How Medicare Bureaucracy Limits the Range of Medical Treatment Available to Seniors

Report Health Care Reform

How Medicare Bureaucracy Limits the Range of Medical Treatment Available to Seniors

May 12, 2000 34 min read

Authors: Robert Moffit, Timothy Blanchard, William Plested and Susan Foote


Welcome to the second in a series of lectures on the governance issues in the Medicare program, the huge federal health benefits program that covers approximately 40 million of America's senior and disabled citizens.

Medicare reform is more than simply throwing more money at the ailing Medicare program. Real Medicare reform would improve the range and quality of services to senior citizens, introduce flexibility and innovation in the delivery of medical benefits, and respect the professional integrity and independent judgment of physicians. It is about time, then, that policymakers in Washington look at the way in which today's Medicare program really operates and think about ways in which a new system could avoid the problems that beset the old one.

Congress has engaged in a major debate on the Patients' Bill of Rights and has focused on the treatment of doctors and patients in private-sector managed care programs. A key issue has been managed care companies' denial of medical claims on the grounds that insurance officials, not doctors, decided that certain treatments or procedures were not medically necessary. Conspicuously absent from that public discussion is the question of the patient's rights and the right to medical care within Medicare, the program over which Congress has direct jurisdiction.

The Secretary of the Department of Health and Human Services (HHS) is legally authorized to make determinations about what is a "reasonable" and "necessary" medical service. In January of 1989, the Health Care Financing Administration (HCFA) proposed a final rule defining what is medically necessary or reasonable treatment, but the rule was never finalized.

Today, the Medicare bureaucracy and its contractors often make such determinations and deny payment for medical services for Medicare patients, even if the services are in many cases formally "covered" by Medicare but don't meet specific terms and the conditions that either HCFA or their contractors say would make those services necessary or appropriate. A lot of Medicare claims are denied each year. Based on 1997 data supplied by HCFA to The Heritage Foundation, 19 percent of the total Medicare Part B claims that were denied were denied on the basis of "medical necessity."

Moreover, doctors and patients who challenge Medicare denials of their claims face an arduous and time-consuming appeals process, including adjudication in administrative law courts. In 1999, HCFA admitted that for Medicare Part B claims alone, which are claims for physicians' services, the average time for administrative law judges to render a decision was 524 days.

In terms of the normal functioning of the Medicare program, this authority is perhaps the most powerful administrative weapon in HCFA's already vast regulatory arsenal. Timothy Blanchard wrote a seminal article on this issue in 1990 in the St. Louis Law Review. He said, "The process of Medicare decision making about Medicare coverage and in particular medical necessity determinations has been shrouded in mystery since the inception of the Medicare Program."

"Indeed," adds counselor Blanchard, "it is one of the most expansive bodies of secret law ever developed against a broad segment of the American population." Mr. Blanchard is the first of three outstanding panelists who are going to talk about this rather arcane, but vitally important, subject.

Robert E. Moffit, Ph.D. is the Director of Domestic Policy Studies at The Heritage Foundation.



The issues related to coverage of items and services under the Medicare program and the processing of claims for those services have proven to be an extremely difficult area of policymaking, both objectively and politically. Medicare does not pay for items or services that are not reasonable and necessary for the diagnosis of injury or illness, or to improve the functioning of a malformed body member. That is what the statute says.

Delegating Tough Decisions
Congress, finding this very difficult to grapple with at the inception of the Medicare program, delegated those detailed decisions to what is now the Department of Health and Human Services and to the Health Care Financing Administration.

Members of Congress subsequently realized that in processing individual claims, there would be situations in which services were furnished that were later determined not to have been reasonable and necessary, but that the doctor and the patient may not, or should not, be responsible for those errors in all cases. Consequently, Congress provided that the Medicare program will make payment for services, even if they are subsequently determined not to have been reasonable and necessary, if neither the physician nor the patient knew, or should have known, when the services were provided that they wouldn't be considered reasonable and necessary.

This concept is sometimes called limitation of liability; other times, it is called waiver of liability. It sounds fair: If you didn't know, or shouldn't have had reason to know, that a medical service wasn't going to be considered covered, then you shouldn't be responsible for it. In essence, that rule, on its face, would appear to put the risk of unclear or absent regulation on the agency responsible for making the rules: the Health Care Financing Administration.

Of course, the responsibility for not having made those rules falls on the Medicare Trust Funds and, ultimately, the taxpayers. In practice, however, the concept is turned on its head. For example, there is a regulatory presumption that the doctor knows in every case what is going to be reasonable and necessary. This simply is not borne out in fact.

Double Standard
In addition, there is a double standard at work. When a doctor prevails on appeal, that is not considered in the context of what they know, or should know. But any denial is considered notice that similar claims would be not considered reasonable and necessary, even if those claims are currently on appeal and even in the event that those appeals are ultimately favorable to the doctor or the provider.

Finally, in areas affecting the application of this rule, there has been a long history of refusing to disclose the standards that would be applied in claims processing. By that I mean, how many services? How often can they be provided? When? Under what circumstances? The details of what is going to be considered "reasonable" and "necessary" in the processing of actual claims are important here. Not many of us would disagree that it does not make sense to pay for services through the Medicare program that are not reasonable and necessary. The difficulty is figuring out what that really means in practice.

In that regard, many people believe that the Medicare program is governed by regulation. Mostly, that is not true in connection with medical necessity determinations and policy development. Let me give you a quick review of the relatively long history of this from a regulatory perspective.

  • In 1987, to settle a lawsuit, the Health Care Financing Administration published a notice regarding the process for medical necessity determinations.

  • In 1989, there were proposed regulations. Years passed without any action on those rules.

  • In 1995, a final rule was published with regard to certain investigational medical devices, but not with regard to the vast range of other items or medical services furnished under the program. More time passes.

  • Last year, on April 27, 1999, HCFA published a notice in the Federal Register--not a regulation but a "notice"-- explaining how it will make what are known as "national coverage" decisions with regard to items or services under the program.

The good news here is that this particular "notice" does set out the process HCFA intends to use. It does create an opportunity for providers to request national coverage determinations to clarify rules that aren't there, and does give us some criteria. The bad news is that national coverage determinations address only a small fraction of the items or services furnished under the Medicare program, or that may be covered under the Medicare program. Consequently, many services continue to be adjudicated under what are known as Local Medical Review Policies (LMRPs) or only as ad hoc claims processing determinations by individual carriers and fiscal intermediaries across the country which contract with HCFA.

In practice, this means an identical medical service furnished in a clinically equivalent circumstance may be covered in one part of the country, not covered in another part of the country, and covered in yet another part of the country only if certain circumstances are met somewhere else. In fact, whether Medicare will pay for, or consider covered, the same medical service for a patient may depend on which side of the road, or which side of the river, that patient lives; or which side of the road, or which side of the river, and in which carrier jurisdiction the services are provided.

Consider this analogy: If HCFA were responsible for interstate highways, we would have a national speed limit that went something like "reasonable and necessary; fast enough but not too fast," with authority delegated to each state to figure out what that meant, what's fast enough but not too fast, in interpreting that broad policy.

This has led to a situation where there are a lot of unmarked speed traps, jurisdiction by jurisdiction, for doctors trying to figure out what's going to be considered reasonable and necessary. And this is, after all, a federal program.

There have been some developments, some favorable and some unfavorable, in recent years. First, in fairness, HCFA contractors have begun to implement HCFA instructions to make the local medical review policymaking process more open and to publish, to a greater extent than they have historically, what those local review policies are.

Secret Standards
But we still have many secret standards in claims processing. These are sometimes called parameters--sometimes they go by other terms--which the agency uses to try and distinguish what it's going to tell providers and what it won't. But they are used in claims processing and have an impact on whether something will be considered "covered" or "not covered."

Second, the stakes are much higher today than they have been at any other point in the Medicare program. We are not just talking about overpayments. We're talking about potential exposure to civil money penalties and the application of the False Claims Act, with its treble damages and five to ten thousand dollar mandatory civil penalties in the event doctors are found to submit claims that are not "medically necessary."

Third, there's no viable way to appeal these standards without first violating them. In order to appeal these determinations, it is essential to submit a claim and have it denied. Then you submit yourself to a very long and arduous appeal process which, fortunately in many cases, ends with a reversal in favor of doctors or providers, but only after they have run the "Medicare Appeals Pentathlon": five mandatory steps that they have to go through in order to ultimately get to a court.

While two United States Courts of Appeals recently interpreted the statute in a rational manner that would have allowed a certain review to proceed prior to going through that claims process--in other words, to figure out in advance whether policy positions taken by the Secretary of HHS were arbitrary and capricious or were appropriate--the United States Supreme Court on February 29 issued a 5-4 decision that essentially closed this avenue of review.

Thus, in order to challenge what may be arbitrary and capricious policies with respect to which services will be covered and which won't, a doctor has to furnish the service, submit the claim, and put himself at risk of not only claims denials, but also false claims exposure and potential exclusion from the Medicare program. So let's update our highway analogy briefly. We still have many unmarked speed traps. We have more posted local speed zones that you can't challenge without violating the rules first.

Just to give you an example: Suppose a local Medicare carrier concludes that six treatments per year is reasonable and necessary but the physician believes that seven or eight are necessary for a particular patient. His options are very limited. He can submit the claim for the seventh and eighth service and then appeal through this long process.

What's the problem with that? Well, there's the time value of money. There's also the loss of confidence that the patient may have in the physician, because a patient is notified when these services are denied. He gets a notice that says, "Medicare doesn't consider these services reasonable and necessary." And that's not the best thing for the doctor-patient relationship.

The situation is actually worse than that. Many physicians specialize and see a lot of the same kind of patients. If a physician sees a number of patients who need that seventh, eighth, or ninth service, he pretty quickly winds up in a situation where he could be construed as having a pattern of furnishing unnecessary services. And this pattern could develop before completing the appeal process with regard to those other services. Physicians, in putting care of their patient first, are going to proceed in that manner and try and proceed that way as best they can.

What other options does a physician have in this situation? If you recall those waiver of liability concepts I mentioned, one thing that the statute would allow them to do is give the patient notice that Medicare is likely to deny these services based on medical necessity grounds. If the physician does that, then the patient has to make a decision: Am I going to pay for this myself, knowing Medicare is not going to pay for it?

Many times, the patient will either be unable to pay for that service or unwilling to accept that risk, and in essence self-disallow that medical service. The problem with that is that there hasn't been a formal determination yet whether that service is reasonable and necessary or not. The appeal right that the patient has in that case still exists, but realistically it is foreclosed.

So this is what we've got: Proceed with the appeal process, get a denied claim, and see what happens. We've also got here a way to shift the risk to the patient under these waiver liability provisions and let the patient make that choice and see what happens. I didn't mention what happens if the carrier actually pays the claim anyway. There's a local review policy that says, "We won't," but the claim gets paid anyway. This happens all the time.

In this situation, the physician may reasonably reach a conclusion that the "published policy" is not really what it is, because I submitted the claims for the seventh and eighth service and they got paid. That may lead to a "pattern" of practice that seems reasonable to the physician, but it exposes them later to challenge on audit; someone pulls out the written policy and says, "Gosh, you knew or should have known that the seventh and eighth weren't going to be covered, so we're going to challenge those now."

The most insidious potential outcome here is that the physician may simply decline to furnish those "on-the-margin" questionable services to the patient, a de facto type of denial. This, of course, exposes the physician to the challenge of furnishing substandard care, or unprofessional conduct, and can also expose the physician to exclusion from the program and to civil penalties. I believe this Catch-22 is simply unconscionable, but it is there, and it has to be dealt with on a daily basis by practitioners trying to figure out how to work.

The situation actually can be worse for some non-physician providers, because they are not really in a position to say, "Well, based on the local medical review policy, Medicare doesn't believe that the service your physician just ordered, and which in some cases may be quite painful to you and inconvenient, is necessary." That certainly also is not good for the physician-patient relationship. It undermines the beneficiary's confidence in his or her physician. It also undermines patients' confidence in the Medicare program; they believed it was going to cover these services.

Let me wrap up with an analogy. It encapsulates the problem fairly well. When I was a youth and growing up, I had friends whose parents had the rule: Don't be out too late or come home early. In my house, by contrast, my parent's rule was, of course, depending on how old we were and other factors, 8 o'clock, 9 o'clock, 10 o'clock. We knew exactly what time we were supposed to be home.

For my friends, it wasn't quite as clear. Whether they were out too late sometimes depended on the mood of their parents when they got home. And there was always the argument: "Isn't 5 a.m. early? You said to be home early." We didn't have that problem. In our house, not only was it a set time; it was the kitchen clock. It wasn't my watch; it wasn't Dad's watch; it wasn't the alarm clock. It was the kitchen clock, and that was the rule. This provided a certain certainty.

I don't mean to make light of these issues. If you violated these rules, you got grounded. You didn't wind up getting excluded from the Medicare program. There's also the possibility that your allowance may have been docked. But you didn't wind up being stuck with civil penalties that vastly exceeded the total amount ever paid by the program.

To protect themselves and patients under these circumstances, doctors and other providers need to have clear notice of what the rules are and what the standards in claims processing are going to be. There needs to be an appeal process regarding exceptions so that, in individual cases, we can address those issues. There also needs to be an appeal, an avenue, to challenge arbitrary and capricious policies at the outset, before the claims are submitted, before the false claims exposure is incurred.

Timothy Blanchard is a partner in the Los Angeles law firm of McDermott, Will and Emery. His practice focuses on health care regulatory issues including fraud and abuse and the development and implementation of health care compliance programs, especially Medicare.



I want to focus today on the issues of medical technology. There is extraordinary innovation going on in the medical technology field. Extraordinary? It is epic.

The National Research Council just came out with a report, Networking Health. That report talks about the extraordinary activities in biochips and implanted chips; continuous monitoring; sensor technology; microelectron devices. The interface with the Internet and the information technology is also quite extraordinary. And this is on top of quite extraordinary advances in medicine. Many of us, including beneficiaries of the Medicare program, can look forward to a greatly improved quality and length of life.

So it's critically important that these new technologies and advances to improve our future are integrated into our health care delivery system, particularly Medicare, which all of us will be part of at age 65. I don't think the public understands how important that is.

Today, these innovations, breakthroughs, and improvements on existing devices bang right up against this huge Medicare bureaucracy, this bill-paying service. This system can't move efficiently and effectively to address these kinds of changes. It's not easy to play the role of prudent purchaser and evaluator and rational decision-maker, but the Medicare program has singularly failed in this regard. We have a lot to learn from the private purchasers. They don't do it perfectly, but I think there is something to be learned from how the private sector makes these kinds of decisions.

It's also important to know, when you're learning about Medicare coverage, that there are some things that aren't covered. So it doesn't matter if they're "reasonable" and "necessary" because they're not part of the program. We're in the middle of a big debate about whether or not pharmaceuticals should be a covered service. They're not part of the Medicare program, no matter how reasonable and necessary a physician might find them to be.

What is reasonable and necessary? It has been said twice, but there is no formal definition. It's been internally defined by HCFA, and that's one of the big problems for innovative medical technology companies. Uncertainty--as to what you must show HCFA--is in conflict with innovation.

The uncertainty has been extreme. For years, manufacturers and physicians have had to guess at the criteria and often hang on the words of HCFA officials when they testify in Congress or give speeches to trade associations to try to figure out the meaning of "demonstrated effectiveness." What does it mean? It has been evolving over time, which is frustrating.

Focus on the policy implications. It's never been part of a national policy debate, but what should the Medicare program consider? What are the criteria that we think it should address? In order to determine whether something is covered or not, there are two paths. The local process is the path for most technologies. The national process addresses at this point less than 10 percent of the new technologies.

The local coverage process has been described at some length, with all of its problems. But it is a very difficult process to navigate and leads to significant variation from time to time. Things will be covered in Northern California and not Southern California. What standards are applied is not known. In fact, the last study on how the local coverage process works, I believe, was done in 1984.

There are a lot of questions about how well this process works, a lot of anecdotes about how poorly it works, and Timothy Blanchard could go into greater detail on all of those problems.

The national coverage process is really in formation. There are a lot of reasons why a national process makes sense, and a lot of reasons why the medical technology industry is rather nervous about such a process, particularly as administered by HCFA. It is true, as you move to evidence-based medicine, that you would want evidentiary review. But if it is not a process that people have confidence in, they might prefer to stick with the local one and get a good decision in one jurisdiction--maybe not a good one in another, but not closed out of the system altogether.

There is some justification for a national process, and for technologies brought into the national process, it is absolutely essential that the process work. But increasingly, HCFA has made what they call a "non-coverage" decision. If at the national level you get a non-coverage decision, that technology or procedure will not be available to any Medicare patient anywhere, because the local carriers must follow the national process.

What is the status of the national coverage process reform? The process itself and the criteria have been in flux or unknown for a long time. In 1989, there was a proposed rulemaking; that failed. In 1996, there was an effort to do rulemaking, and that failed.

Behind Closed Doors
There is an opportunity to reform the national process. It occurred recently because some of the medical device companies cannot operate well under the existing national process: no rules clearly articulated, no notice of when the technology was going to be evaluated, no access to any of the information or data that the evaluators used. In the recent past, HCFA would gather together some of their carriers and, behind closed doors, would make crucial decisions. When rumors of national non-coverage decisions would leak out, there would be near hysteria because the consequences of such a decision were so high and the ability to engage in a discussion on the merits of the technology was simply not available.

Medical device companies explained this process to Members of Congress. They were shocked, including Congressman Bill Thomas, the chairman of the Health Subcommittee of Ways and Means. He couldn't believe that this is how America's Medicare program made decisions, behind closed doors, in a black box, no one knowing who the decision-makers are. He contacted the General Accounting Office (GAO) and asked them to look at this process.

The GAO concluded that the process violated the Federal Advisory Commission Act, the same act that the Clinton Administration violated in 1993 by doing their health care reform plan behind closed doors. This controversy created an opening and an incentive for officials at HCFA, who said previously that this process was not a high priority for them. This created a legal obligation to revise their national coverage process.

Here's the status now of the reform of the national coverage process. HCFA decided to handle this issue in three steps. First, they announced a new process. It was not by rule; it was by a notice. It describes how they would engage in decision-making in the future.

They created an advisory committee, modeled on the FDA Advisory Committees, that would give them help in reviewing national coverage applications, and they have now begun to set up these advisory committees. Quite an impressive group of individuals have volunteered to participate. They're fairly well structured, at least in terms of who can participate. They've had two meetings of the executive committee of this advisory committee.

HCFA also said they were going to propose a true rule, a more formal process, to develop the criteria that they had failed to do in 1989. We're still waiting for that proposed rule. Just a couple of weeks ago, they said before they do a proposed rule, they're going to do an interim "pre-pre" proposal. I think they're concerned about controversy. They'll lay some stuff out first and see what they get. But it's uncertain. We're two years into this reform, and we still have a long way to go.

Cumbersome Process
Think of this process in the context of medical technology and innovation. We've really paralyzed our national coverage process while we've been "reforming" it. Decisions are not being made. You try to fix something that's broken using legislative pressure and a lobbying effort, yet the "fixing process" is a fairly long and involved one, and some critical issues are still unresolved. Step back for a minute and think about it.

  • What are the issues? What are the kinds of things we should be thinking about if we were going to redesign how we make Medicare coverage decisions, in light of the incredible benefit and yet the potential high cost of these new medical technologies?

  • Who should be deciding? Physicians? Bureaucrats? Patients?

  • How do we create a decision-making model so that the best decisions are made?

  • What should be the process? How open should the process be? Who should be able to participate? Who are the stakeholders, including the industry, patients, physicians?

This is a really hard nut to crack. What should be the standards and the criteria and the methodology that is part of the application? What should a manufacturer of a new technology, or a new drug, or the proponent of a new procedure have to show? How much evidence? What kind of evidence? What kind of standards?

For example, there are issues unresolved on cost-effectiveness. Should cost be a criterion that HCFA considers in making coverage policy decisions? If so, how do they make it? What methodology do they use? By whose standards or perspectives is cost measured? The patient? The manufacturer? The hospital? Society?

These are all critically important public policy issues, yet they are never discussed, and HCFA has been unable to resolve them.

Lost Time
Timing is also critical, especially with new medical technologies. If you have processes and bureaucracies that take one, two, or three years, you're going to be past a medical innovation's life cycle and miss an opportunity for access to some of these new medical technologies. So these issues are ones that we, as a society, Congress and HCFA, have not resolved after 25 years in the program. It's time to look at them.

Once a coverage decision is made, that's not the end of the story. The technology or the procedure has to be integrated into the Medicare program, either in the inpatient diagnostic-related groups (DRGs) on the hospital side or the outpatient facilities or the physicians' offices.

Just recently, some changes really showed me how inadequate the Medicare bureaucracy is in dealing with new medical technology. Most of the technologies have been used in the inpatient setting. Major medical procedures used to put people in the hospital for three weeks or four weeks. Now advanced procedures can be done in an outpatient setting or with a short hospital stay. Much better for the patient; much better for the program; much cheaper.

During debate on the Balanced Budget Act of 1997, there was discussion of whether or not the Medicare prospective payment system (PPS) that has been used in hospitals since 1984 should be carried forward to the outpatient setting, which continued to be paid on the cost-based reimbursement. Last spring, HCFA issued a proposed rule that would apply a prospective payment model to the outpatient system. It is very complicated, if you think about it: taking all the procedures that are done in the outpatient setting, thousands of them, and grouping them together and then creating Medicare payment rates for these groups.

In reviewing that proposal, it became clear the prices that were set, and the groupings that were created, were based on data that were available before 1996. This is to be applied to the year 2000: The base is 1996? There are a whole lot of new and improved technologies on the market, now available, previously available and covered in the Medicare program. But suddenly, there was a new payment system that wasn't going to take any of that new development into account.

Representatives of the medical device industry wisely pointed this out to Congress, and in the Balanced Budget Refinement Act passed last fall, with the help of Senator Orrin Hatch (R-UT) and Representative Bill Thomas (R-CA), Congress added new provisions to create transitional rules for new medical technologies that were on the market after 1996. Congress provided also some add-on payments for technologies that were newer and categorized into existing groupings; their prices and costs weren't calculated into these groupings. This is just a tiny piece of what will be a 700-page HCFA rule. It will have lots of other issues as well.

Provisions were passed last year in the Balanced Budget Refinement Act. Now we are seeing how they might be implemented, and you can see where frustration with the Medicare program really boils over. There was a notice published just last week. The title of it says it all: "Process to Identify and Obtain Codes for Items Potentially Eligible for Payment as New Technologies or Transitional Pass-Throughs Under the Outpatient Perspective Payment System." A mouthful.

HCFA basically said that if you want your medical technology to be considered a new technology and your technology is not on their list, if you want to be considered, you have to apply for a special code. The process of application is two years, although the Medicare bureaucracy might be able to issue temporary codes for payment. But your paperwork all had to be sent in by April 1, 2000. The coverage decision or the decision about whether or not your new technology is accepted could be made in July. It could be made in October. But, of course, if you didn't have a payment code, it could be 2001 or 2002.

These are medical technologies that are currently available in the Medicare program in the outpatient setting. But they are currently not coded in the proper way, and they fall short of Medicare's bureaucratic requirements. Here you have a critical problem: If you're going to change the payment structure, how are you going to integrate new medical technologies into this changed payment structure? So HCFA tells the industry, "You have got a long and complicated road ahead."

On my good days, I think it's just the Medicare bureaucracy and its complex structure and the thousands of claims they have to process. On my bad days, I think maybe they really are trying to discourage the integration of new medical technology into the Medicare program. I don't like to have to say that, or even think that, but it just appears to me that this is not a technology-friendly system. The result is that the uncertainty and the bureaucratic complications are harming medical innovation, deterring investment in medical innovations. The reason: The process is so uncertain, so irrational.

Venture capitalists have said that to me that the reimbursement uncertainty is so great that no matter how good the technology looks as a potential health care innovation, they are afraid to invest. So it's an investment issue. For the patient and the doctor at the bedside, we may be losing some incredible benefits in a rich and exciting field. And for physicians and hospitals, God knows how they have to cope with this when they know that good things are available and are not integrated into the Medicare system.

My view is that we really need to start from scratch. We need to think about our goals in terms of health care technology, and then we need to work backwards to design a new system so that there is access for patients to these technologies in the Medicare program.

Susan Bartlett Foote is an associate professor at the University of Minnesota in the Division of Health Services Research and Policy. Her research is focused on the public policies of health care services, with particular emphasis on innovation and medical technology. She is author of Managing the Medical Arms Race: Innovation and Public Policy in the Medical Device Industry. She was also a Robert Wood Johnson Health Policy Fellow and a senior legislative assistant in the office of Senator David Durenberger of Minnesota.



As a cardiovascular surgeon, I spend my life putting my hands onto, or actually into, real living human beings. So let me share with you some of the ways that Medicare actually second-guesses, and even controls, what I do. Some of this, of course, will be repetitive, but I think that that's very good; it highlights the magnitude of the problem.

There's a blatant way, of course, that the Medicare bureaucracy, or HCFA, controls what I do, and that's by covering or not covering a particular service or operation. As you've heard, there are national policies. Historically, they have been developed by a committee of local carrier medical directors. They got together, without any process or guidelines, or any other known or published data, to make these national coverage decisions. This process became a subject of hearings held last year by Chairman Bill Thomas.

But remember: As has been pointed out, national coverage decisions account for only 10 percent of the decisions about what is covered and what is not, so that even if they get through a huge body of work, it will only be a 10 percent answer to the problem. Ninety percent of the policies are made locally by the local carrier medical directors. Here, we continue with no process whatsoever.

I've learned that it's important to look at the way people report, and to whom they report, and it tells you something about the job they do. It tells you about who controls the process. Local carrier medical directors report to the division of program integrity of HCFA, not to the division of clinical standards and quality. And, of course, that's why the local carrier medical directors are so interested in fraud and abuse and in finding out wrongdoing among physicians. They don't even report to the division of quality and clinical standards.

But there is no set protocol for the decisions that they make regarding Medicare coverage. There is huge variation. A medical director can have an advisory committee, and some do. They don't need to follow that advice. Many don't, and it's really absolutely unknown how they arrive at the coverage decision, whether they discuss it over the breakfast table at home or whatever. But a coverage decision is made, and that's the way local coverage decisions are made, and, of course, this leads to huge regional variation.

One of the biggest complaints that HCFA has had about physicians in recent years is that there are regional variations in the treatment that physicians give patients. There are huge variations, and it leads to bizarre results. In one Medicare area, there is no Medicare coverage for lipid profiles in the initial evaluation of a diabetic. Professionals say this is an absolute must. Who should make this decision?

What I do involves the sickest and frailest of our senior citizens with cardiovascular disease. Consider this: It is forbidden to do a routine screening evaluation with a physical examination and pre-operative screening test for these Medicare patients. HCFA does not allow screening evaluations.

Consider the Medicare patient who may have underlying heart disease. Not being a specialist in the clinical evaluation of cardiology, I am not going to do the evaluation as well. I do it better than most surgeons because I'm a cardiac surgeon. But in order for me to get that patient covered for a thorough screening evaluation, I must state that I think the patient has heart disease. I am then at risk of being charged with fraud and abuse, saying that I think the patient has something just so that he can be protected from something that can be easily found by a pre-operative evaluation.

Consider the PSA test. This is a screening test for carcinoma of the prostate. Under current Medicare rules, it is paid for only if it's positive. Only if you've got cancer will the Medicare bureaucracy pay. Fortunately, that was changed just recently. But how? By an act of Congress. It took congressional intervention to bring some reason to this process at HCFA. That's just one test for one disease. It took congressional action.

This goes on and on. There are bizarre results, and they change from region to region. It is clear that in one region a problem that a senior has will not be covered. If he just goes across a state line, or in some places a county line or just, in some places, up the street, he's in another Medicare region, and it may be covered. There is an opportunity for a dot-com business here.

That's the blatant way HCFA tells me what to do. There are subtle ways. We hear a lot about downcoding and upcoding, about how physicians feel that they are not being fairly reimbursed for something that they do, and how they'll charge for something that's a little higher on the coding scale so that they get what they consider fair payment for their efforts.

HCFA Downcoding
HCFA actually downcodes blatantly and subtly. They certainly have a list of the most costly diseases to the program, and they continually downcode the reimbursement for this. There is no question that, regardless of how conscientious a physician is, he can reach a point where he can't tolerate this. He cannot continue to do what he does at too low a cost.

This is especially obvious in some very complex surgical procedures. Again, among the sickest of the patients, the most complex procedures are costly. The Medicare reimbursement has been reduced to levels that the most competent, experienced physicians, surgeons, are telling patients, "You know, I've quit doing this in my practice." They are referring them to teaching institutions, where they can have these procedures done by physicians in training, because they are reimbursed at a different level.

Rigid Pricing
The uniform Medicare reimbursement-by-procedure code is another unique problem. The federal government has the idea that if you have a certain procedure, you should be paid uniformly. Some cases are difficult, and some cases are easy; but in the long run, it will even out.

There are obvious problems with this. No other sector of any economy works this way. I can't imagine trying to tell people that you would pay the same for a week-old loaf of bread as an hour-old loaf of bread. There are variations. So the uniform Medicare price makes absolutely no sense.

What really happens with a uniform price is that practitioners who are the most talented at, say, a surgical procedure attract the most difficult cases. Therefore, they uniformly get markedly underpaid for this, and pretty soon, guess what? They quit doing it, and they do easier things on less sick patients, because they can do it. They can do those much better and much faster, and the reimbursement is better. This process punishes the most skilled physicians and shifts the sickest and most complex cases to those who are least able to handle them.

Clearly, price controls don't work. They've never worked. A basic standard payment schedule is something that has political appeal, but it will work only if there is an ability for individual practitioners to set their own conversion factors and to balance-bill, which is another subject.

Medicaid also comes under HCFA. Some of the problems we see in Medicare are even worse in the Medicaid system. In the last month or so, in California, we just found out that we now have the honor of being number 50 in the 50 states in amount of money spent per Medicaid recipient for their medical care.

Vulnerable Seniors
Consider also the Medicare appeals process for the denial of claims. For the senior population that I deal with every day, believe me, they know you can't fight City Hall. It's beyond their ability.

You've heard of the problems: The process is way too long. They don't have the energy or the means to carry it out. And unfortunately, with some of the diseases they have, they simply are not around by the time the system gets down to the resolution of their particular problem. The whole process is complex. They need help, and many of them cannot afford to get the type of help that they need to fight a denial of claims.

Again, Chairman Bill Thomas introduced a bill to set some time parameters that will help this situation. It will also address the problem of Medicare directly based on Medicare policy. Now you can only appeal an individual denial. You can't appeal the Medicare policy that led to that individual denial. And even if you had 100 individual denials, that doesn't affect the policy that gave rise to those denials. So that would also be changed in Congressman Thomas's bill.

The Medicare system today is an exercise in chaos. We're all familiar with the recent attention that's been given to the IRS and its thousands of pages of regulations. Since we are a competitive society, HCFA is clearly the IRS of the new millennium. There are 100,000-plus pages of HCFA regulations involving the Medicare program.

For a physician, this simply means that there's no way I can follow all the rules. I can't know 100,000 pages of rules, and I can't follow them. I can't follow them when I am asked to see patients faster and faster and faster, make more complex decisions regarding more complex technology, and keep track of more than 100,000 pages of rules and regulations.

So this is a chaotic system, and we have people making decisions about the coverage for my patients who are reporting to an officer who is looking at fraud and abuse. We are criminalizing the practice of medicine, and that must stop.

The determination of whether or not someone is covered must be made in a straightforward public process. It should take into account the science and the literature. This can be done. It isn't that difficult. It certainly doesn't take thousands of pages of regulations. This problem must be fixed with a major overhaul of the Medicare program.

Dr. William G. Plested is a member of the board of trustees of the American Medical Association, and a thoracic and cardiovascular surgeon in private practice since 1970. He is a graduate of the University of Colorado and got his M.D. degree from the University of Kansas Medical School. He pursued his surgical internship and residence at the UCLA School of Medicine. Dr. Plested is also a former president of the California Medical Association.


Robert Moffit

Senior Research Fellow, Center for Health and Welfare Policy

Timothy Blanchard

Senior Associate Fellow

William Plested

Policy Analyst

Susan Foote

Senior Policy Analyst