The Honorable Thomas A. Scully
Administrator
Centers for Medicare and Medicaid Services
Department of Health and Human Services
200 Independence Ave., SW
Washington, DC 20201

Dear Administrator Scully:

We would like to thank you for your efforts to eliminate the payment reductions to Medicare providers reimbursed under the physician fee schedule in 2003. Unfortunately, it now appears that the legislation enacted earlier this year will not be enough to avert a series of additional cuts in Medicare payments. These cuts pose a threat to Medicare beneficiaries' continued access to high quality care and may require action by both the Administration and Congress.

In order to soften the impact of these payment reductions and to further improve the underlying payment formula, we respectfully request that you remove Medicare covered drugs from the sustainable growth rate (SGR) formula. Such a move is justified from both a policy and a legal perspective and would go a long way towards improving Medicare beneficiaries' access to physician services.

In administering the physician fee schedule, the Centers for Medicare and Medicaid Services (CMS) includes "physicians' services" into its calculations of the SGR and its update adjustment factor. However, section 1848 of the Social Security Act possesses multiple definitions for "physicians' services." In section 1848(f)(4)(A), which pertains to the calculation of the SGR, "physicians' services" are defined broadly. The definition includes, "other items and services (such as clinical diagnostic laboratory tests and radiology services), specified by the Secretary, that are commonly performed or furnished by a physician or in a physician's office, but does not include services furnished to a Medicare+Choice enrollee."

Significantly, there is no reference to drugs within this definition. Moreover, since CMS has excluded drugs from "physicians' services" in its administration of other section 1848 provisions, we believe that removing drugs from the calculation of "physicians' services" in determining the SGR would be a consistent, plain reading of the statute.

Between the 1996 SGR baseline and 2002, Medicare drug spending rose from $1.8 billion to $6.2 billion-or from $55 per beneficiary to an estimated $187 per beneficiary. This amounted to a 242% increase for each Medicare beneficiary-almost seven times the 36% increase ($1310 to $1785) for physician services. Drug spending, as a consequence, rose from only 3.7% of all SGR spending in 1996 to 8.7% in 2002.

As a result of this unprecedented growth in expenditures, we believe that the underlying formula no longer accurately reflects true physician service costs. Consequently, we recommend that you utilize your administrative authority to remove drugs from the spending target. The statute permits such an action and good public policy demands it.

Thank you again for all of your outstanding work in this area. We look forward to your prompt reply.

Sincerely,

W.J. "Billy" Tauzin
Chairman

Michael Bilirakis, Chairman
Subcommittee on Health