June 04,1999


Impact of the BBA '97 Provisions

WASHINGTON -- Senate Finance Committee Chairman William V. Roth Jr., (R-DE) today announced the Committee will meet on Thursday, June 10, 10:00 a.m. in 215 Dirksen Senate Office Building, to hear testimony on the impact of the Balanced Budget Act Provisions on the Medicare Fee-for-Service program.

The following witnesses are expected to appear before the Committee:

I. A panel consisting of:

Robert A. Berenson, M.D., Director, Center for Health Plans and Providers, Health Care Financing Administration; Washington, D.C.

Paul Van de Water, Ph.D., Associate Director for Budget Analysis, Congressional Budget Office; Washington, D.C.

Gail Wilensky, Ph.D., Chair, Medicare Payment Advisory Commission; Washington, D.C.

William J. Scanlon, Ph.D., Director, Health Financing and Public Health Issues, Health, Education, and Human Services Division, General Accounting Office; Washington, D.C.

II. A panel consisting of:

Thomas A. Scully, President and CEO, Federation of American Health Systems; Washington, D.C.

Charles M. Smith, M.D., President and CEO, Christiana Care Corp., on behalf of the American Hospital Association; Washington, D.C.

D. Ted Lewers, M.D., Vice-Chair, American Medical Association; Washington, D.C.

Susan S. Bailis, Co-Chairman and Co-CEO, Solomont Bailis Ventures, on behalf of the American Health Care Association; Boston, MA.

Mary Suther, President & CEO, Visiting Nurse Association of Texas on behalf of the National Association for Home Care; Washington,D.C.


Medicare is a nationwide health insurance program now covering close to 40 million aged and disabled persons. Approximately 85% of this population are currently enrolled in the Medicare Fee-for-Service (FFS) program.

The Medicare FFS program consists of two parts - Part A, funded by the Hospital Insurance Trust Fund and Part B, funded by the Supplemental Medical Insurance Trust Fund. Part A provides coverage for inpatient hospital services, skilled nursing care, 100 days of home health services, and hospice care. Part B provides coverage for a complimentary set of health services including physicians' services, laboratory services, durable medical equipment, outpatient hospital services, home health services beyond 100 days, and other medical services. Under FFS, beneficiaries obtain covered services through providers of their choice and Medicare makes payments for each service rendered. Taken together, spending for inpatient hospital services and physicians' services account for roughly 70% of Medicare benefit payments.

The ability of Medicare's financing structure to adequately fund the program coupled with rapid growth in spending and utilization, led to a Bipartisan Budget Agreement designed to reduce the budget deficit to zero by 2002. This agreement, known as the Balanced Budget Act of 1997 (BBA), provided for Medicare savings of $115 billion over the FY 1998-2002 period. These savings were targeted by slowing the rate of growth in payments to hospitals, physicians, and other providers; and by establishing new payment methodologies for skilled nursing facilities, home health agencies, outpatient hospital services and rehabilitation hospitals among others. Along with a number of changes to payment methodologies, the BBA also included a number of preventive benefits in the FFS program.

Since the enactment of the BBA, the Health Care Financing Administration (HCFA) has implemented more than half of the 335 provisions mandated, including 75% of inpatient hospital-related changes, practice expenses under the physician fee schedule, and the skilled nursing facility prospective payment system. In addition, changes to the home health interim payment system were made in an effort to continue progress in curbing Medicare growth and spending until a prospective payment system could be implemented. Legislation in 1998 also adjusted payment methodologies for home health agencies, restoring millions of dollars to the industry. However, meeting the Y2K challenge has continued to create a series of delays for HCFA in implementing the remaining, major payment systems and changes required in the BBA.

The outpatient hospital department prospective payment system (HOPD PPS) originally scheduled for implementation in 1999 was delayed by HCFA until the year 2000. The hospital industry has raised concerns that the HOPD PPS methodology will not maintain budget neutrality, as intended by the BBA, but will create further cuts to hospitals. Additionally, a recent change by HCFA in the outpatient spending cut, from 2.8% to 5.7%, has compounded the concerns over increased cuts to hospitals beyond BBA intentions.

The home health prospective payment system was also delayed by HCFA until the year 2000. Concerns by industry suggest interim payment system (IPS) changes and overpayment issues have had a "crippling effect" on home health agencies. The General Accounting Office recently released a report on home health access indicating a number of closures in the industry, but the report indicates that adequate access has been maintained due to the 87% growth rate in the number of agencies since 1990. There are concerns, however, that home health agencies may be making operational changes, as a result of the IPS, that would adversely impact the sickest beneficiaries.

The three-year transition to a skilled nursing facility prospective payment system began July of 1999. This transition reimburses facilities based on a blend of their 1995 historical costs and national costs. Many agencies, however, are not receiving adequate reimbursement for the care they provide. For example, a facility may serve a much higher proportion of Medicare beneficiaries today than was calculated in 1995, resulting in a rate that does not appropriately reflect the current number of Medicare beneficiaries treated by the facility. In addition, the case-mix methodology, known as the resource utilization group (RUG III) system has been identified as failing to adequately measure the use of non-therapy ancillary services, causing inadequate reimbursement for care provided to medically complex and subacute patients.

The outpatient therapy limit of $1500, established in the BBA, became effective January of 1999. There are concerns that this limit has unintentionally caused a rationing of services to the neediest beneficiaries, who pay 100% of their costs for rehabilitation, once the limit is reached. The $1500 limit is especially dangerous to patients, such as stroke victims, patients sustaining multiple injuries, or those residing in skilled nursing facilities - where consolidated billing requirements do not allow these patients to get relief from the limit, as other beneficiaries may currently do.

Finally, the sustainable growth rate (SGR), created in the BBA and used to update the physician fee schedule, has raised a number of concerns, both by the industry and the Medicare Payment Advisory Commission. The inflexibility of the current methodology to make adjustments in a timely fashion coupled with mismatched time periods for the SGR calculation, results in a large fluctuation in the update on an annual basis. In addition, the current methodology does not take into account technological innovations, especially critical during a time when physicians perform more and more services on an outpatient basis.