The Hospital & Healthsystem Association of Pennsylvania

Comments
to
The United States Senate Finance Committee
on

Financing Comprehensive Health Care Reform:
Proposed Health System Savings and Revenue Options

May 26, 2009

The Hospital & Healthsystem Association of Pennsylvania (HAP) represents and advocates for more than 250 acute and specialty care hospitals and health systems across Pennsylvania, and most importantly, the communities and the patients these hospitals and health systems serve. HAP appreciates the opportunity to comment on the Senate Finance Committee’s May 18 policy options paper on financing comprehensive health care reform.

Pennsylvania hospitals and health systems support comprehensive, meaningful health care reform. Over the past several years, HAP worked to develop a framework for health reform that includes the following tenets:

• The good health of all Pennsylvanians must be a priority. Health care reform must allow our health care delivery system to achieve its full potential to prevent disease, improve treatment, and sustain wellness. Reform also must improve quality and care outcomes, while restraining the overall growth in the cost of health care and health insurance.
• Individual patients must be the core focus of the health care system. The relationship between a patient and his or her health care professional is fundamental to quality health care delivery. Patients have a right to expect quality care and useful information tailored to their needs in every health care encounter. Greater patient choice requires informed decision-making and access to helpful information.
• The health care system must work for all Pennsylvanians. All Pennsylvanians, regardless of health status, national origin, gender, race, age, or income, should have access to affordable health insurance and quality health care.
• The best elements of our health care system must be preserved and enhanced. Health care reform should correct the shortcomings of the current system without sacrificing the features that allow the delivery of the most advanced care in the world. Health care reform should focus on improving quality, coordination, and efficiency of care. Reform also should encourage innovation in all areas of health care, including prevention, screening, diagnosis and medical treatment, and communication between patients and providers.

HAP’s framework for health care reform is consistent with the elements of reform in the American Hospital Association’s (AHA) Health for Life: Better Health. Better Health Care, which focuses on:

1. Health coverage for all, paid for by all.
2. A focus on wellness.
3. The most efficient, affordable care.
4. The highest quality care.
5. The best information.

HAP appreciates the efforts of the Senate Finance Committee to put forth proposals for public comment that call for transforming the health care delivery system, providing health care coverage to all Americans, and striving to achieve fiscally responsible options for financing reform. Keeping health care affordable will involve every segment of the health care system—insurers, hospitals, business, physicians, nurses, employers and individuals. It will involve personal responsibility, better stewardship of health resources and innovative ways to transform care for an aging and increasingly diverse population.

The financing options paper highlights opportunities to lower health spending and raise new revenues to fund health reform. HAP supports looking at new revenue streams, such as new lifestyle-related revenues, and the proposal to expand the Medicaid drug rebate program and would encourage extending this program to more hospitals and to inpatient services to help lower the fast-growing pharmaceutical costs in hospitals.

HAP believes that long-term, sustainable savings can be achieved through policies that produce incentives to improve performance and quality outcomes, rather than simply through discounting reimbursement. Proposals that would merely reduce payments to hospitals and health systems already in fiscal crisis could have far-reaching, negative consequences on the mission of hospitals to deliver needed health care and community services to all, regardless of ability to pay; teach the next generation of physicians and other clinicians; and conduct essential medical research. Therefore, we are concerned about proposals that would reduce Medicare hospital payments, such as reductions in the annual update, as Pennsylvania hospitals are already paid below cost to care for Medicare patients—on average receiving only 94 cents for each dollar of care. Hospitals in Pennsylvania can not withstand additional reductions to Medicare rates, nor to Medicaid rates.

Following are HAP’s detailed comments on the key provisions affecting Pennsylvania hospitals and health systems:

Health System Savings: The proposals in the options paper rely on MedPAC’s recommendations to reduce or eliminate market basket updates for Medicare fee-for-service providers for federal fiscal year, as described in the commission’s March report to Congress. These recommendations include eliminating the 2010 update for skilled nursing facilities and inpatient rehabilitation facilities; eliminating the update for home health agencies along with a further reduction of 2.71 percent to account for changes in coding; and updating long-term care hospitals by the market basket rate minus an adjustment for productivity growth. For hospitals, MedPAC recommended a full market basket inflation update concurrent with implementation of a value-based purchasing program and a reduction in indirect medical education (IME) payments.

While the market basket update is intended to reflect cost increases, it has taken on more complex functions. In recent years, receipt of a full market basket update for hospitals also functions as a financial incentive related to quality reporting and will soon be linked to hospital adoption and use of health information technology. Hospitals that fail to successfully submit quality data to the Centers for Medicare & Medicaid Services are subject to a two percentage point reduction in their market basket updates. In 2015, hospitals that have not yet achieved the status of a “meaningful user” of health information technology will see reductions in the market basket update.

The market basket update is necessary and should fulfill its original function: providing an increase in payment to account for inflation in the costs associated with delivering care. However, since its purpose has evolved to become an incentive related to important public policy goals, HAP believes that cutting or eliminating the market basket update will become counter-productive in achieving the requisite public policy goals.

Improving Payment Accuracy—According to MedPAC estimates, overall Medicare margins—including the costs of inpatient, outpatient and post-acute care services—nationally will reach a ten-year low in 2009 at negative 6.9 percent. The majority of hospitals nationwide lose money caring for Medicare patients. This clearly indicates that Medicare payments are woefully inadequate. The MedPAC recommendations for 2010 recognize that a full market basket increase for inpatient and outpatient hospital services is necessary and HAP urges support of the MedPAC recommendation of a full market basket update.

Long-term Care Hospitals—Long-term care hospitals (LTCHs) provide care to beneficiaries who have clinically complex problems and need hospital care for extended periods of time. The number of LTCH facilities has remained steady, but Medicare spending for LTCHs declined in 2007. In addition, Medicare margins have been on a downward trajectory since 2005 and are projected to reach 0.5 percent in 2009, meaning that Medicare payments will only just cover the costs of providing care to Medicare beneficiaries. In order to halt the decline in margins and preserve beneficiary access to LTCHs, a full market basket increase to account for inflation is needed. HAP is concerned that the financing options paper proposes to adopt the MedPAC 2010 recommendation that would update long-term care hospitals by the market basket rate minus an adjustment for productivity growth. We urge the committee to reject this proposal as it would further jeopardize the financial stability of LTCHs.

Inpatient Rehabilitation Facilities—Inpatient rehabilitation facilities (IRFs) have specially trained doctors and staff who treat both their patients’ rehabilitation and medical needs. The field has experienced significant change since 2007, as the 60 Percent Rule has reduced patient volume and increased the severity of IRF case mix. In addition, IRFs have been subject to an 18-month payment cut that runs through fiscal year 2009. Many IRFs are also facing the pressure of aggressive medical necessity audits that require them to undertake costly appeals to recover funding—appeals which are being decided in favor of IRFs at a high rate. A full market basket increase is needed to maintain payment adequacy. HAP is concerned that the options paper proposes to adopt the MedPAC 2010 recommendation to eliminate the IRF payment update and we urge the committee to eliminate the proposed payments cuts.

Hospital-based Skilled Nursing Facilities—Hospital-based skilled nursing facilities (SNFs) provide a fundamentally different model of care than freestanding SNFs. They treat sicker patients who require more extensive services and they typically have higher nurse staffing ratios per bed than freestanding SNFs. The complexity of these patients is not well accounted for in the SNF payment system. As a result, at its December meeting, MedPAC reported that these medically-complex patients are experiencing delays in being placed into a SNF. Nationally, aggregate Medicare margins for hospital-based SNFs were negative 84 percent in fiscal year 2007, compared to positive 15 percent margins for freestanding facilities. With deplorably low margins and hospital-based SNFs continuing to retreat from the market, a full market basket update for those hospital-based SNFs is critical to preserve the high level of care provided. HAP is concerned that the financing options paper proposes to adopt the MedPAC 2010 recommendations that eliminates the SNF payment update for hospital-based SNFs. We urge the committee to carefully revisit these payments cuts and consider reforms that more appropriately cover the cost of caring for sicker and more complex SNF patients.

Graduate Medical Education and Disproportionate Share Programs—Both Medicare and Medicaid provide additional payments to hospitals that train medical residents or serve a high proportion of low-income patients. Medicare pays teaching hospitals for a portion of the costs associated with graduate medical education (GME) through an indirect medical education (IME) adjustment within the inpatient prospective payment system (IPPS) and direct graduate medical education payments made outside of the IPPS. Pennsylvania’s Medicaid programs also make special medical education payments to teaching hospitals.

In addition, the Medicare and Medicaid programs make special disproportionate share hospital (DSH) payments to certain hospitals that treat high proportions of low-income and uninsured patients. The Medicare program uses measures related to low-income Medicare and Medicaid beneficiaries as proxies for services provided to low-income patients. State Medicaid programs have broad discretion in defining which hospitals qualify for Medicaid DSH programs, and Pennsylvania has implemented DSH programs to recognize that facilities serving large numbers of Medicaid patients often are also providing care to those who are uninsured and underinsured.

The committee’s financing options paper offers several options to change hospital GME and DSH payments. These options range from block granting these programs to targeting payments based on costs of treating uninsured patients and training medical residents.

Hospitals are critical sites for the education of future physicians. Both the Medicare and Medicaid programs have recognized this important need. Medicare’s payments for the direct cost of GME and payments for the higher operating costs of teaching hospitals, the indirect medical education (IME) adjustment, are crucial to the ability of teaching hospitals to carry out their academic missions of education, research and more complicated patient care. These payments provide an important social benefit for all Americans and should not be reduced. A strong clinical workforce, including the need for additional GME training positions and additional primary care providers, must be the foundation upon which reform is built. HAP urges the committee to maintain the current commitment to fund the Medicare and Medicaid GME programs. Proposals to increase the number of residency positions, similar to the legislative proposal introduced by Senators Nelson (D-FL) and Schumer (D-NY) should be part of health care reform legislation.

The Medicare DSH program supports urban and rural hospitals that provide high volumes of low-income care. The Medicaid DSH program supports a broad range of services for Medicaid and uninsured or underinsured children and adults, including primary and specialty outpatient care, hospital care, chronic disease management, mental health services, dental care, social work services and translation services. Medicare and Medicaid DSH funds also help support essential community services such as obstetrics, trauma and burn care, readiness for natural and man-made disasters, pediatric intensive care, high-risk neonatal care and emergency psychiatric services. Low-income and disadvantaged populations are more likely to have chronic conditions or other complicating factors that increase the cost of providing care.

Medicare and Medicaid DSH payments often help offset payment shortfalls for hospital-based inpatient and ambulatory care for both programs. However, even with DSH payments included, the majority of Pennsylvania hospitals are losing money on patient care, receiving on average, payment of only 94 cents for every dollar spent caring for Medicare patients and only 80 cents for every dollar spent caring for Medicaid patients. For hospitals that provide significant levels of care to Medicare, Medicaid and uninsured patients, DSH payments are essential.

As reform efforts in Massachusetts have shown, even if “universal” coverage is achieved through health care reform, there will be populations that will remain uncovered, and hospitals will be asked to bear the burden of their health care and essential community services. HAP supports AHA’s recommendation that the committee reject reductions in federal support for DSH programs until coverage expansions are universal and fully implemented and Medicare and Medicaid payment shortfalls are addressed.

Capturing Productivity Gains: Medicare payment updates are linked to projected changes in specific market basket indices that reflect the effect of inflation on providers’ cost per service. The Congressional Budget Office and MedPAC recommend that provider updates should be adjusted to account for improvements in providers’ productivity that may reduce unit costs. The committee options paper proposes to require an adjustment of the annual market basket increases for certain fee-for-service providers by some or all of the expected productivity gains as a way to improve the accuracy of Medicare payments.

MedPAC’s proposed productivity measure for the hospital market basket update would link the target for efficiency improvement to the gains achieved by firms and workers of private non-farm businesses. This measure of productivity is not at all reflective of the hospital sector, and it specifically excludes not-for-profits and government entities which account for the vast majority of hospitals nationwide and in Pennsylvania. There is no current comparable measure for the service sector, government or not-for-profits because the Bureau of Labor Statistics (BLS) has been unable to create an appropriate measure of output. Additionally, the measure is affected by the composition of the labor force—so, if a hospital were to substitute a higher skilled worker (e.g., a registered nurse) for a lower skilled worker (e.g., a licensed practical nurse) to produce the same “output” with better quality and patient safety, its productivity would go down.

It makes little sense to hold hospitals and other health care settings accountable for a productivity measure that is not reflective of what occurs in the health care field. HAP urges the committee to reject this approach to merely reduce Medicare payments to hospitals.

Variation in Medical Spending: Variation in medical decisions made by health care providers is a product of many factors. Because patients are individuals with varying health care needs and treatment preferences, some degree of variation in medicine should and will always exist. In 1998, HAP collaborated with the AHA and Dartmouth Center for Evaluative Clinical Sciences to publish The Dartmouth Atlas of Health Care in Pennsylvania to be used as a tool to promote quality improvement discussions. Understanding the differences can bring clinicians and others together to work on improving the delivery of health care and to help the provider community rethink assumptions about care delivery and quality improvement. It would be inappropriate, however, to use these analyses as a basis for payment, because there are no single or right answers regarding the questions that surround variation in health care. Therefore, HAP opposes attempts to reduce variation in health care spending and utilization by altering levels of payment either across-the board or to individual providers above certain thresholds. Moreover, a robust comparative effectiveness research program that disseminates findings of what works or doesn’t work to the provider community should contribute to reducing variation in spending and utilization.

Tax Exempt Requirements for Hospitals: Several years ago, HAP participated in a roundtable discussion on this issue before Senator Grassley. HAP spoke to the Institutions of Purely Public Charity Act, which was passed in Pennsylvania in 1997—bringing clarity to criteria to determine institutions’ or organizations’ tax exempt status. The term—Institutions of Purely Public Charity—derives from the Pennsylvania Constitution. In 1985, the Pennsylvania Supreme Court adopted five general criteria:

• Advances a charitable purpose,
• Operates entirely free from private profit motive,
• Donates or renders gratuitously a substantial portion of its services,
• Benefits a substantial and indefinite class of person who are legitimate objects of charity, and
• Relieves the government of some of its burden.

For each of these tests there is more than one way to assess compliance, and no test has a sole level or sole application and there are no specific quantifiable tests that are exclusive to one type of not-for-profit organization. For example, a not-for-profit organization must advance a charitable purpose. The six ways to meet this include:

• Relief of poverty,
• Advancement and provision of education,
• Advancement of religion,
• Prevention and treatment of disease or injury,
• Government or municipal purpose, or
• A purpose which is recognized as important and beneficial to the public and advances social, moral, or physical objectives.

As one can see, not-for-profit hospitals would likely meet several of these tests. The requirement that the tax-exempt institution or organization render a substantial portion of its services to the community also has six ways that an entity could meet this standard. The legislative objective of this standard is to make sure that some portion of an organization’s or institution’s services or goods are provided at no fee or at reduced fees, and so there are a number of tests with which a not-for-profit organization or institution could meet, only one of which is based on a percentage of operating income or operating expense.

Pennsylvania’s Act 55 also recognizes that providing community benefit is broad and that there is no single way to meet all communities’ needs. Thus, the act recognizes the full value of community benefit, including government underfunding at cost, as well as charity care and bad debt at cost. Government underfunding includes all government programs at the federal, state, and local levels. Therefore in health care this includes underfunding valued at cost for Medicare, Medicaid, SCHIP, the state’s adultBasic program for low income workers, health care for county or state prisoners, and the like. The act recognizes the real difference between what it costs to provide a service through a government program and what the entity, such as a hospital, received in payment from the program.

Further, Act 55 recognizes bad debt along with charity care and financially subsidized care as part of community benefit because the tax exempt entity, such as a hospital, accepts anyone regardless of ability to pay and has little or no means to restrict future use of the service by a “bad debtor.”

The act identifies an array of activities that can be deemed to relieve governmental burden and provides six ways in how this can be done. One of the unique features of this section is that payment or services provided to local governments in lieu of taxes are recognized as part of relieving the government of its burden and the act includes incentives for organizations to help their local municipalities in this way.

Act 55 clarified the requirements to secure the privilege of tax exemption in Pennsylvania. It helped immensely to ensure that limited resources (whether donations from citizens, tax dollars, or other funds) are not wasted by not-for-profit organizations in costly legal disputes. All of the concepts in Act 55 were considered extensively by the legislature in Pennsylvania and debated amongst the legislature, the administration, local tax entities, and a variety of not-for-profit organizations representing health care, education, religious organizations, and other human service entities before the legislature reached closure. Act 55 represents a balance between taxing jurisdictions and charitable organizations that has served Pennsylvania citizens well.

Pennsylvania’s Institutions of Purely Public Charity statute was crafted to recognize the full value of not-for-profit institutions in serving citizens of the commonwealth. There are a number of ways that hospitals qualify under this statute as not-for-profit organizations. The standards cover all entities seeking tax exemption and are not applied to only one type of entity or another. The statute also recognized that across the state different communities have vastly different needs that not-for-profit organizations serve.

Pennsylvania’s law recognizes that fulfilling the legal and social obligations of not-for-profit entities is an on-going process of balancing community needs with available resources, which simply cannot be met by a single quantitative standard. We would urge the Senate Finance Committee to evaluate how best to achieve a similar on-going balance without resorting to unilateral or single standards. Therefore, HAP would suggest that the committee not act prematurely to undermine the community benefit standard or impose an excise tax on tax-exempt hospitals that fail to meet a rigid numerical quota for financial assistance. HAP agrees with the AHA’s recommendation that the committee undertake a review when the information it needs to get a full and fair picture of the ways in which tax-exempt, not-for-profit hospitals are meeting their community benefit obligations is available next year through Schedule H. We believe that the Schedule H information will demonstrate that hospitals more than meet their community benefit obligations.

Raising Revenues for Health Reform: HAP recognizes that additional sources of funding for health care reform will be required. While delivery system reforms, ensuring all Americans have coverage, and providing meaningful prevention, primary care, and wellness services will result in longer-term savings, funding these reforms will require an upfront investment, necessitating additional federal revenues. HAP supports the committee’s review and consideration of revenue raising options, such as imposing tax incentives on lifestyle-related choices and other non-health related revenue options. Considering new financing options will place the nation on a path toward better financial security, better health and better productivity.

Consumers, providers, employers, payers and government should share in the responsibility to achieve comprehensive reform that leads to coverage for all. This means fair and balanced reform that considers all funding options, including new revenues or taxes. We support a flexible approach that recognizes the need for up-front investment to set the health system on the path toward significant long-term savings and improvement in the long-term fiscal health of the nation.

Administrative Simplification: Experts estimate that about a quarter of total hospital spending and a little more than a quarter of physician office revenue is spent on complying with administrative requirements. Increasingly complex administrative requirements cause great confusion for patients and their families, who often find that a service is not covered by their insurance or that their out-of-pocket liability is greater than expected. Understanding all of the various administrative requirements puts additional burdens on health care providers. A major key to reducing administrative cost and confusion is limiting the complexity of both public and private health plans by standardizing plan design and benefits, plan notifications, claims submission and adjudication, and appeals.

HAP agrees with the AHA recommendation that Congress require the adoption of a standardized framework and terminology within which all health plans (whether subject to federal and state or just federal regulation) would be required to describe their plans, the benefits covered, the conditions for coverage, and the cost sharing required (i.e., deductibles, copayments, coinsurance, balance billing), including any differences related to the use of in-network or out-of-network providers. Such a requirement would allow plans to continue to develop customized plans for different purchasers, as long as their descriptive information adheres to the standard framework and terminology, so that consumers can more easily compare health plans and better understand their coverage and its limitations, and providers can focus on delivering care rather than on interpreting overly complex insurance requirements for patients.

Hospitals also recommend expanding the scope of the administrative simplification provisions of the Health Insurance Portability and Accountability Act (HIPAA) statute, including:

• Establishing common rules for claims involving coordination of benefits to increase the timeliness and accuracy of processing those claims.
• Expanding the transaction standards to require that health plans fully utilize the information codes in the uniform bill.
• Prohibiting administrative denials for otherwise covered and medically necessary services unless there is a documented pattern of repeated provider abuse.
• Establishing requirements to standardize explanations of benefits (EOBs)
• Improving remittance transaction standards to standardize and better define common terms and timeframes so that providers will have accurate and timely information about the disposition of individual claims and specific adjustments made to plan payments for billed services.
• Making modifications to ensure that claims are paid on a timely basis.
• Establishing a more standardized and equitable process for auditing and resolving claims.

HAP also agrees with the AHA recommendation that there be standardized collection and reporting of clinical information for quality measures. The ever-increasing burden to collect, analyze, and submit vast amounts of patient care data associated with quality and patient safety, along with the lack of consistency in public and private payer requirements at both the state and federal levels, has made it more difficult for providers to spend their time treating patients. All payers should adhere to common definitions for data elements and standard practices around data collection, submission, and frequency of reporting.

Reducing Liability Costs: Hospitals and physicians in Pennsylvania have experienced increasing costs for professional liability insurance. Unaffordable liability insurance has affected access to care as physicians in Pennsylvania have stopped providing services that expose them to higher risks of lawsuits. Particular areas of concern include obstetrics, neurosurgery, and emergency services.

HAP agrees that with the AHA recommendation that liability system reforms should be included in the context of health care reform. Specific approaches to reforming today’s liability system could include: using administrative compensation systems and health courts to determine when an avoidable, preventable event has occurred, providing prompt compensation to injured patients and families based on agreed-upon payment schedules when an error takes place, and adjusting provider’s liability insurance premiums based on the occurrence of preventable errors.

Conclusion: HAP will continue to work with the AHA as it works with the Senate Finance Committee to strengthen and build upon the ideas presented in the financing options paper. Pennsylvania hospitals and health systems have a long-tradition of working with other stakeholders to expand health care coverage in Pennsylvania, and we are steadfast in our support of improving access to affordable health care coverage. We look forward to working with Congress as it moves forward with critical health reform legislation. If you have any questions regarding HAP’s comments, please contact Michael Strazzella, HAP’s vice president, federal legislation, at mstrazzella@haponline.org or at (202) 863-0287.