Welcome to the Department of Justice, Iowa Attorney General Tom Miller

For immediate release - Thursday, July 3, 2003.

Contact Bob Brammer - 515-281-6699.

State Fights for Fair
Medicare Reimbursement

Attorney General, Governor, Members of Congress, and
medical leaders challenge Federal government reimbursement rates that put Iowa last in the nation.

DES MOINES.   Iowa Attorney General Tom Miller, Governor Tom Vilsack and other Iowa elected officials and medical leaders issued a sharp, bipartisan challenge today to the Medicare reimbursement rate proposed by the U.S. government -- a rate that ranks Iowa last in the nation in money spent in the state per Medicare beneficiary. Sen. Tom Harkin, Rep. Leonard Boswell, Rep. Steve King, and Kirk Norris, President and CEO of the Iowa Hospital Association, joined the bipartisan effort.

The challenge said "the inappropriately low Medicare reimbursements are harmful to Medicare beneficiaries, the hospitals that serve them, and the Iowa economy as a whole" -- and it claimed the reimbursement scheme fails to comply with the mandates of the Social Security Act.

"The inordinately low payment rates" proposed by the Centers for Medicare and Medicaid Services (CMS) for hospitals in Iowa "are flatly inconsistent with the law governing reimbursement," said the formal letter challenging CMS's proposed reimbursement plan. The agency will have about a month to consider the Iowa challenge before it issues its final reimbursement rates on August 1 for the federal fiscal year beginning October 1.

Under the Medicare law, payment system rates must be adjusted "for area differences in hospital wage levels." But the Iowa officials say the proposed reimbursement rate runs afoul of the statute's requirement that the adjustment must be made reflecting actual relative wage levels and the cost of providing inpatient services for Iowa hospitals compared to national wage levels.

"The agency has not satisfied this obligation," the Iowa officials wrote -- and they proposed several actions CMS should take to remedy the problem.

Attorney General Tom Miller, who coordinated the formal Iowa "Comment" to CMS, said: "Our message demonstrates the shortfall in reimbursement to Iowa and the widespread damage it inflicts on our state. CMS has an obligation to act now to ensure that the wage index factor complies with the federal law and accomplishes the purposes of the law."

Lt. Governor Sally Pederson, who appeared with Miller and Boswell and leaders of Iowa's medical community at a State Capitol news conference announcing the action, said: "Iowans value security and fairness -- and at the center of that is healthcare security and Medicare fairness. The time is right to correct the inequity of the Medicare payment system. We need to ensure that this essential federal program meets its obligations to all Americans who depend on it for their health care, comfort, and quality of life."

The formal "Comment" on the Medicare reimbursement rates is addressed to Thomas A. Scully, Administrator of the Centers for Medicare and Medicaid Services (CMS) of the Dept. of Health and Human Services.

Miller said the deadline for submitting the Comment is July 16 - but it is being submitted now so CMS has ample time to review the Iowa argument before CMS issues its final reimbursement rate August 1. Other officials and medical community leaders may join in supporting the Comment before the July 16 deadline, he said.

Miller said the State was assisted in drafting the Comment by the law firm of Hogan & Hartson, one of the nation's leading health care law firms.

Harm Caused by Iowa's Lowest-in-the-Nation Reimbursement Rate:

The Iowa leaders' letter detailed a litany of damage caused by Iowa's reimbursement rates for money spent in Iowa -- rates lower than any other state in the nation, at $3,414 per beneficiary. Iowa's average trails the next lowest state by more than $275 per enrollee and it is less than half the average of the state with the highest per capita expenditure. The letter tells CMS there are many damaging consequences of the inordinately low reimbursement rate, including:

Iowa hospitals lose money treating Medicare patients -- amounting to 6.5% of their total operating expenditures in 1999 (the most recent data available) and the worst in the nation. (Those losses, the letter says, indicate "it cannot seriously be questioned that Iowa hospitals are being woefully underreimbursed by the Medicare program.")

Because Iowa hospitals must cover those losses, their overall operations are harmed. It is more difficult for them to keep medical equipment and facilities up to date. It is more difficult for them to invest in newer technologies and advancements. They have more difficulty retaining top medical staff. Iowans often must travel long distances for care.

Other Iowans -- and businesses that employ them -- must make up the shortfall in Medicare reimbursements by paying more for hospital care. The higher costs lead to higher insurance premiums, which make it more costly for businesses to operate in Iowa, which puts the state at a competitive disadvantage.

"This spiral harms Medicare beneficiaries and our health care community," Miller said, "and it causes a ripple effect of damage that washes over Iowa's whole economy."

CMS has "obligation" to adjust the "hospital wage index":

The Iowa officials said the state's low Medicare reimbursement level largely results from the "hospital wage index" -- both the wage index values and how the wage index is applied by CMS. CMS's proposed formula fails to comply with the Medicare law, the Comment argues, because it results in application of extremely low wage index factors in Iowa that don't reflect either actual labor costs here or the proportion of a hospital's total costs expended on labor. The wage index values and how they are applied both should be revised to comply with the law, the Comment said.

CMS proposes to continue to peg the labor-related share at 71% of hospitals' overall expenses, but the Iowa officials say the share should be reduced to just over 61% (which would result in substantially higher Medicare reimbursement in Iowa.) The Comment notes, for example, that computer services, postage, and accounting and billing services are actually purchased nationally but are viewed by CMS as affected by local labor markets - which results in an inappropriate increase in the "labor-related" share of costs discounted for reimbursement. The Comment also cited MedPAC's well-respected figures that wage-related costs as a percentage of total operating costs total just over 61%, well short of the 71% CMS proposes to continue into next year.

The formal Comment urged CMS to reduce the labor-related share to just over 61% and to consider other corrective measures, such as providing additional payments in states with low (or negative) Medicare hospital margins, adjusting hospital wage-index values, and including a floor on wage index values for rural areas.

Noting that Iowa providers furnish care that is among the most efficient and highest quality in the nation, the Comment also urged CMS to consider giving hospitals a Medicare bonus payment for ranking high on quality measures. CMS is considering a demonstration project on those lines.

"The federal government has an obligation to remedy this situation," Miller said. "The Medicare statute requires that the wage index must accurately reflect Iowa wage levels compared to national wage levels, but the proposed formula will not fulfill this requirement."

Miller noted that more than 450,000 Iowans depend on Medicare and nearly half of all Iowa hospital income comes from Medicare -- but that Medicare doesn't fully cover the hospitals' costs. "Overall, there's a gigantic gap between what Medicare pays and what it costs Iowa hospitals to care for Medicare patients," he said. "We all are paying for that gap, and it's not fair. Our message is that the U.S. government has an obligation to fix this problem."

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Click here for link to the formal Comment letter. (PDF)

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