[Senate Hearing 106-898]
[From the U.S. Government Printing Office]





                                                        S. Hrg. 106-898

       IMPLICATIONS OF THE BALANCED BUDGET ACT ON RURAL HOSPITALS

=======================================================================

                                HEARING

                                before a

                          SUBCOMMITTEE OF THE

            COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                            SPECIAL HEARING

                     JULY, 11, 2000--WASHINGTON, DC

                               __________

         Printed for the use of the Committee on Appropriations


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 senate

                                 ______


                    U.S. GOVERNMENT PRINTING OFFICE
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_______________________________________________________________________
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                                 20402




                      COMMITTEE ON APPROPRIATIONS

                     TED STEVENS, Alaska, Chairman
THAD COCHRAN, Mississippi            ROBERT C. BYRD, West Virginia
ARLEN SPECTER, Pennsylvania          DANIEL K. INOUYE, Hawaii
PETE V. DOMENICI, New Mexico         ERNEST F. HOLLINGS, South Carolina
CHRISTOPHER S. BOND, Missouri        PATRICK J. LEAHY, Vermont
SLADE GORTON, Washington             FRANK R. LAUTENBERG, New Jersey
MITCH McCONNELL, Kentucky            TOM HARKIN, Iowa
CONRAD BURNS, Montana                BARBARA A. MIKULSKI, Maryland
RICHARD C. SHELBY, Alabama           HARRY REID, Nevada
JUDD GREGG, New Hampshire            HERB KOHL, Wisconsin
ROBERT F. BENNETT, Utah              PATTY MURRAY, Washington
BEN NIGHTHORSE CAMPBELL, Colorado    BYRON L. DORGAN, North Dakota
LARRY CRAIG, Idaho                   DIANNE FEINSTEIN, California
KAY BAILEY HUTCHISON, Texas          RICHARD J. DURBIN, Illinois
JON KYL, Arizona
                   Steven J. Cortese, Staff Director
                 Lisa Sutherland, Deputy Staff Director
               James H. English, Minority Staff Director
                                 ------                                

  Subcommittee on Agriculture, Rural Development, and Related Agencies

                  THAD COCHRAN, Mississippi, Chairman
ARLEN SPECTER, Pennsylvania          HERB KOHL, Wisconsin
CHRISTOPHER S. BOND, Missouri        TOM HARKIN, Iowa
SLADE GORTON, Washington             BYRON L. DORGAN, North Dakota
MITCH McCONNELL, Kentucky            DIANNE FEINSTEIN, California
CONRAD BURNS, Montana                RICHARD J. DURBIN, Illinois
TED STEVENS, Alaska                  ROBERT C. BYRD, West Virginia
  (ex officio)                         (ex officio)
                           Professional Staff

                           Rebecca M. Davies
                        Martha Scott Poindexter
                              Hunt Shipman
                               Les Spivey
                       Galen Fountain (Minority)

                         Administrative Support

                       Carole Geagley (Minority)




                            C O N T E N T S

                              ----------                              
                                                                   Page

Opening statement of Senator Thad Cochran........................     1
Statement of Senator Conrad Burns................................     2
Prepared statement of Senator Herb Kohl..........................     3
Prepared statement of Senator Richard J. Durbin..................     4
Prepared statement of Senator Dianne Feinstein...................     5
Statement of Senator Charles Grassley, U.S. Senator from Iowa....     7
Statement of Robert A. Berenson, M.D., Director, Center for 
  Health Plans and Providers, Health Care Financing 
  Administration, Department of Health and Human Services........     9
    Prepared statement...........................................    11
Statement of Mary Wakefield, RN, Ph.D., professor and director, 
  Center for Health Policy Research and Ethics, George Mason 
  University.....................................................    15
    Prepared statement...........................................    20
Statement of Thomas A. Scully, president and chief executive 
  officer, Federation of American Health Systems.................    26
    Prepared statement...........................................    29
Statement of Jimmy Blessitt, administrator, South Sunflower 
  County Hospital, Indianola, Mississippi........................    37
    Prepared statement...........................................    44
Statement of Phillip L. Grady, administrator, King's Daughters 
  Hospital, Brookhaven, Mississippi..............................    51
    Prepared statement...........................................    53
  

 
       IMPLICATIONS OF THE BALANCED BUDGET ACT ON RURAL HOSPITALS

                              ----------                              


                         TUESDAY, JULY 11, 2000

                           U.S. Senate,    
         Subcommittee on Agriculture, Rural
                 Development, and Related Agencies,
                               Committee on Appropriations,
                                                    Washington, DC.
    The subcommittee met at 10:48 a.m., in room SD-138, Dirksen 
Senate Office Building, Hon. Thad Cochran (chairman) presiding.
    Present: Senators Cochran and Burns.


               OPENING STATEMENT OF SENATOR THAD COCHRAN


    Senator Cochran. The subcommittee will please come to 
order.
    Today we are convening this hearing to consider the 
economic plight of rural hospitals and their communities. We 
will consider the effects of Federal policies on the financial 
well-being of providers and how that affects efforts to develop 
the economies of small towns and rural communities. Hospitals 
are major economic contributors to their communities and many 
hospitals serve a large portion of Medicare and Medicaid 
patients with very few, if any, private pay patients to offset 
deficiencies caused by lower Medicare reimbursements.
    Experts from HCFA and MedPAC will address reimbursement 
issues and other witnesses will discuss such problems as a lack 
of capital to improve and expand facilities and a lack of 
ability to recruit and retain key personnel. While these are 
problems of all hospitals, rural hospitals seem to be 
disproportionately affected. We will hear from hospital 
administrators from my State of Mississippi about the roles 
that their hospitals play in their communities.
    Our first witness we invited to testify is Senator Charles 
Grassley of Iowa. As you know, we have a vote taking place on 
the floor of the Senate right now and we will hear from him as 
soon as he arrives at the hearing. He has been a leader on 
rural Medicare issues in the Senate Finance Committee.
    We also have a panel of witnesses that includes: Dr. Robert 
Berenson, Director of the Center for Health Plans and Providers 
of the Health Care Financing Administration, who testified at a 
hearing we had last year on this subject and who visited 
facilities in Mississippi last summer; Dr. Mary Wakefield, who 
is Director of the Center for Health Policy at George Mason 
University and is a member of the Medicare Payment Advisory 
Commission; Thomas Scully, President of the Federation of 
American Health Systems, who represents for-profit hospital 
systems and is a former senior official with OMB in the Bush 
Administration.
    We also have a panel of hospital administrators, including 
Mr. Jimmy Blessitt, the Administrator of South Sunflower County 
Hospital in Indianola, Mississippi, and Mr. Philip Grady, who 
is the Chief Executive Officer of King's Daughters Hospital in 
Brookhaven, Mississippi.
    We are pleased to welcome our good friend, my colleague 
from Iowa, the distinguished Senator Charles Grassley, who as I 
pointed out earlier has been a leader in this area and is a 
member of the Finance Committee, which has important 
jurisdiction in this area.
    Senator Burns, do you have any opening comments?


                   STATEMENT OF SENATOR CONRAD BURNS


    Senator Burns. Thank you, Mr. Chairman. I do, and I will 
submit my statement, but there is a couple of points that I 
want to make. I want to thank you for holding this hearing. It 
is a timely hearing and I think most of us coming back now off 
of the Fourth of July break spent most of the time on the road. 
I know I did, and of course if you are up for re-election that 
is where you are.
    I met with a lot of folks in rural areas, and of course the 
whole State of Montana is considered rural, and then we have 
got some that is considered frontier, and they face unusual 
challenges, as you know.
    Not for profit health care facilities are the backbone of 
my State's health care delivery system. Since the beginning 
their mission has been to meet the health care needs and 
improve the health of folks in their communities. While their 
mission remains the same, the environment under which they have 
been operating has been changing at a rapid and inconsistent 
pace, a pace that has negatively impacted those facilities.
    As Montana faces unique challenges, Montana's 56 counties, 
45 are classified as frontier counties. All 40 counties are 
classified as primary care health professional shortage areas. 
For the past 3 years, Montana hospitals have lost money serving 
patients. They are forced to make it up in other areas, by 
managing other services such as physicians' clinics and durable 
medical equipment businesses, and through investments.
    While the larger hospitals survived this way, it is 
increasingly difficult for rurals to do so. Our county-owned 
rural facilities, about 15 in Montana, in an effort to survive 
and keep their doors open to many of their residents in need, 
have increasingly been forced to turn to tax subsidies in the 
form of mill levies and direct subsidies from the county as a 
matter of last resort.
    This bad problem looks like it is only going to get worse, 
folks. Already, this year I have heard that many Montana 
hospitals are far worse than they were just a year ago. I would 
like to provide you with a quick snapshot of some hospitals' 
financial condition. It shows all but one facility losing money 
so far this year. In the case of St. Patrick's Hospital, which 
is considered an urban facility, it has gone from a $12 million 
profit in 1997 to a $4 million loss May 31 of this year of 
2000.
    The Community Hospital of Anaconda is opening at a loss, as 
the Clarkford Valley Hospital in Plains and St. Joseph's 
Hospital in Polson, just to name a few. This is a disturbing 
trend, placing rural America in real jeopardy as far as health 
care delivery systems are concerned.
    I am glad to see Senator Grassley here. I serve with him on 
the Aging Committee and he has long been the champion of rural 
health and considered one of the experts on rural health. I 
look forward to listening to his testimony and also working 
with him on--he has introduced a bill which is the Geographic 
Adjustment Fairness Act of 2000, of which I would like to be a 
co-sponsor.
    It would provide an opportunity to correct the unfair 
geographic inequity in traditional fee for service Medicare 
payments. The changes are set forth in the good Senator's bill 
and they should not be difficult for HCFA to implement because 
hospitals already submit annual cost reports which list their 
labor and non-labor costs. I think it is a step in the right 
direction.
    So, Mr. Chairman, I appreciate the opportunity. As you 
know, we have I think some 13 or 14 counties with no doctors. 
We rely on physician's assistants, PA's. So we face a challenge 
that is not any different than any other State, really, in some 
of their rural areas. But we have a thing called distance to 
deal with because--you have heard me say it before--I come from 
a State where there is a lot of dirt between lightbulbs. But 
those people deserve the best health care that we can provide 
for them.
    I thank the Senator and I look forward to Senator 
Grassley's testimony.
    Senator Cochran. Thank you very much, Senator Burns.


                    ADDITIONAL SUBMITTED STATEMENTS


    The subcommittee has received statements from Senators 
Kohl, Durbin and Feinstein which they have asked be placed in 
the record.
    [The statements follow:]
                Prepared Statement of Senator Herb Kohl
    Thank you, Mr. Chairman. I am glad you have called this hearing to 
draw Congress' attention to the plight of hospitals in rural 
communities, and the disastrous impact of a weakened health care system 
on rural development.
    Some may question why the issue of health care is being explored by 
a Subcommittee which focuses on agriculture and rural development. But 
these issues are inextricably linked. The success of rural America 
depends upon the ability to sustain a viable, attractive health care 
system. A strong health system attracts employers and economic growth 
to rural areas, and hospitals serve as the center of that system. The 
lack of a strong health care infrastructure not only jeopardizes the 
health and well-being of Americans living in rural and agricultural-
based communities; it also jeopardizes the growth and viability of 
rural America.
    As our witnesses are well aware, health care in rural America is in 
trouble. The Balanced Budget Act of 1997 was intended to achieve a 
certain level of savings for Medicare. We intended to eliminate 
wasteful spending. We intended to weed out unscrupulous, fraudulent 
providers. In short, we intended to save the Medicare program from 
bankruptcy.
    However, as we all know, the BBA reforms have resulted in far 
deeper cuts to Medicare providers than Congress originally intended. 
These cuts are causing hardships in many areas of our nation, but they 
are particularly devastating for rural areas, where hospitals and other 
providers are more reliant on Medicare payments.
    I am deeply concerned about these unintended effects. When we 
passed the BBA, we never intended to put good, efficient, hard-working 
health care providers out of business. And we certainly never intended 
to force rural providers to cut back or eliminate needed services--or 
even worse, to jeopardize access to care for rural seniors. Congress 
must act immediately to ensure that Medicare beneficiaries in rural 
areas have access to the health care services to which they are 
entitled and deserve.
    Congress took several important first steps toward addressing 
Medicare payment problems last year when we passed the Balanced Budget 
Refinement Act of 1999. The President recently called on Congress to 
provide an additional $40 billion over ten years to restore Medicare 
cuts to hospitals, home health agencies, and nursing homes--including 
$1 billion for rural providers. In the remaining days of this session, 
Congress must take action to ensure that rural Medicare beneficiaries 
have access to the care they deserve.
    However, in addition to the restoration of BBA cuts, I believe 
Congress must take an even larger step to bring common sense and equity 
to the Medicare program. Current Medicare formulas penalize seniors in 
Wisconsin and other areas of the country by paying less per beneficiary 
than in other States. While the national average Medicare payment was 
$5,538 per senior in 1998, the payment per Wisconsin senior was much 
less--only $4,237. By contrast, the average payment per senior in 
Florida was $6,563; in Texas, it was $6,737; and in Louisiana, it was 
$7,252. Do seniors and health care providers in these States deserve 
more than those in Wisconsin?
    Unfortunately, this inequity is even worse in rural areas. In 1997, 
the average Medicare payment for urban areas of Wisconsin was $4,354--
still much less than the national average of $5,416. But the payment in 
rural Wisconsin was even less--only $3,786. This disparity is causing 
real harm in rural Wisconsin, with many providers barely able to stay 
afloat, and fewer options and benefits for Wisconsin's elderly 
patients.
    After all, we can talk about numbers, but the real travesty here is 
that this payment disparity has a direct effect on seniors' access to 
care. Most seniors in Florida have coverage for prescription drugs, 
eyeglasses, and preventive benefits, but too many seniors in Wisconsin 
do not. Providers in Wisconsin are struggling to make ends meet and 
continue providing the highest quality care. And Medicare+Choice plans 
have been leaving Wisconsin altogether or cutting benefits--resulting 
in interruptions in benefits and confusion and frustration among 
seniors. In other words, even though Wisconsin seniors pay the same 
Medicare payroll taxes and the same Medicare Part B premiums, they do 
not enjoy the same benefits. This is simply unacceptable.
    I have cosponsored legislation, S. 2610, the Medicare Fairness in 
Reimbursement Act of 2000, to address this fundamental inequity. This 
bill would ensure that no State receives less than 95 percent of the 
national average Medicare per-beneficiary payment, and no State 
receives more than 105 percent of the national average payment. It also 
requires the Secretary of Health and Human Services to revise the 
hospital wage index formula so that it more accurately reflects the 
actual costs hospitals incur. These two key changes will help equalize 
Medicare payments--and seniors' benefits--for Wisconsin, including 
rural areas.
    I am fully aware that passing this legislation will not be easy. 
Because the bill is budget neutral, any increase in payments to 
Wisconsin and other disadvantaged States will result in lower payments 
to other States. But this is an issue of fairness--of making sure that 
our nation's elderly have access to the health care they need and 
deserve, regardless of where they live. We must address this issue as 
part of any comprehensive Medicare reform bill considered in Congress.
    Again, Mr. Chairman, I want to thank you for shedding light on the 
important issue of rural health care. I know that the experiences and 
suggestions made by today's witnesses can lead to real BBA relief and 
ensure that Medicare reimburses rural providers more appropriately. I 
share your hope that Congress will act to address these issues quickly 
and comprehensively, so that health care in rural America remains vital 
and strong.
                                 ______
                                 
            Prepared Statement of Senator Richard J. Durbin
    Mr. Chairman, in Illinois, 13 percent, or 11 of all rural hospitals 
have closed in the last 14 years, leaving 23 counties with no hospital. 
This hearing is very important to my state and I thank you for taking 
the time to discuss these critical health access issues during the busy 
appropriations season.
    Financing rural hospitals is not simply a budget issue. It is also 
about providing access to health services for Americans.
    A recent study by the University of Illinois at Urbana-Champaign 
found that poor people in rural areas are more likely to lack health 
insurance than any other group of Illinoisans. Low income adults in 
rural Illinois are 24 percent less likely to be insured than their big 
city counterparts.
    In fact, the study found that poor rural adults with jobs are 20 
percent less likely to have health coverage than unemployed people. 
Rural residents are generally poorer, older and less insured than their 
urban or suburban counterparts.
    Rural areas report higher rates of chronic disease and infant 
mortality. Injuries related to the use of farm machinery and rural 
occupational hazards associated with mining and forestry and fishing 
are unique problems for rural health care systems. Trauma mortality, 
especially for motor vehicle accidents and gun-related injuries is 
disproportionately higher in rural areas.
    The fact is, in rural America, hospitals are serving as a safety 
net. Despite rapid health systems changes, for many rural communities 
it is the hospital that has served as the focus of health care delivery 
in the community and it is the hospital that remains the most prominent 
institution around which the delivery of health care is organized.
    The majority of rural hospitals are government owned or non profit. 
They also are more dependent on Medicare than are urban providers.
    Of the total 38.1 million Medicare beneficiaries in 1997, over 9.7 
million (25.7 percent) resided in non-metropolitan counties. Medicare 
paid 35 billion in reimbursements for rural beneficiaries in 1995 (22 
percent of the total).
    It is also true that a higher proportion of the non-metropolitan 
population is enrolled in Medicaid, 15.9 percent compared to 12.5 
percent in 1996. Many of our states have low reimbursement rates for 
Medicaid, often more than 15 percent lower than Medicare. This puts an 
even greater strain on rural hospitals.
    As a result, we all know that rural hospitals have been 
disproportionately affected by the cuts included in the Balanced Budget 
Act of 1997 (BBA).
    In 1998 rural hospital inpatient margins dropped by more than 4 
percentage points to 5.2 percent. This contrasts with urban hospitals 
whose inpatient margins which fell 2.3 percent to 15.8 percent. The 
Illinois Hospitals and Health Systems estimates that Illinois rural 
hospitals will lose over $271 million between fiscal year 1998 and 
fiscal year 2002 due to the BBA.
    Last year, I introduced the health care preservation act of 1999 
which included important provisions to protect rural hospitals.
    The bill provided stop-loss protections to prevent rural hospitals 
from losing money in the Medicare outpatient payment system.
    It allowed increased flexibility for the creation of critical 
access hospitals.
    It establishes a prospective payment system specifically for rural 
health centers and it creates a new fee schedule for ambulance services 
in rural areas.
    Many of these provisions have since been enacted, but clearly more 
needs to be done.
    I will soon be introducing a new bad debt relief act that provides 
assistance to hospitals when they treat the near poor.
    I look forward to working with both hospitals, seniors groups and 
disability organizations to make sure that the Medicare payment system 
preserves seniors and the disabled's access to quality health care for 
all, including those who live in rural America today.
                                 ______
                                 
             Prepared Statement of Senator Dianne Feinstein
    Thank you Senator Cochran for holding this hearing today on the 
crisis in health care in rural America. Rural hospitals play a key role 
in their communities. They are often the sole provider of health care 
because these communities, unlike their urban counterparts, do not have 
large networks of clinics, physician groups, skilled nursing care 
facilities or other providers of care. They often provide the full 
range of services.
    In California, rural hospitals provide primary and acute services 
to 2.6 million people. The average size of a rural hospital in 
California is 37 acute-care beds. A June 2000 report by the California 
Healthcare Association found the following:

    ``The financial status of rural hospitals in California does not 
look encouraging. Last year, these hospitals averaged a 2.2 percent 
patient operating margin. . . . Seventy-four percent of the rural 
hospitals lost money on operations in 1999. . . . Over the last three 
years, approximately 20 percent of the rural hospitals have either 
closed or entered into bankruptcy . . . three rural hospitals are in 
the planning stages of filing for bankruptcy and two hospitals have 
recently come out of bankruptcy.''

    Mr. Chairman, this conclusion is not just disturbing. It is 
alarming.
    And it is doubly alarming because it is a symptom of a sick system 
in my State as a whole. Let me share with you some headlines from 
newspapers around my state:
    ``Walnut Creek Hospital Closing at End of Month''
    ``Scripps Plans to Shut Down Its Hospital in El Cajon''
    ``Hospitals Closing Its Doors''
    ``ER Crisis Threatens California''
    ``Giant Medical Group Is Back in Crisis Mode''
    ``UCSF Predicts Big Drop in Medical Center's Losses''
    ``State's Blood Banks Find Medicare Cuts Run Deep''
    ``Searching for Doctors; Low Rates Deter Specialists from Treating 
California's Poor''
    Quite frankly, Mr. Chairman, the entire health care system in my 
state is coming unraveled. Resources are stretched to the limit, 
patients are not getting the services they need, and doctors are 
leaving the state. During the past year, I have met with a number of 
doctors, hospital administrators, and patients who say that 
California's health care system is on the verge of self-destruction.
    Several factors are to blame for California's faltering health care 
system:
    (1) California's uninsured population has exploded.--Over 7 million 
Californians currently do not have health insurance. That's more than 
24 percent percent of California's population, compared to a national 
uninsured rate of 18 percent. And more than 50,000 Californians join 
the ranks of the uninsured monthly, totaling more than 600,000 each 
year.
    (2) Hospitals, nursing homes, home health agencies, emergency 
departments, and physician groups are closing their doors.--Thirty-
eight California hospitals have shut down since 1996, and up to 15 
percent more may close by 2005.
    As for rural hospitals, 69 percent of California's rural hospitals 
lost money in 1998 and that conversions and consolidations among rural 
hospitals could eliminate up to 15 percent of rural hospitals by 2005.
    Approximately 167 (12 percent) of the 1,376 nursing home facilities 
have filed for bankruptcy in 1999 and 2000, according to the American 
Health Care Association.
    Over 300 home health agencies in California have closed within the 
last two years, leaving some areas of the State without access to a 
home health care provider.
    California's emergency rooms are also strained to the breaking 
point as 19 statewide have closed since 1997 despite an increase in the 
number of uninsured requiring care.
    Today, 64 percent of California hospitals are losing money.
    For rural California hospitals, because 40 percent of patients 
receive Medicare and 20 percent receive Medicaid, 69 percent lost money 
in 1998, according to the California Health Care Association.
    (3) California spends less on Medicaid beneficiaries than virtually 
all other states.--California ranks 48th nationwide in Medicaid 
spending per beneficiary and we rank last among the ten most populous 
States.
    (4) Californians are much more likely to be enrolled in a managed 
care plan and managed care payment rates are low.--Today, 53 percent of 
all insured Californians are enrolled in an HMO compared to 28 percent 
nationwide. We have the heaviest penetration of managed care in the 
nation. Over 25 million Californians are in some form of managed care. 
Doctors say that HMO premium rates in California are 40 percent lower 
than those in other states.
    (5) California's hospitals must comply with seismic safety 
requirements.--This requirement will cost California hospitals $10 
billion by 2008 and $20 billion by 2030.
    As a result of these difficult dynamics and limited resources, many 
California hospitals and other health care providers have been forced 
to limit hours of operation and discontinue services. The burden to 
provide care is put on those that have remained open, and many of these 
facilities are now facing financial problems of their own.
    I am very glad we are having this hearing because many of the 
problems of California's rural hospitals are replicated and exacerbated 
across the state.
    I believe that Congress must give priority attention to the health 
care crisis. We should revisit the cuts of the Balanced Budget Act and 
their impact on all providers. If Congress does not act this year, 
California will have an even more serious health care crisis on its 
hands.
    The bottom line is that restoring Medicare and Medicaid cuts must 
be of the highest priority. If it is not, the health of people 
throughout California and the nation will be placed in serious 
jeopardy.
    Today's hearing is a good first start. I look forward to working 
with my colleagues to make whatever changes are necessary to insure a 
strong hospital and health care system for all our citizens.

STATEMENT OF SENATOR CHARLES GRASSLEY, U.S. SENATOR 
            FROM IOWA
    Senator Cochran. Senator Grassley, we welcome you to the 
hearing. You may proceed.
    Senator Grassley. First of all, Senator Burns, thank you 
very much for offering to co-sponsor right now. Senator Cochran 
had already done that and I thank Senator Cochran for his help 
in this area of one of the pieces of legislation that I am 
going to speak about.
    First of all, Senator Cochran, thank you very much for 
holding a hearing on the financial health of our rural 
hospitals, because the word ``Development'' being in your 
subcommittee's jurisdiction, ``Rural Development'' 
specifically, obviously could--the health delivery system in 
rural America, it is very important for that rural development.
    Many rural areas are struggling economically and have a 
hard time retaining population. It is difficult to attract 
major employers when you have no hospital because a hospital is 
the basis for other health care facilities. So this is not just 
about preserving hospitals, it is about preserving rural 
America as a viable place to live.
    The Iowa Hospital Association has reported to me that over 
60 percent of our State's rural hospitals lost money on patient 
care last year. I am sure that the numbers that have been given 
by both of you imply that it is similar or even worse in your 
States. So it is not an isolated problem, but a widespread one.
    With negative operating margins, how many of those 
hospitals are going to hold on? We had one close already this 
year in my State. In many cases, they are county hospitals, 
requiring ever-increasing local tax subsidy. But raising taxes, 
of course, is working against economic development as well 
because it scares off potential employers. It is not a 
sustainable situation not to have a viable health system and 
expect economic development to happen.
    There are many reasons for this problem, but I would like 
to focus on one that we are in a position to do something 
about. That is inadequate Medicare payments to low-cost 
hospitals. Rural areas tend to have older populations, so rural 
hospitals rely on Medicare more than most. The sad fact is that 
Medicare has never treated rural hospitals well and the 
situation is now worse than ever before.
    We are probably all familiar with Medicare Plus Choice 
payment battles. That is Medicare people joining managed care 
plans. We fought those battles 3 years ago and we made some 
progress in those areas. But very few rural seniors are in such 
private plans.
    So the legislation we focus on today and we have introduced 
focuses on the inequity in the fee for service payments to 
rural areas. Now, on a per capita basis rural Medicare 
beneficiaries receive many fewer services than those in urban 
and suburban areas. Much of this is due to differences in 
medical practice from one part of the country to the other. We 
in rural America simply do not go to the doctor as much as 
those in places like here in Washington, D.C.
    I wish there were some sort of magic wand that we could 
wave to correct this with just one situation, one approach. But 
that is not because Medicare fee for service is an entitlement 
program. What we can do is identify the unfair aspects of the 
current payment system one by one and try to fix them. We can 
identify those things that are easy to identify other than the 
different methods of practicing medicine, which it is difficult 
to do when you are dealing with an entitlement.
    Now, one such flaw is this hospital wage index, which is 
meant to adjust payments to reflect local labor costs. But one 
of the many problems with the wage index is that it is applied 
to a larger share of rural hospital costs than it ought to be. 
My proposed fix is a bill that you both are now co-sponsoring, 
and I introduced it just before the recess and already you were 
on by that time, Senator Cochran, so thank you.
    The bill simply says that Medicare will apply the wage 
index adjustment which lowers payments to hospitals in low-cost 
rural areas--so we want to apply it to the wage index 
adjustment--only to an individual hospital's actual labor 
costs, not to the national average. It is a very simple reform, 
and who can really argue with a change that makes the system 
more accurate?
    It is an example of a proposal that came to us from the 
grassroots. We had rural hospital administrators examining 
their payments to figure out why they were so low-cost in rural 
areas compared to urban. They identified this flaw in the 
formula in Medicare.
    There are other proposals for wage index reforms that 
differ from mine and I am open to these. The main thing is that 
we get something done and get it done this year.
    Now, there are some other changes that we need to make to 
preserve rural hospitals. I would list some of these from 
Senate bills 980, 2505, and 2537. We need to update the 
Medicare dependent hospital program and make it permanent, 
because since I first was involved in that program I think we 
had to re-authorize it now three times and sometimes it lapses 
and so sometimes that money is not available for rural 
hospitals.
    This program, as you know, benefits hospitals that are over 
60 percent dependent on Medicare, but only if they met that 
level by the statistics that existed in 1988. Now, this is an 
example, Mr. Chairman, of how outdated the Medicare program is 
when these formulas are applied to something in rural America. 
Opposition in the House prevented us from fixing this last 
year, so we will have to try again.
    Now, one hospital in my State that did not make the 60 
percent limit in 1988 has 90 percent Medicare patients today. 
That is how far behind we are on this.
    We need to restore additionally to rural hospitals a full 
market basket increase in inpatient care. We need to accept 
MedPAC's recommendations and, finally, equalize the urban and 
rural standards for receiving disproportionate share funds. We 
need to change Medicare payment rules so that rural hospitals 
can begin to take advantage of telehealth technology.
    These are all examples of the hard work of addressing the 
rural flaws in the Medicare fee for service system. It is not 
easy and it is surely not glamorous. Politically, it is always 
an uphill battle to help rural America, but it has to be done.
    It now seems likely that the Finance Committee will 
consider Medicare provider payment issues again this year. Last 
year rural health care did not do as well in conference as it 
should have. As far as I am concerned, this year rural 
hospitals should be in the front of the line. I look forward to 
fighting for them, and thank you for holding this hearing and 
helping to build momentum for that fight that we all share.
    Senator Cochran. Thank you very much, Senator Grassley. I 
think your testimony is very important for us here in the 
Senate at this time. You point out the possibility of attention 
to this from the Finance Committee. That would be certainly 
welcome. We know that we have got to work hard to bring to the 
attention of those who are in key policy positions of the 
opportunities that they have to modify some of these indexes 
and formulas without Congressional action if that is possible.
    We appreciate your leadership which is very strong and 
steady, and we thank you very much for being here to lead off 
this hearing.
    Senator Grassley. Thank you.
    Senator Cochran. Senator Burns.
    Senator Burns. I have no questions. I just appreciate what 
he is doing. I watched his leadership in the Aging Committee 
and it has been exemplary.
    Senator Cochran. Thank you very much, Senator Grassley.
    Our panel of witnesses from HCFA and MedPAC, as I have 
already indicated, are here and if they will come forward we 
will hear their testimony at this time. Dr. Robert Berenson is 
Director of the Center for Health Plans and Providers of the 
Health Care Financing Administration. Dr. Mary Wakefield is 
Director of the Center for Health Policy at George Mason 
University and a member of the MedPAC, Medicare Payment 
Advisory Commission. Thomas Scully is President of the 
Federation of American Health Systems, representing for-profit 
hospital systems.
    We thank you all for attending our hearing and for being 
available to us with information and suggestions about how we 
can deal with this problem that we have identified this 
morning.
    Let us begin with Dr. Berenson. We appreciate your 
attendance. You may proceed.

STATEMENT OF ROBERT A. BERENSON, M.D., DIRECTOR, CENTER 
            FOR HEALTH PLANS AND PROVIDERS, HEALTH CARE 
            FINANCING ADMINISTRATION, DEPARTMENT OF 
            HEALTH AND HUMAN SERVICES
    Dr. Berenson. Thank you very much, Chairman Cochran and 
Senator Burns. Thank you for inviting me to be here today to 
discuss our efforts to support hospitals in America's rural 
areas. We understand that rural providers face unique 
challenges in serving the medical needs of their beneficiaries 
and helping them is a high priority for the administration.
    In fact, just recently the President recognized the 
challenges rural hospitals face when he included $1 billion in 
additional funding over 10 years specifically for rural 
hospitals in his mid-session budget review. This proposal would 
further assist rural facilities by increasing Medicare payments 
to all hospitals by $10 billion over 10 years. This money would 
be used for policies to improve the sustainability of rural 
hospitals similar to those in the bipartisan Health Care Access 
and Rural Equity Act of 2000, introduced by Senator Conrad and 
co-sponsored by you, Chairman Cochran, Senator Harkin, and 
others in the Senate and House of Representatives. We look 
forward to working with you to secure this essential funding.
    As you know, Chairman Cochran, I have personally visited 
facilities in Mississippi last, I guess, September. Prior to 
that I visited hospitals in East Texas and southern Oklahoma to 
better understand their situation. I learned firsthand of the 
importance of the hospital to the health and economic well-
being of their communities, and indeed I saw that the rural 
hospital was necessary for providing basic emergency medical 
services and basic primary care services that otherwise would 
have been lacking to those communities.
    Rural hospitals tend to be smaller, have difficulty 
attracting and keeping health care professionals, and they are 
more dependent on Medicare patients than urban hospitals. About 
one in four Medicare beneficiaries live in rural America and 
rural providers serve a critical role in areas where the next 
nearest provider may be hours away. Yet many of these rural 
providers have higher average costs than their more urban 
counterparts and face difficulty maintaining enough patients to 
break even.
    Medicare has made exceptions and special arrangements to 
address the needs of rural America and strengthen providers in 
these areas. For example, we have several special designations 
and enhanced payment systems for specific types of rural 
providers. These include critical access hospitals, sole 
community hospitals, Medicare dependent hospitals, and rural 
referral centers. These designations enable qualifying 
facilities to be paid higher rates for their Medicare services.
    The Balanced Budget Act also included several provisions to 
help rural providers. In addition to creating the critical 
access hospital program, it allowed more rural hospitals to 
obtain special disproportionate share hospital payments that 
are available to hospitals serving large numbers of low income 
patients and it authorized payments for telemedicine and it 
included payment reforms for several providers that directly 
impact rural hospitals.
    In addition, Congress and the administration worked 
together last year to enact the Balanced Budget Refinement Act, 
which further enhanced these special payments for rural 
providers, investing over $1 billion over 5 years to help rural 
providers.
    We have also taken administrative steps to help rural 
hospitals. For example, we have made it easier for rural 
hospitals whose payments are now based on lower rural area 
average wages to be reclassified and receive payments based on 
higher average wages in nearby urban areas. And importantly, we 
last year established the rural health initiative within our 
agency to increase and coordinate attention to rural issues. 
Already, that work group has been working with the Office of 
Rural Health in HRSA and has been meeting with organizations 
representing rural health interests, and I think we have an 
increased awareness of rural health issues within the Health 
Care Financing Administration.
    This initiative includes senior staff and a specially 
designated rural point person in each of our ten regional 
offices to respond to rural provider inquiries and concerns, 
and we are proceeding with demonstration projects to expand 
telemedicine in Medicare. We are all committed to ensuring 
rural beneficiaries continued access to quality care and we 
want to work with Congress to make additional adjustments that 
may be necessary to ensure that rural providers can continue to 
provide beneficiaries with access to the high quality care they 
deserve.
    I thank you for this opportunity to discuss our efforts to 
help rural providers and beneficiaries, and I would be happy to 
participate in the discussion. I guess I provided written 
testimony for the record. Thank you very much.
    Senator Cochran. Thank you, Dr. Berenson. Your written 
testimony will be included in the transcript of the hearing in 
full. Thank you.
    [The statement follows:]

                Prepared Statement of Robert A. Berenson

    Chairman Cochran, Senator Kohl, thank you for inviting me to be 
here today to discuss our efforts to support hospitals in America's 
rural areas. We understand that rural providers face unique challenges 
in serving the medical needs of their beneficiaries, and helping them 
is a high priority for us.
    Rural hospitals tend to be smaller, have difficulty attracting and 
keeping health care professionals, and they are more dependent on 
Medicare patients. About one in four Medicare beneficiaries live in 
rural America, and rural providers serve a critical role in areas where 
the next nearest provider may be hours away. Yet many of these rural 
providers have higher average costs than their more urban counterparts 
and face difficulty maintaining enough patients to break even. As you 
know, Chairman Cochran, I have visited some of these facilities in 
Mississippi and other States to better understand their situation.
    Medicare has made exceptions and special arrangements to address 
the needs of rural America and strengthen providers in these areas. The 
Balanced Budget Act included several provisions to help rural 
providers. The Balanced Budget Refinement Act provided further 
assistance, investing about $1 billion over 5 years to help rural 
providers.
    Most recently, the President recognized the challenges rural 
hospitals face when he included $1 billion in additional funding over 
10 years specifically for rural hospitals in his Midsession Review 
budget. This proposal would further assist rural facilities by 
increasing Medicare payment to all hospitals by $10 billion over 10 
years.
    In addition, we have taken administrative steps to help rural 
hospitals. And we have established a Rural Health Initiative within our 
agency to increase and coordinate attention to rural issues. This 
initiative includes senior staff and a specially designated rural point 
person in each of our 10 regional offices to respond to rural provider 
inquiries and concerns. I have attached a list of these 10 point people 
and their contact information. And we are proceeding with demonstration 
projects to expand telemedicine services in Medicare.
    We will continue to closely monitor how laws and regulations 
governing our programs affect rural beneficiaries and providers. And we 
want to work with Congress to make any additional adjustments that may 
be necessary to ensure that rural providers can continue to provide 
beneficiaries with access to the high quality care they deserve.

                 MEDICARE'S SPECIAL RURAL DESIGNATIONS
    Medicare has long recognized the special needs of rural providers, 
and includes several special designations and enhanced payment systems 
for specific types of rural providers. These include:
    Critical Access Hospitals.--These facilities have no more than 15 
inpatient beds, offer 24 hour emergency care, and are located more than 
a 35 mile drive from any other hospital. They are reimbursed based on 
what they spend for each patient, rather than on the average expected 
cost for specific diagnoses that most hospitals are paid.
    Sole Community Hospitals.--These facilities serve as the sole 
source of inpatient care in a community, either because they are 
geographically isolated, or because severe weather conditions or local 
topography prevents travel to another hospital. They can be paid higher 
rates based on their own previous costs.
    Medicare Dependent Hospitals.--These facilities have fewer than 100 
beds, do not serve as a Sole Community Hospital, and Medicare patients 
accounted for at least 60 percent of inpatient days or discharges 
during 1987. They also can be paid higher rates based on their own 
previous costs.
    Rural Referral Centers.--These facilities have 275 or more beds, 
serve beneficiaries living more than 25 miles away or referred by other 
hospitals, or have specialist as more than half of staff physicians. 
They receive higher pay to assist in caring for low income patients and 
can more easily qualify for higher payments based on nearby urban wage 
rates.
                          BALANCED BUDGET ACT
    The Balanced Budget Act of 1997 created the Critical Access 
Hospital program, and built upon other special provisions for rural 
providers. It:
  --reinstated the Medicare Dependent Hospital designation, which had 
        expired in 1994;
  --permanently grandfathered rural referral centers;
  --allowed more rural hospitals to obtain special disproportionate 
        share hospital payments that are available to hospitals serving 
        large numbers of low income patients; and
  --authorized payment for telemedicine, in which medical consultations 
        are conducted via phones and computers, for beneficiaries 
        residing in rural areas that have a shortage of health care 
        professionals.
    The BBA also included payment reforms for several providers that 
directly impact rural hospitals. For example, it modified inpatient 
hospital payment rules. It also mandated development and implementation 
of prospective payment systems for skilled nursing facilities, home 
health agencies, outpatient hospital care, and rehabilitation hospitals 
to encourage facilities to provide care that is both efficient and 
appropriate.

                     BALANCED BUDGET REFINEMENT ACT
    Working together, Congress and the Administration last year enacted 
the Balanced Budget Refinement Act (BBRA), which further enhanced these 
special payments for rural providers. It included several provisions to 
assist Critical Access Hospitals, such as:
  --applying the 96-hour length of stay limit on an average annual 
        basis;
  --permitting for-profit hospitals to qualify for Critical Access 
        Hospital designation;
  --removing constraints on length of stay in ``swing beds'' in 
        hospitals with a total of 50 to 100 beds that serve both acute 
        care and skilled nursing patients;
  --allowing hospitals that closed or downsized since 1989 to be 
        Critical Access Hospitals;
  --permitting Critical Access Hospitals to streamline their billing 
        processes by combining physician and hospital charges; and
  --eliminating beneficiary coinsurance for clinical laboratory tests 
        furnished by a Critical Access Hospital.
    For Sole Community Hospitals, the BBRA included a higher pay 
increase, fully adjusted for inflation, for fiscal year 2001. And it 
extended the Medicare Dependent Hospital program for 5 years. For other 
rural hospitals, the BBRA holds them harmless for 4 years during the 
transition to the new prospective payment system for hospital 
outpatient care, and provides separate, budget-neutral payments for 
high-cost patients and certain drugs, devices, and biologicals for all 
hospitals, which will especially help hospitals that would otherwise 
have had to spread these costs across a small case load.
    To promote physician services, the BBRA raised the cap on medical 
residents by 30 percent in rural areas. It also included incentives to 
encourage urban physician education programs to establish separate 
training programs in rural areas.
    For skilled nursing facilities that are part of many rural 
hospitals, the BBRA provided an immediate increase in payment for high-
cost patients. It created special payments to facilities that treat a 
high proportion of AIDS patients, and excluded certain expensive items 
and services from consolidated billing requirements, such as ambulance 
services for dialysis, prostheses, and chemotherapy. Importantly, the 
BBRA provided an across-the-board increase of 4 percent for fiscal year 
2001 and fiscal year 2002 for skilled nursing facilities, and gave them 
options in how their rates are calculated. It also placed a two-year 
moratorium on physical and occupational therapy caps in the BBA, which 
appeared to be presenting particular problems for patients in these 
facilities.
    For home health agencies that also are part of many rural 
hospitals, the BBRA delayed a scheduled 15 percent pay cut until after 
the first year the new home health prospective payment system is in 
place. It also provided an immediate adjustment to per beneficiary 
limits for certain agencies, gave extra pay to help cover the costs 
associated with the OASIS quality survey system, and excluded durable 
medical equipment from consolidated billing under the prospective 
payment system. Once the prospective payment system is in place, 
payments will be tailored specifically to the condition and needs of 
the patients and there will be no per visit or per beneficiary limits. 
A case-mix adjusted payment will be made for each 60-day episode of 
care, the limit on the number payment episodes will be removed, and 
agencies will receive extra pay for more costly cases.

                     PRESIDENT'S MIDSESSION BUDGET
    The President's Midsession Budget proposal includes a reserve for 
specific provisions to help rural hospitals, which total $500 million 
over five years and $1 billion over 10 years. This money would be used 
for policies to improve the sustainability of rural hospitals, similar 
to those in the bipartisan ``Health Care Access and Rural Equality Act 
of 2000 (H-CARE)'', introduced by Senator Conrad and cosponsored by 
you, Chairman Cochran, Senator Harkin, and others in the Senate and 
House of Representatives. H-CARE, for example, would:
  --provide payment increases that are fully adjusted for inflation to 
        all rural hospitals with 100 beds or less;
  --make the Medicare Dependent Hospital program permanent and make it 
        easier for hospitals to qualify by letting them use any of the 
        three most recent audited cost reporting periods rather than 
        their 1987 cost reporting period as mandated under current law;
  --pay Critical Access Hospitals for clinical diagnostic services 
        based on reasonable costs and without the beneficiary 
        copayment;
  --extend payment flexibilities for Sole Community Hospitals; and
  --provide grants for upgrading data systems.
    We also would consider improving equity for rural hospitals in the 
Medicare disproportionate share hospital (DSH) formula, which provides 
additional funding for facilities that serve large numbers of low 
income patients.
    In addition, the Midsession Budget proposal would provide 
assistance for all hospitals totaling $10 billion over 10 years, as 
well as $2 billion over 10 years for skilled nursing facilities and $3 
billion over 10 years for home health agencies. All of these provisions 
will result in increased payments to rural hospitals and other rural 
providers. Including the reserve for rural hospital policies, the 
proposal includes a reserve fund of $21 billion over 10 years for 
developing future policies.

                         ADMINISTRATIVE ACTIONS
    We have taken a number of administrative steps to further assist 
rural providers. For example, we have made it easier for rural 
hospitals, whose payments are now based on lower, rural area average 
wages, to be reclassified and receive payments based on higher average 
wages in nearby urban areas. This allows them to apply for all the 
special rural designations described above and the higher payments 
these designations confer.
    We are helping rural hospitals adjust to the new outpatient 
prospective payment system by using the same wage index for determining 
a facility's outpatient rates that is used to calculate inpatient 
rates. We are postponing for two years expansion of the BBA ``transfer 
policy,'' which limits hospital payments when patients with certain 
diagnoses are discharged early to a post-acute care setting, and 
considering whether further postponement is warranted. We also are 
working with colleagues at the General Accounting Office and Medicare 
Payment Advisory Commission to review the impact and appropriateness of 
the wage index that is used to factor local health care wages into 
Medicare payment rates and generally results in lower payments to rural 
hospitals than to their urban counterparts.
    For skilled nursing facilities, we are using our administrative 
flexibility to refine, in a budget neutral way, the manner in which we 
classify medical conditions for purposes of payment that more 
accurately reflects the full range of costs incurred on behalf of 
sicker patients. The refinements should increase payments for patients 
with complex medical conditions.
    For home health agencies, we are providing financial relief by 
extending the time frame for repaying overpayments resulting from the 
lnterim payment system from one year to three, with the first year 
interest-free. We are postponing the requirement for home health 
agencies to obtain surety bonds until October 1, 2000. And we have 
eliminated a ``sequential billing'' requirement that had been 
problematic for some agencies, including some in rural areas.

                            RURAL WORKGROUP
    In an effort to redouble our efforts to more clearly understand and 
actively address the special circumstances of rural providers and 
beneficiaries, we last year launched a new Rural Health Initiative. We 
are meeting with rural providers, visiting rural facilities, reviewing 
the impact of our regulations on rural health care providers, and 
conducting more research on rural health care issues. We are 
participating in regularly scheduled meetings with the Health Resources 
and Services Administration's Office of Rural Health Policy to make 
sure that we stay abreast of emerging rural issues. And we are working 
directly with the National Rural Health Association to evaluate rural 
access to care and the impact of recent policy changes.
    Our goal is to engage in more dialogue with rural providers and 
ensure that we are considering all possible ways of making sure rural 
beneficiaries get the care they need. We are looking at best practices 
and areas where research and demonstration projects are warranted. We 
want to hear from those who are providing services to rural 
beneficiaries about what steps we can take to ensure they get the care 
they need.
    We have put together a team for this rural initiative that includes 
senior staff in our Central and Regional Offices and dedicated 
personnel around the country. The work group is co-chaired by Linda 
Ruiz in our Seattle regional office and Tom Hoyer in our central office 
headquarters in Baltimore. Each of our ten regional offices now has a 
rural issues point person that you and your rural provider constituents 
can call directly to raise and discuss issues, ideas, and concerns. A 
list of these contacts and their respective States is attached to my 
testimony. We are confident that this initiative will ensure that 
Medicare policies are attuned to the needs of rural health providers 
and beneficiaries.

                              TELEMEDICINE
    We are proceeding with projects to evaluate Medicare coverage for 
telemedicine. We recently completed a comprehensive, $230,000 
technology assessment of telemedicine, in conjunction with the Agency 
for Healthcare Research and Quality, under contract with the Oregon 
Health Sciences University. This study involved an assessment of the 
clinical and scientific literature dealing with the cost-effectiveness 
of telemedicine, specifically looking into the areas of ``store and 
forward'' technologies, patient self-testing and monitoring, and 
potential telemedicine applications for non-surgical medical services. 
We will examine the results of this study to determine if there is a 
need to expand telemedicine beyond the current payment regulations.
    We are also testing expanded coverage for telemedicine. On February 
28, 2000, we awarded a $28 million cooperative agreement to Columbia 
University for the Informatics, Telemedicine, and Education 
Demonstration Project, as required by the BBA. This randomized, 
controlled study will explore how teleconsultations between physicians 
in New York City and rural, upstate New York affect diabetic patient 
care and program costs.

                               CONCLUSION
    We are all committed to ensuring rural beneficiaries' continued 
access to quality care, and we are all concerned about the 
disproportionate impact that policy changes can have on rural health 
care providers. The Balanced Budget Act, the Balanced Budget Refinement 
Act, and the administrative actions we have taken address these 
concerns with specific provisions targeted to assist rural providers. 
Our Rural Health Initiative and our consultation with the SBA will help 
us to take any additional steps that may be appropriate.
    We are very grateful for this opportunity to discuss our efforts to 
help rural providers and beneficiaries, and to explore further actions 
we might take to address their concerns in a prompt and fiscally 
prudent manner.

                MEDICARE REGIONAL RURAL REPRESENTATIVES
    REGION I: Boston.--Jeanette Clinkenbeard, 617-565-1257; Serving: 
Maine, New Hampshire, Vermont, Massachusetts, Connecticut, and Rhode 
Island.
    REGION II: New York.--Elizabeth Romani, 212-264-3958; Serving: New 
York, New Jersey, Puerto Rico, and the Virgin Islands.
    REGION III: Philadelphia.--Joe Hopko, 215-861-4192; Serving: 
Pennsylvania, Maryland, Delaware, West Virginia, and Virginia.
    REGION IV: Atlanta.--Catherine Cartwright, 404-562-7465; Serving: 
Kentucky, North Carolina, South Carolina, Tennessee, Mississippi, 
Alabama, Georgia, and Florida.
    REGION V: Chicago.--Gregory Chesmore, 312-353-1487; Serving: 
Minnesota, Wisconsin, Michigan, Illinois, Indiana, and Ohio.
    REGION VI: Dallas.--Becky Peal-Sconce, 214-767-6444; Serving: New 
Mexico, Oklahoma, Arkansas, Louisiana, and Texas.
    REGION VII: Kansas City.--Robert Epps, 816-426-5783; Serving: 
Nebraska, Iowa, Kansas, and Missouri.
    REGION VIII: Denver.--Penny Finnegan, 303-844-7117; Serving: 
Montana, North Dakota, South Dakota, Wyoming, Utah, and Colorado.
    REGION IX: San Francisco.--Sharon Yee, 415-744-2935; Serving: 
California, Nevada, Arizona, Hawaii, Guam, and American Samoa.
    REGION X: Seattle.--Jim Underhill, 206-615-2350; Serving: 
Washington, Oregon, Idaho, and Alaska.



    Senator Cochran. Dr. Mary Wakefield, welcome. You may 
proceed.
STATEMENT OF MARY WAKEFIELD, RN, Ph.D., PROFESSOR AND 
            DIRECTOR, CENTER FOR HEALTH POLICY RESEARCH 
            AND ETHICS, GEORGE MASON UNIVERSITY
    Dr. Wakefield. Thank you. Good morning, Chairman Cochran 
and Senator Burns. I am Mary Wakefield, the Director of the 
Center for Health Policy Research and Ethics at George Mason 
University, and I want to personally thank you for holding a 
hearing on rural health care again this year and I am pleased 
to participate in it.
    I do want to say that, while I serve as a Commissioner, I 
have the privilege of serving as a Commissioner, on the 
Medicare Payment Advisory Commission, as well as some other 
rural-oriented committees, I am not here today representing 
MedPAC's views, though I will be incorporating some of their 
data in my testimony.
    This morning I want to address two topics: first, the 
relevance of health care to rural economic development; and 
second, the financial health of rural hospitals. You know, 
there is an old expression that says if you have your health 
you have everything, and if you lose your health you lose 
everything. On a larger scale, I think that statement is really 
true. Communities that have good access to health care can 
survive and grow, but communities that lose local health care 
and good access to services lose their ability to prosper.
    Health care service is a key to economic survival. It is as 
much a cornerstone of a local economy as schools are and 
businesses are. Health care service is not only an essential 
service, it is an economic engine that generates hundreds of 
thousands of dollars in additional revenues for local areas.
    The economic statistics offered today come from a 
substantial body of national research and indicate that health 
care provides 10 to 15 percent of the jobs in many rural 
counties. When the secondary benefits of those jobs are 
included, health care accounts for 15 to 20 percent of all 
jobs. Also, when industry and business consider a new location, 
schools and health services are the most important quality of 
life factors that influence their choices about where to 
locate. In addition, a strong health care system also attracts 
retirees.
    The economic impact of individual practitioners, health 
care practitioners, is also important to consider. One Oklahoma 
study of a small community revealed that if a single physician 
were to move away or retire a total of 8.4 jobs would be lost 
within the local economy as a result of that departure.
    Unfortunately, a lot of health care spending takes place 
outside of rural communities. For example, an average rural 
county of 22,000 residents generates about $73 million annually 
in health expenditures, but only about $35 million are spent 
locally. The money that rural citizens pay out for health 
insurance premiums and Medicare taxes does not return to the 
local community in the form of payment for services at nearly 
the same rate as it flowed out of the community.
    The movement of both services and dollars out of rural 
communities impacts both rural residents and the economy of 
their communities. Some of this loss is unavoidable and is in 
fact appropriate when there is a need for highly specialized 
health care services. But a significant portion could stay in 
rural areas if the health care system were organized and 
supported to encourage local utilization.
    When considering rural economies, why should we be 
especially concerned with rural hospitals? I think because in 
rural areas they are a linchpin for the development of local 
and regional health care services. There is little service 
redundancy in rural areas, especially in small towns. In 
contrast, many metropolitan areas are flush with services: 
multiple hospitals, multiple nursing homes, home health 
agencies, and ambulance companies and the like. But in rural 
towns there are fewer providers in most service categories and 
gaping holes in some types of service.
    The rural health care system is also highly interdependent. 
A rural town's only hospital very likely has the only 
outpatient surgery unit, the only ambulance service, and the 
only home health agency. The importance of rural hospitals as 
coordinators of services for their communities can be seen in 
these statistics: In 1996, approximately two-thirds of rural 
hospitals provided home health services and one-third provided 
nursing home care. Twenty-one percent of rural hospitals in 
1996 provided both.
    While not every hamlet can afford a hospital, rural 
communities minimally need a hospital within a reasonable 
distance to anchor their local primary care, to support 
emergency services, and to stabilize the ill and injured. Rural 
hospitals have been able to keep going thanks to a patchwork of 
special fixes and protective policies enacted by Congress in 
the last decade. For example, the critical access hospital 
program was established under the BBA as a national model to 
support small rural facilities that could provide brief care or 
stabilize a patient before transferring them elsewhere. 
Critical access hospitals constitute an option that is welcomed 
by many rural communities, and as of June of this year Medicare 
has already certified 170 critical access hospitals. Another 
191 hospitals are considering making that conversion to 
critical access hospital status.
    Even with these kinds of programs, however, many rural 
hospitals remain threatened. While hundreds of rural hospitals 
closed in the first decade of prospective payment system 
implementation, eliminating in some cases excess capacity, much 
more care needs to be exercised now if we are to avoid 
significantly compromising access to rural health services.
    We are again poised to make sweeping changes to their 
financial health, though, through efforts to balance the budget 
and control Medicare costs. I think that Congress should 
carefully assess broad Medicare reform proposals for their 
impact specifically on rural health care systems and also look 
carefully at the effects of the new prospective payment systems 
on access to services for rural Medicare beneficiaries.
    The Balanced Budget Act introduced new prospective payment 
systems for outpatient care, skilled nursing facilities, home 
health, and ambulance services. These new payment systems will 
have a compound impact on rural hospitals and the rural health 
infrastructure. In fact, 72 percent of all rural hospitals will 
come under two of the new Medicare prospective payment system 
payment policies and 21 percent will be affected by at least 
three of them. The payment systems will also have a substantial 
effect because rural hospitals are more dependent on Medicare 
reimbursement than their urban hospital counterparts. In fact, 
Medicare patient expenses in 1998 accounted for an average of 
47 percent of rural hospitals' patient care expenses, compared 
to 36 percent of urban hospitals.
    Mr. Chairman, today we have some data by which to measure 
the impact of the BBA so far on categories of rural hospitals. 
Based on recently available data for 1998, the first year that 
BBA policies began to take effect, the picture is not 
particularly reassuring. There is a decline in Medicare margins 
for inpatient care and rural hospitals' revenues on average 
have decreased more than urban hospitals.
    Rural hospitals' margins in 1998 were down, with a 4.3 
percent decline in just 1 year. In 1997 the average Medicare 
inpatient margin of rural hospitals had been half as large as 
urban hospitals. One year later it was only a third of the 
urban hospital margin.
    The poor facility profile of rural hospitals under Medicare 
is also reflected in the percent with negative Medicare 
inpatient margins. The lowest Medicare inpatient margins 
reported by the Medicare Payment Advisory Commission for any 
hospital groups are for two somewhat overlapping categories, 
both in rural areas: one, very small rural hospitals with fewer 
than 50 beds; and secondly, government-owned rural hospitals. 
In 1998, for example, the very small, those with under 50 beds, 
had an inpatient margin of 2.6 percent.
    In 1998 the overall Medicare margin for rural hospitals was 
6.4 percent under their costs, down further from their 3.9 
percent loss in 1997. This downward turn in 1998 for rural 
hospitals in Medicare revenues is especially worrisome because 
it reflects just the leading edge of changes due to the BBA. 
The worst may well still be to come with the extension of 
prospective payment over more forms of services, and that is 
especially important because over the past several years rural 
hospitals have diversified their services, enabling them to 
meet a wider range of health care needs for rural communities, 
but potentially without adequate revenues from these services.
    Yet, the new prospective payment systems may be imposed 
without correcting in the process some fundamental problems in 
the Medicare formulas. I would like to focus just a couple of 
comments on these problems because I think they now represent 
an important opportunity for Congress to put rural health care 
on a more level playing field with the rest of the Nation. 
There are three areas that offer an opportunity and addressing 
those areas could go a long way toward protecting rural health 
care access.
    First there is the long-recognized bias toward urban 
hospitals in the payment that Medicare makes to hospitals 
shouldering a disproportionate share of low-income patients. 
These are known as DSH, or disproportionate share payments. 
Second, Medicare reimbursement formulas do not recognize or 
compensate small, low-volume rural hospitals for the higher per 
unit costs they incur in providing care. Third, Medicare's 
geographic wage adjustment, which is supposed to account for 
differences in urban and rural labor rates and to which Senator 
Grassley spoke, is flawed and it undercompensates many rural 
hospitals.
    First a comment about DSH payments. Under the present 
complex allocation formulas, hospitals with the same proportion 
of low-income patients can have very different payment 
adjustments. Current policy particularly favors urban areas. As 
a consequence of this inequity, more than 95 percent of all DSH 
payments go to urban hospitals. How much money are we talking 
about? In 1998, total Medicare DSH payments added up to 6 
percent of Medicare's total inpatient PPS payment, which was 
$75.6 billion. That is $4.5 billion, and urban facilities 
received through DSH about 95 percent of it.
    The Medicare Payment Advisory Commission has recommended 
redressing this situation by treating all hospitals more 
equitably. That Commission proposes that payments should be 
made according to each hospital's share of low income costs.
    The second issue that relates to the unique circumstances 
of rural health care systems is also important, and that is the 
problem of fixed overhead costs coupled with low patient 
volume. Medicare's prospective payment policy was designed to 
promote efficiency and eliminate waste. The decision to pay all 
providers the same base price for the same procedure, 
irrespective of all hospitals, size of all hospital size, was 
deliberate. This prospective payment for a procedure was based 
upon the average cost per care incurred by a presumably 
efficiently operated hospital.
    I would like to suggest to the committee that this design 
feature certainly was sensible policy for urban providers, but 
not for all rural providers, for whom major economies of scale 
are simply not achievable. Basically, the one size fits all 
approach ignores the population distinctions between rural and 
urban populations and their order of magnitude. Since many 
rural towns have few or only one provider for particular 
services, it is critical that these regions--it is critical in 
these regions to take into account the relationship between a 
provider's volume and unit costs.
    An X-ray machine and a minimum staff are required, for 
example, for a radiology lab, whether it takes 5 X-rays a day 
or 50 X-rays a day. These fixed costs in low-volume facilities 
result in high cost per unit of service, and almost all 
services have fixed costs associated with them. A good example 
of this unique problem with high fixed costs and low volume is 
rural ambulance service.
    Mr. Chairman, I believe it is time for the Congress to 
consider including low-volume adjustment for small isolated 
rural providers for the prospective payment systems. I am also 
attaching to my testimony today a paper by Dr. Graham Atkinson 
which offers a fuller discussion of policy approaches to 
accomplish this.
    The last problem I will just mention in need of a policy 
solution is, as Senator Grassley has already described, dealing 
with Medicare's geographic area wage index. Currently the 
hospital wage index used to adjust Medicare inpatient payments 
for geographic variation in labor costs generally 
undercompensates rural hospitals and potentially 
overcompensates urban hospitals. While the index should rightly 
reflect area labor costs that are beyond a hospital's control, 
it should not reflect a rich occupational mix that reflects 
from a hospital's desire to enhance its staffing.
    But in fact, the current index is calculated on averages in 
actual payrolls rather than the relative differences in wage 
scales. This rural inequity has unfairly depressed many rural 
hospitals' payments, inpatient payments, for close to 2 
decades. As far back as 1988 and at least four times since 
then, the Prospective Payment Advisory Commission expressed 
concern over the inappropriate treatment of occupational mix 
within the area wage index. So we have known and this problem 
has been recognized for a number of years.
    In addition, the crudely drawn definition of hospital labor 
market areas is also a problem, based on the metropolitan 
statistical area-non-metro statistical area dichotomy and on 
arbitrary boundaries of States. Thanks to Congressional action 
to alleviate large wage index differences near labor market 
borders, some hospitals today can apply for reclassification to 
an adjacent area. However, both HCFA and ProPAC before MedPAC 
analysts have said that this has not solved the problem.
    As we move further into the post-BBA era, it will become 
important to monitor Medicare reform's effect on the entire 
rural health care system. That is to say, the highly 
interdependent nature of rural health care providers makes it 
important to have the latest financial information on the 
combined impact of all recent and future Medicare policies, 
including the new prospective payment systems.
    Mr. Chairman, our Nation's population has shifted largely 
from rural to urban areas in just three generations. But even 
so, rural Americans today number 61 million people. 
Consequently, we need to ensure that our national policies do 
not defeat rural economies nor compromise rural beneficiaries' 
access to quality health care services. Special Medicare 
payments to rural providers should not be considered add-ons. 
Medicare payments per enrollee are already 18 percent less per 
rural beneficiary than per urban beneficiary even with the 
modest programs focusing on rural needs.
    There is a legitimate cost of sustaining health care 
services in rural areas and there is a tremendous return on 
investment when we realize the economic impact of the health 
care sector.
    Finally and fortunately, Federally supported research 
linking rural economic impact with rural hospitals and rural 
health care delivery is research that is not gathering dust on 
university shelves. Through an important new national 
initiative, for example, rural communities are now looking at 
their own economic profiles. Today there is a project under way 
in 15 States called Operation Rural Health Care Works, in which 
local data is collected to demonstrate the multiplier effect of 
locally spent health care dollars on service and employment for 
individual communities.
    That is a joint project supported by USDA's Cooperative 
Extension, the Health Resources and Services Administration, 
and the Minnesota-based Rural Policy Research Institute. This 
and other research endeavors on rural health care systems and 
their relationship to rural economies will help to illuminate 
challenges and policy opportunities for sustaining health care 
and strengthening communities for millions of rural Americans.
    Thank you for your attention, and I would be happy to try 
to answer any questions.
    [The statement follows:]
                  Prepared Statement of Mary Wakefield
    Chairman Cochran, Senator Harkin, members of the Subcommittee, I am 
Mary Wakefield, director of the Center for Health Policy, Research and 
Ethics at George Mason University. I want to thank you for holding a 
hearing on rural health care again this year and I am pleased to 
participate in it. This morning I will address two major topics in my 
testimony: First, the relevance of health care to rural economic 
development, and second, the financial health of rural hospitals.
    There is an old expression that says, ``If you have your health, 
you have everything. If you lose your health, you lose everything.'' On 
a larger scale, it is also true. Communities that have good access to 
health care can survive and grow. But communities that lose local 
health care and good access to services, lose their ability to prosper. 
Health care service is a key to economic survival. It is as much a 
cornerstone of the local economy as schools and business. Health care 
service is not only an essential service, it is an economic engine that 
generates hundreds of thousands of dollars in additional revenue for 
local areas. Every health care dollar spent locally recycles through 
that local economy one and a half times.

                       RURAL ECONOMIC DEVELOPMENT
    The economic statistics offered today come from a substantial body 
of national research developed over the last decade, much of it 
pioneered out of Oklahoma State University, and the Universities of 
Nebraska and Kentucky--and supported by the Agency for Healthcare 
Research and Quality and the USDA. Health care provides 10 to 15 
percent of the jobs in many rural counties. When the secondary benefits 
of those jobs are included, health care accounts for 15 to 20 percent 
of all jobs. Also, when industry and business consider location, 
schools and health services are the most important quality-of-life 
factors influencing their choices. In addition, a strong health care 
system also attracts retirees.
    The economic impact of individual practitioners is also important 
to consider. One Oklahoma study of a small community revealed that if a 
single physician were to move away or retire, a total of 8.4 jobs would 
be lost within the local economy as a result of that departure.
    One study of the economic impact of National Health Service Corps 
physicians on rural communities found that each generates more than 
five jobs and over $233,000 in income to the local economy. In addition 
to the fact that the Corps provides essential access to health services 
for communities in need of practitioners, this is another good reason 
to reauthorize this program.
    Unfortunately, too much health care spending takes place outside of 
rural communities. For example, an average rural county of 22,000 
residents generates $73 million annually in health expenditures, but 
only about $35 million is spent locally. The money that rural citizens 
pay out for health insurance premiums and Medicare taxes does not 
return to the local community in the form of payment for services at 
nearly the same rate it flowed out of the community.
    The movement of both services and dollars out of rural communities 
impacts both rural residents and the economy of their communities. Some 
of this loss is unavoidable where there is a need for highly 
specialized services. But a significant portion could stay in rural 
areas if the health system were organized to encourage local 
utilization. The trend in the health care industry is to move care and 
related expenditures from high-cost acute care settings back to the 
home sites of patients and providers. The lower intensity, lower cost 
of care of the sort that predominates in rural communities can be 
advantageous in an era of cost containment.
    Small communities can provide a broad array of primary, preventive, 
wellness, home health, and residential care. Larger rural communities 
of 40,000 to 50,000 can provide a wide range of fairly sophisticated 
services. But delivering affordable, cost-effective care requires 
knowing the real needs of the community.

               RURAL HOSPITALS AND RURAL HEALTH SERVICES
    When considering rural economies, why should we be especially 
concerned with rural hospitals?--Because in rural areas, they are a 
lynchpin for the development of local and regional health care 
services. There is little service redundancy in rural areas, especially 
in small towns. In contrast, metropolitan areas are flush with 
services--multiple hospitals, nursing homes, home health agencies, and 
ambulance companies, not to mention freestanding surgical centers, 
freestanding radiology centers, freestanding clinical laboratories, 
ambulatory care clinics and the like. But in rural towns, there are 
fewer providers in most service categories and gaping holes in some 
types of service, like obstetrics and kidney dialysis.
    The rural system is also highly inter-dependent. A rural town's 
only hospital very likely has the only outpatient surgery unit, the 
only radiology unit and the only clinical laboratory. Its outpatient 
clinic may be the only primary care practice in town, and it may have 
the only ambulance service and the only home health agency. The 
importance of rural hospitals as coordinators of services for their 
communities can be seen in these statistics: In 1996, approximately 
two-thirds of rural hospitals provided home health services and one-
third provided nursing home care in a nursing home facility. Twenty-one 
percent of rural hospitals in 1996 provided both.
    While not every hamlet can afford a hospital, rural communities 
minimally need a hospital within reasonable distance to anchor their 
local primary care, support emergency services, and stabilize the ill 
and the injured.
    Rural hospitals have been able to keep going, thanks to a patchwork 
of special ``fixes'' and protective policies enacted by Congress in the 
last decade. For example, some rural hospitals can apply for payment 
reclassification to a higher urban wage area rate. Some are exempted 
from the inpatient PPS by virtue of their classification as sole 
community hospitals, or status as Medicare-dependent, or their 
willingness to become limited service hospitals with a restricted 
average patient length of stay. This latter group, known as the 
Critical Access Hospital, was established under the BBA as a national 
model to support small rural facilities that could provide brief care 
or stabilize a patient before transferring them elsewhere.
    Critical Access Hospitals constitute an option that is welcomed by 
many rural communities. The cost-based Medicare reimbursement for 
inpatient and outpatient Part A services and the more flexible staffing 
requirements under Medicare are important contributions to the 
viability of facilities that are essential providers in their 
localities. As of June of this year, Medicare has already certified 170 
critical access hospitals. Another 191 hospitals are considering making 
the conversion to CAH status. This program, implemented with direct 
state-level involvement and federal grants to states for supporting 
technical assistance, will encourage the best use of rural resources 
and foster a stable service infrastructure.
    The federal Office of Rural Health Policy, which administers the 
program, also provides regional workshops and a national technical 
assistance resource center to help states and rural communities assess 
their best options. A vision of the program is to foster service 
networks that might include area physicians, health departments, and 
ambulance companies, in addition to hospitals. The development effort 
is also designed to involve the community in understanding the economic 
role of local health care.
    Even with these programs, however, many rural hospitals remain 
threatened. While hundreds of rural hospitals closed in the first 
decade of PPS implementation--eliminating some excess capacity--much 
more care needs to be exercised now if we are to avoid significantly 
compromising access to rural health care services. We are again poised 
to make sweeping changes to their financial health through our efforts 
to balance the budget and control Medicare costs. I believe the 
Congress should carefully assess the impact of broad Medicare reform 
proposals for their impact on rural health care systems, and look 
carefully at the effects of the new prospective payment systems on 
access to services for rural Medicare beneficiaries.
    While there are many good reasons to proceed with cost controls 
introduced by the Balanced Budget Act of 1997, we should realize that 
poorly drawn formulas of reimbursement through Medicare--the nation's 
largest public insurer--will have a complex and reverberating impact on 
both rural health and the rural economic picture.
    The BBA introduces four new prospective payment systems: one for 
outpatient care, another for skilled nursing--already being phased in, 
another for home health, and yet another for ambulance services. These 
new payment systems will have a compound impact on rural hospitals and 
the rural health infrastructure. Seventy-two percent of all rural 
hospitals will come under two of the new Medicare PPS payment policies 
and 21 percent will be affected by at least three of them. They will 
also have a substantial effect because rural hospitals are more 
dependent on Medicare reimbursement than urban hospitals. Medicare 
patient expenses in 1998 accounted for 47 percent of their total 
patient care expenses, compared to 36 percent of urban hospitals'.
    A year ago at this time there was great concern that the BBA, with 
its new Medicare prospective payment mandates and its reductions in 
inpatient care payments, was creating a financial crisis for rural 
hospitals and other rural providers. While there were a lot of 
assumptions at that time, there were no post-BBA data on which to base 
any corrections in our course of action.
    Nevertheless, given the severity of projections for the impact on 
rural hospital outpatient revenues using 1997 data, Congress agreed to 
a temporary hold-harmless provision for them in the Balanced Budget 
Refinement Act of 1999. This provision (through year 2003) is not 
insignificant to rural Americans: It protects rural hospitals of up to 
one hundred beds. That's 1,785 hospitals--or fully 82 percent of all 
rural hospitals.
    Mr. Chairman, today we have some data by which to measure the 
impact of the BBA so far on rural hospitals. The February Medicare cost 
reports are in and analyzed and the Medicare Payment Advisory 
Commission has issued its June Report. For the first time, this report 
not only compares rural hospitals with urban hospitals but it looks at 
rural hospitals on a number of dimensions that include five major 
subgroups: The report provides some data on very small hospitals of 
under 50 beds, those with 50-100 beds, and those hospitals operating 
under special programs--namely rural referral centers, sole community, 
and small Medicare-dependent facilities. These breakouts give policy 
makers a much more detailed picture of the condition of rural hospitals 
and make it possible to track and target--when necessary--new policies 
and programs to those groups most in need.
    What do the data tell us for 1998--the first year BBA policies 
began to have an effect on hospital revenues? The picture is not 
reassuring. There is a decline in Medicare margins for inpatient care, 
and rural hospitals' revenues on average have decreased more than urban 
hospitals'. While urban hospitals' overall average margin was 15.8 
percent in 1998--a decrease for them of 2.3 percent--rural hospitals' 
margins were down to 5.2 percent with a 4.3 percent decline in just one 
year.
    In 1997, the average Medicare inpatient margin of rural hospitals 
had been half as large as urban hospitals'--9.5 percent compared to 
18.1 percent. One year later it was only a third of the urban hospital 
margin. The poorer financial profile of rural hospitals under Medicare 
is also reflected in the percent with negative Medicare inpatient 
margins. Thirty-nine percent of all rural hospitals had negative 
inpatient margins compared with about half that proportion of urban 
hospitals at 20.6 percent.
    The lowest Medicare inpatient margins reported by MedPAC for any 
hospital groups are for two, somewhat overlapping categories: very 
small rural hospitals with fewer than 50 beds and government-owned 
rural hospitals. In 1998, the ``very smalls'' had a margin of 2.6 
percent and rural government-owned hospitals had a margin of 1.8 
percent. Within these two categories, the bottom 10 percent had 
negative margins starting as low as minus 26 percent. It's hard for any 
business to survive long with these kinds of margins.
    Another reading on the BBA's impact to date is available in the 
form of Medicare payment-to-cost ratios reported by the American 
Hospital Association's annual survey. This survey takes into account 
all expenses attributable to the patient, not just Medicare's allowable 
costs. In 1998, the overall Medicare payment for rural hospitals was 
6.4 percent less than their costs--down further from their 3.9 percent 
loss in 1997. Compare this to urban hospitals whose overall Medicare 
payments exceeded their costs by 1.9 percent in 1998.
    This downward turn in 1998 for rural hospitals and Medicare 
revenues is especially worrisome because it reflects just the leading 
edge of changes due under the BBA. The worst may well be yet to come 
with the extension of prospective payment over more forms of service. 
Over the past several years, rural hospitals have diversified their 
services, enabling them to meet a wider range of health care needs for 
rural communities. But without adequate revenues from these services--
outpatient care, nursing home care, home health and ambulance services, 
it can be difficult to keep the doors open.
    Yet none of the new prospective payment systems contains any 
special payment adjustments for rural hospitals. Worse, they may be 
imposed without correcting some fundamental problems in the calculus of 
the Medicare formulas. I would like to focus on those problems because 
they now represent an important opportunity for Congress to put rural 
health care on a more level playing field with the rest of the nation.

                          POLICY OPPORTUNITIES
    There are three areas that offer an opportunity to correct Medicare 
payment inequities. These are flaws, omissions, or inequities in the 
program's payments that can be corrected at little cost to the Medicare 
fund. Addressing them could go a long way toward protecting rural 
health care access. Left unchanged, and replicated in the forthcoming 
PPS formulas, these flaws will compromise rural health services--
eliminating them in some instances, and adversely impacting rural 
economies in the process.
    First, there is the long-recognized bias toward urban hospitals in 
the payments that Medicare makes to hospitals shouldering a 
disproportionate share of low-income patients. These are known as DSH, 
or Disproportionate Share Payments. Second, Medicare reimbursement 
formulas do not recognize or compensate small, low-volume rural 
hospitals for the higher per-unit cost they incur in providing care. 
Third, Medicare's geographic wage adjustment, which is supposed to 
account for differences in urban and rural labor rates, is flawed and 
under-compensates many rural hospitals.

                 DISPROPORTIONATE SHARE (DSH) PAYMENTS
    Let me begin with the DSH payments. Under the present complex 
allocation formulas, hospitals with the same proportion of low-income 
patients can have very different payment adjustments. Current policy 
particularly favors urban areas. Almost half of urban hospitals receive 
DSH payments compared with only about a fifth of rural facilities. 
Also, urban facilities receive payments that are steeply graduated by 
hospital size.
    As a consequence of this inequity, more than 95 percent of all DSH 
payments go to urban hospitals. How much money are we talking about? In 
1998, total Medicare DSH payments added up to six percent of Medicare's 
total inpatient PPS payment, which was $75.6 billion. That's $4.5 
billion--and urban facilities received 95 percent of it.
    The Medicare Payment Advisory Commission has made a recommendation 
every year since 1998 to redress this situation by treating all 
hospitals equally. The commission proposes that payments should be made 
according to each hospital's share of low-income patient costs. What 
would this change mean for rural hospitals as a group? It would 
increase the total of Medicare's inpatient PPS payment to them by 6.5 
percent. It would decrease the total inpatient payment to urban 
hospitals by only one percent.

                    ABSENCE OF LOW-VOLUME ADJUSTMENT
    Let me now turn to the second issue that relates to the unique 
circumstances rural health care systems face: That is the problem of 
fixed overhead costs coupled with low patient-volume. Medicare's 
prospective payment policy was designed to promote efficiency and 
eliminate waste. The decision to pay all providers the same base price 
for the same procedure, irrespective of hospital size, was deliberate. 
The prospective payment for a procedure was based on the average cost 
per case incurred by a presumably efficiently operated hospital. Also, 
it was not unreasonable to assume that a uniform price would be an 
incentive for smaller providers to merge and achieve economies of scale 
that could result in lower costs and higher margins.
    I would like to suggest to the committee that this design feature 
was sensible policy for urban providers, but not, certainly, for all 
rural providers--for whom major economies of scale are simply not 
achievable. In terms of low volume and fixed overhead, there are good 
lessons government programs can learn from the private sector. For 
example, even as we attempt to draw large managed care plans into rural 
areas to serve Medicare beneficiaries, the private sector is telling us 
that the market dynamics are difficult; and given payment rates, they 
cannot afford to do business in low-volume, low-density places.
    Basically, the ``one-size fits all'' approach to Medicare payment 
policy ignores the population distinctions between rural and urban 
populations and their order of magnitude: Urban hospitals serve 
populations in the tens and hundreds of thousands. Forty percent have 
200 or more beds and 75 percent have a hundred or more beds. Rural 
hospitals serve populations numbered in the hundreds and the thousands. 
Eighty-two percent have fewer than one hundred beds.
    Since many rural towns have few or only one provider for particular 
services, it is critical in these regions to take into account the 
relationship between a provider's volume and the unit costs. An X-ray 
machine and a minimal staff are required for a radiology lab, whether 
it takes five X-rays a day or 50. These fixed costs in low volume 
facilities result in high costs per unit of service. And almost all 
services have fixed costs associated with them--costs that can't be 
eliminated through attempts to improve efficiency.
Rural Ambulance Service
    A good example of the unique problems with high fixed costs and low 
volume is rural ambulance service. The availability of ambulance 
service is one of the top priorities for developing viable health 
systems in rural communities. Medicare payment must be adequate to 
sustain such a critical service. HCFA will soon publish a proposed rule 
on the Medicare ambulance fee schedule that was developed through a 
negotiated rulemaking committee. This schedule recognizes the need to 
adjust rates to compensate for the higher costs per transport where 
population density is low, although there is a methodological obstacle 
of not having a scale of rurality for making graduated payments. The 
proposal for a 50 percent add-on to the mileage rate on the first 17 
miles is a temporary proxy for the higher cost of low-volume suppliers 
and the negotiated rule-making committee urged development of a method 
that could address low-volume payment as soon as possible. This will be 
extremely important to the new Critical Access Hospitals and the effort 
to integrate them with rural ambulance service.
    Mr. Chairman, I believe that it is time for the Congress to 
consider including a low volume adjustment for small, isolated rural 
providers for all of the prospective payment systems: the new systems 
as well as inpatient PPS. Such an adjustment would be possible to 
design using available data. Most importantly it would be inexpensive--
in the range, according to one estimate, of only $500 to $1,500 for 
every million dollars in Medicare inpatient payments. This is because 
total Medicare payments to small rural providers are a tiny proportion 
of total Medicare payments. In 1996 the Prospective Payment Advisory 
Commission estimated that rural hospitals of under 50 beds received 
only two percent of Medicare inpatient PPS operating payments and those 
of 50-99 beds received only four percent.
    I am attaching to my testimony today a paper by Dr. Graham 
Atkinson, which offers a fuller discussion of policy approaches to 
accomplish this.

                MEDICARE GEOGRAPHIC AREA WAGE ADJUSTERS
    The last problem in need of a policy solution has to do with the 
Medicare Geographic Area Wage Index. Currently, the hospital wage index 
used to adjust Medicare inpatient payments for geographic variations in 
labor costs generally under-compensates rural hospitals and 
overcompensates urban hospitals. While the index should rightly reflect 
area labor costs that are beyond a hospital's control, it should not 
reflect a rich occupational mix that results from a hospital's desire 
to enhance its staffing. But in fact, the current index is calculated 
on averages in actual payrolls rather than the relative differences in 
wage scales.
    The rural inequity in the wage index has unfairly depressed rural 
hospitals' inpatient payments for close to two decades. Now it is to be 
used in the new prospective payment systems rather than just the one 
for which it was designed. The rural underpayment built into the 
current inpatient system is about to be extended to a much larger 
proportion of Medicare payments to rural hospitals, not to mention 
freestanding rural nursing homes and home health agencies. Mr. 
Chairman, there is a new urgency to the need for Congress to address 
the rural inequity in the Medicare area wage index.
    As far back as 1988 and at least four times since then, the 
Prospective Payment Advisory Commission expressed concern over the 
inappropriate treatment of occupational mix in the wage index.
    Since then, MedPAC has recommended improving the crudely drawn 
definition of hospital labor market areas, which is based on the MSA, 
non-MSA dichotomy and on the arbitrary boundaries of states. In fact, 
rural labor markets are treated as statewide and ending at the state 
line. This ignores legitimate variations in the labor market across a 
state's rural areas, as well as the reality that labor market areas 
often include parts of two or more states. The result is that 
neighboring hospitals on opposite sides of the state boundary are often 
compensated very differently for the same procedure. For example, a 
North Dakota rural hospital across the border from a neighboring 
hospital in Minnesota will be paid eight percent less by Medicare for 
all its Medicare cases: It will get only $3,515 from Medicare for a 
simple pneumonia and pleurisy case, compared to the $3,821 paid to the 
Minnesota hospital.
    Thanks to Congressional action to alleviate large wage index 
differences near labor market borders, some hospitals today can apply 
for reclassification to an adjacent area. However, both HCFA and ProPAC 
analysts have said this has not solved the problem. ProPAC specifically 
recommended a more accurate delineation of labor market areas.
    An enormous problem now on the horizon is the fact that this flawed 
hospital inpatient wage index is inappropriate to apply to skilled 
nursing facilities and home health agencies as they move to prospective 
payment. The mix of employees and the wages paid by these providers 
differ substantially from those of hospitals. Yet HCFA is using--the 
inpatient wage index for these providers.
    By way of example, when the state of Wisconsin recently used its 
own nursing home wage data to calculate an appropriate wage index for 
rural Wisconsin, the result was a much higher index than the hospital-
based one proposed by HCFA in the May 2000 Federal Register notice. 
Rural Wisconsin's was 98 percent of Milwaukee's wage index, not 93 
percent as calculated by HCFA using the hospital index. Lest this seem 
too trivial, let me add that the state calculated it would mean a six 
or seven million-dollar difference a year in reimbursements for rural 
Wisconsin nursing homes. Mr. Chairman, the wage index is certainly not 
an easy topic to tackle, but it is a crucial one for rural areas, and I 
will leave your staff with a policy brief on the topic by Anthony 
Wellever just published in conjunction with the Rural Policy Research 
Institute.

                      MONITORING THE WHOLE SYSTEM
    As we move further into the post-BBA era, it will be important to 
monitor reform's effect on the whole rural health care system. That's 
to say, the highly inter-dependent nature of rural health care 
providers makes it important to have the latest financial information 
on the combined impact of all recent and future Medicare policies, 
including the new prospective payment systems.
    Studies which look only at how many home health agencies have 
closed, for example, will miss the point in rural areas: If a rural 
hospital operates the only home health agency, it is more likely to 
keep that service open to ensure patients have access to post-hospital 
care--even though home health may very well move from a profit center 
to a loss center for the hospital. A more valid measure of home health 
access would be to look at operating margins for hospitals with 
hospital-based home health agencies before and after the new interim 
payment system was imposed.

                       SEEING THE ECONOMIC STAKES
    Mr. Chairman, our nation's population has shifted from largely 
rural to urban in just three generations. Even so, rural Americans 
today number 61 million people--exceeding the population of France and 
many other European nations combined. Consequently, we need to ensure 
that our national policies do not defeat rural economics, or compromise 
rural beneficiaries' access to quality health care services. Special 
Medicare payments to rural providers should not be considered add-ons. 
Medicare payments per enrollee are already 18 percent less per rural 
beneficiary than per urban beneficiary--even with the modest programs 
focusing on rural needs. There is a legitimate cost of sustaining 
health care services in rural areas. And there is a tremendous return 
on investment, when we realize the economic impact of the health care 
sector.
    Fortunately, federally supported research on this subject is not 
gathering dust on university shelves. Through an important new national 
initiative, for example, rural communities are looking at their own 
economic profiles. Today there is a project underway in fifteen states 
called ``Operation Rural Health Works,'' in which local data is 
collected to demonstrate the multiplier effect of locally spent health 
care dollars on services and employment for individual communities. 
It's a joint project supported by USDA's Cooperative Extension, the 
Health Resources and Services Administration, and the Minnesota-based 
Rural Policy Research Institute. This and other research endeavors on 
rural health care systems and their relationship to rural economies 
will help to illuminate challenges and policy opportunities for 
sustaining health care and strengthening communities for millions of 
rural Americans.
    Mr. Chairman, thank you for your attention. I would be happy to 
answer any questions.

    Senator Cochran. Thank you, Dr. Wakefield, for your helpful 
analysis of the situation. It is very illuminating for our 
committee and I appreciate very much your efforts to put 
together such a helpful statement.
    Mr. Thomas Scully, President of the Federation of American 
Health Systems, welcome.

STATEMENT OF THOMAS A. SCULLY, PRESIDENT AND CHIEF 
            EXECUTIVE OFFICER, FEDERATION OF AMERICAN 
            HEALTH SYSTEMS
    Mr. Scully. Mr. Chairman, thank you.
    Senator Cochran. Thank you for being here.
    Mr. Scully. I talk almost as fast as Mary does. Two Yankees 
in a row; maybe the next Mississippi panel will balance that 
out.
    Senator Cochran. We are exhausted, or we will be, listening 
so hard.
    Mr. Scully. Well, I will try to keep it slow.
    I am the President of the Federation, which has 1,700 
member owned and managed hospitals, 28, as you know, in 
Mississippi. We actually have 12 that we manage in Montana. 
Across the country, about 400 of those 1,700 hospitals are 
rural, so we have a significant problem, obviously, with rural 
hospitals.
    I am going to shift gears a little bit from what Mary and 
Dr. Berenson talked about. I am going to take a little more of 
a budget angle. As you mentioned, I spent 4 years on the White 
House staff in OMB doing health care budgeting in the prior 
administration, so I have a little bit of background on that.
    The problem really here I think is that there is really no 
precedent for what has happened in 1997 BBA numbers-wise. When 
you look at the numbers, I think they are pretty stunning. 
There is no precedent in the Medicare program or in the history 
of the Federal budget for what has happened in the last 2 or 3 
years in the Medicare program.
    All across the board hospitals, urban and rural, have been 
hammered by the BBA, but I think it has been unquestionably 
much tougher for rurals. If you look just at this year, fiscal 
year 2000, Medicare spending this year will be $29 billion or 
12 percent less than it was supposed to be when the BBA passed 
two and a half years ago. That was after the cuts, after the 
BBA cuts, $29 billion less.
    The original $103 billion savings target of the BBA is now 
conservatively estimated to have saved about $250 billion. So 
while it is wonderful for the surplus and wonderful for the 
deficit, it has had a huge impact on the Medicare program. The 
rural share just this year of those cuts is $7 billion, so 
rural health care spending on Medicare is $7 billion less than 
it was supposed to be when the bill was passed two and a half 
years ago.
    I would respectfully suggest that if your 302(b) 
allocations on the committee were cut by $7 billion this year, 
there would be a big problem in the Appropriations Committee 
and a big problem in the Senate. But because this happened in 
an extremely complex entitlement program, Medicare, even though 
that money is flowing to the same communities, most people do 
not really have a grip for what has happened policywise and 
there has been far less attention on it.
    Medicare spending in total, which a lot of people do not 
realize, actually fell last year by 1 percent, negative 1 
percent real growth, and Part A spending in the trust fund, 
which is mainly hospitals and also nursing homes, fell by 4.4 
percent. That has never happened in the history of Medicare.
    Medicare hospital spending--and I have an attached chart, 
attachment D in my testimony--Medicare hospital spending in 
1999 was 2 percent less, $3 billion lower almost, in 1999 than 
it was in 1996. So if you look back 3 years later, with 1 
percent a year beneficiary growth and roughly 2.5 to 3 percent 
a year inflation, in 1999 absolute Medicare hospital spending 
was a couple billion dollars less than it was in 1996. There is 
nothing in the history of any Federal entitlement program that 
I am aware of that is remotely like that, and certainly not in 
the Medicare program.
    What is the rural impact of that? Well, one-third of rural 
hospitals are now operating in the red and, whether you look at 
the MedPAC, the Commission that Mary serves on, or HCFA's data, 
the Urban Institute has a rather detailed study on rural health 
care out, or the HCA-Ernst and Young study that was put out 
this spring, no matter what data you put out, and I have 
attachments on each of those, I think you will find that the 
overwhelming evidence of all the recent studies is that rural 
hospitals and rural health care have been hit far harder than 
anybody else, although I think all hospitals have been hit 
hard.
    Well, why do hospitals get hit hardest in rural areas? I 
will just try to use one example, Mississippi, to give you an 
example of what has happened. There is a hospital in Bolivar, 
as I am sure you all know, Bolivar County, Mississippi, 
Cleveland, Mississippi, the home of Delta State. It has a 70-
bed hospital that has about $30 million a year in revenue. For 
many years it was a very successful hospital, had generally 
about a $500,000 surplus on $30 million of revenue. Forty-five 
percent of its patients are Medicare patients, 30 percent 
Medicaid, 15 percent, which is very low, private insurance, and 
10 percent indigent care, who just cannot pay.
    As a direct result of the BBA, that $500,000 a year surplus 
on average through the nineties was turned into a $2 million a 
year loss, and that is a county-owned hospital. What was the 
reason for that? Medicaid pays $200 a day less than costs. 
Medicaid in almost every State, including Mississippi, is 
generally the worst payer by far. Medicare is usually the 
second worst.
    Second, even though that is the only hospital in the 
county, it cannot get sole community provider payments because 
technically there is one very small psychiatric hospital also 
in the county, quite a far distance away. But due to the 
Medicare rules they cannot become a sole community provider, so 
they could not get extra payment due to that. There is 
obviously, with 15 percent private pay, no private sector to 
shift the cost to when you have extremely low Medicaid patient 
payments and extremely low Medicare patients--payments, excuse 
me.
    So they really had nowhere to go. So the county really had 
no choice, but they sold the hospital about 2 months ago, as I 
am sure you know, to Providence Health Care, one of my members 
that owns 19 rural hospitals around the country and manages 58. 
Now, what has had to happen? Providence has invested, committed 
to invest, $10 million over the next few years in that hospital 
and they have paid off the hospital's debt. But there is no 
question, and the community knows this, that they are going to 
have to cut $2 to $3 million in costs per year.
    Now, that is a small town with the hospital probably next 
to Delta State as the biggest employer, and that means 
significant cuts in staffing and significant changes in the 
hospital, in a hospital that has done a great job for many 
years for that community. So obviously they are going to be a 
terrific impact on that small community.
    When you look at it, what are the reasons? Lower Medicaid 
payments by far is the biggest reason. Low Medicaid payments, 
and in rural areas very little private sector-based to shift 
any costs to. So what is the remedy? We think a very good start 
is obviously, we call it, the Grassley-Cochran-Conrad-Baucus-
Daschle--I could throw in a few others--bill. But obviously, 
the bill that you have introduced is a very good start.
    I do not think you can solve all the problems of rural 
health care this year, but that bill provides a full market 
basket update, which I think is appropriate for all hospitals. 
If you look at the last 3 years, due to the BBA all hospitals 
had a freeze in their base payments, which are DRG's, in 1998. 
They had market basket, which is our CPI minus 1.8 percent, for 
the last 2 years. Those cuts, which are the biggest in the 
hospital program, so it saved probably close to three times 
what they are supposed to save in 1997. And I think it is hard 
for me to argue with the rural-urban that a hospital should not 
get a full inflation update in the coming years.
    The Medicare-dependent hospital program is a very helpful 
program to a lot of rural hospitals, but unfortunately you 
cannot qualify for it unless you were in the program in 1986. 
Dr. Berenson mentioned that the administration is looking at 
changing that. That would be helpful.
    Another thing in your bill is the capital loan program that 
would be very helpful to put in for small hospitals. Finally, 
and I am very happy to see the administration actually support 
it this morning, adjustments to the Medicare disproportionate 
share program, which I think probably would have the biggest 
single impact to a lot of rural hospitals, is to allow rural 
hospitals more flexible rules to get into the Medicare 
disproportionate share program.
    Now, I have a lot of big urban hospitals, too, and I would 
argue it would not be--hopefully, that would be done with new 
money, because I think it would be very dangerous. No hospital 
I know are doing particularly well. So I think opening up the 
DSH program to new providers would be a terrific idea, but 
hopefully would not be done at the expense of the hospitals 
that already provide a lot of indigent care.
    What is the process this year? The President reversed some 
of the budget suggestions early in this year. Obviously, 
hospitals were happy with that. He proposed a $21 billion BBA 
restoration package about 2 weeks ago, which we are very 
supportive of. That included a full market basket inflation. We 
think that is a great start, with a lot of the rural provisions 
from your bill in it.
    We hope--the Democratic leadership in the House and the 
Senate have supported it. We have seen very positive signs 
certainly in the House, a little bit in the Senate. And we hope 
very strongly that, with your support, there will be some kind 
of a BBA restoration package. I think when you look at the 
numbers, you find the BBA overshot its target by $29 or $30 
billion this year, and the most I know of anybody talking about 
putting back in is probably $2 billion this year. And it has 
overshot its target by $200 billion over 5 years and we are 
talking about in the President's package $21 billion. So you 
are basically talking about putting back in at the very most 10 
percent of what was inadvertently taken out.
    I think that is a pretty modest restoration package. So we 
very much appreciate your support, Mr. Chairman, and the 
support of the committee in having these hearings, and we have 
tried to work with you closely and we would love to work with 
you in the future to do whatever we can to help push forward a 
rural health package and a rural Medicare package.
    [The statement follows:]
                 Prepared Statement of Thomas A. Scully
    Mr. Chairman, My name is Tom Scully, and I am the President and CEO 
of the Federation of American Health Systems. The Federation represents 
nearly 1,700 privately owned and managed community hospitals across the 
United States. Our member hospitals are heavily concentrated in the 
Southern and Western United States. In Mississippi, we have 28 member 
hospitals, mostly in rural areas, serving a very diverse and very low-
income population. In total, we represent more than 400 rural 
hospitals, in almost every state of the Union. As I am sure you will 
hear from almost all of the witnesses today, the last few years have 
not been pleasant--or easy--for anyone involved in rural healthcare.
    Since much of my testimony is budget related, I might add that from 
1989 to 1993 I served as the Associate Director of the Office of 
Management & Budget, and as a Deputy Assistant to President Bush. Among 
other responsibilities, I was responsible for the budget and policy 
oversight of Medicare, Medicaid and other federal health programs.

                       THE PROBLEM: THE 1997 BBA
    All hospitals, urban and rural, have been hammered by the Balanced 
Budget Act of 1997 (BBA), which has had a far greater impact than 
anyone could have imagined when it passed 2\1/2\ years ago. Just this 
year, fiscal year 2000, Medicare spending will be more than $29 billion 
less than intended when the BBA passed (see Attachment ``A''). This is 
an unintended 12 percent cut in the program.The rural share of this 
unplanned plunge in program spending is about $7 billion this year (see 
Attachment ``B''). You can't pull nearly $30 billion a year out of the 
health system--and nearly $7 billion out of rural communities--and not 
see a BIG impact. It wasn't intended, but the results are impossible to 
miss (see Attachment ``C'').
    I would respectfully suggest that if the Subcommittee's 302(b) 
allocation for rural programs were cut by $7 billion this year, there 
would be chaos in the Appropriations Committee and the Senate. This is 
the magnitude of the cut in rural health spending. But it has occurred 
in a very complex entitlement program, where the impact of policy 
changes on each community can be difficult to ascertain. So, the 
legislative focus on the problem has also been somewhat blurred.
    Last November, the Balanced Budget Refinement Act (BBRA), a.k.a. 
the BBA `add back' bill, restored $1 billion in program spending for 
fiscal year 2000, and $15.8 billion over 5 years. We were, and are, 
very grateful for Congress' thoughtful bipartisan response. However, 
between November 1999 and January 2000 Medicare spending estimates fell 
by $8 billion for fiscal year 2000 alone, and by $73 billion over 5 
years, wiping out--many times over--the intended impact of the 
restoration package.
    Making matters worse, when the Congressional Budget Office's (CBO) 
``Mid-Session'' estimates are released later this month, Medicare 
spending estimates are expected to fall.an additional $45-$85 billion 
from fiscal year 2001-05. The result is an astounding, and totally 
unprecedented, reduction in projected spending of well over $100 
billion in just eight months.
    Medicare BBA savings could exceed the intended $103 billion (1998-
2002) by as much as $200 billion. Over $125 billion of this unexpected 
windfall is forever ``gone'' to deficit reduction and the surplus. Both 
Houses of Congress have considered Medicare `lock box' proposals that 
would ensure that any future unexpected savings would be reserved for 
Medicare. This would be an enormous positive step in strengthening the 
program.
    Medicare spending, in total, fell 1.0 percent last year, and Part A 
of Medicare (the Hospital Insurance Trust Fund) fell by 4.4 percent. 
For comparison, total hospital-based Medicare revenues were almost 2 
percent lower in fiscal year 1999 than they were in fiscal year 1996! 
(see Attachment ``D''). It is impossible to find any major federal 
program that has felt this type of squeeze particularly with the 
Medicare population growing at greater than 1 percent a year, and 
inflation at 2-3 percent per annum.

                            THE RURAL IMPACT
    Almost one-third of ALL hospitals will operate in the red this year 
the highest number ever. No matter where you look, whether it is 
government reports or independent studies, hospital margins are sharply 
lower. An equally clear point, in virtually every study, is that rural 
hospitals have been hit the hardest. The evidence is overwhelming:
  --The Medicare Payment Advisory Commission found that ``rural 
        hospitals have lower inpatient margins. From 1992-97 the gap 
        widened . . . and rural hospitals were also disproportionately 
        affected by the BBA''. (June 2000 Report)
  --The Health Care Financing Administration (HCFA) in its recently 
        released Hospital Prospective Payment System (PPS) Rule for 
        fiscal year 2001, stated that, ``rural hospitals continue to 
        struggle financially approximately one-third of rural hospitals 
        continue to experience negative Medicare margins.'' The rule 
        further states that ``because rural hospitals' financial 
        performance has consistently remained below that of urban 
        hospitals, we now believe that rural hospitals merit special 
        dispensation . . .''
  --The Urban Institute, in a March 2000 study, Supporting the Rural 
        Health Care Safety Net, found that ``unless rural circumstances 
        are taken explicitly into account, not only in the design of 
        programs for rural areas, but in policy changes in Medicare and 
        Medicaid, the unintended consequences for rural areas can be 
        severe. The importance of such changes can be seen most clearly 
        in the toll that the Balanced Budget Act changes have taken on 
        rural hospitals . . . For communities whose systems are 
        struggling, the result may be the collapse of the local 
        system.''
  --An HCIA/Ernst & Young study found that margins for rural hospitals 
        (<100 beds) in 2000 averaged .69 percent, while larger 
        hospitals (>100 beds) averaged 4.27 percent.(see Attachment 
        ``E''). This study also found that ``hospitals with less than 
        100 beds are hardest hit by the BBA: their margins 
        significantly decrease from positive 4.2 percent in fiscal year 
        1998 to negative 5.6 percent in fiscal year 2002, a drop of 233 
        percent.''

                WHY DO RURAL HOSPITALS GET HIT HARDEST?
    They have a higher Medicare inpatient population (about 63 percent 
on average) than the average hospital, and Medicare pays substantially 
less than private payers (about 98 percent of costs vs. 119 percent of 
costs). With a limited private insurance sector to shift costs to, 
there is nowhere for rural facilities to go.
    Rural hospitals generally have very high Medicaid populations and 
Medicaid is almost always the worst payer.
    Doctors, nurses and even ``coders,'' i.e. those who code Medicare 
payments, are extremely hard to recruit to rural areas. And while 
payments for hospitals are ``adjusted'' to reflect local wages, rural 
wages are usually extremely low. Therefore, the cost of recruiting 
medical staff, and the proportion that these costs represent of a rural 
facility's costs, are often higher.
    Finally, regulatory burdens are also more costly. The expense of 
inspections, compliance programs, and all other regulatory costs are 
roughly the same for a 60-bed hospital in the country as they are for a 
400-bed hospital in an urban setting. But, they are a far greater 
percentage of the rural facility's expenses.

                        ONE MISSISSIPPI EXAMPLE
    The experience of one Mississippi hospital is a microcosm of rural 
America. Bolivar County Hospital, a 70-bed hospital in Cleveland, 
Mississippi, had operated successfully for years in this small town, 
home to Delta State University. It had operated on approximately $30 
million a year in revenues, showing an annual profit--or surplus--of 
about $500,000. Its patient base was, and is, about 45 percent 
Medicare, 30 percent Medicaid, 15 percent private insurance and 10 
percent indigent care (i.e. `bad debt').
    As a direct result of the BBA, Bolivar County went from a $500,000 
a year profit to a $2 million per year loss. What happened?.
  --Medicaid pays $589 per day a certain loss of over $200 per day per 
        patient;
  --Even though it is the only significant hospital in the county, due 
        to arcane Medicare rules, it couldn't qualify for Sole 
        Community Provider status because there is another very small 
        (mostly psychiatric care) hospital in the county; and
  --Finally, as noted earlier, like most other rural facilities, there 
        is no private base for Bolivar County to shift the cost. 
        Therefore, the loss of Medicare and Medicaid revenues from the 
        BBA could not be made up elsewhere.
    So, the community was in a fiscal hole, with no way out and no 
warning. As a result, this May the county sold the hospital to Province 
Healthcare, a Federation member that owns 19 rural hospitals and 
manages 58 other non-profit hospitals. Province has agreed to pay off 
the hospital's debt, and invest $10 million over the next few years in 
Bolivar County Hospital. But this transition will be painful. Province 
hopes to cut $2-$3 million in expenses, partially by improving 
contracts and cutting supply costs through its larger system. Still, 
there will also be staff layoffs there was simply no other way out. The 
community understands this, but still, they won't like it--what 
community would?
    Keep in mind, Bolivar County was in a relatively healthy situation. 
And hundreds of other rural hospitals aren't on such solid footing, and 
without Congressional action, might soon be in similar straits. This is 
the reality of the BBA in rural communities. The numbers don't lie and 
absent some relief, it will only get worse.

 THE BEST REMEDY: S. 2735--THE GRASSLEY/COCHRAN/CONRAD/BAUCUS/DASCHLE 
                                  BILL
    The long-term problems of rural health care can't be solved this 
year. But the Health Care Access & Rural Equity Act of 2000 (H.R. 2735) 
is a solid start. The key components are:
  --A full market basket (MB) update, which is the hospital equivalent 
        of the Consumer Price Index (CPI). This full inflation update 
        should be done for ALL hospitals--on both inpatient and 
        outpatient payments. The inflation adjustment policy from the 
        BBA for the last three years has been: a freeze (fiscal year 
        1998); MB-1.8 (fiscal year 1999) and MB-1.8 (fiscal year 2000). 
        The cumulative impact has been devastating, and the policy has 
        already saved far, far more than was intended in 1997.
  --An update in the rules for the Medicare Dependent Hospital (MDH) 
        program, which now only includes hospitals that were eligible 
        in 1986. Basing the qualification on more recent data would 
        help hundreds of rural hospitals receive marginally higher but 
        certainly helpful--additional payments for the patients they 
        serve; and
  --The capital loan program, which would provide greatly needed 
        assistance in raising capital for rural hospitals. Few of my 
        members would utilize this program, but it could be very 
        helpful to many struggling rural facilities.
    Finally, we would suggest adding a policy, not included in the 
bill:
  --Adjusting the Medicare Disproportionate Share Hospital (DSH) 
        eligibility to allow for greater equity between rural and urban 
        hospitals. This would aid hospitals that care for very poor 
        seniors. However, any change must NOT be made at the expense of 
        urban hospitals that are already in the program. Still, many 
        rural hospitals serve huge numbers of poor seniors (as in 
        Mississippi), but they receive little or no DSH payments 
        because the qualifications are so much higher for rural 
        hospitals (generally 45 percent of indigent patients vs. 15 
        percent in urban areas). This policy alone would have an 
        enormous impact in poor rural areas.

                      THE PROCESS FOR RURAL RELIEF
    In addition to S. 2735, another much needed addition would be a 
fuller BBA restoration package. The President recently offered such a 
proposal, totaling more than $21 billion in relief over the next five 
years. The package included a full inflation adjustment for inpatient 
payments for fiscal year 2001, and implied that it would also include 
the Grassley/Cochran/Conrad/Baucus/Daschle bill. But, it only specified 
$10 billion of the $21 billion in new spending, leaving much to 
``future discussions with the Congress''. The Federation believes that 
this is a good start to what we hope will be a serious, bipartisan and 
bi-cameral BBA restoration discussion.
    The Democratic Leadership of the House and Senate has endorsed the 
President's package, and the House Republican Leadership has indicated 
that they also intend to address BBA relief over the next few months. 
We certainly hope that this hearing will encourage Senators, on a 
bipartisan basis, to place BBA restoration on the ``must do'' list for 
the Senate before Congress adjourns. The nation's 39 million seniors, 
who depend on America's hospitals to meet their daily healthcare needs, 
desperately need this attention.
    Mr. Chairman, thank you again for inviting the Federation to 
testify. I look forward to answering any questions that you may have 
for me.

    Senator Cochran. Tom Scully, we thank you for your insight 
and your helpful observations about what we can do and what the 
administration can do to help alleviate this very serious 
problem. I am fascinated by the prospects that we are arriving 
at a consensus for some change legislatively and I hope 
administratively as well. I hope this hearing will help serve 
the purpose to generate some more interest and enthusiasm for 
moving quickly to deal with these problems.
    In connection with the suggestions, Dr. Berenson made a 
couple of observations of things that could be helpful. I would 
hope that we would see some specific administrative changes and 
not just suggestions for Congressional action. Is there a list 
or do you have some items that you could tell us that the 
administration is expected to do on its own, that does not 
require Congressional action, that would help alleviate some of 
the problems that are confronting rural hospitals?
    Dr. Berenson. Most of the benefits really come out of 
legislation. We have on our own, however, for example, in the 
implementation of the outpatient hospital regulation provided 
clarity that critical access hospitals do not have to meet the 
requirements of the new, more complicated line item billing 
procedures or reporting. We actually had worked with the 
Congress last year to make sure that as we implement outpatient 
that rural hospitals are protected for over 3 years in terms of 
the financial hit that would happen to them.
    We have in a number of instances tried to make it easier 
for rural hospitals to reclassify into urban areas for purposes 
of getting the urban wage index and work through something 
called the Goldsmith modification that permits a rural-like 
area within a large urban county to be able to also get 
additional wage index payments.
    So we have in a number of instances within our discretion 
tried to accommodate some of the immediate needs of rural 
hospitals, but many of the fixes I think really do require 
statutory change.
    Senator Cochran. One of the suggestions that we have heard 
from some hospitals is that it would be helpful to receive full 
and timely payments under Medicare. Is this something that the 
administration plans to implement, this so-called OPPS payment 
contingency plan?
    Dr. Berenson. Yes. That refers to the current transition 
that we are now making to the outpatient payment system, which 
will for all hospitals require significant changes. We have 
actually postponed the effective day for implementation of the 
outpatient prospective payment system from July 1 to August 1 
because we understood that neither HCFA systems were fully 
ready and that we needed to give hospitals somewhat more time 
to become ready.
    As part of that, we have committed to payments. If in fact 
we are not able to get the system up on time and be able to 
process claims on time, we will be making payments for this 
adjustment period and have committed to doing that.
    Senator Cochran. One suggestion included in Senator 
Grassley's testimony dealt with the wage index, and also Dr. 
Wakefield mentioned that it assumes that rural areas pay less 
for health care professionals and other expenses in doing 
business. Does HCFA plan to re-evaluate the wage index policy 
for reimbursement purposes?
    Dr. Berenson. Well, we on an ongoing basis may determine--
the Office of the Actuary actually determines--what the 
percentage that is attributable to the wage index. The 
suggestion of having it be based on the hospital's own cost 
report gives us some concern about operational issues. This 
would certainly complicate the calculation for over 6,000 
hospitals, their ability to project what their payment would be 
to be dependent on what could be for small hospitals year to 
year fluctuations.
    At the same time, if in fact--we are prepared to look at 
whether there is a systematically different percentage of wage 
index that applies to rural hospitals as opposed to urban 
hospitals and if that can be demonstrated perhaps could work 
with the Congress to develop a system that does not create sort 
of operational problems, but has a different percentage that 
would apply to rural hospitals. We will be happy to work with 
the committee to try to understand that.
    Senator Cochran. Dr. Wakefield, you mentioned also this 
wage index problem and I wonder if it is your view that this 
should be something that is undertaken through legislative 
action by Congress working with the administration to develop a 
plan that we could agree on and then put it in place that way. 
Is that your suggestion?
    Dr. Wakefield. It would be. It is in fact, and I think 
Senator Grassley and his colleagues are to be commended for 
starting to tackle this really complicated formula that by all 
accounts disadvantages rural hospitals.
    There are some additional areas that one might look at from 
the Congress beyond the focus of his bill, and he himself 
mentioned that his bill addresses one facet of the area wage 
index problem, but that there are others. For example, 
currently there is a 4-year gap between the time when data are 
collected on which that wage index is calculated and the year 
to which that wage index is applied. So for example, the wage 
index for fiscal year 2000 is based on data that were collected 
in fiscal year 1996. So that would be one additional area to 
look at.
    Second, defining labor market areas, a big problem. All 
rural areas within a State now are assigned to the same labor 
market for calculating the rural area wage index. These labor 
market definitions really do not adequately reflect the 
variation in relative labor costs among hospitals. You can have 
two hospitals across a State border and they may be in the same 
labor market, but they are assigned to different indexes. And 
you can have a single State-wide labor market that may be too 
large in many States to recognize differences in the amounts 
that are paid for labor.
    So that is another area. Effective occupational mix is a 
third. Also, I would say to be really mindful that, with the 
introduction of prospective payment systems now for other 
services--home health, skilled nursing facilities, et cetera--
the wage index that is applied to those services is also going 
to impact rural hospitals to the extent that rural hospitals 
provide not only inpatient care, but also home health, skilled 
care, et cetera.
    Senator Cochran. What would you view as the most pressing 
inequity between rural and urban hospital reimbursement that 
should be addressed by this Congress, if you had to pick the 
highest priority?
    Dr. Wakefield. Boy, pressing is tough, because they are all 
such high priorities. But one that I think could be done with 
relative ease and, frankly, with your good staff I bet they 
could put the formula together pretty quickly, that would be a 
change in DSH. We have already got some parameters for how that 
should change, and not even going as far as MedPAC has 
proposed, but just applying more broadly to rural hospitals DSH 
formula as it currently exists would be a relatively easy fix. 
That could be put together with the help of some analysts, some 
of the Federal Office of Rural Health Policy staff, I think 
very quickly.
    Senator Cochran. This is the disproportionate share 
payment?
    Dr. Wakefield. Yes, thank you. Sorry for using the acronym.
    Senator Cochran. That is all right. There might be somebody 
here who does not know what that meant.
    But the current policy favors the urban areas, is what you 
said in your testimony?
    Dr. Wakefield. Absolutely, in a very significant way. And 
that could be fixed with relative ease.
    Senator Cochran. Well, by fixing it are we going to hurt 
the urban hospitals? We do not want to do that.
    Dr. Wakefield. Well, you are going to have to do what Tom 
asked for, actually. That is to take it out----
    Senator Cochran. Say that again yourself, then, Tom?
    Mr. Scully. Well, I said that it is about a $4.5 to $5 
billion pot, and a lot of it by definition you are going to 
have to treat a lot of low-income people to get into the 
program. Now, I think it is very unfair to rural hospitals. For 
example, if you had a small rural hospital in Mississippi with 
say 90 beds, you would have to have 45 percent of your patient 
population be either Medicaid, which is low income, or SSI, to 
be eligible as a general rule, whereas in an urban area it 
would be 15 percent.
    So if you are in Clarksdale or Bolivar or someplace like 
that, it is very difficult to qualify. Now, it is relatively 
cheap to just expand the program for rurals because there are 
not that many and the costs are relatively low to expand the 
DSH program. But my own personal view is that if you did it at 
the expense of large urban hospitals that are, in fact, taking 
care of a lot of poor people in urban areas, that would be a 
mistake, and I also think it would be--you know, they are 
highly dependent on it and they are not doing particularly 
well, either.
    Just to switch back to wage index, to be honest, you have a 
similar problem there. The wage index also, I believe, is 
largely--and these sound technical, but it is $4.5 billion for 
DSH, the wage index, is the single biggest factor in $90 
billion worth of payments a year. It is the single biggest 
factor for every hospital in the country.
    When you look at the wage index, it used to be far more 
unfair until 2 years ago, when the AHA convened a group of 
State hospital association people and myself and we spent 5 
months helping HCFA hammer out a new wage index. It used to be 
more heavily weighted toward the Northeast and big cities and 
it is now a little bit better. But the idea that I think you 
can get a wage index adjustment that hurts the hospitals that 
are already hurting in big cities to shift a finite pot, I 
think you have the same problem with the wage index. If you are 
going to fix it for rural areas, there probably has to be an 
addition of new money and not taking it out of Philadelphia and 
Cleveland and New York, because I think that is difficult to 
do.
    The good news is when you are trying to fix rural problems 
they are significantly less expensive to fix as a budget matter 
than they are when you are trying to fix urban problems.
    Senator Cochran. I know, for example, in our State the 
University of Mississippi Medical Center has a high percentage 
of indigent care and that would be a shame if we ended up 
taking money away from that center, for example.
    Mr. Scully. Yes, clearly I am sure you would not want to do 
that.
    Senator Cochran. Let me ask you one other thing, and that 
is you mentioned this sole provider benefit, that if you were 
the only hospital in a county like Bolivar, can you get a 
waiver in case of a situation like that? Where there is a 
hospital but it is a specialty hospital and may not have been 
contemplated that it would be the kind of hospital that was 
intended in the legislation? Can the administration grant a 
waiver?
    Mr. Scully. They can, but it is tough and it is on a case 
by case basis. I think that is someplace they could help. I 
mean, we have the situation in Bolivar where I think there is a 
10-bed, maybe 12-bed hospital with a few psych beds that 
happens to be in the same county, so Bolivar cannot get sole 
community provider status even though they really are the only 
acute care provider in that county.
    I have another situation in Alice, Texas, just to give you 
an example, where the only hospital in that county, someone 
opened a small, 20-bed hospital in the same county, so they 
just lost their sole community provider status, which is about 
$3 million a year to that hospital. It took it from being in 
the black to being in the red in a day.
    HCFA is flexible and in that case we are still working on 
it. But that is one place I think where HCFA can be 
significantly helpful.
    Senator Cochran. Dr. Berenson, did you write that down?
    Dr. Berenson. I did. I am looking actually at our 
eligibility criteria and we have tried to contemplate lots of 
exceptions. The definition of the sole community hospital is 
that it is located more than 35 miles from another, is located 
between 25 and 35 miles from another and it serves at least 75 
percent of inpatients in its service area or has less than 50 
beds. Then there is weather and then there is other things, and 
I cannot imagine that we cannot find a way to help that 
situation out.
    Senator Cochran. The weather is hot down there. Does that 
count?
    Dr. Berenson. There you go.
    Mr. Scully. We can get a building at Delta State named for 
that.
    Dr. Berenson. It actually says ``where the weather makes it 
inaccessible for at least 30 days in each of 2 out of 3 
years.'' I mean, we have attempted to try to be flexible with 
how we apply this, but obviously as sort of a Federal program 
we try to be consistent and have criteria that could be applied 
broadly.
    I would also like to just, if I could have the opportunity, 
just make one comment on picking up a point actually that both 
Mary and Tom made about occupational mix, but then the 
difficulty of making a change. ProPAC before MedPAC had 
identified this issue, as Mary said, of occupational mix which 
potentially is an explanation for why urban hospitals have 
higher wage index, because they have a more significant burden 
of illness, the kinds of diseases that come through, and so 
they need a higher occupational mix.
    The logic would be that by factoring out occupation in 
trying to determine wages for comparable professional staff you 
would find a differential. When HCFA and the hospital industry 
has looked at it, it has not been clear and there has been 
concern about new reporting burdens, and I think there is also 
a concern by the urban hospitals about what happens to them if, 
in fact, they found such a change.
    So it is not as if we have not looked at it in the past. 
There has really been on consensus for change in this area. 
Maybe, Tom, you have a little history as well. It would seem 
like that would have explained some of this difference, but at 
least as I understand it, not having been there at the time, it 
really did not hold up as a valid differentiator or, 
alternatively, the burden of reporting was just too much for 
what the difference that turned up.
    But having said that, we are quite interested in looking at 
wage index issues. GAO and MedPAC specifically are now looking 
at wage index issues and we are certainly willing to work with 
them. It is complicated in a context where some group of 
hospitals will be winners and others will be losers, and so it 
is a complicated area. But as Tom says, it makes up such a 
large percentage of the payment that is made that it deserves 
another look at this point.
    Senator Cochran. You mentioned, Tom, about making greater 
equity, allowing greater equity between urban and rural 
hospitals. What adjustment specifically would you suggest?
    Mr. Scully. Well, there are a number, I think. As I said, 
the wage index certainly could be further adjusted. I would 
strongly urge you to do it in a way that is not budget-neutral, 
because I think when you create losers you create even bigger 
problems in the hospital sector. But I think the biggest one is 
probably Medicare disproportionate share and the 
disproportionate share program is clearly--there are about 
seven different categories and I would not hope to torture you 
with all the details of how it works.
    But generically, it is very difficult for a rural hospital. 
To get 45 percent of your hospital population, if you have 
under 100 hospital beds, which most rural hospitals do, 45 
percent of your hospital population as either Medicaid or SSI 
is very, very tough. I think there may be two or three in 
Mississippi that meet that criteria. But it is difficult. And 
if you have over 100 beds, it becomes far easier. If you have 
over 250 beds, it becomes still far easier. And I am not sure 
that makes a lot of sense in a low income, rural State like a 
Mississippi or Arkansas. A lot of those hospitals that are 
struggling to stay open would be significantly enhanced by 
getting access to the Medicare disproportionate share pool. I 
think that by far in my opinion would have the single biggest 
impact, if you changed the DSH rules for most hospitals.
    Senator Cochran. That would have to be done by legislation?
    Mr. Scully. I believe that has to be done by legislation. 
HCFA does not have the discretion to do that.
    Senator Cochran. Well, your testimony has been very 
helpful. I appreciate the time you have all put into 
preparation for the hearing in a concise way, even though you 
did talk fast, really fast. I think we have got the gist of it 
anyway, and a lot of specifics in the record, and I appreciate 
that very much. You have been very helpful. Thank you.
    Mr. Scully. Thank you very much.
    Senator Cochran. Our other witnesses include administrators 
from hospitals in my State. I introduced Mr. Blessitt and Mr. 
Grady during my opening statement. To remind everyone, Mr. 
Jimmy Blessitt is the Administrator of South Sunflower County 
Hospital in Indianola, Mississippi, which is a 69-bed facility 
located in the Mississippi Delta area; and Mr. Phillip Grady, 
who is Chief Executive Officer of King's Daughters Hospital in 
Brookhaven, Mississippi. That is a 122-bed facility which 
serves as a regional--serves a regional health care role.
    We appreciate very much your attendance at our hearing and 
we will ask Mr. Jimmy Blessitt to proceed first.

STATEMENT OF JIMMY BLESSITT, ADMINISTRATOR, SOUTH 
            SUNFLOWER COUNTY HOSPITAL, INDIANOLA, 
            MISSISSIPPI
    Mr. Blessitt. Thank you, Senator Cochran. After listening 
to the presentations that have been given, I feel like wanting 
to change what I have to say. But I do want to thank you for 
allowing the opportunity for me to come and give testimony 
today concerning the crisis facing the small rural hospitals 
and its impact on rural development, particularly in my 
emphasis in the low-income communities.
    This crisis has been building for some time due to certain 
inequities in the Medicare and Medicaid reimbursement system 
and they are being compounded severely now by the provisions of 
the Balanced Budget Act of 1997. I know I am preaching to the 
choir, but agriculture is an important part of any civilization 
and it is necessary for it. American agriculture, its economic 
value is tremendous as far as export and the balance of trade. 
The food and fiber of American agriculture, the raw products of 
timber and mining, cannot be done in New York City and it 
cannot be done in Washington, D.C., and it cannot be done in 
San Francisco. Somebody has got to live and work in rural 
America if we are going to maintain the Nation that we have.
    While our rural population is accustomed to a lack of 
diversity in cultural and social opportunities, it does require 
certain fundamental support services through economic 
development and government support. One of these services which 
directly impacts economic development is adequate health care. 
In rural impoverished communities all across this country, the 
hospital is not only the local basic center for primary care, 
it is also usually one of the largest employers, with the most 
highly trained and highest paid employees in the community.
    When one of these hospitals closes, it is not only 
devastating to the provision of health care, it is devastating 
to the local economy. The closure of a hospital also precludes 
further economic development. Businesses will not locate in a 
community without adequate health care, physicians will not 
practice in a community without a hospital. They cannot afford 
the sophisticated lab, X-ray equipment and whatever to practice 
modern medicine in a small private clinic. If you do not have a 
local hospital, you lose your physicians, as Senator Burns was 
demonstrating the problem in Montana due to that very reason.
    One factor that I think sometimes in economic development 
terms we tend to overlook is the impact of the payment for 
medical services at the local level. As most hospital care is 
paid for by third party payers, these funds that come to a 
local community for the payment of health care should be viewed 
as new money. They are new money coming into the community.
    Even at a small facility such as South Sunflower County 
Hospital, that approximates $10 million a year of new dollars 
coming into Indianola, Mississippi. Regardless of the 
multiplier you use to evaluate the value of new dollars in a 
community, $10 million has a dramatic effect on a small 
community in rural Mississippi serving an impoverished 
population. It is a dramatic amount.
    Obviously, not all hospitals currently open should remain 
so. Some hospital closures necessitated by demographic changes 
and other factors are inevitable and appropriate. But to force 
the closure of an otherwise viable community hospital due to an 
inequitable payment system is to economically doom the 
community it serves.
    I think Mr. Jim Clayton in a letter that I think he sent a 
copy to you, Senator, he has branches of his bank in nine 
communities in Mississippi, very active in economic 
development; he summed it up best in that letter when he 
stated: ``We are doing all we can to promote the area and 
develop the economy, but without adequate health care we do not 
have a chance to survive.'' I think that is very true in a lot 
of our rural communities. If we lose our hospitals, we are 
going to lose a lot of those communities.
    I am going to talk about my hospital just a little bit, 
Senator. It is South Sunflower County Hospital. It is a 69-bed 
acute care facility with 150 employees located in the center of 
the Delta. As in many low-income communities in Mississippi, 
Medicare and Medicaid account for 76 percent of our gross 
revenue. Our charity and bad debt is 18 percent. That leaves us 
6 percent of gross revenues available from commercial insurance 
sources.
    It does not take a lot of calculating to realize that there 
is no room there. Our bad debt and charity is three times our 
commercial. So you can see the importance of Medicare and 
Medicaid in our operation.
    While we share--support the efforts for relief for all 
rural hospitals, including Senate bill 2018 and 2735, for the 
inpatient restoration as well as the measures to prevent 
further reduction in the State Medicaid disproportionate share 
program, which is Senate 2299 and 2203, especially important is 
those bills to Mississippi. The Medicare disproportionate share 
payment system is critically important to the State of 
Mississippi and other really low-income States.
    While I have not had the opportunity to read Senator 
Grassley's proposal, it sounds good and I think we appreciate 
you signing onto that and we would support anything to address 
the wage index issue. At the same time, Senator, as you know, 
our hospital is part of a coalition of 48 other small primary 
care hospitals in Mississippi which constitutes 50 percent of 
the hospitals in the State. They feel like more of the story 
needs to be told.
    There are several factors which contribute to rural 
hospitals' ability to remain viable in the face of continued 
reimbursement inequities and reductions. These include income 
of the population served. We have got to have some methodology 
of recognizing the importance of that. And also whether it is a 
primary care hospital or whether it provides specialty 
services. That changes the world as far as providing hospital 
services.
    When a hospital is small and rural, serving a low-income 
population by providing acute care, there are no resources to 
counteract the slow continuous ratcheting down of the 
reimbursement necessary for survival. Last year our 150 
employees--and this is 150 employees, is what we have--we 
admitted and cared for 2,700 inpatients, delivered 400 babies, 
performed 400 major surgical procedures and 800 minor 
procedures, carried out 45,000 lab tests, 10,000 X-rays, 1,500 
ambulance trips, and saw over 12,000 patients in the emergency 
room.
    In hospitals like ours there is no middle management 
personnel to cut, no extra nurses, no extra lab technicians. We 
are providing the basic 24-hour acute care services with the 
barest of staffs already. We are at the bare minimum.
    If you will look at those numbers I just called out and 
compare them to most rural hospitals, you will think, well, how 
can you do that? But that is true in a lot of your primary care 
hospitals in Mississippi.
    If reimbursement is reduced for emergency care, emergency 
room care, how do you lay off a half of the only nurse you have 
got working? How do you cut those costs under the new 
prospective payment system for outpatient services?
    Also, the small acute care, primary care hospitals do not 
have the ability to any patient volume. We are already serving 
the needs, the primary care needs of our communities. We do not 
have a big enough patient base to attract specialists to 
provide specialty care. So our market is as big as our market 
is going to be. We are doing all we can do.
    Two additional items I would like to stress is, number one, 
is that the closure of a primary care hospital in a rural 
setting is loss of the most economic health care available to 
that population and also to third party payers. A pneumonia 
treated at South Sunflower County Hospital is going to cost the 
payer, by Medicare's own figures, a great deal less than the 
same pneumonia treated at a medical center in Jackson. Costs 
are higher at specialty hospitals and they are distributed 
through all patients.
    To force the closure of these primary care hospitals is 
really a bad deal for Medicare. If you take all those patients 
treated in these little hospitals and put them in urban 
settings, Medicare is going to be paying more, because they 
just pay us by the disease anyway.
    The second something that I feel is grievous and does not 
get any attention, I do not think, is the way the Medicare 
methodology works, it inadvertently makes the poorest elderly 
citizens in the United States pay the highest portion of their 
out of pocket expense. Not only--this affects the hospital and 
its ability to collect these additional revenues, but it just 
really negatively impacts the very population who is already 
struggling to obtain health care. As we shall see, the effects 
of the BBA then penalizes the hospitals that are providing the 
care to the poor populations.
    I was going to skip the next part, Senator, but due to the 
testimony I want to briefly go through a little bit about how 
the payment system works. We have had a lot of testimony about 
how complicated this system is and fixes to it. On the basic 
level it is not really complicated. I can calculate it for 55 
rural hospitals in Mississippi with me and my secretary, so it 
is not that hard to figure out what is going on and how it 
hurts you.
    Basically, as far as rural Mississippi it is pretty simple. 
HCFA comes up with a dollar amount that is the nationwide 
dollar average to treat a patient in a rural setting, 
$3,888.46. They then say: Nationwide average, 71 percent of a 
hospital's cost is labor. So they multiply it by 71 percent and 
come up with a dollar figure, multiply it by your wage index, 
add the other 29 percent.
    On the surface, sounds fairly reasonable. That is then 
multiplied by the relative wage index. I do not know whether 
you have a copy of any of the information or not, but the 
trouble is how all these things are done. You ask what can HCFA 
do. Dr. Berenson said that they are continually looking at the 
relative weights of the DRG's and making those adjustments.
    I would like to point out that between 1998 and 1999, those 
2 years, which 1999 is the nearest figures we have, there was 
adjustments made to the relative weight scale. It seems to be 
perpetually taking the weight away from the primary care 
diagnosis and putting them on the specialty diagnosis. This 
cost the 55 primary care hospitals in Mississippi $48.68 per 
admission loss between 1998 and 1999. At my hospital that is 
well over $40,000, purely on HCFA's changing how much they 
calculate it takes to treat a pneumonia versus heart surgery. 
That is an ongoing thing and it is something that you do not 
recognize in the payment system. It is a hidden thing, but it 
is a very real cut to primary care hospitals.
    We have talked a lot about the wage index and relooking at 
it. I am not sure what happens with the wage index. It must be 
when they make the calculations they pull it back to budget 
neutrality or something.
    For 2000, as of October 1 this year, rural Mississippi's 
wage index fell from .7327 to .7306. In other words, by HCFA's 
calculations wages dropped in rural Mississippi; increased in 
the Jackson area, increased everywhere else, but they went down 
in rural Mississippi. Now, we know that wages in rural 
Mississippi did not take a dive this year. They went up just 
like anywhere else. But that adjustment increased the 
discrepancy between rural Mississippi and Jackson area 
hospitals. Of course, I am not saying they are paid too low, 
and they are paid well below Memphis and well below New 
Orleans.
    But in 1999 we were paid $269 less than the Jackson 
hospitals. This year it is up to $311 less than Jackson for the 
year 2000.
    There is something wrong with those calculations, Senator. 
You cannot recruit, retain employees, health care 
professionals, get them to come to communities like Indianola, 
Mississippi, these young college graduates, for less than they 
could go to Memphis or Jackson or Tupelo. We know that is not 
correct. That is just not the way it really works. There is not 
that substantial degree in differences.
    In the information you have, I pulled from HCFA's public 
use files their wage indexes of some hospitals in Jackson, 
Memphis, and rural Mississippi. You can look at those and see 
that--I will just call out one, Saint Dominic's in Jackson; by 
HCFA's own record, hourly rate is $15.71 an hour. Mine is 
$16.36 an hour. Just a few hospitals scattered across rural 
Mississippi: Hazlehurst, $16.51; Centerville, $16.75; Houston, 
Mississippi, $17.30; Meadville, $17.41; Emory, Mississippi, 
$17.89.
    But we are paid $311 less because our wages are less. It is 
not a realistic thing. The wage index does far more damage than 
its application to the wage factor, though, Senator. A big part 
when I was talking about the formula, it is 71 percent labor as 
applied to the $3,800. The 29 percent is non-labor, the cost of 
supplies and goods and services. That is the same supplies, not 
different ones. The weight of the DRG for each diagnosis pays 
for the difference in the cost of treating pneumonia versus a 
heart attack, that type thing, and the more expensive supplies 
required. Capital, the equipment to do the bigger procedures, 
is paid through a separate capital payment. So this is for the 
same supplies.
    Theoretically, this year for 2000 there is a $20 difference 
between Memphis area and rural Mississippi. However--and this 
is part of what Senator Grassley was talking about. He was 
really talking about it on the labor side. But if you look at 
the effect of the calculation on the non-labor side, the 
problem is HCFA says that, of the national average, 71 percent 
of rural Mississippi's labor cost, 71 percent of that amount is 
our rural labor cost.
    That is not true. The average of all Mississippi hospitals 
is slightly over 50 percent. In the primary care rural 
hospitals it is about 45 percent. So if you think about how the 
multiplication then works, if you take 71 percent and say, 
okay, this is your cost, then apply the wage factor to it, then 
add it back to your supply cost, what is the net difference?
    In material I have submitted, you will see that the 
difference if you used, actually used our 45 percent, which is 
what is the real labor cost in rural Mississippi, slightly over 
50 for all of Mississippi. And if it is that hard to calculate, 
we will get up a group and calculate it nationwide. It is not 
undoable.
    But that difference, when you run those together and add it 
back, costs the 55 primary care hospitals in Mississippi 
$277.42 per admission decrease in their allowance for the cost 
of their supplies. If you total those, just those three 
things--and we have not gotten to the BBA yet. This is non-BBA 
issues. With the rural hospitals in Mississippi, average case 
mix for this year being .9461 and our prospective payment rate 
being $3,100, that will give us a payment of $2,900, a little 
over $2,900. Those three items I just called out to you add up 
to $637. That is 21 percent of our payments. Those cuts are 21 
percent of the payments that a rural primary care hospital in 
Mississippi would receive.
    Those reasons, coupled with the DSH problems, is why the 
rural, the really rural primary care hospitals serving these 
really poor populations, are not going to survive. Many of them 
are going to close. As you are aware, we have identified about 
396 of these across the country that serve a really poor 
population that have these effects and that are true primary 
care hospitals that offer no specialty care.
    That is a factor that is tremendously important and is not 
recognized. When you start providing specialty care and get the 
higher paying DRG's, it is a different world than when you only 
provide primary care.
    As far as the BBA, of course, we need the inpatient update, 
but I think an item in Mississippi, in rural Mississippi, the 
beneficiary has to pay 26.6 percent of the cost of their 
hospital care out of pocket. These are the poorest Medicare 
beneficiaries in the United States. They are having to pay the 
highest proportion of their hospital care out of their pocket. 
That average in New York is 8 percent. A Medicare beneficiary 
in rural Mississippi pays 26 percent of the cost of the care; 
one in New York pays 8. Of course, it varies on the type of 
hospital you are attending. Iowa is about 15 percent, which is 
about like Saint Dominic's in Jackson.
    But the BBA is disallowing 50 percent or 45 percent of any 
Medicare deductibles that is uncollectible, that becomes bad 
debt. So in Mississippi, in rural Mississippi, BBA is going to 
cut 12 percent on all those patients, and we have the highest 
portion of patients that are below poverty level of any State 
in the Union. So the way the situation is working, you know, 
you have the poorest beneficiaries in the Nation have to pay 
the highest percentage of their hospital care and the lowest 
paid hospitals in America have to collect the highest percent 
of their revenues from those poorest people, and now the BBA is 
going to disallow 12 percent of our revenues because we are 
serving a poor population, is how the system, how the mechanism 
really works if you sit down and run the numbers out.
    I know I am running over and I am going to stop.
    Senator Cochran. That is all right. We have not got 
anything to do that is any more important than this.
    Mr. Blessitt. One thing I would--well, two things I would 
like to touch on, one in my notes on the outpatient PPS. I 
think the issue you were trying to raise, which is a very real 
issue: HCFA is only going to pay 85 percent. Congress directed 
HCFA to hold the smaller hospitals harmless, reimburse them 
their costs on the old basis if it was less than the PPS.
    How they are implementing that is they are saying: Okay, we 
will pay 85 percent of it until cost report settlement. So 
bottom line, if you are a rural primary care hospital, although 
Congress has said hold us harmless, HCFA is going to hold 15 
percent for 18 months. That very thing will get some small 
hospitals. There are small hospitals out here that cannot take 
a 15 percent cash flow cut in their outpatient payments for 18 
months. They will be gone before those payments are made, which 
is I think HCFA is not carrying out the intent of Congress on 
that particular issue.
    I think HCFA could take a chance and go on and pay 100 
percent. If it is a couple dollars over, they can pull it out 
of a payment register later on.
    The billing regulatory requirements are a problem, but the 
critical access hospital situation, Senator, is exactly the 
same type situation with the wage index with these other 
calculations. You know, the trouble with the wage index on your 
payment system is it works to your disadvantage if your wage 
index is below one, like Mississippi is .73, because you are 
getting reduced on 70 percent of your base amount when it is 
only really 45 percent. So you are taking this big--you are 
getting reduced on theoretically 71 percent of your costs when 
in fact it is only 45 percent.
    If your wage index gets above one, as it is in more 
affluent areas, whatever, the multiplication runs the other 
way. It is not a geometrically smooth payment system according 
to a change in the wage index. If you are average, if your wage 
index is one, which HCFA says is the average across the Nation, 
it does not make any difference. It does not make any 
difference how those calculations between the base amount and 
71 percent works. If you are below that, it geometrically hurts 
you more. If you are above one, it geometrically helps you, 
because you will get say a 10-percent increase on 71 percent of 
your cost when, in fact, it is only 60 percent of your costs.
    So those are the things in the system that hurt and 
geometrically work against you depending on where you are 
within the scale of rich to poor. The critical access to a 
great extent works the same way. If you do not have around 25 
percent commercial pay basis, you cannot--you can convert to 
critical access, but you can get ready to close your doors. You 
will go broke. Critical access works well again in a community 
that has a good commercial pace and pretty good shape anyway. 
In rural Mississippi, there is one hospital that I know of--
that is at Forest, Mississippi--that has the base, the 
commercial base, to convert and take advantage of critical 
access.
    There is a world of hospitals that would love to, Belzoni, 
Water Valley, on and on and on, that would love to be able to 
convert and be critical access and be cost-based reimbursed. 
But the way your payment runs out as a critical access hospital 
unless you have above 25 percent commercial pay, you are 
financially ruined if you try to do it. As I say, Lackey is the 
only one in the State that I know of that is seriously 
considering doing it, because it just will not work.
    Senator, I appreciate the time. I would like to conclude by 
again asking you and maybe your committee to consider the 
legislation that has been presented from the Coalition on 
Essential Service Hospitals. We really feel like that these 396 
hospitals that serve these poorest counties across the Nation 
that are truly primary care hospitals, they are the bottom of 
the barrel. Some Senators I have heard say, and Congressmen, 
they would support relief if they could identify which 
hospitals really need it. These hospitals really need it. But I 
would like to have consideration of bringing this before the 
Senate.
    We would be glad to work with you, any of the 
administrators of the 48 hospitals in Mississippi that meet 
this definition. I appreciate the opportunity to present the 
story of the small hospital. Thank you, Senator.
    [The statement follows:]

              Prepared Statement of H.J. (Jimmy) Blessitt

    Mr. Chairman, members of the Committee: I am Jimmy Blessitt, 
Administrator of South Sunflower County Hospital in Indianola, 
Mississippi. I want to thank you for the opportunity to testify before 
you today on the crisis facing small rural hospitals and its impact on 
rural development, particularly in low-income communities. This crisis 
has in fact been building for some time due to certain inequities in 
the Medicare and Medicaid reimbursement system, which are now being 
compounded by the Balanced Budget Act of 1997.
    Where to begin is problematic. We could start with World Peace 
being impossible as long as hungry populations exist, or with the 
concept that a stable and adequate food supply is one of the 
fundamental roles of Government and is key to the development of any 
nation. We could start with the tremendous production capabilities of 
American Agriculture, its economic value in export dollars and its role 
in maintaining our balance of trade. Whatever our individual ``big 
picture'' concept may be, I feel we can all agree that you cannot 
produce the food and fiber of American Agriculture, nor the raw 
materials of the mining or timber industries, in New York City, or in 
Chicago, or in Dallas, or in San Francisco; somebody must live and work 
in Rural America.
    While our rural population is accustomed to a lack of diversity in 
local cultural and social opportunities, it does require fundamental 
support services provided through economic development and Government 
support. One of these essential services, and one which also directly 
impacts economic development, is adequate health care.
    In rural, impoverished, communities all across this country, the 
local hospital is not only the center of basic primary acute care, it 
is often one of the largest employers with the most highly trained and 
highest paid employees in the community. When one of these hospitals 
closes, it is not only devastating to the provision of local health 
care, it is devastating to the local economy. The closure of a local 
hospital also precludes further economic development; business will not 
locate in a community without adequate health care; Physicians will not 
go into practice in a community without a hospital. When a hospital 
closes, physicians generally leave; a hospital not only provides a 
place for them to admit and treat patients, it provides the 
sophisticated ancillary services, such as radiology and lab, that are 
too costly to maintain in a small private clinic.
    Another factor to be considered in this crisis is the direct 
economic impact of the payment for hospital services at the local 
level. As most hospital care is paid for by third party payors outside 
the local community, these payments are in fact ``new dollars'' to the 
local economy. Even at a small facility such as South Sunflower County 
Hospital, these new dollars can approximate $10,000,000 per year. 
Regardless of the multiplier one uses to evaluate the effect of new 
dollars on a local economy, $10,000,000 has a dramatic influence in any 
small rural, perhaps impoverished, community.
    Obviously, not every hospital currently open should remain so; some 
hospital closures necessitated by demographic changes or other factors 
are inevitable and appropriate. But to force the closure of an 
otherwise viable community hospital due to an inequitable payment 
system is to economically doom the community it serves. I think Mr. 
James Clayton, President and CEO of Planters Bank and Trust, which has 
branches in nine Mississippi communities, and who is very active in 
economic development activities, summed up the situation very well in a 
recent letter regarding the rural Banking industry wherein he stated, 
``We're doing all we can to promote the area and develop the economy, 
but without adequate health rare, we don't have a chance to survive.''
    South Sunflower County Hospital is a 69-bed acute care rural 
facility, with 150 employees located in the center of the Mississippi 
Delta. As in many low-income communities, Medicare and Medicaid account 
for 76 percent of our gross inpatient revenues, charity (and bad debt) 
will account for another 18 percent, leaving us 6 percent of gross 
revenues available from commercial sources. We share problems common to 
many rural facilities and support efforts at relief for all rural 
hospitals. This includes restoration of inpatient payment reductions 
(S2018) and legislation to prevent further reductions in the state 
Medicaid disproportionate-share hospital payments (S2299/2308). The 
latter is especially critical to Mississippi hospitals. And, while I 
have not had the opportunity to read Senator Grassley's proposed 
legislation regarding the Wage Index, I fully support any effort to 
reform this area of the payment system.
    At the same time, South Sunflower County Hospital is also a member 
of a Coalition that includes 48 rural Mississippi hospitals (50 percent 
of the hospitals in Mississippi) that feel there is more to the story 
which needs to be told. Not all rural hospitals are the same, nor do 
they face the same problems. There are several factors which contribute 
to a rural hospital's ability to remain viable in the face of continued 
reimbursement inequities and reductions: the income of the population 
it serves, the size of the facility, and whether the hospital is a 
provider of Primary Care or Specialty Care (though frequently the size 
of the hospital also determines the focus of care).
    When a hospital is small and rural, serving a low-income population 
by providing basic primary acute care, there are no resources available 
to counteract the slow, continuous ratcheting down of the reimbursement 
necessary for survival. Last year our 150 employees admitted and cared 
for 2,700 inpatients, delivered 400 babies, performed over 400 major 
surgeries and 800 minor procedures, carried out 45,000 lab tests and 
10,000 x-rays, made nearly 1,500 ambulance trips, and saw over 12,000 
patients in the Emergency Room. In hospitals like ours, there are no 
middle management personnel to cut, no extra nurses or overabundant lab 
technicians to lay off, in fact they are usually providing the basic 24 
hour acute care services required by their communities with the barest 
of staffs already. If reimbursement is reduced for emergency room care, 
how do you lay off one-half of the only nurse that is working the ER at 
night? And, the primary care hospital cannot generate new revenue by 
increasing the volume of patients; they are already treating the 
primary care needs of the surrounding population.
    Lastly, two other important issues are often overlooked in 
considering the overall economic impact of closing a rural hospital: 
the first is that closure of the primary care hospital in the rural 
setting is loss of the most economic healthcare available to that 
population and to the third party payors. A pneumonia treated at South 
Sunflower County Hospital is going to cost the payor, by Medicare's own 
figures, a great deal less than the same pneumonia treated at a medical 
center in Jackson; costs are simply higher at the specialty hospitals, 
and those costs are distributed throughout all patient types.
    The second issue is that current reimbursement methodologies 
inadvertently result in the poorest of our elderly citizens paying the 
highest proportion of ``out of pocket'' expenses. Not only does this 
equate to an inability of the hospital to collect those additional 
revenues, it negatively impacts the very population who is already 
struggling to obtain health care. As we shall see, the B.B.A. 
provisions unfairly penalize the rural primary care hospitals that 
serve this population.
    The following pages present a brief overview of the current 
reimbursement methodology, and the very specific ways in which it 
inadvertently continues to ratchet down the reimbursement to small 
rural providers, even before the effects of the B.B.A. are considered. 
While this information is tedious, a knowledge of these issues is 
necessary to understand why we are on the verge of a wave of small 
rural hospital closures.

                INPATIENT PPS DIAGNOSTIC RELATED GROUPS
    The base DRG amount is what Medicare will pay nearly all Hospitals 
for the inpatient care of a patient with a specific diseases or 
conditions.
    In theory, it should take into account the complexity of an average 
case of standard medical practice, and arrive at the average cost of 
treating a group of those patients.
    While differences may seem slight when each element is looked as 
individually, they lead to tremendous changes in reimbursement to the 
individual hospitals.
    Calculation of the DRG payment is critically important. It has 2 
parts, the relative weight and hospital-specific PPS rate.
    The Relative Weight of the disease or condition is supposed to 
indicate its complexity or intensity of service, reflecting the kinds 
of supplies needed for the condition, and how difficult it is to treat. 
Relative Weights are based on an average of 1. Some Relative Weights 
are above 1, and some are below 1.
  --This Relative Weight is ____
  --Multiplied by ____
  --The Hospital-Specific PPS Rate ____
    The Hospital-Specific PPS Rate is a dollar amount calculated for 
each hospital. It has 2 parts, but each part is arrived at based on 
HCFA's estimation of the average cost to treat an inpatient in an 
``Urban'' area ($3,951.03) or in all ``Other'' areas ($3,888.46). The 
two parts are:
    The Federal Labor Amount (71 percent of HCFAs estimate of the 
average cost of treating a patient--$2,809.18 in ``Urban'' and 
$2,764.70 in ``Other'' areas) adjusted by (multiplied) a Local Wage 
Index for different groups of hospitals. Plus:
    The Federal Non-Labor Amount (HCFA's estimate of the average cost 
of treating a patient minus the Federal Labor Amount--$1,141.85 in 
``Urban'' and $1,123.76 in ``Other'' areas). This is to cover the cost 
of supplies, goods and services.
    The PPS rate is then adjusted by (multiplied) a Market Basket 
Updating Factor (This is the BBA effect on the DRG). (Any 
Disproportionate Share payment is then added to the base PPS amount)

THE EFFECT OF THE RELATIVE WEIGHT CALCULATION ON THE PRIMARY CARE RURAL 
                                HOSPITAL
    HCFA seems to be systematically reducing the relative weights of 
the DRG's commonly seen in the Primary Care Rural Hospital. The 
following are some of the most frequently treated DRG's at 55 primary 
care rural Mississippi Hospitals, showing the change in the relative 
weights from 1988 to 1999. These are reflective of the typical rural 
primary care hospital. The ``dollar loss'' is calculated from the base 
PPS rate for rural Mississippi of $3,001.36 during 1998.

----------------------------------------------------------------------------------------------------------------
                                                                  1998 Relative    1999 Relative    Dollar loss
   DRG                         Description                            weight           weight      per admission
----------------------------------------------------------------------------------------------------------------
     127 Heart failure & shock                                          1.0199           1.0131         $21.22
     089 Simple Pneumonia > l7cc                                        1.1006           1.0838          52.43
     088 C.O.P.D.                                                        .9705            .9530          54.61
     140 Angina Pectoris                                                 .5993            .5957          11.23
     296 Nutritional & Metabolic                                         .8657            .9497          49.93
     294 Diabetes age > 35                                               .7546            .7478          21.22
     320 Kidney & Urinary Inf. > 17                                      .8787            .8665          38.07
----------------------------------------------------------------------------------------------------------------

    Most of the remaining DRG's that the small primary care hospital 
treats are spread out over a wide variety of generally low paying 
medical diagnoses, with only 2 or 3 treated per year.
    The Average Case Mix Index fell from an average of .9617 in 1998 to 
.9461 for 1999 for these 55 Mississippi Hospitals. With an average DRG 
payment of $3,001.36 in 1998, this represents a cut in revenue of 
$48.68 per discharge. (It is estimated to be approximately $50.00 for 
2000)
    With this large of a sample it is statistically possible to state 
that the decreases in the Relative Weights for the DRG's treated by 
primary care hospitals is the cause of this loss in revenue.
    Remember, the Relative Weight system is based on an average of 1; 
therefore whatever was taken away from the Weights in the above DRG's 
was added to the Weights of other DRG's in the system. (HCFA makes the 
nonsensical argument that nothing really changed because the average is 
still 1)
    There are increases in some high paying DRG's (Craniotomy, Spinal 
Procedures, Extracranial Vascular Procedures, Other Nervous system 
procedures, E.N.T. and mouth Malignancy, Cardiac Valve procedures, 
Major Cardiovascular Procedures, Major Joint & Limb procedures, Hip and 
Femur procedures, Major Male Pelvic procedures, etc.).
    However, these conditions are not treated by the primary care rural 
hospital.
    This reduction in reimbursement for rural hospitals is not part of 
the BBA reductions.

THE EFFECT OF THE HOSPITAL-SPECIFIC PPS RATE CALCULATION ON THE PRIMARY 
                          CARE RURAL HOSPITAL
Part 1. The Federal Labor Amount
    The Federal Labor Amount for most of Mississippi for 1999 was 
$2,739.36. Desoto County and Tupelo were paid at the Memphis Urban rate 
of $2,809.18. For 2000 the rural rate was increased to $2,764.70 (71.1 
percent of $3,388.46).
    This Federal Labor Amount is multiplied by a Wage index figure to 
arrive at a hospital's labor portion of the DRG. The 1999 Wage Index 
figure for rural Mississippi was .7327; for the Jackson area it was 
.8310.
    As of October 1st, the 2000 rate for rural Mississippi fell to 
.7306, while the Jackson rate increased to .8387.
    The effect is rural Mississippi hospitals are paid an average of 
$311.62 per discharge less than Jackson area hospitals, ($269.13 in 
1999) and much less than the Memphis area and Tupelo hospitals based on 
their Labor Cost. This implies a determination by HCFA of a higher 
hourly wage paid in these areas. However, in looking at HCFAs hospital 
specific hourly rates (available in HCFA Public Use Files) for the 
following rural hospitals in various areas of the State, the following 
is noted:

------------------------------------------------------------------------
                                                              Average
             Hospital                        Town           hourly rate
------------------------------------------------------------------------
Gilmore Memorial..................  Amory................         $17.89
Franklin County Hospital..........  Meadville............          17.41
Trace Regional Hospital...........  Houston..............          17.30
Field Memorial....................  Centreville..........          16.75
Hardy Wilson Memorial.............  Hazlehurst...........          16.51
South Sunflower County............  Indianona............          16.36
The following Hospitals are paid
 at the higher Jackson rate:
    St. Dominic Memorial..........  Jackson..............          15.71
    Central Miss. Med. Center.....  Jackson..............          16.93
    Madison General...............  Canton...............          13.62
The following are paid at the
 higher Urban Memphis rate:
    North MS Medical..............  Tupelo...............          17.12
    Baptist Hospital Desoto.......  Southaven............          17.12
------------------------------------------------------------------------

           THE REALITY OF HOSPITAL WAGES IN RURAL MISSISSIPPI
    You can not recruit and retain hospital staff in Rural Mississippi 
for substantially less than the urban areas. Rural hospitals often have 
longer tenure staff that have earned pay increases over time. In an 
effort to survive, many rural hospitals have used Exempt Units to cover 
the cost of core staff which lowers the hospital hourly rate, but this 
is being cut also. Rural hospitals must retain a core staff and do not 
have the ability to adjust staff by patient load. Again, this reduction 
for rural Mississippi hospitals is in addition to the reductions of the 
BBA.
Part 2. The Federal Non-Labor Amount
    The 2000 Federal Non-Labor Amount for most of Mississippi is 
$1,123.76 ($3,888.46-$2,764.70). The Memphis Urban Rate is $1,141.85.
    The non-labor amount is supposed to reflect what hospitals pay for 
the same supplies, goods, and services. It does not reflect the 
different types of supplies, goods, or services required for specialty 
care; that cost is reflected in the Relative Weights of the more 
complicated DRG's. The more expensive equipment is reflected in an 
additional payment for capital cost.
    Superficially HCFA's formula implies a small rural hospital in 
Mississippi has the purchasing power to buy similar medical supplies 
for $20.00 less per patient than Baptist Memphis or Charity in New 
Orleans, after paying the additional transportation cost; this is 
nonsensical.
    The same supplies and drugs are used to treat DRG 089 (Simple 
Pneumonia) whether in Indianola, Memphis, or New Orleans.
    However, the reduction in payment to rural providers is actually 
far more than the obvious $20.00. This is due to the averaging system 
used by HCFA. In the formula they use an average of 71 percent of total 
cost as the labor cost. This would not be an accurate assumption in a 
small rural hospital serving a high poverty population. The average 
labor cost for all hospitals in the state of Mississippi is only 
slightly above 50 percent of their total cost, with the average in the 
55 small rural hospitals in the poorest counties being about 45 
percent. Using HCFA's rural average of $3,888.46, the following 
demonstrates the effect the current method compared to using the actual 
percentage of labor cost (available to HCFA on our yearly Cost Reports)

Federal Labor Amount Calculation

Calculation using Current Average:
    Average Rural Cost..................................       $3,888.46
    71.1 percent average................................   .711
                    --------------------------------------------------------
                    ____________________________________________________
      Fed. Labor Amount.................................        2,764,70
Calculation using Actual Labor percentage:
    Average Rural Cost..................................        3,888.46
    45 percent actual...................................    .45
                    --------------------------------------------------------
                    ____________________________________________________
      Fed, Labor Amount.................................        1,749.81

(The Hospital Specific PPS labor amount would decrease by $1,014)

Federal Non-Labor Amount Calculation

Calculation using Current Average:
    Average Rural Cost..................................       $3,888.46
    Less labor amount...................................       -2,764.70
                    --------------------------------------------------------
                    ____________________________________________________
      Non-labor amount..................................        1,123.76
Calculation using Actual Labor percentage:
    Average Rural Cost..................................        3,898.46
    Less labor amount...................................       -1,749.81
                    --------------------------------------------------------
                    ____________________________________________________
      Non-labor amount..................................        2,138.65

(The Hospital Specific PPS non-labor amount is increased by $1,014)

    When these figures are applied to the computation of the PPS rate 
---------------------------------------------------------------------------
of the small rural hospital in an impoverished area the effect is seen.

Hospital Specific Rate using current method:
    Fed. Labor Amount...................................       $2,764.70
    MS Rural Wage Index................................. .73306
                    --------------------------------------------------------
                    ____________________________________________________
      Adjusted Labor Cost...............................        2,019.89
    Add Non-Labor Cost..................................        1,123.76
                    --------------------------------------------------------
                    ____________________________________________________
      Total PPS Amount..................................        3,143.65
                    ========================================================
                    ____________________________________________________
Hospital Specific Rate Using actual percentages:
    Fed. Labor Amount...................................        1,749.81
    MS Rural Wage Index................................. .73306
                    --------------------------------------------------------
                    ____________________________________________________
      Adjusted Labor Cost...............................        1,282.72
    Add Non-Labor Cost..................................        2,138.65
                    --------------------------------------------------------
                    ____________________________________________________
      Total PPS Amount..................................        3,421.07

    The use of the 71 percent average labor cost by HCFA causes small 
rural hospitals in low income are to loose $277.42 per patient on the 
cost of their medical supplies. As can be seen, this loss is 
attributable to the wage index in two ways in that it affects the labor 
to total cost ratio as well as the adjusted labor cost of an individual 
hospital. This causes any change in the wage index not to geometrically 
adjust a hospitals payments in relation to the national base amounts. 
The current methodology works to the advantage of the 50 percent of the 
hospitals in affluent communities, with a wage index above 1.0000 (a 
wage index of 1.0000 is the point at which the 71 percent averages have 
no effect). They receive percentage increases on 71 percent of the base 
amount, even though their labor cost may only be 60 percent of their 
actual cost. We have a ``poor gets poorer and rich get richer'' 
situation as it relates to actual revenue to cover operating cost.
    Total effect of relative weight, wage index, and PPS calculation.--
With an Average Case Mix Index of .9461 and a Total Federal PPS rate of 
$3,143.65, small rural Mississippi hospitals will be paid an average of 
$2,974.20 per discharge in fiscal year 2000.
    When the dollar affect of the Relative Weight recalculation 
($48.68), the Wage Index discrepancy ($311.62), and the Non-Labor 
Amount of the PPS calculation ($277.42) are added together the small 
rural primary care hospital in Mississippi is facing a shortfall of 
$637.72 per discharge.
    This is over 21 percent of their average payment. (For South 
Sunflower County Hospital this represented $542,062 in 1999) In 
addition:
    MedPAC's March 2000 Report to the Congress essentially reiterated 
it's report for the last two years regarding the Medicare DSH 
adjustments. Excerpts include:

    ``In particular, current policy favors hospitals located in urban 
areas; almost half of urban hospitals receive DSH payments, compared 
with only about one-fifth of rural facilities.
    ``The Commission believes the objective of protecting Medicare 
patients' access to hospital services is best met by concentrating DSH 
payments on Medicare cases in the hospitals with the largest low-income 
patient shares.''

    The small primary hospitals in rural America serving a low income 
population can not survive unless immediate action is taken to rectify 
this situation. This is the basis of the request of the Coalition of 
Essential Service Hospitals for a 20 percent DSH payment adjustment.

             THE EFFECTS OF THE BALANCED BUDGET ACT OF 1997
    Part of the inequity in the BBA adjustments is that, by most 
reliable estimates--Urban reimbursement is Reduced by about 6 percent 
while Rural reimbursement is Reduced by about 14 percent.
    However, small rural primary care hospitals serving a low income 
population face additional cuts not recognized in this average.
    A factor negatively impacting the hospital serving the low-income 
Medicare population is the Deductible and Coinsurance system. Patients 
in impoverished rural areas are going to be paying a higher percentage 
of the cost of their hospital care. The average Medicare discharge DRG 
at the 55 Mississippi Hospitals in this category is $2,952.68; the 
Medicare Deductible is $786.00; the impoverished Medicare population of 
these Counties are expected to pay nearly 26.6 percent of the cost of 
their hospital bill. A Medicare Beneficiary in Iowa pays 15 percent 
(about the same as St. Dominic Jackson), those in Pennsylvania pay 11 
percent, and in New York they would pay 8.5 percent.
    And when those beneficiaries cannot pay their deductibles, the BBA 
will disallow 45 percent ($353.70 per admission) from the reimbursement 
in rural Mississippi, or 12 percent of the total reimbursement per 
discharge at these small rural Hospitals. The Hospital in Iowa will 
lose only 6.9 percent (about the same as St. Dominic), in Pennsylvania, 
5 percent, and in New York, 3.9 percent. And this is only considering 
each patient; the small rural hospital in an impoverished area is going 
to be treating a higher percentage of Medicare patients who cannot pay 
their deductible than hospitals in less rural and less disadvantaged 
areas, disproportionately burdening the small rural provider serving a 
poor population.
    The current Medicare reimbursement system requires the poorest 
beneficiaries in America to pay the largest percentage of their 
hospital care; and the lowest paid hospitals in America to collect the 
largest percentage of their cost from the poorest people.
    Now the BBA is making the largest percentage cuts in reimbursement 
for Medicare Bad Debt to the lowest paid hospitals, which are located 
in impoverished areas with no commercial payor base to make up the 
shortfall.
    Some BBA cuts impact the Small Rural Primary Care Hospitals serving 
a low income population far more dramatically than other facilities.

                            OUT-PATIENT PPS
    The out-patient PPS system (APG's) came into being to address the 
rising cost of out-patient services. Most of the growth in out-patient 
payments came as a result of speciality procedures that were 
historically done on an in-patient basis being shifted to out-patient 
procedures as a result of the restrictions placed on in-patient 
reimbursement. This had little to do with the small primary care 
hospitals as they do not perform the high cost speciality procedures. 
However, the OP-PPS system does not address just the speciality 
outpatient procedures, it includes basic Evaluation and Management 
codes of the primary care Emergency Room.
    This will be devastating to the small rural hospital. It is 
estimated to cut out-patient reimbursement by 17 percent for rural 
hospitals. This is again an ``average''. In any given Emergency Room 
the actual cut in reimbursement when going from Cost Based 
reimbursement to an ``average payment, adjusted for labor cost, per 
unit of service'' will be the 17 percent reduction only if you have the 
``average number of visits and the average wage index''. The per unit 
cost of a low volume Emergency Room will always be higher than a large 
busy Emergency Room. The small rural hospital that only has one nurse 
in the Emergency Room, with laboratory and X-Ray staff on call at 
night, does not have the ability to cut its cost.
    While Congress has adopted legislation to ``hold harmless'' rural 
hospitals of less than 100 beds for several years, we are still faced 
with the cost of immediately implementing the systems to bill under the 
new system. Also HCFA has decided to hold 15 percent of any ``hold 
harmless'' payment for the 18 months required to file and settle a cost 
report. As far as cash flow is concerned, small hospitals will see at 
least a 15 percent reduction in payment even if they can correctly code 
under the new system (and most small hospitals will not be able to).

                         CAPITAL RELATED COSTS
    Added to this situation is the BBA reduction in allowable Capital 
Related Costs. Small Hospitals in impoverished rural areas have little 
hope of raising capital from local bond issues or community sources; 
they will be unable to maintain their facilities or update their 
equipment or technology.

                  BILLING AND REGULATORY REQUIREMENTS
    The small rural hospital must have the computer systems and 
administrative personnel to function within the billing and regulatory 
guidelines of the Medicare program. This is a far greater percent of 
operating revenue than in the larger hospitals. In many rural 
facilities there are many charges for services to Medicare 
beneficiaries that are simply not filed, as the system has become so 
complicated, time consuming, constantly changing, and legally 
threatening that our small administrative staffs, with multiple other 
duties, can not develop and implement systems to comply with these 
regulations.
    Finally, your staff has previously been provided with proposed 
legislation that is specifically directed at approximately 396 small 
rural primary care hospitals serving a very low income population 
across the United States. I understand some Members of Congress would 
support relief for hospitals that really needed help, but did not know 
how to identify them. While other rural hospitals may need relief also, 
I can assure you that virtually all of these facilities are truly at 
the bottom of the barrel.
    Mr. Chairman, I realize the reluctance of many in Congress to enter 
into a serious political debate in which there will be divisiveness 
between the Urban and Rural Delegations. I also realize there are 
problems faced by a Member of Congress in supporting legislation for a 
one segment of an industry in his/her home state. It is somewhat 
similar to why our Trade Associations (such as The American Hospital 
Association and many State Hospital Associations) will not support 
legislation for a particular segment or group of hospitals. The best 
they will do is not oppose legislation as long as it is ``New Money'' 
and not a reallocation of existing funds. As demonstrated above there 
has been a continual reallocation of funds away from the rural primary 
care hospital unfortunate enough to serve a low income population. 
Unless someone in Congress interested in the Quality of Life in rural 
America will address the special issues of the approximately 396 
primary care rural hospitals serving a very low income population we 
are going to see many of these facilities close in the very near 
future. I would like for you and this Committee to consider being the 
vehicle to bring this issue, so important to many areas of rural 
America, to the attention of the United States Senate.
    My colleagues from our 48 Mississippi hospitals and I (as well as 
many from other states) would be very interested in working with you 
and your Committee to incorporate our special issues into any existing 
or new proposals for relief for rural hospitals.
    Thank you for this opportunity to present the small rural primary 
care hospital story. It is one that has been seldom heard.

    Senator Cochran. Thank you very much. I thought your 
testimony was very persuasive and compelling in every respect, 
and I appreciate your coming up here and giving us this 
information and making it clear so even a Senator can 
understand it. We appreciate it.
    Mr. Grady, we are glad you are here from Brookhaven and we 
invite you to proceed now.

STATEMENT OF PHILLIP L. GRADY, ADMINISTRATOR, KING'S 
            DAUGHTERS HOSPITAL, BROOKHAVEN, MISSISSIPPI
    Mr. Grady. Thank you. I would like to summarize my prepared 
statement that I ask be included in the record.
    Senator Cochran. It will be included.
    Mr. Grady. I am honored to testify today on how the 1997 
Balanced Budget Act and other Medicare regulations are 
affecting Mississippi's rural hospitals and specifically King's 
Daughters Medical Center.
    King's Daughters Medical Center is a 122-bed facility 
serving five counties in southwest Mississippi. Due to our 
rural location, we are not only the primary source of access to 
essential health care services in our region, but we also 
contribute significantly to the area's economic well-being as 
well. But that role of the rural hospital in the economy is 
being seriously threatened. The BBA and other Medicare statutes 
and regulations are jeopardizing the ability of rural providers 
like King's Daughters Medical Center to ensure that high 
quality health care will be there when our community needs it, 
and with it the community's ability to recruit and retain 
industry.
    For the first time in 10 years, we sustained an operating 
loss of $350,000 in fiscal year 1999 that was directly 
attributable to the impact of the BBA. It is estimated that the 
BBA will reduce Medicare payments to King's Daughters Medical 
Center by $9.9 million through 2002. Last year's Balanced 
Budget Refinement Act will restore only about $60,000 of that 
amount to our facility. The result of these BBA cuts is 
diminished access to care.
    For example, we have seen a 30-percent reduction in sub-
acute patient days due to BBA-mandated changes. This past year, 
an 80 year old Medicare beneficiary was admitted to the sub-
acute unit following hip surgery for continued therapy and 
treatment of a minor pressure ulcer. Once physical therapy 
rehabilitation was complete, the patient no longer met 
Medicare's continued stay criteria, despite the pressure ulcer, 
requiring us to discharge the beneficiary. Because her family 
was unable to care for her, she was readmitted 2 weeks later 
with a more extensive pressure ulcer. Had we been allowed to 
keep the patient in the sub-acute unit, we could have prevented 
her re-admission and saved the Medicare program thousands of 
dollars.
    BBA cuts also forced us to curtail service at our rural 
health care clinic, again diminishing access to care. Despite a 
clear need for the facility, the BBA payment cuts made it 
impossible for us to continue operating this facility. We 
transferred ownership in January to Franklin County Hospital of 
the rural health care clinic because they could be reimbursed 
on a cost basis versus the way that we were being reimbursed.
    While our reimbursement has been dramatically reduced under 
the BBA, our costs have not decreased and in many cases 
continue to increase. Health care services cannot be provided 
without varied and competent professionals. The BBA cuts have 
impacted our ability in some instances to provide competitive 
salaries for our employees. In the past year, we have lost 21 
highly trained professionals as a result. This further drives 
up our payroll costs as we then have to incur the expense of 
recruiting and training replacements, diverting resources that 
would otherwise go to patient care.
    Another issue of concern, as addressed by Senator Grassley, 
Dr. Wakefield, and Jimmy, is the wage index component of the 
Medicare reimbursement system. As it is currently structured, 
urban hospitals have more money to pay higher wages when it is 
often, in fact, necessary to pay a premium in rural markets to 
obtain the necessary clinical skills to meet patient needs.
    Mr. Chairman, I am very concerned about our ability to make 
adjustments in salary in the next year. This is critical as we 
face shortages of professionals in such areas as critical care 
nursing, ultrasoundography, and coders, among others. Staff 
shortages not only impact access to service, but also our 
ability to contribute to Brookhaven and Lincoln County's local 
economy.
    Availability of capital for the purchase of new equipment 
and reinvestment in our facilities is key to our health care 
mission. Access to capital markets has diminished as a result 
of the BBA due to lenders' concerns over the fiscal health of 
the health care industry. Moody's Investors Service in March 
noted that downgrades for bond ratings for hospitals last year 
exceeded upgrades at a rate of five to one. This translates to 
increased cost of financing needed improvements in health care 
facilities.
    Rural hospitals will soon be in a crisis mode if we cannot 
update our facilities and equipment. We are now less than 20 
days from implementation of the outpatient prospective payment 
system. While HCFA took one and a half years to develop the 
final regulations, health care organizations have had only 120 
days to make the necessary costly system and billing changes to 
comply. We estimate that our initial expenses to comply will 
exceed $50,000 and that will be in order for us to receive an 
estimated $398,000 less than cost to provide these services to 
Medicare beneficiaries.
    Upon expiration of the transitional corridor on January 1, 
2002, our loss for providing these services will increase to 
$772,000 annually. I am not confident at this point that HCFA 
and the fiscal intermediaries will be ready to administer this 
new payment methodology beginning August 1, 2000. Dr. Berenson 
referenced contingency payment plans, but these are not 
adequate for hospitals to continue with their sustained 
operations if HCFA is not ready to proceed at that point. 
Nevertheless, hospitals are expected to be fully compliant with 
their billing or face the threat of false claims.
    The burden of increasing regulations continues to require 
hospitals to shift much-needed patient care resources to 
administrative functions. Additionally, we are already 
beginning to see a slowdown in payments under the existing 
Medicare program as HCFA makes changes in their systems.
    Mr. Chairman, the following specific action is needed: 
First, Congress should restore a full market basket update for 
fiscal year 2001 and 2002. S. 2018, the American Hospital 
Preservation Act, has been introduced to address this issue. 
Hospital update amounts must keep pace with the cost of 
delivering care.
    Second, Congress should pass legislation providing relief 
on wage index inequities and the arbitrary way that the wage 
index is used to calculate payments. Senator Grassley, as he 
discussed earlier, introduced S. 2828, the Geographic 
Adjustments Fairness Act, which will help King's Daughters 
Medical Center meet the rising costs of attracting highly 
qualified health care professionals. Senator Cochran, I 
appreciate your co-sponsorship of this legislation along with 
that of Senator Burns.
    Third, the reduction in Medicare bad debt payments to 55 
percent must be repealed for those States where over 10.5 
percent of their over-65 population is in poverty. As you are 
well aware, Mississippi's level is 19.5 percent. Mississippi 
hospitals should not be penalized for serving lower income 
Medicare beneficiaries. Implementation of outpatient PPS, as 
Jimmy discussed a few minutes ago, will further compound this 
problem, as the majority of outpatient payments will remain the 
responsibility of the Medicare beneficiary.
    Fourth, delay implementation of the outpatient prospective 
payment system. Also, extend the definition of hospitals that 
qualify for the hold harmless provision to rural hospitals with 
an average daily census less than 100, such as King's Daughters 
Medical Center, versus a definition that focuses on licensed 
beds, as the BBA legislation does. Our size facility often does 
not qualify for the special Medicare designations that Dr. 
Berenson discussed earlier. It is unreasonable to expect 
hospitals to provide mandated services at less than the cost to 
provide these services.
    Finally, rural hospitals need help in maintaining a viable 
post-acute care network, as we are often the only providers 
left furnishing home health, ambulance, and nursing care 
services due to the drastic payment reductions imposed by the 
BBA.
    My colleagues and I look forward to working with you to 
rebuild some of the damage made by the BBA's cuts to both our 
hospitals in rural Mississippi and rural America and to our 
economies. Thank you for providing me with the opportunity to 
share our experiences with you.
    [The statement follows:]

                  Prepared Statement Phillip L. Grady

    Mr. Chairman, members of the committee, I am Phillip Grady, CEO of 
King's Daughters Medical Center in Brookhaven, Mississippi. I am 
honored to present testimony before you today on the effects of the 
passage of the Balanced Budget Act of 1997 (BBA) and the impact of 
other Medicare regulations on Mississippi's rural hospitals, 
specifically, King's Daughters Medical Center and their local 
communities.
    To set the stage, I will briefly describe our facility. King's 
Daughters Medical Center is a 122-bed, acute-care hospital located in 
Brookhaven, a community of 11,500 in Lincoln County. We serve five 
counties in southwest Mississippi. In Fiscal 1999, we provided services 
to over 16,000 emergency room patients, 29,000 outpatients, delivered 
590 babies and admitted more than 3,800 patients.
    Typical of rural providers, our sources of revenue are heavily 
weighted to governmental payors, with Medicare comprising 50.2 percent 
of our gross inpatient revenues and Medicaid comprising 10.5 percent. 
From an expense standpoint, hospitals are very labor, supply and 
capital intensive. Salary, wages, and benefits account for 44 percent 
of our expenses. Patient supplies, including pharmaceutical expenses, 
account for 17.3 percent. King's Daughters, due to our rural location, 
is not only the primary source of medical care for a sizable portion of 
southwest Mississippi, but also contributes significantly to the area's 
economic well-being. With 511 employees, we are one of the region's 
largest employers. Our employees are among the most highly educated and 
involved members of our local community. For example, one of our 
employees not only is a full-time therapist, but also has started two 
local businesses and is president of a parent organization in the 
public schools.
    The presence of a strong, viable medical community is key to 
economic development, along with strong schools, churches and 
recreational activities. It is impossible to successfully recruit 
business and industry without these elements. But the rural hospital's 
role in the economy is being seriously threatened. The BBA and other 
Medicare statutes and regulations are jeopardizing the ability of rural 
providers, like King's Daughters Medical Center, to ensure that high-
quality healthcare will be there when our community needs it and, with 
it, the community's ability to recruit and retain industry. The closure 
or limitation of a rural healthcare facility would destroy the 
community's ability to grow in the future.
    For King's Daughters, the provision of quality healthcare is the 
key element of our mission. For the first time in 10 years, we 
sustained an operating loss of $350,000 in fiscal 1999 that was 
directly attributable to the impact of the BBA. These losses will be 
exacerbated due to increased regulatory requirements hampering our 
ability to generate a positive operating margin.
    The five-year projected impact of the BBA on King's Daughters is 
$9.9 million. While every little bit helps, the estimated relief of the 
BBRA for our facility is only $60,000 per year. This significant impact 
on financial operations has not only been seen at our facility but also 
in other rural locations in Mississippi and through out the country.
    It is important that I share some specific examples of how the BBA 
has impacted King's Daughters, hampering not only our ability to offer 
high quality of services, but, in fact, reducing access to care.
    We offer one of the only hospital-based subacute facilities in our 
region of the state. Most providers have already eliminated this 
service due to the BBA, two providers in southwest Mississippi alone. 
We have seen our reimbursement decline from an average of $460 per day 
to $217. Bear in mind this is an all-inclusive rate for all the care 
provided including pharmaceuticals. We have seen a 30 percent reduction 
in our patient days, thus making this unit less accessible to patients.
    This past year, for example, an 80 year-old Medicare beneficiary 
was admitted to the subacute unit following hip surgery for continued 
therapy and treatment of a minor pressure ulcer. Once physical therapy 
rehabilitation was complete, the patient no longer met Medicare's 
continued-stay criteria, despite the pressure ulcer, requiring us to 
discharge the beneficiary. Because the patient's family was unable to 
care for the beneficiary, she was readmitted two weeks later with a 
more extensive pressure ulcer. Had we been allowed to keep the patient 
in the subacute unit, we could have prevented her readmission and saved 
the Medicare program thousands of dollars. As this example 
demonstrates, there is a need for this skilled nursing facility and the 
positive impact it has had on our patients. But, without further 
relief, I am concerned about our ability to continue its operation.
    The number of home health patients we served decreased 50 percent 
since January 1998, due to BBA-mandated changes in covered services 
such as venipuncture for stable diagnosis like insulin dependent 
diabetics. We operate a home health branch in affiliation with Lawrence 
County Hospital, a 64-bed facility located in Monticello. Lawrence 
County's five year BBA impact has been estimated by the Lewin Group to 
be $7 million. While I am deeply concerned about our ability to 
shoulder our BBA impact, I am even more concerned about the viability 
of smaller rural facilities like Lawrence County, which depend on 
programs such as home health agencies for survival.
    The BBA also changed the payment methodology for hospital-based 
rural health clinics from a reasonable cost methodology to a per-visit 
payment cap. This change significantly impacted our rural health care 
clinic resulting in a $289,000 loss in fiscal 1999. To combat this 
loss, we dramatically reduced staffing and clinic hours resulting in a 
50 percent reduction of services. As you are aware, services provided 
in rural clinics particularly benefit patients with limited financial 
resources. Our efforts to reduce costs to a point where we did not have 
to subsidize this service failed.
    However, there are not only financial considerations, but human 
factors as well. This clinic serves as the primary care provider for 
over 700 Medicaid patients that would have no other provider if the 
clinic closed. Additionally, the clinic is the only outpatient source 
in our region for epogen and procrit shots, expensive and critical 
injections to increase red blood cell counts in dialysis and cancer 
patients. The 20 patients served per week would not be able to afford 
the $300 per injection that they need twice a week without the clinic. 
In an effort to keep from closing this facility completely and wanting 
to see the needs of these patients served, King's Daughters transferred 
ownership of the clinic on January 1st to Franklin County Hospital, a 
41-bed facility that is still reimbursed on a cost basis. We would 
rather give up being the provider of this service than see it 
eliminated for our patients.
    While our reimbursement has been dramatically reduced under the 
BBA, our costs have not decreased and, in many cases, continue to 
increase. Healthcare services cannot be provided without varied and 
competent professionals. The BBA cuts have impacted our ability in some 
instances to provide competitive salaries for our employees. In the 
past year, we lost 21 highly trained professionals as a result. This 
further drives up our payroll cost, as we then have to incur the 
expense of recruiting and training replacements.
    Recently, the Medicare Payment Advisory Commission (MedPAC), 
Congress' advisor on Medicare payment issues, agreed that more needs to 
be done to help hospitals deal with the magnitude of the BBA's cuts. 
The commission recommended that Congress increase the inpatient 
prospective payment system update by between 3.5 percent and 4 
percent--more than twice what is in current law.
    According to independent estimates, the BBA reduced Medicare 
payments to hospitals by more than $70 billion over five years--about 
$20 billion more than anticipated at the time the law was enacted. 
MedPAC recognized the rising labor, drug and technology costs faced by 
hospital's as they struggle with the BBA's impact. While Congress last 
year passed the Balanced Budget Refinement Act to take some of the 
sting out of those cuts, the legislation increased Medicare payments to 
hospitals by only 1 percent which equates to only an estimated $59 
million over 5 years to Mississippi hospitals. A drop in the bucket 
compared to the nearly $1 billion removed from the healthcare system in 
Mississippi through the BBA. This amount does not include the impact on 
the Mississippi economy.
    Availability of capital for the purchase of new equipment and 
reinvestment in our facility is key to our healthcare mission. Access 
to capital markets has diminished as a result of the BBA due to 
lenders' concerns over the fiscal health of the healthcare industry. 
Moody's Investors Service in March noted that downgrades in bond 
ratings for hospitals last year ``exceeded upgrades at a rate of 5 to 
1.'' This increases the cost of financing needed improvements in health 
care facilities. Of last year's BBRA, Moody said the ``relief will not 
make a material difference to the majority of hospitals and by itself 
will not ensure the financial stabilization necessary to avoid credit 
deterioration.'' With reduced borrowing ability in the capital markets 
and with small to negative operating margins, rural hospitals will be 
hard-pressed to survive if they cannot update their facilities and 
equipment.
    Another issue of concern is the wage index component of the 
Medicare reimbursement system. It arbitrarily favors urban hospitals 
over rural hospitals. The base rate on which all hospital payments are 
calculated is adjusted by a wage index. The wage index variation 
between urban and rural hospitals is the primary reason Medicare 
reimbursement is lower to rural hospitals. The net result is urban 
hospitals have more money to pay higher wage rates when in fact it is 
often necessary to pay a premium in rural markets to obtain the 
necessary clinical skills to meet patient needs.
    I am very concerned about our ability to make adjustments in 
salaries in the next year. This is critical as we face shortages of 
professionals in such areas as critical care nursing, ultrasonography, 
and coders among others. Staff shortages impact not only access to 
service, but also impact quality of care and buying power in the local 
economy.
    In addition to the wage index issue, we are gravely concerned about 
the implementation of the outpatient prospective payment system. HCFA 
has less than 20 days to implement the system. While the agency took 
one and a half years to develop the final regulations, healthcare 
organizations have had only 120 days to make the necessary, costly 
system and billing changes to comply. We estimate our initial expenses 
to comply will exceed $50,000 and that will be in order for us to 
receive an estimated $398,000 less than cost for providing outpatient 
services to Medicare beneficiaries. Upon expiration of the transitional 
corridor on January 1, 2002, our loss for providing these services will 
increase to $772,000 annually.
    After a meeting with HCFA officials, it is clear HCFA was and 
continues to be on a steep learning curve for this system change. My 
peers and I are not confident that HCFA and the fiscal intermediaries 
will be ready to administer this new payment methodology by August 1, 
2000. Nevertheless, hospitals are expected to be fully compliant with 
their billing or face the threat of false claims. The burden of 
increasing regulations continues to require hospitals to shift much 
needed patient care resources to administrative functions.
    Mr. Chairman, the following specific action is needed:
    First, Congress should restore a full market-basket update for 
fiscal year 2001 and 2002. S.2018, the American Hospital Preservation 
Act, have been introduced to address this issue. Hospital update 
amounts must keep pace with the costs of delivering care. A study by 
Ernst & Young and HCIA-Sachs found that Medicare hospital spending has 
been flat while hospital costs plus beneficiary growth rate are 
approximately 4.5 percent per year.
    Second, Congress should pass legislation providing relief on wage 
index inequities and the arbitrary way the wage index is used to 
calculate payments. Senator Grassley introduced S.2828, the Geographic 
Adjustment Fairness Act, which will help King's Daughters Medical 
Center meet the rising cost of attracting highly qualified healthcare 
professionals. Senator Cochran, I appreciate your co-sponsorship of 
this legislation.
    Third, the reduction in Medicare bad debt payments to 55 percent 
must be repealed for those states with over 10.5 percent of their over 
65 population in poverty. Mississippi's level is 19.5 percent--
Mississippi hospitals should not be penalized for serving lower income 
Medicare beneficiaries. Implementation of outpatient PPS will further 
compound this problem, as the majority of outpatient payments will 
remain the responsibility of the beneficiary.
    Fourth, delay implementation of the outpatient PPS system. Also, 
extend the definition of hospitals that qualify for the hold harmless 
provision to rural hospitals with an average daily census less than 100 
such as King's Daughters Medical Center. It is unreasonable to expect 
hospitals to provide mandated services at less than the cost to provide 
those services.
    Finally, rural hospitals need help in maintaining a viable post-
acute care network since they are often the only providers left 
furnishing home health, ambulance and nursing care services due to the 
drastic payment reductions imposed by the BBA.
    Mr. Chairman, you and your fellow members on this committee are 
faced with tough decisions on how to best allocate healthcare dollars 
just as hospital administrators and hospital boards are faced with 
difficult decisions about the allocation of resources. I encourage each 
of you to visit the hospitals in your states to see first hand the 
impact of Medicare reform legislation on the healthcare delivery 
system. When you do, it will becoming increasingly clear that, despite 
some Medicare payment relief provided to hospitals last year by 
Congress, the cost of caring continues to rise--to the point where 
further relief this year from the BBA's cuts, its associated 
regulations, and Medicare system inequities such as the wage index is 
essential.
    My colleagues and I look forward to working with you to rebuild 
some of the BBA's damage to both hospitals and their local economies 
across the United States.
    Thank you for providing me with the opportunity to share King's 
Daughters experiences with you.

    Senator Cochran. Thank you very much, Mr. Grady. I think 
the facts that you both have made available to us are very 
alarming and I think the Congress has got to get serious and 
get on the ball to get this legislation that you have 
identified that will be very helpful considered and passed and 
to the President before this session of the Congress ends. We 
are going to see a lot of closures throughout our State and 
other States as well unless that happens. I think it is just as 
clear as can be from what you tell us and what we have heard 
from those who are experts in this issue area.
    So I am very grateful to you for letting us have the 
benefit of your time and your effort to be here and to 
understand fully what the implications of these Federal 
policies are for the people who live in the small towns and 
rural communities of our Nation.
    We spend a lot of time and effort here designing policies 
to encourage investment, to encourage enterprise in small towns 
and rural communities. That is part of our mission as a 
committee that has jurisdiction over rural development 
initiatives. To see this Federal program now on the other hand 
working as a disincentive for those same kinds of activities 
just flies in the face of reason. So I am hopeful that our 
committee can serve as a catalyst for moving the Congress to 
act quickly and help alleviate some of these serious problems 
that you are facing.

                         CONCLUSION OF HEARING

    I commend you for hanging in there and doing as well as you 
have done under these extraordinarily difficult circumstances 
in the situation that you find yourself in. So I want you to 
know we are on your side. We are going to do everything we can 
to be helpful, not just to you but to the people who depend 
upon the hospitals and the health providers to continue to 
provide them with the health care that they absolutely have to 
have if they are to stay in these small towns and rural 
communities.
    Thank you very much. This concludes our hearing.
    [Whereupon, at 12:27 p.m., Tuesday, July 11, the hearing 
was concluded, and the subcommittee was recessed, to reconvene 
subject to the call of the Chair.]

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