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March 2005

Washington Health Policy Week in Review Archive 127e1bbe-3c39-4c3f-a51b-ce095c96ea4a

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Amazing Medicaid Facts

March 3, 2005—Oh, the inscrutable Medicaid program. Governors look at it, and don't understand. The public hears passing mention of it in the news, and gets the wrong idea. Rugged individualists think they can bring it to heel, and it jumps up and bites them. Politicians think they can ignore it, but find it bleeds profusely when cut. As congressional debate over the program's future heats up, politicians, the public, the press and even policy wonks and providers are all getting a crash course in the mysteries of Medicaid and its unsuspected role undergirding the entire U.S. health care system.

At a press briefing Wednesday sponsored by AARP, former Indiana Medicaid director Kathleen D. Gifford sought to shed light on the program's mysteries, conducting a tutorial dubbed "Medicaid 101." Among the lessons:

It's the biggest health insurer:
Although it's becoming better known, one fact about Medicaid that still surprises people is that it's bigger than Medicare. Gifford said fiscal 2005 Medicaid spending is expected to total $329 billion, compared with $309 billion for Medicare. Of the $329 billion in projected Medicaid spending, 60 percent, or $197 billion, consists of federal spending, and 40 percent, or $132 billion, is made up of state and local funds. Fifty–three million people get Medicaid coverage, while 42 million are enrolled in Medicare.

Medicaid is also the largest single source of grant funds received by the states, and pays for more than half of publicly financed mental health care. It shells out $13 billion a year in "DSH" money to public and teaching hospitals that make up much of the nation's health care safety net and take all comers, including high proportions of uninsured and underinsured people. It's also a big source of funding for community health centers, which treat people regardless of their ability to pay.

Medicaid's benefits in funding acute care extend beyond the poor, Gifford said. By picking up much of the cost that facilities incur caring for poor people, Medicaid keeps hospitals from charging commercial insurers as much for those expenses, thereby holding down premiums charged to more affluent Americans, she said.

Medicaid now appears to be the biggest spending category in state budgets. It accounted for 21.4 percent of total state expenditures in 2003, slightly less than elementary and secondary education at 21.7 percent. Gifford said Medicaid has likely overtaken that category by now. However, it's not accurate to say states spend more on Medicaid than on education, only that it accounts for more spending than elementary and secondary education. Higher education consumed another 10.8 percent of state spending in 2003, Gifford said.

It's a big safety net with big holes:
"Folks think that everybody who is poor qualifies for Medicaid," Gifford said. "That is not the case." According to a Kaiser Commission analysis of U.S. Census data, Medicaid covers 40 percent of Americans below the federal poverty line. Employers cover another 15 percent, while 5.9 percent have individual or other private coverage, other public entities cover 3.3 percent, and 36 percent are uninsured.

In addition to having a low income, qualifying for Medicaid requires falling into one of more than two dozen categories, said Gifford, now a principal with the consulting firm Health Management Associates. "In reality, Medicaid is not one program, but many," Gifford's colleagues Vernon Smith and Greg Moody said in a paper released Feb. 28 for the National Governors Association. Medicaid is:

  • "An insurance program for low-income, uninsured children and some parents, and pregnant women."
  • "A program of chronic and long-term care for persons with disabilities, including persons with mental illness, and low-income elderly."
  • "A supplement to Medicare for low-income seniors and persons with disabilities, and a support for those awaiting qualification for Medicare on the basis of permanent disability."
  • "A source of funding for safety-net hospitals and community health centers that serve a disproportionate share of the uninsured."

Poor women and kids account for few of its costs:
Gifford said children account for 48 percent of Medicaid's enrollment but just 18 percent of its costs. Adults, not including the elderly, make up 26 percent of enrollment, but only 11 percent of costs. The elderly account for 10 percent of enrollment, but 26 percent of Medicaid costs. And the blind and disabled pack the biggest cost wallop, making up just 16 percent of enrollment but 44 percent of costs. The elderly and disabled accounted for 70 percent of the increase in Medicaid spending between 2002 and 2003.

Almost half of Medicaid spending goes to pay for Medicare beneficiaries: Forty-two percent of Medicaid spending in fiscal year 2002 went to cover a variety of expenses for poor Medicare beneficiaries. Of Medicaid spending on these "dual-eligibles," 65 percent went for long-term care, 15 percent for acute care, 14 percent for prescription drugs, and 6 percent for Medicare premiums.

In general, Medicare doesn't cover these expenses, regardless of income level. Although Medicare will begin picking up prescription drug costs in 2006, states will have to keep paying part of those costs through "clawback payments" required under the Medicare overhaul law (PL 108-173).

Given the high percentage of Medicaid spending on Medicare beneficiaries, Gifford said it's small wonder governors look at their growing Medicaid budgets and voice frustration that the federal government isn't picking up more of the tab.

Optional Medicaid may not be so optional:
Gifford cautioned that proposals to allow a lesser set of benefits for "optional" populations covered by the states may create the wrong impression. "Some of the optional categories are the most needy categories from a medical perspective," she said.

Among the optionals are the "medically needy," or people with low incomes who have high medical bills they can't pay; disabled people with low incomes above the very low level that qualifies them for SSI benefits; low-income elderly nursing home residents making above SSI levels; low-income children above federal minimum incomes qualifying them for mandatory coverage; and low-income pregnant women making above 133 percent of the federal poverty level.

And optional benefits may not be so optional either, she suggested. They include prescription drugs; nursing facility care and inpatient psychiatric care for low-income recipients younger than 21; and intermediate care facilities for the low-income mentally retarded.
The optional part of Medicaid dominates the program, Gifford noted. In total, 65 percent of Medicaid spending is optional, she said. Thus if states go after optional Medicaid, potentially they go after a big part of the program.

Cut it, and it may bite back at the middle class: For every dollar a state decides to cut from Medicaid, it loses up to two dollars in federal matching money, Gifford said. There is also a potential ripple effect throughout the health care system that hurts the middle class, and affluent people using Medicaid to protect assets they want to pass on to their children.

AARP asserted Thursday that cuts to Medicaid could cause hospitals and doctors to charge other insurers more for their services to cover growing costs of uncompensated care. Employers might react to the rising costs of insurance by dropping coverage, adding to the uninsured population.

It isn't just AARP that's concerned about the impact of cost shifting on employer coverage. Major business groups may weigh in on the debate over Medicaid cuts, Mary Grealey, president of the Healthcare Leadership Council, an industry group, noted earlier this week.

For better or worse, Medicaid functions as what HHS Secretary Michael Leavitt calls "an asset protection program" for more affluent Americans. That's not what it should be, Leavitt says. An estate planning industry has sprung up in which the elderly shift assets to their children to qualify for Medicaid nursing home care instead of funding that care themselves. Leavitt says $5 billion in federal Medicaid spending could be saved by making it more difficult to shelter assets in that way.

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Cage the "Clawback," Governors Urge

March 8, 2005—A mechanism within the 2003 Medicare overhaul law that aims to ease the cost burden on states for providing drug coverage to people enrolled simultaneously in Medicare and Medicaid follows a flawed formula that undermines its purpose, according to the National Governors Association.

Under the "clawback" mechanism, Medicare picks up the costs of drug coverage for those "dually eligible" for both Medicare and Medicaid, but states repay 90 percent of those costs next year through clawback payments. Since states now pay 100 percent of those costs, they save 10 percent compared to current spending.

Eventually, state clawback payments drop to 75 percent of the costs of drug coverage for the dual eligibles. But NGA says that flaws in the formula for calculating clawback payments undermine congressional intent to save states money.

In a resolution adopted at its just-concluded winter meeting, the NGA urges regulatory and legislative changes "to ensure that the congressional intent of the program is realized and all states gain some form of relief."

A California Medicaid official said last week that his state will pay $200 million more in 2006 because of flaws in the clawback mechanism (CQ HealthBeat, March 4, 2005).

The formula calculates a per capita rate of prescription drug spending per dual eligible, then requires the state to pay 90 percent of that amount to the federal government. The per capita rate is based on spending levels on dual-eligible drug costs in 2003. The higher that 2003 baseline, the higher the clawback payment.

Governors complain that the 2003 baseline doesn't fully subtract rebates obtained that year by state Medicaid programs. They add that clawback payments will get inflated every year under the formula by a "national growth average" exceeding spending growth in many state programs.

The NGA resolution adds that "many states are concerned that the [Medicare prescription drug plans] will not be as effective as the states were in negotiating drug prices, therefore establishing a national growth average that is too high at the outset."

"Because states never stop paying less than 75 percent of a baseline number that is too high to begin with, many feel that they will never be held harmless from the negative impacts of the clawback," the resolution adds.

The NGA also said state spending on duals may rise higher than it would have without the Medicare drug benefit (PL 108-173) for another reason. Outreach efforts to sign up people for the benefit likely will add to the number of people dually enrolled in both Medicaid and Medicare. That's because many people eligible for Medicaid are not now enrolled in the program.

"Because of the woodwork effect, the number of dual eligibles may increase substantially, resulting in a clawback payment for states that is higher than states would have spent on pharmacy absent" the drug benefit, the governors say.

How to fix the problem? NGA asserts that states have substantially lowered drug spending since the 2003 base year through a variety of cost control tactics. "A clawback estimate based on a more recent base year would more appropriately estimate the costs the state would have spent on this population absent" the Medicare law, the resolution concludes.

Centers for Medicare and Medicaid Services Administrator Mark B. McClellan said last week that every state will save money in 2006 on drug spending on dual eligibles. States that doubt such savings should bring their data to the agency for review, he said.

Under the regulations establishing the drug benefit, states will save $8 billion over 10 years, he said. Those savings reflect the decline of the clawback payment to 75 percent of Medicare's tab, and the fact that Medicare will pick up coverage costs for retired state employees, he added.

A CMS spokesman added Tuesday that the agency wants "states to get all the savings they are entitled to have." But if states want to change the baseline year, "they have to go to Congress for that," he said. The spokesman added that "new data show the woodwork effect is not going to be as great as we thought. We think states all will come out ahead."

Regarding how rebates are counted, the spokesman suggested that CMS has no choice under the Medicare law but to exclude rebates paid in 2004 from 2003 purchases. But by the same token, the agency does include 2002 rebates counted in 2003, he said.

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CBO Says Bush Medicaid Plan to Save $27 Billion

March 4, 2005—A Congressional Budget Office analysis of President Bush's fiscal 2006 budget plan released Friday finds the administration's Medicaid overhaul proposal would save $27 billion over the next decade, a figure well below administration projections. The CBO document also states federal spending on Medicare will be $70 billion more than CBO estimated in January for the 2006–2015 period. The higher figure is due primarily to revised estimates of the cost of the new Medicare prescription drug program.

The less-than-expected Medicaid savings coupled with higher costs for the Medicare drug benefit mean budget officials on Capitol Hill will have to dig deeper for savings if they want to help meet Bush's goal of cutting the deficit in half by 2009. The higher Medicare spending numbers will also provide more fodder for GOP conservatives who fear the new benefit will soar in cost in the coming years and want to move legislation to scale it back.

Administration officials have said Bush's Medicaid plan would save $60 billion over the next decade, with $15 billion of those savings spent on children's health care coverage and home-based care for nursing home patients and other changes, making the net cuts to Medicaid $45 billion.

CBO has increased its projection of net spending for the Medicare drug benefit by $54 billion over the 10-year period, with about $36 billion of that amount expected through 2013, the time frame covered by CBO's original cost estimate of the new drug law (PL 108-173) which Congress passed in 2003.

Changes in the estimated net cost of the basic benefits of the Medicare drug bill account for somewhat more than half of the revision, CBO stated, while changes in the cost of the low-income subsidies provided in the bill account for the rest of the increase.

The CBO's Medicare changes "reflect both a refinement of CBO's estimating methods and provisions in the final rules governing formulary requirements and the eligibility for the low-income subsidy that differ from those CBO had anticipated on the basis of legislative language," CBO Director Douglas Holtz-Eakin wrote Friday in a letter to Senate Appropriations Committee Chairman Thad Cochran.

On Medicaid, Bush and congressional Republicans were already meeting stiff resistance from the nation's governors and some lawmakers.

Opponents of the plan say it will force states to reduce the number of beneficiaries and provide less coverage to those who do qualify. But administration officials have said the plan would give governors more flexibility with "optional" populations—people who would not qualify for Medicaid but who have been allowed to join the rolls at states' discretion.

In an interview, CMS Administrator Mark B. McClellan said much of the difference between the CMS and CBO Medicaid estimates is because CBO "did not take a position" on three elements of the Bush Medicaid plan. McClellan said the CBO $27 billion figure is a net savings number that should be compared to the $45 billion CMS net savings estimated, not the $60 billion gross savings figure. McClellan predicted that the differences between the $27 billion and the $45 billion will narrow pending further discussions with CBO.

Concerning the CBO's Medicare drug estimates, McClellan said his agency is doing "everything we can to keep costs down. We have all the legislative authority we need to do that." Senate Budget Committee Chairman Judd Gregg, R—N.H., said in a statement Friday he was not surprised that the CBO estimates differed from the administration's figures.

"That is the nature of estimates," Gregg said, adding that his panel is still on target to "mark up a budget in committee next week that cuts the deficit in half, holds the line on discretionary spending and includes mandatory savings."

While there are plenty of lawmakers who want to accomplish that goal, it may be a difficult one to reach, said Urban Institute President Robert D. Reischauer, a former CBO director.

"It's not like there aren't significant groups in Congress that would like to see entitlement caps to curb the growth of Medicaid, but I think it will be difficult to construct majorities in both houses for those types of proposals," he said.

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Docs Push for Payment Fix, Medical Malpractice Overhaul

March 15, 2005—Hundreds of physicians assembled in Washington wanted to hear Bush administration officials and Capitol Hill lawmakers promise to fix scheduled cuts in Medicare payments to physicians and overhaul the nation's medical malpractice system.

That's exactly what they got last Tuesday at the Mayflower Hotel, but there was bitter with the sweet.
Speakers also warned that "pay for performance," an initiative that links Medicare payments to the quality of medical care delivered, is on the way, as are audits to make sure that Medicare is not improperly paying for medical services.

The biggest crowd pleaser at the American Medical Association gathering was the speakers' resolve to push legislation that would place a $250,000 cap on damages awarded for pain and suffering and limit the amount of fees that attorneys could collect in such cases.

The medical malpractice system is "spinning out of control further and further each day," Senate Majority Leader Bill Frist, R–Tenn., told the audience, urging them to make sure "your voices and the voices of your patients are heard in the halls of Congress."

AMA officials and many lawmakers, including Frist, contend that high medical malpractice insurance rates are forcing physicians to leave medicine, which in turn is hurting patients' ability to seek medical care.

Frist, one of two physicians in the Senate, has failed three times to pass his medical malpractice overhaul plan, and he lamented his lot to the AMA. "I'm a pilgrim in an unholy land," Frist said, referring to the Senate's 58 lawyers, many of whom oppose the GOP's medical malpractice proposal.

If Frist does not prevail, government officials are hopeful that a Department of Health and Human Services program aimed at encouraging settlements of patients who have alleged medical malpractice against their physicians will help cut litigation.

The "Early Offers" pilot program, which former HHS secretary Tommy G. Thompson announced last fall, applies to claims made against HHS by patients who are treated by employees of federally funded community health centers overseen by HHS' Health Resources and Services Administration or by patients who receive medical care through Indian Health Service programs, HHS said in a news release. Participation is voluntary.

Frist, as well as Mark B. McClellan, administrator of the Centers for Medicare and Medicaid Services, addressed AMA members' concerns about Medicare payment cuts which are scheduled to begin next January.

McClellan said his agency is now evaluating an AMA proposal on how to change the formula Medicare uses to pay physicians, stressing that doctors are "the critical piece" in providing quality care to Medicare patients.

Frist said after his remarks that "it's too early to know" if Congress will pass either a one-year or a multi-year fix on Medicare physician payments, but he said it would be addressed this year.

Frist also told reporters physician payments as well as a "pay for performance" initiative for physicians could be addressed separately, rather than first reversing the scheduled cuts before linking any payments to performance, as some physicians have advocated.

"They're independent tracks," Frist said.

Separately, Rep. Nancy L. Johnson, R–Conn., urged her colleagues to "reward, not penalize, physicians"” as Congress considers changes in how Medicare pays doctors.

In a "Dear Colleague" letter sent to House members, Johnson wrote "emails, phone calls and other new forms of communications and health care delivery must be integrated into the payment system to help avoid medical care in costlier settings, such as nursing homes, hospitals and emergency rooms."

"The challenge is real in a tight budget cycle but to fail will erode seniors' access to the physician of their choice," Johnson wrote.

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Docs Urge Congress to Go Slow on 'Pay for Performance'

February 28, 2005—A physicians group on Monday warned lawmakers to move cautiously on proposals to link Medicare payment for doctors' services to their performance on measures of quality of care, saying that many physicians are not ready for such a change.

The Alliance of Specialty Medicine, a coalition of 13 medical groups representing more than 200,000 specialty physicians, also urged Congress to take steps this year to avert scheduled annual payment cuts of approximately 5 percent between 2006 and 2013.

At a Capitol Hill briefing, Alliance representatives responded to recent recommendations from the Medicare Payment Advisory Commission concerning both the sustainable growth rate (SGR) formula, which is used to determine pay increases for Medicare physicians, and the "pay-for-performance" initiative.
Among the problems with the current SGR formula, speakers said, is that it is based on changes in the gross domestic product rather than changes in beneficiaries' need for medical services. Another problem with the SGR is that it fails to account for price inflation when adjusting for the cost of providing services.

The SGR also includes Medicare-covered drugs and other services, the cost of which physicians cannot control. Removing those elements from the SGR would help make the formula more equitable, the group claims.
MedPAC has raised concerns about the SGR as a volume control mechanism and has recommended its elimination.

In testimony presented Feb. 10 to the House Ways and Means Health Subcommittee, MedPAC chairman Glenn M. Hackbarth said that instead of relying on a formula "MedPAC recommends a different course—one that involves explicit consideration of Medicare program objectives and differentiating among physicians."
Yearly payment updates should ensure that physician payments are adequate to maintain Medicare beneficiaries' access to care and the growth in the volume of physician services should be addressed directly, Hackbarth testified.

MedPAC has also endorsed linking physicians' Medicare reimbursements to the quality of care they provide.

Instituting pay-for-performance now could be problematic, the Alliance said, because it could not be applied equitably to all services.
While physicians are interested in improving quality, not all physicians are ready to do that through pay-for-performance, said Nancey McCann, chair of the Alliance's Medicare Working Group.

Not all fields have equal experience in pay-for-performance testing, she said. While some large primary care practices have begun demonstrations and some specialties, such as thoracic surgery, have experience in that area, other smaller physician practices have not.

Instituting pay-for-performance measures in hospitals is far different than physicians offices, McCann said, due to vast differences in numbers (6,000 hospitals vs. 800,000 physicians) and procedures (10 measures in hospitals vs. almost 10,000 different procedures for physicians).

McCann said lawmakers are looking carefully at implementing pay-for-performance measures this year, noting the Ways and Means Health Subcommittee hearing and future hearings before the Senate Finance Committee.

McCann also predicted while Congress would take action this year to advert a scheduled cut in physician payments, it was unclear whether lawmakers would seek to overhaul the SGR or instead opt for a short-term fix.

In the Medicare drug bill (PL 108-173), for example, Congress dumped scheduled physician payment cuts and substituted a 1.5 percent payment increase in 2004 and 2005.
McCann is hoping for a broader overhaul of the payment system. "Every time they do that (limited solution) it compounds the problem," she said.

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Frist Says Feds Should Focus on Health Care IT Interoperability

March 11, 2005—Senate Majority Leader Bill Frist said earlier this week that the government can encourage the health care industry to invest in information technology by keeping a focus on electronic information-sharing standards. Using government resources to promote "interoperability" would do more than distributing federal grants to hospitals, physicians, and other health care providers to install health care IT systems, Frist, R-Tenn., said March 9 after a speech to America's Health Insurance Plans, a trade group representing health care insurers.

"As soon as we do it, you're going to have more people coming under this industry. You're going to see capital flow into it. The need is so huge. It saves lives. The money is waiting to flow in here. It doesn't have to be taxpayers' dollars," he said. While the government may set up some "reserve funds to sort of send the right signal," Frist said, "that's not the fundamental problem. It's not a matter of money."

The role the federal government plays in creating a nationwide health information technology network lies at the heart of the debate over how to improve the use of health care information technology, which analysts say will improve medical care and reduce medical costs.

There is virtually no debate about the value of health care IT. Medical experts and government officials alike praise its potential to cut fraud, waste, and inefficiency from the nation's health care system. Health and Human Services Secretary Michael O. Leavitt has said information technology can transform the federal government's health care programs, such as Medicare and Medicaid, which in turn can lead to major changes in the private sector.

"I believe that the foundation is information technology and a streamlining of the system that we, as federal agencies, need to lead on and create a framework for the rest of the health care system to build upon," Leavitt said March 3 before the House Appropriations Subcommittee on Labor, Health and Human Services and Education. The health care industry has fallen behind other industries that have successfully incorporated information technology to cut costs and improve productivity. Plentiful automatic teller machines and the ability to apply for consumer credit online are just two of the many examples that show how technology has transformed commerce and can do the same for health care.

"American health care has been in the stone age when we should really be in the information age," Frist said, envisioning a future where paramedics can access a patient's medical record at the scene of a traffic accident to check allergies, blood type, and other critical factors.

Dr. David Blumenthal, a primary care physician from Boston, told a House panel last year that health care information technology "has the power to save as many or more lives than antibiotics—indeed, clinical IT has the power to make sure that antibiotics themselves are used more effectively, to save more lives and prevent more suffering."

But there are numerous problems on the road to that goal. Such systems cost money, reduce productivity in the short run, and will not be totally effective until the information they gather is linked to other system across the country.

"Even if every doctor, hospital, and nursing home in the country had the best available computers and software to manage clinical information, it would still be essential to have a means of moving that information from one place to another in a reliable, secure fashion, so that patients and their doctors could take advantage of it wherever they go," said Blumenthal, who is director of the Institute for Health Policy at Massachusetts General Hospital and partners HeathCare System in Boston.

"We need a secure, modern national information superhighway that criss-crosses our country, just as we have a national transportation infrastructure. To get that information highway will require public–private partnerships in which government plays a leadership role," he told the House Energy and Commerce Health Subcommittee in July.

While some larger hospitals and physician groups have invested heavily in health IT and have seen its benefits, many physicians who have their own offices or are in small-group practices have been more reluctant, citing costs and concerns that insurers will use such data as a way to reduce physicians' compensation.

In his remarks, Frist, a physician himself, noted that "too many doctors have been burned...(by) 30,000 dollar off-the-shelf" health care IT systems that they've thrown away a month later because they were too complicated to operate or did not deliver as promised.

"We need to act first" to make such system interoperable, Frist said, "before giving you a $50,000 grant or linking it to payment."

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High Fives at HHS Over Signs of Budding Competition to Offer Medicare Drug Benefits

March 7, 2005—Spirits are up at HHS following reports that two of the nation's biggest health insurers are likely to square off next year in a Medicare drug benefits marketplace some analysts predicted would never materialize.

Both UnitedHealth Group and Aetna said they intend to offer drug coverage nationally.

HHS Secretary Michael O. Leavitt now predicts perhaps "the most competitive market we've ever seen in prescription drugs."
Saying it will offer plans "for both individuals and employers in every state," Aetna boasted it aims to play "a leadership role" in offering prescription drug plans starting Jan. 1 under the Medicare overhaul law (PL 108-173).

Part D of the law allows companies to offer benefits either through "Prescription Drug Plans" (PDPs) in the traditional part of Medicare or through "Medicare Advantage" (MA) plans in the managed care part of the program.

Aetna said Feb. 23 that it will offer drug coverage both through PDPs and MA plans. Aetna said it also intends to offer fully insured drug benefit plans to employers who want to provide drug benefits for their retirees.

Minneapolis-based UnitedHealth Group also plans to offer PDPs in all 34 regions into which Medicare has divided the Part D marketplace. That means every Medicare beneficiary in the country who intends to stay in traditional Medicare would have the option of signing up for a United PDP plan, said Tom Paul, head of United's Ovations Pharmacy Solutions unit.

The Medicare drug benefit also will be offered through United's Medicare Advantage plans, which now enroll some 330,000 Medicare beneficiaries, said Paul. United also aims to enter new markets next year with its Medicare Advantage plans and will offer the Medicare drug benefit in those areas as well.

Although a hopeful sign for the Part D program, the announcements by the two companies do not necessarily mean they will actually offer the benefits, only that they intend to do so.

Companies interested in offering Part D benefits had to file a "notice of intent" by Feb. 18 stating they plan to apply to offer drug benefits. The applications are due March 23 and qualified applicants must file bids to offer coverage by June 6. CMS plans to award contracts by early September.

Critics of the Medicare law said the competitive scheme didn't make sense because drug-only insurance plans didn't exist in the commercial marketplace. Insurers themselves challenged the viability of the plans, saying they would not generate profits. The frequency and predictability of covered expenses would make offering drug-only plans akin to offering insurance for haircuts, said one industry executive.

But business considerations other than profitability in Medicare itself may enter into a decision about participating in the Medicare private plan market. The ability to offer a company a full menu of services, including coverage for retirees, may help an insurer land an employer as a customer in the commercial market, for example.

Paul wouldn't comment directly on expected profitability, but said "it is important to offer a full suite [of products] to our customers."

Paul said he expects national competition beyond the plan provided by Aetna. United currently handles the Medigap plans the senior lobby AARP offers to its members. Medigap covers expenses not currently paid by Medicare including drug costs.

Analysts have speculated that AARP will offer a PDP, but Paul said only that the senior lobby is "exploring solutions with United HealthGroup at this time."

An AARP spokeswoman said "the board hasn't made a decision."

According to published reports and company press releases, other companies that may offer PDPs nationally include Medco Health Solutions and Caremark. Both are pharmacy benefits management firms that manage drug benefits for insurers and employers. One of the considerations pharmacy benefits managers face in deciding whether to offer PDPs is the possibility that they will end up competing with their own customers.

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House Panel Approves Association Health Plan Measure

March 16, 2005—The House Education and Workforce Committee approved a bill Wednesday that would help small businesses purchase health insurance after narrowly staving off adoption of an amendment aimed at making it more difficult for insurers or companies to discriminate against higher-risk patients.

The panel voted along party lines 25-22 to adopt the bill (HR 525), which would allow small businesses that band together into association health plans (AHPs) to bypass state laws that mandate coverage for specific treatments and procedures. Olympia J. Snowe, R–Maine, introduced a similar bill (S 406) in the Senate.

Opponents said one section of the bill would allow companies and insurers to discriminate against older workers or other high-risk employees by increasing premiums dramatically for those groups. Democratic lawmakers said companies who employ a large number of women, for example, might be charged higher premiums, leading employers to steer away from hiring women.
Rep. Charlie Norwood, R–Ga., who supported the underlying bill, offered an amendment he said would prevent such "cherry-picking." His amendment would have struck language from the bill that he said could be read as giving insurers a wide berth in setting rates for different groups, which could lead to premiums so high that high-risk patients essentially would not have access to insurance.

Norwood said the language he wanted to strike from the bill was ambiguous enough that it would end up being disputed in the courts, and he urged a clarification of the bill's intent.

"If we mean there is no cherry-picking, let's say that," he said.

Rep. John A. Boehner, R–Ohio, and bill sponsor Rep. Sam Johnson, R–Texas, said the amendment was not necessary. They said the bill's language was clear in its intent and insurers would be subject to the state law where the AHP was established in deciding how they determine coverage rates.

Norwood pointed out AHPs would simply set up in states with the most lenient laws.

Joined by one other Republican, Rep. Tom Price of Georgia, and all the Democrats present, the amendment was defeated on a tie vote of 24–24.

Supporters of AHPs say the complexity of complying with many different state laws have discouraged small businesses from joining together as AHPs to negotiate better prices on health insurance. Bypassing the state laws, they say, will ease the bureaucracy for AHPs, and ensure more Americans have access to coverage.

Democrats, however, said they were concerned that insurers would have no incentive to cover preventative measures or some expensive procedures if the law did not require them too.

Democrats offered a series of amendments—each defeated along party lines—that would maintain state mandates for coverage of specific treatments, supplies, and preventative care such as diabetes supplies and treatment, breast cancer screenings, autism treatment, mental health treatment, maternity coverage, contraceptives, and childhood checkups and immunizations.

Rep. Ron Kind, D–Wis., offered a substitute that would have used federal funding—made available by changing tax laws for off-shore companies—to assist small businesses with premium costs and set up a national health insurance pool modeled after the Federal Employee Health Benefits Program.

Kind's amendment was defeated 22–21 along party lines.

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MedPAC Report Theme: Differentiating Among Providers to Spur Quality, Efficiency

March 1, 2005—That March 1 ritual in the health policy world, the submission by the Medicare Payment Advisory Commission of its annual recommendations to Congress, has in some respects become empty. Reporters wring it dry of news long before by filing stories on the recommendations for payment updates adopted by the commission at its January meeting leading up to the report. But missing in the nitty gritty details of those recommendations this year is a larger theme, that Medicare may soon begin moving toward a system of differential payment.

Mark Miller, the commission's executive director, outlined that theme in a briefing with reporters Tuesday morning, saying the advisory body wants Medicare to adopt a system of differential payment as a way to spur gains in quality and efficiency. Medicare should pay more for higher quality performance from hospitals, home health agencies, and physicians, the March 1 report says.

One of the goals of higher payments for better quality is to create a greater return on investments in information technology, thus improving the quality of care. While only 1 or 2 percent of payments for hospital, doctor, or home health care will be earmarked for higher quality care, Miller said these small percentages are of very large numbers-$111 billion in the case of hospital care and $50 billion in the case of doctor care. "One to 2 percent of that can get to real money." Miller added that the goal is to set aside larger sums for better quality once "pay for performance" is better established.

The report also says the Centers for Medicare and Medicaid Services, which oversees the Medicare program, should include quality measures that reflect the use of functions of information technology systems, beginning in physicians' offices, and require reporting of lab values and prescription claims data that would be combined with physician claims to provide a more complete picture of patient care, the report says.

MedPAC said providers who perform imaging studies and physicians who interpret them should be required to meet quality standards as a condition of Medicare payments and that CMS should improve coding edits for imaging services. MedPAC commissioners are also urging CMS to measure resource use of physicians serving Medicare beneficiaries and provide information about practice patterns on a confidential basis to physicians.

Other recommendations included updates and policy improvements from six Medicare payment systems for hospitals, physicians, skilled nursing facilities and other Medicare providers (see CQ HealthBeat, January 12 and 13, 2005). Several health care groups reacted to the MedPAC recommendations. Jack Ebeler, president and chief executive officer of the Alliance of Community Health Plans, which represents not-for-profit health plans, commended MedPAC for "recommending that Congress retool the payment system in Medicare to provide incentives for the highest-quality care and improvements in quality."

While all Medicare providers should eventually be included in a pay-for-performance program, Medicare should begin with Medicare Advantage plans, Ebeler said. The Medical Group Management Association, which represents medical group practices, expressed "a mix of support and concern" for the MedPAC recommendations, praising its suggestions on physician reimbursements but taking issue with those concerning health information technology (HIT), specialty hospitals and imaging services.

"MGMA remains concerns that HIT's upfront investment discourages the majority of medical group practices from realizing HIT's promise of better quality," said Dr. William F. Jessee, the group's president and chief executive officer. Jessee also urged an extension of the current 18-month moratorium on specialty hospitals in the Medicare drug law (PL 108-173).

Concerning MedPAC's recommendations on imaging, Jessee said while his group appreciates congressional concern about rising health care costs, "the solution is not to restrict patients' ability to receive effective and efficient imaging services in the group practice setting."

An imaging industry group, the National Electrical Manufacturers Association, said any imaging standards should be developed in an "open and collaborative" process that includes industry. Standards shouldn't be burdensome and should be updated to reflect advances in technology and medical practice, the group added. The switch to standards also should include "transition mechanisms," NEMA said.

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New York Medicaid Plan Would Streamline State's Health System

March 16, 2005—New York Gov. George Pataki introduced a plan on Wednesday to "right-size" his state's health care system that includes many of the innovations the Bush administration hopes to foster with its proposal to give states greater control over Medicaid.

With HHS Secretary Michael O. Leavitt by his side, Pataki discussed his plan to eliminate underused hospital and nursing home beds, spend $1 billion on health care information technology, and rely more on home-based care rather than nursing home care.

The plan, which requires approval by HHS, would also turn over control of New York's Medicaid program from its cities and counties to the state, Pataki told a press conference in Washington.
Leavitt said the plan would ensure continued medical coverage to millions of New York residents.

Leavitt has warned in recent weeks that states need flexibility over Medicaid benefits to avoid dropping coverage entirely for large categories of the Medicaid population. "Is it better to give everyone a Chevrolet or few a Cadillac?" he asked Wednesday.

Pataki said the plan, which also would have to be approved by the state legislature, would provide significant savings to the state, but declined to estimate how big the savings would be.

Asked what the impact would be on benefits for existing Medicaid patients, Pataki said there would be "some changes" for New York's "Family Health Plus" program, which extended Medicaid coverage to low-income adults in the state who otherwise did not qualify. But Pataki did not say how benefits would change.

New York received approval eight years ago from HHS for its "Partnership Plan," which relied on managed care plans. The program saved $6 billion over eight years, while expanding coverage to more than 400,000 New Yorkers, HHS said. Family Health Plus was an expansion of the Partnership Plan.

The new plan, called the "Federal-State Health Reform Partnership Program," would "reinvest" $1.5 billion of the $6 billion saved, HHS said. New York said it would use the $1 billion in infotech money for electronic prescribing, electronic health records, and regional health information networks.

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Report: House, Senate Medicaid Cuts Could Add to Uninsured

March 10, 2005—The Medicaid spending reductions included in the House and Senate budget resolutions are likely to weaken health care coverage for low-income Americans and increase the ranks of the uninsured, according to two reports released Thursday by the Center on Budget and Policy Priorities.

Both proposals would go farther than the Medicaid spending changes in the Bush administration's fiscal 2006 budget that have already drawn opposition from the nation's governors.

Medicaid is the joint federal–state health insurance program for the poor. Like Medicare, its costs have been growing rapidly in recent years, straining both federal and state budgets.

Bush's proposal would reduce the growth in Medicaid spending by $7.6 billion over the next five years, according to the Congressional Budget Office.

The House Budget Committee's fiscal 2006 budget resolution would require the Energy and Commerce Committee, which has jurisdiction over Medicaid and part of Medicare, to make cuts totaling $20 billion over the next five years. The Ways and Means Committee, which has primary jurisdiction over Medicare, would have to produce $18.7 billion in net savings.

The Senate Budget Resolution would require the Senate Finance Committee to reduce the growth in Medicaid spending by $14 billion.

Hospitals, nursing homes, and other provider groups fear the spending reductions will reduce their Medicare and Medicaid reimbursements, and they have already begun lobbying campaigns opposing any spending reductions in those entitlement programs.

The proposed spending cuts for Medicare and Medicaid are "ill considered and jeopardize the progress we have worked so hard to achieve on behalf of our nation's frail, elderly, and disabled," wrote Hal Daub, president and chief executive officer of the American Health Care Association, which represents nursing homes, in a letter to House and Senate budget committees.

A House Ways and Means Committee spokeswoman said Thursday that committee members haven't yet developed any specific recommendations, but the Budget Committee has given Ways and Means maximum flexibility within its jurisdiction to achieve savings.

House Energy and Commerce Chairman Joe L. Barton, R-Texas, has said he plans to hold hearings on the Medicaid program. His committee is investigating how states have spent Medicaid funds generated by intergovernmental transfers, or IGTs, as well as how much Medicaid pays for prescription drugs.

Senate Finance Chairman Charles E. Grassley, R-Iowa, predicted Thursday that his colleagues would support Medicaid spending reductions. "I believe the votes will be there on the committee and even on the floor," he told reporters.

The bigger question, Grassley said, is whether there will be enough support for the entire budget reconciliation bill, saying "heavy lifting" will be required to ensure the measure survives on the Senate floor.

Center for Budget and Policy Priorities analyses of the House and Senate budget resolutions said the proposed Medicaid cuts would hurt states that are already struggling to fund their share of Medicaid costs.

In analyzing the House plan, the Center stated that "proposals that would reduce the federal commitment to Medicaid and shift costs to states would increase the pressures that states are facing, and likely lead to additional and larger reductions in Medicaid."

Medicaid spending reductions in the Senate bill "are likely to push hard-pressed states to eliminate coverage for a substantial number of low-income people, increasing the ranks of the uninsured and the underinsured," the Center's analysts wrote.

They also noted a new "point of order" in the Senate budget resolution that they said would "heavily and inappropriately skew debates on health care policy and the uninsured."

Future costs to increase Medicaid to cover more of the uninsured would have to be offset but legislation to provide new tax deductions for or other tax breaks related to health insurance (other than refundable credits) would not have to be offset, the Center stated, adding that such proposals "would necessarily be less well targeted on the uninsured population and likely be less effective at reducing the ranks of the uninsured."

The new point of order, the Center stated, "would make it difficult to have a balanced and carefully considered debate about the most effective and efficient ways to deal with the problem posed by 45 million Americans lacking health insurance."

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Senate HELP Panel Approves Medical Errors Bill

March 9, 2005—The Senate Health, Education, Labor and Pensions Committee on Wednesday approved legislation aimed at improving patient safety.

The bill (S 544), approved by voice vote, would establish a legal framework for health care providers to report medical errors without fear of the data being used in malpractice lawsuits and would set up a database to track such errors to analyze trends and prevent repeating common mistakes.

The Senate unanimously passed a nearly identical medical errors measure last year. The House passed its own version of the legislation in 2003. Senate leaders named conference committee members after their vote, but the House never appointed its conferees and the legislation languished.

The committee approved this year's bill with the understanding that some concerns about the use of the data raised by ranking Democrat Sen. Edward M. Kennedy of Massachusetts would be resolved before the measure goes to the floor.

HELP Chairman Sen. Michael B. Enzi, R-Wyo., agreed to work with Kennedy and insert a colloquy into the record that clarifies the intent of the bill is not to bar use of the information in criminal cases.

"We should make clear in the legislation that the privilege does not shelter criminal acts," Kennedy said. He also urged clarification to ensure that the measure "does not allow the good intentions of the legislation to inadvertently conceal information that should be in the public domain."

The momentum for the patient safety legislation came after an Institute of Medicine report in 1999 found that medical errors cause up to 98,000 deaths a year.

It took five years of negotiations on ways to gather and analyze data about medical mistakes without exposing health care providers to added liability before the Senate reached a bipartisan deal last July. House and Senate leaders disagree about which chamber is to blame for the failure to reach a conference agreement in the 108th Congress.

The legislation is expected to pass the Senate again easily.

The House Energy and Commerce Committee has not yet scheduled a markup of its version of a medical errors bill.

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Senate Sets Stage for Bruising Budget Battle with House

March 18, 2005—In adopting its budget resolution Thursday, the Senate posed more questions than it answered for the budget conferees who will begin to hammer out a deal when lawmakers return to Capitol Hill in two weeks.

The House by 218–214 adopted its resolution (H Con Res 95) calling for mandatory spending cuts of $69 billion and tax cuts totaling $106 billion, including $45 billion in tax cuts that would be protected from a filibuster in the Senate. It also set a total discretionary spending ceiling of $843 billion, in keeping with President Bush's request.

But the Senate, before adopting its version (S Con Res 18) of the budget Thursday night, voted 52-48 to strip out $15 billion of the $32 billion in mandatory spending cuts envisioned by the Budget Committee over five years. It also increased the overall discretionary spending cap by $5.4 billion and nearly doubled—to $129 billion—the net amount of tax cuts that would enjoy protection from a filibuster in the Senate.

Spending Battles Ahead
The reduction in mandatory spending cuts came in the form of an amendment by Sen. Gordon H. Smith, R–Ore., that knocked out reconciliation instructions to the Finance Committee to find $15 billion in savings from programs under its jurisdiction—about $14 billion of which was expected to come from Medicaid, the federal-state health insurance program for the poor.

The Senate adopted several amendments expressing support for increased funding for a variety of discretionary programs that Bush is seeking to cut, including Community Development Block Grants, rural education and health care, and homeland security grants for first responders.

But those amendments did not raise the discretionary spending level in the budget. All they did was put some pressure on appropriators to fund the named programs.

The more significant amendment, raising the overall discretionary cap to nearly $849 billion, was offered by Edward M. Kennedy, D–Mass., and adopted by 51–49. With the House and Bush insisting on a spending ceiling of no more than $843 billion, that figure may not survive conference negotiations.

Despite continued deficits, the votes in favor of various spending priorities did not quell the Senate's appetite for tax cuts.

Tax Cut Surprise
The Senate budget resolution originally called for the protection of $70 billion in tax cuts through the reconciliation process. The House resolution would shield $45 billion.

The Kennedy amendment increasing discretionary spending by $5.4 billion was offset by an equal reduction in the $70 billion tax cut figure. But an amendment by Sen. Jim Bunning, R–Ky., pushed the net tax cut number to $129 billion.

"It firmly goes off in two different directions," Robert L. Bixby, executive director of the Concord Coalition, said of the Senate budget.

Republican leaders are mulling the implications of Thursday night's surprise vote. While GOP moderates had balked at anything more than the $70 billion of the initial resolution, several voted for the Bunning amendment—possibly out of confusion.

The amendment had the stated purpose of reversing a 1993 law (PL 103-66) that increased to 85 percent the proportion of Social Security benefits paid to relatively well-off seniors that is subject to income tax.

But that policy recommendation is non-binding, and the practical effect of the amendment was to expand the total tax cut figure that would be afforded procedural protection against filibusters in the Senate.

Bunning has offered similar amendments in past years only to see them rejected.

"That was a shocker," Bixby said. "You kind of have to wonder if they were fully aware of what they were doing because the end result is to double the tax cut."

Five deficit-wary GOP moderates opposed the Bunning amendment, but five Democrats—Robert C. Byrd, W.Va., Ben Nelson, Neb., Bill Nelson, Fla., Mary L. Landrieu, La., and Ken Salazar, Colo.—joined 50 Republicans to adopt it.

Byrd has already signaled that while he voted "yes," he wants any tax cuts in a reconciliation package to be fully offset. In the past, Byrd has opposed efforts to use the reconciliation process to cut taxes.

The House budget calls for $106 billion in tax cuts, only $45 billion of which would be given procedural protection. GOP leaders say they want to push legislation that would make certain 2001 and 2003 tax cuts permanent, a goal that cannot be accomplished in reconciliation.

Top GOP tax and budget aides were surprised by the vote. Budget Chairman Judd Gregg, R–N.H., has been wary of including too high a tax cut number in his budget, lest he lose the support of GOP moderates.

Some GOP supporters of the Bunning amendment suggested Thursday night that a final tax reconciliation figure higher than $70 billion still might meet with opposition, given concerns about the deficit.

Norm Coleman, R–Minn., said there will be "reality and sobriety at the end of the day."

But while House and Senate conferees will have to assess whether they can get a compromise budget through the Senate, an overall tax figure of more than $100 billion—a figure desired by the Bush administration—now appears more possible, said one GOP aide.

Senate tax writers have signaled that the original $70 billion figure is not big enough to easily accomplish GOP goals—which include a series of popular tax cut extensions and a more controversial extension of the 15 percent tax rate on capital gains and dividends.

On the spending side, it remains unclear whether House and Senate negotiators will be able to arrive at a mandatory savings figure that is big enough to please House conservatives but does not alienate Senate Republicans, like Smith, who thought $14 billion cut from Medicaid was too much.

House appropriators are already discussing how they will divide the discretionary spending pot among their 10 subcommittees. However, the Senate adoption of a higher figure may not change their calculations.

"We've even started doing our allocation meetings, based on the president's budget request," said House Appropriations spokesman John Scofield.

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State Administrators Say Feds Adding to Their Medicaid Costs

March 4, 2005—A panel of state Medicaid administrators appearing at a congressional forum Friday said between the Medicare drug benefit and a Medicaid overhaul plan proposed by the Bush administration, states face higher costs associated with the publicly funded insurance for the poor. However, CMS Administrator Mark McClellan denied the Medicare drug benefit would add to state costs, saying it would save them billions of dollars.

California Medicaid official Stan Rosenstein said at the forum the Medicare overhaul law (PL 108-173) is supposed to save his state 10 percent in 2006 on prescription drug costs for Medicare beneficiaries now receiving Medicaid drug benefits.

But Rosenstein said California will actually pay $215 million more in prescription drug costs for the one million "dual eligibles" in his state next year even though the federal Medicare program will cover their prescription drugs.

That's not the way it's supposed to be under the Medicare drug law. States are supposed to save money when the feds begin picking up the tab for the drug costs of people on both Medicaid and Medicare. That's the case even though so-called "clawback" payments by the states limit those savings.

Under the clawback mechanism, states must pay the federal government back for 90 percent of the duals' drug costs in 2006. Since states pay 100 percent of those costs now, California should save 10 percent compared to current spending.

But Medicare will calculate clawback payments based on state outlays in 2003 for the duals' drug costs. The use of those outlays is causing controversy in some cases.

A number of states including California say they restrained drug outlays after 2003 with preferred drug lists, rebates, and other cost control tactics. But since the clawback payments are based on the higher 2003 spending levels, California's clawback payment in 2006 will actually be higher than its drug expenses for the duals this year, even including the 10 percent reduction, Rosenstein said.

Over time, state clawback payments are supposed to decline as a percentage of Medicare's prescription drug outlays for the duals. The proportion eventually declines to 75 percent. But a yearly inflation factor gets built back in to clawback payments, limiting the savings to states from the decline to 75 percent.

States that have cracked down on duals' drug costs since 2003 argue they shouldn't be subject to the clawback inflation factor, and rebates they received in 2004 from 2003 outlays should be factored back in to the 2003 baseline for clawback payments.

States also complain they are saddled with other uncompensated expenses from enrolling residents in the new Medicare drug benefit. Enrollment efforts will identify people who qualify for Medicaid and will be enrolled in that program, adding to state costs, officials say.

And state outreach efforts for the Medicare drug benefit will also boost enrollment in other state programs to help poor people pay Medicare premium costs, officials add.

McClellan asserted each and every state will save money on drug costs related to the duals under CMS estimates, including in 2006. If states have questions about their savings, they should contact CMS, he said. "We want the states to be coming to us with the numbers," he reiterated.

McClellan added states, notably California, will see big savings as well from Medicare picking up the drug costs of retired state employees. Overall the drug benefit will save states a total of $8 billion over 10 years, McClellan said. States also will get matching payments for added administrative costs incurred with enrolling people in the Part D drug benefit, he added.

But states say they still have to come up with their own portion of such expenses, despite the federal matching payments. And if the administration's Medicaid overhaul plan passes, federal payments to states for Medicaid administrative expenses will be capped, they add.

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Ways and Means Signals Readiness to Base Medicare Payment on Quality Performance

March 15, 2005—Ways and Means Health Subcommittee Chairwoman Nancy L. Johnson, R–Conn., signaled at a House hearing Tuesday how she aims to reform Medicare payments to physicians, while stressing that her thinking on the matter is still "embryonic." The key elements: Get rid of the "Sustainable Growth Rate" (SGR) system that has lined up physicians for big annual cuts over the next several years and replace it with a system that rewards doctors who perform well on specific measures of quality care.

Johnson indicated she doesn't have the luxury of waiting until performance measures and the data systems to gather them have been perfected. Repeal of the SGR "is the only possibility," Johnson said at the hearing. "It's unfortunate that we have to do this two years in advance of the technology."
The message of the hearing is that performance measures are ready, a GOP aide said. That may be less the case with physician care than with other forms of care, but the aide said doctors may have to report data on quality of care next year to qualify for higher payments, with income for the year after based on that data. Decisions on the issue haven't been made, the aide said.

Hospitals were recently given higher Medicare payments to report data on quality performance measures, which will soon be released publicly. Performance data also is available for skilled nursing facilities, home care agencies, and managed care plans. One possible scenario is that Medicare payments to those sectors of health care will be based on performance data in fiscal 2006, with doctors coming under such a system in fiscal 2007.

Johnson hinted at the possibility of a one-year fix of physician payment while a more permanent system is designed, but said she isn't ready to throw the towel in on speedier action on the more lasting changes. "My belief is that if you get the right bill at the right time, you will find a way to fund it," she said. A "Dear Colleague" letter by Johnson estimated the cost of a one-year fix—erasing projected payment cuts to physicians in fiscal 2006 and replacing them with a 1.5 percent increase—at $11 billion over five years.

Johnson expressed concern at the hearing about several aspects of performance-based payment to physicians, including the problem of patients who won't comply with doctors' instructions despite their best efforts, and the reliance in part on administrative claims data rather than solely on clinical data to measure performance. Witnesses told Johnson that those problems are manageable.

But one of those witnesses, Jeffrey Rich of the Society of Thoracic Surgeons, warned against carving payments to reward higher quality out of the existing pool of doctor payments rather than adding to the pool. A budget-neutral "tournament" approach that rewards winners at the cost of lower payments to losers could harm care to Medicare beneficiaries, lessen savings, and stifle sharing of best practices among doctors to improve care, he said. The Medicare Payment Advisory Commission has recommended the budget-neutral approach to paying for performance.

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