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For Immediate Release: Thursday, March 06, 2008
Contact: CMS Office of Public Affairs


CMS Acting Administrator Kerry Weems

JP Morgan Health Care Conference

San Francisco, CA 

January 9, 2008

The CMS Forecast for 2008


My remarks today are more focused on themes than details.  I have three main points.  So, for those of you who want to forecast CMS’s next moves, or look good to your clients, or even try to impress your portfolio manager in the coming year, here are your CliffsNotes:


First, when CMS makes a decision, we aim to get the most value for the dollar for our beneficiaries.  This means that our beneficiaries have access to safe and appropriate care. It means they are paying appropriately for that care.  It means that Medicare and Medicaid are meeting their fiduciary responsibilities to taxpayers.


Second, we are very serious about payment reform.  Our programs will go bankrupt without it.


Third, when we finalize a set of rules we’re going to make every effort to ensure those rules don’t change without public notice and public input.  Over the next 12 months, you can expect predictability, stability, and transparency from CMS.


When you are contemplating CMS’s next move, you may think we’re operating from a perverse set of guidelines; the reverse of the rules you’d expect to follow in a market-based system.  When you look for a company to invest in, you look for growing profits and expanding market share.  I think it’s safe for me to assert that all of you consider these to be positive elements in making an investment decision.


CMS, however, hasn’t shared the same perspective. In fact, if we see rapidly growing profits and market share, we look closer, but for entirely different reasons.  Our concern is that something might be wrong.  The explanation, of course, is that for the last four decades, Medicare has not operated as part of a market-based system. 


Historically, Medicare reimbursement has been based on resource consumption and volume.    The more a provider does, the more Medicare pays the provider.  The system works by establishing input pricing.  In far too many cases it pays too much.  It pays for unnecessary care.  It pays for complications when things go wrong. 

A good example is our durable medical equipment payment system, which we’re attempting to fix.


Some history:  Last May, we began a process to replace the outdated, inflexible DME fee schedule—part of Medicare’s traditional fee-for-service system—with market prices set by competitive bidding.  We required suppliers to be accredited if they wanted to participate. 


Predictably, many suppliers resisted the change.  According to one trade publication report, suppliers said the program “will jeopardize patients’ standard of care, choice of provider and access to the medical equipment and services they need.” 


However, these assertions are not credible. Companies are bidding in the initial 10 metro areas and the bids look good.  CMS received 6300 certified bids from the first round of bidding.  This is much higher than industry predictions.  Preliminary indications are that the many accommodations CMS made to encourage small suppliers to participate will be effective.


Once competitive bidding is up and running in the first 10 markets in July, CMS will begin to expand nationally into another 70.  We announced this in Los Angeles yesterday.


Early versions of the most recent Medicare bill included provisions to delay the second round. Ultimately, these efforts failed to make it into the legislation just passed. The reason: they are just too expensive and inefficient for Medicare, its beneficiaries, and the taxpayers.  


There is simply no reason for beneficiaries and the government to pay more than market rate for these products.  Efficiency is in the best interest of the Medicare program.  Taxpayers and beneficiaries will be assured of higher quality supplies at lower cost not only because suppliers compete, but also because they will be required to meet tough accreditation standards.

Competition works. It will work for DME just as it has worked in the drug benefit.


Competition in Medicare Part D has made the prescription drug program an unprecedented success.  The numbers are in from the most recent open enrollment period.  Beneficiaries are saving an average of $1200 annually on their medications, the 10-year cost of the program is nearly $200 billion less than estimated.  Beneficiary satisfaction rates over the past 18 months, confirmed yet again in December by a Wall Street Journal/Harris poll, have been hovering around 87 percent.


I challenge you to find anything in the public or private sector which has achieved this level of results.


Furthermore, competition in Part D has de-politicized the debate over which individual drug is better relative to another.  I get no mail on Lipitor.  In contrast, in Part B, where CMS uses input pricing, my mailbox is full of complaints from parties of interest saying “you’re paying too little” for a particular drug.  Or, on the other hand, the Inspector General and the GAO saying “you’re paying too much.”


I shouldn’t need to say that a number of very smart, professional people at CMS work very hard to calculate the fair and appropriate price for Part B drugs.  However, the answer is not to revamp input pricing to arrive at a fairer and more appropriate payment; the shortest path to fair and appropriate pricing is the objective path.  Let the market work.


In the Medicare Advantage market, a combination of competitive bidding and federal incentives has enabled these plans to provide additional benefits at a lower cost to beneficiaries than original Medicare, including case management programs for chronic diseases.


These plans have become an especially important option for people with income over the Medicaid limit but not high enough to afford a Medigap policy.  For example, a higher proportion of Medicare Advantage enrollees—57 percent—is low-income, with incomes between $10,000 and $30,000 a year.  This compares to 46 percent in the traditional program.   A higher percentage—27 percent—of Medicare Advantage participants are minorities compared to basic Medicare at 20 percent.



CMS is moving to get the most value for the health care dollar.  Payment reform is a serious effort, and the future of health care depends on paying for performance and results.


The disconnect between health care’s value and what it costs is one reason the health care share of GDP is skyrocketing.  Health care today is one-seventh of the economy.  We already spend $2 trillion annually on health care.  By 2017, we will spend roughly $4 trillion on health care: 21 percent of our GDP. 


This trajectory is unsustainable.  The assets of the Medicare Part A Hospital Insurance Trust Fund are projected to go bankrupt in 2019, 11 years from now.  The question is not whether to reform, but rather how to produce reform pragmatically.


Sensible reform now will save painful reform later.  I suspect that every CMS Administrator in the past 20 years has given you the same lecture.  But this is not a time to be complacent.  In 2003, the Medicare Trustees predicted that the Part A Trust Fund would reach the “break-even” point in 2013.  Guess what?  We’re already there.  


Reform will require discipline from all sides.  This is not a partisan issue.  Up to now, Administrations and Members of Congress from both parties have been complicit in responding with short term, isolated “fixes” instead of collaborating on long-term pathways to reform.  A case in point:  the six-month “fix” overriding the statutory 10 percent cut in physician payment scheduled for this year.  This was one of the few changes to the Medicare program that managed to make it through before Congress recessed for the holidays.   


These small changes give the public the impression that we are one physician fee fix or oxygen cut away from true reform.  Instead, we need to fix our payment system.  One way to do this is pay for value and outcomes rather than volume of services and charge-based inputs.  This is not piecemeal.  It involves every sector of health care, from the physician’s office to the hospital to hospice, and everything in between. 


We are already doing this. 


Doctors, through the Physician Quality Reporting Initiative, now can receive additional payments for reporting on a standard set of quality measures they themselves helped to develop.  CMS recently sent a plan to Congress laying out the steps to move hospitals from pay-for-reporting to pay-for-performance and we fully expect legislation to implement it in the not so distant future. 


Value-based purchasing is a win-win situation.  Beneficiaries win.  They get better health care that actually works.  Taxpayers win.  They don’t have to foot the bill for preventable complications and unnecessary tests, or medical equipment of questionable quality that does not reflect the market price.  Providers win.  They get paid predictably for quality care…the care they want to provide.


Predictability is important. When we finalize a rule, you can expect us to refine it, but don’t expect us to diverge from the path we’ve laid down over the long term.  If you look at the hospital inpatient regulation issued last August you will see what I mean.


The latest IPPS rule represented the most significant revision of Medicare’s inpatient hospital rates since 1983.  It continued changes begun in 2006 to improve the accuracy of Medicare’s inpatient hospital payments by using hospital costs rather than charges to set rates.  


It adjusted the payment system to better recognize severity of illness, updating an analysis of a severity system for diagnosis-related groups that we considered adopting in the mid-1990s.  


And, it implemented a Deficit Reduction Act provision doing away with Medicare payment for preventable conditions—high cost, high volume or both—acquired in the hospital. 


Beginning next year, if a patient is discharged with one of eight complications in addition to the admitting diagnosis, Medicare will pay for the admitting diagnosis only, and the hospital—not Medicare—will absorb the cost of treating the condition acquired in the hospital.


The IPPS rule also was a significant step forward toward value-based purchasing.  But it wasn’t a sudden shift in policy.  It added to the framework established over the last few years by the Administration, MedPAC, Congress and others.

Because we are committed to predictable, sustainable rules we strive to be an equal opportunity enforcer.  To illustrate, here is an example you may be familiar with:  private equity ownership of skilled nursing facilities.  


You may remember that back in September, the New York Times ran a front-page article about the Carlyle Group’s acquisition of Manor Care.  The article drew a causal link between private equity ownership and substandard nursing homes.  Many in Congress noticed. 


By October, legislation had been dropped in the hopper to require nursing homes to disclose ownership and to require regulators to release information about poorly managed homes.  Congressional authorizing committees held hearings.  Senior members announced that they would investigate business practices at nursing homes owned by private investment groups. 


I testified at one of these hearings.  The gist of my testimony: CMS will enforce the rules no matter who owns the nursing home.


The Administration believes the free market can—and should—be the vehicle to determine how to most efficiently finance the operating and real estate aspects of business.  It is not our role to interfere unless access to quality care is being compromised.


CMS regulates the quality of care as part of the conditions of participation in the Medicare and Medicaid programs. All facilities have to play by the same rules. While we are, of course, interested in the assertions presented by the New York Times and others, when actual evidence of substandard and unsafe nursing homes is presented to us, we do not stand on the sidelines. We vigorously enforce safety standards.


Late last year, CMS posted the names of 52 poor performing nursing homes on medicare.gov as part of our “Special Focus Facility” initiative.  These are nursing homes that yo-yo in and out of compliance with standards by fixing only the minimum number of safety and quality of care problems that allow them to temporarily comply with requirements, only to lapse back into unacceptable quality shortly afterwards. This list included facilities owned by large and small chains, as well as individual owners. 


We posted this list for two reasons.  One, to inform the residents, their families, and the community that these particular homes were chronic under-performers.  Two, to put pressure on these facilities to transform themselves into environments of quality care, or turn themselves over to a management team that would do so.


Posting the poor performing nursing homes on our website was not an isolated activity, but just one milestone in a year-long, special effort to move nursing homes forward on quality.  It includes a pay-for-performance initiative for nursing homes, a pilot demonstrating a comprehensive system of criminal and other background checks for prospective new-hires in nursing homes, and strengthened surveillance of infection control and nutrition in nursing homes.


Our fundamental concern is the quality of care provided to our beneficiaries.  However, my point remains the same.  How we monitor behavior and how we enforce quality should not depend on tax status or ownership structure.  Whether you operate or invest in a nursing home, you are obligated to provide quality care.  CMS will do everything within our regulatory authority to hold you accountable and make sure you provide it.  It’s good business, and it’s the right thing to do.



Good business, in fact, is key to high value health care.  If you can’t make the business case, any new policy, no matter how promising on paper, will never make it to execution.   Health information technology is a case in point. 


If, three years ago, a small physician practice invested in a health information technology system, the practice was investing in a negative business case.


But the business environment is changing.  Thanks to the Medicare Modernization Act, we have a series of pilot programs which are demonstrating the effectiveness of interoperable health information technology. 


Thanks to the American Health Information Community—one of Secretary Leavitt’s initiatives—we’re working toward a nationwide interoperable health information system.  Thanks to the Certification Commission for Health Information Technology this system will have functionality, privacy and security.  Approximately 75 percent of the ambulatory EHR systems on the market have been certified by CCHIT.


CMS recently proposed new e-prescribing standards on formulary and benefits, and medication history to add to our set of foundation standards.  These represent two significant steps forward toward an interconnected health IT system that speaks a common language. 


Widespread adoption and use of electronic health records are the next step.


CMS is currently developing a new five-year Medicare demonstration project to reward physician practices that use EHRs to deliver high quality care. 


In the first year, Medicare will provide a financial incentive to small and mid-sized practices that use certified EHRs to manage patient care, with higher payment for more sophisticated technology use.


In the second year, we’ll up the ante.  Medicare will pay participating doctors’ practices that use certified EHRs and also report clinical quality measures associated with EHR use, again with additional payments available for the most aggressive adopters of technology. 


During years three to five we’ll provide an added bonus based on the degree to which the practice has used the EHR to change and improve the way it operates. 


EHRs have a central role to play in health care that delivers real value to the people of this country.  Over the next several months we will select 12 communities to participate in this project, so keep an eye on the CMS website.  Medicare payment for quality care that includes EHRs will demonstrate that using them to support quality care provides real value to practices.  It’s a major commitment in making interoperable EHRs widely available. 



I hope that as you dust off your crystal ball and look forward to 2008 and beyond you will be able to see some common themes.


CMS is focused on the sustainability of our programs.  We are working to reduce the cost of health care to individuals.   Competition is critical.  And we are committed to a predictable and stable set of rules.  


CMS’s first priority is the health and well being of our beneficiaries, which depends on getting the most value from our payment for our beneficiaries.  Remember that—it’s the most important advice I can give you today.


Thanks for the opportunity to be here.




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