Mr. Chairman, I am Charles M. Smith, M.D., president and CEO of Christiana Care Corporation in Wilmington, DE. I am here today on behalf of the American Hospital Association (AHA) and its nearly 5,000 hospitals and health systems, networks and other providers of care. We appreciate this opportunity to present our views on an issue that is critical to our members and their communities: the need for relief from the unintended consequences of the Balanced Budget Act of 1997.

Christiana Care is a not-for-profit, coordinated health care system that provides health care services to a four-state area. In addition to many other services, Christiana Care includes two teaching hospitals with 1,100 licensed beds and 225 residents and fellows in training; a long-term care facility; a preventive medicine and rehabilitation institute; a home health care company; a primary physician network and a wide variety of other outpatient services including school and senior wellness centers. The Balanced Budget Act of 1997 and the changes it has brought about in Medicare reimbursement affect all of our services.

The Balanced Budget Act was the biggest reform of the Medicare program ever undertaken during the past 30 years. It was a major piece of legislation encompassing approximately 350 changes that have significant implications and consequences for the program, for caregivers, and for the people we serve. Hospitals and health systems are greatly affected by those changes. I urge the committee to seriously evaluate the consequences of the Balanced Budget Act – intended or unintended. Such consideration will lead to the conclusion that change is needed as soon as possible.

Balancing America’s budget shouldn’t deprive Americans of the health care they need and deserve. But that’s exactly what’s happening across the nation, even though two-thirds of the cuts have yet to take effect. Today’s hospitals and health systems encompass all elements of health care delivery affected by the Balanced Budget Act: home health, skilled nursing, outpatient and inpatient hospital, and health plans. This makes the act’s changes particularly burdensome, and the worst is yet to come, as a new analysis from The Lewin Group, a highly respected health care consulting firm, makes clear.

The Lewin Group was asked by the AHA to forecast the Balanced Budget Act’s impact through the year 2002 on payments for hospital services including inpatient, outpatient, hospital-based home health, rehabilitation, long-term care, psychiatric and cancer services. The Lewin Group report shows that the actual cost of the Balanced Budget Act for hospitals will be $71 billion over five years -- $18 billion more than was anticipated when the bill passed. Further findings from the analysis:

• For all hospitals, total Medicare margins are projected to be between negative 4.4 percent and negative 7.8 percent in 2002.

• Already in the red when treating Medicare patients, rural hospitals’ total Medicare margins may plummet to between negative 7 percent and negative 10.4 percent in 2002 as a result of BBA payment cuts. Urban hospitals’ total Medicare margins in three years are predicted to range from negative 3.9 percent to negative 7.3 percent.

• Outpatient service margins also are expected to drop. Medicare outpatient margins – already negative in 1999 – are estimated to be negative 28.8 percent if costs increase at the historical rate of growth; and negative 20.3 percent if hospital costs increase more slowly.

• In just one year, margins for hospital-based home health services are predicted to drop dramatically from negative 4 percent in year 2000, to negative 11.6 percent margin in 2001. Fifty percent of hospitals now provide home health care.

The new report contributes to the growing evidence that hospitals and their communities are facing hardship. A report released in April by Moody’s Investors Services stated that U.S. not-for-profit hospitals’ credit deteriorated at a faster clip in the first quarter of 1999 than the entire previous year. Moody’s cited the fiscal pressures of the Balanced Budget Act as one of the reasons for the downward slide. And other recent analyses by Ernst & Young and HCIA Inc. and the Association of American Medical Colleges echo that hospital margins and, therefore, their stability, will be greatly eroded.

At Christiana Care, the post-hospital care part of the system cannot provide adequate care to home health and nursing patients because of the Balanced Budget Act’s reductions in reimbursement for those services. As a result, a genuine "Catch-22" has been created: Hospitals are unable to discharge Medicare patients when acute care is completed and nursing home placement or home heath support is needed. At the same time these hospitals are being penalized by the system for not discharging these patients. We now have an ever-increasing number of patients in the hospital awaiting placement. Recently, this number reached 80 – as opposed to about 25 prior to the Balanced Budget Act.

This creates several significant problems. The most important is that hospitalization of the elderly, when not needed for acute care reasons, is bad patient care. Older people may manifest dramatic physical and mental deterioration during periods of hospitalization, and some may never recover their previous functional state.

It’s also a problem for the operation of the hospital. We now have beds filled with patients who do not need to be in the hospital. The fact that these beds cannot be used for the care for which they were intended interrupts the normal flow of patients through the hospital, from more acute to less acute settings, creating what might be termed "medical gridlock."

The financial consequences of all this is an unintended and unnecessary increase in health care costs. Of course, these costs are largely uncompensated and will result in losses to hospitals because Medicare, quite appropriately, pays only for necessary hospitalization.

The medical education programs at Christiana Care are very important for providing medical manpower in our state. We have developed a special program to introduce our medical residents to underserved areas in Delaware, and as many as 45 percent of our graduating primary care residents stay in the state to practice. Without our residency programs, it would probably be impossible – certainly much more expensive – to continue providing the enormous amount of uncompensated care that we provide now to the underprivileged and uninsured. We are the only level one trauma center in the state and without our residents we could not retain that designation and trauma care would be disrupted. As a result, we are very worried about the already implemented, as well as future, BBA reductions in support for medical education and the impact they will have on our community.

Because Christiana also provides so much outpatient care, we also are worried about the changes in the prospective payment system for Medicare outpatient services. Currently, Medicare outpatient payments do not cover our costs, and these changes will make the situation worse. And because we provide so much care to low-income people, we are very concerned about changes in Disproportionate Share Hospital payments.

America’s hospitals, and the patients and communities they serve, must have relief from these unintended consequences of the Balanced Budget Act. We need both administrative and legislative solutions. Medicare should be treated like Social Security: a portion of the federal budget surplus should be used to address the Balanced Budget Act’s unintended consequences … because Medicare is Social Security.

Relief from the Balanced Budget Act should include:

• Repeal of the Balanced Budget Act’s unreasonable transfer provision, as proposed in H.R. 405 and S. 37, as proposed by Senator Grassley. The transfer provision redefined discharges to post-acute care as transfers for up to 10 types of cases (with authority for the HHS secretary to add more), in effect penalizing hospitals for providing efficient care in the right setting.

• Easing the reductions in the proposed Medicare outpatient prospective payment system (PPS). The new outpatient PPS greatly reduces and redistributes payments for services, and includes a "volume cap" that penalizes hospitals for adopting new technology. It also includes a formula for setting payment rates that, contrary to Congress’ intent, cuts payments by an additional 5.7 percent. Our solutions: Establish a transition for implementation of outpatient PPS that ensures that no facility will receive reductions of more than 5 percent per year; repeal the volume cap; and encourage the Health Care Financing Administration (HCFA) to revisit its decision to further reduce outpatient payments by another 5.7 percent, which it has the administrative authority to do.

• Increase the Medicare inpatient hospital service update by 0.5 percent, as recommended by the Medicare Payment Advisory Commission, to reflect the costs hospitals are incurring to prepare for Y2K. This would help offset some of the Balanced Budget Act’s cuts, as well as ease the sting of the nearly $8.2 billion hospitals nationwide are expected to spend to make sure the change to the Year 2000 does not affect health care services.

• Relief from reductions for teaching hospitals and academic medical centers. The Balanced Budget Act limits payments for "indirect medical education," causing significant hardship for teaching hospitals and academic medical centers, many of which are the only place for America’s urban poor to receive care. AHA thanks Senators Moynihan and Kerrey for introducing S. 1023, which would freeze these payments at current levels and prevent future scheduled cuts.

• Repair the damage the Balanced Budget Act has caused to America’s small and rural hospitals. Ensure that a portion of the federal budget surplus is devoted to providing relief to small and rural hospitals through repeal of the transfer provision of the BBA, and prevention of deep losses on the outpatient side.

• Restore adequate reimbursement for skilled nursing facilities (SNF). The new SNF PPS does not adequately account for the high costs of treating medically complex cases. It also penalizes newer skilled nursing facilities, causing many to limit services or shut down completely. In the short term, a pool of funds should be established from which additional payments can be made available to help offset the cost of caring for medically complex SNF patients. In the long run, SNF PPS must be revised.

• Redress for inequities in home health care services. Address both the short-term inequity in the interim payment system, which has severely diminished the availability of these services, and the scheduled 15 percent cut in payments for home health services.

• "Carve out" disproportionate share hospital (DSH) payments. For providers participating in Medicare managed care, Medicare DSH payments are made to Medicare+Choice plans without requiring that the payments be passed on to the providers who actually incurred the costs of caring for large numbers of the poor. AHA thanks Senators Moynihan and Kerrey for introducing S. 1024, which would mandate that these payments be made by HCFA directly to those providers, not to the plans.

• Encourage HCFA to develop a rehabilitation PPS that uses a per-discharge payment method rather than a per-case method. HCFA is contemplating using the SNF PPS per-case model for rehabilitation PPS, but the SNF PPS model may not adequately recognize the unique elements involved in providing rehabilitation care. AHA believes that HCFA should adopt MedPAC’s recommendation that the Secretary develop a discharge-based PPS for rehab patients based on the Functional Independence Measure-Function Related Groups.

• Remove barriers to expanded Medicare options through Medicare+Choice.

Mr. Chairman, the environment for hospitals and health systems today is filled with uncertainty – financial pressures in the private market, mergers and consolidations, the ebb and flow of managed care, implementation of the Balanced Budget Act, unstable Medicare revenue streams that result, and the specter of even more change on the horizon. For many hospitals, Medicare has been an anchor in choppy waters. It has been a major and relatively stable source of revenue that has allowed hospitals to provide the care their communities need.

The Balanced Budget Act has changed all that. Hospitals today are struggling to make up for the shortfalls caused by the Act. They refuse to compromise the quality of services they provide, but they can’t afford to continue providing those services if their costs aren’t even covered. As a result, communities are losing access to vital health care services even as Washington debates how to spend a federal budget surplus of billions of dollars.

This is a trend that must be reversed, now. When the government acted to reduce Medicare spending to help balance the budget, no one was certain what effect such enormous reductions would have. Now, the evidence is pouring in from all over the country: the Balanced Budget Act is causing real pain for real people. We look forward to working with you to repair these unintended consequences of the Balanced Budget Act.

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