In 1992, in my inaugural address as president of Stanford, I said: "The true university must draw together and reinvent itself every day. The days of a university are always first days." At academic medical centers this has been true with a vengeance and I am sorely tempted to exclaim: "Mercy! Mercy! I did not mean it literally when I said all days are first days!"
This step made it difficult to reconcile the priorities of the school with those of the hospital, especially as the institution was under pressure to contract on a basis that integrated inpatient with outpatient services. This is when "First Day 2" dawned.
In January of 1993, I convened a small working group to consider the consolidation of inpatient and outpatient services and the transfer of the faculty practice to the new integrated not-for-profit. "First Day 2" led to the formation of Stanford Health Services, which began operations on September 1, 1994.
"First Day 3" consisted of the implementation of this fairly ambitious undertaking. It was ambitious because only a reorganization of this kind makes you understand how Byzantine an institution a medical school can be after decades of incremental decision-making. As Kurt Lewin has said: If you want to truly understand something, try to change it.
As the market place became ever more of a jungle, we concluded that the crucial issue was the need for greater economies and greater market strength of academic medical centers. At this point, we began discussions with UCSF about merging our clinical activities. This is "First Day 4." It began in late spring/early summer of 1995. In parallel, we also negotiated integration of the Lucile Salter Packard Children's Hospital at Stanford, which, until then, was mostly autonomous.
Since the summer of 1996, we have experienced "First Day 5," which is not over yet and which covers the go-ahead and planning for the formation of UCSF-Stanford Health Care and which, I trust, will result in closing the transaction this summer. A board has been constituted and a CEO, COO, and a Chief Medical Officer have been chosen.
Then will follow "First Day 6," the implementation phase.
Stanford has certainly been willing to restructure and to take risks. Why? Because we and UCSF are firmly committed to maintaining high-quality academic medicine in spite of the extraordinary exposures that have resulted from the market place and in spite of nerve-racking changes in government policies. I should like to talk about both subjects: market place exposures and exposures to government regulation.
In 1959, under the leadership of then-President Wallace Sterling, Stanford relocated its School of Medicine from San Francisco to the university's main campus forty miles south, where it had built, with the City of Palo Alto, the Palo Alto-Stanford Medical Center.
The move made sense for Stanford. The Santa Clara Valley was beginning to develop as a center of high-tech industries and President Sterling realized that the time was right for Stanford to become a major player in biomedical research. Beginning in the late 1940s, and through the 1950s, Stanford had begun to attract a small nucleus of notable medical researchers to the School of Medicine, including Arthur Kornberg in biochemistry, Joshua Lederberg in genetics, and Henry Kaplan in radiology. By moving the school from San Francisco to the university's main campus, Stanford would be able to take the next step in becoming an active participant in the biomedical revolution. The move created many opportunities for significant collaboration between researchers at the School of Medicine and their counterparts in biology, chemistry, the other basic sciences, and various departments in the School of Engineering. In short, the richness of the physical, financial, and human resources at the main campus were exactly what the School of Medicine needed to transform itself from a respectable clinical institution into a leader in biomedical research.
The effects of the Medical School's relocation to Palo Alto are still felt today. The juxtaposition of Stanford's resources in the computational sciences to our School of Medicine allows researchers on both sides to carry out creative research and educational programs in the biomedical and biomechanical sciences. From collaborations of orthopedic surgery and mechanical engineering to projects combining chip technologies and molecular genetics, the capacity to create interdisciplinary excellences has been phenomenal.
Moreover, the 1959 move enabled the School of Medicine to become integrated with the rest of the university. Over the years, the medical school faculty has increasingly contributed to undergraduate and graduate programs beyond the Medical Center. No longer a distant stepchild, the Medical Center has become an active and contributing member of the greater campus community: The research it conducts, the education it imparts to its students, the clinical services it provides to the surrounding community, and the reputation it has developed as an esteemed academic medical center have all become intertwined with Stanford's overall identity.
However, while the benefits to the school, university, and community have been significant, the close relationship between the School of Medicine and the rest of the university has resulted in challenges that Stanford is still struggling with today. For example, difficult issues of faculty compensation and tenure confront all universities that have medical schools: The financial demands and institutional structure of medical schools usually result in appointment and tenure decisions and a faculty compensation structure that differ from those of the rest of the university. When a school of medicine is closely integrated into its parent university - as is the case at Stanford, where medical school faculty members consider themselves to be identical, in terms of their status as professors and as members of the Stanford community, to their colleagues throughout the rest of the university - all of these issues of compensation and tenure are magnified.
The Medical School has also made the university extremely vulnerable. The secular changes you are only too familiar with have left universities such as Stanford in an uncertain and unfamiliar state, struggling to continue the mission of medical research, education, and patient care, while remaining financially afloat.
II. Marketplace Exposures
Academic medical centers can never compete on equal footing with other health care providers because they invest so heavily in a public good that for-profits cannot and will not afford. They are the repositories of the most advanced medical knowledge and treatment available. They quickly transfer lifesaving discoveries from their laboratories to the bedside. They educate and train the nation's future physicians. And institutions such as Stanford are the engines of the biotechnology revolution. Because of these extraordinary efforts, academic medical centers bear costs that competing health care providers escape. Without the support of extra-market funding sources - such as the federal government - academic medical centers cannot continue to invest in that form of human capital Americans otherwise prize so highly: health.
Prior to World War II, academic medicine was a modest enterprise. At that time, it was primarily funded by university resources, with some contributions from foundations and industrial sources. Public financial support was minimal. By the mid-1960s, two significant changes in federal policy fundamentally transformed the magnitude, dimensions, and economics of academic medicine. The first change fueled a tremendous growth in academic biomedical research. The second world war marked the beginning of substantial federal funding of university-based scientific research. The federal government began appropriating large sums of money for use in university research programs, including those in medical schools. After the war, the government continued the pattern of federal financial investment in university-based science programs, with medical research monies coming mainly from the NIH. In the meantime, the enactment of the Medicare/Medicaid legislation in the mid-1960s provided a new, steady source of financial support for academic medical centers. In providing funding to support the delivery of medical services to underserved, primarily indigent and elderly populations, the Medicare legislation eventually mandated an explicit federal responsibility for the support of graduate medical education.
Fueled by these dual funding sources, academic medicine underwent an unprecedented era of expansion from the mid-1960s to the early 1990s. The number of medical schools in the United States increased by half, medical school enrollments doubled, and medical school faculty grew ten-fold. It seems very appropriate indeed that we realize that the present size of academic medicine was not determined by natural law or by God.
Even more important than the expansion in the size of the academic medical enterprise, the shape of academic medicine has changed dramatically. By providing an increasing source of new funding for what had traditionally been charity care, Medicare and Medicaid provided a new source of revenues for faculty physicians and practice plans. With these new funds, academic clinical programs grew and grew and grew in a way that has been critical for supporting - in fact, subsidizing - the research and education components of our medical schools.
A quick survey of total medical school expenditures and revenues illustrates this point. In 1961, there were 86 schools of medicine. These 86 schools had an aggregate expenditure of $436 million, with more than 40 percent of their income derived from federal funds for research and less than 5 percent from clinical services. Over thirty years later, in 1994, the number of medical schools had grown to 126, with combined expenditures of $27.5 billion and only about 19 percent of their income coming from federal research funds. Forty-nine percent - almost half of all medical school revenues - came from clinical practice sources. During the same time frame, federal research assistance as a proportion of total medical school expenditures peaked in the mid-1960s - right when Medicare was passed - at about 55 percent. Since then, this proportion has progressively declined to a relatively steady level of about 20 percent.
Our ability to maintain the unrivaled quality of American academic medicine is what's in jeopardy today. Academic medical centers face cuts in Medicare and Medicaid payments, as Congress and the President attempt to decrease the federal deficit and balance the budget. Despite generous congressional appropriations for medical research, obtaining NIH grants is becoming more and more competitive, so that the securing and maintenance of research funding has increasingly become a full-time job for faculty researchers.
Moreover, the core problem, particularly in California, is a fundamental shift in the management of our health care delivery system. Academic medical centers have flourished in an environment in which fee-for-service insurance and federal and state policies shielded them from external market forces. But in recent years that shield has been peeled back, as the health care delivery system has come increasingly under the control of market forces that are adverse to the academic medical center.
As an AAMC task force on medical school financing recently reported, medical schools are vulnerable in the current economic environment of managed care, consolidation of providers, and price competition. The increased penetration and consolidation of managed care plans - especially in states like California - have the effect of capping hospital prices and directing patients away from higher cost teaching hospitals to lower cost health care providers. Moreover, managed care policies fail to cover sufficiently their fair share of the costs of medical education and research. As a result, medical school faculty practices and teaching hospitals are now competing with other health care providers on an uneven playing field. Purchasers of health care services are extremely price-conscious and unwilling to share some responsibility for the added costs associated with teaching and research. As it stands now, Stanford Hospital is unable to cover the full costs on most managed care contracts.
By virtue of its location and position, Stanford has been on the front line in confronting this new health care environment. Managed care and the consolidation of for-profit health plans dominate the San Francisco Bay Area. More than 55 percent of the area's total population and 70 percent of the area's commercially insured under-65 population are enrolled in HMOs and preferred provider plans. The Medicare population is increasingly moving into HMOs as well, with about 30 percent of Medicare beneficiaries now enrolled. Moreover, over the last decade, the California managed care market experienced the conversion of most HMOs from non-profit to for-profit status as well as the extraordinary consolidation of health plans that has accompanied this conversion. In 1985, fifteen HMOs, most of them non-profit, competed in Northern California. Ten years later, in 1995, following many mergers, five giants - four of which are for-profit - dominated the market. Moreover, Stanford finds itself in a local health care economy with a considerable surplus of physicians and hospitals, where competition for "enrolled lives" is fierce. Stanford's market has more than 25,000 physicians, 80 percent of them specialists. At Stanford itself, specialists make up 96 percent of the medical faculty, a figure that does not bode well in a managed care environment where HMOs operate most efficiently with equal proportions of primary care physicians and specialists.
When I arrived at Stanford, one of the first things I realized was that the existing organization of the Medical Center - made up of disparate, decentralized institutions - was not structured effectively to respond to the fundamental changes taking place in the economics of health care. Thus, as I mentioned at the outset, I created a task force to examine how the coordination and management of clinical services at Stanford could be improved, in order to respond rapidly and effectively to the changing health care market. In this effort, as throughout "First Day 2," Dean David Korn was crucial to its success. Other major contributors were Ken Bloem, Peter Van Etten, and Isaac Stein, now a Stanford trustee and Chairman of the Board of UCSF-Stanford Health Care, and, somewhat later, of course, Stanford's present dean, Gene Bauer.
The end result of that examination was the creation of Stanford Health Services, or SHS, in 1994. The creation of SHS - a separate corporate entity with its own board of directors and president and CEO - integrated the business and clinical operations of Stanford University Hospital, the Faculty Practice Program that operated Stanford University Clinics, and the affiliated primary care groups. A few months ago, in January, SHS added the Lucile Salter Packard Children's Hospital on the Stanford campus.
The creation of SHS was necessary to improve the effectiveness, competitiveness, and economic viability of the clinical enterprise at Stanford. By eliminating the duplication inevitable with multiple service systems, SHS has streamlined operations, cut bureaucracy, and reduced paperwork. By lowering operating expenses, we have been able to lower our costs,
In the last two years, we realized that creating SHS was only the first step in strengthening our position in the changing health care marketplace. Like all universities with medical programs, we faced a number of options. Some academic medical centers have simply eliminated programs. Some are selling out to, or merging with, for-profit community-based delivery systems. Others - most recently George Washington University - are joining with for-profit hospital corporations and crossing their fingers that they will be able to retain their missions of public service. We decided a different response made sense for Stanford.
This summer, I expect, will mark the beginning of UCSF-Stanford Health Care. The new, nonprofit private corporation will unite the hospitals, clinics, and faculty practices at Stanford Health Services and UCSF. The merger attempts to ensure highest quality teaching, research, and advanced health care in an increasingly competitive marketplace, and it is unprecedented on three levels.
First, it joins not just private and public hospitals, but two university medical centers, one private and one public. Although our two institutions have different cultures, we share missions and values, including providing the most advanced care in the world, teaching the doctors who will care for our children and making life-saving discoveries. And merged, our two institutions can pursue those goals more cost-effectively, through economies of scale and elimination of duplication - including de-escalating the equipment race, in which institutions are compelled to match their competitors MRI for MRI.
Second, the level of quality presented by the combination of UCSF and Stanford is, to use a term popular with today's students, "awesome." As a third-party review commissioned by the Regents of the University of California made clear, we will be more than the sum of our parts, going from leadership in six specialties each to leadership in twenty with our combined strengths. I am especially pleased about what this merger will do for the pediatric programs at Stanford and UCSF and the established excellence at Packard Children's Hospital. The combined program is expected to be the West Coast leader in specialty services for children.
And third, this partnership offers long-term potential, not just for outstanding patient care, but for joint projects between two leading medical schools. With closer coordination and cooperation in teaching, training, and research, we can strengthen even further our ability to move new medical treatments from the laboratory bench to the bedside. This translation of basic science discoveries into effective treatments thrives where the activities are side by side, in an academic medical setting.
Of course, nothing as complex and significant as the merging of two major academic medical centers is accomplished without some bumps along the road. The merger is a merger of equals, in which both Stanford and the University of California have equal rights as the two only in-control "members" of the new not-for-profit health care corporation. This essentially means that the two universities have veto power over each other. Because the Board of UCSF-Stanford Health Care includes three independents, some California legislators have come to believe that the University of California's equal status has been diminished and it seems hard to persuade them otherwise.
Another set of issues has to do with the fact that both Stanford and UCSF are convinced that the new enterprise cannot do its job unless we enjoy the same degree of privacy in our decision-making that is accorded other private not-for-profits - always keeping in mind that not-for-profit medical centers are subject to extensive public reporting requirements. Some opponents of the merger characterize this insistence in ways that suggest that UCSF-Stanford Health Care wants to behave as if it were not for the benefit of its two parent universities and the public purposes served by them but profiting some unidentified forces. It would be sad, indeed, if rhetoric of this kind were to thwart the efforts of two major medical schools imaginatively and in the spirit of cooperation to address our present dilemmas.
As I said earlier, the size of the academic medicine establishment in the United States was not determined by natural law. The cutbacks we are facing do not interfere with God-given rights. However, it is also true that the United States' investment in the human capital represented by medical research and education has produced an extraordinary rate of return for health and the quality of life in the United States and the entire world (not to mention the economy). It has taken decades to build up, it would take only a few years to tear down.
Many American universities are conscientiously attempting to change the status quo and respond imaginatively, even daringly, to the challenges that have come our way. Indeed, what could be more daring than the cooperation of two universities, one private, the other public, that until yesterday thought of themselves mostly as competitors? We are truly seizing the present as made up of first days. As no less than the survival of entire institutions is at stake, it would be welcome if the United States government were a more reliable partner than it often turns out to be.
III. Government Exposures
But the exposure of the free market is not the only challenge facing us. While universities like Stanford try to cope with the changing health care marketplace, we are also confronted by potentially devastating government exposures - primarily as a result of the Department of Health and Human Services' recent actions regarding Medicare billing. As you know, HHS's Office of Inspector General last summer began conducting a national audit of Medicare billing by teaching physicians for patient care - known as the Physicians at Teaching Hospitals, or PATH, initiative. In October, Stanford Health Services volunteered to be an early participant in the PATH audits. However, my concerns about the government's actions in this area go far beyond the specifics of Stanford's own situation. Regardless of how Stanford's audit turns out, the government's actions reveal a troublesome pattern as well as a disregard of long-established administrative procedure, notions of due process, and the rule of law.
As you know, I once was the dean of a law school. In my new life, I am both a client and a target of lawyers. In short, I now have three qualifications to address an issue that needs somebody to speak out. I shall confess though that some have warned me that if I were to address the matter I am about to address, Stanford might suffer. I trust that that will not be the case.
Permit me one other prefatory remark. The comments I am about to make do not question in any way that academic medical centers and universities more broadly should be scrupulously honest regarding funds we receive from the government or, for that matter, anybody else. But that is not the only issue involved. Confusing government standards do not help accuracy and universities can be scrupulously honest and still make mistakes given the incredible complexity of the accounting tasks for millions of transactions.
In auditing teaching hospitals' Medicare billing from 1990 to 1995, the PATH audits have focused on three main questions: (1) the level of teaching physician involvement in patient care involving residents, (2) how the teaching physician documented involvement in those cases, and (3) whether documentation supports the level of service billed to Medicare for physician visits. The OIG, in conducting these audits, is applying standards that were not articulated until August 1, 1995, and July 1, 1996, and is disallowing millions of dollars in fees previously billed. The Department of Justice has begun to assess penalties calculated as double and treble the amounts disallowed.
The retroactive application of standards that came into effect only in the last year or two is the most obviously troublesome aspect of the audits. Let us take the case of teaching physicians who oversee residents and their ability to bill Medicare for services rendered by residents directly under the teaching physician's care. We all know that the training of residents is a process in which the resident first observes the teaching physician's care of a patient and then over time is gradually delegated increasing amounts of responsibility for the patient's care. As a residency progresses, a resident may begin to handle some procedures, after which the resident reports back to the teaching physician. Under the standards being applied in the PATH audits, these services would not be billable to Medicare. In conducting the audits, the OIG is imposing a physical presence requirement for all physician services that are to be reimbursed by Medicare. That means, as I understand it, that to bill a procedure to Medicare, the teaching physician must be physically in the room as the resident undertakes it; that is, the doctor and resident must be "elbow-to-elbow." But this did not become the required standard until new regulations took effect in July 1996.
Prior to 1996, the Medicare statute was silent regarding how Medicare would reimburse physician services furnished in teaching hospitals, while the original regulations promulgated pursuant to the statute, in 1967, clearly established two different standards for teaching physician involvement required to bill for patient care involving residents. The regulations created a higher standard for major surgeries and other complex and dangerous procedures. In these situations, "the attending physician must personally supervise the residents and interns who the physician involves in the care of the patient."1 But for less complex procedures, there was a general, more lenient standard: "Payment on the basis of the physician fee schedule applies to the professional services furnished to a beneficiary by the attending physician when the attending physician furnishes personal and identifiable direction to interns or residents who are participating in the care of the patient."2 This second, more general standard did not clearly indicate that teaching physicians had to be physically present during all procedures that were to be charged to Medicare.
There are serious concerns about the merits of such an elbow-to-elbow requirement in terms of the training of doctors, which I will not go into here, but, more relevant to our discussion today, the idea that the government is now changing the rules and applying the newly promulgated regulations to past procedures contradicts the sense of fairness that supposedly characterizes American law.
A general presumption against retroactive application of government rules and standards is embodied in our legal system. In determining the shape of a new government, the Framers of the federal Constitution expressed concern regarding the power of government to attach new legal rights and duties to past conduct by retroactive legislation in the Bill of Attainder, Ex Post Facto, Contract, and, later, the Due Process Clauses. Since the Supreme Court held early on in the history of the new republic that the Ex Post Facto Clause applied only to criminal laws, and the Bill of Attainder and Contract Clauses have also been narrowly construed, the constitutional analysis of retroactive civil legislation has fallen to due process jurisprudence. Under due process analysis, courts and commentators have focused on the fairness of retroactive legislation in determining if it is within Congress' constitutional powers to enact.
In terms of retroactive policymaking by administrative agencies, as opposed to Congress, the Supreme Court has similarly held that "[r]etroactivity is not favored in the law."3 In a country committed to the rule of law and predictability, you wish that that went without saying. In a 1988 decision, the Supreme Court held that an administrative agency cannot promulgate regulations with a retroactive effect "unless that power is conveyed by Congress in express terms."4
Interestingly, there are several similarities between that case, Bowen v. Georgetown University Hospital, and the situation all of us in this room are facing today. In Bowen, the Court struck down a Medicare cost-limit reimbursement standard, which had been adopted in 1984 to replace a prior rule that had been invalidated for various procedural flaws. Pursuant to the new rule, HHS had attempted to recoup reimbursement funds that health care providers had received in previous years, prior to the adoption of the 1984 rule. In determining the validity of this retroactive cost-limit rule, the Court examined whether the Medicare Act authorizes retroactive rulemaking, as "courts should be reluctant to find such authority absent an express statutory grant."5 After carefully reviewing the language and history of the Medicare Act, the Court concluded that they convincingly indicated that Congress had in fact considered the issue and limited HHS's discretion to prospective cost-limit rules.
Although HHS has not explicitly made the 1996 regulations retroactive - that is, the regulations themselves do not contain language making them apply to actions prior to 1996 - the OIG's use of the standards in them, such as the physical presence requirement, make them retroactive in effect. As such, absent any clear statement by Congress empowering HHS to issue retroactive regulations, application of the physical presence requirement in the PATH audits goes beyond HHS's delegated authority.
Even where the courts have not applied such a hard-and-fast rule for determining whether an agency has the authority to take retroactive action - such as when reviewing the actions of agencies in performance of their adjudicatory, rather than rulemaking, functions - they have balanced the importance of the government interest in applying the retroactive standard against the hardships that affected parties would consequently suffer.6 The considerations include the degree of "surprise," the harm to the party on which the new rule is imposed, the level of reliance on the old rule by that party, and the need, in terms of fulfilling a statutory goal, for retroactive effect. Even under this less rigorous balancing analysis, the retroactive application of the physical presence requirement is disfavored. The burdens placed on teaching hospitals - potentially many millions of dollars in billings disallowed and in punitive damages - are substantial, while the government interest in applying the standard retroactively is difficult to make out.
Of course, HHS contends that it is not retroactively applying a new standard in the PATH audits, but that it is using criteria that have been in effect since 1969. That contention, however, flies in the face of reality. In applying the physical presence requirement, the OIG has stated that it is using criteria contained in the Intermediary Letter 372 as its standard. This letter was issued in April 1969 by the Bureau of Health Insurance, the predecessor to the Health Care Financing Agency, or HCFA, the agency currently charged with carrying out Medicare, in order to clarify the original regulations from 1967. But IL-372 did not clearly state a physical presence requirement for all billable physician services. In fact, the government's guidance in this area has been anything but lucid. Even HCFA itself has openly admitted that carriers, hospitals, and physicians found IL-372 to be confusing. In the preamble to the new teaching physician rule that became effective last July, HCFA stated that IL-372 "left it to individual carriers to determine coverage of the [teaching physician] services based on customary practices in the area."7 HCFA also acknowledged that IL-372 "was not applied uniformly by all Medicare carriers."8 The ambiguity of IL-372 was further highlighted in a General Accounting Office report and in the dialogue between HCFA and the academic medical community after a 1992 HCFA memorandum stated, in a side comment, that teaching physicians must be present in all cases involving residents to bill Medicare.
This brings me to an area of even broader and much more serious concern: that is, the way in which federal regulators have approached their responsibilities under the Medicare legislation. In failing to set forth universal, unambiguous standards, and in delegating much of its oversight and enforcement authority to third-party carriers, the government - particularly HHS and HCFA - has blatantly ignored the dictates of accepted administrative procedure. In delegating the power to enforce the laws it enacts to executive agencies, Congress empowers those agencies to promulgate regulations whose legal effect is as binding as a statute. But unlike Congress, these agencies are not representative bodies, whose members are held accountable for their actions by constituencies that elect them to office. As a result, as the size of the federal bureaucracy began to increase rapidly with the New Deal, Congress passed the Administrative Procedure Act9 in 1946. To ensure a level of openness in agency policymaking that democratic governance demands, the APA sets forth certain notice-and-comment procedures for the promulgation of such a rule or regulation. These procedures require (1) notice of the proposed rulemaking, (2) a comment period during which interested members of the public have an opportunity to participate in the rulemaking through the submission of written comments or, in some cases, an oral legislative-type hearing, (3) production, after consideration of the comments received, of a concise general statement of the regulation's basis and purpose, (4) publication of the regulation in the Federal Register, (5) at least a 30-day grace period between publication in the Federal Register and the effective date of the regulation, and (6) a right of an interested person to petition the agency to adopt or revise a rule. These procedures ensure that those groups and individuals affected by a proposed agency rule or regulation are notified of and given an opportunity to participate in the rulemaking process.
However, IL-372, though not merely interpretive, was never subjected to the notice-and-comment requirements of the APA. If it had been, maybe then the letter's many ambiguities regarding teaching physicians and the billing of patient care services would have been cleared up. Maybe then teaching hospitals undergoing PATH audits would have known that physicians have had to be physically present during all forms of patient care rendered by residents. Or maybe, by participating in the rulemaking process, teaching hospitals and teaching physicians would have been able to persuade HHS to limit the physical presence requirement to surgical and other complex procedures. And maybe then these teaching hospitals would not today be faced with the prospect of double and treble damages.
But HHS's failure to follow the dictates of the APA to create a clear standard for physician involvement is not the only troubling aspect of this story. Compouding the acknowledged ambiguity regarding IL-372 physical presence requirements is the fact that 35 third-party carriers - Blue Shield had been Stanford's carrier in Northern California - contracted with HCFA to process Medicare claims and to enforce payment policy. HCFA has allowed these carriers great latitude in interpreting the Medicare regulations and standards. As a result, the thirty-five carriers have interpreted and communicated the regulations and standards differently across the country, resulting in substantial variation in guidance being given to different academic medical centers. And even though HHS has acknowledged this variation in interpretation, it is applying the same physical presence standard in all of the PATH audits. Is this fair?
The same concerns I have just reviewed about the physical presence requirement - retroactive application, failure to comply with the APA, and inconsistent and ambiguous standards - are just as applicable to the standard OIG is applying in the PATH audits regarding the documentation of teaching physician involvement in patient care and whether the documentation supports the level of service billed to Medicare. Regarding documentation of teaching physician involvement in patient care, the OIG is using the standard articulated in the July 1996 regulations in its PATH audits - that is, that a countersignature by the teaching physician of a resident's note in the medical record, in and of itself, is not sufficient documentation of involvement by the teaching physician. This standard is not supported by the plain language of IL-372 or its progeny, IL-70-2, and, furthermore, there had never been a statutory or regulatory requirement for documentation by more than a countersignature prior to the 1996 rule. In fact, many carriers conducted audits throughout the years reviewing teaching physicians' medical records and had required only a countersignature as sufficient documentation. Regarding the proper coding of the level of service a teaching physician billed to Medicare, the OIG is similarly applying standards that did not go into effect until August 1995 to services provided in 1990-95. Prior to August 1, 1995, HCFA had no uniform documentation guidelines for the coding of levels of visit services for its carriers to follow in reviewing these services or to educate physicians as to what documentation was required. In fact, HCFA explicitly informed carriers that they should not conduct audits on the level of visit services until the documentation guidelines were finished and made effective. As a result, the PATH audits are reporting numerous instances of overbilling resulting from insufficient documentation and inadvertent upcoding.
To make matters even worse, the ultimate result of the retroactive application of standards for evaluating teaching physician involvement and proper documentation and coding has not been just the disallowance of past fees billed to Medicare. In addition, the Department of Justice has imposed penalties under the False Claims Act - double and treble the alleged overpayments. And by threatening them with the possibility of exclusion from the Medicare program, criminal prosecution of individual physicians, and a fine of $10,000 for each "false claim" submitted, the federal government is pressuring institutions - which are also frightened by the prospect of the negative publicity that would accompany a lawsuit, whether successful or not - to settle under its terms.
Significant reform is needed in HHS's administration of Medicare programs, to bring it into accordance with accepted notions of fairness and administrative procedure. I highlight three possibilities for reform, which are by no means exclusive or exhaustive, but merely a starting point for addressing the serious concerns I have outlined.
First, in an area as complex and widespread as Medicare billing, rules and standards must be uniform, consistent, and universally applied. The formal adoption of regulations in 1996 is a step in the right direction. Additional guidance regarding teaching physicians and Medicare billing should also be provided in the form of regulations subject to the notice-and-comment requirements of the APA.
Second, functional management is the most appropriate way to regulate such a complex area as Medicare physician service billing. HHS is presently trying to regulate the area in minutiae with the PATH audits by penalizing teaching hospitals for every allegedly incorrect billing item. But in such a complex arena, 100 percent compliance is not a realistic or reasonable goal. In regulating functionally, OIG would allow for some limited room for error and would only look to see if a particular hospital reaches some threshold of compliance, like 90 percent. If it does, the government would neither disallow past payments nor assess penalties. If a hospital does not meet the threshold, then the government might more closely scrutinize a hospital's practices.
Finally, if the government assigns substantial duties to nonpublic third-parties - such as it has with the Medicare carriers - then it must take responsibility for those third parties' negligence or errors. That is, academic medical centers should not be held liable when the third parties give inconsistent or inaccurate guidance in the performance of their duties. For example, if the ambiguity regarding the level of physician involvement required for billing patient services performed by residents is at least in part the fault of differing interpretations of IL-372 by Medicare carriers, is it really fair to hold the teaching hospitals and physicians responsible? Should not the government take some responsibility for failing to oversee these carriers more carefully?
Now, as a lawyer I know that government lawyers may see the issue differently. Given legal ambiguities, value preferences, and also politics, lawyers have an even harder time than doctors to agree on a diagnosis or therapy. This, however, does not mean that the country should assume that the government lawyers are always right in their analysis.
Like all other academic medical centers, Stanford is trying to cope with the potentially enormous regulatory exposure that results from Medicare reimbursements. But, as I have outlined for you today, the problem goes far beyond the PATH audits currently taking place. Its roots go much deeper into the overall way in which the federal government has approached and administered its Medicare programs, and its potential for inflicting serious, if not irreparable, damage to academic medicine's financial underpinnings we have only begun to realize.
IV. Conclusion
Academic medicine is in a transition period and, while I recall the economist George Stigler's definition of a transition period as "a period between two transition periods," this time it may be a terminal transition. Our ability to weather the dual storms of a more competitive health care economy and governmental coercion will largely determine our continued success as innovators and leaders in medical education, research, and patient care.
All of us here know that survival of academic medicine calls for reconfiguring existing institutions in imaginative ways. But even if these efforts succeed, we know that they are not enough. America must realize that academic medical centers can never be the cheapest, and must find ways to end the squeeze that greatly threatens their investment in the future.
1 42 C.F.R. § 405.521(b)(2) (emphasis added).
2 42 C.F.R. § 405.521(b)(1) (emphasis added).
3 Bowen v. Georgetown University Hospital, 488 U.S. 204, 208 (1988).
4 Id.
5 Id. at 209.
6 See SEC v. Chenery Corp. (Chenery II), 332 U.S. 194, 203 (1947); Retail, Wholesale, and Department Store Union v. NLRB, 466 F.2d 380, 390 (D.C. Cir. 1972).
7 60 Fed. Reg. 63139 (Dec. 8, 1995).
8 Id. at 63137.
9 5 U.S.C. §§ 551-559, 701-706 (1946).