his opening statement.
Mr. STARK. Well, thank you, Mr. Chairman. Like so many of the issues we're facing, I think your proposed solutions and the conundrums you raise are ones that this Subcommittee will have to address.
My interest in graduate medical education is more, I guess, because we're trying to keep hospitals that provide high quality care for Medicare and Medicaid uninsured than the idea that we have to use taxpayer dollars to encourage people to join the highest 1 percent of salaried elite in our society. We do need good teaching hospitals as safety net hospitals, but there is a lot of evidence we're paying too much for this education, certainly for too many specialists.
New York's North Shore University Hospital is getting more than $147,000 a year per resident, and that might explain why their program is growing rapidly. But cutting teaching hospitals just puts pressure on the public hospitals who do a good job treating the poor and the uninsured.
And, to compound this issue, we've got to do something with the disproportionate share formula through nobody's fault, really, but through a change in the way much medical care is being delivered. For example, I think I'm correct in assuming that in Tennessee, where you suddenly have Tenn Plan, every hospital qualifies as a disproportionate share hospital. Arguably, we need a new formula to figure out which hospitals really are under pressure from the uninsured and the underinsured and what kind of a proxy to use to recalculate that.
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So we have these two programs that need coordination and some decision by this Subcommittee as to how we'll allocate scarce resources among them.
I share your admonition to the witnesses that we need some new ideas because we're dealing with really a different way to calculate this. I think everybody agrees we know who needs help. How do we identify them in simple law so that we don't have to go on a hospital-specific basis?
Thanks very much.
Chairman THOMAS. Thank you. Not only identify them but we need to figure out the most appropriate way to supply that subsidy.
The first panelists are not new to us, painfully not new to us. Dr. Newhouse with his Executive Director, Dr. Young, and Dr. Wilensky. Dr. Newhouse is from the Prospective Payment Assessment Commission and Dr. Wilensky is from the Physician Payment Review Commission, accompanied by Dr. Schwartz.
So Dr. Newhouse, Dr. Wilensky, your written testimony will be made a part of the record and you can address us in any way you see fit, as long as you're creative in your solution options.
STATEMENT OF JOSEPH P. NEWHOUSE, PH.D., CHAIRMAN, PROSPECTIVE PAYMENT ASSESSMENT COMMISSION; ACCOMPANIED BY DONALD A. YOUNG, M.D., EXECUTIVE DIRECTOR
Mr. NEWHOUSE. Thank you very much, Mr. Chairman. It's a pleasure to be back with you this afternoon to talk about teaching and disproportionate share payments.
There are two types of teaching payments: Indirect medical education payments, which are designed to compensate teaching hospitals for the sicker patients they treat, for the broader range of technologies they offer; and direct medical education payments, which are designed to pay Medicare's share of costs of training residents and the faculty that teach.
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The Disproportionate Share Program is designed to ensure access to care by the Medicare population to those hospitals that treat a large number of low-income patients and are under severe and growing financial pressure.
The amount of moneys here are substantial. In 1996 the indirect and direct medical education payments were just under $7 billion and disproportionate share was just over $4 billion.
As you see in my first chart, there are about 1,000 teaching hospitals that receive the teaching payments, about 2,000 hospitals that receive the disproportionate share payments, and a little under 700 that receive both. These tend to be the larger hospitals, and they account for a disproportionate share of the payments.
Hospitals generally are in an environment that's increasingly price competitive. It's harder for the hospitals to subsidize low-income patients and teaching missions to the degree they had before, and there is no mechanism in the at-risk program for getting the teaching and disproportionate share payments to the hospitals that they're designed for.
The teaching and disproportionate share payments, as you mentioned in your opening statement, have led to very high PPS, prospective payment system, margins. My chart 2 shows that major teaching hospitals have a PPS margin that's just under 19 percent, and large urban disproportionate share hospitals have a PPS margin just over 16 percent on their Medicare patients. But if you look at my chart 3, the story is just the opposite on total margins. The large major teaching hospitals have the lowest margin of any teaching hospitals or nonteaching, and the large disproportionate share, large urban, also have the lowest margins, 3.5 percent against 6, 7, and 8 percent for other groups.
Now, the teaching hospital payments, if you look at chart 4, have been growing in the last 6 years. The indirect payment grew from $2.5 to $4 billion and the direct or GME payment grew from $1.5 to over $2 billion.
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This has, in part, reflected an increase in the total number of residents because both of these programs increased their payments approximately in proportion to the number of residents. As you see in my chart 5, the number of residents has been pretty steadily increasing since the beginning of the prospective payment system. From 1990 on, it went up 18 percent and that led to approximately an 18-percent increase in these payments.
Now, we have a number of recommendations for you. On the teaching side, I think our most important recommendation is that the link between the number of residents at a hospital and the amount of money it gets from Medicare be severed. And how those moneys would be distributed could be done in a variety of ways that we can talk about in the questions and answers, but if a hospital hired another resident we would not give it more money.
Similarly, on the indirect side, we would reduce the amount of the markup that Medicare pays slowly toward its so-called empirical level; that is, the rate at which hospital costs empirically go up with a measure of teaching. We recommend starting out with a reduction from the current 7.7 to 7 percent. The empirical level is around 4 percent.
Finally, under the current methodology, only full-time equivalent residents in the hospital are included in the payment calculations, and we would like to be flexible enough to support training outside the hospital and in freestanding facilities.
Finally, we recommend, as you alluded to in your opening statement, a broader based financing mechanism that could be financed in a number of ways, and maybe we can talk about that in the questions and answers.
On the disproportionate share side of the ledger, we have several recommendations. The current program pays hospitals according to the number of low-income patients it treats, but the number of low-income patients is merely reflected in the number of Medicare SSI patients and Medicaid patients. We would recommend you broaden that to include a much more comprehensive measure of low-income patients, which we believe can be done with a fairly minimal addition to hospitals' administrative burden.
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Another major change we would make in disproportionate share payments is to set a threshold where the hospital would receive payments at the same level for urban, rural, and various size hospitals. You see in my chart 8 that hospitals with similar low-income patients percentages now get quite different payments because the thresholds are set at quite different levels.
Finally, as I mentioned, we would pay hospitals for treating low-income patients that are currently in the at-risk program, and we would pay the teaching payments also if those continue to be tied to Medicare patients or patients that are in the at-risk program. This would require hospitals know that a Medicare patient is in the at-risk program. We believe that can be done.
I'll look forward to your questions, Mr. Chair.
[The prepared statement follows:]
Statement of Joseph P. Newhouse, Ph.D., Chairman, Prospective Payment Assessment Commission
Good afternoon, Mr. Chairman. I am Joseph Newhouse, Ph.D., Chairman of the Prospective Payment Assessment Commission (ProPAC). I am accompanied by Donald Young, M.D., the Commission's Executive Director. We are pleased to be here to discuss Medicare's teaching and disproportionate share (DSH) policies. During my testimony, I will refer to several charts. These charts are appended to the end of my written testimony.
As you know, Medicare makes additional payments to teaching hospitals and hospitals that serve a disproportionate share of low-income patients to recognize their special missions. Teaching payments are intended to recognize the roles teaching hospitals play in conducting medical research, developing technological innovations, and training the future health care work force. There are two distinct types of teaching payments, each with a different purpose and payment methodology. The indirect medical education (IME) adjustment to payments under Medicare's Prospective Payment System (PPS) is intended to compensate teaching hospitals for the additional patient care costs they incur as a result of treating a more complex patient population, developing and utilizing new technologies, and offering a broad range of sophisticated services. The second teaching payment, the direct graduate medical education (GME) payment, is intended to pay for Medicare's share of costs associated with operating a residency program. It covers costs such as residents' salaries and benefits and faculty supervision, as well as the portion of the residency program's overhead allocated to the hospital.
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Medicare pays hospitals that serve a disproportionate share of low-income patients an additional amount to ensure access to care for the Medicare population. These hospitals frequently are the only source of care for the patients that use them, and they are under intense financial pressures because of their willingness to serve the poor. The DSH adjustment to PPS payments helps to alleviate these pressures and preserves the availability of these hospitals to both poor and non-poor Medicare beneficiaries.
Medicare spending though these special payments is not inconsequential. In 1996, IME and GME payments to teaching hospitals were about $6.8 billion, and DSH payments were about $4.3 billion. About 45 percent of all hospitals paid under Medicare's prospective payment system received teaching or DSH payments in 1996, and these facilities accounted for about two-thirds of PPS discharges.
Mr. Chairman, it is important to keep in mind that there is substantial overlap in the hospitals that receive teaching and DSH payments. Hospitals that have both teaching and disproportionate share classifications receive about 75 percent of total IME payments and 65 percent of total DSH payments. These hospitals benefit financially from receiving both types of special payments, thus changes to these policies will also have the greatest impact on them.
These hospitals also are facing a financial environment that is increasingly price-competitive, which threatens their ability to fulfill their teaching and low-income service missions. Medicare makes explicit payments to support these hospitals under its fee-for-service program but, as I will discuss later in my testimony, there is no mechanism to distribute teaching and DSH payments under the risk contracting program. These enrollees currently represent 11 percent of the Medicare population, and this share is growing rapidly. As it grows, and the fee-for-service population necessarily declines, Medicare support to these hospitals will erode if no change is made.
This afternoon, I would like to first describe Medicare payments to and use of teaching and DSH hospitals, as well as their financial performance. Then, I will discuss Medicare's policies specific to each of these payment types and the Commission's recommendations to improve these policies. These recommendations are discussed in more detail in our Report and Recommendations to the Congress, which we released on March 1.
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PPS Payments and Financial Conditions of Teaching and DSH Hospitals
More than 1,000 teaching hospitals receive Medicare payments under PPS. These hospitals accounted for an estimated 43 percent of PPS discharges and 53 percent of PPS operating payments in fiscal year 1996 (see Chart 1). Facilities with the most intensive teaching activity—at least one resident for every four hospital beds—are referred to as major teaching hospitals. While these institutions represented only 5 percent of all PPS hospitals in 1996, they accounted for 11 percent of discharges and 19 percent of payments in 1996.
Almost 2,000 hospitals receive Medicare DSH payments, accounting for an estimated 51 percent of discharges and 58 percent of PPS payments in fiscal year 1996. DSH hospitals located in large urban areas accounted for a quarter of all discharges and received one-third of all PPS payments, even though they represent only 15 percent of all hospitals.
As I noted, almost 700 hospitals receive both teaching and DSH payments. These institutions comprise about two-thirds of all teaching hospitals and one-third of all DSH hospitals. They accounted for 27 percent of all PPS discharges and 36 percent of all PPS payments, as well as 65 percent of total DSH payments and 75 percent of IME payments.
With the additional monies provided through the special payments, Medicare has more than adequately compensated teaching and DSH hospitals for the costs of treating Medicare patients. ProPAC analyses show that, since the first year of prospective payment in 1984, teaching and DSH hospitals' PPS margins—which compares Medicare's inpatient operating and capital payments to the corresponding costs—have exceeded those of other hospitals, and these differences have widened over the years (see Chart 2). In 1995, the average hospital had an estimated PPS margin of 7.9 percent. Major teaching hospitals had the highest average PPS margin, 18.6 percent; large urban DSH hospitals followed closely with a margin of 16.2 percent. As I mentioned earlier, there is a large overlap between these two groups.
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"The Official Committee record contains additional material here."
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"The Official Committee record contains additional material here."
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Another indication of the impact of teaching and DSH payments on hospitals' performance under Medicare is the PPS margins for hospitals that receive neither of these payments. About 55 percent of hospitals meet this criteria, and in 1995 their average PPS margin was 0.5 percent. These hospitals, however, account for only 33 percent of discharges.
Our analyses also indicate, however, that the overall financial condition of teaching and DSH hospitals is much less robust than their PPS margins might suggest. In 1995, the average total margin for all hospitals—which measures the difference between hospitals' total revenues and total expenses—was 5.6 percent. Major teaching hospitals had total margins of 3.7 percent. DSH hospitals in large urban areas had the lowest total margins of any group we examined, 3.6 percent (see Chart 3). Even though these margins are relatively low, they are still the highest total margins for these hospitals in the past 10 years, and higher than during the period before PPS began.
Teaching and DSH hospitals have total margins that are lower than those of other hospitals for several reasons. These include the provision of large amounts of uncompensated care and their difficulties in obtaining additional revenues from private payers to support the extra costs associated with the special roles they serve.
"The Official Committee record contains additional material here."
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Medicare Teaching Payment Policies
As I mentioned, Mr. Chairman, Medicare's teaching payment policies are intended to recognize the multiple missions of teaching hospitals. In addition to providing patient care, these missions include conducting medical research, developing technological innovations, and helping to ensure there is a well-trained physician work force for the future. Medicare spending to support the special roles served by teaching hospitals has grown rapidly over the past several years, increasing 63 percent between 1990 and 1995 (see Chart 4).
One of the primary factors driving both IME and GME spending growth is increases in the number of residents. Currently, both IME and GME payments rise approximately in proportion to the number of residents at each hospital. Hospitals, therefore, have an incentive to train more physicians. In fact, since 1990, the number of residents has increased by 18 percent. Historically, the increase in the number of specialty residencies has far exceeded the rise in primary care physicians. Over the past few years, however, the growth in primary care has been greater. The number of residents who are graduates of international medical schools also has risen rapidly over the past several years (see Chart 5).
The Commission recommends modifying the IME and GME polices so that Medicare's payment policies do not influence hospitals' decisions concerning the number of residents they train. In addition, we also believe the teaching payments should be available to those organizations that incur the costs of training, but that policies be flexible enough to allow training in other settings when appropriate. The current payment methods are biased towards training in the hospital setting, even though training in other settings may be increasingly necessary for future practicing physicians.
I would like to take a moment to briefly summarize the views of the Commission related to each of the teaching adjustments.
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"The Official Committee record contains additional material here."
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"The Official Committee record contains additional material here."
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IME Payment Policy
As I mentioned earlier, teaching hospitals generally have higher patient care costs than other hospitals. The Commission agrees that teaching hospitals should receive additional payments that are associated with these higher costs, but Medicare's payments for these costs are higher than can be justified by their teaching status.
The IME adjustment is a per discharge percentage add-on that is applied to Medicare PPS payments. Since 1989, PPS payments for Medicare fee-for-service discharges have been adjusted upwards by about 7.7 percent for every 10 percent increase in teaching intensity, measured using a ratio of residents to beds. ProPAC analyses indicate, however, that Medicare operating costs per discharge are only 4.1 percent higher for each 10 percent increase in teaching intensity. The Commission recommends that for fiscal year 1998, the IME adjustment should be lowered to 7.0 percent; this would mean a 9.1 percent decrease in each hospital's IME payments. We believe that teaching hospitals should be able to adjust to this reduction without compromising their service functions. Ultimately, we think the adjustment should more closely correspond to the actual relationship between teaching intensity and costs.
The Commission also recommends that the IME payment method be changed so that payments do not fluctuate with variations in the number of residents or beds. Currently, IME payments are based on the number and mix of Medicare patients, as well as teaching intensity. We believe payments should continue to vary based on patient volume and case-mix, but that the relationship between payments and changes in the number of hospital residents should be modified. This could be accomplished in a number of ways, including maintaining each hospital's teaching intensity at its level for the current year level or some previous year. Over time, however, it may be necessary to revise the level for each hospital to reflect substantial changes in the size of residency programs.
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Alternatively, only a portion of any change in the number of residents could be recognized for payment purposes. Under this policy, hospitals that increased their number of residents would not be paid in full for the additional residents; but, at the same time, hospitals that reduced their residency positions would not lose the entire amount associated with that reduction.
Finally, under the current IME methodology, only full-time equivalent residents that train in the inpatient or outpatient areas of the hospital are included in the payment calculations. We believe the payment method should be flexible enough to support training in settings outside of the hospital, including free-standing ambulatory facilities, and managed care organizations.
GME Payment Policy
Direct graduate medical education (GME) payments cover Medicare's share of residents' salaries and benefits, the services of supervising physicians, and the general operating costs of running hospital residency programs. The amounts hospitals receive are based on their costs per resident in a base year (for most hospitals this is 1984) updated to the current year using the Consumer Price Index. These amounts vary widely. In 1993, per resident payment amounts ranged from around $20,000 to over $100,000 (see Chart 6). Medicare's share of these amounts is determined according to the proportion of the hospital's total inpatient days accounted for by Medicare fee-for-service beneficiaries.
As with the IME adjustment, the Commission recommends that GME payments not change based on variations in the number of residents a hospital trains. The current system discourages hospitals from reducing the size of their residency programs when it is appropriate to do so because they stand to lose a relatively large payment for each resident. Removing the direct link between payments and the number of residents a hospital trains would weaken the adverse incentives associated with the current method.
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To accomplish this, Medicare could consider replacing the current per resident payment amount with a lump-sum payment for resident costs that would be based on the hospital's historical share of GME spending. Alternatively, the current method could be retained but revised so that a change in the number of residents would result in a smaller than proportionate change in payments. In this way, hospitals would still receive partial payments for residency slots they eliminated and not receive full payment if they decide to take on additional residents. At some point in the future, however, Medicare GME payments would need to be adjusted to reflect changes in the number and distribution of residency positions.
The Commission also recommends that GME policies be modified to provide financial support for training residents in sites outside the hospital, such as ambulatory care clinics and health maintenance organizations. Hospitals currently have some leeway in this regard, but only if they own the ambulatory facility and incur the resident costs. There are no provisions to pay other types of providers directly for resident training. The Commission believes GME payments should be as neutral as possible concerning the site where residents receive training.
"The Official Committee record contains additional material here."
STRIP OFFSET FOLIO 6 HERE
Establishing a Broader-Based Financing Mechanism for Teaching Hospitals
Mr. Chairman, teaching hospitals are the flagships of the most widely respected health care system in the world, yet the Medicare program is the only payer to make explicit payments nationwide to support their teaching and research missions. While other payers have implicitly helped fund these costs though higher prices for inpatient care services, these purchasers are becoming less willing to pay more to these facilities in an increasingly price-conscious environment. The Commission believes separate funding mechanisms should be developed that would include contributions from a broader range of sources. While there would be a number of technical issues to decide, explicit financial support for medical education and teaching hospital costs would enable these facilities to compete with other hospitals for patients and enhance efficiency, while supporting their multiple missions.
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Disproportionate Share Payment Policy
Since 1986, Medicare has made special payments to PPS hospitals that treat a disproportionate share of low-income patients. DSH payments increased almost four-fold between fiscal years 1989 and 1996, from $1.1 billion to $4.3 billion (see Chart 7). Almost 2,000 hospitals receive DSH payments, but the top 250 hospitals account for about half of the total, and about 95 percent of all DSH payments go to urban hospitals.
Similar to the IME adjustment, DSH payments are distributed through a percentage add-on to Medicare fee-for-service discharge payment rates. The DSH adjustment is determined by a complex set of formulas that incorporate information about a hospital's location, size, and the proportion of low-income patients it treats. The low-income share is calculated by summing two ratios: Medicaid patient days as a share of total patient days, and patient days for Medicare patients eligible to receive Supplemental Security Income (SSI) cash payments as a share of total Medicare patient days. Hospitals do not receive DSH payments unless the low-income share meets a threshold. This threshold varies for different hospital groups, ranging from 15 percent for large urban hospitals to 45 percent for small rural hospitals.
"The Official Committee record contains additional material here."
STRIP OFFSET FOLIO 7 HERE
Mr. Chairman, as Medicare seeks to reduce the overall growth in payments, it is especially important that available DSH funds be targeted to those hospitals most in need of financial support because of their role in providing access to Medicare beneficiaries. The current method is increasingly inadequate to achieve this goal. A primary reason is because the formula relies, in part, on Medicaid utilization to identify low-income patients. The Medicaid utilization measure has never been a good overall indicator of service to the poor because the portion of the low-income population covered by Medicaid varies markedly from state to state. As states implement Medicaid and welfare reforms, this disparity is likely to be exacerbated. The recently enacted welfare law also changes eligibility for SSI payments, which will affect the distribution of DSH payments under the current formula.
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The DSH formula is flawed also in that it emphasizes hospitals' location and size and excludes other measures of identifying care to the poor, primarily uncompensated care. Under the current method, hospitals that have similar low-income patient shares have vastly different payment adjustments depending upon whether they are located in urban or rural areas and how many beds they have (see Chart 8). For example, urban hospitals with 100 or more beds and rural hospitals with 500 or more beds that have low-income percentages of 45 percent receive a 26 percent payment add-on per discharge, while smaller urban and rural hospitals with similar low-income burdens receive an adjustment that is one-fifth that much.
In addition, many of these hospitals provide similar levels of uncompensated care, but this is not accounted for in the current formula (see Chart 9). Public major teaching hospitals provide the greatest amount of this care and generally receive the highest Medicare DSH adjustments. But, on average, hospitals in rural areas provide a similar proportion of uncompensated care as a share of total costs as hospitals in large urban areas, yet the rural hospitals receive much lower DSH add-ons from Medicare.
"The Official Committee record contains additional material here."
STRIP OFFSET FOLIO 8 HERE
"The Official Committee record contains additional material here."
STRIP OFFSET FOLIO 9 HERE
The Commission believes that the current DSH payment method should be changed. Our March report sets forth a number of details to guide the development of a new formula. Briefly, the Commission recommends that DSH payments be determined using a measure based on providers' costs of treating poor patients regardless of geographic location. In the Commission's view, such a measure would be the best way to determine the amount of low-income care hospitals furnish. Under our proposal, the DSH measure would include the costs associated with Medicaid patients and Medicare patients who receive SSI payments, but it also would include the costs of care furnished to patients in other indigent care programs and hospitals' uncompensated care costs. These costs as a share of the hospital's total patient care costs would reflect the proportion of resources the hospital devotes to caring for the poor.
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Revising the DSH formula would target payments more precisely, thus providing the most financial help to those hospitals that serve the greatest share of poor patients. It also would avoid the current inconsistencies arising from differences in Medicaid eligibility requirements across states. To implement the Commission's proposal would require collecting some additional data from hospitals, but this requirement could be met without substantially increasing hospitals' current reporting burdens.
Teaching and DSH Payments for Hospitals That Treat Risk Enrollees
Mr. Chairman, teaching and DSH special payments currently apply only within Medicare's fee-for-service program. Over 4 million beneficiaries, however, are enrolled in Medicare's risk contracting program, and this number is expected to increase rapidly over the next few years.
When risk plan enrollees are treated in a teaching or DSH hospital, the risk plan pays the hospital a mutually agreed upon payment; there is no requirement that risk plans pay teaching or DSH hospitals additional amounts to support the missions associated with these institutions. Often, hospitals must accept lower prices from risk plans or jeopardize their Medicare patient base. Even in those cases where a risk plan may pay higher prices to certain hospitals, these payments may not explicitly correspond to the IME, GME, and DSH payments received under the fee-for-service program.
The Commission believes that hospitals that receive teaching and DSH payments under the fee-for-service program should receive comparable payments for the risk enrollees they treat. Several approaches could be taken to develop a mechanism to distribute these payments. One option, for example, would have hospitals submit their billing information for risk patients to Medicare. Medicare could then compute teaching and DSH payments based on a calculation of payments the hospital would have received if the patients had been in the fee-for-service program. Regardless of the approach, however, it would be important that hospitals be able to identify patients that are enrolled in a risk contracting plan.
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Conclusion
Mr. Chairman, this nation's teaching and disproportionate share hospitals fulfill unique roles in our health care system. As Medicare payments are necessarily constrained to preserve the Hospital Insurance Trust Fund, it is imperative that Medicare's teaching and DSH policies are structured to ensure that Medicare payments are appropriate to support the missions served by these hospitals.
This concludes my formal statement, Mr. Chairman. I would be pleased to answer any questions from you or other members of the Subcommittee.
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Chairman THOMAS. Thank you, Doctor.
Dr. Wilensky.
STATEMENT OF GAIL R. WILENSKY, PH.D., CHAIR, PHYSICIAN PAYMENT REVIEW COMMISSION; ACCOMPANIED BY ANNE SCHWARTZ, PH.D., SPECIAL ASSISTANT TO THE EXECUTIVE DIRECTOR
Ms. WILENSKY. Thank you, Mr. Chairman, for inviting PPRC, the Physician Payment Review Commission, to share its views.
There will be three chapters in PPRC's 1997 report that are relevant to today's hearings: The changes in the health care market and its effect on academic medical centers, how the changes in the market have affected physician supply and specialty mix, and the implications of financing graduate medical education and teaching hospitals from a trust fund.
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As you know, since 1990 PPRC has looked at issues relating to the supply and specialty distribution of physicians and the Medicare financing of graduate medical education; that is, the direct portion of graduate medical education.
What I'd like to do in the brief time I have in this oral testimony is to highlight some of the issues as the Commission sees them and then to go back and spend just a few minutes talking about the purpose of Medicare funding. Some of the changes that are being discussed or you may be considering or were being considered in the last session of Congress goes to the heart of why it is that Medicare funds graduate medical education. We think before you make changes that issue needs to be revisited.
First, some of the issues. One is that payments are based on the number of residents and this, of course, creates an incentive to increase the number of residents being trained. You've already heard mention of this. In figure 1 of PPRC's testimony, we show the very substantial increase that has occurred in the number of residents being trained. It is partly because of an increase in the length of training that has occurred. It is also partly because of the increase in the number of international medical graduates.
The second point is that the payments under direct medical education are based on institution-specific historic costs; more specifically, based on what a hospital was showing as its costs in 1984–85, updated for inflation. That has produced very variable payments, from a low of $11,000 per resident to more than $100,000 per resident.
In 1993 the Commission recommended that there be a standardized amount paid. We have not changed from that recommendation.
The next issue is that the payments are made primarily for training in inpatient settings. I think you all know there has been substantial movement to take health care outside of inpatient settings. Medicare policy doesn't reflect these changes that have gone on in medicine. And furthermore, hospitals are not accountable for how they spend that money. There's an issue of fungibility and that is one that, again, gets raised once you look at the notion of paying only for inpatient settings.
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A fourth issue is the one that Dr. Newhouse has already mentioned concerning managed care, which is that the structure of the payment occurs so that the teaching hospital does not receive payment directly, at least, when a managed care enrollee is admitted to a teaching hospital. PPRC has recommended in the past and continues to recommend that the dollars be removed and another mechanism be found to distribute those moneys so that you can use the teaching facility or also so that you can sponsor training in managed care settings, but to do so in a more directed way.
And a final issue we think needs to be raised has to do with the way Medicare supports nursing education. Medicare is usually discussed in terms of medical education with regard to its impact on academic health centers and physician training, but of course Medicare is a very important source of money for the training of nurses. Some $250 million went to nurse training in the last year and some other $83 million to other allied professionals. But it only goes for those who are trained at the diploma level and not at the graduate level.
When Medicare was enacted in 1965, that made some sense. About 77 percent of the nurses were in diploma programs. It no longer makes a great deal of sense. In fact, as of 1990, less than 8 percent of the nurses were in diploma programs and that is projected to go down even further.
Let me spend a few minutes talking about the broader issue, which is the purpose for Medicare's financing graduate medical education. These are very big issues and I obviously can only touch upon a few of them. There are at least three reasons why Medicare might wish to support direct medical education payments. This is a philosophical and practical discussion that we had at one of our recent Commission meetings.
One is to make sure seniors have access to teaching hospitals. Although it does not appear that that is a problem, that was initially one of the driving forces behind having Medicare payments go for teaching.
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A second is to ensure the viability of teaching hospitals. As Dr. Newhouse has indicated, the margins for the major teaching hospitals, because of Medicare, has, in fact, been very high, although their overall margins are not high. And it is clear that without this very substantial subsidy by the Medicare Program, these major teaching hospitals would have had some financial difficulties.
And the third justification is to support the production of physicians to meet the needs for our seniors. And I just want to summarize a couple of the findings that are included in some detail in this year's report.
The bottom line, as I think you know, is that it doesn't appear the production of physicians is exactly a problem in the United States. In fact, it looks like we have, if anything, a substantial excess supply, particularly in terms of some of the specialists.
PPRC has done some analysis of what is going on in the physician market and in the market for residents, as an economist looks at these issues. It does look like the physician labor market is changing but the changes are more modest than the anecdotes would suggest.
There was a decline in income 2 years ago. There was an increase in terms of overall specialties but overall, in the last 2 years, there's still been some decline in physician income.
It also appears there's a mixed picture with regard to the choice between generalism and more specialized fields. It is easier for people who are in primary care residencies to get jobs when they finish. But it also appears there's still a very strong demand for specialists, and residents in specialty fields are finding jobs, although with some difficulty.
We have some trouble looking at specific markets. Our data are usually available only at the national level. We know that some of the changes are very specific in terms of their geographic impact, and we think it's important to look there, as well. But in terms of being worried about whether there will be an adequate physician supply to take care of the physician population, that does not seem to be an issue.
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We think it is important Congress think through in a very clearly articulated way why it is that Medicare is supporting graduate medical education and disproportionate share funding. That may lead you to some different policy conclusions than what was built in the program in 1965.
Thank you. I'd be glad to answer any questions.
[The prepared statement and attachments follow:]
Statement of Gail R. Wilensky, Ph.D., Chair, Physician Payment Review Commission
Mr. Chairman and members of the Subcommittee, I appreciate the opportunity to be here this afternoon to present the Physician Payment Review Commission's views concerning Medicare payment to teaching hospitals. As you know, the Omnibus Budget Reconciliation Act of 1990 expanded the Commission's mandate to include consideration of the supply and specialty distribution of physicians, and Medicare financing of graduate medical education (GME). We have been working on these issues ever since.
The Commission's 1997 annual report to Congress will include three chapters relevant to today's hearing:
• how changes in the health care market have affected academic medical centers,
• how changes in the market have affected physician supply and specialty mix, and
• the implications of financing graduate medical education and teaching hospitals from a trust fund.
My testimony today primarily focuses on the last of these but I will touch on the others where relevant. My remarks focus on three key areas:
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• problems associated with current policy that the Congress may wish to address,
• the importance of clarifying policy objectives, and
• the implications of financing GME and teaching hospitals from a trust fund.
Although the Commission's 1997 report will not make recommendations on GME financing, there is much that we can offer as you begin to deliberate this issue. First, some of the recommendations we made in 1993 are still relevant (for example, those concerning financing of training in ambulatory settings). Second, in this report, we provide the Congress with an framework for discussing changes in GME financing. We also have some analytic activities planned for later this spring that could assist this subcommittee as it debates changes in Medicare policy.
Before I begin, let me clarify how the PPRC and the Prospective Payment Assessment Commission have divided responsibilities in these areas where our mandates overlap. PPRC has primarily concerned itself with Medicare payments for the direct costs of graduate medical education (residents' compensation, faculty supervision, and overhead), leaving consideration of the indirect medical education adjustment (IME) to ProPAC. This is because the indirect adjustment was not designed to support teaching per se. Rather it was meant to compensate teaching institutions for their relatively higher costs attributable to teaching and patient mix. The PPRC has not considered issues related to disproportionate share hospital (DSH) payments.
Current Medicare Policy
Graduate medical education is largely financed through patient care revenues generated by hospitals. The federal government is the largest single explicit financing source through the Medicare program. Other payers have less explicit mechanisms. Teaching hospital charges to private payers reflect the direct costs of GME (for example, residents' stipends) although these payers do not identify and separately pay for them.
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In Medicare's early years, GME was funded like other hospital services on a retrospective, reasonable cost basis. With the adoption of prospective payment, new policies were needed to ensure equitable payment for teaching hospitals. The costs of graduate medical education are now recognized under two mechanisms:
• direct medical education payments to hospitals for residents' stipends, faculty salaries, administration, and overhead allocated to residency programs; and
• an indirect medical education adjustment.
In the early years of prospective payment, direct medical education payments were essentially a pass-through of costs related to training. Since the passage of the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), direct payments have been based on three factors:
• hospital-specific per resident costs from the 1984 or 1985 cost-reporting years updated for inflation,
• the number of full-time equivalent residents, and
• Medicare's share of inpatient days.
Under OBRA93, the inflation adjustment for residents in nonprimary care fields was eliminated for fiscal years 1994 and 1995. As a result, the per resident amount differs for primary care and other residents.
The hospital's per resident base amount is multiplied by the number of full-time equivalent (FTE) residents during the payment period times Medicare's share of inpatient days. Residents beyond the initial period of residency (up to the minimum for board eligibility, not to exceed five years) are weighted as 0.5 FTEs. There is also a special exception that allows residents in accredited geriatrics training programs to be considered as 1.0 FTE for an additional 2 years.
The indirect medical adjustment, by contrast, is a hospital-specific percentage amount (based on the ratio of interns and residents per bed) added to each DRG payment. As I mentioned just a moment ago, the IME adjustment was developed to compensate teaching institutions for costs associated with teaching such as the involvement of residents in patient care, and the severity of illness of patients who require the specialized services available only in teaching hospitals.
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Problems With Current Medicare Policy
The Commission has identified five critical problems with Medicare's current methods of financing graduate medical education. Policymakers should be concerned that Medicare payments for the direct costs of graduate medical education are:
• based on the number of residents in a teaching hospital,
• based on institution-specific historical costs,
• made primarily for training in inpatient settings,
• structured so that teaching hospitals do not receive payment when enrollees of Medicare managed-care plans are admitted to these hospitals, and
• structured to support nursing education in diploma schools, rather than at the graduate level.
Let me describe in a little more detail why the Congress might choose to address these issues.
Payment Based on the Number of Residents
Medicare payment for graduate medical education is proportional to the number of residents training in each institution. For direct medical education payments, there is a payment for each full-time equivalent resident (FTE). For the indirect adjustment, the add-on to per case payments increases as the ratio of interns and residents to beds in an institution increases.
Under both mechanisms, more residents result in more Medicare dollars flowing to the institution. Although the number of residents is not strictly a function of Medicare policies, these policies do create an incentive for hospitals to organize patient care services around residents rather than other caregivers (for example, nurse practitioners, physician assistants or staff physicians). In recent years, the number of residents has increased dramatically (Figure 1). This growth reflects both increases in the length of training and the growing number of positions filled by international medical graduates.
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Medicare's rules could be changed so that payment is no longer proportional to the number of residents. Under the Medicare restructuring legislation proposed in the last Congress, payments to hospitals would have been based on their historical share of direct and indirect payments. The implication is that hospitals that increase the number of trainees do so at their own expense; those that decrease the number of trainees are held harmless for this action. Implementing such changes will require methods of periodically rebasing payments so that hospitals do not receive payments into perpetuity based on the number of residents they had at one point in time.
Direct Medical Education Payments Are Highly Variable
Because Medicare payments for the direct costs of graduate medical education are based on institution-specific historical costs, per resident payments vary substantially across hospitals, from a low of $11,000 to more than $100,000 per resident. This variation may reflect differences in the true costs of training. But it also reflects differences in accounting practices (for example, how overhead costs are allocated across departments) and inaccuracies in measuring the number of full-time equivalent residents. Other differences, for example, whether or not faculty physicians are employees of the hospital, also affect training costs but there are questions about how much of this variation Medicare should support.
Variation in direct payments could be addressed by paying hospitals a standardized amount per resident as recommended by the Commission in 1993. Important implementation questions concern whether this payment should be simply the national average payment, the national average adjusted by differences in local wage rates, specialty or other factors, or whether it should be derived by other means.
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Payment to Hospitals
A third problem with current policy is that payments may only be made to hospitals, despite the fact that much of physician practice now takes place in ambulatory settings. This emphasis on inpatient care also does not provide residents with the competencies they will need to practice in managed care. Although residents do spend time in ambulatory settings, time spent in ambulatory sites and compensation for outpatient faculty is recognized only for the purposes of Medicare direct medical education payment if the hospital ''incurs all or substantially all'' of the costs of training.
This policy does not reflect the changes that have occurred in medicine since Medicare was enacted. Medical care no longer takes place primarily in hospitals. While educators have changed curricula to provide more training experiences outside the hospital, Medicare's financing mechanisms pose an obstacle to broader changes. Paying primarily for time spent in inpatient settings creates a disincentive to move training to other sites such as outpatient clinics, nursing homes, physician group practices, and managed-care plans.
It is also worth noting that hospitals are not held accountable for the use of the Medicare payments they receive. These dollars are fungible; once they flow into the hospital, they can be used for any purpose, not just the training of physicians. No empirical data exist to examine how hospitals are using these funds.
There are several ways to address these concerns. The disincentive to moving training outside the hospital could be removed by permitting time in other settings to be counted for the purposes of either direct or indirect payments. For example, the Administration's fiscal year 1998 budget proposal would count work in nonhospital settings for the purposes of indirect payments. Or payment could be extended to entities other than hospitals for the time residents spend in those settings. This is the approach recommended by the Commission back in 1993. It is also included in the Administration's budget proposal which would extend GME payments to federally qualified health centers for primary care residents when a hospital is not paying for the residents' salary in that setting. A complication in setting such payments is the lack of information about the costs of training in ambulatory sites.
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A third alternative, that would both permit training to be moved out of the hospital and introduce more accountability, would be to make payments for the full direct cost of medical education to training programs or consortia rather than hospitals. This approach raises a number of implementation issues including how much should be paid and the measure of Medicare activity for determining Medicare's share of costs.
Lack of Medicare Payment for Medicare Managed-Care Enrollees
Growth of Medicare's risk contracting program has raised two additional concerns about current policy for financing GME and teaching hospitals. First, as I described in testimony before this subcommittee two weeks ago, risk-plan payments are based on fee-for-service expenditures at the county level which include both GME and DSH payments. The effect of including these payments is shown in Figures 2 and 3. Overall GME and DSH payments account for about 5.5 percent of Medicare capitation rates although the share varies across the country. In effect, managed-care plans are receiving payment for activities they are not obligated to support.
Second, Medicare does not make additional payments to teaching institutions when they serve Medicare managed-care enrollees. Payments for direct costs are currently based on the notion that Medicare should pay its share of GME costs with the share determined by the percentage of Medicare discharges. But the count of discharges does not include Medicare managed-care enrollees.
INSERT OFFSET FOLIOS 10 TO 11 HERE
[The official Committee record contains additional material here.]
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As I mentioned at the previous hearing on Medicare managed care, the Commission recommends that medical education payments be removed from calculation of capitation payments, and that other methods be developed to pay for managed-care enrollees' use of teaching facilities or for training in managed-care sites. This approach was taken by the Senate in the last session of Congress although it was dropped in the conference agreement on Medicare restructuring. The final bill provided for payment to teaching institutions admitting Medicare managed-care enrollees but funded these payments from general revenues, rather than extracting them from capitation payments.
Nursing Education
In addition to supporting the costs of GME, Medicare also provides cost-based reimbursement to hospitals for operating training programs in nursing and a variety of allied health fields including cytotechnology, dietetics, hospital administration, inhalation therapy, medical records administration, medical technology, nurse anesthesia, occupational therapy, physical therapy, pharmacy, and X-ray technology. In 1994, Medicare paid an estimated $248 million for nursing education and $83 million for allied health education under this provision.
Medicare support for nursing education primarily supports diploma programs because of its origins as a mechanism to ensure equitable payment to hospitals for the costs they incur in treating Medicare patients. The Congress may wish to reconsider, however, as to whether the program should be supporting these programs given changes in nursing education and practice. When Medicare was enacted, 77 percent of nurses were trained in hospital-operated diploma programs. By 1990, however, less than 8 percent of graduates were from diploma schools. Moreover, the annual percentage of diploma-prepared graduates is expected to decline further, dropping to about 2.5 percent by the year 2020.
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Nursing education at the graduate level receives no Medicare support despite the potentially greater need for nurses trained as nurse practitioners and clinical nurse specialists. These disciplines did not even exist when the Medicare program was first implemented and lack of support cannot be interpreted as a conscious policy decision.
The Purpose of Medicare Financing
Policymakers are now focusing on how to make Medicare's policies more rational, equitable, and less of an impediment to change as educators seek to adapt GME to changes in the nation's health and its health system. In the last Congress, this committee and others proposed placing Medicare revenues in a trust fund from which payments could be made to hospitals, training programs, consortia, or medical schools based on principles other than hospital costs and admissions. Since these proposals did not become law, the Commission assumes that they form the starting point for debate in this Congress.
There are many ways to reallocate Medicare dollars, none of which is inherently correct. What matters is what Congress considers the purpose of such support. All other decisions (for example, who can get the money and how much they are eligible to receive) should flow from a common understanding about these purposes.
There are at least three different reasons why it may be appropriate for the Medicare program to provide special support for teaching hospitals (Table 1):
• to ensure beneficiary access to teaching hospitals,
• to ensure the viability of teaching hospitals, and
• to support the production of physicians to meet Medicare beneficiaries' needs.
A case can also be made that there is no compelling rationale for continuing Medicare support.
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Maintaining Beneficiary Access to Services in Teaching Institutions
The report accompanying the 1965 Social Security Amendments notes that the original intent of Medicare's support of the special costs incurred by teaching institutions was to ensure that beneficiaries could receive care in the best hospitals, those where training also occurred. Medical research costs, by contrast, were not to recognized by Medicare because these were not closely related to normal patient care, and there was ample funding from other sources.
This rationale of tying Medicare dollars to activities benefiting Medicare patients remains evident in current policy despite the changes that occurred with the adoption of prospective payment. Under both direct and indirect formulas, Medicare only pays hospitals that admit Medicare beneficiaries, and determines its share based on the number of bed days in each institution.
Does beneficiary access to teaching hospitals remain a compelling policy concern? Despite the many changes in the health care system, public perceptions still often tend to equate teaching status with high quality care. Many complex services, however, such as open-heart surgery and organ transplants, that were previously available exclusively in academic settings, are now provided in nonteaching hospitals where costs are typically lower and outcomes are often comparable.
It is important to note that under managed care, decisions regarding whether to use a teaching hospital are made primarily by plans, not patients. Although there are no good data on the extent to which Medicare risk contractors use teaching hospitals, the assumption is that most managed-care plans will use teaching hospitals only if comparable services are unavailable elsewhere or if including these providers in their networks makes the plan more marketable. It may be difficult to argue, therefore, that Medicare support is critical to ensuring beneficiaries' access to teaching institutions when there are no such assurances of access for its managed-care enrollees.
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Ensuring the Viability of Teaching Hospitals
A second rationale for Medicare support of teaching hospitals is that the nation's academic medical centers are unique resources which have laid the groundwork for important medical advances, ensured the quality of medical education and the competence of practicing physicians, and continue to provide a wealth of specialized health services.
Beginning with recognition of the costs of clinical education as reasonable costs, Medicare policies have been designed to ''level the playing field'' so that teaching hospitals are not disadvantaged in a competitive environment by a payment system that does not account for all the relevant factors that explain their higher costs.
This rationale may have greater relevance now as academic centers face competitive pressures arising from growth in managed care. Given the increasingly cost conscious health environment and declining use of hospital services, at issue is how much federal support for academic medical centers is warranted and whether recognition of these costs by Medicare in the form of direct and indirect medical education payments is an appropriate vehicle. Those arguing for cutbacks in federal support point out that since the prospective payment system was implemented, teaching hospitals' Medicare inpatient margins have exceeded those of other hospitals. In fiscal year 1995, major teaching hospitals (those with at least 0.25 residents per bed) had the highest Medicare inpatient margin at 18.6 percent (Table 2). Margins for other teaching hospitals were 7.6 percent and those of nonteaching hospitals were 3.7 percent.
Moreover, teaching hospitals are taking steps to respond to the changing health care environment. They are developing new sources of revenue; creating new organizations to negotiate managed-care contracts; building networks of providers through mergers, acquisitions, and contract arrangements; and taking steps to differentiate their products. They are also working to reduce costs and improve operational efficiency.
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Total margins, as opposed to Medicare margins, however, suggest the pressures now being faced by teaching institutions (Table 2). Major teaching hospitals have the lowest total margins at 3.7 percent (compared to 6.5 percent for nonteaching hospitals), reflecting a combination of heavy uncompensated care burdens, inefficiencies, and payments from many payers that do not recognize the full incremental costs of education. Medicare's special payments to teaching institutions therefore are viewed as a thin buffer from powerful market forces that do not value missions beyond patient care.
Supporting the Production of Physicians to Meet Beneficiary Needs
A third rationale for Medicare funding of GME is that the program should support the production of physicians sufficient to ensure that Medicare beneficiaries have access to appropriate medical care. Since there are no other identifiable financing sources for physician training, public financing may be needed to ensure that Medicare beneficiaries have access to physicians. If these costs were not subsidized, potential candidates might decide to enter other professions. Public support of GME thus ensures that there is a sufficient supply and mix of physicians to meet beneficiary health care needs.
This rationale is consistent with concerns at the time of Medicare's enactment about an impending physician shortage. Policymakers responded to these concerns by offering construction grants to health professions schools that agreed to increase enrollment, providing direct funding to schools based on enrollment, and extending loans and scholarships to students. Residency programs also expanded rapidly during this period. Between 1970 and 1989, the number of training programs increased by nearly 40 percent; the number of positions offered almost doubled.
Today, however, the concerns are different. One school of thought is that whatever the problems in physician supply and specialty mix, these are better left to the market. In its 1995 and 1996 annual reports, and once again in this year's report, the Commission has examined how changes in the market for health services are actually affecting the types of employment opportunities available to physicians. Despite the anecdotes we have all heard, the empirical data do not suggest that the market is leading to substantial changes in the work force. While there are some signs that specialty mix may be changing in response to market demand for primary care physicians, there are also signs of continued strong demand for physicians in highly specialized fields. In addition, despite common beliefs to the contrary, many indicators do not reflect an oversupply of physicians. For example, physician incomes continue to grow (although at lower rates than in the past) (Table 3). Interest in medicine as a career is at an all-time high.
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A second school of thought is that Medicare funding could be used to address work force concerns if subsidies were targeted, rather than open-ended. Rather than ending Medicare support for clinical education because it has led to the overproduction of physicians, Medicare could attach conditions to its dollars to take some of the steps on which there is broad agreement—for example, training fewer physicians overall, providing training experiences in outpatient settings, and training physicians to locate in underserved areas. Based on this rationale, appropriate policy responses might include paying for fewer trainees (as proposed by the Administration), basing direct payments on a national average, and permitting use of funds in settings other than hospitals and hospital-owned outpatient sites.
Some have also argued that Medicare subsidies are necessary to ensure that disadvantaged students are able to select medicine as a career. That is, if residents were required to pick up the costs of training themselves, only the privileged could become doctors. Broad support for GME is not an effective strategy for encouraging diversity in the physician work force, however. A more effective approach would be to fund individuals, rather than institutions, either through Medicare or through the Public Health Service's grants and scholarship programs.
Implications of Trust Fund Financing
Finally, let me describe some of the implications of financing GME and teaching hospitals from a trust fund (Table 4). First, the existence of a trust fund creates the opportunity to correct all the problems I discussed earlier. Spending can be oriented for specific purposes, such as training in ambulatory settings or for training in specific specialties. Or it can be structured to be neutral with respect to the type and setting of training.
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A second implication is that the trust fund shifts financing from an open-ended entitlement to a fixed amount of funding. Under current law, the amount paid per resident is fixed but total funding increases with increases in the number of residents. A trust fund could be structured so that the total amount of funding is fixed, and the payment per resident is variable (for example, decreasing as the number of residents grows).
Third, financing from general revenues creates a new political dynamic for stakeholders. Given concerns about the solvency of Part A trust fund (from which direct and indirect payments are made), infusion of general revenues would insulate teaching institutions from stringent Medicare cuts. For teaching hospitals, however, reliance on general revenues is a risky strategy. Currently, Medicare payments are an entitlement; there is always enough money for those eligible. General revenues, however, are subject to the annual appropriations process and could be whittled away over time as teaching institutions are forced to compete with others for scarce discretionary funds.
Finally, the existence of a trust fund creates an administrative structure that could be used for accepting and distributing revenues from other payers. Although I am aware that the current Congress does not appear inclined to compel other payers to contribute to GME financing, leaders in academic medicine see creation of a federal trust fund as an important first step in securing broader support.
At least some of the policy goals envisioned under previous trust fund proposals could be accomplished by more modest changes in Medicare policy than creation of a trust fund. For example, a trust fund is not necessary for: paying based on factors other than the number of residents; recognizing the costs of training in ambulatory settings; paying standardized per resident amounts, paying teaching hospitals when a Medicare managed-care enrollee receives care in their institutions, or paying for graduate clinical education of nurses. It is also possible to reduce the number of trainees receiving public support without creating a trust fund. This may more easily accomplished (administratively and politically) with a trust fund, however, because explicit decisions do not have to be made about who not to fund. Instead if the number of trainees increases above the desired level, amounts paid per resident drop.
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Conclusions
In the months ahead, the Commission will continue exploring the implications of making payments from a GME and teaching hospital trust fund and will be providing you with guidance about different policy alternatives. Issues to be considered include which entities should be eligible to receive trust fund payments and methods to ensure their accountability, the implications of paying hospitals based on their historical share of Medicare dollars, other options for allocating trust fund revenues, and how to set allocations to accommodate change over time in where training occurs. The implications of some alternatives, for example, the distributional consequences at the hospital level of changing Medicare payments, will be modelled using data from Medicare cost reports and the Health Care Financing Administration's Intern and Resident Information System.
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Mrs. JOHNSON [presiding]. Thank you.
Dr. Schwartz.
Ms. WILENSKY. She's just here to accompany me.
Mrs. JOHNSON. Thank you very much for your testimony this morning. Everyone has testified? OK.
I'd like to elicit the panel's comments on any work or thinking any of you have done on how we would distribute payments from a trust fund for medical education. If we reroute dollars into a trust fund, how do we distribute them? In the Republican bill last year, we used a very crude mechanism. We did it on the basis of the preceding year's Medicare patient census, but you can't keep doing that.
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And particularly in a world of mergers and changes and where your long-term goal is to reduce the number of residencies you are subsidizing, how would you distribute that money from the trust fund?
Ms. WILENSKY. We have some ideas about how you would not distribute it that I would suggest first and then, again, some general principles. PPRC does not have specific recommendations, although I know the Institute of Medicine is going to be delivering a report soon that will look at those issues.
Our concerns have been that you not link the payments to the number of residents being produced, an issue that Dr. Newhouse also raised; and that while initially looking at historical shares is a way that you can begin, it will clearly not make sense to continue doing so in the long term. Finally, when you make the payments, you should allow for payments to go outside just the inpatient setting, either to institutions more broadly defined or to institutions and consortia.
Again, let me emphasize the general point, which is to the extent that payments were made, in part, to encourage physicians in general to have graduate training and particularly to make sure that opportunities were available to low-income or disadvantaged physicians to have graduate training, the payment to institutions is a crude or clumsy way to go about it. Some of the funds might be redirected, to the extent that that was the concern, to make sure physicians in certain specialties or physicians from certain disadvantaged backgrounds are, in fact, able to continue their specialty training. The institutional basis of the payment should be rethought.
Mr. NEWHOUSE. Our Commission did not take a position on how to do this. I would distinguish for you between the indirect medical education payments and the direct medical education payments.
On the indirect side, I would suggest some historical basis of the kind you used, with some intent to revisit that some years down the line. If there is a broader or so-called all-payer mechanism established, then I would use some measure of all patients, not just Medicare patients.
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On the direct medical education side, as Dr. Wilensky noted, there's a tremendous amount of variation across the country in these payments. Our Commission had some discussion of that. Some of that variation, of course, is due to the fact that different institutions have different proportions of Medicare patients. Some of it is because the cost allocations for the faculty side are sometimes contributed and sometimes salaries are paid. If salaries were paid, then Medicare picked up its share of those salaries.
But this goes back to 1984, trended forward, as Dr. Wilensky noted, and what was right in 1984 may not be right now.
So my personal bias is to support some slow move toward uniformity, but that is my personal view, not the view of the Commission.
Mrs. JOHNSON. Thank you.
I'd like to conclude my questioning by asking if you have any comments on the administration's proposal for the New York demonstration project.
Ms. WILENSKY. These are comments of myself personally and not a PPRC recommendation. It is likely, in my view, that ultimately when a full package of reform is put together that providing some support at the same time you try to encourage a downsizing of the number of residents might be a part of the final package.
My concern about the New York demonstration is twofold. The first is I'm not sure we'll ever know what happened because it's not set up in the normal way that research design is set up with a control, an experimental group, and a clear assessment strategy.
But even more than that, I'm afraid you're giving away everything and not getting enough in return. The problems with graduate medical education are far greater than simply the number of residents being trained and the mix between generalists and specialists. You also need to address the whole issue of the payments and their variation, as well as the major philosophy about why you're doing it and what you want to get in return.
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I think providing this kind of payment at this point without getting enough in return is a mistake, but do not question so much the idea of providing some support in a transition period. I think that probably will be a part of an ultimate package of policy changes.
Mr. NEWHOUSE. Our Commission did not take any position on the New York demonstration, so these are my own views.
When or if the link between the number of residents and Medicare payments is severed or partially severed, I think it's important that that ultimately lead to some savings to Medicare or to the government, and the New York demonstration provides that over time by phasing down the payments that would be made if residency slots are cut.
So while I don't want to comment on the specifics of the phasing down, that general notion, I think, is consistent with the way to go.
The other thing I would point out about the New York demonstration is that to the degree that it allows hospitals to save some money, not have their payments cut completely, by reducing residents, it's consistent with the spirit of our recommendation, but the New York demonstration is entirely voluntary.
So the spirit of our recommendations would be to go something like the spirit of the New York demonstration but do it for everybody. As it is, the New York hospitals, the ones that want to reduce residents anyway, will gain by this and the ones that don't want to reduce residents or want to increase can just stay under the old system.
Mrs. JOHNSON. Thank you very much.
Thank you, Mr. Chairman.
Chairman THOMAS. The other problem I have with a ''demonstration project'' is when it includes two-thirds of the universe, that is the problem. When you're looking at it, it makes it fairly difficult to call it a demo project. I think a relief project is more appropriate, and I don't know whether you do that without running through us, in terms of a policy change.
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Does the gentleman from California wish to inquire?
Mr. STARK. Thank you, Mr. Chairman.
In this residency stuff, it just seems to me we have a lot of approximations out there. I think it's probably fairly certain the residents don't get much money. They get maybe $20,000 or $30,000.
Ms. WILENSKY. $40,000.
Mr. STARK. $40,000?
Ms. WILENSKY. But not $120,000.
Mr. STARK. It runs $20,000 to $40,000.
Now, the hospitals want to sign them up. Some of them have more residents than they have beds, right? So you can just put a resident in every bed and let them hug the patient.
If residents would walk into hospitals and say, ''Here I am; I'll do this free; use me; train me and use me; I'll volunteer,'' leaving the subsidies out of this for 1 minute, does anybody know what it would cost a hospital, on average, hard costs, out-of-pocket costs, to train them? Assuming they're getting something back, I presume there's some benefit which the resident adds, some productivity; is that correct? Some service or resource that——
Ms. WILENSKY. That the residents provide?
Mr. STARK. Is that correct?
Ms. WILENSKY. Oh, absolutely.
Mr. STARK. OK. So they're contributing $20,000 to $40,000 to the hospital. Now, how much does it cost them to supervise them? On the hospital's side, what is it? Does anybody know that or have any studies?
Ms. WILENSKY. There have been studies that have been done but they have varied widely.
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Mr. STARK. This is not with the hospital accountant loading in the limousine for the hospital administrator and all that sort of thing, but just what——
Ms. WILENSKY. I'd be glad to provide what we know about it.
Mr. STARK. Make a guess.
Mr. NEWHOUSE. We can provide some information on that.
Mr. STARK. Double?
Dr. YOUNG. We have some information from the Medicare Cost Report. Now, this is as was reported by hospitals. What we did was break their costs that they report into three categories. The first category is resident salaries and fringe benefits——
Mr. STARK. Yeah, but these guys are contributing, now.
Dr. YOUNG. That's right. The second category is physician supervision and other costs related to that, and the third category is allocated overhead—the heating bill and all of that.
Mr. STARK. Let me ask you this. How far off would I be if I said the allocated overhead is marginal?
Dr. YOUNG. It is a legacy of cost-based reimbursement. It is marginal.
Mr. STARK. I understand that but in reality, if you sent a cost accountant in——
Dr. YOUNG. Under today's payment systems it is marginal.
Mr. STARK. OK. Supervision makes sense. What I'm trying to get a handle on is, What does the resident contribute? What is the value of their service? If there were some way to calculate all this we might get to—Gail, you suggest a universal national fee?
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Ms. WILENSKY. I think we ought to regard this as a training service delivery effort. We ought to basically be netting out the difference between what the physicians are contributing and what they receive in teaching. And for those that we think can't or wouldn't be able to receive additional training, because they are too poor or don't have access to basically tuition kinds of moneys, that a program be used to target for those individuals.
That is a clear function. It's not clear to me, in the long term, what Medicare's continuing role is to the institutions. In the interim, there are a lot of reasons to want to support——
Mr. STARK. No, I understand. It's a proxy for paying extra money to these institutions which are very expensive. Whether they're worth it or not is——
Ms. WILENSKY. Well, there's no historical precedent that I'm aware of in other areas besides graduate medicine for the Federal Government to be paying institutions directly of this nature.
Mr. STARK. You guys are going to come up with a formula, right? No? To do this?
Mr. NEWHOUSE. We'll try to respond to what you asked.
Mr. STARK. The other side of this coin is the DSH stuff. I want to come at this just a little bit. I think that Gail, you said you want to give the rural hospitals a little more DSH, right? A little bit? Did you say that in your testimony?
Ms. WILENSKY. Today?
Mr. NEWHOUSE. I said that.
Mr. STARK. You said that—Joe, OK. You wouldn't pay that to the cost basis rural hospitals, I believe. Is that correct?
Mr. NEWHOUSE. We view the DSH payment as a way of helping hospitals that have large low-income patients, and we would set the threshold at——
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Mr. STARK. Then you're telling me that this is going to cause a minimal reduction in payments to urban and a little bit higher reduction in suburban areas, correct?
Mr. NEWHOUSE. Depending on the details of the scheme, yes.
Mr. STARK. All right. So basically you could say that the DSH payments are flat. Fair?
Mr. NEWHOUSE. I'm not sure I follow you.
Mr. STARK. A little bit more for the rural, a little bit less for the urban, and a little bit less for the suburban.
Mr. NEWHOUSE. Yes.
Mr. STARK. Now, the problem is that the uninsured people are going up pretty rapidly. There are probably 40 to 41 million uninsured. I don't know; it depends on how they count them. That's one-fifth of the people under age 65 uninsured. Twenty-five percent of New York residents, they tell us, are uninsured.
If we keep the DSH payment constant, how do we take care of the uninsured?
Mr. NEWHOUSE. We did not make a recommendation on the total size of the pot.
Mr. STARK. But I'm just saying, as a practical matter——
Mr. NEWHOUSE. Our proposed targeting method would help your problem because we would include the uninsured in the low-income count that triggers the DSH payment, whereas the current formula does not. It only——
Mr. STARK. How are you going to count that in Tennessee?
Mr. NEWHOUSE. I'm going to count Medicaid plus uninsured plus indigent care. Basically count all except privately insured and regular Medicare——
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Mr. STARK. But you won't know in Tennessee. They're all on Tenn Plan.
Mr. NEWHOUSE. Oh, I'm sorry. Medicaid will also count. It's not that I'm going to get rid of Medicaid. I'm just going to——
Mr. STARK. How are you going to know?
Mr. NEWHOUSE. It won't matter because they'll either be Medicaid or they'll be uncompensated care.
Mr. STARK. Or low income.
Mr. NEWHOUSE. Or low income. I'll count all of them.
Mr. STARK. But then every hospital that has Tenn Care people is—it's just those hospitals that have the most will get DSH?
Mr. NEWHOUSE. Yes, correct.
Mr. STARK. OK.
Ms. WILENSKY. One of the problems, of course, is trying to use part A Medicare wage tax money that's supposed to go for certain functions of inpatient——
Mr. STARK. If we treated the Defense Department the way we're talking about treating Medicare, we'd have to close down the Defense Department and privatize it to Wackenhutt & Pinkerton.
Now, we are never going to have enough tax revenue to pay for the Defense Department and the gap and the budget deficit that's being created there—this trust fund figment—we're obligated to pay for the medical care of seniors and we aren't going to stop that, in spite of any Chicken Little ideas that the sky is falling, and people are trying to address the problem.
I would rather have it be dedicated, obviously, but I don't much care if it comes out of general revenues or not. I'd sure as hell rather do that than the ignition facility at Lawrence Lab for $20 billion or something that we know won't work. At least we have some idea that medical care will cure people who are sick.
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I don't know. I'm more concerned about how we figure out how to fairly reimburse the hospitals to which the uninsured gravitate because they can get into an emergency room and they can't get care someplace else.
And this proxy that we've used, we've all accepted. It was probably very inefficient when we weren't being so chintzy or forced to be so tight with a dollar, so maybe that's good for us, but then we've got to find a more accurate way to determine who's providing uncompensated care and try and, I think, reimburse them so that these people truly do get care.
You could say we could block grant the States but are we sure they'll do it? I don't think the States can afford it. I think we have to continue to help. It's up to you guys. You're the experts here, the wonks in this world. Come up with some formulas.
Ms. WILENSKY. Well, in part, the frustration is the split in this case, in disproportionate share payments, between Medicare and Medicaid makes it very difficult to have a rational policy for taking care of uninsured people.
Mr. STARK. I hear you but that's what we've been doing, right, since—well, when did DSH come in?
Mr. NEWHOUSE. In 1986.
Ms. WILENSKY. It became a serious Medicaid issue in 1989.
Mr. STARK. I don't know. We can argue about how much it'll be here, because that's a thing relative to how much we're going to spend on B–2 bombers, but once we decide, you guys should be able to help us up our comfort level that we're going to get it to the people we intend to get it to. That's what we're asking you for.
Thank you, Mr. Chairman.
Chairman THOMAS. I thank the gentleman.
I apologize. I'm going to be in and out. I've got another Subcommittee that I have to deal with, as well.
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This whole direction bothers me and bothers me a lot and I think you know it. I'm not someone who's been in this field either as a chosen profession or for years and years. So there are a number of disadvantages to that but frankly, the primary advantage is I look at what people have been doing and I say, ''This is ridiculous.'' After a while I'm beginning to hear back from other folk and the one answer I don't want to hear is, ''We do it this way because we do it this way.''
I happen to believe there were very real political reasons why we began funding the way we funded. There may continue to be very real political reasons based upon which groups are receiving a subsidy.
I think that's a legitimate debate issue that should be carried out and not simply locked in and argued that we are ''funding'' medical education, and I'll use disproportionate share first as an example.
What it does, in my opinion, is inhibit our ability to fund graduate medical education, especially in today's marketplace, with the innovative delivery of medicine in different locales and different structures.
The fact that we have very large, very important hospitals in urban centers that provide medical services to particular profiles of individuals who otherwise might not be able to pay for them is a different question, and I think it's clearly becoming more a different question every year, as we look at the size of the commitment in terms of the subsidy.
In addition to that, the more traditional ways of funding graduate medical education, as we've seen, don't make a lot of sense.
But what bothers me most, and in my opening remarks—my colleagues were not here when I said it—is our inability or refusal to get out of the box. All we do is create miniadjustments—the demonstration project is one of those—as we continue the current structure.
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What is your reaction to the idea I mentioned in my opening remarks that if the President is bound and determined to buy some years on the part A trust fund by transferring costs that are currently in part A to part B, it makes more sense, to me, to transfer a broad-based societal funding benefit, like graduate medical education, than it does home health care. Especially if he's going to transfer it without attachment to the premium or to the copay which existed prior to 1980, it's simply a 100-percent drain on the general fund.
I think a higher calling on the general fund, rather than a specific benefit to beneficiaries, would be the funding of graduate medical education.
Now, we proposed in the Balanced Budget Act a separate general revenue fund and asked you folk and others, within 3 years by creating a commission, to give us a better way of funding education. The question of whether we should continue to subsidize any particular group at an appropriate amount, increase it or decrease it, is a separate question.
By moving it to the general fund, we can begin to engage, in my opinion, in the discussion about who gets what, when and how, which will lead us to changes that, frankly, we need to discuss—regarding subsidizing low income. Do we subsidize it through the Medicaid structure or through graduate medical education? Obviously, I think the choice is defining the group and assisting it.
But when we talk about general fund drain and who's getting it, a subsidy to particular groups, it might lead us into examination of those retired millionaires who are getting 75 cents on every dollar.
It may also lead us to the argument that we have a group of people who are receiving no health insurance and we have another group of people who are receiving an open-ended opportunity for medical insurance because of the Tax Code, and that we need to reexamine those who are enabled by the Tax Code to get open-ended benefits and those who, through no fault of their own but by accident of where they work, get no benefits.
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And it just seems to me we can't forget about those other groups getting open-ended and only concentrate on how we are able, then, to find additional resources to provide for those who don't benefit enough to get an open-ended benefit, try to move them to that position, but to take all of our resources, put it together, figure out a rational reallocation so that everyone gets something, and then figure out how to move everyone up, rather than an open-ended benefit for one group and no benefit whatsoever for another.
And the first step, to me, in getting there, in our jurisdiction, is to take what we're currently spending out of a dedicated payroll trust fund to aid hospitals who deliver medical care to certain patients and reimburse this crazy relationship between beds and residents and get it into the general fund with a commitment, over a very short period of time—3 years, let's say—to take the dollar amounts, because we're going to have to continue to redistribute them under the system that we now have in place, and get it so that you get a distinct and discrete funding of medical education and a separate funding of medical services, subsidizing particular groups.
What's wrong with that?
Ms. WILENSKY. As an individual policy wonk, I find your logic compelling. As Chair of PPRC, PPRC has no official position. I, in fact, do think you've raised some very important issues.
The one hesitation or qualification would be the one that you yourself referenced, which is if the switch of home care into part B is done without being subjected to the normal constraints of part B, then there really isn't any good reason for not swapping one for the other. If it were to be subjected to the normal constraints, then you would be taking a part and putting it into general revenue without that.
But given that that is not what the President has proposed, then I think the rationale you've just offered is compelling.
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Chairman THOMAS. And the amount that's currently coming out of part A, in the area that I described, is close to $70 billion.
Ms. WILENSKY. It's greater. I thought it was closer to $80 billion.
Chairman THOMAS. I'm trying to get the exact numbers. It is close enough to say how ironic that if you want to transfer something, you can accomplish what the President said he wanted to by moving these broader-based societal funds and get the same length on the trust fund but, frankly, a higher calling on the general fund to fund medical education than to pay for particular benefits to particular beneficiaries.
It just seems to me that's a far smarter thing to do if we're looking for something to transfer from part A to part B and, being honest about it, that we're trying to buy years' extension on the trust fund, because if anything has ceased its useful life, it's the way in which we fund graduate medical education.
Mr. NEWHOUSE. Mr. Chairman, I have essentially the same thing as Dr. Wilensky. ProPAC doesn't have an official position but personally, I think insofar as these programs, both the teaching program and the Disproportionate Share Program serve a broader social purpose than buying medical care for the elderly and the disabled, that there's a very strong argument for financing them out of general revenues.
Chairman THOMAS. I've got a bunch of other questions but I'll move on.
The gentleman from Wisconsin.
Mr. KLECZKA. Thank you, Mr. Chairman.
Last session we talked about the trust fund and I don't think we fully developed the idea. However, I think more than the taxpayers and Medicare should be contributing to that type of medical education.
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Let me understand this more fully. Do third-party payers also pay not a segregated fee for graduate medical training but as part of their reimbursement to a medical facility, a hospital?
Ms. WILENSKY.