By Geof Koss, CQ Staff

October 2, 2009 -- The Senate Finance Committee wrapped up its debate on amendments to its health care overhaul early Friday, after adopting a bipartisan plan that would ease penalties for lower-income Americans who cannot afford to comply with the bill's mandates.

The committee now has finished debating the more than one hundred amendments offered to the bill. A final vote is possible next week, after the Congressional Budget Office scores the measure.

However, Finance Chairman Max Baucus, D-Mont., raised the possibility of having to reconvene to make tweaks if the bill "doesn't score well" at CBO.

"We'll come back and will have to make some adjustments," he said.

But he promised senators "a reasonable amount of time" to review the bill before the final vote.

The panel voted 22–1 late Thursday to accept an amendment by Charles E. Schumer, D-N.Y., and Olympia J. Snowe, R-Maine, that would provide penalty exemptions for taxpayers who cannot find health care coverage at 8 percent of their adjusted gross incomes. The hardship waiver in the chairman's mark was 10 percent, a level Schumer called "too high."

Schumer said the plan would prompt insurance companies to offer lower premiums. "This is the major amendment on affordability," he said.

It also would eliminate a penalty imposed in the first year the insurance exchange takes effect on any person who is not eligible for a waiver and does not purchase health care. In the second year of the exchange, 50 percent of the penalty would be imposed. The full penalty would go into effect in the third year of the law.

Snowe said she would press to further ease the fines on the Senate floor. "I would prefer to have no penalties, frankly," she said. Sen. Jon Kyl, R-Ariz., was the lone vote in opposition to the amendment.

The committee approved, 13–10, an amendment by John D. Rockefeller IV, D-W.Va., clarifying that the Medicare commission in the chairman's mark cannot propose certain changes to beneficiary premiums. Certain recommendations under Medicare Part C and Part D would be permitted. It also would refine several amendments that were adopted to the bill earlier.

The committee voted 14–8 to adopt an amendment by Blanche Lincoln, D-Ark., to limit deductions for executive compensation for health insurance providers to $500,000 if at least 25 percent of the firm's gross income is derived from the bill's mandates. Lincoln said it would be unfair for taxpayers to subsidize excessive payments. "This is a tax windfall for health insurance executive pay," she said.

But Kyl called it an "astoundingly bad precedent" for Congress to dictate limits on executive compensation for the private sector.

The committee also waded into the immigration debate, rejecting on a 10–13 vote a Kyl amendment that would clarify that legal immigrants must reside in the United States for five years to be eligible for tax credit in the bill.

Kyl noted that current law bars legal immigrants from Medicaid benefits for the same period.

"It would be inconsistent to deny people Medicaid and then allow them the benefits under this bill," he said.

But opponents said it was unfair to impose a coverage mandate on legal, permanent U.S. residents and then deny them the federal subsidy. Robert Menendez, D-N.J., noted that legal immigrants who serve in the military and pay taxes would be disqualified from the tax credit. "That clearly is a Catch-22," he said.

The committee rejected on a 9–14 vote another Kyl amendment that would have eliminated the health insurance providers' fee, which Republicans insisted would be passed on to consumers through higher premiums.

"They're going to be paid by lower- and middle-income Americans," said Charles E. Grassley of Iowa, the panel's ranking Republican.

A second Kyl amendment that would have eliminated the $2,500 cap on flexible spending accounts failed 10–13, as did the Arizonan's effort to eliminate fees on medical devices.

Earlier Thursday, senators by a 12–11 vote adopted an amendment by Maria Cantwell, D-Wash., that would allow states to opt in to a new federal health care plan for individuals between 133 and 200 percent of the federal poverty level who are not covered by Medicare. Under the program, 85 percent of the individual tax credit for eligible participants would be distributed to the states, which are authorized to negotiate rates with insurers.

Cantwell said the plan puts states "in the driver's seat" to negotiate lower insurance rates for their residents.

But Republicans said it was unclear how the plan would work in different regions, and expressed concerns that it would force low-income residents in participating states into the program.

"I just think there's a lot of questions," said John Cornyn, R-Texas.

Emily Ethridge contributed to this story.

By Jane Norman, CQ HealthBeat Associate Editor

September 29, 2009 -- Given the tenor of the nearly five hours of passionate arguments on the public option in the Senate Finance Committee on Tuesday, you'd think a close vote was on its way.

Not the case. Senators on a rare bipartisan 8–15 vote turned down the idea of including a government-sponsored plan in the health overhaul bill, with Chairman Max Baucus, D-Mont., leading the majority in what could be a turning point in the push to finish the committee's work. He brought four more Democrats along with him to oppose the public option, joining all 10 Republicans.

Baucus voted no again a little while later on a second amendment on the public option, this one finishing somewhat closer on a 10–13 vote. It was anticlimactic, since the committee's temperature already had been taken—but it did show that two more Democrats could be brought along to back a public option in some form, Thomas R. Carper of Delaware and Bill Nelson of Florida.

Baucus, who has been under intense pressure, including ad campaigns from liberal groups to back a public option, said he had to face reality. At the close of the debate on the first public option amendment, this one sponsored by Sen. John D. Rockefeller IV, D-W.Va., Baucus said he wants consistency and coherence in the nation's disjointed health care system.

But his job is to put together a bill that has a chance of winning 60 votes on the floor of the Senate, he said.

"I can count," said Baucus, "and no one has shown me how they can count up to 60 votes with the public option in the bill."

He said he agrees that including a government plan strongly supported by liberal colleagues likely would "hold insurance companies' feet to the fire." But "my first job is to get this bill across the finish line," Baucus said, and the drive to expand insurance to millions more Americans has to be his priority.

While it's been clear for some time that the public option doesn't spark much excitement among Senate Democrats, the vote in the Finance Committee was the first concrete sign that the concept has a ways to go in gaining widespread support.

The committee's move means the bill appears ready to be voted out of the committee without the public option set up to compete with private insurance companies in the exchange system, and instead with a plan for nonprofit, consumer-owned cooperatives pushed by Sen. Kent Conrad, D-N.D., and harshly criticized by liberals.

Meanwhile, the new chairman of the Senate Health, Education, Labor and Pensions Committee, Democrat Tom Harkin of Iowa, said on "The Bill Press Show" that he believes close to 50 Democrats in the Senate back the public option.

"Why shouldn't we have a public option? We have the votes," said Harkin, who also said that he believes there are 60 votes to counter a Republican filibuster on the overhaul.

Harkin's committee has approved its version of the bill with a public option, so the two bills will have to be combined. Carper said in an interview on CNN that he believes some kind of hybrid public option will emerge, perhaps with a trigger mechanism in markets that lack competition, an idea suggested by Sen. Olympia J. Snowe of Maine, a Republican viewed as a key swing vote in the overhaul debate. Snowe opposed both public option amendments.

In the House, liberal Democrats are strongly supportive of the public option, but leaders there indicated in a meeting with reporters that its makeup remains under discussion. House Majority Leader Steny H. Hoyer, D-Md., who's said he doesn't want to see the overhaul fail for lack of a public option, said that "the issue is how it's configured. And we're in the process of discussing that."

House Speaker Nancy Pelosi, D-Calif., said members want to control costs and the public option would have that effect. She also pointed out that all three House committees and the Senate HELP Committee have approved legislation that includes a public option.

"We're building consensus now. I'm confident that, as we go forward in the House we will reach a strong consensus with a bill that lowers cost, improves quality, expands coverage and retains the choice that people value now," said Pelosi.

Under Rockefeller's amendment, a voluntary "Consumer Choice Health Plan" would have been added to the bill and available to all individuals and businesses purchasing insurance through the national exchange. For its first two years of operation, providers who participate in Medicare would be required to also participate in the public plan. Rockefeller said a Congressional Budget Office analysis found it would save $50 billion over 10 years.

Rockefeller said polls of the public and of doctors have found widespread support for the public option to keep a check on "rapacious" health insurers. "We need this option because insurance companies have failed to meet their obligations," he said. "Insurance companies, in my view, are determined to protect their profits." The people he represents in West Virginia "need this because they are helpless in the face of insurance companies," said Rockefeller.

This produced a reaction from Nelson, who eventually split his votes on the public option amendments, that as a former state insurance commissioner he was becoming "very sympathetic" to the arguments from Rockefeller.

However, Baucus objected that "the implication is the mark is easy on the insurance industry, and it's not." He pointed out that insurance market reforms he has included would, among other things, require that insurance companies sell policies to those who seek them and allow them to renew them as often as they want.

"They have never followed the rules," replied Rockefeller. "They just have not done it."

Sen. Charles E. Grassley of Iowa, the ranking Republican on the committee, took advantage of the situation to fire back at White House officials who he said have accused him of not clarifying his opposition to the public option. Grassley, who at one time was a member of the "gang of six" negotiators seeking a bipartisan bill, cited three occasions on which he said he made his opposition clear to the Obama administration.

Grassley discounted polls showing majorities in favor of the public option. "It kind of depends on how you ask the question," he said. And he repeated a longtime GOP argument that the public option is the opening to a single-payer system for the country. "If you support government bureaucrats, not doctors, making medical decisions, you should vote for this amendment," said Grassley.

Democratic Sen. Charles E. Schumer of New York needled Grassley, asking if he thought Medicare was a good program. "What you're arguing in terms of public option is we shouldn't have Medicare at all," he said. "That's not what people want. They like Medicare and they want the option of Medicare Advantage. Your arguments all say don't have Medicare because it's a government-run plan."

Grassley said "the government is not a fair competitor, it's not even a competitor—it's a predator." He said that Medicare is part of the "social fabric of America" that can't be changed and the legislation makes some important corrections needed in the program. "Giving people choice is very, very important and this is going to kill choice," he said.

Looking on during the Schumer-Grassley exchange was Sen. Orrin G. Hatch, R-Utah, who like several other senators seemed happy to have the public option issue hashed out in public view. "I've enjoyed this," he said, before launching into his own remarks on the "perils" of the public option.

By John Reichard, CQ HealthBeat Editor

October 2, 2009 -- Thursday's efforts by the Senate Finance Committee to prepare health overhaul legislation for Senate floor action gave Democrats breathing room politically by weakening penalties for failing to buy health insurance, but fewer uninsured Americans are expected to gain coverage as a result.

In addition, insurers complain that fewer young people with low health costs can be expected to sign up for benefits, raising premium costs for those who do obtain coverage through new health insurance exchanges that would be created by the legislation.

And a new Medicare commission created to streamline the program turns out to exempt much of the health care industry from any cuts it recommends in the next decade.

Republicans add that the commission's recommendations will lead to seniors paying higher premiums for their Medicare prescription drug benefits.

Policy analysts do say, however, that an amendment by Sen. John D. Rockefeller IV, D-W.Va., to continue the Children's Health Insurance Program will assure good health coverage for children until health insurance exchanges are up and running for a while.

The panel voted 22–1 late Thursday to accept an amendment by Charles E. Schumer, D-N.Y., and Olympia J. Snowe, R-Maine, that would provide penalty exemptions for taxpayers who cannot find health care coverage at 8 percent of their adjusted gross incomes. It also would ease the impact of penalties by phasing them in gradually.

Insurers released statements Friday emphasizing the importance of an effective mechanism to ensure compliance with an expected mandate in overhaul legislation that individuals purchase coverage.

"These changes make it much more likely that people will go without coverage, and history has shown that this will lead to significantly higher premiums for all policy holders," said Robert Zirkelbach, spokesman for America's Health Insurance Plans (AHIP).

An AHIP "fact check" released Friday states that "without an enforceable personal coverage requirement that brings everyone into the system, market reforms may adversely impact those who are currently insured, causing premiums to skyrocket. Studies show that states that have imposed guarantee-issue and rating reform laws in the absence of a personal coverage requirement have seen a rise in insurance premiums, a reduction of individual insurance enrollment, and no significant decrease in the number of uninsured."

"It's one of the most serious problems that's come out of the Senate Finance Committee markup," said another managed care industry executive. With lesser penalties, younger people who are better insurance risks won't buy coverage while sicker people who need health care will buy it in relatively large numbers. The result will be higher premiums that, in turn, will lead to growing complaints about the cost of private insurance and greater pressures for a public plan and single-payer health care, the executive said.

The executive said he does not expect the problem of having fewer good risks in the insurance pool to change the minds of Democrats on the Senate Finance Committee who will vote in coming days on the Baucus overhaul, nor is he optimistic about that happening in Senate floor action. "I, for one, am not holding my breath," the executive said.

Meanwhile, the Baucus proposal as amended appears to exempt for 10 years hospitals, home health agencies and some physician groups from any reimbursement cuts recommended by a new Medicare commission created to help streamline the program. A Rockefeller amendment says that the panel could recommend cuts to subsidies for premiums paid for Medicare prescription drug and Medicare private health plan premiums.

Republican Sen. Charles E. Grassley of Iowa said the amendment was offered "in order to add back $11 billion in Medicare cuts that were lost because of the special carve-out from the proposed Medicare Commission's authority over spending for hospitals in the pending reform legislation."

He added, "The special exception for hospitals was agreed to in secret negotiations last summer. The overall committee bill was short the $11 billion for the hospital deal after the Congressional Budget Office (CBO) this week provided its score for the hospital carve-out."

Rockefeller's office had no immediate comment.

Another Rockefeller amendment adopted by the committee that would extend the life of the Children's Health Insurance Program (CHIP) drew praise from outside analysts and child health advocacy groups. The Baucus proposal originally would have required families of children in CHIP to get coverage instead through plans offered by new insurance exchanges. The Rockefeller language continues CHIP through 2019.

"By continuing Medicaid for children and CHIP for several years, the amendment provides states with the time needed to get the new exchanges up and running and to make sure that in practice they can do as well as Medicaid and CHIP in offering strong affordability protections and decent benefits to children," said Joan Alker, co-executive director of the Center for Children and Families at Georgetown University's Health Policy Institute.

The CHIP amendment saves an estimated $15 billion or more over 10 years, money that child health advocates say would go in part to boost efforts to enroll uninsured children in the program. Rockefeller noted in a statement Friday that the money also would help to pay to exempt certain workers in risky occupations who pay high premiums from a new excise tax on high-cost health insurance plans.

Other Rockefeller language accepted in the markup "is designed to protect coal miners, first responders and other high-risk workers" from the excise tax and the unrelated CHIP language helps pay for that change, the West Virginia senator noted. One reason the CHIP amendment saves money is that states have to help pay for that program.

By Edward Epstein, CQ Staff

October 2, 2009 -- Dutiful House Democrats trudged through the Capitol basement last week to yet another caucus on what many consider the biggest domestic policy issue they will face as legislators: overhauling the health care system.

The Oct. 1 meeting was part of what leaders say is an unprecedented effort to help all 256 House Democrats understand every nuance of a bill that is expected to be more than 1,000 pages long.

The sessions are key to Speaker Nancy Pelosi's goal of unifying her caucus to the point that she can count on at least 218 Democratic votes—the number that would guarantee House passage.

The meetings have consumed more than 60 hours, according to caucus Chairman John B. Larson of Connecticut. Party leaders plan to continue the sessions this week and right up to floor consideration, which Democrats hope will take place by the end of the year.

The central stumbling block remains the inclusion of a government-run health insurance plan to compete with private insurance. Liberals want such a plan, popularly known as the "public option," but moderate and conservative lawmakers are opposed.

If Democrats were united, the House would most likely have already voted on health care. In the face of solid Republican opposition to the majority's legislation (HR 3200), the leadership is trying to reconcile a number of Democratic factions.

In addition to attending the full caucus sessions, those factions—including the Congressional Progressive Caucus, New Democrat Coalition, Congressional Black Caucus, Congressional Hispanic Caucus and fiscally conservative Blue Dog Coalition—have each held meetings and met separately with leaders to discuss their particular concerns.

In addition, the Democratic leadership and the chairmen of the three committees that marked up the legislation—Energy and Commerce, Ways and Means, and Education and Labor—hold daily meetings on melding the three bills and on finding compromises that House Democrats can support.

At the Democratic Caucus meetings, Pelosi digs into the fine print of the legislation, fields questions and frames options, participants said. The Californian also exhorts her troops. "I've said to the members, 'This is the moment you were born for — to be here at such a historic moment,'" she said Sept. 30.

So far, Pelosi has resisted the customary arm-twisting required when rounding up votes on a consequential bill. Instead, she continues to use the meetings to take the caucus's temperature, aides said.

No formal whip count has been taken to gauge whether a sufficient number of Democrats will back a public option. That will wait, aides say, until the details of how the plan would work are in writing.

Financial Services Chairman Barney Frank of Massachusetts, among the most senior House Democrats, said he cannot recall such sustained and intense caucus meetings on a single topic. "With bills from three committees, the caucus is actually a supercommittee on this," said Frank.

The intense caucus meetings on the Troubled Asset Relief Program, which addressed the economic crisis, provide the closest comparison with the health care sessions, Frank said. But those only lasted about a week, while health care has been discussed for much of this year.

Caucus Vice Chairman Xavier Becerra of California said the meetings, which included a five-hour marathon in July, have allowed leaders to whittle points of concern down to all but the most controversial issues.

"More and more, we are closing the door on unanswered questions. More and more members can respond to those who say, 'You don't know what's in the bill.' They can say, 'Absolutely I do,' " he said.

Controversial Issue Remains
Pelosi insists nearly daily that efforts toward fashioning a single bill are progressing, but she has stopped predicting when a bill can be brought to the floor.

Congressional Progressive Caucus Co-Chairman Raúl M. Grijalva of Arizona suggested a reason for Pelosi's reticence. Soon, he said, she is going to be forced to decide how to resolve contentious issues that could tear apart the consensus she has been working to build.

"The crunch is coming, and it's coming pretty soon," said Grijalva, a leading advocate of a "robust public option."

The sessions have done little to bridge disagreements over whether to include a public option.

Grijalva is convinced that the caucus supports a public insurance plan. "We're past whether we should have a public option. It's the mechanism for doing it right that we're discussing now," he said.

But Earl Pomeroy of North Dakota demurred. "The politics of our caucus now look like the Senate Finance Committee," he said, referring to that panel's defeat of two amendments that would have put a public plan into its draft bill on Sept. 29.

Nature of the Sessions
In recent weeks, the meetings have been part lecture hall, part question-and-answer period, with outside experts discussing the arcane aspects of the proposed overhaul.

Robert E. Andrew—the chairman of Education and Labor's Health, Employment, Labor and Pensions Subcommittee—and others describe the caucus meetings as unusually detailed, zeroing in on the specifics of such topics as whether to tax generous "Cadillac" health insurance plans or what formula to use when reimbursing medical providers for health services.

At one session, Andrews urged the caucus to avoid taxing health plans that middle-class unionized workers won through collective bargaining. "There is a very broad consensus that that is the last place we want to go," the New Jersey Democrat said.

For Pomeroy, whose state has one of the nation's lowest Medicare reimbursement rates, the sessions provide a forum to try to correct that situation. At every turn, he said, he exhorts his colleagues to address the issue upfront—or forfeit his support for the bill.

"I have a threshold issue: You cannot have a Medicare payment rate for a public-plan option unless you fix Medicare or have negotiated rates, as opposed to Medicare rates," Pomeroy said.

But so far, he said, party leaders have shown no willingness to tackle the Medicare reimbursement-rate issue. "They want to fix Medicare going forward. I want to fix it now," he said.

Steve Cohen of Tennessee, a Congressional Progressive Caucus member, said the meetings have broadened his understanding of health care policy. He said he used to view universal health care as a moral issue, and now he views it in economic terms.

"Health care costs have a devastating impact on our economy. I've learned that, in the long run, it's important to control the costs to correct the economy," he said.

By Drew Armstrong, CQ Staff

October 1, 2009 -- The ongoing effort to overhaul the health system was supposed to give Congress an opportunity to fix one of its most troublesome recurring problems—what to do about a Medicare payment formula that, each year, mandates deep cuts to physicians and forces Congress to scrounge for money to temporarily undo them.

But lawmakers won't make good on that opportunity this year. Again.

The payment system, known as the Sustainable Growth Rate, is a cost control measure dating to 1997 that orders cuts or increases depending on Medicare's spending on physicians in years past. In 2010, it will demand a 22 percent reduction; for years into the future, even more deep cuts are anticipated.

Almost everyone involved in the debate views the cuts as politically unacceptable, and Congress has stepped in almost every year since 2002 to stop them.

"We have a broken doctor payment system in Medicare that we have to fix every year," said Orrin G. Hatch, R-Utah, a member of the Finance Committee, which has responsibility for the policy in the Senate. "It's a disgrace."

The draft health care overhaul plan from Finance Chairman Max Baucus, D-Mont., offers yet another one-year patch over the cuts. But because the formula categorizes that patch as a spending increase, there will be even more cuts in the future—which Congress will almost certainly try to stop.

The mandated cuts would set Medicare reimbursement rates so low that few, if any, members of Congress believe they reflect what physicians should be paid.

Protecting Cost Estimates
But punting on an overhaul of the physician payment system preserves a major virtue of Baucus' draft: It would reduce the deficit by billions of dollars over the next decade and even more in the future.

As a result, Baucus is content to ignore the issue; he said in May that a physician payment overhaul would not be included.

"Sen. Baucus has been a leader in addressing the problems with this formula, and it is an issue that continues to be important to him," a Democratic Finance Committee aide said. "The physician payment formula is a problem that Congress should address as quickly as possible to bring predictability and stability to doctors and other health care providers."

But the costs of eventually addressing the physician payment problem will be enormous.

According to a 2008 analysis by the Congressional Budget Office (CBO), merely freezing physicians' Medicare payment rates at 2009 levels would cost $318 billion over the next decade. Letting them grow at what CBO estimates is the current rate of medical inflation will drive costs much higher — up to $556 billion, well more than half of the cost of the Finance Committee's entire health care proposal. Even a modest revamp of the system that would make changes to how physician payments are calibrated would cost $185 billion.

Because of the staggering costs involved, deleting a physician payment fix is a popular idea with lawmakers.

"If you did it for the 10 years of the window, you're talking about $285 billion and you're talking about something that's impossible," said Charles E. Grassley of Iowa, the Finance Committee's ranking Republican.

Short-Term Fix
Instead, lawmakers are looking again at a short-term fix of a year or two. "The longer it can be, the better," Grassley said. "But we've been so used, over the last five or six years, to doing it for one year, or one year and six months, that it's kind of 'What do you have money to offset?'"

On Wednesday, John Cornyn, R-Texas, offered an amendment that would have created a three-year patch—which seems to be the maximum length the Finance Committee can find the funds for. The amendment failed, 9-14, but Democrats are looking for a way to get the policy into Baucus' bill.

North Dakota Democrat Kent Conrad said that it would cost about $15 billion more to add an extra year's patch to the current policy. "I think it would be very helpful to have the 'doc fix' for two years in the bill," he said Wednesday.

Efforts to address the physician payment system in the long run may eventually be proposed apart from a health debate, as part of an even bigger reset of several major federal budget items such as the alternative minimum tax, President George W. Bush's tax cuts and a package of tax extenders that Congress also deals with regularly.

"There's going to have to be a recalibrating of our long-term budget picture sooner rather than later," said Conrad, the chairman of the Senate Budget Committee. "And that's going to be part of it."

By John Reichard, CQ HealthBeat Editor

September 28, 2009 -- What types of medical conditions account for the highest levels of Medicare spending and spending growth? Figuring that out could help implement new payment incentives in a way that delivers better value for the Medicare dollar, laying the foundation for what health policy wonks call "episode based payment."

In addition to better targeting new payment incentives to improve quality and efficiency, it could also signal areas where spending might be questionable and where further research might pinpoint inappropriate spending.

Data released by the staff of the Medicare Payment Advisory Commission earlier this month stirred excitement among commissioners about moving forward with this type of payment system. The analysis suggested that a manageable number of clinical areas accounted for a big chunk of Medicare spending.

"This is the middle ground way of looking at things where all the action is," said commissioner Peter W. Butler, chief operating officer of the Rush University Medical Center in Chicago. "And if we don't make an impact here, we're not going to change the system. So I think it's the right unit of analysis that we ought to dive into."

"This is just a huge advance," enthused commissioner Arnold Milstein, who recalled lamenting when he first joined the commission the lack of data on what Medicare gets for its money relative to the data available to analysts in industries outside health care. He called the data a real glimpse into "what could be a value-based navigation system for us. . .and for the people putting money into these benefits." The medical director of the Pacific Business Group on Health, Milstein is an expert on health care purchasing strategies to improve the quality and efficiency of care.

MedPAC staffer Jennifer Podulka reported at the commission's meeting September 18 that "the 20 clinical episodes that accounted for the greatest share of total Medicare spending on episodes in 2005 together accounted for 58 percent of total spending on episodes."

The findings confirmed the view of many analysts that Medicare dollars flow overwhelmingly into treatment of chronic conditions. Of the 20 types of clinical episodes, just two were acute conditions: closed fractures or dislocation of the thigh, hip and pelvis, and bacterial lung infections.

The 20 clinical episodes with the highest levels of Medicare spending as a percentage of all program spending on clinical episodes were as follows: ischemic heart disease (14 percent); congestive heart failure (4.3 percent); hypertension (4 percent); cerebral vascular accident (3.6 percent); chronic obstructive pulmonary disease (3.4 percent); diabetes (3.2 percent); joint degeneration of the knee and lower leg (3.1 percent); joint degeneration of the back (3 percent); chronic renal failure (2.8 percent); closed fracture or dislocation of the thigh, hip and pelvis (2.3 percent); cataract (2.3 percent); bacterial lung infections (2.1 percent); malignant growths of the prostate (1.4 percent); malignant growths in the breast (1.4 percent); psychotic and schizophrenic disorders (1.3 percent); major skin malignancies (1.2 percent); joint degeneration of the thigh, hip and pelvis (1.2 percent); other metabolic disorders, 1.2 percent; and atherosclerosis, 1.1 percent.

Podulka also reported on the clinical episodes with the fastest growing annual spending. The top five were joint degeneration of the neck (19 percent); other metabolic disorders (18 percent); lymphoma (16 percent); joint degeneration of the back (16 percent); and joint degeneration of the knee and lower leg (14 percent).

About half of the clinical episodes with the highest levels of Medicare spending were also among the areas with the highest levels of spending growth. Podulka noted that while there was little geographic variation in terms of clinical episodes with the highest levels of Medicare spending, that was not the case for the episodes with the high levels of spending growth. She observed that "policy options that focus on the high-growth conditions are probably going to have some differential impact by local area."

Among the strategies MedPAC is developing to get better value for the Medicare dollar is paying a bundled fee for services involved in treating a clinical episode. Paying such a fee for care in the hospital of a particular condition and for treatment in the period after discharge would replace individual payments per diagnosis to the hospital, doctor, skilled nursing facility, or hospital outpatient department.

Instead, Medicare would make one payment to a provider entity that would allocate the funds among the providers delivering care during the covered episode, Medicare explained in a June 2008 report to Congress. The system would create an incentive for doctors and hospitals to work together to avoid unnecessary forms of treatment. MedPAC also envisions tying levels of payment to the quality of care given for a treatment episode.