[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]
STRENGTHENING MEDICARE FOR FUTURE GENERATIONS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON HEALTH
of the
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
__________
SEPTEMBER 22, 1999
__________
Serial 106-48
__________
Printed for the use of the Committee on Ways and Means
U.S. GOVERNMENT PRINTING OFFICE
65-698 CC WASHINGTON : 2000
_______________________________________________________________________
For sale by the U.S. Government Printing Office,
Superintendent of Documents, Congressional Sales Office, Washington, DC
20402
COMMITTEE ON WAYS AND MEANS
BILL ARCHER, Texas, Chairman
PHILIP M. CRANE, Illinois CHARLES B. RANGEL, New York
BILL THOMAS, California FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York SANDER M. LEVIN, Michigan
WALLY HERGER, California BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana JIM McDERMOTT, Washington
DAVE CAMP, Michigan GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota JOHN LEWIS, Georgia
JIM NUSSLE, Iowa RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania KAREN L. THURMAN, Florida
WES WATKINS, Oklahoma LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
A.L. Singleton, Chief of Staff
Janice Mays, Minority Chief Counsel
______
Subcommittee on Health
BILL THOMAS, California, Chairman
NANCY L. JOHNSON, Connecticut FORTNEY PETE STARK, California
JIM McCRERY, Louisiana GERALD D. KLECZKA, Wisconsin
PHILIP M. CRANE, Illinois JOHN LEWIS, Georgia
SAM JOHNSON, Texas JIM McDERMOTT, Washington
DAVE CAMP, Michigan KAREN L. THURMAN, Florida
JIM RAMSTAD, Minnesota
PHILIP S. ENGLISH, Pennsylvania
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
hearing records of the Committee on Ways and Means are also published
in electronic form. The printed hearing record remains the official
version. Because electronic submissions are used to prepare both
printed and electronic versions of the hearing record, the process of
converting between various electronic formats may introduce
unintentional errors or omissions. Such occurrences are inherent in the
current publication process and should diminish as the process is
further refined.
C O N T E N T S
__________
Page
Advisories announcing the hearing................................ 2
WITNESSES
Congressional Budget Office, Dan L. Crappen, Director............ 9
U.S. General Accounting Office, Hon. David M. Walker, Comptroller
General........................................................ 32
______
Dowd, Bryan, School of Public Health, University of Minnesota.... 60
Moon, Marilyn, Urban Institute................................... 47
Wilensky, Hon. Gail R., Project Hope............................. 55
SUBMISSIONS FOR THE RECORD
Accent Insurance Recovery Solutions, Omaha, NE, and Omnium
Worldwide, Omaha, NE, Douglas R. Wilwerding, joint statement... 72
American College of Nurse-Midwives, Karen S. Fennell, statement.. 73
American Counseling Association, Alexandria, VA, statement....... 75
American Medical Association, statement.......................... 77
National Center for Policy Analysis, John C. Goodman, statement.. 88
STRENGTHENING MEDICARE FOR FUTURE GENERATIONS
----------
WEDNESDAY, SEPTEMBER 22, 1999
House of Representatives,
Committee on Ways and Means,
Subcommittee on Health,
Washington, DC.
The Subcommittee met, pursuant to notice, at 2:07 p.m., in
room 1100, Longworth House Office Building, Hon. William M.
Thomas (Chairman of the Subcommittee) presiding.
[The advisories announcing the hearing follow:]
ADVISORY
FROM THE
COMMITTEE
ON WAYS
AND
MEANS
SUBCOMMITTEE ON HEALTH
CONTACT: (202) 225-3943
FOR IMMEDIATE RELEASE
September 9, 1999
No. HL-9
Thomas Announces Hearing on the
Strengthening Medicare for Future Generations
Congressman Bill Thomas (R-CA), Chairman, Subcommittee on Health of
the Committee on Ways and Means, today announced that the Subcommittee
will hold a hearing on strengthening the Medicare program for future
generations. The hearing will take place on Thursday, September 16,
1999, in the main Committee hearing room, 1100 Longworth House Office
Building, beginning at 10:00 a.m.
In view of the limited time available to hear witnesses, oral
testimony at this hearing will be from invited witnesses only.
Witnesses will include experts in the structure, financing and history
of the Medicare program. However, any individual or organization not
scheduled for an oral appearance may submit a written statement for
consideration by the Committee and for inclusion in the printed record
of the hearing.
BACKGROUND:
In the years ahead, the Medicare program will face serious
challenges brought on by rapid changes in the aging of the population
and increasing medical costs. Today, Medicare comprises 11 percent of
Federal outlays, but by 2030, it is projected to consume between 28 and
38 percent of Federal spending, requiring more than doubling the
payroll tax to cover increased expenditures. Even sooner, without
structural changes in the program, Medicare will be bankrupt by 2015.
Additionally, Medicare has not kept pace with the transformation of
the health care delivery system. While the program represented first-
class coverage in 1965, private insurance plans have surpassed Medicare
in offering their enrollees better benefits, including prescription
drug coverage, and greater choice of providers at reduced cost. The
National Bipartisan Commission on the Future of Medicare considered
these facts in indicating its support for a plan to strengthen and
improve the Medicare program in time for the retirement of the 77
million ``Baby Boomers'' beginning in 2010.
In announcing the hearing, Chairman Thomas stated: ``The Medicare
Commission's proposal received bipartisan support from 60 percent of
its members. I believe that the Commission's approach, based on
expanded choice for all beneficiaries in all areas, improved benefits,
and increased efficiencies, offers the best plan for sustaining the
Medicare program for future generations. As Congress deliberates the
best methods to strengthen Medicare and expand benefits to include
prescription drugs for needy seniors, we must act in a comprehensive
way that will not bankrupt Medicare and deny seniors their current
benefits. Medicare's current statutory and regulatory structure simply
cannot keep pace with innovations in the health care delivery system.''
FOCUS OF THE HEARING:
The hearing will focus on the need to reform the administration,
structure, and financing of the Medicare program to maintain its long
term solvency, ensure enrollees' access to benefits, and improve choice
of health plans.
DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:
Any person or organization wishing to submit a written statement
for the printed record of the hearing should submit six (6) single-
spaced copies of their statement, along with an IBM compatible 3.5-inch
diskette in WordPerfect 5.1 format, with their name, address, and
hearing date noted on a label, by the close of business, Thursday,
September 30, 1999, to A.L. Singleton, Chief of Staff, Committee on
Ways and Means, U.S. House of Representatives, 1102 Longworth House
Office Building, Washington, D.C. 20515. If those filing written
statements wish to have their statements distributed to the press and
interested public at the hearing, they may deliver 200 additional
copies for this purpose to the Subcommittee on Health office, room 1136
Longworth House Office Building, by close of business the day before
the hearing.
FORMATTING REQUIREMENTS:
Each statement presented for printing to the Committee by a
witness, any written statement or exhibit submitted for the printed
record or any written comments in response to a request for written
comments must conform to the guidelines listed below. Any statement or
exhibit not in compliance with these guidelines will not be printed,
but will be maintained in the Committee files for review and use by the
Committee.
1. All statements and any accompanying exhibits for printing must
be submitted on an IBM compatible 3.5-inch diskette in WordPerfect 5.1
format, typed in single space and may not exceed a total of 10 pages
including attachments. Witnesses are advised that the Committee will
rely on electronic submissions for printing the official hearing
record.
2. Copies of whole documents submitted as exhibit material will not
be accepted for printing. Instead, exhibit material should be
referenced and quoted or paraphrased. All exhibit material not meeting
these specifications will be maintained in the Committee files for
review and use by the Committee.
3. A witness appearing at a public hearing, or submitting a
statement for the record of a public hearing, or submitting written
comments in response to a published request for comments by the
Committee, must include on his statement or submission a list of all
clients, persons, or organizations on whose behalf the witness appears.
4. A supplemental sheet must accompany each statement listing the
name, company, address, telephone and fax numbers where the witness or
the designated representative may be reached. This supplemental sheet
will not be included in the printed record.
The above restrictions and limitations apply only to material being
submitted for printing. Statements and exhibits or supplementary
material submitted solely for distribution to the Members, the press
and the public during the course of a public hearing may be submitted
in other forms.
Note: All Committee advisories and news releases are available on
the World Wide Web at `HTTP://WWW.HOUSE.GOV/WAYS__MEANS/'.
The Committee seeks to make its facilities accessible to persons
with disabilities. If you are in need of special accommodations, please
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four
business days notice is requested). Questions with regard to special
accommodation needs in general (including availability of Committee
materials in alternative formats) may be directed to the Committee as
noted above.
NOTICE--CHANGE IN TIME
ADVISORY
FROM THE
COMMITTEE
ON WAYS
AND
MEANS
SUBCOMMITTEE ON HEALTH
CONTACT: (202) 225-3943
FOR IMMEDIATE RELEASE
September 13, 1999
No. HL-9-Revised
Change in Time for Subcommittee Hearing on
Strengthening Medicare for Future Generations
Thursday, September 16, 1999
Congressman Bill Thomas (R-CA), Chairman of the Subcommittee on
Health of the Committee on Ways and Means, today announced that the
Subcommittee hearing on strengthening Medicare for future generations,
previously scheduled for Thursday, September 16, 1999, at 10:00 a.m.,
in the main Committee hearing room, 1100 Longworth House Office
Building, will now begin at 1:30 p.m.
All other details for the hearing remain the same. (See
Subcommittee press release No. HL-9, dated September 9, 1999.)
NOTICE--HEARING POSTPONEMENT
ADVISORY
FROM THE
COMMITTEE
ON WAYS
AND
MEANS
SUBCOMMITTEE ON HEALTH
CONTACT: (202) 225-3943
FOR IMMEDIATE RELEASE
September 15, 1999
No. HL-9-Revised
Postponement for Subcommittee Hearing on
Strengthening Medicare for Future Generations
Thursday, September 16, 1999
Congressman Bill Thomas (R-CA), Chairman of the Subcommittee on
Health of the Committee on Ways and Means, today announced that the
Subcommittee hearing on strengthening Medicare for future generations,
previously scheduled for Thursday, September 16, 1999, at 1:30 p.m., in
the main Committee hearing room, 1100 Longworth House Office Building,
has been postponed until Wednesday, September 22, 1999, beginning at
2:00 p.m.
All other details for the hearing remain the same. (See
Subcommittee press release No. HL-9 , dated September 9, 1999.)
Chairman Thomas. The Subcommittee will please come to
order. I want to thank everyone for allowing the week to lapse,
and especially those witnesses who were inconvenienced in terms
of I know very busy schedules.
Today hopefully we will do a little bit of discussing about
Medicare and the way it should be. There is no question that
the Medicare Program has improved the health and has provided
security to millions of seniors since its inception in 1965.
Thirty-five years ago Medicare was modeled on what was then
state-of-the-art health care insurance. The program was based
on acute hospital care, offered no real preventive benefits,
and provided the then going model of cost reimbursement.
However, it is obvious that the evolving health care delivery,
shifting demographics, advanced technology, all structured into
rising health care costs, are threatening the Medicare Program,
without change.
Medicare's current statutory and regulatory structure has
not been able to keep pace with the changes in the health care
marketplace. Seniors are often not afforded the choices of
health care that Members of Congress and most Americans enjoy.
It wasn't until 1997 that a really meaningful preventive and
wellness package was even included, and there it fell far short
in many areas.
Seniors do not benefit from the availability of the most
innovative and advanced treatments. In addition, income tax
payers have been called upon to shoulder an increasing share of
the program's financing. Providers are almost literally crushed
under the 130,000 pages of minutely detailed rules and
regulations. Increasingly, policymakers are calling for a
structure that offers solutions.
As all of us now know, 10 of the 17 members of the National
Bipartisan Commission on the Future of Medicare--which was
about a 60 percent majority, but given the rules under the
statute, it had to be a super, super, supermajority--thought a
market-based structure would provide the solution for reforming
a significant portion of the seniors' health program.
The term that was utilized was ``premium support,'' and it
modernized Medicare by integrating innovations of the
marketplace into the program and harnessing competition to
control costs, while preserving the entitlement, the specific
defined benefits, and the safety net. Structural reform of
Medicare, many of us believe, is the best way to ensure that
seniors get the added health benefits they need, such as
prescription drug coverage, while also guaranteeing Medicare
will meet the health care needs of the Nation's retiring 77
million baby boomers.
There are a lot of myths about premium support, and I hope
that some of them will not be perpetuated today. We do want to
look at other options and focus on proposals that are
constructive for fundamental reform.
I am particularly heartened that the President has
delivered on his promise of those many months ago, that he
would provide a proposal. And interestingly, when you look at
some of the President's proposal, there is a degree, at least
as they perceive it, of competition in the President's model as
defined, to provide more choice for seniors.
In the House, we are working with a bipartisan group to
further refine that concept of premium support, but all of us
obviously are still looking for any new ideas or innovations
that can make Medicare work better, and preferably at a cheaper
price.
We can better integrate Medicare benefits under a single
comprehensive package which would allow for more rapid access
to new benefits and technology. Clearly, I think most people
believe that we can improve Medicare's administrative structure
so that choices are not just available to some but available to
all seniors.
And, finally, I think we can make the program more
efficient through a better structured incentive arrangement for
health plans to offer seniors higher quality care at
competitive premium prices, and for seniors, to make the
``right kinds of choices available to them.''
I look forward to hearing the witnesses, but prior to that,
it will be my pleasure to recognize the Ranking Member on the
Subcommittee, the gentleman from California, Mr. Stark.
Mr. Stark. Thank you, Mr. Chairman. I would like to yield
for an opening statement to the gentleman from Washington, Mr.
McDermott.
Chairman Thomas. Let the Subcommittee say first of all,
welcome back, to the gentleman from Washington.
Mr. McDermott. Good to be back, with all his moving parts
working.
Chairman Thomas. Is that kind of like it is good to be
anywhere, considering the options? But, as I told you before,
you look amazingly well for what has been described as to what
happened to you. So would you dispel the myth that you just
took a vacation, or did they really do something to you?
Mr. McDermott. I will take my shirt off and show you the
scar.
I want to thank Mr. Thomas for holding this hearing and Mr.
Stark for yielding me the time, and I would like permission to
enter my full statement in the record.
We are having this hearing today because Medicare is the
Nation's most important social health insurance program. I
think it is fair to say that most everybody in this room
believes it is vital to the well-being of the seniors of this
country.
Since Medicare was enacting in 1965, Medicare has had an
enormous impact on the quality of life of America's families by
drastically increasing the number of seniors who have health
care coverage. Before Medicare, only 46 percent of seniors had
health insurance. Today, 99 percent do. We must never forget
that basic fact when we talk about Medicare's future. So I
think you can understand I get nervous when folks start talking
about the magic of health care competition strengthening
Medicare for the future, when before Medicare the marketplace
left 54 percent of America's seniors uninsured.
The objective of Medicare reform should not be to further
segment the market under the guise of competition, that is, to
make it easier for insurance companies to pick off the
healthiest beneficiaries as subscribers and leave the rest for
the Government to take care of. The issue of market competition
through the issuance of vouchers, versus the importance of
maintaining a commitment to a social insurance program, was
essentially the crux of the debate that Mr. Thomas referred to
on the Medicare Commission, and it is why the Commission
ultimately was unable to fulfill its congressional mandate.
As an aside, I would say a lot of people think we ought to
have things decided by sixty and two-thirds percent and all
these kind, and suddenly it turns out that maybe that is a
little tougher to get done, so when you do that with taxes, you
have got to remember that.
I would be naive if I did not suspect that the proposal
that the Chairman will propose today looks a lot like the
premium support program that was presented to the Commission.
The problem is that in the 6 months since that proposal was
unveiled, it still lacks sufficient detail. The concept and the
proposal itself remain mostly spin and not very much substance,
in my view.
In fact, in a recent memo to Mr. Stark, the HCFA actuary
wrote that there is insufficient detail available regarding
that proposal to permit the estimation of its financial
effects. Now, I think if those details were given us, I am sure
the actuary could do it.
Conversely, the President has been using the last 6 months
to develop a detailed Medicare reform plan that addresses many
of the holes left by the Commission; most importantly, both
extends the life of the Medicare Trust Fund beyond 20, 25, and
guarantees a prescription drug benefit to all beneficiaries.
The irony is that the plan that the chairman of the
Commission presented cut costs by really putting it onto the
beneficiaries of Medicare. Only a small part of the cost-
cutting comes from so-called premium support competition, that
is, putting people in HMOs. Most of the savings comes from
raising the costs on beneficiaries and cutting payments to
doctors and hospitals.
Now, if there is some change, we will have to have that
discussed here today. But I find it particularly hypocritical
that the same people, both Democrats and Republicans, who
advocate premium and by inference to extend the BBA cuts
another 5 years, have been running around this Hill for the
last few weeks saying that we have to give tens of billions of
dollars back to the health care industry in lieu of
comprehensive Medicare reform.
You cannot have it both ways. You can't talk about saving
money by extending those BBA cuts on the one hand, and on the
other hand have a budget process over here where we are bogged
down on the HHS appropriation because we can't decide how much
to give back in this process.
Radical Medicare reform that replaces the guarantee of
health care with an inadequate defined contribution voucher
will harm the typical Medicare beneficiary. Premium support,
advanced by the leaders of the Commission, is not a solution in
my view but a worsening of health care problems.
So I would like to enter into the record the dissent myself
and the other Democratic Members prepared in March, detailing
the failure of the Commission to meet its statutory directives
to look at what it did to seniors and to the disabled, and how
it would improve the long-term health of Medicare. This dissent
also describes a more rational framework for reform, which I am
glad to say the administration has used a number of pieces from
in their proposal.
[The information had not been received at the time of
printing.]
Mr. McDermott. I think it is important that the Chairman
have this hearing, and I appreciate having this discussion. I
think we are going to have to ultimately have this debate
inside the Congress, and I applaud you for starting it, and we
will have a long and interesting debate. Thank you.
[The opening statement follows:]
Statement of Hon. Jim Ramstad, a Representative in Congress from the
State of Minnesota
Mr. Chairman, thank you for calling this important hearing
to discuss ways to preserve and protect Medicare.
We all know we must make some changes to strengthen
Medicare if it is going to be operational beyond 2015. But we
need to do more than make sure the program is simply still in
existence.
While Medicare is clearly a vital program in many respects
for seniors today, I think we could do much more for these
seniors if we introduced greater innovation into the system
overall. Today, we will hear about many alterations we can
make, and I am pleased that we have someone from my home state
of Minnesota to talk about his proposal.
Minnesota is a leader in health care innovation, and has
done many things to make our health care delivery system one of
the most efficient in the country. But as the saying goes, ``no
good deed goes unpunished.'' Minnesota has been penalized for
being efficient because other states have been allowed to
continue with less efficient practices. Just as it is time to
change a tax system that penalizes saving and marriage, it is
also time to reform a health care system that penalizes
efficiency.
I hear from beneficiaries from Minnesota every day who want
greater equity in the system today and improvements for future
generations. They know the problems that face Medicare are more
complex and daunting, and they support comprehensive reforms
sooner rather than later.
Thanks again, Mr. Chairman, for calling this important
hearing. I look forward to hearing from today's witness on ways
we can improve this important health care program for all those
who have paid into it.
Chairman Thomas. I thank the gentleman from Washington, and
it is clearly evident he has fully recovered.
Mr. McDermott. I think I am stronger than when I went away.
Chairman Thomas. That is the problem with this modern
medicine.
Our first witness will be the director of the Congressional
Budget Office, the fifth director of the Congressional Budget
Office. Mr. Crippen, you have a written testimony. We will make
it a part of the record, and you may address us in any way you
see fit in the time allotted to you, and there may be some
questions.
STATEMENT OF DAN L. CRIPPEN, DIRECTOR, CONGRESSIONAL BUDGET
OFFICE
Mr. Crippen. I should hope so. Thank you, Mr. Chairman. I
am pleased to be here today to discuss reforming Medicare,
especially for the long term.
While I apologize to the Committee for being a little
redundant in saying things about how bad the problem is, I
think it is always important to characterize what we think we
know about the near future and the long term, and the stability
of the program and its financial condition, so I will start
there with the numbers and comments that are familiar to you. I
will not stop there, but I will spend a minute.
Spending for Medicare is expected to exceed $200 billion
this year, providing benefits to 39 million elderly and
disabled. Growth in Medicare spending has slowed remarkably in
the last 2 years, partly because of provisions enacted in the
Balanced Budget Act of 1997. Nonetheless, without reform, the
program is expected to face mounting pressures in coming years,
arising from rapid growth in the number of eligible people and
increases in the cost of care per patient.
Mr. Chairman, I have found it useful and would invite you
to think about dividing the future into three distinct periods:
the next 10 years, before the baby boomers retire; the period
2010 to 2030, which is when most of the boomers do retire; and
then kind of the time thereafter, 2030 to 2070.
In the first instance of the next 10 years, despite the
recent slowdown of growth in spending, outlays for benefits are
expected to more than double in this decade. Medicare spending
will account for almost 20 percent of the budget by 2009, up
from about 12 percent this year.
Mr. Chairman, after that it gets worse. Medicare's share of
the budget will continue to increase rapidly for 20 years
thereafter, largely because of the influx of the baby boom
population. The Medicare trustees estimate that program
spending will double as a percent of our economy, double as a
percent of GDP, from 2.5 to 4.9 percent in 2030. At the same
time, Social Security is expected to absorb an additional 6.8
percent of GDP, bringing the total for these programs together
to 12 percent of the economy, compared to 6.9 percent today.
And that doesn't include other likely increases for the
retirees, such as Medicare and Medicaid for long-term care.
The elderly population, Mr. Chairman, will increase by
almost 3 percent a year between 2010 and 2030, rising from 39
million to 69 million people. The number of workers for each
retiree will fall from 3.8 today to 2.2 by 2030, making the
current system of financing virtually impossible to maintain
without tax increases or substantial cost reductions. By 2070,
Medicare spending is projected to grow to 5.7 percent of GDP,
or a total of 13 percent with Social Security. Meanwhile, the
ratio of active workers to retirees continues to fall to 2.
As the chart illustrates, the gap between spending and
revenues dedicated to the program is projected to increase
dramatically over time. We estimate that revenues dedicated to
Medicare equals about 1.8 percent of GDP this year,
substantially less than program spending.
By 2030, dedicated revenues will be about 2.2 percent of
GDP, while total Medicare spending will be about 4.9 percent.
By 2030, then, Mr. Chairman, general funds equal to almost 3
percent of the economy would be needed to supplement current
revenues. The financial imbalance will continue to grow after
2030.
That turns out to be the good news. The bad news is that
these projections assume that the growth in spending per
beneficiary will gradually decline to be more in line with
growth in hourly earnings, even without a significant policy
change. That assumption is likely unrealistic.
Since 1980, Medicare's costs grew more than twice as fast
as wages and salaries. Contrary to the assumptions made in the
Trustees' Report, Medicare's costs will probably continue to
grow faster than wages, reflecting continuing advances in
medical technology and increases in the use of services by
enrollees.
At the risk of stating the obvious, if a slow growth in
Medicare is not realized, the fiscal future quickly gets
bleaker. For example, if the long-term growth in hospital
spending per beneficiary increased by 1 percentage point more
than wages, the payroll tax increase needed to restore
actuarial balance in the trust fund would more than double,
from 2.9 percent of current wages to 6.5 percent.
So, in light of these sobering projections, which likely
understate the extent of the problem, what can we do? There are
two aspects to keep in mind in evaluating both short- and long-
run reforms.
First, we need to always be mindful that the ability to pay
for goods and services, including health care services, grows
as the economy grows. Thus, policies that enhance economic
growth will make it easier to meet the needs of the elderly
population. What is most important is not necessarily the
status of the trust fund, or ultimately the source of the
funding for the benefits, but rather the portion of the economy
that is promised to the retired population, the amount of goods
and services, including health care, that must be transferred
from the working population to the non-working.
Second, the tradeoff between health care and other goods
and services will be less marked if Medicare is more efficient,
meeting enrollees' needs in the least costly way. Improving
Medicare's efficiency may require restructuring the program
more fundamentally than has been accomplished so far.
About 85 percent of Medicare enrollees remain in the
program's traditional fee-for-service sector. According to our
projections, that share will fall to only 70 percent by 2009.
Unless reform proposals markedly reduce fee-for-service
enrollment, that sector will remain dominant over the next
decade, especially in less populated areas, until at least the
boomers retire.
Consequently, the costs of care in the fee-for-service
sector will significantly determine overall Medicare spending
and efficiency for the next decade. Despite your best efforts
to constrain fee-for-service costs, more fundamental reform is
almost certainly necessary. A more complete discussion is
included in my written statement and other CBO reports on
reforms to the fee-for-service program.
Quickly, Mr. Chairman, I want to speak to a couple of long-
run options that seem to be in the debate today. There may be
others, but recently the debate seems to have centered around
two broad approaches to restructuring the Medicare Program:
shifting from pay-as-you-go financing to prefunding, and
shifting from open-ended Federal payments to a defined
contribution. Both of these approaches would attempt to make
beneficiaries more aware of the costs and benefits of seeking
additional care, and would depend on competition among health
plans to ensure efficiency and maintain high standards of
quality.
On the prefunding side, proposals to prefund Medicare would
require people to save during their working years to finance
health insurance after they retire. Ironically, that approach
would put into place a self-financing mechanism that many
people believe already exists with the Medicare Trust Funds.
Prefunding would obviously require the working population to
pay twice, once for themselves and once for their parents.
In its simplest form, a defined contribution plan would
make a fixed payment, in most cases adjustable at least every
year, to beneficiaries who would choose from a range of health
plans, including the traditional fee-for-service program. In
principle, health plans would have an incentive to compete on
the basis of price and become more efficient, thereby lowering
costs and reducing the future fiscal burden on workers.
The design most frequently discussed in current debates has
already been evidenced here today, is the premium support
model. It would retain a basic benefit package that all plans
would offer. The Government's payment would ensure that at
least one plan could be purchased with no more than a modest
additional premium paid by beneficiaries. Plans could offer
additional services and would be free to set higher premiums.
For any of these plans, Mr. Chairman, accurate risk
adjustment methods are necessary if the plans are to compete on
the basis of benefits, quality of service, and premium cost.
Indeed, Mr. McDermott just mentioned the severe problems of
adverse selection.
Eliminating all of the risks associated with high-cost
enrollees would be undesirable, since financial risk promotes
more efficient practices. Nonetheless, undue vulnerability to
financial risk could be used by adjusting payments using risk
adjusters which account for the expected greater use of
services by sicker beneficiaries. Alternatively, the Federal
Government could share some of the risks through such methods
as blending a capitated rate with a fee-for-service payment, or
providing reinsurance and stop-loss coverage for high cost
cases to the providers.
The Balanced Budget Act of 1997 attempted to improve the
efficiency of Medicare's fee-for-service system through payment
reforms, and laid the groundwork for a more competitive system
through the creation of Medicare Plus Choice. The resulting
changes to Medicare's risk-based and fee-for-service sectors
have slowed the growth in costs, but the BBA reforms still do
not promote the best health outcomes at the lowest cost to
taxpayers and beneficiaries.
The Congress could consider raising Medicare revenues by
increasing the payroll tax; allocating more revenues to the
program from the general fund; or increasing the costs imposed
on enrollees. Options to raise revenues for the program,
however, are likely to succeed only temporarily in shoring up
Medicare's financing as health costs continue to escalate.
Congress could also consider reducing Medicare benefits,
but that would impose greater financial burdens, obviously, on
the elderly and disabled, and eventually could prove to be
unacceptable.
A third approach would address the inefficient use of
medical resources in Medicare. Treatment patterns vary greatly
nationwide, with consequences for both health outcomes and
program costs. For example, patients are more likely to be
hospitalized in areas with high bed-to-population ratios than
in other areas, even though they have identical medical
conditions.
Medicare could be restructured to allow health plans to
compete on the basis of price as well as benefits and quality.
Premium support approaches, such as recent proposals from the
President and that of the National Bipartisan Commission on the
Future of Medicare, are potentially promising strategies to do
this.
Enrollees could be given better information about their
health plan choices, including a report card that could help
them assess the quality of care the plans provide. Payment
systems and cost-sharing requirements could be revamped to
provide plans with clear financial incentives to improve both
the quality of care and the efficient use of resources.
Those changes could also provide beneficiaries with better
incentives to enroll in efficient, high-quality health plans,
but those types of changes are possible only through
fundamental reform. Making marginal changes to the current
program while adding significant benefits would likely only
hasten the day of reckoning.
Thank you, Mr. Chairman.
[The prepared statement follows:]
Statement of Dan L. Crippen, Director, Congressional Budget Office
Mr. Chairman and Members of the Committee, I am pleased to
be here today to discuss reforming Medicare for the long term.
Growth in Medicare spending has slowed remarkably in 1998 and
1999, partly because of provisions in the Balanced Budget Act
of 1997 (BBA). Nonetheless, without reform, the program is
expected to face mounting pressures in coming years, arising
from rapid growth in the number of eligible people and
increases in the cost of care per patient.
Projections of Medicare Costs Under Current Law
Spending for Medicare is expected to exceed $200 billion
this year, providing benefits to 39 million elderly or disabled
people. Despite the recent slowdown in the growth of spending,
outlays for benefits are expected to more than double in the
next decade.
At that rate, Medicare spending will account for almost 20
percent of the federal budget by 2009, up from about 12 percent
this year. Under current law, Medicare's share of the budget
will continue to increase rapidly thereafter, partly because of
the influx of the baby-boom population. According to the
intermediate assumptions of the Social Security trustees, the
elderly population will increase by about 1 percent a year
between 2000 and 2010 but by almost 3 percent a year between
2010 and 2030--rising from 39 million to 69 million people.
And, as in the past, Medicare's costs will probably grow faster
than its enrollment, reflecting continuing advances in medical
technology and increases in the use of services by enrollees.
Although such projections involve much uncertainty,
Medicare has to prepare for the unprecedented demands that the
baby-boom population will soon impose on it. Assuming no change
in policy, the Medicare trustees estimate that program spending
will grow from about 2.5 percent of gross domestic product
(GDP) this year to 4.9 percent of GDP in 2030, as the last of
the baby boomers enroll in the program. By 2070, spending is
projected to grow to 5.7 percent of GDP. Meanwhile, the ratio
of active workers to retirees will fall, making the current
system of financing difficult to maintain without tax increases
or substantial cost reductions.
There is a widening gap between spending for Medicare and
the revenues that are specifically dedicated to the program
(see Figure 1). The Congressional Budget Office (CBO) estimates
that revenues dedicated to Medicare equal about 1.8 percent of
GDP this year, substantially less than program spending.\1\ The
gap largely reflects the infusion of general funds into
Supplementary Medical Insurance (SMI), which accounts for 75
percent of the cost of that program. The gap between spending
and dedicated revenues is projected to increase over time, as
the Hospital Insurance (HI) Trust Fund goes into deficit. By
2030, dedicated revenues will be about 2.2 percent of GDP while
spending will be about 4.9 percent of GDP. The financial
imbalance will continue to grow after 2030.
---------------------------------------------------------------------------
\1\ Dedicated revenues include payroll taxes and income taxes on
Social Security benefits, which are paid into the Hospital Insurance
Trust Fund, plus premiums for Supplementary Medical Insurance
(estimated as 25 percent of the costs of that insurance).
[GRAPHIC] [TIFF OMITTED] T5698.001
Restoring actuarial balance to the HI trust fund for the
next 75 years would require significantly increasing revenues
or decreasing spending. According to the latest report of the
Medicare trustees, balance would be restored in the HI trust
fund if the payroll tax was immediately increased by about 50
percent--from 2.9 percent of wages to 4.36 percent--or spending
was reduced by an equivalent amount. Such policies would not
address the growth of SMI, which is already largely funded by
general revenues.
Moreover, those projections assume that growth in spending
per beneficiary will gradually decline to be more in line with
growth in hourly earnings, even without a significant policy
change. That assumption is probably unrealistic; if spending
per beneficiary does not slow, the financial status of the HI
trust fund will be considerably worse. For example, if the
long-term growth in HI spending per beneficiary increased by 1
percentage point, the payroll tax increase needed to restore
actuarial balance in the trust fund would more than double.
Under that circumstance, the Medicare trustees estimate that
the HI payroll tax would immediately increase from 2.9 percent
of wages to 6.52 percent.
The nation will most likely devote more of its income to
health care in the coming decades, and since the elderly will
become an increasingly dominant part of the population, public
acceptance of larger federal health spending may grow.
Furthermore, the ability to pay for goods and services,
including health care services, grows as the economy grows.
Thus, policies that enhance economic growth will make it easier
to meet the needs of the elderly population. But the trade-off
between health care and other goods and services would be less
marked if Medicare was more efficient, meeting enrollees' needs
in the least costly way. Improving Medicare's efficiency may
involve restructuring the program more fundamentally than has
been done so far.
BBA Policies to Promote Competition Among Health Plans
In establishing the Medicare+Choice system under the
Balanced Budget Act, the Congress wanted to make Medicare's
risk-based sector more competitive by expanding the range of
available plans--both the kinds of plans offered and the areas
in which they were offered. The Congress also mandated a
coordinated open-enrollment process intended to better inform
beneficiaries about their options.
But the BBA left in place the administered pricing system,
which sets Medicare's payments to plans. Consequently, the
program has no meaningful price competition among plans for the
basic benefit package. Instead, plans have incentives to
increase optional benefits rather than to reduce costs, just as
they did before the BBA. Changing to a premium-support or
bidding system could expand competition to include price as
well as benefits and quality of service, so that Medicare could
capture some of the savings from plans' more efficient health
care management. Many issues would have to be resolved,
however, before Medicare could carry out such an approach
nationwide. The competitive-bidding demonstrations mandated by
the BBA, if successfully implemented, could provide some
answers.
Options for Restructuring Medicare
Recent policy debate has centered around two broad
approaches to restructuring the Medicare program: shifting from
pay-as-you-go financing to prefunding and shifting from open-
ended federal payments to a defined contribution. Both of those
approaches would attempt to make beneficiaries more aware of
the costs and benefits of seeking additional care and would
depend on vigorous competition among health plans to ensure
efficiency and maintain high standards of quality.
Prefunding
Proposals to prefund Medicare would require people to save
during their working years to finance health insurance after
they retire. Ironically, that approach would put into place a
self-financing mechanism that many people believe already
exists with the Medicare trust funds. When fully implemented,
prefunding would largely eliminate the current flow of
subsidies from workers to retirees. Those subsidies will become
increasingly burdensome as the number of workers for each
retiree falls from 3.8 today to 2.2 by 2030. Because each
generation would pay for its own Medicare costs, prefunding
would avoid the prospect of generations with relatively few
workers having to finance the health expenditures of larger
generations--a problem inherent in Medicare's current financing
system.
Any switch from a pay-as-you-go system to prefunding faces
a potentially long, complex, and costly transition period.
Current Medicare enrollees and older workers, who have
insufficient working years left to save enough to cover their
health spending in retirement, will continue to depend on pay-
as-you-go financing. Younger workers could face significant
mandatory contributions to finance their own future insurance
needs while paying additional taxes to fund the transition.
Defined Contribution
Under a defined contribution (or voucher) plan, Medicare
would make a fixed payment to beneficiaries, who would choose
from a range of health plans--including the traditional fee-
for-service program. If their chosen plan's premium exceeded
Medicare's payment, they would pay the extra amount. In
principle, with beneficiaries required to pay the additional
costs of more expensive plans, health plans would have an
incentive to compete on the basis of price and become more
efficient, thereby lowering costs and reducing the future
fiscal burden on workers.
The design most frequently discussed in current debates--
the premium-support model--would retain a basic benefit package
that all plans would offer. The government's payment would
ensure that at least one plan could be purchased with no more
than a modest additional premium paid by beneficiaries. Plans
could offer additional services and would be free to set higher
premiums.
Accurate risk-adjustment methods are necessary if plans are
to compete on the basis of benefits, quality of service, and
premium cost. Plans that attracted higher percentages of high-
cost enrollees would find it difficult to compete if the
payments they could expect for those people did not reflect
their probable costs. Instead of focusing on ways to improve
efficiency, plans in those circumstances might focus on
attracting healthier enrollees (a situation known as favorable
selection).
Eliminating all of the risks associated with high-cost
enrollees would be undesirable since financial risk promotes
more efficient practices. Nonetheless, undue vulnerability to
financial risk could be reduced in the following ways:
Payment adjusters: The Health Care Financing
Administration (HCFA) currently uses demographic factors for
age, sex, Medicaid receipt, and institutionalization to adjust
payments to plans for the expected costs of their enrollees.
Beginning in 2000, HCFA will add an adjuster based on prior
inpatient admissions to better account for health status.
However, a payment adjustment based on prior inpatient
admissions creates an obvious way for plans to increase their
Medicare payments by hospitalizing enrollees unnecessarily--a
problem that HCFA is well aware of. Consequently, HCFA intends
to develop a more comprehensive health status adjuster as soon
as possible.
Partial capitation: Because even the best payment
adjuster can account for only a modest amount of variation in
health spending at the plan level, the Medicare Payment
Advisory Commission and others have suggested that some kind of
partial capitation may be necessary to ensure that plans do not
skimp on the services provided to their enrollees. Partial
capitation could be introduced by blending a capitated rate and
a fee-for-service rate, supplementing payments for unusually
costly cases, providing stop-loss protection on total costs at
the plan level, or carving out selected high-cost services. All
of those approaches would reduce the capitation rate across the
board, imposing a kind of premium on plans in return for
insurance against excessive risk.
Other strategies for controlling adverse selection could
reduce the demands on risk adjustment. Such strategies include
coordinated open-enrollment periods, controls on the marketing
of plans, and a requirement that plans offer a standardized
benefit package.
Reforming Fee-for-Service Medicare
About 85 percent of Medicare enrollees remain in the
program's traditional fee-for-service sector. According to
current CBO projections, that share will fall to 70 percent by
2009. Thus, Medicare's fee-for-service sector should remain
dominant, especially in less populated areas, at least through
the next decade. Consequently, efforts at cost control must
include the fee-for-service sector. Previous efforts have
focused almost entirely on providers. Although some additional
policy changes affecting providers could be made, changes
affecting enrollees could also be considered.
Policies Affecting Providers
Paying separately for each service a patient receives
encourages the provision of unnecessary services. One
alternative to separate payments is a single payment,
determined prospectively, for all services deemed appropriate
to treat a given condition. Prospective payment encourages
providers to treat the patient with the fewest services
possible to adequately address the condition. Medicare has had
a prospective payment system for hospital inpatient services
since 1983. The BBA mandates new prospective payment systems
for hospital outpatient, skilled nursing, and home health
services.
Prospective payment could be expanded. One way is to bundle
together payments for acute and postacute hospital services.
Another way is to combine payments for physician and facility
services during a hospital stay. However, developing viable
prospective payment systems is difficult. Having more
comprehensive bundles of services reduces providers'
opportunity to shift services to sites or times not included in
the prospective payment, increasing their incentive to reduce
costs; but such bundling also imposes greater financial risk on
providers. One way to reduce excessive risk and the resulting
incentive to avoid difficult cases is to include severity
adjustments in the payment system, similar to the risk
adjusters applied to capitation rates for paying
Medicare+Choice plans. Another option is to expand the current
hospital outlier policy to compensate providers for unusually
expensive cases.
An alternative approach could use competitive bidding to
establish prices for individual services in the fee-for-service
program. HCFA is conducting a demonstration of competitive
bidding for certain categories of durable medical equipment,
which Medicare currently pays for according to a fee schedule.
The demonstration, in Polk County, Florida, covers hospital
beds and four other categories of supplies. The agency received
bids from 30 suppliers and plans to contract with 16 of them.
Price reductions range from 13 percent for surgical dressings
to 31 percent for enteral nutrition products. HCFA plans to
begin paying suppliers under the new pricing system on October
1, although legal challenges could delay that. The animosity of
suppliers toward the demonstration illustrates the general
problem that HCFA faces in testing competitive bidding as an
alternative to administrative price setting.
Policies Affecting Enrollees
Enrollees in Medicare's fee-for-service sector currently
have to pay some of the costs of their covered services and all
of the costs of outpatient prescription drugs, which are not
typically covered by Medicare. In principle, cost sharing gives
patients an incentive to use services more prudently. For
several reasons, however, Medicare's cost-sharing requirements
are not as effective in that regard as they might be. First,
the requirements are too varied and complex to be well
understood by patients. Second, some services (such as home
health care) have no cost-sharing requirements. Instituting
such requirements could help reduce inappropriate utilization.
Third, some circumstances (such as long hospital inpatient
stays for severely ill patients) require high cost sharing,
even though there is little possibility of reducing the use of
services. Fourth, because Medicare does not limit enrollees'
cost-sharing liabilities, most enrollees seek some kind of
supplementary (or medigap) coverage to limit their financial
risk. Such supplementary coverage often eliminates the
incentives for prudent use of services that cost sharing is
intended to create.
In its recent volume on maintaining budgetary discipline,
CBO discussed one policy option that could better protect
enrollees from catastrophic expenses and improve the
effectiveness of Medicare's cost-sharing requirements. That
option would change those requirements to more accurately
reflect the costs of the services used and make the
requirements easier for enrollees to understand. It would also
cap each enrollee's annual liability for cost-sharing expenses.
Medicare could implement the option for no net cost by raising
cost-sharing requirements somewhat for the majority of
enrollees, who use relatively few services during the year, and
using those savings to finance the cost-sharing cap for the
minority of patients with more serious health problems that
year. One option would replace the current complicated mix of
cost-sharing requirements with a single $750 deductible, a
uniform coinsurance rate of 20 percent for amounts above the
deductible, and a cap of $2,000 on each beneficiary's total
cost-sharing expenses. That would yield $8 billion in federal
savings over the next 10 years.
A complementary option, which would further increase the
effect of Medicare's cost-sharing requirements, would restrict
the kind of coverage that medigap plans could provide. Under
one approach, those plans might be prohibited from covering
Medicare's deductible amounts. Alternatively, they might be
permitted to offer coverage only for a cost-sharing cap that
was lower than the one provided under Medicare--such as one set
at $1,000 a year when Medicare's cap was set at $2,000.
Restricting medigap coverage could generate considerable
savings for Medicare, which pays most of the costs of the
additional services that medigap policyholders use. If, for
example, medigap plans were prohibited from covering any part
of Medicare's new deductible under the cost-sharing option
discussed above, program savings would be about $46 billion
over 10 years. Those savings could be used to improve
Medicare's benefits--for example, by financing the costs of a
prescription drug benefit.
The President's Proposal for Medicare Reform
The President's recent proposal to reform Medicare provides
a framework for making significant changes to the program. It
is intended to modernize Medicare's benefits, enable the
federal government to become a more prudent purchaser of health
services, and encourage price competition among health plans to
slow the growth of Medicare spending in the longer term. CBO
estimates that the President's Medicare reform plan would
increase federal outlays by $111 billion over the 2000-2009
period (see Table 1). By comparison, the Administration
estimates the 10-year cost of the proposal at $46 billion.
Table 1.--Ten-Year Estimates of the President's Medicare Proposal
[In billions of dollars]
------------------------------------------------------------------------
Administration CBO
------------------------------------------------------------------------
Benefit Payments (Increase) a:
Prescription drug benefit.................... 118.8 168.2
Changes to fee-for-service Medicare.......... -64.2 -48.2
Competitive defined benefit b................ -8.9 -8.9
------------------------
Subtotal..................................... 45.7 111.1
Transfers from the General Fund................ 327.7 327.7
------------------------
Total........................................ 373.4 438.8
------------------------------------------------------------------------
Sources: Congressional Budget Office (based on the July 1999 baseline)
and Office of Management and Budget.
aIncludes effect on Medicaid.
bAdministration's estimate.
The President proposes a new prescription drug benefit that
would provide first-dollar coverage, with an annual limit of
$2,500 in 2008, when the benefit was fully phased in. Although
most Medicare enrollees would receive some benefit, the
proposal would not substantially protect those in poor health
who incurred very large out-of-pocket expenses for prescription
drugs.
Under the President's proposal, the federal share of the
prescription drug benefit would be paid through transfers from
the Treasury's general fund. Those transfers are simply
promises to pay future benefits with future tax dollars. How
burdensome that commitment might become depends on both the
growth of future spending for prescription drugs and the growth
of the economy over the coming decades.
The Balanced Budget Act includes provisions that limit
updates, and the President proposes to extend some of them
beyond their 2002 expiration date. The President would also
provide a small amount of additional funds to reduce the impact
of the act's payment reductions through as-yet-unspecified
legislation. On balance, payments to providers would be lower
than baseline levels, but only after 2002.
Reducing payment rates for fee-for-service providers would
yield Medicare savings without contributing to the program's
efficiency. But improving the efficiency of the fee-for-service
sector is key to achieving short-term cost savings and longer-
term reform. Successful adoption of the contracting and payment
methods that private health plans use to manage their costs
could establish the basis for a competitive fee-for-service
sector. But recent efforts to test such methods have not found
much acceptance among providers, and the President's proposal
treads lightly on that issue.
The President's provisions for rationalizing cost-sharing
requirements would modestly increase some of those requirements
and lower others, without reducing their complexity. A more
thorough reform might subject all Medicare-covered services to
a single deductible and uniform coinsurance rates, at the same
time placing an annual limit on the amount that enrollees paid
in cost sharing for all covered services (including drugs if
that benefit was added to the program).
The President's proposal for a competitive defined benefit
would provide new opportunities for Medicare's managed care
plans to compete on the basis of price as well as the
generosity of benefits and the quality of service. Although the
proposal would introduce elements of competition among health
plans that could help slow the growth of Medicare spending in
the longer term, it would fall short of a fully competitive
program. By establishing the fee-for-service sector as the
benchmark for defining Medicare benefits and setting premiums
for health plans, it would blunt the incentives for efficiency.
Conclusion
The Balanced Budget Act of 1997 attempted to improve the
efficiency of Medicare's fee-for-service system through payment
reforms and laid the groundwork for a more competitive system
through the creation of Medicare+Choice. The resulting changes
to Medicare's risk-based and fee-for-service sectors have
slowed the growth in costs. But the BBA reforms still do not
promote the best health outcomes at the lowest cost to
taxpayers and beneficiaries.
The Congress could consider raising Medicare revenues by
increasing the payroll tax, allocating more revenues to the
program from the general fund, or increasing the costs imposed
on enrollees. Options to raise revenues for the program,
however, are likely to succeed only temporarily in shoring up
Medicare's financing as health care costs continue to escalate.
The Congress could also consider reducing Medicare benefits,
but that would impose greater financial burdens on the elderly
and disabled that could eventually prove unacceptable.
A third approach would address the inefficient use of
medical resources in Medicare. Treatment patterns vary greatly
nationwide, with consequences for both health outcomes and
program costs. For example, patients are more likely to be
hospitalized in areas with high bed-to-population ratios than
in other areas, even though they have identical medical
conditions. Patients in fee-for-service settings rely more on
specialist and hospital care than patients in managed care. In
addition, managed care settings emphasize disease prevention
and primary care more than fee-for-service settings do.
Medicare could be restructured to allow health plans to
compete on the basis of price as well as benefits and quality.
Premium-support approaches, such as recent proposals from the
President and the National Bipartisan Commission on the Future
of Medicare, are potentially promising strategies. Enrollees
could be given better information about their health plan
choices, including a report card that could help them assess
the quality of care that plans provide. Payment systems and
cost-sharing requirements could be revamped to provide plans
with clear financial incentives to improve both the quality of
care and the efficient use of resources. Those changes could
also provide beneficiaries with better incentives to enroll in
efficient, high-quality health plans. But those types of
changes are possible only through fundamental reform. Making
marginal changes to the current program while adding
significant benefits would only hasten the day of reckoning.
Chairman Thomas. Thank you, Mr. Crippen.
In terms of your chart, and I know it is on page 3 of your
testimony, so people appreciate what ``dedicated revenues''
mean, that is basically the HI Trust Fund, any Social Security
transfers, and it is the part B premium----
Mr. Crippen. Yes, sir.
Chairman Thomas [continuing]. That is paid, as well. So,
obviously, take 2070, since that is a vertical line that we can
measure. The white part on the lower end would be the dedicated
revenues. The red up to spending would be the general fund?
Mr. Crippen. Yes.
Chairman Thomas. And of course some of the concern that
folks have, recalling membership on the Commission, Senator
Kerrey, I think, was one of the more adamant ones about the
problem of relying more and more on general fund means you have
fewer dollars available for other programs.
My guess is that the 50-50 mark is somewhere around 2025,
and that is, beyond that there would be more coming out of
general fund than the dedicated revenues.
Mr. Crippen. It is probably toward the end of the baby boom
generation.
Chairman Thomas. Roughly.
Mr. Crippen. But you are right, 2030, 2025.
Chairman Thomas. And it starts flattening out after that
baby boomer climb, because once we digest the baby boomers, if
we can get through to about 2050, at least current demographic
trends indicate that that will be more of a constant line that
we are dealing with.
Mr. Crippen. Yes.
Chairman Thomas. Do you have any idea, from what we project
budgeting to be, what that red zone would be from the general
fund?
Mr. Crippen. In billions, I don't. Everything we prepared
for today----
Chairman Thomas. Percentagewise?
Mr. Crippen [continuing]. Was percent of GDP, in which it
will be almost 7 percent of GDP by 2030.
Chairman Thomas. And it is currently now, what did you say?
Mr. Crippen. 2.9, I believe.
Chairman Thomas. 2.9, and you extrapolate that out, the
concern of Senator Kerrey was that the portion of the general
fund being dedicated to this one particular program would begin
to crowd out options available, not unlike the concern that
people were having about the interest payments on the national
debt----
Mr. Crippen. Yes.
Chairman Thomas [continuing]. Going for yesterday's
payments and not current uses.
Mr. Crippen. For comparison purposes, today the Federal
Government employs about 20 percent of GDP for all of its
various programs. By 2030, Social Security and Medicare alone,
we project, would consume 12 percent, so well over half of what
the Federal Government currently enjoys as part of the economy
would be in these two programs alone.
Chairman Thomas. One additional question, because the
President has offered, as you indicated in your testimony and
the gentleman from Washington indicated, at least a partial
proposal in terms of competition, but he also included the
concept of prescription drugs, and the Bipartisan Commission
proposed an integrated approach to prescription drugs.
Doesn't the President's plan, if in fact it were enacted,
require greater contributions on the part of beneficiaries for
the overall program as envisioned? Or does he do it for the
same beneficiary contribution?
Mr. Crippen. No, it would envision that there would be--50
percent of the premiums would be paid by beneficiaries.
Chairman Thomas. So it would be an increase on the
beneficiaries. So the President's plan says the beneficiaries
need to pay more, for sure to get more, but they have to pay
more. The Commission plan said beneficiaries would have to pay
more to get more.
I think the basic concept is that if you are going to give
more, you have got to talk about paying more, and I was pleased
to see that the President was realistic in that regard and
didn't try to talk about the fact that you can get something
from nothing, either from changing from traditional payment of
Medicare operating costs and shifting to drugs. In fact, I
think they talked about that a little bit, but backed away from
it relatively quickly.
No one, I think, is talking about putting less money into
Medicare. We are talking about bending the growth curves in
ways that we can live with them, and hopefully we can generate
some additional new ways of talking about providing responsive
and appropriate care for seniors at reasonable cost. And I want
to thank you very much for your testimony.
The gentleman from California?
Mr. Stark. Thank you, Mr. Chairman. I am inclined to agree
with you. Somebody is going to have to pay more, but I guess
the debate may come down to whom, what cat we bell.
Mr. Crippen, off the top of your hat, can you pick a
payroll tax figure that would make Medicare solvent for all
time, whatever ``all time'' is? I think I have heard bandied
around that if we kicked it up 1 percent, a half percent for
employers and a half percent for employees----
Mr. Crippen. That may be right, Mr. Stark. I have got the--
--
Mr. Stark. Do you know, is there a figure that you are
aware of?
Mr. Crippen. There is a figure. The trustees have it in
their report, I believe. I think it is more like 2 percent of
payroll under----
Mr. Stark. A point on each. So there is an alternative, at
an extreme, I suppose, to say OK, instead of paying what we pay
now, we could increase that a percent on wage earners and on
employers, and that would take care of it without making any
other changes, basically. That is not to say we wouldn't, but--
--
Mr. Crippen. It would, under the current trustees'
assumptions. As I cautioned, those assumptions may be
optimistic, but----
Mr. Stark. Yes, but that is a long time out, too, that we
are talking about.
Chairman Thomas. Would the gentleman yield for
clarification purposes?
Mr. Stark. Sure.
Chairman Thomas. A 1-percent increase is not a 1-percent
increase.
Mr. Stark. No, it is an additional percentage.
Chairman Thomas. And what would that be in terms of a
percentage above the current rate?
Mr. Stark. What do we pay now?
Chairman Thomas. When you say 1 percent, it sounds like
that is a pretty easy solution. So it would be total 2 percent,
and what is the current HI tax?
Mr. Crippen. 2.9 percent.
Mr. Stark. 2.9.
Chairman Thomas. So it would be, what, a 40 percent, 40 to
50-percent increase in the current HI tax, in other words?
Mr. Crippen. It looks like, Mr. Stark, the answer to your
question is that the trustees estimate it would take to go from
2.9 percent to 4.36 percent, so it is not--you know, two points
altogether, one on employees, one on----
Chairman Thomas. And what percentage is that of an increase
of the amount they pay now?
Mr. Crippen. It is almost 50 percent.
Mr. Stark. So it is a 50-percent increase.
Chairman Thomas. OK. Thanks. Fifty-percent increase.
Mr. Stark. And the question, you know, would come down to
if it is a 50-percent increase on all of us, on a very modest
and small tax, as opposed to maybe several thousand dollars,
$3, $4, $5, $6,000 on seniors, particularly those who, if they
have no pharmaceutical benefits, that is taking 10 percent of
their--10, 20, 30 percent, it might kick the percentage they
now pay.
What do seniors on average now pay of their income for
medical costs? There is a number. Does that one ring a bell in
your memory?
Mr. Crippen. I don't have here an exact number. It might be
$2,500 out of pocket?
Mr. Stark. $2,500 out of pocket, and their median is about
$25 grand, maybe less, so 10 percent. So either way you want to
slice it, if you kick up a couple thousand dollars for those
folks in increased pharmaceutical costs, that could be a 100-
percent increase on people who perhaps can less well afford it.
But I just kind of would like to focus everybody's
attention that the choices might very well be, certainly the 1
percent on employers, who are making all time high profits,
shouldn't be of any problem in today's booming economy. And for
the rest of us, we all just got a raise, thanks to the
generosity of our Republican leadership. We could afford it.
And that might be less painful than it would be, certainly it
would be less painful for me than it would be for my mother
with her modest income.
I just wanted to get those numbers out and say there are
those alternatives. I guess my one other question--well, thank
you. I yield back.
Chairman Thomas. The gentlewoman from Connecticut wish to
inquire?
Mrs. Johnson. Thank you, Dr. Crippen. I want you to enlarge
on the part of your testimony where you discuss the issue of
competition, and particularly how you move from or what the
relationship between an administered price system and a
competitive system, and what you see as how the administered
price system--at least your testimony implies that it inhibits
the base from which the competition in the competitive system
would start. I mean, that is the way I hear it. Could you
enlarge on that?
Mr. Crippen. Let me try.
Mrs. Johnson. And what would be the way out?
Mr. Crippen. Let me make one point and then one example,
and go from there, and see if this gets to your question.
The example is, and actually Mr. McDermott and I had an
exchange about this a couple of months ago, there are currently
about 50 percent too many hospital rooms across the country. We
don't know where exactly, but there is excess capacity.
It is not to say you could ever cut 50 percent of costs by
eliminating hospitals, but the point is, there is some excess
capacity, so there is room for efficiencies of some sort,
whether it is deploying those rooms for skilled nursing
facilities, shutting them down, all kinds of other options. So
the point is, the system as currently constructed has room to
do better.
How we get competition in could be slow and incremental. It
could be by giving the beneficiaries more choices and letting
them instill the competition by choosing. Let me give you one
quick example.
One thing that we have talked about a little is, for
Medicare recipients, for example, there are some very costly
procedures, although not common, but costly, such as liver
transplants. One could offer up a national competition on liver
transplanting, or on both price and outcome, because we do have
some outcomes data on whole organ transplants that might make
sense: the length of hospital stay, rehospitalization,
mortality, other things.
In such a competition, the last I checked, at least, the
Mayo Clinic would likely win on both points. That is, it would
provide a less costly liver transplant with at least as good if
not better outcome than other places. One could use that result
to come up with an average price that Medicare is willing to
pay.
You could allow beneficiaries to go wherever they wanted,
but the price that Medicare would pay would be based on this
competition, which would give you the best price but also
potentially the best outcome, give information to beneficiaries
as to who does a better job with these kinds of procedures. And
by pulling these very costly measures out of a capitated
payment or even the current fee-for-service system, you start
to put more competition into the system, and you make the
resulting pool that is left a little less risky, which makes it
easier to have a risk-sharing arrangement or indeed a fully
capitated arrangement.
Mrs. Johnson. Now, the private sector, for instance the
Federal Employee Health Benefit Plans, don't exclude liver
transplants as a possible medical treatment. Why couldn't we
set the premiums for a Medicare managed care plan in a sense
the same way we set premiums for the Federal Employee Health
Benefit Plans, adjusted of course for age, and let that premium
deal with this issue of liver transplants and what we are going
to pay?
The problem with the model you describe, of determining
what should be paid for a liver transplant, is that it doesn't
take into account so many other factors like transportation and
the distance from family and things like that, and all the
other things that go with having one or two centers that
perform a certain service for Medicare recipients. And then you
get into frailty issues and a lot of things.
So why can't you just move to this other system which we
use in every other sector of the health care industry?
Mr. Crippen. That is certainly what the chairman's
Commission recommended, was I mean very much modeled after the
FEHB Plan, and you could do something like that. Frankly, the
pricing in FEHB is, because of my ignorance, still a bit of a
mystery for me. There are a lot of moving pieces in it. There
is not a fixed benefit plan, as you know, and people can move
easily between plans.
Mrs. Johnson. So one of the things you would need to do is
to clarify what the fixed benefit plan is.
Mr. Crippen. You would have to go from a mandated price to
a mandated benefit, and then in the system adjust prices around
for that. But again, our view essentially as an institution at
CBO is, anywhere you can instill some competition to take
advantage of what appears to be the potential efficiencies,
whether it is hospital rooms or differences in procedures,
currently will better utilize current resources. So in addition
to adding resources, you can better utilize what you are doing
now.
Mrs. Johnson. Thank you.
Chairman Thomas. The gentleman from Wisconsin wish to
inquire?
Mr. Kleczka. Thank you very much, Mr. Chairman.
Dr. Crippen, I have a quick question. You indicated that
currently about 85 percent of the Medicare beneficiaries avail
themselves of fee-for-service, and projected over the coming
years that will probably drop to about 70, but you indicated
that wasn't a heck of a lot of a drop.
Is it your view that if we move to a premium support plan,
that that fee-for-service percentage would drop much more
rapidly?
Mr. Crippen. I don't really have a view on that. We have
not had and do not have in front of us a specific legislative
proposal that we have had to make those decisions about.
Mr. Kleczka. Well, based on the Commission proposal, would
you view that as----
Mr. Crippen. The actuaries, when they first looked at it,
not in this last round apparently for Mr. Stark, but when they
first looked at it, did think there would be some diminution,
more people moving out of fee-for-service into other health
plans. We don't, I don't think, have an opinion on that.
Mr. Kleczka. And the theory was that the program would then
save X amount of dollars because of this shift?
Mr. Crippen. Not so much because of the shift. It is
because we think there may be efficiencies out there, whether
it is in fee-for-service, and there are some ways to get at
those, that inefficiency, as well. But because of the ability
of recipients to choose, and in the exercise of that choice
instilling some competition between plans on, if not price,
then quality or benefits, that if that--it is the choice, it is
the competition that produces it.
Mr. Kleczka. But it seems to me that if the goal is to try
to decrease the number of fee-for-service beneficiaries, we can
do that by legislation without a wholesale shift to a program
like premium support.
Mr. Crippen. I think it is the ability of the recipients to
choose. Not only is it desirable in some metaphysical way----
Mr. Kleczka. Well, that is something we say every 2 years
when we are back on the streets of our districts, running for
reelection.
Mr. Crippen. Right.
Mr. Kleczka. ``I'm not going to take away your right to
choose.''
Mr. Crippen. Yes.
Mr. Kleczka. Then when we come to Washington, and in my
case 800 miles away, now we start doing certain little things
to reduce the participation in fee-for-service without saying
the words ``right to choose.''
Mr. Crippen. But it is in that exercise of choice, not in
the kind of metaphysical or political sense, it is in the
exercise of that choice we expect consumers would help instill
more efficiency in the delivery systems.
Mr. Kleczka. OK. Thank you.
Chairman Thomas. I thank the gentleman.
The gentleman from Louisiana wish to inquire?
Mr. McCrery. Yes, thank you, Mr. Chairman.
Mr. Crippen, I thought I heard you say that the payroll tax
fix for Medicare would require the Federal tax to go up from
2.9 percent to 4.63 percent. Is that right.
Mr. Crippen. Thirty-six. Four point thirty-six.
Mr. McCrery. Four point thirty-six. OK. Well, even at that,
I think we are looking at closer to a 60-percent increase than
we are a 50-percent increase in the payroll tax, so I just
wanted to get that straight.
Also, does that assume that the payroll tax increase would
go into effect immediately?
Mr. Crippen. Yes.
Mr. McCrery. At January 2000 or January 1999 or----
Mr. Crippen. I would have to look at the Trustees' Report,
Mr. McCrery. We get that number directly from the trustees, and
I think it is a calendar year, so it would be--but it is
assumed that you have to raise it now, forever, that amount, in
order to close the gap.
Mr. McCrery. And, again, I would assume that to close that
gap, the trustees would assume that the excess in Federal tax
revenues over expenditures in the short term would be invested
and interest gained on that investment. That is part of the
fix.
Mr. Crippen. Presumably, yes.
Mr. McCrery. And those interest payments are going to have
to be paid from general revenues at some point.
Mr. Crippen. Yes.
Mr. McCrery. So if we were to wait a year or two or five,
the 4.36 percent would become something higher than that?
Mr. Crippen. Yes. And I should say again, too, that the
percentages we are talking about are for the Hospital Insurance
Trust Fund. It doesn't include increases in premiums in part B,
which have of course general revenues going into as well.
Mr. McCrery. Right.
Mr. Crippen. So there would be more general revenue in
addition to this payroll tax increase.
Mr. McCrery. And since I don't hear anybody yet proposing
that we increase the payroll tax today, or January 2000, we are
really talking about a higher increase than the 4.36 percent,
aren't we?
Mr. Crippen. Most likely.
Mr. McCrery. I don't know how much you have looked at
health care and Medicare, but have you looked at it enough to
draw a conclusion as to the inevitability of these rises in
cost to the Medicare Program? Is that inevitable, no matter
what we do in terms of structural reforms, or do you think
there are flaws in the way the program is designed now which
lead to some of the increases in costs?
Mr. Crippen. I guess, on the whole, the short form of the
answer is more the latter. That is to say, we are hopeful that
some reforms could instill some competition that would take
advantage of potential efficiencies in delivery, so that the
current system may spend more money than it needs to. So
reforms, in other words, could help bring down these cost
increases.
It is, however, immutable that we are going to have a lot
more people before very long taking advantage of this program.
That is not something you can change. It will go from 39
million recipients to 69 million recipients in from 2010 to
2030, and you and I aren't going to change that.
Mr. McCrery. Can you give us some of the elements of the
structural reform that would lead to increased competition and
therefore lower increases in costs?
Mr. Crippen. Well, some of the things we have already
talked about, I think. In general, what CBO believes is that
anywhere you can instill more competition and more choice by
beneficiaries, they will do what is in their self-interest,
which is to pick either cheaper or better plans. And in so
doing, you will drive some of the inefficiencies out of the
current system.
So that is the overarching umbrella. Now, below that, I
mean, it is easy for me to say, because it is very hard for
anyone to write a bill and implement it. Your colleagues are
grappling with that now.
Mr. McCrery. If that is the case, then what is the
explanation for Mr. Stark's statement, which I think is
accurate--or maybe it is Mr. McDermott's statement that was
accurate--that very little of the savings associated with the
Commission's plan comes from the structural changes? First of
all, is that accurate? And, second, why is that, if what you
have just said is true?
Mr. Crippen. I can't answer the first question. We have not
priced or otherwise scored a plan like the Commission's.
But, again, to the extent we believe there are savings
possible in these reforms, it comes mostly from giving people
more choice and competition, therefore more efficient delivery.
It does not come so much from any inherent cuts in benefits.
Mr. McCrery. OK. Thank you.
Chairman Thomas. The gentleman from Georgia wish to
inquire?
Mr. Lewis.
Mr. Lewis. Thank you, Mr. Chairman.
Mr. Director, during the August break I had an opportunity
to meet and visit with several hospital administrators, and
based on those visits in the fifth district of Georgia and from
people throughout the State of Georgia, I wrote a letter, I
believe to the Ranking Member and to the Chairman of the
Subcommittee, regarding my strong concern about the financial
impact of the Balanced Budget Act on hospital and skilled
nursing facilities in my district and the State of Georgia.
I notice in the President's Medicare reform proposal he set
aside $7.5 billion for BBA fixes. To my knowledge, the Breaux-
Thomas proposal doesn't set aside any money for such fixes. Is
there any plan by Chairman Thomas, to your knowledge, to fix
the financial impact of the BBA, and where would the money come
from?
Mr. Crippen. I will let the Chairman address the question
of him. We do have and I can report that we are working with
the Congress on just scoring and helping them analyze a number
of additions back to some of the BBA reductions, but they are
all over the board.
I mean, whether it is 7.5 that the President over 10 years
proposed, or more or less, it depends on what day and which
proposal. But there certainly is active consideration, I am
assuming by Mr. Thomas as well as his colleagues in the Senate,
on adding back to some of these areas before the end of this
session.
Mr. Lewis. In your position----
Chairman Thomas. Would the gentleman yield?
Mr. Lewis. Yes, briefly.
Chairman Thomas. The discussions have been over where it
might be appropriate. Where numbers were used as plug numbers
because there was to be generated new scoring mechanisms,
prospective payment systems, and where they have not been able
to be generated, the argument being the Y2K problem, some of
those numbers that were supposed to be there for 6 to 9 months
are now going to be there for 2 or 3 years, and that is just
not a reasonable way to go.
The costs can be adjusted in part by administrative
decisions, if it is possible statutorily, stretching out time
lines, or there may have to be some legislatively enacted
provisions. And what we are doing is discussing actively with
the Administration what seems to be the administrative changes,
No. 1, that could be made and,
No. 2, that would be made by the Administration.
So it is very difficult to put a dollar value on what we
would have to carry from a legislative or a statutory point of
view until we work out what portion of the load they can and
would be able to carry, versus what we think needs to be done
and would have to do legislatively. And we are in those
discussions right now.
I thank the gentleman for yielding.
Mr. Lewis. Thank you. Thank you, Mr. Chairman.
Chairman Thomas. The gentleman from Minnesota wish to
inquire?
Mr. Ramstad. Just briefly, Mr. Chairman.
Dr. Crippen, as you know, Minnesota delivers high quality
health care very cost efficiently and effectively, and we are
penalized under the current program for being efficient. Could
you comment on, in your judgment, how a premium support model
like the Breaux-Thomas proposal would address inequities facing
Minnesota's seniors? Wouldn't it at least bring a more level
playing field, not only for Minnesota's seniors but across the
Nation for all beneficiaries?
Mr. Crippen. It could, Mr. Ramstad. Again, the devil is in
the details and how one establishes the floor and the
allocation formulas. It certainly has every prospect for doing
that, from what we know at the moment, but one cannot say
definitively that the Minnesota recipients would get more or
less until we had looked at the details. But it would appear
that it is possible that using the national averages for the
basic benefit package in the kinds of proposal that are being
discussed would raise the rates.
Mr. Ramstad. And I certainly will follow up with the other
witnesses and the other panels with that major concern that we
have. Too many times do I hear that seniors can receive two and
a half Medicare surgeries at the Mayo Clinic, which you
mentioned earlier in your testimony, for every one in Miami,
Florida or New York City or a lot of other places.
I want to just shift gears and ask also, in your testimony
you refer to premium support as a defined contribution. Isn't
there, however, a difference between premium support and a
defined contribution model, where in premium support the
government contribution varies with the average cost, not some
arbitrary fixed amount that may not actually cover seniors'
health care needs?
Mr. Crippen. No, you are absolutely right. I didn't mean to
imply, and I apologize if I did in the testimony, that it would
be one number for everyone. Clearly there are abilities to
adjust. What I was trying to connote was, as a broad category
it would be a move away from what is currently thought of as a
defined benefit to one in which it was more like a defined
contribution.
But, again, one of the characteristics at least of the
Commission's recommendation was that there would be a basic
benefit package, and then on top of that you would add
essentially a defined contribution. So it would be a hybrid of
both. I didn't mean to make it sound that there is only one or
the other choice. You can obviously mix them.
Mr. Ramstad. I appreciate that clarification, and yield
back, Mr. Chairman. Thank you, Dr. Crippen.
Chairman Thomas. I thank the gentleman.
Does the gentleman from Washington wish to inquire?
Mr. McDermott. Thank you, Mr. Chairman.
I have a feeling I am before the Kansas school board here,
where we are talking about competition and there is the belief
that it works. I have a chart here which is compiled from
looking at CBO figures and our own figures.
In 1998 Medicare went up 1.5 percent and Federal Employees
Health Benefit Plan went up 8.5 percent. Now, one is an
administered plan, that is Medicare, and the other has
competition in it. Everybody says managed competition is just
like the FEHBP. And so we have a 7-percent increase over what
Medicare was able to do during that period.
Then we go to 1999, where the estimates from CBO were
minus, actually a reduction of 1.2 percent, and the FEHBP went
up 8.9 percent, so we have got more than a 10-percent increase
over what Medicare did in 1999. And in 2000 we have the CBO
projections of 7.2 percent, and in yesterday's paper or
Monday's paper, I guess, Sunday's paper, we had an article that
the Federal Employees Health Benefit Plan is going to go up 9
percent, so we are even 2 percent this year.
Now, I hear you say, and I listened very carefully, you
said, ``We believe that competition will lower costs.'' But the
Federal Employees Health Benefit Plan, which is put out there
as the model that we should be creating for senior citizens,
with a totally different population--not young people, not
working people, but we're talking about old people--that this
plan that can't do it for young people is suddenly going to
work for old people. Where do you get that belief?
Mr. Crippen. Let me answer in a couple of ways. First, as I
understand, at least part of the debate on creationism versus
evolution depends on where you begin. If you think the Earth is
3 million years old, you may be an evolutionist. If it is 6,000
years old, you may be a creationist.
Mr. McDermott. I was thinking 4004 B.C. was where we
started. Maybe it is----
Mr. Crippen. And making that a little more relevant to your
question.
Chairman Thomas. Maybe we should ask Strom Thurmond.
Mr. Crippen. That is true. He would know. He would know the
difference.
It depends on when you begin, and even with the FEHB
comparisons. In fact, the folks that work with me anticipated
that this might come up and have given me a list of increases
in FEHB compared to both private and Medicare, and it depends
largely on what year you pick as to whether or not, and
therefore probably doesn't show you much. For example, in 1994
Medicare spending went up 11.4 percent, FEHB premiums went up
1.6 percent. So it depends a bit on when you start and stop.
There is also a lot, as I suggested to Mrs. Johnson, a lot
of moving parts in FEHB in terms of what the plans can provide,
do provide, and also that the announced increases, such as you
heard earlier this week, don't necessarily end up being the
actual increases because people do exercise choice and go to
lower cost plans. So the weighted average, although it is
anticipated would be whatever the announcement was this week, 9
percent, will probably end up being more like 6 or 7.
That is not to take away your point. All I am saying is,
there are a lot of moving parts and it depends. That comparison
between FEHB and Medicare, varies from year to year. It looks
like FEHB is just picking up in the end of an underwriting
cycle. They have been lower than Medicare for a while. Now they
are going to be higher. That, as you well know, in private or
public insurance, happens.
Mr. McDermott. The fact is, the Urban Institute put out a
chart which I assume maybe Dr. Moon or someone will speak to,
which shows that the private health insurance industry has
always been higher than the Medicare spending over the last--
well, beginning as far back as 1970.
Chairman Thomas. Would the gentleman yield?
Mr. McDermott. I mean, this is 1970 to 1997, and the
cumulative growth has been considerably less than private
insurance, where we have had all this competition and we have
had all this putting people in HMOs and everything else, and
the fact is that we now have, today's article out of the
newspaper is that the HMOs are taking back all their drug
coverage. That is the most recent thing, and we saw all over
this country HMOs pulling out of rural areas. So the idea that
competition is the way to work I think comes off a very shaky
base. And I think, Mr. Chairman, before we go leaping to see
that as our solution, we have to be very careful to look at the
numbers and see that it really does work. I don't think there
is any evidence that you can show, that really shows that they
win in the end.
Chairman Thomas. I thank the gentleman. My query was, as
Dr. Crippen indicated, it depends on what years you pick. My
question would have been, why did she start it in 1970, since
Medicare started in 1965? My assumption is that starting the
curve in 1970 gave a different look than going back to 1965.
Again, it depends upon when and how you want an outcome, as to
what you use.
The gentlewoman from Florida wish to inquire?
Mrs. Thurman. Thank you, Mr. Chairman.
Dr. Crippen, let me go to maybe what Mr. Ramstad was
talking about as well, because some of us feel a little
neglected on this HMO stuff, and particularly as we then start
talking about going into a premium support theory or the theory
of this premium support.
In your testimony you say that they would retain a basic
benefit package that all plans would offer. Now, is that based
on the same costs that are being given to these HMOs today,
where there would be the built-in difference from regions in
what is being costed out?
Mr. Crippen. Again, presumably the--we don't have at CBO a
bill to which we could answer that very specifically.
Presumably, any system of payment for a basic benefit package
would include regional or State variations in costs. The old
AAPCC, as you may know, on which were kind of based managed
care payments now, was down to a county level. There were some
problems with that.
But presumably there will be some factoring in of
differences in regional variations in costs. The policy, one of
the policy questions is, do you also factor in regional
variations in practice patterns? As you know, it varies across
the country, depending upon where you are and what kind of
treatment you get. Some of those treatments are more expensive
than others. And do you want to encourage that?
I mean, those are the kinds of complex mixes. But I would
imagine virtually any plan would account for basic cost
differences among regions.
Mrs. Thurman. However, I mean, it has just been reported
that in the Medicare Plus Choice we have overextended maybe
about $1.3 billion in some of these cases. I think GAO came out
with that.
Mr. Crippen. That I am not aware of, Mrs. Thurman, but the
Comptroller General is right behind me, so you can----
Mrs. Thurman. Fine. And I guess my concern is if we built
back in the same problems that we have had in the past, and the
issue really to me is one of parity. I mean, I am spending my
money into my payroll to get my Medicare when I reach that
magical age, and if I live in one part of the country they may
get $800, where this other part, or even within a State, only
gets $400.
Well, what really becomes something that I think all of us
should be very concerned about is, that is that same person's
money, and one is getting $800, one is getting $400. But worse
yet, what ends up happening is that the one who is getting the
$800, because we have built this in, gets an extra benefit.
They might get the prescription drug or they might get
eyeglasses or they might get something else. The person or the
beneficiary over here who gets $400 in this region is getting
no extra benefit, and any extra benefit that they get, they are
having to pay a premium on top of this, where this other group
is not.
So I am trying to figure out, why would I go into any of
this and not stay in some sort of a fee-for-service, where at
least I am treated equally, or at least to get rid of these
choice issues or straighten out this formula somehow? I mean,
how does a premium support help that situation?
Mr. Crippen. In theory, those who are joining a managed
care plan now are giving up something, whether it is choice of
doctors or something else, so that they are willing to give up
part of their choice in order to have better benefits. I mean,
that is part of the notion of care. Clearly, the $400 versus
$800, whether it is Iowa versus New York, originally was based
on differences in costs for a roughly equal benefit package.
Again, it incorporates some differences in practice patterns.
To the extent that is the case, I mean, the person in Iowa
presumably paid in less as well. Payroll taxes would probably
be lower, wages are lower, all that stuff. How it all comes out
is a complex question of what you paid in versus what you
expect to get out, how sick you are, and all of those things
that we try to factor in. But clearly there are----
Mrs. Thurman. But you still end up in the same situation if
you did then a cost at the end. So say you were that person or
this area that was getting $800, and in the testimony it talks
about, well, you could add a premium onto there so you could
get additional. But if you were getting $800, the premium for
that additional benefit still may be less than what somebody
who over here is getting $400, so you are back into the same
situation that we are today.
Mr. Crippen. It is possible, sure. I mean, again, the devil
is in the details of how the distribution is going to work. I
think that at least, at a minimum, cost differences would be
accounted for.
Beyond that, it does--it can be--I worked for a fellow at
Brookings at one time who said that people have a propensity to
complexity things. We can certainly make this formula very
complex, in a way that could have unforeseen outcomes. But,
again, if it at least reflects the differences in costs for
some basic benefit package, as it in theory does----
Mrs. Thurman. However we are not sure that that is what has
happened. We think that these have been just set in the BBA and
they have not changed, and we have not looked at any of those
circumstances.
Mr. Crippen. No. They have been frozen, yes.
Mrs. Thurman. OK. Thank you.
Chairman Thomas. I will tell the gentlewoman that that was
one of the concerns about arbitrary formula rather than
reflecting real world prices, but that is not unlike the
problem where people collect pensions, having worked in one
State, moved to another one because the costs are so much
lower, their dollars go further, and the attempt by the first
State to try to collect taxes because, after all, they made
their money here and they have left. Florida should have some
familiarity with----
Mrs. Thurman. It is called a source tax.
Chairman Thomas. Yes, the idea being that there are
different prices in different regions, and one's dollar can go
further in one region versus another. So trying to create some
equity on a pure dollar amount would, in fact, result in
significantly different or more housing, groceries, medical
care, or any other number of items, based upon the prevailing
wage rate and other structures in the community that they are
in.
The best solution, for me, is to simply take whatever the
real costs are in that location and have folks compete against
each other, using those real dollar costs, to produce a
product. I mean, that is kind of what we have been talking
about.
Mrs. Thurman. But those also can be inflated from one
region to another by whoever is making those determinations,
and I think that is all----
Chairman Thomas. The determination should be one plan
against another, and the key there is to have enough plans so
that it is a competitive controlling factor. But we will
obviously be talking about this.
Mrs. Thurman. We will talk, yes.
Chairman Thomas. I thank the gentlewoman very much.
If there are no additional questions, I want to thank the
director very much for your presentation.
And I want to announce to the audience that although we had
planned a separate presentation by Mr. Walker, Comptroller
General of the U.S. General Accounting Office, because of the
time constraints of several of our witnesses who have gone out
of their way to come here again this week, if the panelists
would allow us, we could perhaps combine Dr. Walker with the
other panel and put the presentations and the questions
together and try to do it all at once.
If I hear no strenuous objection to that, I would ask Mr.
Walker to come forward, and then the panel that was to follow
after that: Gail Wilensky, Dr. Wilensky, as you know, Project
HOPE, Bethesda, Maryland, but also chairman of MedPAC, a
structure we rely heavily on for information and policy
decisions; Dr. Bryan Dowd, who is a professor of the Division
of Health Services, Research and Policy at the University of
Minnesota in Minneapolis; and the aforementioned Marilyn Moon.
Dr. Moon is a senior fellow at Urban Institute.
I want to thank all of you for your cooperation. I would
then say that Mr. Walker is the seventh Comptroller General of
the United States. It is a pleasure to have you with us. Your
written testimony will be made a part of the record, and you
can address us in any way you see fit in the time that you have
available.
STATEMENT OF HON. DAVID M. WALKER, COMPTROLLER GENERAL, U.S.
GENERAL ACCOUNTING OFFICE
Mr. Walker. Thank you, Mr. Chairman, Members of the
Subcommittee. I appreciate the opportunity to be here today to
discuss efforts to reform the administration, structure and
financing of Medicare, steps that are essential to maintain the
programs long-term sustainability and to its modernization.
The long-term cost pressures facing this program are
significant. In fact, Medicare and other health care
expenditures may represent the single largest threat to our
fiscal future. Fundamental program reforms are vital to
reducing the program's growth, which threatens to absorb an
ever-increasing share of the Nation's budgetary and economic
resources.
Currently, Medicare is not a sustainable program, based on
current financing. As noted in Exhibit 1, which is on the left,
Medicare's HI component is on a cash basis in the red, and it
has been in the red since 1992. To finance this deficit,
Medicare has been drawing on its special issue Treasury
securities acquired during the years when the program generated
an annual cash surplus.
Consequently, Medicare is already a net claimant on the
Treasury, a threshold that Social Security is not expected to
reach until 2014. In essence, for Medicare to redeem its
securities, the Government must either raise taxes, cut
spending on other programs, or reduce the projected surplus.
Outlays for Medicare services covered by SMI are already funded
largely through general revenues, and as you know, HI is not.
Without meaningful reform, the long-term financial outlook
for Medicare is bleak. Today, Medicare's HI and SMI
expenditures are expected to increase dramatically, rising from
12 percent of all Federal revenues in 1999 to more than a
quarter of Federal revenues by mid-next century.
As noted in Exhibit 2, over the same timeframe, on the
right, Medicare's expenditures are expected to more than double
as a share of our economy, rising from 2.5 to 5.3 percent. When
viewed from a perspective of the entire budget and the economy,
the growth of Medicare spending will become progressively
unsustain- able over the longer term. Our updated budget
simulations show that to move into a future without making
changes in Social Security, Medicare and Medicaid Programs is
to envision a very different role for the Federal Government
for future generations.
As noted in the next exhibit on the left, Exhibit 3, even
assuming that all projected surpluses are saved and
discretionary budget caps are complied with--which many if not
most believe are not realistic assumptions--our long-term
budget simulation model shows the world in 2030, whereby Social
Security, Medicare and Medicaid increasingly absorb larger
available resources in the Federal budget and they start to
haircut other discretionary spending.
If, on the other hand, as noted on the right, the surplus
is not saved and the unified surplus is spent, then based upon
projected growth in Medicare and other health care programs,
virtually the entire discretionary spending portion of the
Federal budget will be scalped. And the discretionary spending
portion of the budget includes national defense, the young,
infrastructure, and law enforcement.
Now, realistically, spending is going to be made in those
programs. The point here is, there are tremendous pressures on
the mandatory part of the budget, largely fueled by known
demographic trends, primarily but not exclusively health care
issues, and Medicare is a major part of it.
Given the size of Medicare's unfunded liability, it is
realistic to expect that reforms intended to bring down future
costs will have to proceed incrementally. The time to begin the
difficult but necessary steps to reclaim our fiscal future is
now, when we have budget surpluses and a demographic holiday,
with retirees now representing a smaller portion of our
population and before the baby boom generation, my generation,
begins to retire.
Ideally, the unfunded promises associated with today's
programs should be addressed before or concurrent with
proposals to make new ones, such as adding prescription drug
coverage. To do otherwise might be politically attractive but
not fiscally prudent.
If benefits are added, policymakers need to consider
targeting strategies and fully offsetting the related costs.
They may also want to design a mechanism to monitor these and
aggregate program costs over time, as well as to establish
expenditure or funding thresholds that would trigger a call for
fiscal action.
Our history shows that when benefits are attractive, fiscal
controls and constraints are difficult to maintain. In
addition, any potential program expansion should be accompanied
by meaningful reform of the current Medicare Program to ensure
its sustainability, which is more important than solvency.
Proposals to reform Medicare should be assessed against the
following criteria: affordability, equity, adequacy,
feasibility, and acceptability. People want unfettered access
to health care, and some have needs that are not being met.
However, health care costs compete with other legitimate
priorities in the Federal budget, and their projected future
growth threatens to crowd out future generations' flexibility
to decide which of these competing priorities will be met.
Thus, in making important fiscal decisions for our Nation,
policymakers need to consider the fundamental differences
between wants, needs, and what both individuals and the Nation
can collectively afford. This concept applies to all aspects of
government, from major weapons system acquisitions to issues
involving domestic programs, most importantly health care,
because wants are unlimited, needs are different, and there are
very real limits on what we can afford.
It also points to the fiduciary and stewardship
responsibility that we all share to ensure the sustainability
of Medicare for current and future generations, within a
broader context of providing for other important national needs
and economic growth.
A useful discussion of reform has been initiated. In March,
the Bipartisan Commission on the Future of Medicare completed
its deliberations, and in July the President proposed certain
reforms. These options have spurred other proposals as well as
discussions on the future of Medicare.
The details of any reform plan need to be specified before
it can be fully evaluated. Both of the major plans, Breaux-
Thomas and the President's plan, leave important details left
unsaid, and they are important to be filled in, in order to
assess their impact on sustainability of the Medicare Program
as well as feasibility of adopting the proposals.
The bottom line is that surpluses represent both an
opportunity and an obligation. We have an opportunity to use
our unprecedented economic wealth and fiscal good fortune to
address today's needs, but an obligation to do so in a way that
improves the prospects for future generations.
This generation has a stewardship responsibility to future
generations, to reduce the debt they inherit, to provide a
strong foundation for future economic growth, and to get on
with substantive entitlement reform in order to ensure that
future commitments are both adequate and affordable. To do so,
the Congress will need to address, as I said, the difference
between wants, needs and affordability in connection with
anything from weapons systems to health care. This is tough
work, but it must be done.
Mr. Chairman, this concludes my statement. I would be happy
to answer any questions after my colleagues have a chance to
make theirs.
[The prepared statement follows:]
Statement of Hon. David M. Walker, Comptroller General, U.S. General
Accounting Office
Mr. Chairman and Members of the Subcommittee: I am pleased to be
here today as you discuss efforts to reform the administration,
structure, and financing of Medicare--steps essential to maintaining
the program's long-term solvency and to its modernization. There
appears to be an emerging consensus that substantive financing and
programmatic reforms are necessary to put Medicare on a sustainable
footing for the future. The long-term cost pressures facing this
program are considerable. Fundamental program reforms are vital to
reducing the program's growth, which threatens to absorb ever-
increasing shares of the nation's budgetary and economic resources.
Against this backdrop, I want to acknowledge your efforts, Mr.
Chairman, as well as the contributions of the other members of the
Bipartisan Commission on the Future of Medicare. The Breaux-Thomas
proposal, which grew out of the Commission's deliberations, included a
comprehensive reform plan on a technically difficult issue that touches
on both the future health of beneficiaries and the fiscal health of the
U.S. economy.\1\ I also want to commend both this Subcommittee and the
Congress as a whole for remaining steadfast in the face of intense
pressure to roll back the Medicare payment reforms included in the
Balanced Budget Act of 1997 (BBA). It is in no sense hyperbole to note
that the BBA changes constituted a critical down payment for Medicare
reform. I know that the Subcommittee appreciates the vital importance
of waiting for strong evidence that demonstrates the need for any
modifications before acting.
---------------------------------------------------------------------------
\1\ The National Bipartisan Commission on the Future of Medicare
held its last meeting on March 16, 1999. By a vote of 10 to 7, the
Commission failed to achieve the 11-member super majority required by
law to report a recommendation to the Congress.
---------------------------------------------------------------------------
You must be especially prudent during this period of prosperity as
you consider Medicare reform initiatives. Please remember that, even as
recent estimates have increased the size of budget surpluses, these are
projected budget surpluses, and we know that the business cycle has not
been repealed. Current projected surpluses could well prove to be
fleeting, and thus appropriate caution should be exercised when
creating new entitlements that establish permanent claims on future
resources. While I do not relish being the accountability cop at the
surplus celebration party, that is part of my job as Comptroller
General of the United States.
Moreover, while the size of future surpluses could exceed or fall
short of projections, we know that demographic and cost trends will, in
the absence of meaningful reform, drive Medicare spending to levels
that will prove unsustainable for future generations of taxpayers.
Accordingly, we need to view this period of projected prosperity as an
opportunity to address the structural imbalances in Medicare, Social
Security, and other entitlement programs before the approaching
demographic tidal wave makes the imbalances more dramatic and
meaningful reform less feasible.
As the foregoing suggests, the stakes associated with Medicare
reform are high for the program itself and for the rest of the federal
budget, both now and for future generations. Current policy decisions
can help us prepare for the challenges of an aging society in several
important ways: (1) reducing public debt to increase national savings
and investment, (2) reforming entitlement programs to reduce future
claims and free up resources for other competing priorities, and (3)
establishing a more sustainable Medicare program that delivers
effective and affordable health care to our seniors.
In this context, I would like to make a few summary points before
delving into the specifics of Medicare's financial health and a
discussion of potential reform.
In March, the Bipartisan Commission on the Future of
Medicare completed its deliberations. Reform options emerged from these
and other discussions that touched on all aspects of the Medicare
program, including (1) modernization of the traditional Medicare fee-
for-service program, both to update the benefit package and enhance its
potential for containing program costs; (2) modernization of the
Medicare+Choice program to ensure that beneficiaries have health plan
choices and allow the program to more efficiently purchase plan
services; and (3) adoption of a program like the Federal Employees
Health Benefits Program (FEHBP) or a premium support model to foster
quality and price based competition among health plans and to elevate
beneficiaries' consciousness about and responsibility for program
costs.
Given the size of Medicare's unfunded liability, it is
realistic to expect that reforms intended to bring down future costs
will have to proceed incrementally. The time to begin the difficult but
necessary steps to reclaim our fiscal future is now, when we have
budget surpluses and a demographic ``holiday'' with retirees a far
smaller proportion of the population than they will be in the future.
Ideally, the unfunded promises associated with today's
program should be addressed before or concurrent with proposals to make
new ones, such as adding prescription drug coverage. To do otherwise
might be politically attractive but not fiscally prudent. If benefits
are added, policy makers need to consider targeting strategies that
fully offset the related costs. They may also want to design a
mechanism to monitor aggregate program costs over time and to establish
expenditure or funding thresholds that would trigger a call for fiscal
action. Our history shows that when benefits are attractive, fiscal
controls and constraints are difficult to maintain. In addition, any
potential program expansion should be accompanied by meaningful reform
of the current Medicare program to help ensure its sustainability.
To qualify as meaningful reform, a proposal should make a
significant down payment toward ensuring Medicare's long-range
financial integrity and sustainability--the most critical issue facing
Medicare. The 1999 annual reports of the Medicare trustees project that
program costs will continue to grow faster than the rest of the
economy. Care must be taken to ensure that any potential expansion of
the program is balanced with other programmatic reforms so that we do
not worsen Medicare's existing financial imbalances. Proposals to
reform Medicare should be assessed against the following criteria:
affordability, equity, adequacy, feasibility, and acceptance. (See
Table 1.)
Table 1.--Criteria for Assessing the Merits of Medicare Reform Proposals
------------------------------------------------------------------------
What this means for a
Criterion proposal
------------------------------------------------------------------------
Affordability............................. A proposal should be
evaluated in terms of its
effect on the long-term
sustainability of Medicare
expenditures
Equity.................................... A proposal should be fair to
providers and across groups
of beneficiaries
Adequacy.................................. A proposal should include
resources that allow
appropriate access and
provisions that foster cost-
effective and clinically
meaningful innovations that
address patients' needs
Feasibility............................... A proposal should
incorporate elements that
facilitate effective
implementation and adequate
monitoring
Acceptance................................ A proposal should be
transparent and should
educate provider and
beneficiary communities
about its costs and the
realities of tradeoffs
required by significant
policy changes
------------------------------------------------------------------------
People want unfettered access to health care, and
some have needs that are not being met. However, health care
costs compete with other legitimate priorities in the federal
budget, and their projected future growth threatens to crowd
out future generations' flexibility to decide which of these
competing priorities will be met. Thus, in making important
fiscal decisions for our nation, policymakers need to consider
the fundamental differences between wants, needs, and what both
individuals and our nation can afford. This concept applies to
all major aspects of government, from major weapons system
acquisitions to issues affecting domestic programs. It also
points to the fiduciary and stewardship responsibility that we
all share to ensure the sustainability of Medicare for current
and future generations within a broader context of providing
for other important national needs and economic growth.
Let's not kid ourselves--reforming Medicare is
hard work. Health care spending accounts for one-seventh of the
nation's economy, and Medicare is the nation's single largest
health care payer. The program's beneficiary populations
consist of roughly 35 million seniors and 4 million disabled
individuals under age 65. The Health Care Financing
Administration (HCFA) estimates that the program's billers--
physicians, hospitals, equipment suppliers, and other providers
of health services--number about 1 million.
As the various reform options come under scrutiny,
the importance of design details should not be overlooked. Our
work on efforts to implement reforms mandated in the BBA is
instructive regarding reform specifics. Three principal lessons
can be drawn from recent experience: (1) The particulars of
payment mechanisms largely determine the extent to which a
reform option can eliminate excess government spending while
protecting beneficiaries access' to care. (2) Revisions to
newly implemented policies should be based on a thorough
assessment of their effects so that, at one extreme, they are
not unduly affected by external pressures and premature
conclusions or, at the other extreme, they remain static when
change is clearly warranted. (3) For choice-based models to
function as intended--that is, to foster competition based on
cost and quality--consumers must have information that is
sufficiently comparable.
At this time, I would like to discuss the competing
concerns at the crux of Medicare reform, in general, and to
provide a conceptual framework for considering the various
possible combinations of reform options, in particular.
Competing Concerns Pose Challenges for Medicare Reform
The current Medicare program, without improvements, is ill
suited to serve future generations of seniors and eligible
disabled Americans. On the one hand, the program is fiscally
unsustainable in its present form, as the disparity between
program expenditures and program revenues is expected to widen
dramatically in the coming years. On the other, the program is
outmoded in that it has not been able to adopt modern, market-
based management tools, and its benefit package contains gaps
in desired coverage compared to private employer coverage.
Compounding the difficulties of responding to these competing
concerns is the sheer size of the Medicare program--even modest
program changes send ripples across the program's 39-million-
strong beneficiary population and the approximately 1 million
health care providers that bill the program. Balancing the
needs of all these parties requires hard choices that have been
brought before this Subcommittee, the Congress, and the
National Bipartisan Commission on the Future of Medicare.
Medicare Is Already in the Red
Unlike private trust funds that can set aside money for the
future by investing in financial assets, the Medicare Hospital
Insurance (HI) Trust Fund--which pays for inpatient hospital
stays, skilled nursing care, hospice, and certain home health
services--is essentially an accounting device. It allows the
government to track the extent to which earmarked payroll taxes
cover Medicare's HI outlays. In serving the tracking purpose,
annual trust fund reports show that Medicare's HI component is,
on a cash basis, in the red and has been since 1992. (See fig.
1.) Currently, earmarked payroll taxes cover only 89 percent of
HI spending and, including all earmarked revenue, the fund is
projected to have a $7 billion cash deficit for fiscal year
1999 alone. To finance this deficit, Medicare has been drawing
on its special issue Treasury securities acquired during the
years when the program generated a cash surplus. Consequently,
Medicare is already a net claimant on the Treasury--a threshold
that Social Security is not currently expected to reach until
2014. In essence, for Medicare to ``redeem'' its securities,
the government must raise taxes, cut spending for other
programs, or reduce the projected surplus. Outlays for Medicare
services covered under Supplementary Medical Insurance (SMI)--
physician and outpatient hospital services, diagnostic tests,
and certain other medical services and supplies--are already
funded largely through general revenues.
[GRAPHIC] [TIFF OMITTED] T5698.002
Without meaningful reform, the long-term financial outlook
for Medicare is bleak. Together, Medicare's HI and SMI
expenditures are expected to increase dramatically, rising from
12 percent in 1999 to more than a quarter of all federal
revenues by mid century. Over the same time frame, Medicare's
expenditures are expected to double as a share of the economy,
from 2.5 to 5.3 percent, as shown in figure 2.
[GRAPHIC] [TIFF OMITTED] T5698.003
The progressive absorption of a greater share of the
nation's resources for health care, like Social Security, is in
part a reflection of the rising share of elderly in the
population. Medicare's rolls are expanding and are projected to
increase rapidly with the retirement of the baby boom. Today's
elderly make up about 13 percent of the total population; by
2030, they will comprise 20 percent as the baby boom generation
ages and the ratio of workers to retirees declines from 3.4 to
one today to roughly two to one.
However, Medicare growth rates also reflect the escalation
of health care costs at rates well exceeding general rates of
inflation. Increases in the number and quality of health care
services have been fueled by the explosive growth of medical
technology. Moreover, the actual costs of health care
consumption are not transparent. Third-party payers generally
insulate consumers from the cost of care decisions. In
traditional Medicare, for example, the impact of the cost-
sharing provisions designed to curb the use of services is
muted because about 80 percent of beneficiaries have some form
of supplemental health care coverage (such as Medigap
insurance) that pays these costs. For these reasons, among
others, Medicare represents a much greater and more complex
fiscal challenge than even Social Security over the longer
term.
When viewed from the perspective of the entire budget and
the economy, the growth in Medicare spending will become
progressively unsustainable over the longer term. Our updated
budget simulations show that to move into the future without
making changes in the Social Security, Medicare, and Medicaid
programs is to envision a very different role for the federal
government. Even assuming that all projected surpluses are
saved and existing discretionary budget caps are complied with,
our long-term model shows a world by 2030 in which Social
Security, Medicare, and Medicaid increasingly absorb available
revenues within the federal budget. (See fig. 3.) If none of
the surplus is saved, the long-term outlook is even more
daunting. (See fig. 4.) Budgetary flexibility declines
drastically, and there is little or no room for programs for
national defense, the young, infrastructure, and law
enforcement. In short, there will be essentially no
discretionary programs at all.
[GRAPHIC] [TIFF OMITTED] T5698.004
[GRAPHIC] [TIFF OMITTED] T5698.005
When viewed together with Social Security, the financial burden of
Medicare on the future taxpayers becomes unsustainable. As figure 5
shows, the cost of these two programs combined would nearly double as a
share of the payroll tax base over the long term. Assuming no other
changes, these programs would constitute an unimaginable drain on the
earnings of our future workers.
[GRAPHIC] [TIFF OMITTED] T5698.006
While the problems facing the Social Security program are
significant, Medicare's challenges are even more daunting. To close
Social Security's deficit today would require a 17 percent increase in
the payroll tax, whereas the HI payroll tax would have to be raised 50
percent to restore actuarial balance to the trust fund. This analysis,
moreover, does not incorporate the financing challenges associated with
the SMI and Medicaid programs.
Early action to address the structural imbalances in Medicare is
critical. First, ample time is required to phase in the reforms needed
to put this program on a more sustainable footing before the baby
boomers retire. Second, timely action to bring costs down pays large
fiscal dividends for the program and the budget. Our long-term budget
simulations, as shown in figure 6, illustrate how critical early action
on Medicare reform is to our long-term fiscal future. If the annual
growth in per person Medicare spending could be slowed to 4 percent
over the 70-year period it would yield the kind of savings needed to
establish a truly sustainable budget policy for the long term. This is
not easy however. Although over 70 years the projected average annual
growth in per person spending is 4.5 percent, over the next 10 years it
is nearly 5 percent. The high projected growth of Medicare in the
coming years, means that the earlier the reform begins, the greater the
savings will be as a result of the effects of compounding. Reforms
fully phased in by 2005 would enable us to maintain surpluses over the
entire 70-year simulation period.
[GRAPHIC] [TIFF OMITTED] T5698.007
The actions necessary to bring about a more sustainable program
will no doubt call for some hard choices. Some suggest that the size of
the imbalances between Medicare's outlays and payroll tax revenues for
the HI program may well justify the need for additional resources. One
possible source could be general revenues. Although this may eventually
prove necessary, such additional financing should be considered as part
of a broader initiative to ensure the program's long-range financial
integrity and sustainability.
What concerns me most is that devoting general funds to the HI may
be used to extend HI's solvency without addressing the hard choices
needed to make the whole Medicare program more sustainable in economic
or budgetary terms. Increasing the HI trust fund balance alone, without
underlying program reform, does nothing to make the Medicare program
more sustainable--that is, it does not reduce the program's projected
share of GDP or the federal budget. From a macro economic perspective,
the critical question is not how much a trust fund has in assets but
whether the government as a whole has the economic capacity to finance
all Medicare's promised benefits--both now and in the future.
If more fundamental program reforms are not made, I fear that
general fund infusions would interfere with the vital signaling
function that trust fund mechanisms can serve for policymakers about
underlying fiscal imbalances in covered programs. The greatest risk is
that dedicating general funds to the HI program will reduce the sense
of urgency that impending trust fund bankruptcy provides to
policymakers by artificially extending the solvency of the HI program.
Furthermore, increasing the trust fund's paper solvency does not
address cost growth in the SMI portion of Medicare, which is projected
to grow even faster than HI in coming decades.
Long-Term Fiscal Policy Choices
Beyond reforming the Medicare program itself, maintaining
an overall sustainable fiscal policy and strong economy is
vital to enhancing our nation's future capacity to afford
paying benefits in the face of an aging society. Decisions on
how we use today's surpluses can have wide-ranging impacts on
our ability to afford tomorrow's commitments.
As we know, there have been a variety of proposals to use
the surpluses for purposes other than debt reduction. Although
these proposals have various pros and cons, we need to be
mindful of the risk associated with using projected surpluses
to finance permanent future claims on the budget, whether they
are on the spending or tax side.\2\ Commitments often prove to
be permanent while projected surpluses can be fleeting. For
instance, current projections assume full compliance with tight
discretionary spending caps. Moreover, relatively small changes
in economic assumptions can lead to very large changes in the
fiscal outlook, especially when carried out over a decade. In a
recent report, the Congressional Budget Office (CBO) compared
the actual deficits or surpluses for 1988 through 1998 with the
first projection it had produced 5 years before the start of
each fiscal year. Excluding the estimated impact of
legislation, CBO says that its errors averaged about 13 percent
of actual outlays. Such a shift in 2004 would mean a potential
swing of about $250 billion in the projected surplus.
---------------------------------------------------------------------------
\2\ See Federal Budget: The President's Midsession Review (GAO/OCG-
99-29, July 21, 1999).
---------------------------------------------------------------------------
Although most would not argue for devoting 100 percent of
the surplus to debt reduction over the next 10 years, saving a
good portion of our surpluses would yield fiscal and economic
dividends as the nation faces the challenges of financing an
aging society. Our work on the long-term budget outlook
illustrates the benefits of maintaining surpluses for debt
reduction. Reducing the publicly held debt reduces interest
costs, freeing up budgetary resources for other programmatic
priorities. For the economy, running surpluses and reducing
debt increase national saving and free up resources for private
investment. These results, in turn, lead to stronger economic
growth and higher incomes over the long term.
Over the last several years, our simulations illustrate the
long-term economic consequences flowing from different fiscal
policy paths.\3\ Our models consistently show that saving all
or a major share of projected budget surpluses ultimately leads
to demonstrable gains in GDP per capita. Over a 50-year period,
GDP per capita would more than double from present levels by
saving all or most of projected surpluses, while incomes would
eventually fall if we failed to sustain any of the surplus.
Although rising productivity and living standards are always
important, they are especially critical for the 21st century,
for they will increase the economic capacity of the projected
smaller workforce to finance future government programs along
with the obligations and commitments for the baby boomers'
retirement.
---------------------------------------------------------------------------
\3\ See Budget Issues: Long-Term Fiscal Outlook (GAO/T-AIMD/OCE-98-
83, Feb. 25, 1998) and Budget Issues: Analysis of Long-Term Fiscal
Outlook (GAO/AIMD/OCE-98-19, Oct. 22, 1997).
---------------------------------------------------------------------------
BBA Made Medicare Reform Down Payment
In addition to its significant financial imbalance,
Medicare is outmoded from a programmatic perspective. In its
current form, the program lacks the flexibility to readily
adjust its administered prices and fees in line with market
rates and lacks the tools to exercise meaningful control over
the volume of services used. Nevertheless, BBA reforms enacted
in 1997 have begun to address certain programmatic shortcomings
by modernizing the program's pricing and payment strategies and
by moving toward quality-based competition among health plans.
The act's combination of structural reforms, constraints on
provider fees, and increases in beneficiary payments was
expected to lower program spending by $386 billion over 10
years. Because certain key provisions have only recently or
have not yet been phased in, the full effects of the BBA on
providers, beneficiaries, and taxpayers will not be known for
some time.
Of particular significance was BBA's creation of the
Medicare+Choice program, which furthered the use of a choice-
based model of providing Medicare benefits. Medicare+Choice
expanded Medicare's managed care options to include, in
addition to health maintenance organizations (HMO), health
plans such as preferred provider organizations, provider-
sponsored organizations, and private fee-for-service plans. In
making this expanded consumer choice program, BBA provisions
placed a dramatic new emphasis on the development and
dissemination of comparative plan information to consumers to
foster quality-based plan competition. Other BBA provisions
were designed to pay health plans more appropriately than
Medicare had done under the previous HMO payment formula.
BBA also made historic changes to traditional Medicare. It
is gradually eliminating, for the most part, cost-based
reimbursement methods and replacing them with prospective
payment systems (PPS). The intent is to foster the more
efficient use of services and to lower growth rates in spending
for these providers, replicating the experience for acute care
hospitals following the implementation of Medicare's PPS for
hospitals, which began in the mid-1980s. BBA mandated phasing
in PPSs for skilled nursing facilities, home health agencies
(HHA), hospital outpatient services, and certain hospitals not
already paid under such arrangements.
Yet pressures mount to undo some of these changes. Affected
providers are currently seeking to repeal various BBA
provisions, some relying on anecdotal evidence rather than
systematic analysis to make their case. An illustration is the
reporting of health plan withdrawals from the Medicare+Choice
program for 1999. Plans cite, and the press reports, inadequate
payment rates as the reason for dropping out of Medicare or
reducing enrollees' benefits. We have another point of view
based on our fact-gathering and analyses.
BBA sought to moderate Medicare's payments to managed care
plans because, ironically, Medicare managed care cost, not
saved, the government money. That is, the government was paying
more to cover beneficiaries in managed care than it would have
if these individuals had remained in the traditional fee-for-
service program. In our report, we noted that BBA has reduced,
but not eliminated, excess payments.\4\ In fact, Medicare's
payments to some plans are generous enough for plans to make
profits and to finance prescription drugs and other extras not
available to the majority of senior and disabled beneficiaries
who remain in traditional Medicare. We have also reported that
factors additional to or even exclusive of payment rates--
including competition and other market conditions--played a
significant role in the 1999 plan dropouts.\5\ Our ongoing
analysis of the year 2000 plan dropouts reveals similar
findings. The question this raises for policymakers is the
extent to which they should be concerned about health plan
dropouts from Medicare when plan participation means that the
government finances non-Medicare benefits for a minority of
beneficiaries while paying more for these beneficiaries than
for similar ones in traditional Medicare. Among other lessons,
however, the intensity of pressure to roll back BBA's curbs on
managed care rate increases teaches us the difficulty that this
Subcommittee and the Congress as a whole face in making
Medicare payment reforms.
---------------------------------------------------------------------------
\4\ See Medicare+Choice: Reforms Have Reduced, but Likely Not
Eliminated, Excess Plan Payments (GAO/HEHS-99-144, June 18, 1999).
\5\ See Medicare Managed Care Plans: Many Factors Contribute to
Recent Withdrawals; Plan Interest Continues (GAO/HEHS-99-91, Apr. 27,
1999).
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Dimensions of Reform Include Benefit Expansions and Financing Changes
Concern continues to be voiced about the obvious gaps in
protections for Medicare beneficiaries, in contrast to what is
available for most individuals with private employer-based
coverage. At the same time, competing concerns remain about the
need to check Medicare's cost growth, even without adding new
benefits. In response, the various reform options, including
those favored by a majority of the Bipartisan Commission, have
two major dimensions: (1) expansion of Medicare's benefit
package and (2) cost containment through financing and other
structural transformations. Two commonly discussed benefit
expansions are the inclusion of a prescription drug benefit and
coverage for extraordinary out-of-pocket costs, known as
catastrophic coverage. The financing reforms are reflected in
three models: fee-for-service modernization, Medicare+Choice
modernization, and a premium support system fashioned after
FEHBP. Each of these models is designed, to different degrees,
to alter program incentives currently in place to make
beneficiaries more cost conscious and providers more efficient
(see Table 2).
Table 2.--Major Dimensions of Medicare Reform, by Option
------------------------------------------------------------------------
Financing and organizational
Updated benefit package options change options
------------------------------------------------------------------------
Coverage for outpatient prescription drugs Fee-for-service
modernization
Limit on beneficiary liability............ Medicare+Choice
modernization
FEHBP-type premium support
------------------------------------------------------------------------
Benefit Expansion Reforms
Medicare's basic benefit package largely reflects the
offerings of the commercial insurance market in 1965 when the
program began. Although commercial policies have evolved since
then, Medicare's package--for the most part--has not.\6\ For
example, unlike many current commercial policies, Medicare does
not cover outpatient prescription drugs or cap beneficiaries'
annual out-of-pocket spending. Some beneficiaries can augment
their coverage by participating in the Medicaid program (if
their incomes are low enough), obtaining a supplemental
insurance policy privately or through an employer, or enrolling
in a Medicare+Choice plan. However, these options are not
available to or affordable for all beneficiaries. Furthermore,
to the extent that Medicaid and supplemental policies provide
first-dollar coverage of services, the beneficiary population's
sensitivity to service costs is dulled, contributing to some
continued excess utilization. Consequently, many reform
advocates believe that Medicare's basic benefit package should
be brought into line with current commercial norms for active
workers.
---------------------------------------------------------------------------
\6\ Some Medicare benefits have changed. For example, BBA added or
expanded coverage for screening mammograms, prostate cancer screening
tests, bone mass measurements, and several screening or preventive
services.
---------------------------------------------------------------------------
Two benefit reforms under discussion by policymakers are
the inclusion of prescription drugs and stop-loss coverage that
caps beneficiary out-of-pocket spending. Each involves myriad
options, and assessing the merit of these reforms would depend
on the specifics included. For instance, a Medicare
prescription drug benefit could be targeted to provide coverage
for all beneficiaries, coverage only for beneficiaries with
extraordinary drug expenses, coverage only for low-income
beneficiaries, or coverage for selected drugs, such as those
deemed to be cost beneficial. Such coverage decisions would
hinge on understanding how a new pharmaceutical benefit would
shift to Medicare portions of the out-of-pocket costs borne by
beneficiaries as well as those costs paid by Medicaid, Medigap,
or employer plans covering prescription drugs for retirees. How
would these new program costs be shared between taxpayers and
beneficiaries through premiums, deductibles, and copayments?
Would subsidies be provided to help low-income beneficiaries
not eligible for Medicaid with these costs? The administration
of the benefit raises other questions, such as, Who would set
and enforce drug coverage standards among the private health
plans participating in Medicare? And, for traditional Medicare,
How would reimbursable prices be set? Price-setting options
include using a formula based on market prices, negotiating
directly with manufacturers, or contracting with pharmaceutical
benefit management companies. The Breaux-Thomas proposal
favored targeting a drug benefit to low-income beneficiaries
while allowing those at higher incomes to buy into the benefit.
A catastrophic, or stop-loss, coverage benefit would similarly
entail its own design permutations and variables.
Financing and Other Structural Reforms
Many Medicare reforms are designed to slow spending growth
to keep the program viable for the nation's growing aged
population. Although the various proposals, including those
considered by the Bipartisan Commission, differ from one
another in concept, they generally include mechanisms to make
beneficiaries more cost conscious, and incorporate provider
incentives to improve the efficiency of health care delivery.
The various financing and structural reforms consist of
components of three general models: fee-for-service
modernization, Medicare+Choice modernization, and a premium
support system fashioned after FEHBP (see Table 3).
Table 3.--Three Medicare Financing and Structural Reforms
----------------------------------------------------------------------------------------------------------------
Fee-for-service Medicare+Choice FEHBP-type premium
modernization modernization support
----------------------------------------------------------------------------------------------------------------
Pending under BBA.................... Prospective payment Health-based risk
systems for HHAs, adjustment of rates.
hospital outpatient Annual enrollment and
departments, and lock-in.
others. Competitive pricing
demonstration.
Potential under current proposals.... Selective purchasing... Plan savings shared Premium based on
Negotiated pricing..... with program and/or offered or negotiated
Case management for beneficiaries. price
complex and chronic Competitive premium Beneficiary
conditions. pricing. contribution based on
Utilization management. plan cost
Medigap and beneficiary Traditional Medicare
cost-sharing reforms. incorporated
Expanded use of centers Enhanced flexibility
of excellence. Self-financed
----------------------------------------------------------------------------------------------------------------
Fee-for-Service Modernization
BBA improved the efficiency of Medicare's traditional fee-
for-service program by substituting a variety of PPSs and other
fee changes for its cost-based reimbursement methods and
outdated fees. Nevertheless, Medicare is still not an efficient
purchaser. Adjusting its systems of administered prices and
fees up or down to ensure beneficiary access or to capture
potential savings as the market changes poses an overwhelming,
if not impossible, challenge. Medicare largely remains a
passive bill payer, exercising little meaningful control over
the volume of services used. Proposals to modernize fee-for-
service Medicare aim at providing flexibility to take advantage
of market prices and introducing some management of service
utilization. In proposing to make fee-for-service more fiscally
accountable and to provide it with additional flexibility to
achieve these fiscal goals, the Bipartisan Commission also
discussed fee-for-service modernization as one of the critical
elements of reform.
Preferred provider arrangements, whereby insurers select
certain providers because of their willingness to accept lower
fees and their efficient style of practice, have become
commonplace in the commercial insurance market. By accepting
negotiated or competitively bid fees that fall below the usual
levels, selected providers and the beneficiaries using their
services would be afforded certain advantages. The selected
providers with lower fees may experience increased demand,
while beneficiaries using their services could be subject to
lower cost sharing. Comparable arrangements have been proposed
for fee-for-service Medicare. Testing of this concept has been
under way in the HCFA's Centers of Excellence demonstrations,
where hospitals and physicians agree to provide certain
procedures for negotiated all-inclusive fees. BBA also allowed
for testing of competitive bidding for medical equipment and
supplies, with high bidders being excluded from serving
Medicare beneficiaries.
About 87 percent of beneficiaries in traditional Medicare
face little cost sharing in the form of deductibles or
copayments for services by virtue of their eligibility for
Medicaid or their enrollment in a supplementary insurance plan.
While increases in cost sharing have been common in private
insurance to make beneficiaries sensitive to the value and cost
of services, it has been a cost-containment tool largely
unavailable to Medicare. Protecting low-income beneficiaries
from financial barriers to care remains a critical concern. One
possible change in allowable supplementary coverage would be to
restructure cost sharing to heighten beneficiary sensitivity to
the cost of services while removing catastrophic costs for
those who have intensive health care needs.
Private indemnity insurers have moved to incorporate
certain utilization management techniques into their policies,
such as prior authorization of some expensive services and case
management for persons with serious chronic conditions.
Although such techniques are increasingly common among private
insurers, their effectiveness on the population Medicare covers
is unknown.
Medicare+Choice Modernization
Medicare+Choice signaled a new phase in efforts to
transform Medicare. Built on the program that allowed
beneficiaries to enroll in participating managed care plans,
Medicare+Choice expands options available to beneficiaries and
substantially changes plan payment methods. By raising payments
in certain areas and allowing additional types of entities to
contract with Medicare, Medicare+Choice is intended to boost
plan participation and beneficiary enrollment. Payment changes
are designed to adjust the per capita rates to more accurately
reflect enrollees' expected resource use and slow the growth of
spending over time.
Among other payment changes, BBA required HCFA to implement
by January 1, 2000, a methodology to adjust plan payments to
reflect the health status of plan members. Favorable
selection--that is, the tendency for healthier beneficiaries to
enroll in managed care plans--has resulted in payments that are
higher than warranted. The new risk adjustment method developed
for Medicare will more closely align payments to the expected
health care costs of plans' enrollees. This will help produce
the savings originally envisioned when managed care enrollment
options were offered to Medicare beneficiaries and will foster
competition among plans on the basis of benefits and quality
rather than enrollment strategies.
The design of the Medicare+Choice program does not,
however, allow taxpayers to benefit from the current
competition among health plans. If a plan can provide the
Medicare package of benefits for less than the Medicare
payment, it must cover additional benefits, reduce fees, or
both.\7\ Plans that offer enriched benefit packages--such as
including coverage for outpatient prescription drugs or routine
physical examinations--may attract beneficiaries and gain
market share. Medicare, however, pays the predetermined price
even in fiercely competitive markets.
---------------------------------------------------------------------------
\7\ Alternatively, plans can contribute to a stabilization fund
that would allow them to provide additional benefits or lower fees in
future years. Before BBA, health plans also had the option of accepting
a lower capitation payment. In practice, plans preferred to add
benefits to attract beneficiaries.
---------------------------------------------------------------------------
The Medicare+Choice program could be modified, through new
legislation, to require that taxpayers and beneficiaries both
benefit from health plan competition. The Congress could
require that when payments exceed a plan's cost of services
(including reasonable profit), part of the savings be returned
to the program and the rest be used to fund additional
benefits. Another alternative would be to set plan payments
through competitive bidding. In fact, BBA mandates a
competitive pricing demonstration. However, setting the
parameters of a competitive pricing system is a formidable
task. Furthermore, this payment-setting approach may be best
suited to urban areas with high concentrations of managed care
members.
FEHBP-Type Premium Support
Although modernizing traditional Medicare and
Medicare+Choice could improve the control of program spending,
several incentives would remain unaltered. For example,
beneficiaries would remain partially insulated from the cost
consequences of their choices. They would not benefit directly
from selecting plans capable of delivering Medicare-covered
benefits less expensively because the premiums they pay might
well remain constant. Program payments to plans would continue
to be established administratively. The Breaux-Thomas proposal
recognized beneficiary sensitivity to cost as the critical
element missing from the current Medicare program. To remedy
this situation, the Breaux-Thomas proposal and others have
proposed the adoption of an FEHBP-type premium support for
Medicare--a mechanism that could, at the same time, serve to
increase beneficiary sensitivity to the cost consequences of
their choices and enhance quality/cost based competition.
The two defining elements of an FEHBP-type of premium
support are (1) the establishment of premium levels for plans
through negotiations between the program and plans and (2) the
linking of beneficiaries' contributions to the premiums of the
plans they join. This system makes transparent to beneficiaries
which plans operate less expensively and can therefore charge
lower premiums. In principle, it encourages competition because
plans that can deliver services more efficiently can lower
premiums and attract more enrollees. In practice, some caveats
remain. Differences in premiums can reflect more than variation
in efficiency. For example, plans may achieve savings through
narrower provider networks that, while capable of providing
Medicare-covered benefits, could cause beneficiaries
inconveniences and delays in accessing services. Providing
beneficiaries adequate comparative information on plans'
expected and actual performance becomes even more critical.
Because most beneficiaries participate--and are expected to
continue to participate--in traditional fee-for-service
Medicare, its incorporation into the FEHBP-type system is seen
as important. Under current arrangements, the only premium for
participating in the traditional program is the fixed monthly
amount that beneficiaries voluntarily pay to receive coverage
for SMI or to be eligible to enroll in a Medicare+Choice plan.
Because the premium amount represents only 25 percent of the
program's cost and is deducted from beneficiaries' monthly
Social Security payments, participants are not as aware of the
cost of the traditional Medicare program. The Breaux-Thomas
proposal incorporates traditional Medicare as another plan
under an FEHBP-type premium support system. Traditional
Medicare would propose and negotiate premiums like any other
plan and be expected to be self-financing and self-sustaining.
Recognizing the challenge the latter requirement creates, the
proposal would also provide traditional Medicare more
flexibility to manage costs using tools similar to proposals
for fee-for-service modernization.
Incorporating traditional Medicare as another plan puts all
plans on equal footing and maximizes beneficiaries awareness of
costs. However, the sheer size of the traditional program
creates questions. How much flexibility can be granted to
traditional Medicare, given its market power? What will it mean
for a public plan to be self-sustaining and self-financing? Can
it generate and retain reserves as a protection against future
losses? How will losses be managed? The insolvency of
traditional Medicare, which may continue to enroll the majority
of beneficiaries and may be the only plan serving many areas of
the country, is not acceptable. The dilemma of how to guarantee
traditional Medicare's solvency in the context of an FEHBP-type
premium support system needs to be addressed.
An FEHBP-type premium support system would increase the
importance of effective program management and design. In
particular, the ability to risk-adjust premiums to reflect the
variation in health status of beneficiaries joining different
plans would become paramount. Participating plans that attract
a disproportionate number of more seriously ill and costly
beneficiaries would be at a competitive disadvantage if their
premium revenues were not adjusted adequately. In turn,
enrollees in those plans might find services compromised by the
plans' financial situation. Inadequate risk adjustment may be a
particular problem for the traditional Medicare plan, which may
function as a refuge for many chronically ill persons who find
selecting among plans challenging and opt for something
familiar.
Concluding Observations
In determining how to reform the Medicare program, much is
at stake--not only the future of Medicare itself but also
assuring the nation's future fiscal flexibility to pursue other
important national goals and programs. Mr. Chairman, I feel
that the greatest risk lies in doing nothing to improve the
program's long-term sustainability or, worse, in adopting
changes that may aggravate the long-term financial outlook for
the program and the budget.
It is my hope that we will think about the unprecedented
challenge facing future generations in our aging society.
Relieving them of some of the burden of today's financing
commitments would help fulfill this generation's fiduciary
responsibility. It would also preserve some capacity to make
their own choices by strengthening both the budget and the
economy they inherit. While not ignoring today's needs and
demands, we should remember that surpluses can be used as an
occasion to promote the transition to a more sustainable future
for our children and grandchildren.
General fund infusions and expanded benefits may well be a
necessary part of any major reform initiative. Updating the
benefit package may be a necessary part of any realistic reform
program to address the legitimate expectations of an aging
society for health care, both now and in the future. Such
changes, however, need to be considered as part of a broader
initiative to address Medicare's current fiscal imbalance and
promote the program's longer-term sustainability. In addition,
the Congress should consider adequate fiscal incentives to
control costs and a targeting strategy in connection with any
proposal to provide any new benefit such as prescription drugs.
I am under no illusions about how difficult Medicare reform
will be. The Breaux-Thomas proposal addresses the principal
elements of reform, but many of the details need to be worked
out. Those details will determine whether reforms will be both
effective and acceptable--that is, seen as guaranteeing the
sustainability and preservation of the Medicare entitlement, a
key goal on which there appears to be consensus. Experience
shows that forecasts can be far off the mark. Benefit
expansions are often permanent, while the more belt-tightening
payment reforms--vulnerable to erosion--could be discarded
altogether. Recent experience implementing BBA reforms provides
us some sobering lessons about the difficulty of undertaking
reform and the need for effectiveness, flexibility, and
steadfastness. Effectiveness involves collecting the data
necessary to assess impact--separating the transitory from the
permanent and the trivial from the important. Flexibility is
critical to make changes and refinements when conditions
warrant and when actual outcomes differ substantially from the
expected ones. Steadfastness is needed when particular
interests pit the primacy of their needs against the more
global interest of making Medicare affordable, sustainable, and
effective for current and future generations of Americans. This
makes it all the more important that any new benefit expansion
be carefully designed to balance needs and affordability, both
now and over the longer term.
The bottom line is that surpluses represent both an
opportunity and an obligation. We have an opportunity to use
our unprecedented economic wealth and fiscal good fortune to
address today's needs but an obligation to do so in a way that
improves the prospects for future generations. This generation
has a stewardship responsibility to future generations to
reduce the debt burden they inherit, to provide a strong
foundation for future economic growth, and to ensure that
future commitments are both adequate and affordable. Prudence
requires making the tough choices today while the economy is
healthy and the workforce is relatively large. National saving
pays future dividends over the long term but only if meaningful
reform begins soon. Entitlement reform is best done with
considerable lead time to phase in changes and before the
changes that are needed become dramatic and disruptive. The
prudent use of the nation's current and projected budget
surpluses combined with meaningful Medicare and Social Security
program reforms can help achieve both of these goals.
Mr. Chairman, this concludes my prepared statement. I will
be happy to answer any questions you or other Members of the
Subcommittee may have.
GAO Contacts and Acknowledgments
If you have any questions regarding this testimony, please call
Paul L. Posner, Director of Budget Issues, at (202) 512-9573 or William
J. Scanlon, Director of Health Financing and Public Health at (202)
512-7114. Other individuals who made key contributions include Linda F.
Baker, James Cosgrove, Hannah F. Fein, James R. McTigue, Walter
Ochinko, and Deborah Spielberg.
Chairman Thomas. Thank you very much, Mr. Walker.
And given the structuring, why don't we just start, Dr.
Moon, with you, and then we will swing this way and wind up
with the gentleman, if that is OK. And any written testimony
you have will be made a part of the record, and you can address
this in any way you see fit in the time you have.
STATEMENT OF MARILYN MOON, PH.D., SENIOR FELLOW, URBAN
INSTITUTE
Ms. Moon. Thank you, Mr. Thomas. It is a privilege to be
here this afternoon and address your Committee.
I would like to talk a little bit about some of the
concerns I have with the restructuring proposals that people
are discussing now, and to try to put them into some context in
terms of understanding both whether or not the solution fits
the problem, and what some of the issues in terms of
protections that I believe should be extended to beneficiaries
need to be in place if we are going to move in this direction.
Projected increases in Medicare spending arise because of
the high costs of health care and because growing numbers of
persons will be eligible for the program. Further, the primary
reason for higher costs over time is technological change and
increased improvements in the health care system, a phenomenon
that is occurring system-wide and not just in Medicare.
But both of these reasons for higher spending are not
necessarily solved by proposals to restructure Medicare. Claims
for savings from options that shift Medicare more to a system
of private insurance usually rest on two basic arguments,
first, that the private sector is per se more efficient than
Medicare; and, second, that competition among plans will
generate more price sensitivity on the part of beneficiaries
and plans alike.
In the chart that you have already discussed to some extent
here, I looked back over the last 27 years, starting in 1970
when the National Health Expenditure Accounts really set up a
consistent series to look at. And also in the early years it is
interesting that both Medicare and private insurance were
largely just pass-through systems, where they were just paying
the bills and not much was being done to manage health care.
Over this 27-year period, though, Medicare's performance in
terms of growth in the costs of care has been better than that
of private insurance, largely because Medicare started early on
in the eighties to be serious about cost containment efforts
and made substantial improvements at that point in time.
To date, most of the cost savings generated by all payers
of care has come from slowing growth in the prices paid for
services and making only preliminary inroads in reducing the
use of services or addressing the issue of technology. Reining
in the use of services will constitute a major challenge for
both private insurance and Medicare in the future, and I think
it is not clear whether the public or private sector is better
able to do this.
The other way in which people talk about saving money
through restructuring the Medicare Program is by requiring that
beneficiaries who choose higher cost plans pay substantially
higher premiums, and here there is some evidence from Calpers
and the FEHBP program that that does have some impact on the
costs of care. I think the question for Medicare is whether or
not beneficiaries of this program will operate in the same way
as younger persons have operated in the FEHBP and Calpers
systems, and you can look to a number of other places, such as
the California retirement system for the university, where
retirees have not behaved in the same way as the younger
population, so there is some concern here.
Moreover, new approaches to the delivery of health care
under Medicare may generate a whole set of problems, including
problems in areas where Medicare is now working well. For
example, shifting across plans is not necessarily good for
patients. It is disruptive and can raise the cost of care. And
if it is only the healthier beneficiaries who choose to switch
plans, the sickest and most vulnerable beneficiaries will end
up being concentrated in plans that become increasingly
expensive over time.
I believe there are also some critical protections that
exist in the Medicare Program now, that would need to be
rethought and redone if we moved primarily to a private system.
That is protecting the universality and redistribution that
occurs in Medicare; the pooling of risks that occurs in the
current Medicare system; and recognizing that there are
protections that the Government has traditionally provided. So
these are issues that I think are particularly important and
must be part of a reform system if we move in that direction.
What are the tradeoffs from increasingly relying on private
plans to serve Medicare beneficiaries? The modest gains and
lower costs that are likely to come from some increased
competition, and from the flexibility that the private sector
enjoys, could be more than offset by the loss of social
insurance protection. In addition, not all the consequences of
a competitive market are positive. For example, some plans will
not do well in a particular market, and as a result they will
leave, creating the same kinds of disruptions that people have
been very upset about in terms of the withdrawals from the
Medicare Plus Choice program that have been recently announced.
Rather than focusing on restructuring Medicare to emphasize
private insurance, I would place emphasis on innovations
necessary for improvements in health care delivery regardless
of setting, and many of these, such as improvements in the
standards and norms of care, protection for individuals'
information, can be better done often in a public setting than
in a private setting.
Finally, Medicare as a default plan, as the traditional
program, needs to get a lot of attention and care. As people
have already mentioned, it will continue to be a major part of
this program, and I think a considerable amount of emphasis
needs to go there, to improve that program.
Thank you.
[The prepared statement follows:]
Statement of Marilyn Moon, Senior Fellow, Urban Institute
The aging of the U.S. population will generate many
challenges in the years ahead, but none more dramatic than the
costs of providing health care services for older Americans.
Largely because of advances in medicine and technology,
spending on both the old and the young has grown at a rate
faster than spending on other goods and services. Combining a
population that will increasingly be over the age of 65 with
health care costs that will likely continue to rise over time
is certain to mean an increasing share of national resources
devoted to this group. How will the burden of that expense be
shared over time and what role will Medicare play in meeting
these needs?
Projections from the 1999 Trustees Report indicate that
Medicare's share of the Gross Domestic Product (GDP) from both
parts of the program will reach 4.43 percent in 2025, up from
2.53 percent in 1998. This projection is lower than just a few
years ago, however. For example, the estimates of the date of
exhaustion of the Part A Trust fund have been pushed out to
2015. While this new date of exhaustion reduces some of the
perceived urgency in addressing the issue, it is important not
to underestimate the need for addressing reforms and financing
issues for Medicare. This reprieve in the deadline for action
offers an opportunity to engage in a careful discussion of the
issues surrounding Medicare that extends beyond the budgetary
focus that has thus far dominated much of the debate. Action is
needed, but there is time to do it deliberately.
The Focus on Structural Reforms
Projected increases in Medicare's spending arise because of
the high costs of health care and growing numbers of persons
eligible for the program. But most of the debate over Medicare
reforms centers on only a piece of the cost issue. That is,
changes to reduce Medicare spending through restructuring can
only go so far. Technological advances that raise the costs of
care are the primary reason for higher costs over time, and
this phenomenon is occurring system wide, not just in Medicare.
Further, a beneficiary population that is growing now because
of increased life expectancy and will be exacerbated in the
future by the retirement of the baby boom raises issues well
beyond any restructuring options. Nonetheless, restructuring
could profoundly affect Medicare's future.
Claims for savings from options that shift Medicare more to
a system of private insurance usually rest on two basic
arguments: first, it is commonly claimed that the private
sector is per se more efficient than Medicare, and second, that
competition among plans will generate more price sensitivity on
the part of beneficiaries and plans alike. What about these
claims?
Medicare vs. the Private Sector: Looking back over the last
27 years (between 1970 and 1997), Medicare's performance in
terms of growth in the costs of care has been better than that
of private insurance. Starting in the 1970s, Medicare and
private insurance plans initially grew very much in tandem,
showing few discernible differences (See Chart 1). By the
1980s, per capita spending had more than doubled in both
sectors. But Medicare became more proactive than private health
insurance in the 1980s, and cost containment efforts,
particularly through hospital payment reforms, began to pay
off. From about 1984 through 1988, Medicare's per capita costs
grew much more slowly than those in the private sector.
This gap in overall growth in Medicare's favor stayed
relatively constant until the early 1990s when private insurers
began to take seriously the rising costs of health insurance.
At that time, growth in private insurance moderated in a
fashion similar to Medicare's slower growth in the 1980s. Thus,
it can be argued that the private sector was playing ``catch
up'' to Medicare in achieving cost containment. Private
insurance thus narrowed the difference with Medicare in the
1990s, but as of 1997, there was still a considerable way for
the private sector to go before its cost growth would match
Medicare's achievement of lower overall growth.
It should not be surprising that the per capita rates over
time are similar between Medicare and private sector spending
since all health care spending shares technological change and
improvement as a major factor driving high rates of expenditure
growth. To date, most of the cost savings generated by all
payers of care has come from slowing growth in the prices paid
for services and making only preliminary inroads in reducing
the use of services or addressing the issue of technology.
Reining in use of services will constitute a major challenge
for both private insurance and Medicare in the future, and it
is not clear whether the public or private sector is better
equipped to do this. Further, Medicare's experience with
private plans has been a distinctly mixed.
Using Competition to Generate Savings: Reform options such
as the premium support approach seek savings by allowing the
premiums paid by beneficiaries to vary such that those choosing
higher cost plans pay substantially higher premiums. The theory
is that beneficiaries will become more price conscious and
choose lower cost plans. This in turn will reward private
insurers that are able to hold down costs. And there is some
evidence from the federal employees system and the Calpers
system in California that this has disciplined the insurance
market to some degree. Studies that have focused on retirees,
however, show much less sensitivity to price differences. Thus,
what is not known is how well this will work for Medicare
beneficiaries.
For example, for a premium support model to work, at least
some beneficiaries must be willing to shift plans each year
(and to change providers and learn new rules) in order to
reward the more efficient plans. Without that shifting, savings
will not occur. In addition, there is the question of how
private insurers will respond. Will they seek to improve
service or instead focus on marketing and other techniques to
attract a desirable, healthy patient base? It is simply not
known if the competition will really do what it is supposed to
do.
In addition, new approaches to the delivery of health care
under Medicare may generate a whole new set of problems,
including problems in areas where Medicare is now working well.
For example, shifting across plans is not necessarily good for
patients; it is not only disruptive, it can raise costs of
care. Some studies have shown that having one physician over a
long period of time reduces costs of care. And if it is only
the healthier beneficiaries who choose to switch plans, the
sickest and most vulnerable beneficiaries may end up being
concentrated in plans that become increasingly expensive over
time. The case of retirees left in the federal employees high
option Blue Cross plan and in a study of retirees in California
suggest that even when plans become very expensive,
beneficiaries may be fearful of switching and end up
substantially disadvantaged. Further, private plans by design
are interested in satisfying their own customers and generating
profits for stockholders. They cannot be expected to meet
larger social goals; and to the extent that such goals remain
important, reforms in Medicare will have to incorporate
additional protections to balance these concerns as described
below.
What It is Crucial To Retain from Medicare
The reason to ``save'' Medicare is to retain for future
generations the qualities of the program that are valued by
Americans and that have served them well over the last 33
years. This means that any reform proposal ought to be judged
on principles that go well beyond the savings that they might
generate for the federal government.
In this testimony I stress three crucial principles that
are integrally related to Medicare's role as a social insurance
program:
The universal nature of the program and its
consequent redistributive function.
The pooling of risks that Medicare has achieved to
share the burdens across sick and healthy.
The role of government in protecting the rights of
beneficiaries--often referred to as its entitlement nature.
While there are clearly other goals and contributions of
Medicare, these three are part of its essential core.
Traditional Medicare, designed as a social insurance program,
has done well in meeting these goals. What about options
relying more on the private sector?
Universality and Redistribution: An essential
characteristic of social insurance that Americans have long
accepted is the sense that once the criterion for eligibility
of contributing to the program has been met, that benefits will
be available to all beneficiaries. One of Medicare's great
strengths has been providing much improved access to health
care. Before Medicare's passage, many elderly persons could not
afford insurance, and others who could not obtain it were
denied coverage as poor risks. That changed in 1966 and had a
profound impact on the lives of millions of seniors. The
desegregation of many hospitals occurred under Medicare's
watch. And although there is substantial variation in the
ability of beneficiaries to supplement Medicare's basic
benefits that should be of concern, basic care is available to
all who carry that Medicare card. Hospitals, physicians and
other providers largely accept the card without question.
Once on Medicare, illness or high medical expenses no
longer place enrollees in fear of losing care or battling to
retain coverage with a private plan--a problem that still
happens too often in the private sector. This assurance is an
extremely important benefit to many older Americans and persons
with disabilities. Developing a major health problem is not
grounds for losing the card; in fact, in the case of the
disabled, it is grounds for coverage. This is vastly different
than the philosophy of the private sector towards health
coverage. Even though many private insurers are willing and
able to care for Medicare patients, the easiest way to stay in
business as an insurer is to seek out the healthy and avoid the
sick.
Will reforms that lead to a greater reliance on the market
still retain the emphasis on equal access to care and plans?
For example, differential premiums could undermine some of the
redistributive nature of the program that assures even low
income beneficiaries access to high quality care and responsive
providers.
The Pooling of Risks: One of Medicare's important features
is the achievement of a pooling of risks among the healthy and
sick covered by the program. Even among the oldest of the
beneficiaries, there is a broad continuum across individuals'
needs for care. While some of this distribution is totally
unpredictable (because even people who have historically had
few health problems can be stricken with catastrophic health
expenses), a large portion of seniors and disabled persons have
chronic problems known to be costly to treat. If these
individuals can be identified and segregated, the costs of
their care can expand beyond the ability of even well-off
individuals to pay over time.
A major impetus for Medicare was the need to protect the
most vulnerable. That's why the program focused exclusively on
the old in 1965 and then added the disabled in 1972. About one
in every three Medicare beneficiaries has severe mental or
physical health problems. In contrast, the healthy and
relatively well-off (with incomes over $32,000 per year for
singles and $40,000 per year for couples) make up less than 10
percent of the Medicare population. Consequently, anything that
puts the sickest at greater risk relative to the healthy is out
of sync with this basic tenet of Medicare. A key test of any
reform should be who it best serves.
If the advantages of one large risk pool (such as the
traditional Medicare program) are eliminated, other means will
have to be found to make sure that insurers cannot find ways to
serve only the healthy population. This is a very difficult
challenge that has been studied extensively; as yet no
satisfactory risk adjustor has been developed. What has been
developed to a finer degree, however, are marketing tools and
mechanisms to select risks. High quality plans that attract
people with health care needs are likely to be more expensive
than plans that focus on serving the relatively healthy. If
risk adjustors are never powerful enough to eliminate these
distinctions and level the playing field, then those with
health problems--who disproportionately have lower incomes--
would have to pay the highest prices under many reform schemes.
The Role of Government: Related to the two above principles
is the role that government has played in protecting
beneficiaries. In traditional Medicare, this has meant having
rules that apply consistently to individuals and assuring
everyone in the program access to care. It has sometimes fallen
short in terms of the variations that occur around the country
in benefits, in part because of interpretation of coverage
decisions but also because of differences in the practice of
medicine. But in general, Medicare has to meet substantial
standards and accountability that protect its beneficiaries.
If the day-to-day provision of care is left to the
oversight of private insurers, what will be the impact on
beneficiaries? It is not clear whether the government will be
able to provide sufficient oversight to protect beneficiaries
and assure them of access to high quality care. Particularly is
an independent board is established, to whom will it be
accountable. Further, what provisions will be in place to step
in when plans fail to meet requirements or who leave an area
abruptly? What recourse will patients have when they are denied
care?
One of the advantages touted for private plans is their
ability to be flexible and even arbitrary in making decisions.
This allows private insurers to respond more quickly than a
large government program and to intervene where they believe
too much care is being delivered. But one plan's cost
effectiveness activities may translate into a beneficiary's
loss of potentially essential care. Which is more alarming, too
much care or care denied that cannot be corrected later? Some
of the ``inefficiencies'' in the health care system may be
viewed as a reasonable response to uncertainty when the costs
of doing too little can be very high indeed.
What Should Be the Direction for Reform of the Delivery of Care?
Much of the debate over how to reform the Medicare program
has focused on broad restructuring proposals. However, it is
useful to think about reform in terms of a continuum of options
that vary in their reliance on private insurance. Few advocate
a fully private approach with little oversight; similarly few
advocate moving back to 1965 Medicare with its unfettered fee-
for-service and absence of any private plan options. In
between, however, are many possible options and variations. And
while the differences may seem technical or obscure, many of
these ``details'' matter a great deal in terms of how the
program will change over time and how well beneficiaries will
be protected. Perhaps the most crucial issue is how the
traditional Medicare program is treated. Is it just one of many
plans that beneficiaries choose among, or does it remain the
basic default option with private plans playing a comparable or
larger role than under the current Medicare+Choice arrangement?
What are the tradeoffs from increasingly relying on private
plans to serve Medicare beneficiaries? The modest gains in
lower costs that are likely to come from some increased
competition and from the flexibility that the private sector
enjoys could be more than offset by the loss of social
insurance protection. The effort necessary to create in a
private plan environment all the protections needed to
compensate for moving away from traditional Medicare seems too
great and too uncertain. And, on a practical note, many of the
provisions in the Balanced Budget Act of 1997 that would be
essential in any further moves to emphasize private insurance--
generating new ways of paying private plans, improving risk
adjustment and developing information for beneficiaries, for
example--still need a lot of work.
In addition, it is not clear that there is a full
appreciation by policy makers or the public at large of all the
consequences of a competitive market. Choice among competing
plans and the discipline that such competition can bring to
prices and innovation are often stressed as potential
advantages of relying on private plans for serving the Medicare
population. But, if there is to be choice and competition, some
plans will not do well in a particular market and as a result
they will leave. In a market system, withdrawals should be
expected; indeed, they are a natural part of the process by
which uncompetitive plans that cannot attract enough enrollees
leave particular markets. If HMOs have a hard time working with
doctors, hospitals and other providers in an area, they may
decide that this is not a good market. And if they cannot
attract enough enrollees to justify their overhead and
administrative expenses, they will also leave an area. The
whole idea of competition is that some plans will do well--and
in the process drive others out of those areas. In fact, if no
plans ever left, that would likely be a sign that competition
was not working well. This will result in disruptions and
complaints by beneficiaries--much like those now occurring
surrounding the recently announced withdrawals from
Medicare+Choice.
What I would prefer to see instead is emphasis on
improvements in both the private plan options and the
traditional Medicare program, basically retaining the current
structure in which traditional Medicare is the primary option.
Rather than focusing on restructuring Medicare to emphasize
private insurance, I would place the emphasis on innovations
necessary for improvements in health care delivery regardless
of setting.
That is, better norms and standards of care are needed if
we are to provide quality of care protections to all Americans.
Investment in outcomes research, disease management and other
techniques that could lead to improvements in treatment of
patients will require a substantial public commitment. This
cannot be done as well in a proprietary, for-profit environment
where dissemination of new ways of coordinating care may not be
shared. Private plans can play an important role and may
develop some innovations on their own, but in much the same way
that we view basic research on medicine as requiring a public
component, innovations in health delivery also need such
support. Further, innovations in treatment and coordination of
care should focus on those with substantial health problems--
exactly the population that many private plans seek to avoid.
Some private plans might be willing to specialize in
individuals with specific needs, but this is not going to
happen if the environment is one emphasizing price competition
and with barely adequate risk adjustors. Innovative plans would
likely suffer in that environment.
Finally, the default plan--where those who do not or cannot
choose or who find a hostile environment in the world of
competition--must, at least for the time being, be traditional
Medicare. Thus, there needs to be a strong commitment to
maintaining a strong traditional Medicare program while seeking
to define the appropriate role for alternative options. But for
the time being, there cannot and should not be a ``level
playing field'' between traditional Medicare and private plans.
Indeed, if Medicare truly used its market power like other
dominant firms in an industry, it could set its prices in
markets in order to drive out competitors. It could sign
exclusive contracts with providers, squeezing out private
plans. When private plans suggest that Medicare should compete
on a ``level playing field,'' it is unlikely that they have
such activities in mind, however.
Other Reform Issues
While most of the attention on reform focuses on structural
questions, there are other key issues that must also be
addressed, including the adequacy of benefits, reforms that
pass costs on to beneficiaries, and the need for more general
financing. Even after accounting for changes that may improve
the efficiency of the Medicare program through either
structural or incremental reforms, the costs of health care for
this population group will still likely grow as a share of GDP.
That will mean the important issue of who will pay for this
health care--beneficiaries, taxpayers or a combination of the
two--must ultimately be addressed to resolve Medicare's future.
Improved Benefits: It is hard to imagine a ``reformed''
Medicare program that did not address two key areas of
coverage: prescription drugs and a limit on the out-of-pocket
costs that any individual beneficiary must pay in a year.
Critics of Medicare rightly point out that its inadequacy has
led to the development of a variety of supplemental insurance
arrangements which in turn create an inefficient system in
which most beneficiaries rely on two sources of insurance to
meet their needs. Further, without a comprehensive benefit
package that includes those elements of care that are likely to
naturally attract sicker patients, viable competition without
risk selection will be difficult to attain.
It is sometimes argued that improvements in coverage can
only occur in combination with structural reform. And some
advocates of a private approach to insurance go further,
suggesting that the structural reform itself will naturally
produce such benefit improvements. This implicitly holds the
debate on improved benefits hostage to accepting other
unrelated changes. And to suggest that a change in structure,
without any further financial contributions to support expanded
benefits, will yield large expansions in benefits is wishful
thinking. A system designed to foster price competition is
unlikely to stimulate expansion of benefits.
Expanding benefits is a separable issue from how the
structure of the program evolves over time. It is not separable
from the issue of the cost of new benefits, however. This is
quite simply a financing issue and it would require new
revenues, likely from a combination of beneficiary and taxpayer
dollars. A voluntary approach to provide such benefits through
private insurance, such as we have at present, is seriously
flawed. Prescription drug benefits generate risk selection
problems; already the costs charged by many private
supplemental plans for prescription drugs equal or outweigh
their total possible benefits because such coverage attracts a
sicker than average set of enrollees. A concerted effort to
expand benefits is necessary if Medicare is to be an efficient
and effective program.
Benefits and Eligibility Issues for Disability
Beneficiaries: A number of special problems face the under-65
disabled population on Medicare. The 18 month waiting period
before a Social Security disability recipient becomes eligible
for coverage creates severe hardships for some beneficiaries
who must pay enormous costs out of pocket or delay treatments
that could improve their disabilities if they do not have
access to other insurance. In addition, a disproportionate
share of the disability population has mental health needs and
Medicare's benefits in this area are seriously lacking. Special
attention to the needs of this population should not get lost
in the broader debate.
Beneficiaries' Contributions: Some piece of a long-term
solution probably will (and should) include further increases
in contributions from beneficiaries beyond what is already
scheduled to go into place. The question is how to do so
fairly. Options for passing more costs of the program onto
beneficiaries, either directly through new premiums or cost
sharing or indirectly through options that place them at risk
for health care costs over time, need to be carefully balanced
against beneficiaries' ability to absorb these changes. Just as
Medicare's costs will rise to unprecedented levels in the
future, so will the burdens on beneficiaries and their
families. Even under current law, Medicare beneficiaries will
be paying a larger share of the overall costs of the program
and more of their incomes in meeting these health care expenses
(see Chart 2).
In addition, options to increase beneficiary contributions
to the cost of Medicare further increase the need to provide
protections for low income beneficiaries. The current programs
to provide protections to low income beneficiaries are
inadequate, particularly if new premium or cost sharing
requirements are added to the program. And the issue of whether
such protections should be housed in the Medicaid program also
needs further consideration.
Financing: Last, but not least, Medicare's financing must
be part of any discussion about the future. We simply cannot
expect as a society to provide care to the most needy of our
citizens for services that are likely to rise in costs and to
absorb a rapid increase in the number of individuals becoming
eligible for Medicare without taking the financing issue head
on. Medicare now serves one in every eight Americans; by 2030
it will serve nearly one in every four. And these people will
need to get care somewhere. If not through Medicare, then
where?
[GRAPHIC] [TIFF OMITTED] T5698.008
Chairman Thomas. Thank you very much.
Dr. Wilensky.
STATEMENT OF HON. GAIL R. WILENSKY, PH.D., JOHN M. OLIN SENIOR
FELLOW, PROJECT HOPE, BETHESDA, MARYLAND
Ms. Wilensky. Thank you very much, Mr. Chairman and Members
of the Subcommittee, for including me on this panel. I am here
as a health policy person and economist rather than in my
official position as MedPAC Chair, although I am going to draw
on some of my experiences as having been Administrator of the
Health Care Financing Administration in the early nineties.
I want to summarize with a few points. The first one has to
do with the continuing need to reform. As the Comptroller
General has indicated, there is a problem with regard to
financial pressures. I know you have heard about this in the
past.
Recently, in the spring, it was announced that there was an
extra 5 years in terms of the time when the part A trust fund
would go into bankruptcy. I only want to point out that those
extra 5 years depend on razor-thin surpluses in each of the
years in the early part of this next decade, and if for any
reason they were to go away, either because expenditures go up
just a little bit or income drops just a little bit because of
an employment drop, those surpluses would disappear very
quickly.
But at least as important as the solvency issues is the
fact that there are other reasons to reform Medicare. The
current benefit structure is inadequate, and, importantly, it
is unfair.
We have heard from Members of your Committee the
frustration that in some parts of the country far less is spent
on Medicare than in other parts of the country, not because of
cost-of-living differences or because of health status
differences, but because of the way that health care is
practiced or because of the demands of seniors. That is an
issue that we need to address because it means that there is a
lot of cross-subsidizing going on in this country from areas
with conservative practice styles to areas with more aggressive
practice styles.
As many of you know, I personally support a premium support
model as a reform vehicle to address this, and the reason is
because I believe it gives people choices between traditional
Medicare as they have known it and other Medicare replacement
plans, but more importantly, it rewards both the seniors who
choose low-cost programs and also it rewards the physicians and
other health care providers in providing them with better
incentives.
Now, I know that not all Members of your Committee agree
with this model, and so I want to also be clear that people
understand that some of the most vexing issues with regard to
premium support are present in our current system that allows
for either traditional Medicare or Medicare replacement. And by
that I mean risk adjustment, the need to educate seniors
seriously so that they understand what they are choosing, and
the issue about very different spending patterns across the
country.
One of the areas that will need reform if we are to change
the Medicare Program has to do with building an infrastructure
and who or what agency is actually to administer that
infrastructure. I support the notion of a Medicare board if we
are to have a serious package of Medicare replacement programs
along with the Health Care Financing Administration as the
administrator of a traditional Medicare Program. And I say that
with both affection and respect for what HCFA can do in terms
of administering a traditional Medicare Program.
They have a clear focus and expertise, and that is in
administering a public program with administered prices. And I
think they most of the time, although I know occasionally you
disagree, do a good job of running that program. But I think it
is a conflict of interest, and it also draws far beyond their
expertise to have them also be administering a set of insurance
replacement programs. So my advice is that a Medicare board, or
whatever you may choose to name it, would be better for
administering the replacement programs and allowing HCFA to
administer the traditional program.
Having said that, I think it is important that the Congress
extend to HCFA more flexibility than it has tended to allow
HCFA in the past. Its relationship with HCFA has been very
micro-prescriptive, allowing very little flexibility. If you
are serious about talking about a modernized fee-for-service,
you will need to allow HCFA some of the authority that exists
now with the private plans--centers of excellence, disease
management, selective contracting, best practices, the kinds of
things that HCFA cannot do.
A part of me was a little skeptical about whether HCFA will
be able to get beyond its own bureaucratic inertia to make use
of that flexibility, but we will not know and we will not see a
modernized fee-for-service plan if you do not extend that
additional flexibility.
Two points, and then I will close. The first is, reform
will take some time. MedPAC, whenever we make recommendations,
almost always recommends phasing in change. That is clearly
true in terms of a major restructuring of Medicare. My advice
is start now. It will take some time.
The second point I would like to leave with you is remember
that tomorrow's seniors will be different, a different
generation than today's seniors. Almost all of the women will
have had working experiences for many of them, including those
on the panel, all of our adult life. We will see many more
people with assets that they have developed and some pension
differences. And so while it is important to understand the
needs and concerns of today's senior population, we do need to
understand that the baby-boomer generation will be a different
population and to plan for Medicare for the 21st century with
that in mind.
Thank you.
[The prepared statement follows:]
Statement of Hon. Gail R. Wilensky, Ph.D., John M. Olin Senior Fellow,
Project HOPE, Bethesda, Maryland
Let me summarize my points as follows:
There is a continuing need to reform Medicare
1. Solvency and financial pressures continue as important
issues
2. The current benefit structure is inadequate and unfair
A premium support model is a reform vehicle to address
these issues
1. It rewards seniors choosing low-cost, efficient plans,
allows seniors to choose plans that best suit their needs, and
provides better incentives to physicians and other providers
2. Many of the most vexing issues of premium support are also
present with the current combination of fee-for-service
Medicare and Medicare replacement plans
Medicare reform will require a series of changes
1. Reform should start now; building the infrastructure will
take time
2. Future seniors will be different from today's seniors in
terms of work experiences, health plan experiences, income and
education
Premium support model requires a different institutional
structure
1. A Medicare Board, separate from HCFA, to oversee and
negotiate with plans
2. A Modernized FFS Medicare requires a different mind-set
from HCFA and a more flexible relationship with the Congress
Mr. Chairman and members of the subcommittee, thank you for
inviting me to appear before you. My name is Gail Wilensky. I am the
John M. Olin Senior Fellow at Project HOPE, an international health
education foundation and I chair the Medicare Payment Advisory
Commission. I am also a former Administrator of the Health Care
Financing Administration. My testimony today reflects my views as an
economist and a health policy analyst as well as my experiences running
HCFA. I am not here in any official capacity and should not be regarded
as representing the position of either Project HOPE or MedPAC.
The Need for Reform
Medicare's popularity as a social program notwithstanding,
the program is in need of major reform. Although Medicare
solved the primary problem it was designed to address, ensuring
that seniors had access to health care, there are a variety of
problems with Medicare as it is currently constructed.
Much of the motivation for Medicare reform has been
financial. Medicare, as it is currently structured, is
partially dependent on a Part A trust fund that is scheduled to
be depleted of funds just as the pressure of the baby boomers
retirement starts to be felt. Although the April 1999 report of
the Social Security Trustees moved the date of depletion from
2010 to 2015, the new estimate is extremely fragile. The
additional five years of Part A solvency are based on razor-
thin surpluses over several years that could easily disappear
if Part A expenditures increase slightly faster than
anticipated or wage tax revenue grows slightly slower than
anticipated. In addition, the pressure on general revenues from
Part B growth will continue although this is less observable
since Part B is not funded by a stand-alone trust fund.
However, the motivation for Medicare reform is and should
be more than financial. Traditional Medicare is modeled after
the indemnity insurance plans that dominated the way health
care was organized and delivered in the 1960's. The benefit
package also reflects the 1960's, not covering outpatient
pharmaceuticals or protection against very large medical bills.
Because of the limited nature of the benefit package and,
at least until recently, the restricted nature of plan choices
allowed under Medicare, almost all seniors supplement
traditional Medicare. The use of this two-tiered insurance
strategy has had important consequences for both seniors and
for the Medicare program. For many seniors, it has meant
substantial additional costs, with annual premiums varying
between $1000 and $3000 or more.
The supplemental plans have also meant additional costs for
Medicare. By filling in the cost-sharing requirements of
Medicare, the plans make seniors and the providers that care
for them less sensitive to the costs of care, resulting in the
greater use of Medicare-covered services and thus increased
Medicare costs.
In addition to concerns about the incentives associated
with Medicare, there are also issues of equity. The amount
Medicare spends on seniors varies substantially across the
country, far more than can be accounted for by differences in
the cost of living or differences in health status among
seniors. Since seniors and others pay into the program on the
basis of income or wages and pay the same premium for Part B
services, this results in substantial cross-subsidies from
people living in low cost states and states with conservative
practice styles to people living in higher cost states and
states with aggressive practice styles.
The Direction of Reform
I believe a program modeled after the Federal Employees Health
Benefits Program or what is now generically referred to as a premium-
support program would provide a better structure for Medicare. Such a
program could produce a more financially stable and viable program, and
would provide better incentives for seniors to choose efficient plans
and/or providers and better financial incentives for physicians and
other health care providers to produce high-quality, low-cost care.
This type of program would allow seniors to choose among competing
private plans, including a modernized fee-for-service Medicare program,
for the plan that suited their needs.
I am well aware that the premium support model remains
controversial among some Members of Congress. However, I think it is
important that committee members understand that many of the most
vexing issues that need to be resolved for a premium support program
must also be resolved for the current Medicare program. This will be
true as long as the Medicare program includes a traditional fee-for-
service benefit and a variety of Medicare replacement programs. These
issues include risk adjustment, providing understandable and user-
friendly information to seniors, assuring that quality care is being
delivered and providing safeguards for frail and vulnerable
populations.
Some are raising questions about the difficulties surrounding the
Medicare+ Choice program and what that portends for premium support.
Although the Medicare+Choice program continues to grow, the growth rate
has slowed down dramatically.
Understanding the problems being experienced by Medicare+Choice may
help to prevent them from occurring in a premium support program. In
some cases, plans just made bad business decisions. They went into too
many markets or tried to enter markets where they were unable to form
networks. Plans also found special problems entering rural areas,
especially those with a single hospital or a few dominant provider
groups. Finding ways to make more plan choices available in rural areas
will clearly need more effort.
But other problems reflect actions by the government that can and
should be addressed. There is substantial uncertainty about the ``rules
of the road'' --new regulations and requirements, reimbursement
changes, changing models of risk adjustment, etc. Equally disturbing is
the growing differential in spending rates for Medicare services in
traditional Medicare versus spending in Medicare replacement plans.
These are issues that need to be resolved for Medicare+Choice as well
as a premium-support model.
Getting From ``Here'' to ``There''
Historically, changes in Medicare reimbursement policy and
structure have been phased in over several years. This has
helped to cushion the disruption that abrupt changes could
cause. It also makes sense to consider phasing-in changes in
the structure or organization of a reformed Medicare program
that requires substantially different roles for government or
substantially different roles for the administrative
institutions supporting the program such as exists with premium
support. Any interest in experimenting with various strategies
for reform or the administrative structures supporting reform
makes it even more urgent that we begin the process now.
Concerns have been raised about instituting significant
changes in a program involving the elderly. Many of today's
seniors have had little experience with health plans other than
fee-for-service indemnity plans, many seniors have modest
incomes and some have little education. Whatever changes are
made to the Medicare program may need to be modified for at
least some subsets of the existing senior population. Some
groups of seniors may be need to be excluded from any change.
Because of the difficulties that comes with changing
programs involving seniors, it is important that we establish
now where we want to go with a reformed Medicare program.
It is also important to understand that the people who will
be reaching age 65 over the next decade as well as the baby-
boomers have had very different experiences relative to today's
seniors. Most of them have had health plans involving some
forms of managed care, many of them have had at least some
experience choosing among health plans, most have had more
education than their parents and many will have more income and
assets. The biggest change involves the women who will be
turning 65. Most of these women will have had substantial
periods in the labor force, many will have had direct
experience with employer-sponsored insurance and at least some
will have their own pensions and income as they reach
retirement age. This means we need to think about tomorrow's
seniors as a different generation, with different experiences,
with potentially different health problems, and if we start
soon, with different expectations.
The Administrative Structure Supporting a Reformed Medicare
At least two major administrative issues need to be
addressed. The first involves using a Medicare Board as the
major administrative structure supporting a premium support
type of program. The second involves the potential role of the
Health Care Financing Administration in running a modernized
fee-for-service Medicare program.
I support the notion of a separate Medicare Board that
would oversee and negotiate with the private plans and the
traditional Medicare program. The most important functions of
such a Medicare Board would be to review and approve benefit
packages, to negotiate premiums, make payment modifications
(such as risk adjustment), direct open enrollment periods and
to provide information about plan choices.
While I think it is appropriate and proper that the
individuals who have been involved in administering the
Medicare+Choice program at HCFA be moved to the Board, it would
be better to have a Board that is separate from HCFA and with
leadership from outside of HCFA. It would be desirable to
include people with experience administering the FEHB program,
the CalPERS program and some of the more comparable programs
from the private sector.
The reason I think a separate Medicare Board is desirable
is that the mind-set of HCFA is focused on running a publicly
administered, price-setting, fee-for-service system. The
functions and roles for government in running and monitoring a
premium support system are so fundamentally different from the
experiences and mind-set of HCFA personnel that it would
detract from rather than enhance the successful operations of a
premium-support program.
The more difficult issue is whether HCFA or any
governmental entity could administer a modernized fee-for-
service system that competes effectively with privately
administered plans. A series of changes would be needed to
modernize the traditional Medicare program. These include the
use of selective contracting, centers of excellence, disease
management programs, best practice programs, variations in
benefit structures and other changes that are commonplace in
the better-run private sector plans.
The question in my mind is whether the Congress will allow
HCFA the flexibility that would be needed to run such a program
and whether the Congress and the Administration will provide
HCFA with the resources needed to carry out such a task.
History is not encouraging on either of these issues.
If HCFA or any other governmental agency is to run a
modernized fee-for-service program, Congress will need to
change its relationship with HCFA and retreat from its very
micro-prescriptive directives. This would require both changes
in statute and changes in attitude. It would also require
changes in attitude and behavior by the employees of HCFA.
Demonstration and/or adoption of promising ideas from the
private sector have been painfully slow to be undertaken by
HCFA. Some of this slowness may be caused by political
difficulties associated with these strategies, such as the
selective exclusion of providers, or by a lack of appropriate
funding. But too often it appears to be the results of
bureaucratic inaction and indecision.
An alternative to a publicly-administered, modernized fee-
for-service Medicare program is the use of competitively-
procured, private fee-for-service plans. These plans could be
bid out on a risk basis at a national, regional or state level
with plans using administered pricing if they chose to do so.
The attraction of the privately administered fee-for-
service plans is that they can introduce changes in local
markets that HCFA may not be able to do. But for many people,
this is also the fundamental drawback of the privately
administered plans. The public oversight and control of a
publicly administered plan provides a sense of protection that
will be difficult to ignore and at least to me, the political
objections likely to result from eliminating a publicly
administered traditional Medicare program, seem overwhelming.
This means that if there is to be a publicly-administered,
modernized fee-for-service component to a premium support
program, which I think is both desirable and politically
necessary, Congress will need to change its relationship with
HCFA and grant it more flexibility than it has done in the
past. In return, HCFA will need to be more responsive, more
pragmatic and more creative in its behavior.
Chairman Thomas. Thank you very much, Dr. Wilensky.
Dr. Dowd.
STATEMENT OF BRYAN DOWD, PH.D., PROFESSOR, DIVISION OF HEALTH
SERVICES RESEARCH AND POLICY, SCHOOL OF PUBLIC HEALTH,
UNIVERSITY OF MINNESOTA
Dr. Dowd. Thank you, Mr. Chairman and Subcommittee Members,
and thank you for the opportunity to appear here today.
I am a professor at the University of Minnesota. My
colleagues and I have spent the last 20 years analyzing health
insurance purchasing strategies and ways to apply the most
successful of those strategies to the Medicare Program. Our
research is non-partisan. It has been sponsored by HCFA, the
American Enterprise Institute, the Robert Wood Johnson
Foundation, and the National Academy for Social Insurance.
Currently, we are providing technical assistance to HCFA on the
congressionally-mandated competitive pricing demonstration
project. Despite these various affiliations, I want to be clear
that the opinions that I express today are purely my own.
Under the current payment system for Medicare+Choice plans,
the Government tells health plans how much it will pay them to
care for Medicare beneficiaries. In other words, information
about the cost of caring for beneficiaries flows from the
organization that knows the least about the health plan's true
cost, that is, the Government, toward the organization that
knows the most about the true cost of care, that is, the health
plan. That to use seems perverse. Instead, we think health
plans should be telling the Government how much it costs to
care for Medicare beneficiaries.
Our proposal for competitive pricing in the Medicare
Program, which is virtually identical to the system used by the
State of Minnesota, would offer fee-for-service Medicare to all
beneficiaries, regardless of their location, and would contract
with HMOs in market areas where HMOs are available.
The government would pay the full cost of the low-cost
health plan and beneficiaries would pay the cost of more
expensive plans out of their pocket. That is how I get my
health insurance and how I have gotten it for the last 15
years.
Now, apparently, we are not alone in our admiration of
purchasing systems that are used by large employers. Virtually
every Medicare reform proposal being discussed today, from the
Clinton administration proposal to that of the Heritage
Foundation, contains some element of competitive pricing. Most
importantly, in 1997, Congress mandated HCFA to conduct a
demonstration of competitive pricing for Medicare in at least
four sites. Congress established the Competitive Pricing
Advisory Committee, or CPAC, to design the demonstration and
pick the sites.
Now, CPAC members include former Senator Dave Durenberger,
Bob Reischauer, John Rother, Chip Kahn, and other national
experts. CPAC subjected 30 different design parameters and over
300 potential demonstration sites to expert analysis and open
public debate. Their final design was not our proposal, nor was
it the Breaux-Thomas proposal, the Clinton proposal, or HCFA's
proposal. It was a negotiated compromise hammered out by people
who were face to face with the reality of putting a
demonstration project on the ground in short order.
CPAC also selected two initial demonstration sites: Kansas
City and Phoenix. The result, as you probably know, is that
legislation to kill the demonstration in these two sites
already has been passed by the Senate as a rider to their
Patient Protection Act. If this legislation comes before you, I
would implore you to consider your decision carefully.
I know there is discussion about establishing an
independent board to run various aspects of the Medicare
Program, but I suggest to you that Congress has already
established an independent board of national experts to run
what is perhaps the most important demonstration project in the
history of the Medicare Program. The question before Congress
at this point is whether that independent board will be allowed
to complete the tasks that it was assigned by Congress.
I want to finish my testimony today by addressing one of
the most controversial points in the Medicare competitive
pricing debate, that is, the degree to which fee-for-service
Medicare should be included in a competitive pricing system.
Now, there are good arguments in favor of including fee-
for-service Medicare. That system is most likely to produce the
best bids from health plans. We found that employers who adopt
a defined contribution system for all of their health plans
have total health insurance costs, that is, the part paid by
both employers and employees, that are about 7 percent lower on
average than employers who subsidize the cost of high-priced
health plans.
However, there are also good arguments in favor of
providing some subsidy for the consumer's cost of high-cost
plans. The main empirical argument, despite our advice to the
contrary, is that most employers do it. The Federal Employees
Health Benefit Plan is a good example, with its level
percentage contribution up to a cap. About two-thirds of the
employers in our survey data subsidize high-cost plans to some
degree.
Another consideration, for better or worse, is that the
fee-for-service Medicare sector operates under a different set
of rules than private sector plans, and those differences
either must be addressed or accommodated in any competitive
pricing system that includes the fee-for-service sector. I
think that what I have seen of the Breaux-Thomas proposal is
very clear on that point.
Federal and State governments also subsidize the cost of
higher-priced health plans through the tax exemption of health
insurance premiums which provide an equal percentage subsidy of
higher-cost plans for any given consumer.
It is our hope, in the interest of addressing the
fundamental problems of information flows, inefficiency, and
inequity in the current Medicare Program, that some compromise
can be reached on inclusion of fee-for-service and the
appropriate level of subsidy for high-priced health plans.
That concludes my remarks. I will be happy to provide
copies of our studies to anyone who would like them, and I look
forward to your questions. Thank you.
[The prepared statement follows:]
Statement of Bryan Dowd, Ph.D., Professor, Division of Health Services
Research
and Policy, School of Public Health, University of Minnesota
Outline
I. Two objectives of Medicare contracts with private health plans:
A. Offer Medicare beneficiaries the same choices that are
available through employment-based insurance.
B. Create price-based competition to improve quality and reduce
cost
II. The primary problem with the current payment system for
Medicare+Choice plans:
A. Information about cost flows from the government to the health
plans
B. Competitive pricing reverses that information flow
III. Large employers provide an interesting model
A. They offer multiple health plans during open enrollment periods
with good consumer information
B. They often offer their own self-insured FFS plan, in addition
to HMOs that are available in each market area.
C. Premium contribution methods vary widely.
IV. Growing consensus on bidding models
A. Our proposal, Breaux-Thomas, the FEHBP proposals and even
President Clinton's plan include some type of bidding.
B. Congress mandated a demonstration of bidding for M+C plans as
part of 1997 BBA
V. The Congressionally-Mandated Demonstration of Competitive
Pricing
A. Established an independent national expert advisory panel (The
Competitive Pricing Advisory Committee or CPAC)
B. Told CPAC to design the demonstration and choose the sites.
C. CPAC complete its tasks.
D. Congressionally-mandated Area Advisory Commissions (AACs) were
formed and provided input.
E. Congress is threatening to kill the Demonstration.
VI. Should traditional FFS Medicare be included in the bidding
system?
A. Arguments in favor of including FFS Medicare:
1. Fairness (level playing field with private plans)
2. Defined contribution for all plans reduces costs.
B. Arguments in favor of subsidizing the consumer's cost of high-
priced health plans:
1. Most employers do it.
2. May help compensate plans that attract high cost enrollees.
3. Consumers may like being protected from having to pay the full
premium differential of the high-cost plan, should they ever want to
join it.
Remarks to the House Ways and Means Health Subcommittee
Mr. Chairman and Committee members, thank you for the
opportunity to appear before this Committee. I and Roger
Feldman, my colleague at the University of Minnesota, have
spent the last twenty years working on analyses of private
sector health insurance purchasing strategies, and thinking
about ways to apply the most successful of those strategies to
the Medicare program. Our work is non-partisan. We have
completed several design projects for HCFA, written a book on
the subject that was published by the American Enterprise
Institute, and contributed to a book on Medicare reform edited
by the National Academy of Social Insurance. For the past four
years, along with Abt Associates, we have provided technical
assistance to HCFA on the Competitive Pricing Demonstration
project.
When we first took up the question of how to pay Medicare
HMOs in 1989 we started by asking two basic questions: what are
the goals of contracting with private health plans in the
Medicare program; and what sort of payment system would advance
those goals?
The goals are two-fold:
(1) to offer Medicare beneficiaries the same health plan
choices that are available through employment-based health
insurance, and
(2) to create price-based competition among health plans
that can help improve quality and reduce cost.
Unfortunately, the government's method of contracting with
private health plans does not meet those goals. In the 1980s,
despite some sound advice to the contrary, Congress set up an
administrative pricing system to pay Medicare HMOs. Under that
system, the government tells health plans how much it will pay
them to care for Medicare beneficiaries. Prior to the Balanced
Budget Act of 1997 (BBA), the government told health plans they
would be paid 95 percent of the estimated cost of caring for
``similar'' beneficiaries in the FFS sector. Post-BBA, the
government tells health plans they will be paid an amount based
on the old payment system, adjusted by a schedule of fixed
percentage increases. In both systems, the information about
the cost of caring for beneficiaries flows from the
organization that knows the least about true costs, i.e., the
government, to the organization that knows the most about the
true cost of care, i.e., the health plan. That strikes us as
perverse.
A number of prominent analyses of the HMO payment system
have defined that problem with the current system as the
government not being very good at guessing the health plans'
true cost. They have proposed a multitude of ways to help the
government guess better, primarily by including more variables
in the government's payment formula for HMOs.
Our analysis of the problem in 1989 was quite different.
We thought that the primary problem was not that the government
was guessing badly, but that the government was guessing at
all. We proposed that the flow of information should be
reversed. In other words, the health plans should be telling
the government how much it cost to care for Medicare
beneficiaries, not the other way around. Ten years later, that
simple idea still makes sense to us.
We began to look for a model of how to reverse the flow of
information, and of course, we didn't have to look far, because
virtually all major purchasers of health insurance except the
federal government, ask health plans to submit bids. Of course,
when you ask health plans to reveal their cost through the
bidding process, you need to give them some incentive to tell
you the truth, and that market discipline generally is provided
by the threat of not being offered, or having consumers face a
higher out-of-pocket premium.
In our own proposal for competitive pricing, we suggested
that rather than throwing health plans out of the Medicare
program, the government simply should set its contribution to
premiums at the lowest bid submitted by a qualified health plan
in each market area, so that consumers pay the marginal cost of
more expensive plans out of their own pocket. That is the same
system under which I get my health insurance through the State
of Minnesota, and over the past ten years it has produced very
low premium increase including some years in which premiums
actually declined. In fact, our entire proposal was modelled in
the success of large employers that offer multiple health plans
to their employees. Many of those employers, like Medicare,
also offer a self-insured fee-for-service plan that is
available to all consumers in all locations. Again, that is
exactly the model used by my employer.
Our proposal combined a defined benefit with a defined
contribution. The government's premium contribution was limited
to the lowest priced plan, but unlike some voucher proposals,
beneficiaries were guaranteed that they could purchase the
benefits to which they were entitled for no more than the Part
B premium. In our proposal, FFS Medicare was included as a
bidding health plan, as in the Breaux-Thomas proposal.
Apparently we were not alone in our admiration of the
purchasing systems of large employers. Virtually every Medicare
reform proposal being discussed today contains some version of
competitive pricing. In fact, competitive pricing is one of the
few common elements among the major reform proposals.
Most importantly, in 1997, Congress agreed that
competitive pricing should have a fair test in the marketplace.
Congress mandated HCFA to conduct a demonstration of
competitive pricing in at least four sites. Congress also
established the Competitive Pricing Advisory Committee or
``CPAC'' with representation from consumers, health plans,
providers, employers and policymakers. Congress charged CPAC
with designing the demonstration and choosing the demonstration
sites. CPAC members include former Senator Dave Durenberger,
Bob Reischauer, John Rother, Chip Kahn, and other national
experts. CPAC carried out its duties carefully and
expeditiously. They subjected 30 different design decisions and
300 potential sites to expert analysis and open public debate.
Their final design was not our proposal. Nor was it the Breaux-
Thomas proposal, the Clinton proposal, HCFA's proposal, the
FEHBP proposal or the Heritage Foundation's proposal. It did,
however contain the common element in all those proposals:
health plans submit bids, rather than being told by the
government how much they will be paid.
CPAC also selected two initial demonstration sites: Kansas
City and Phoenix. The Congressionally-mandated Area Advisory
Committees or AACs were established in each demonstration site,
again consisting of representatives of consumers, health plans,
providers, employers and policymakers. The Kansas City AAC met
for the first time on March 22, of this year, under the
direction of Edward Holland, Assistant Vice-President for
Corporate Benefits at Sprint Corporation. By May 12, the Kansas
City AAC had completed all the tasks assigned to it by CPAC.\1\
The Phoenix AAC was not as successful in completing its tasks,
but had made substantial progress by July of this year.
---------------------------------------------------------------------------
\1\ The four tasks delegated to the AACs by the CPAC were (1)
specifying the ``market norm'' standard benefit package in each site,
(2) choosing the median or weighted average bid as the government
contribution rule, (3) exercising an option to delay the new PIP-DCG
risk adjustment system in the first year of the demonstration, and (4)
deciding whether plans should submit separate bids on each county in
the demonstration area, or bid on a ``reference'' county with payments
to other counties determined by payment ratios under the current
system.
---------------------------------------------------------------------------
So what we have here is a Congressionally-mandated
demonstration project, designed by a Congressionally-mandated,
independent task force of national experts, implemented in
sites chosen by that independent task force, and advised at the
local level by the Congressionally-mandated, independent Area
Advisory Committees. Only the most cynical among you will not
be surprised when I tell you that the greatest current threat
to this Congressionally-mandated demonstration is Congress
itself. In fact, legislation to kill the demonstration in
Kansas City and Phoenix already has been passed by the Senate
as a rider to their Patient Protection Act (Senate Bill 1344).
Recently, the Co-Chairs of CPAC, Bob Berenson of HCFA and
James Cubbin, Executive Director of Health Care Initiatives for
General Motors, wrote to Chairman Thomas saying, and I quote:
The Balanced Budget Act gave CPAC the sole authority to
select sites for this demonstration. If Congress decides to
override CPAC's decision on sites and take action to exempt
Kansas City and Phoenix as demonstration sites, in our
judgement, CPAC would not be able to carry out its mission as
specified in BBA 97.
If this legislation comes before you, I would implore you to
consider your decision carefully. I left a meeting of CPAC at noon
today to come to this hearing. The message I would like to take back to
CPAC at 3:30 this afternoon is that the members of this Subcommittee
place a high value on the hundreds of hours that these national health
care leaders have devoted to the tasks that Congress assigned them, and
that you intend to be a reliable partner with them in Medicare reform
efforts, not a group that mandates demonstrations one day and kills
them the next.
I would like to finish my testimony today by addressing one of the
most controversial points in the Medicare competitive pricing debate:
the degree to which traditional FFS Medicare should be included in the
competitive pricing system. There are good arguments in favor of
including FFS Medicare in a defined contribution system. Such a system
is viewed as fair by the private health plans that must compete against
the government-sponsored FFS plan. Furthermore, a defined contribution
that applies to all health plans is likely to produce the best prices
from health plans. In a recent study of large employers, we found that
employers who adopt a defined contribution have total health insurance
costs (including the portion of the premium paid by both employers and
employees) that are about seven percent lower, on average, than
employers who subsidize the cost of high-priced health plans.
However, there also are good arguments in favor of subsidizing the
consumer's cost of higher-priced health plans. The main empirical
argument favoring that approach is that most employers do it. Only
about one-third of the employers in our sample set a defined
contribution to premiums. The Federal Employees Health Benefit Plan
(FEHBP) is an example of a large employer that does not set a defined
contribution to premiums. FEHBP sets a level percentage contribution to
premiums, up to a cap, thus subsidizing the consumer's cost of higher-
priced plans.
Why would employers reject a defined contribution system that has
been shown to save money? There are several possible answers.
Subsidizing high cost plans may be one way to compensate plans that
attract higher cost enrollees. Also, consumers currently in low cost
plans may like knowing that if they ever wanted to join the high cost
plan, the premium would be subsidized, to some degree. We don't know
all the reasons why employers subsidize the consumer's cost of higher-
priced health plans, but it appears to be common practice. Federal and
state governments also subsidize the cost of higher-priced health
plans, through the tax exemption of health insurance premiums, which
provides an equal percentage subsidy of higher cost plans for any given
consumer. It seems to us that a some compromise on the inclusion of
FFS, and the appropriate level of subsidy, could be reached.
I will conclude my remarks at this time. I will be happy to
provide copies of our studies to anyone who would like them, and I look
forward to your questions.
Chairman Thomas. Thank you, Doctor.
Mr. Walker, one of the things that the Medicare Commission
looked at what the concern that historically part of the
driving force for change on Medicare was the ``insolvency'' of
Medicare. And when we tried to look at a model--and Social
Security came to mind--it was fairly obvious that applying a
dedicated tax model from Social Security, which has 100 percent
of its funds in that model and then when it has no money there,
it truly is insolvent, versus a plan that is partially paid out
of a general fund and, in fact, based upon recent decisions in
BBA 1997 and the President's ongoing proposal, one of the
easiest ways to solve the insolvency of Medicare is to continue
to transfer either programmatically to the general fund or
simply dollars over to the HI Trust Fund.
We tried to focus on the sources of money, the dedicated
payroll taxes, the general fund, and the beneficiaries. One of
the difficulties in getting a good dialog going about what the
problem is is that the general fund portion is an entitlement,
and it really does stay below the surface in any kind of a
discussion.
We came to the conclusion that, in essence, forcing a
public discussion about the relative share of the costs of the
Medicare Program between those funding sources and the need for
more money carried on as a general debate before you could
transfer funds from the general fund or increase beneficiaries
or increase payroll taxes, was in part inhibited because of the
way we define solvency and insolvency today. So we came up with
a different way of doing it called programmatic insolvency.
Did you look at that portion of the----
Mr. Walker. I am somewhat familiar with it, yes.
Chairman Thomas. Is that a useful concept. Does it help us
at least elevate it to a public discussion of the relative
share of moneys?
Mr. Walker. I think solvency is too limited. I think
solvency can be misleading. It is not that it is unimportant,
but the fact of the matter is that the assets that are in the
trust fund right now represent Government securities. Basically
what they represent is a first claim on future general
revenues. That is what they are.
I think if you are going to move to a shared financing
source, partially dedicated payroll taxes, partially premiums,
partially general revenues. I think it is important to look
beyond solvency, to look at such things as percentage of the
economy, percentage of the budget, to look at other factors.
Because one of the concerns that we have, Mr. Chairman and
Members of the Committee is we need to also look at
sustainability. Can we keep the promises that have been made?
And looking at it from the standpoint of percentage of the
budget and percentage of the economy, is frankly a lot more
relevant in making those judgments than solvency.
Chairman Thomas. And, in fact, that is what the Commission
did. It took an arbitrary figure of 40 percent of the General
Fund exposure and used that as a programmatic insolvency
criteria, which would trigger the discussion of where and how
the finances would come from.
Mr. Walker. Mr. Chairman, I think one of the basic problems
we have in health care, which is not just Medicare, it's much
broader, is a fundamental disconnect between who gets and who
pays, a fundamental disconnect on behalf of individuals, not
the Government, not employers, not providers, but individuals
on cost and quality of care. They do not have adequate
transparency, they do not have adequate incentives. Whether it
be through Medicare or whether it be through, frankly, the tax
system, that is the fundamental problem.
Chairman Thomas. Well, I would even go one step further. We
don't have a very educated consumer in this area, with woefully
inadequate information available to make a decision, even if
you wanted to be an educated consumer. That is why
confidentiality, the collection of data, the ability to put
outcomes and all of that is part of the solution to the
problem.
Dr. Moon, I want to thank you in recent publications where
you have taken the time in print to distinguish, at least in
concept, defined contributions from a premium support versus
voucher. It is true that if you mess up in a number of ways,
they can all wind up looking the same. But that if you do
understand that there is a difference, it allows you to at
least see what we believe to be some significant differences on
the emphasis of the ability to share the cost of increases. I
know others have not been as discriminating or as
sophisticated, and I want to thank you for that.
But the question I want to ask you runs through I think all
three of the other panelists. In terms of this business of fee-
for-service being such a big chunk, and we know it is going to
be a big chunk, and then the managed plans as an option, the
difficulty I have is that today, in Medicare+Choice and in some
models that have been discussed, is that the managed one,
because of the way in which it is run, lends itself to a
requirement of a cost-quality comparison. And the idea of a
risk adjuster, as is contemplated by the administration, is
within the managed area, with dollars being removed from a
fixed amount.
But you have got an entitlement program over here that is
not subjected to the same cost and quality criteria with an
unlimited funding arrangement. And I guess I would tell you,
Dr. Wilensky, that some of us would be more willing to give the
management tools you talked about to HCFA if they would subject
themselves to some of the cost and quality comparisons that we
are utilizing in other areas. There are two sides to the
ledger. Let them go out and be ``competitive.'' But the
downside of that, of course, is that you also have to be
measured by the same measurements that are used elsewhere.
Any reactions from anybody?
Ms. Moon. I would like to indicate that I think that one of
the things that you are talking about, in terms of holding fee-
for-service accountable I think is very important. We need to
work very hard on finding new tools and new ways to deal with a
part of the Medicare Program that is going to be around for a
long time.
Chairman Thomas. But just let me interrupt, just briefly,
because we do have what we call cost and quality comparisons,
but they are surrogates for the real thing, which is what do
you do in the real world on a direct relationship on a cost
basis. And I would really like real world cost and quality
comparisons rather than the surrogates that we now use.
Ms. Moon. OK. But I do think that whether you have the
current system of Medicare+Choice or a premium support kind of
model, you are going to have people comparing the private plans
to the traditional Medicare Program. And so, to some extent,
there is, I think already, that kind of a comparison that
people can make. They do need some additional information and
tools to be able to understand those tradeoffs. And I think
that those tradeoffs are not very clear to individuals right
now.
Ms. Wilensky. I support the notion that we ought to have
common requirements and common payment, common spending with
regard to the risk plans or however we want to call these
Medicare replacement or Medicare Choice plans and traditional
Medicare.
As I indicated in my testimony, I am very concerned that
the spending between traditional Medicare and the Choice plans
or the risk plans is diverging at both ends of the scale. I
think that is an invitation to difficulty. I think it is
important that we have information on the quality and the
outcomes. It needs to be available for traditional Medicare, as
well as the Choice plan. I very much agree with the comments
you made, that if the Congress is to grant HCFA more
flexibility, it ought to demand more accountability. It has not
in the past. It is within your right to so demand.
We need to get these issues so that, frankly, the
Government is not trying to push or pull people either out of
or into various plans, but to give them information, to make
adjustments for a health status that is critical and to make
sure that plans are providing quality health care, and they are
not cheating in any way in terms of their enrollment. That is a
very important job that needs to be done.
Chairman Thomas. And the long overdue education program
ought not to be funded by one particular element of the program
across the entire structure, which obviously was the----
Ms. Wilensky. MedPAC has, as you know, already recommended
that it is inappropriate to use only the risk plans to fund
medical education. We think it is important that people know
what they are choosing, but that is a broad Medicare function.
Chairman Thomas. But that mental set is the key to the
point you made about HCFA doing fairly well on an administered,
bureaucratic fee-for-service structure, but doesn't understand
the concept of managed care.
Does the gentleman wish to respond at all, Mr. Dowd?
Mr. Dowd. Yes. We have been fans for a long time of trying
to level the playing field between HMOs and fee-for-service
Medicare. That will cut both ways, though, as you suggest, and
so that is important.
I also support the idea of very careful monitoring of what
is going on in both fee-for-service Medicare and HMOs. To a
certain extent, we are sort of running a competitive pricing
demonstration now on the HMO side because, with the changes in
the HMO payment that are put in place by BBA, we are lowering
the payments on the high side relative to the true cost of
care. We are raising them on the low side. In a sense, that is
what we would call a Dutch auction. You keep raising the prices
until something good happens or lowering them until something
bad happens. And it is important to me that we have the
monitoring systems in place so that we know when good things
and bad things happen.
Chairman Thomas. Thank you. My time is up, and I want to
turn it over to the gentleman from California.
But to, Mr. Walker, I want to say thank you. In your
written testimony, you made some very nice statements about
some things that have been done and that you wanted Congress to
hold the line on the Balanced Budget amendment changes that we
made.
I want to assure you that if we decide to make any
adjustments in the area, it is not because we have caved to any
pressure about rolling back. We cannot roll back. But part of
the deal was that prospective payment structures, going from
the old Cost Plus to these new ones, were promised on a certain
time table, and they haven't been delivered. And we put some
plug numbers in there, and those plug numbers were not designed
to be a 2- to 3-year period.
And in legislation, as broad-based as the BBA, you
inevitably think you said one thing, and the lawyers are now
telling you that you actually did something else. So the
traditional term is a ``trailer bill.'' There are some
provisions for that. But I can assure you that your concern, at
least from the Chairman of this Subcommittee, is not that we
intend to rollback BBA, in any way, but to fine-tune it in
areas where we believe there is potentially a need.
So I appreciate your written comments.
Mr. Walker. Mr. Chairman, obviously, some refinements may
be necessary for a lot of the reasons that you articulated. But
it is important to target those refinements, to base them on
hard data. For example, some of the data for 1998 is just now
becoming available.
And in addition, I think what this does is it serves as a
precursor of how tough this is going to be going forward. I
mean, the fact of the matter is everybody has unlimited wants
here, whether it is the individuals, whether it is the
providers, meaning the hospitals, the physicians or whatever.
And ultimately I think we are going to have to ask ourselves a
much more fundamental question than historically we have done.
Rather than incrementally making changes to existing systems,
we are going to have step back and say, OK. Where are we at?
Where should we be going? What do people need versus what they
want? And what is the best way to address that in a way that is
affordable that we can deliver on the promise, not just today,
but for future generations?
Chairman Thomas. Appreciate that. We made our first run at
it, got 10 out of 11 votes. We will do it again.
The gentleman from California?
Mr. Stark. Thank you, Mr. Chairman.
General Walker, I don't think I heard you deal with the
part of your testimony on 12 and 13, pages 12 and 13, where, in
effect, you say--or not in effect--but if I may quote you, You
say, ``Ironically, Medicare Managed Care cost, not saved, the
Government money.'' And then you further go on that you have
reported in a paper or a monograph that you reference in your
footnote that ``Factors additional to or exclusive of payment
rates, including competition and market conditions, played a
significant role in the 1999 plan dropouts.''
Now, I suspect that what you are saying there was that if
we were going to try and save some money with the Cost Plus
Choice or whatever it is, we didn't. That is fair?
Mr. Walker. Yes, Congressman Stark.
Basically, what happened was the failure to have a proper
risk adjustment meant that caused this, in part.
Mr. Stark. Well, and now we find that all Medicare HMOs
offering drug coverage will charge copayments for that next
year, which was not the case in a large number. So that these
experiments, I guess my only quarrel, coming from an area that
has been served by Kaiser, and there are other excellent areas
of the country, that we are just pushing it too fast; that the
HMO's biggest worry is one of two, they will have too many
patients or too few. And anything below or above causes them
real problems. And by our trying to force-feed whatever might
happen, we do create some problems.
Second, I wanted to just point out that the premium
support, as I read it, is an attempt to end Medicare as an
entitlement. This 40-percent draw, on page 8 of the March 15
description, says that ``If the draw is exceeded by 40 percent
. . .'' that means that more than 40 percent of the program
comes out of general revenues ``. . . it would require
congressional approval to authorize any additional
contributions.''
Now, General, isn't that correct that if that's what it
says, if you did that, that ends it as an entitlement and turns
it into a defined contribution, wherein the Government will
contribute no more than 40 percent of the aggregate from
general revenues? Am I saying that----
Mr. Walker. Basically, what it does is provide a mechanism
which would, as I understand it, force Congress to go back and
make a conscious decision----
Mr. Stark. To appropriate the money.
Mr. Walker. Correct. To make a conscious decision whether
or not to violate the limit.
Mr. Stark. Then it ain't an entitlement any more. And the
third or last thing that I would----
Chairman Thomas. Would the gentleman yield just briefly?
Mr. Stark. Sure.
Chairman Thomas. That would be one of the choices
available. They could just as easily raise the HI taxes or to
increase beneficiaries' amount----
Mr. Stark. But they have to act. Now they don't. Now it's
an entitlement, and I get my Medicare benefits regardless of
what we do here. And so, by definition, Medicare would cease to
be an entitlement.
Now, I have heard an awful lot about people purchasing
medical care, and I contend, have always contended it is
impossible for the layman, even those of us in this room who
are perhaps more familiar with medical provider options than
others, but I just would suggest this. One of our interns of
the Joint Economic Committee spent a couple of weeks, and she
dreamed up this question for health care providers in the
Washington, D.C., area. Her father, she said, was 63 and had no
health insurance and was having a severe attack of kidney
stones, but had a lot of money or she was willing to pay for
lithotripsy to help pop. How much would it cost?
Well, it took her 2 weeks to get answers. Now, if any of
you have had any experience with kidney stones, 2 weeks is
beyond the millennium. Well, it is interesting that in the area
here, in the Washington, D.C., area, out of eight providers
who--some wouldn't answer at all. They just wouldn't tell her
what it cost or wouldn't call back--Johns Hopkins won with
$5,300 for the hospital and the doc, and UVA in Charlottesville
somewhere they said between $8- and $10,000.
So let's take $9,000, almost a $4 thousand difference here
for the same procedure if you get down and you can possibly
drag that information out of these providers who don't really
choose to tell you. And some, in the initial calls, just said,
``Well, we don't give that information out.''
Well, my question is I am not sure that it is the
Government and the payers. I am not sure the providers, quite
frankly, want to tell us what it costs, particularly until they
see how much money we have got, and then I will bet you the
cost tends to come amazingly close to whatever they think we
can pay.
So I have always said that I don't think the market can
work because there is no good basis for any of us getting the
information. And without reasonable information, markets can't
exist.
So, Mr. Chairman, I hope we don't have entitlements. I hope
we don't have premium support. I hope we slow down the growth
of for-profit managed care plans, which they may all go broke,
and that would probably be the best thing we could do for
Medicare beneficiaries.
Thanks again for the hearing.
Mr. Walker. Mr. Chairman, may I comment?
Chairman Thomas. Sure.
Mr. Walker. I think one of the things, with all due
respect, Congressman, I think that the Congress really needs to
consider, given these charts, because these are based upon
trusty intermediate assumptions for Social Security and
Medicare, they are based upon CBO estimates, economic
assumptions, which are not that different from OMB. And
basically what they say is the debate needs to be also what
percentage of our economy and what percentage of our budget do
we want to dedicate to health care.
And you are right, Congressman, that managed competition is
not a panacea, by any means, as we have heard. But I think we
have to ask ourselves some of those fundamental questions and
figure out how to get there.
Chairman Thomas. The gentleman's time has expired. We have
got less than 5 minutes to vote. And just briefly, the
gentleman from Louisiana.
Mr. McCrery. I have a quick question for any of the
panelists. I don't know the answer to this, but I am curious.
It goes along the lines of the entitlement question that Mr.
Stark posed.
If the HI Trust Fund runs out of money, if we don't have
sufficient money--or let me put it another way--if we don't
have sufficient money in the trust fund to pay all of the
bills, does current law authorize us to simply make up the
difference with general revenues?
Mr. Walker. That is a legal question. My understanding is,
that you can only use the trust fund assets to pay for
benefits. But if the trust fund runs out of assets, then I
would ask the trustee what happens.
Ms. Moon. I think the legislation is not clear on that
point. And I know that that had come up at some point.
Chairman Thomas. We are down to 3 minutes, and we are
getting pressed again. And the point is entitlements would end
in that situation as well.
Mr. McCrery. Yes. I mean, we may not have an entitlement in
the ideal that Mr. Stark posed it.
Chairman Thomas. Exactly.
Mr. McCrery. So if we run bone dry in the trust fund, it
may, in fact, require congressional action, just as it would
under the Commission's proposal.
Chairman Thomas. Does the gentlewoman from Connecticut wish
to make a----
Mrs. Johnson. I just want to make a comment. I appreciate
the quality of your testimony and the degree to which this
hearing has focused on the seriousness of the problems in
Medicare and their significance to the whole country long term.
But I wish you would, and I also appreciate, Dr. Dowd, your
pointing out to us what happened in the Senate Patient Bill of
Rights. I will, at least, certainly support knocking out that
provision. I think it is outrageous to set up a demonstration
project and then not have the courage to stand by it.
But I would appreciate it if you would try to focus on what
are the two concrete actions we should take this session to
secure Medicare in the future? Because we have got to start
acting now. Clearly, we can't get a macro solution. And so, if
you would get back to me in writing with the two things you
think it would be wisest for us to accomplish in this year's
legislation, I would appreciate it.
Chairman Thomas. Thank the gentlewoman.
The Subcommittee is adjourned.
[Whereupon, at 4 p.m., the hearing was adjourned.]
[Submissions for the record follow:]
Statement of Douglas R. Wilwerding, Chief Executive Officer,
Omnium Worldwide, Omaha, NE, and Accent Insurance Recovery Solutions,
Omoha, NE
The administration of the Medicare program greatly rests on
the shoulders of its contractors who are responsible for: (1)
receiving claims; (2) judging their appropriateness; (3) paying
appropriate claims promptly; (4) identifying potentially
fraudulent claims or providers, and withholding payment if
necessary; and (5) recovering overpayments or inappropriate
payments. When Medicare contractors do not perform these
functions correctly or appropriately, the Medicare program
loses billions of dollars. The actions of Medicare contractors,
therefore, greatly impact the future of the Medicare program.
As reported in the September 20th New York Times--as well
as in recent reports by the General Accounting Office--
contractors are not performing the most basic claim paying
functions, and are, in fact, defrauding the Medicare program.
If contractors are not acting in a manner to stop the flow of
inappropriate dollars from the Medicare program, and are in
fact acting in a manner that promotes the inappropriate flow of
dollars, then the Health Care Financing Administration should
implement resources from the private sector to halt the waste
of taxpayer money.
I can speak specifically for the fifth function named
above: overpayment identification and recovery. Medicare
contractors make overpayments during the normal course of
business. An overpayment is excess money released on a claim,
in total or in part, paid to a provider of service or a
beneficiary. Medicare contractors make billions of dollars of
overpayments every year. However, they are not doing enough to
identify overpaid claims nor are they doing enough to pursue
recovery from the overpaid party.
The private health insurance industry also makes billions
of dollars in overpayments a year. But, the private sector
realizes the value of retrieving this overpaid money. Private
insurance companies employ specialized recovery firms to
identify and pursue overpaid funds, resulting in millions of
dollars returned back to the health insurance plan, helping to
keep health care premiums down. The same successful procedures
could be used to return billions to the Medicare program, funds
that could be used to extend the life of the program, or
provide additional benefits such as pharmaceutical coverage.
The concept of private recovery firms working on Medicare
claims has been recognized and contemplated by other
Congressional committees. H.R. 1827, introduced by the
Government Reform Committee, would mandate the identification
and recovery of overpayments, paying particular attention to
the Medicare program by singling it out for a demonstration
project testing the abilities of private recovery firms. In
addition, the Senate Appropriations bill is recommending the
Department of Health and Human Services' Inspector General's
office to perform a study on the use of private recovery firms
on Medicare overpayments.
Under the Health Insurance Portability and Accountability
Act, HCFA has complete authority to contract with eligible
entities for the recovery of payments that should not have been
made. HIPAA also gives HCFA the funding to enter such
contracts. HCFA has been slow to implement any such program
despite its vast resources. Instead they continue to rely on
their contractors for overpayment identification and recovery.
However, as the reported in the New York Times and by the GAO,
contractors are not even performing the most important
functions of paying claims or answering phones. It can
therefore be reasonably assumed they aren't adequately
performing identification and recovery of overpayment, which is
a process that is usually overlooked because it doesn't impact
the daily functions of paying claims.
I look forward to discussing with the Committee the
services the private sector can offer the Medicare program and
how such private sector services could easily be tested with
Medicare contractors. Thank you for the opportunity to submit
this written testimony.
Statement of Karen S. Fennell, RN, MS, Senior Policy Analyst, American
College of Nurse-Midwives
The American College of Nurse-Midwives (ACNM) believes that
the Medicare program would be strengthened by expanding access
for disabled women to preventive health services and maternity
care services provided by Certified Nurse-Midwives (CNMs) and
free-standing birth centers.
The ACNM makes the following recommendations:
Medicare reimbursement for CNM services should be
increased from 65 percent of the physician fee schedule to 95 percent
of the physician fee schedule.
Medicare should establish a global payment for accredited
free-standing birth centers.
These recommendations are included in The Certified Nurse-
Midwives Medicare Services Act of 1999 (HR 2817). We urge the
Committee to approve this important legislation.
The American College of Nurse-Midwives (ACNM), the national
professional organization for certified nurse-midwives (CNMs),
welcomes the opportunity to submit testimony before the Health
Subcommittee on Strengthening Medicare by ensuring enrollees'
access to benefits and by improving their choice of plans and
providers.
A. The Professional Practice of CNMs
A certified nurse-midwife is a registered nurse with
advanced, formal education in midwifery who cares for women
throughout the life cycle. Nurse-midwifery practice is the
independent management of women's primary health care, focusing
on pregnancy, childbirth, the postpartum period, care of the
newborn, and the family planning and gynecological needs of
women. The certified nurse-midwife practices within a health
care system that provides for consultation, collaborative
management or referral as indicated by the health status of the
client.
In 1996, nurse-midwives attended over 239,000 births in
hospitals, free-standing birth centers and homes, and provided
over five million visits to women and newborns. Fifty-six
percent of women who are cared for by CNMs live in areas that
are designated as underserved, within inner city or rural
areas. In fact, 70 percent of women and newborns seen by nurse-
midwives are considered vulnerable by virtue of age,
socioeconomic status, education, ethnicity, or place of
residence. In addition, CNMs have a long history of working
collaboratively with physicians and other health care providers
to assure that quality, individualized care is available to
high risk mothers, newborns and the disabled. Over 200
certified nurse-midwives serve as faculty of medical schools,
teaching and supervising residents.
B. Provision of Primary Care
As is documented in many research publications, nurse-
midwives have a long history of providing first contact,
comprehensive care with a focus on health promotion and disease
prevention.
The ACNM is committed to ensuring that disabled women and
their families do not get short-changed in the primary care
movement. We are concerned about models of ``primary care''
that: do not provide continuity of care to disabled women, do
not allow for choice of different types of providers, decrease
access to individualized care, and lose the voice of women in
determining what is appropriate for themselves and their
families. For example, studies have documented that chronically
disabled women who have specialists as their primary care
providers are sometimes neglected with regard to their
obstetrical and gynecological needs. Often, too little time and
resources are allocated to nutrition counseling, STD screening
and education, family planning services, risk reduction
counseling, as well as mental health evaluation and treatment.
The recent Medicare Managed Care demonstration projects totally
left out disabled women of childbearing years. However, in 1996
there were approximately 5,200,000 women under 65 years of age
enrolled in Medicare through the disabled program. The Medicare
statistical files for 1996, the most recent available data from
HCFA, indicate that in the MCH 14 grouping over 50,000 women
were cared for in hospitals with a primary diagnosis related to
``pregnancy, childbirth and puerperium.''
C. The Medicare Population and Accessability to CNMs and Free-standing
Birth Centers
The ACNM is committed to increasing Medicare beneficiaries'
access to midwifery care. Medicare payment policies have made
it almost impossible for CNMs to serve this population.
Medicare has provided for coverage of the professional services
of CNMs since July 1, 1988. The law provided the Secretary of
Health and Human Services with very little guidance as to how
the fee schedule should be established, except to stipulate
that payment for the CNM service cannot be greater than 65
percent of the applicable prevailing charge for the same
services when performed by a physician.
This low level of payment results in CNMs being paid $800-
1,200 for nine to ten months of care for pregnancy, including
deliveries. At this level, CNMs can not afford to serve the
Medicare population.
Legislation has been introduced this fall in Congress to
raise the payments to 95 percent of the physician fee schedule.
The CNM Medicare Services Act of 1999 (HR 2817) is a bipartisan
bill that will strengthen the Medicare program. Dramatic cost
savings can be achieved by using nurse-midwives. It is
estimated that for every $1 million invested in nurse-midwifery
education, there could be a saving of $6 million in health care
costs annually. (Summary findings: ``Nurse Midwifery Care for
Vulnerable Populations in the United States,'' October 1994,
grant funded by the Robert Wood Johnson Foundation).
As has just been discussed, preventive health, a proven
cost containment strategy, is an integral part of nurse-
midwifery care. The lower costs of labor and birth care, when
managed by nurse-midwives, is partly due to a judicious use of
technology. Less reliance on routine electronic fetal
monitoring and ultrasound, reduced need for medication and
epidural anesthesia, fewer routine episiotomies, and fewer
cesarean sections reduce costs without compromising quality of
care.
A recent study commissioned by the Centers for Disease
Control and published in The Journal of Epidemiology &
Community Health (May, 1998) shows that nurse-midwives'
outcomes are excellent when compared to those of physicians.
The study of 3.5 million births compared physician's and CNM's
outcomes in the U.S. in 1991, and after controlling for various
risk factors, reported the following outcomes:
1. The risk for neonatal mortality was 33 percent lower for births
attended by CNMs.
2. The risk of delivering a low birth weight infant was 31 percent
lower for CNM attended births.
3. The mean birth weight was 37 grams higher for CNM attend births.
4. The infant mortality rate was 19 percent lower for CNM attended
births than for physician attended births.
Currently, the Medicare program does not recognize free-
standing birth centers. Birth centers are non-hospital
facilities organized to provide family -centered maternity care
and primary care services for women evaluated to be at low risk
for obstetrical complications.
In 1975, the Maternity Center Association established the
first urban birth center in New York City. Birth centers have
also been developed to serve rural communities, such as the
Monroe Maternity Center in Madisonville, Tennessee. Today there
are 145 such facilities.
The excellent quality of care, accompanied by great cost-
savings, has been demonstrated in many research studies. The
New England Journal of Medicine
(12/28/89) reported that:
Few innovations in health service promote lower cost, greater
availability, and a high degree of satisfaction with a
comparable degree of safety. The results of this study suggest
that modern birth centers can identify women who are at low
risk for obstetrical complications and care for them in a way
that provides these benefits.
Specifically the study found that:
The quality of care in birth centers reported in the ``The
National Birth Center Study'' reflects the low overall intrapartum and
neonatal mortality rate of 1.3/1000 births; 0.7/1000 if lethal
anomalies are excluded. These rates are comparable to studies of low
risk, in-hospital births.\1\
---------------------------------------------------------------------------
\1\ Rooks, J., et al., ``Outcomes of Care in Birth Centers: The
National Birth Center Study,'' New England Journal of Medicine,
321:1804-1811, (December 28), 1989.
---------------------------------------------------------------------------
The cesarean section rate for women receiving care in
birth centers averages 4.4 percent, approximately one half the rate
reported in studies of low risk births in hospitals.\1\
Birth centers nationally have consistently displayed
charges for care for normal birth that average up to 50 percent less
than regular hospital stays and 30 percent less than short stays--
including practitioner fees.\2\, \3\
---------------------------------------------------------------------------
\2\ Health Insurance Association of America, Source Book of Health
Insurance Data--1996, 1196, Washington, DC.
\3\ National Association of Childbearing Centers, NACC 1996 Annual
Survey Report of Birth Centers Experience, 1997, Perkomenville, PA.
---------------------------------------------------------------------------
More than half of birth centers include routine laboratory
exams, childbirth education, home visits, extra office visits, and
initial newborn examinations in their charges.
Most major health insurers contract with birth centers for
reimbursement. Because charges reflect cost and since the birth center
is a single service unit, there is no opportunity for cost shifting or
operating the birth center as a ``loss leader'' to other services.
98.8 percent of women using the birth center would
recommend it to friends and/or return to the center for a subsequent
birth.\1\
The most recent data released by the Health Insurance
Association of America and the National Association of
Childbearing Centers showed that in 1995 there was a cost
savings of over $3,000 per birth when comparing a vaginal birth
at a birth center to a hospital.
1995/Charges:
Birth Centers Birth: $3,3241
Hospital Vaginal Births: $6,378
Hospital Cesarean Births: $10,638
If only 25,000 Medicare births were attended in birth
centers, not only would access to care be greatly improved,
annual savings could be almost $78.5 million. Plus, for every
500 women that birth centers prevent from having a cesarean
birth, savings could equal $3.7 million. This savings to the
payers of care has been consistently shown for more than two
decades of birth center operation.
The CNM Medicare Services Act (HR 2817) will include
accredited free-standing birth centers in the Medicare program.
Summary
The ACNM believes that the lack of recognition for the
contributions of CNMs and birth centers must be addressed by a
concentrated effort to eliminate unnecessary payment
restrictions to nurse-midwifery practices at the federal level.
Therefore, we seek the Subcommittee's support for HR 2817.
Statement of the American Counseling Association, Alexandria, VA
The American Counseling Association (ACA) is the nation's
largest non-profit membership organization representing
professional mental health counselors. Counselors are master's-
degreed mental health providers, licensed or certified in 45
states and the District of Columbia. Under the typical
standards required for licensure, counselors must complete a
master's degree in counseling, accumulate two years and 3,000
hours of post-master's supervised experience, and pass a
national examination. Licensed professional counselors practice
in a variety of settings, including private practice, clinics,
agencies, health plans, hospitals, and group practices.
ACA strongly supports efforts by Congress to modernize and
strengthen the Medicare program. With an increasingly large
segment of the U.S. population entering eligibility for the
program, it is imperative that Medicare provide effective care
in an efficient manner. We believe any effort to strengthen
Medicare must do so in part by improving beneficiaries' access
to mental health care.
Older Americans are not getting the mental health treatment
they need. According to testimony from the National Institute
of Mental Health delivered at a Senate Special Committee on
Aging hearing in 1996, of the older Americans in need of mental
health care, only an estimated one in three receives care from
a mental health professional. Approximately one-third of this
population receives no care at all, and another third receives
care only through a primary care physician.\1\ According to
other testimony presented at the hearing, those over age 65 are
more likely to commit suicide than any other age group \2\, and
of the elderly who commit suicide, more than \3/4\ths had
visited a primary care physician within the month before their
suicide, and 35 percent had done so within the past week.\3\
---------------------------------------------------------------------------
\1\ Senate Special Committee on Aging, Treatment of Mental
Disorders in the Elderly: Reducing Health and Human Costs, 104th
Congress, 2nd session, 1996, 46.
\2\ Senate Committee, Treatment of Mental Disorders in the Elderly,
2.
\3\ Senate Committee, Treatment of Mental Disorders in the Elderly,
42.
---------------------------------------------------------------------------
As with all other populations and demographic groups,
inadequate treatment of mental disorders among the elderly
leads to higher general medical care costs. Medicare enrollees
with untreated severe depression experience general health care
costs roughly 91 percent greater than those without depression,
and it is estimated that if only 25 percent of Medicare
enrollees with depression were effectively treated, the system
would save about $500 million per year.\4\ Depression is only
the most common, and not the only, mental disorder experienced
by older Americans.
---------------------------------------------------------------------------
\4\ Senate Committee, Treatment of Mental Disorders in the Elderly,
78.
---------------------------------------------------------------------------
Policy analysts, members of Congress, and Congress's own
Congressional Budget Office have all stated that important keys
to improving patient care while constraining costs are
increasing choice and competition within the Medicare program.
In the area of mental health, one of the ways in which choice
and competition can be added to the system is through the
reimbursement by Medicare of the services of licensed
professional counselors.
In the private sector, the vast majority of health plans
contract with or employ licensed professional counselors in
providing services to plan enrollees. Licensed professional
counselors (LPC's) are master's degreed mental health
providers, meeting education, training, and examination
requirements virtually identical to those of clinical social
workers. Professional counselors are licensed or certified in
45 states and the District of Columbia, and are recognized as
core mental health professionals by the Health Resources and
Services Administration, the federal Center for Mental Health
Services, and under the Public Health Service Act.
Patient choice of provider is important in all forms of
health care, but perhaps is most important in the area of
mental health treatment. Under current Medicare law
beneficiaries are precluded from seeing licensed professional
counselors, even though an LPC may be the beneficiary's first
choice of provider. Anecdotal evidence suggests that many older
Americans feel more comfortable seeing a counselor than a
psychiatrist or a psychologist, or than confiding highly
personal mental or emotional problems in his or her primary
care physician. In many cases, counselors with good working
relationships with primary care or other physicians have older
patients referred to them by the physician, and must inform the
patient that counselors' services are not covered by Medicare.
This fact usually comes as a surprise to the physician.
Access to care is also an issue for older Americans, who
often do not have ready access to reliable transportation. In
many areas and communities, a counselor may be the only mental
health specialist available. Consequently, current Medicare
policy both limits choice of provider for program enrollees and
makes mental health care less accessible.
Coverage of LPC's under Medicare would not represent the
addition of a new type of benefit. Counselors provide the same
types of psychotherapy and counseling currently provided under
the program by psychologists and clinical social workers, and
coverage of counselors would increase competition in the
program. This analysis has been borne out by the experience of
states which have enacted counselor coverage laws. According to
a 1996 survey by the Texas Department of Insurance, payments to
licensed professional counselors amounted to only \1/10\th of 1
percent of total claims paid by insurers.\5\ In the private
sector, professional counselors typically charge roughly the
same rates as clinical social workers for therapy sessions, and
charge less than is charged by clinical psychologists.
---------------------------------------------------------------------------
\5\ Texas Department of Insurance, Health Insurance Regulation in
Texas: The Impact of Mandated Health Benefits, report to the Texas
Legislature, 1998, 57.
---------------------------------------------------------------------------
In summation, any attempt to increase competition and
consumer choice in the Medicare program and to reduce the costs
of inadequate mental health treatment for beneficiaries should
include recognizing licensed professional counselors under the
program. Medicare beneficiaries deserve the same choice of
provider and access to high-quality services as is enjoyed by
those with private insurance. Current Medicare policy is not
meeting the mental health needs of its enrollees.
ACA looks forward to working with members of Congress to
bring Medicare's mental health coverage up to date.
Statement of American Medical Association
The American Medical Association (AMA) appreciates the
opportunity to submit this written testimony for consideration
by the Ways and Means subcommittee on Health and requests that
it be included in the printed record.
The AMA applauds the efforts of the members of this
subcommittee for focusing on this important issue. For years
the AMA has been a strong advocate of basic, essential reforms
of the Medicare program. It is clear that the system, as
currently structured, cannot continue to support the provision
of quality medical services to the elderly and disabled in this
country, particularly as the baby boom generation becomes
Medicare-eligible while at the same time the numbers of
employees in the workforce who financially support the system
dwindle.
Congress has already acknowledged that Medicare must be
reformed to keep the promise of health care for this and future
generations of elderly Americans, as represented by the
establishment under The Balanced Budget Act of 1997 (BBA) of
the National Bipartisan Commission on the Future of Medicare.
We urge, however, that this subcommittee and Congress not delay
in passing badly needed reform. Now is the time, before the new
millennium, to fix the Medicare program.
Medicare's current tax-based ``pay-as-you-go'' financing
structure makes it highly unlikely that the promise of health
care to our elderly can be sustained in the coming years.
Moving Medicare from an open-ended entitlement system to one in
which the government makes a contribution that allows
individuals to have meaningful choice and quality care is the
key to gaining budgetary control over outlays.
For the Long Term: Deal with the Trust Fund Myth
Because the term ``trust fund'' is officially used to
describe the financing of Medicare, many people think that the
payroll taxes they pay are saved and accumulate interest to pay
for their personal medical needs in retirement. In fact, the
Part A program is financed on a ``pay-as-you-go'' basis, with
taxes paid into the program being used to pay for the benefits
received by current retirees, and the excess used to purchase
federal debt. Part B is financed mostly out of general
revenues, with the premiums that retirees pay calculated to
cover only about 25% of the outlays. Part B is modeled after
private sector health plans, with a significant difference:
beneficiaries fund only 25% of the cost of their services
through premiums, leaving taxpayers to fund a significant
portion of the remaining cost of providing Part B services.
Most retirees have received much more in benefits than
their contributions to the program could purchase. The pay-as-
you-go financing is often likened to a ``Ponzi'' or ``pyramid''
scheme. The similarity lies in the promise of future benefits
to those who fund services for current beneficiaries, and the
need for a growing number of new contributors to fund the
growing number of beneficiaries. Pyramid schemes, almost by
definition, must eventually collapse from an insufficient
influx of new participants. The number of workers contributing
payroll taxes to finance the current hospital trust fund is
declining. In 1965 when Medicare was enacted, there were 5.5
working-age Americans for every individual over age 65. Today,
there are only 3.9 workers supporting each Medicare-age
individual. In the coming decades, as the ``baby boom''
generation continues to age, this number will fall more
rapidly. By the year 2030, it is estimated that there will be
only 2.2 working-age Americans for each individual over age 65.
By that time, Medicare will enroll 20% of the population,
compared with the 12.8% of the population now enrolled.
Medicare's actuaries base their calculations for funding
the Medicare fee-for-service program on the assumption that the
rate of health care cost inflation will be controlled over the
next 25 years. This assumption allows them to project a
significantly lower tax increase needed to fund the program
than would be needed if the historical rate of cost inflation
continued. Continuing the ``pay-as-you-go'' system of financing
Medicare will impose an ever-increasing burden on working U.S.
taxpayers. While this country's obligations to those who are
and will be dependent on Medicare in the future must clearly be
honored, we need to implement reforms so that the program is
available for future generations.
How would we design Medicare if we had it to do over again?
How would we protect the younger generations that will face
ever-increasing taxes and prospects of eroding benefits and
less choice if the current program were to be continued?
To restore the viability of the program's promise to future
generations, certain immediate priorities must be met,
including shifting away from the ``pay-as-you-go'' system;
establishing a system under which the government makes a
contribution that allows individuals to have meaningful choice
and quality care; and improving the fee-for-service Medicare
program.
This will assure that all working Americans have access to
health care in retirement and will maintain choice and quality
of care for the elderly.
Improving Fee-for-Service Medicare
Despite the establishment of and focus on Medicare+Choice,
85% of Medicare beneficiaries receive health care through the
Medicare fee-for-service program. It is imperative to improve
the efficiency of the fee-for-service program, thereby
constraining Medicare's cost growth at a reasonable level over
the next several decades and limiting out-of-pocket costs
incurred by beneficiaries. The AMA proposes the following
structural modifications to the program that would save both
beneficiaries and the government money by providing needed
incentives for efficiency.
The Path to Scoreable Savings: Eliminate the ``Gap'' Problem
The large cost imposed on the Medicare program and
beneficiaries by the ``Medigap problem'' has long been
recognized as a potential source of significant government
budget savings. When Medicare's intended cost sharing is
covered by private supplemental insurance (Medigap), it has
been demonstrated that beneficiaries use more services than
they would otherwise. Since more than 75% of beneficiaries own
such supplemental coverage, Medicare's outlays are considerably
higher than they would be if the cost sharing were not
subverted by Medigap insurance.
Effectively solving this problem presents the best source
of scoreable budget savings because the savings produced are
the result of efficiency improvements, rather than from
imposing additional costs on taxpayers, beneficiaries or
providers of medical care.
The potential cost sharing exposure for beneficiaries under
the current system can reach more than $34,000 per year since,
unlike most private insurance policies, Medicare does not place
a ceiling on the out-of-pocket cost that beneficiaries can be
required to pay. The current system is designed so that the
beneficiary's rational response is to purchase supplemental
coverage, which over three-quarters of beneficiaries do as a
hedge against economic catastrophe. This occurs, despite the
fact that 20% of beneficiaries incur no actual cost sharing
liability each year, while 70% incur a cost sharing liability
under $500 and 80% incur under $1000 of expense. The risk of
paying tens of thousands of dollars out-of-pocket is not one
that most beneficiaries want to take.
It is safe to assume that if beneficiaries were not exposed
to such potentially high out-of-pocket costs, they (and/or
their former employers who provide insurance to supplement
Medicare as a retirement benefit) would not feel compelled to
insure against it. In fact, the government does not need to
expose beneficiaries to such high risk, precipitating the
increased burden on beneficiaries and its own budget. The
government can give beneficiaries and their former employers an
economic break by eliminating their need for supplemental
coverage. In so doing, the government can also lessen the
pressure that Medigap puts on the federal budget.
The AMA proposes that Medicare restructure its cost sharing
to reduce potential beneficiary liability in a manner that
eliminates the need for private Medigap insurance. In exchange,
beneficiaries would pay a somewhat higher premium than they do
now, but they would also have more money available to help
cover out-of-pocket costs, such as prescription drugs that are
not currently covered by Medicare. The premium charged by
Medicare for the expanded coverage would be much less than that
charged by private insurance companies because the government's
premium would not be padded by marketing expense and profit.
The reinstitution of effective cost sharing would reduce
government outlays for medical services. The balance to be
struck would be one in which beneficiaries would be provided an
effective incentive to reasonably moderate their demand for
covered services, while eliminating their need to insure
against an enormous potential out-of-pocket liability.
One alternative that the AMA has developed is for Medicare
to convert its current cost sharing into a modest deductible
with no coinsurance requirement above the deductible, and
charge a fair premium for the extra coverage implied by
lowering the cost sharing. In this way, beneficiaries would
readily know in advance the maximum liability to which they
would be exposed. In turn, few would be motivated to buy
supplemental insurance (which would no longer be valuable
because its premium cost would meet or exceed the liability it
would be purchased to insure against). Beneficiaries would be
trading the unknown for the known.
As an illustration of this reallocation approach, we
estimate that the average cost of the Medigap ``Plan C'' that
covers all of Medicare's potential cost sharing liability as
about $1,330 in 1999. This amount could be divided into two
parts, consisting of a modest, single deductible for both Parts
A and B of Medicare, and a premium for the extra Medicare
coverage represented by eliminating all existing cost sharing
liability except for the single deductible. Dividing the
current cost of Medigap Plan C into two parts--a deductible and
a premium for extra coverage--would guarantee that
beneficiaries would incur no greater out-of-pocket expense than
they do now, and many of them would actually save money.
For example, consider dividing the current Medigap cost
into a $500 deductible and a premium of $830. According to the
most recent actuarial analysis by PriceWaterhouse, the average
beneficiary would spend only $400 of the $500 deductible,
saving $100 per year from the cost of $1,330 for Medigap. By
neutralizing the first-dollar-coverage incentive of Medigap,
the Medicare program would save an average of $334 per
beneficiary, which could be returned to beneficiaries in the
form of reduced Part B premiums or additional coverage. If the
government savings were used to reduce the deficit, a total of
$40 billion of savings would accrue over the 5-year budget
period 1999-2003.
Medicare's current cost sharing requirements are self-
defeating because they frighten beneficiaries into insuring
against them with expensive private coverage. By incorporating
most of Medigap's coverage into Medicare benefits, the
government could save beneficiaries money by reducing the
premium required for the coverage. In turn, the government can
achieve the intended benefit of effective cost sharing to
reduce program expenditures.
Neutralizing Medigap is a ``win'' for patients and
beneficiaries, the government and taxpayers. For example, we
understand that Congress and the Administration are exploring
various methods to help beneficiaries pay the exorbitant cost
of pharmaceutical drugs. As discussed above, it is expected
that beneficiaries' out-of-pocket costs will almost double over
the next couple of decades. A significant portion of those
costs will be for pharmaceutical drugs that are covered by the
Medicare fee-for-service program, which CBO projects will
increase between 13% and 21% each year during the next decade.
The savings received by beneficiaries as a result of
eliminating the Medigap problem will help offset the cost of
the drugs.
Even if Congress does not enact broad program restructuring
now, we urge Congress to avoid approving legislation in the
interim that would either:
increase beneficiary uncertainty regarding
potential out-of-pocket costs, which will drive up demand for
Medigap insurance;
increase availability of first-dollar coverage for
covered Medicare benefits, which will promote inefficient
utilization of services, thus driving up program costs; or
greatly expand Medicare benefits in a manner that
adds significantly to Medicare's future financing problems.
Improving Medicare's Sustainable Growth Rate System
Improving Medicare's sustainable growth rate (SGR) system
is a major priority for the physician community. We urge
inclusion of legislation to fix the problems with the SGR in
any legislation approved by the Committee to reform Medicare or
refine elements of the Balanced Budget Act of 1997.
Enacted under the BBA, the SGR establishes a target growth
rate for Medicare spending on physician services, then annually
adjusts payments up or down, depending on whether actual
spending is below or above the target. The SGR system was
intended to slow the projected rate of growth in Medicare
expenditures for physicians' services.
Physicians are the only group subject to this target,
despite the fact that Medicare spending on physician services
has been growing more slowly than other Medicare benefits.
Although the BBA included measures to slow projected growth in
these other benefits, the Congressional Budget Office continues
to forecast much higher average annual growth rates for other
services than for physician services over the next decade. In
contrast to annual growth in outlays of 4.6 percent for
inpatient hospital services, 5.7 percent for skilled nursing
facilities, 6.5 percent for home health, and 14.6 percent for
Medicare+Choice plans, average annual growth in physician
services is projected at only 3.1 percent from 2000-2009.
Physicians were subject to significant and disproportionate
Medicare payment cuts prior to the BBA, yet we have never
abandoned our elderly and disabled patients. From 1991-97,
physician payment updates already had slipped 10 percent below
growth in medical practice costs.
In its March 1999 Report to Congress, the Medicare Payment
Advisory Commission (MedPAC) identified serious problems in the
SGR system and recommended significant improvements to it. The
AMA and the national medical specialty societies share MedPAC's
concerns and believe that improving the SGR is a critical
component of efforts to ensure that the 85 percent of Medicare
beneficiaries who are enrolled in the fee-for-service program
continue to receive the benefits to which they are entitled.
Specifically, the physician community is concerned that the
growth limits in the current SGR system are so stringent that
they will have a chilling effect on the adoption and diffusion
of innovations in medical practice and new medical
technologies. In addition, we are concerned that the Health
Care Financing Administration (HCFA) did not revise the
projections it used in the 1998 SGR when data proved HCFA
erroneous. Further, HCFA stated it will not correct 1999 SGR
errors without a congressional mandate, despite that in the
first two years of the SGR, erroneous HCFA estimates have
already shortchanged the target by more than $3 billion.
Finally, we are concerned that the SGR could also cause future
payments to be highly volatile and fall well behind inflation
in practice costs.
Medicare Physician Payments and the BBA: Medicare payments
for physicians' services are updated annually by HCFA. Payment
rates are based on a relative value scale system, enacted under
OBRA 89, that reflects the physician work, practice expense and
professional liability insurance costs involved in each
service. The relative value for each service is multiplied by a
dollar conversion factor to establish actual payment amounts.
The conversion factor is required to be updated each calendar
year, which involves, in part, establishing an update
adjustment factor that is adjusted annually by the SGR.
MedPAC recommends, and the AMA agrees, that Congress revise
the SGR system as follows:
The SGR should include a factor of growth in real
gross domestic product per capita plus an allowance for cost
increases due to improvements in medical capabilities and
advancements in scientific technology,
The Secretary should be required to publish an
estimate of conversion factor updates by March 31 of the year
before their implementation;
The time lags between SGR measurement periods
should be reduced by allowing calculation of the SGR and update
adjustment factors on a calendar year basis;
HCFA should be required to correct the estimates
used in the SGR calculations every year; and
The SGR should reflect changes in the composition
of Medicare fee-for-service enrollment.
The SGR system was enacted under the BBA and replaces the
Medicare Volume Performance Standard system, which had been the
basis for setting Medicare conversion factor updates since
1992. The SGR sets a target rate of spending growth based on
four factors: changes in payments for physician services before
legislative adjustments (essentially inflation); changes in
Medicare fee-for-service enrollment; changes in real per capita
gross domestic product (GDP); and an allowance for legislative
and regulatory factors affecting physician expenditures. Growth
in real per capita GDP represents the formula's allowance for
growth in the utilization of physician services.
The target rate of spending growth is calculated each year
and is designed to hold annual growth in utilization of
services per beneficiary to the same level as annual GDP.
Physician payment updates depend on whether utilization growth
exceeds or falls short of the target rate. If utilization
growth exceeds GDP, then payment updates are less than
inflation. If utilization is less than GDP, payment updates are
above inflation.
Because of the serious problems with the SGR system, as
discussed below, four improvements must be included in
legislation to fix the SGR:
There must be a requirement to correct HCFA's
projection errors and to restore the $3 billion SGR shortfall
resulting from these errors;
The SGR must be increased to account for physician
costs due to adoption of new technology;
Measures must be implemented to curtail volatility
in physician payment rates and avoid steep cuts in the future;
and
HCFA and MedPAC must be required to provide
information and data on payment updates.
Problems with the SGR System: Of the needed improvements
listed above, we wish to focus on two major problems with the
SGR. First, there is a ``projection error'' problem.
Specifically, in determining the SGR each year, HCFA must
estimate certain factors that are used to calculate the SGR. In
the first two years of the SGR system, HCFA has seriously
miscalculated these factors, and thus physicians have been
shortchanged by several billion dollars. In addition, these
projection errors will continue each year, and the resulting
shortfalls will be compounded. Second, the SGR system does not
allow growth in physician payments sufficient to account for
physicians' costs due to technological innovations.
Unlike some other Medicare payment issues, the problems
with the SGR system and their solutions are a matter on which
the physician community is unified. National organizations
representing diverse medical specialties, including surgeons,
primary care physicians and others, as well as organizations
representing medical colleges and group practices, have been
working closely together with the AMA to address these complex
issues. On behalf of the entire physician community, we are
asking Congress to take the necessary steps to assure that we
can continue to afford to provide our Medicare patients with
the best medical care available in the world.
I. The Projection Error Problem.--Two of the four factors
used to calculate the SGR target each year are growth in U.S.
GDP and fee-for-service enrollment growth. Because the target
must be calculated before the year begins, HCFA can only
speculate as to what GDP growth will be and how many people
will enroll in fee-for-service versus managed care. Recognizing
the need for such speculation, HCFA acknowledged in a 1997
physician rate update regulatory notice that the actual data
for each year, once available, might reveal errors in its
estimates of as much as 1 percent, or $400 million. HCFA also
promised that the difference between its projections and actual
data would be corrected in future years.
In the first two years of the SGR, erroneous HCFA estimates
have already shortchanged physician payments by more than $3
billion. These projection errors have not been corrected and
HCFA does not plan to do so. Specifically, one year after the
1997 notice, HCFA reneged on its pledge to correct SGR errors
and simultaneously issued its most egregious error, projecting
Medicare managed care enrollment would rise 29 percent in 1999,
despite the many HMOs abandoning Medicare in 1999. This error
led, in turn, to a projected drop in fee-for-service enrollment
and a negative 1999 SGR. Data now show that managed care
enrollment has increased only 11 percent, a fraction of HCFA's
projection, which means physicians are caring for 1 million
more patients in Medicare fee-for-service than were forecast.
The 1998 and 1999 SGR projection errors are a serious
problem. The SGR is a cumulative (as opposed to an annual)
system, and the cumulative SGR target is like a savings account
for physician services. As discussed, HCFA's errors have left a
$3 billion shortfall in this account, which, if not restored,
will either produce unwarranted payment cuts or deficient
payment increases. Although the President's 2000 budget
proposes to address the projection errors, we are concerned
that HCFA may correct the errors in a way that will effectively
cancel any benefit to payment rates from using accurate data.
Physicians have faced a decade of payment cuts without ever
abandoning Medicare patients. We have done our part to keep
costs within the limits imposed by the BBA. Now, Congress must
do its part by insisting that payment updates be based on
correct SGR estimates.
II. The SGR Must Allow for Technological Innovations and
Other Factors Impacting Utilization of Health Care Services.--
MedPAC has also recommended that Congress revise the SGR to
include a factor of growth in real gross domestic product per
capita plus an allowance for cost increases due to improvements
in medical capabilities and advancements in scientific
technology.
The system is currently designed to hold annual utilization
growth at or below annual GDP growth. A common method for
policymakers to evaluate trends in national health expenditures
is to look at growth in health spending as a percentage of GDP,
but this approach is replete with problems. There is no true
relationship between GDP growth and health care needs.
Forecasts by Congressional Budget Office and the U.S. Census
Bureau indicate that real per capita GDP growth will average
about 1.5 percent per year over the next decade. This is far
below historical rates of Medicare utilization growth. Indeed,
at 5.9 percent, average annual per beneficiary growth in
utilization of physicians' services was three to four times
higher than GDP growth from 1981-1996. Thus, if history is any
guide, holding utilization growth to the level of GDP growth
virtually guarantees that Medicare physician payments will
decline.
A primary reason for this lack of congruity between GDP and
Medicare utilization is that GDP does not take into account
health status trends nor site-of-service changes. Thus, if
there were an economic downturn with negative GDP growth at the
same time that a serious health threat struck a large
proportion of Medicare beneficiaries, the consequences could be
disastrous.
Secondly, GDP does not take into account technological
innovations. The only way for technological innovations in
medical care to really take root and improve standards of care
is for physicians to invest in those technologies and
incorporate them into their regular clinical practice. The
invention of a new medical device cannot, in and of itself,
improve health care--physicians must take the time to learn
about the equipment, practice using it, train their staff,
integrate it into their diagnosis and treatment plans and
invest significant capital in it. Yet physician spending is the
only sector of Medicare that is held to as stringent a growth
standard as GDP and that faces a real possibility of payment
cuts of as much as 5 percent each year. Keeping utilization
growth at GDP growth will hold total spending growth for
physician services well below that of the total Medicare
program and other service providers.
To address this problem, as recommended by MedPAC, the
factor of growth under the SGR relating to GDP must be adjusted
to allow for innovation in medical technology. We believe to
implement adequately MedPAC's recommendation, the SGR should be
set at GDP + 2 percentage points to take into account
technological innovation, as discussed further below.
In addition, we urge that Congress consider a long-term
approach to setting an appropriate growth target that takes
into account site-of-service changes, as well as health status
and other differences between Medicare's fee-for-service and
managed care populations that lead to differential utilization
growth. Thus, we believe that the Agency for Health Care Policy
and Research (AHCPR) should be directed to analyze and provide
a report to MedPAC on one or more methods for accurately
estimating the economic impact on Medicare expenditures for
physician services resulting from: improvements in medical
capabilities and advancements in scientific technology; changes
in the composition of enrollment of beneficiaries under the
fee-for-service Medicare program; and shifts in usage of sites-
of-service.
Technological Advances: Congress has demonstrated its
interest in fostering advances in medical technology and making
these advances available to Medicare beneficiaries through FDA
modernization, increases in the National Institutes of Health
budget, and efforts to improve Medicare's coverage policy
decision process. The benefits of these efforts could be
seriously undermined if physicians face disincentives to invest
in new medical technologies as a result of inadequate
expenditure targets.
As first envisioned by the PPRC, the SGR included a 1 to 2
percentage point add-on to GDP for changes in medical
technology. Ever-improving diagnostic tools such as magnetic
resonance imaging, new surgical techniques including
laparoscopy and other minimally-invasive approaches, and new
medical treatments have undoubtedly contributed to growth in
utilization of physician services and the well-being of
Medicare beneficiaries. For example, a recent paper published
by the National Academy of Sciences indicated that from 1982-
1994 the rates of chronic disability among the elderly declined
1.5 percent annually.
With GDP projected to grow by 1.5 percent annually, the
failure to allow an additional 1 to 2 percentage points to the
SGR for technological innovation means that the utilization
target is only half the rate that was originally planned.
Technological change in medicine shows no sign of abating, and
the SGR should include a technology add-on to assure Medicare
beneficiaries continued access to mainstream, state-of-the art
quality medical care.
Site-of-Service Shifts: Another concern that should be
taken into account by the GDP growth factor is the effect of
the shift in care from hospital inpatient settings to
outpatient sites. As MedPAC has pointed out, hospitals have
reduced the cost of inpatient care by reducing lengths-of-stay
and staff and moving more services to outpatient sites,
including physician offices. These declines in inpatient costs,
however, are partially offset by increased costs in physician
offices. Thus, an add-on to the SGR target is needed to allow
for this trend.
Beneficiary Characteristics: The SGR should also be
adjusted for changes over time in the characteristics of
patients enrolling the fee-for-service program. A MedPAC
analysis has shown that the fee-for-service population is
older, with proportions in the oldest age groups (aged 75 to 84
and those age 85 and over) increasing, while proportions in the
younger age group (aged 65-74) has decreased as a percent of
total fee-for-service enrollment. Older beneficiaries likely
require increased health care services, and in fact MedPAC
reported a correlation between the foregoing change in
composition of fee-for-service enrollment and increased
spending on physician services. If those requiring a greater
intensity of service remain in fee-for-service, the SGR
utilization standard should be adjusted accordingly.
III. Other Problems with the SGR System.--The AMA strongly
agrees with MedPAC's further recommendation that Congress
should stabilize the SGR system by calculating the SGR and the
update adjustment factor on a calendar year basis.
Instability in annual payment updates to physicians is
another serious problem under the SGR system, as has been
acknowledged by HCFA. Projections by the AMA, MedPAC and HCFA
show the SGR formula producing alternating periods of maximum
and minimum payment updates, from inflation plus 3 percent to
inflation minus 7 percent. Assuming a constant inflation rate,
these alternating periods could produce payment decreases of 5
percent or more for several consecutive years, followed by
increases of similar magnitude for several years, only to shift
back again. These projections are based on constant rates of
inflation (2 percent), enrollment changes, GDP growth and
utilization growth. There is a serious problem when constant,
stable rates of change in the factors driving the targets lead
to extreme volatility in payments that are entirely formula-
driven.
A primary reason for this instability is the fact that
there is a time lag in measurement periods for the SGR.
Specifically, while physician payment updates are established
on a calendar year basis, SGR targets are established on a
federal fiscal year basis (October 1 through September 30) and
cumulative spending (used to calculate the SGR) is established
on an April 1 through March 31 basis. These time periods must
all be consistent and calculated on a calendar year basis to
attempt to restore some modicum of stability to the SGR system.
Simulations by the AMA and MedPAC have also shown, however,
that the change to a calendar year system will not, by itself,
solve the instability problem. Additional steps would be
needed. The wide range of updates that are possible under the
current system, from inflation + 3 percent to -7 percent, is
one reason for the instability. The lower limit is also
unacceptably low, and, assuming an MEI of 2 percent, represents
an actual 5 percent cut in the conversion factor in a single
year. These levels of payment cuts would be highly disruptive
to the market, and likely would have the ``domino effect'' of
impacting the entire industry, not simply Medicare fee-for-
service. Many managed care plans, including Medicare+Choice and
state Medicaid plans, tie their physician payment updates to
Medicare's rates. Thus, payment limits under current law must
be modified to assist in stabilizing the SGR system. We
recommend that the current limits on physician payment updates
(MEI +3 percent to MEI -7 percent) be replaced with new,
narrower limits set at MEI +2 percent and MEI -2 percent.
Use of the GDP itself also contributes to the instability
of the payment updates since GDP growth fluctuates from year to
year. Thus, we recommend measuring GDP growth on the basis of a
rolling 5-year average.
Finally, MedPAC has also recommended that Congress should
require the Secretary of the Department of Health and Human
Services to publish an estimate of conversion factor updates
prior to the year of implementation. We agree.
When the SGR system was enacted to replace the previous
Medicare Volume Performance Standards, the requirements for
annual payment review reports from HCFA and the PPRC were
eliminated along with the old system. Without these reports, it
is impossible to predict what the payment update is likely to
be in the coming year, and it is impossible for Congress to
anticipate and respond to any potential problems that may ensue
from an inappropriate update or a severe projection error.
Changes in Medicare physician payment levels have
consequences for access to and utilization of services, as well
as physician practice management. These consequences are of
sufficient importance that the system for determining Medicare
fee-for-service payment levels should not be left unattended on
a kind of ``cruise control'' status, with no ``brake''
mechanism available to avoid a collision.
The AMA, therefore, urges that the payment preview reports
be reinstated. Specifically, we believe that HCFA should be
required to provide to MedPAC, Congress and organizations
representing physicians quarterly physician expenditure data
and an estimate each spring of the next year's payment update.
MedPAC could then review and analyze the expenditure data and
update preview, and make recommendations to Congress, as
appropriate.
The Importance of Fixing the SGRL: Enactment of the SGR
system improvements recommended by MedPAC are critical to the
continued ability of our nation's physicians to be able to
offer our Medicare patients the benefits of the finest medical
care available in the world. If these improvements are not put
in place, the SGR system could lead to severe payment cuts in
the Medicare physician fee schedule and payments for services
that do not accurately reflect their costs. The cuts resulting
from both the statutory design of the SGR system and
administration of the system by HCFA would be in addition to
more than a decade of cuts in physician payments. For example,
in the six years from 1991-1997, overall Medicare physician
payment levels fell 10 percent behind the rate of growth in
medical practice costs. Many individual services and procedures
faced even deeper cuts.
Recent survey data from the AMA's Socioeconomic Monitoring
System indicates that these payment changes are having very
significant effects on the practice of medicine. Of 2,450
randomly selected physicians that were surveyed from April-
August 1998, 35 percent reported they are not renewing or
updating equipment used in their office, are postponing or
canceling purchasing equipment for promising new procedures and
techniques, or are performing many procedures in hospitals that
were formerly performed in the office. Three quarters of these
physicians reported that Medicare payment cuts were an
important factor in their decisions to defer or cancel these
investments in capital.
With these kinds of changes already taking place in
response to previous payment changes, we have grave concerns
about the effects of the further reductions that could take
place due to the SGR or incorrect practice expense values. In
order for the medical innovations that will come from Congress'
enhanced funding of biomedical research, FDA modernization, and
better Medicare coverage policies to translate into ever-
improving standards of medical care, physicians must be able to
adopt these innovations into their practices. It is already
clear that Medicare payment cuts are threatening continued
technological advancement in medicine, and this is a threat
that affects all of us, not just Medicare beneficiaries.
Clearly, reversal of the trend to move services away from
inpatient sites into ambulatory settings could also have severe
consequences for health care costs, as well as patient care.
Additional Modifications to Fee-For-Service Medicare
There are several other considerations that we believe are
necessary for reforming fee-for-service Medicare. First,
Medicare reform legislation must address funding for graduate
medical education. We believe that a national all-payer fund
should be established to provide a stable source of funding for
the direct costs of GME, including resident stipends and
benefits, faculty supervision and program administration and
allowable institutional costs. Without predictable and reliable
funding, this important training program is seriously
undermined, with a resulting adverse impact on patient care.
Additionally, other issues should be addressed as well,
including increasing the age of Medicare eligibility to match
the eligibility requirements for purposes of Social Security
and establishing income-related premium payments for Medicare
benefits.
The AMA is also aware that there is interest among a number
of states in allowing them to make managed care enrollment
mandatory for dually-eligible Medicare and Medicaid
beneficiaries. State medical societies have told us of numerous
serious problems in states with mandated Medicaid managed care
programs for their non-Medicare populations, including
Tennessee, Kentucky, Massachusetts, Florida, Nebraska,
Washington, and others. Given the current instability within
both Medicare and Medicaid managed care plans, we urge Congress
not to extend the states' authority to mandate managed care
enrollment to their dually-eligible populations.
In addition, we agree with concerns raised by Members of
the National Bipartisan Commission on the Future of Medicare
about providing HCFA with increased authority to contract for
health care services with lowest cost bidders, and believe
HCFA's contracting authority should be strictly limited. Such
authority often permits HCFA to contract selectively for
individual services. Competition should be based on choice of a
comprehensive health plan, not with respect to individual
services. Proposals that carve out certain services dangerously
fail to recognize a crucial dynamic within the health care
market. That is, certain services are a mainstay for many
providers' economic base. If that base is jeopardized because
HCFA has the ability to contract elsewhere for this singular
service, the cost of other services offered by that provider
will significantly increase, or, worse, the provider may cease
to exist due to insolvency. Either alternative is extremely
damaging to patients with respect to cost, quality and
continuity of care and convenience.
Indeed, AMA policy firmly opposes competitive bidding
initiatives for professional medical services with respect to
the Medicare program and health care payers generally. First,
as discussed above, this type of system threatens a dramatic
decrease in quality of and access to medical care. In any bid
process, there are always low cost bidders that wish to corner
a large share of the market. The low cost bidder may drive
competitors out of the market, in which case the bidder will
obtain a monopoly and will be free to set prices in an
environment that is unconstrained by competition. Since the
current health care payer market has become more significantly
concentrated, this result would be a significant threat.
Additionally, providers, including those that provide the
highest quality of care using new state-of-the art technology,
will have a strong incentive to provide less costly and lower
quality alternatives to maintain competitiveness within a
competitive bidding environment. Further, there have been cases
when the competitive bidding process has resulted in the
procurement of services from organizations that have gone
bankrupt, thereby disrupting continuity of and access to care,
as well as causing harm to physicians and other providers who
rely on a failed contractor for payment. This would be even
more damaging if competitors have already been driven from the
market.
Evaluating Medicare+Choice
Since most Medicare reform plans envision an expanded role
for private plans, we believe that it is important to evaluate
the new private options mandated under the BBA. Experience to
date with the new program called Medicare+Choice suggests
several areas which warrant Congressional attention.
To date, Congressional concern has focused primarily on the
financial complaints of the traditional managed care plans that
have long been part of Medicare. While we agree that the spate
of plan withdrawals in 1999 and 2000 have created significant
problems for Medicare's 39 million beneficiaries, we think that
proposals to correct the situation by increasing payments to
plans are short-sighted.
Rather than channeling more funds to these long-time
players, lawmakers might have more effect by removing some of
the roadblocks that have stymied the entry of other types of
plans into Medicare. In addition, with more than 80% of all the
nation's elderly and disabled citizens still enrolled in fee-
for-service Medicare, it is important to keep that program
strong and ensure that it is possible for beneficiaries to
return to fee-for-service when their managed care plan
withdraws from Medicare. And since there will always be some
withdrawals in a market-based program, protecting beneficiaries
who find themselves in this situation will be critical to the
success of Medicare+Choice and any further reforms that build
on private sector initiatives.
Beneficiary Protections
The AMA's House of Delegates has called for additional
safeguards for beneficiaries abandoned by their Medicare+Choice
plan and we believe that these protections will become even
more important as more beneficiaries move into private plans. A
number of such provisions have been offered and have bipartisan
support and the AMA urges Congress to make the protection of
beneficiaries orphaned by their health plan a key part of any
Medicare bill it should approve.
Among the protections the AMA would like to see are several
that would extend and improve the Medigap guaranteed issue
rights included in the BBA. These provisions would provide all
beneficiaries--including those who have disabilities or End
Stage Renal Disease (ESRD)--with the right to purchase Medigap
coverage following a plan termination. In addition, they would
modify current law to include policies with drug coverage among
the Medigap plans that are available to beneficiaries abandoned
by their Medicare+Choice plan.
Another thrust of many of the new beneficiary safeguards
that have been proposed this year is to let beneficiaries leave
a plan as soon as it announces its intent to withdraw from
Medicare. Under the BBA, beneficiaries' ability to switch to a
new plan or switch back to Medicare fee-for-service, except at
the beginning of a new year, will be restricted after 2002.
Several proposed amendments would let beneficiaries switch out
of a withdrawing plan without waiting until the new year.
The AMA supports these amendments. However, according to
the General Accounting Office (GAO), half of the 400,000
orphaned beneficiaries who could have switched to another plan
in 1999 returned to fee-for-service Medicare. It is
understandable that beneficiaries who have experienced a plan
withdrawal should prefer fee-for-service Medicare to another
Medicare+Choice plan. Therefore we believe that in addition to
switching to a new plan, beneficiaries should have the right to
return to fee-for-service Medicare. To make this a plausible
option, the Medigap guaranteed issue rights should also become
available as soon as the beneficiary is notified that his or
her plan intends to leave Medicare.
While these steps would protect beneficiaries when their
relationship with the plan is severed, they do not address an
equally traumatic event: the severing of relationships between
patients and their physicians. Medicare patients often pick a
particular Medicare+Choice plan because their physician is part
of that network. We are also aware of physicians who joined a
particular network based on the requests of patients who desire
to continue seeing their long-time physician. Maintaining a
relationship with a trusted physician is important to patients
of all ages. It can be absolutely critical for some frail
elderly and disabled patients who are facing serious illness.
That is why the AMA believes that it is of utmost
importance that Medicare+Choice plans be required to stress in
their marketing materials and brochures that their network of
physicians and hospitals may change during the course of the
year. In addition, we believe that Medicare should follow the
example of the numerous states that have enacted continuity of
care provisions to protect patients when their physician/s
leaves their Medicare+Choice plan.
Essentially, such provisions require plans to continue
covering treatment by the departing physician for a specified
period of time (usually 60 to 120 days) if the patient is
undergoing a course of treatment, hospitalized or pregnant. The
National Committee for Quality Assurance (NCQA) requires a
continuation of coverage provision for accreditation of managed
care plans. The AMA believes that Medicare should do no less.
The So-Called Fairness Gap
The managed care industry has repeatedly complained that
the BBA created a so-called ``fairness gap'' between managed
care and fee-for-service. In the AMA's view, nothing could be
further from the truth. Rather than creating a fairness gap,
the BBA in fact began to eliminate a fairness gap that favored
the managed care industry with more than a decade of
substantial overpayments.
As evidence that health plans are suffering from a
``fairness gap,'' the industry points to a Price Waterhouse
analysis which concludes that by 2004, two-thirds of
Medicare+Choice enrollees will live in areas where the Medicare
payment for managed care is at least $1,000 less per year than
the government spends for each fee-for-service beneficiary in
the area. The enrollees in question are characterized as living
in the ``top 100 counties'' (i.e., they live in the counties
that have the highest Medicare+Choice rates in the country).
The AMA submits that one of the goals of the BBA was to
reduce the differences between payments in the ``top'' and the
``bottom'' counties. It is important to remember that about a
third of all counties in the U.S. are seeing significant
increases in payments for Medicare beneficiaries who enroll in
managed care. In most of these counties, Medicare is now
spending more per capita for managed care enrollees than for
fee-for-service beneficiaries.
In other words, there are two sides to this picture.
Payment restraints in ``top'' counties are balanced by payment
increases in ``bottom'' counties. The managed care industry
proposes to improve the lot of plans in the ``top'' counties by
having Congress guarantee Medicare+Choice plans payment rates
equal to at least 91% of fee-for-service per capita
expenditures. Ironically, however, the industry has totally
ignored the other side of the equation. Should Congress also
reduce Medicare+Choice payments that exceed fee-for-service
rates?
The Congressional Budget Office (CBO), GAO, Physician
Payment Review Commission (PPRC) and Mathematica all have
concluded that Medicare overpaid HMOs by 7% to 14% prior to the
BBA. In addition, PPRC found some evidence that the excess
tended to be greatest in the so-called ``top'' counties. The
BBA reduced these overpayments. But due to an oversight,
Congress inadvertently precluded Medicare officials from
adjusting 1997 county rates for previous forecast errors,
thereby building a $1.3-billion-a-year excess into the
Medicare+Choice rates. Moreover, all plans are guaranteed
annual payment increases of at least 2% a year.
The AMA therefore agrees with the GAO's conclusion that
managed care plans should be able to continue offering
supplemental benefits despite the payment modifications enacted
in the BBA. In our view, reducing some of the payment and
coverage disparities that existed under the Medicare risk
program was an intended and desirable impact of those payment
modifications. As noted earlier, we also do not agree that
payment rates are the key ingredient in the spate of program
withdrawals seen to date in the Medicare+Choice program.
As a result, the AMA cannot at this time support amendments
that would increase plan payment rates. It would not be
fiscally prudent to increase financial incentives to keep plans
and beneficiaries in Medicare+Choice if the only way to
accomplish this is to pay plans more than it would cost to
treat a given beneficiary under Medicare's traditional fee-for-
service program. Therefore, our preference is to make across-
the-board improvements in both fee-for-service and
Medicare+Choice as part of an overall reform strategy.
Risk Adjustment
More than half of all Medicare beneficiaries have covered
health care costs of less than $500 a year. Another 5% have
costs of more than $25,000 per year and this 5% generate more
than half of all Medicare expenditures each year. Clearly any
system that makes similar payments on behalf of all patients
will overpay for some and greatly underpay for others. Yet that
is essentially how Medicare has paid managed care plans until
now.
This might not have mattered much if expensive and
inexpensive patients were evenly dispersed among plans and
between fee-for-service and managed care. For a variety of
reasons, however, Medicare beneficiaries choosing managed care
have tended to be younger and healthier than those who remain
in fee-for-service. A 1996 beneficiary survey indicated that
Medicare beneficiaries in fee-for-service are about one-and-a-
half times as likely to report poor health as those in managed
care. Costs in the same survey were three to five times higher
for beneficiaries in poor health than those in excellent or
good health.
Medicare obviously needs to adjust payments to reflect
these differences and under the BBA, Congress ordered HCFA to
replace the relatively crude demographic adjustment it had
previously used with a new risk adjuster that includes health
status. Although we are sympathetic to the managed care
industry's concerns that the new risk adjuster initially will
only be based on hospital data, the AMA believes that the
proposed adjustment is a marked improvement over the current
system nonetheless.
Although the new adjuster is predicted to reduce aggregate
payments to Medicare+Choice plans by 7.6% a year when fully
implemented, we note that this will only be the case if plans
continue to attract a relatively healthy mix of patients. If,
on the other hand, they enroll a larger number of patients who
are seriously ill, their aggregate payments will actually
increase.
The AMA has generally been supportive of transition periods
whenever Congress orders significant changes in Medicare
payments and we are pleased that HCFA has decided to phase the
new risk adjuster in over five years. However, we cannot
support proposals to require the agency to recalculate the
rates to guarantee a budget neutral implementation of the risk
adjuster.
Such proposals, in effect, assume that Medicare's total
expenditures on managed care have been about right in the past
and that we need only to redistribute these payments among
plans. However, as noted earlier, most experts agree that
Medicare has been paying 7% to 14% more per year for managed
care enrollees than for similar beneficiaries who remained in
fee-for-service. A budget neutral risk adjuster would continue
that disparity, diverting money that might be better spent in
across-the-board program improvements.
While we are anxious to see improved risk adjusters
implemented as soon as possible, the AMA concurs with the
managed care industry's contention that better risk adjusters
are needed. Risk adjustment will assume an increasingly
important role as private sector options are expanded and it is
important that HCFA continue to work to develop risk adjusters
that can more accurately predict expenses for individual
Medicare beneficiaries.
Other Medicare+Choice Issues
Although Congress to date has focused primarily on the
withdrawal of managed care plans from Medicare+Choice, the AMA
believes that it is just as important to determine how the
other private sector alternatives envisioned in the BBA have
fared. As the BBA Conference Report observes, private fee-for-
service (PFFS) plans represent ``the first defined contribution
plan. . .in the history of the program.'' PFFS plans thus could
serve as a test case for Medicare reforms that legislators
would like to see expanded. In addition, alternatives such as
medical savings accounts and PFFS plans could serve as a viable
option to Medicare fee-for-service in some communities that are
too small to support managed care. To date, however, neither of
these options is available to Medicare beneficiaries.
As pointed out in a recent study by Families USA, three-
quarters of elderly and disabled Americans living in rural
counties do not have access to a managed care plan. Moreover,
this situation could worsen next year because according to
HCFA, a disproportionate number of Medicare+Choice withdrawals
in the year 2000 are occurring in rural areas.
There clearly is a need for other Medicare+Choice options
in rural communities and a number of analysts had speculated
that PFFS plans could fill the void in small communities. That
this has not proven true to date likely is due to obstacles
that were set up in the legislation and then magnified in the
implementing regulations.
One area of particular concern is the so-called ``deeming''
requirement, which was included in the BBA and then expanded
upon in the regulation. Essentially, this provision stipulates
that in addition to participating and nonparticipating
providers, PFFS plans must create a ``deemed'' contractor
category. Deeming is assumed if ``the provider, professional,
or other entity has been informed of the individual's
enrollment'' in a PFFS plan and was either ``informed of the
terms and conditions of payment'' or ``given a reasonable
opportunity to obtain information concerning such terms and
conditions.''
This provision is extremely confusing and has no precedent
in the real world. It has the potential to disadvantage the so-
called ``deemed'' providers in some circumstances and the PFFS
organization in others. The resulting uncertainty will
undoubtedly discourage the development of PFFS organizations
and should such an organization ever emerge, disputes over
``deemed'' status are highly likely. Both physicians and their
patients could be caught up in endless billing hassles that
cannot be easily or quickly resolved.
To make matters worse, the interim final regulation
implementing Medicare+Choice appears to create a situation in
which a PFFS organization could contend that it had met the
``deemed'' requirement with a mass mailing to hospitals and
physicians or even to billing agencies. Busy hospitals and
physicians might not even see the notice. Those that do would
have the burden of notifying the plan that they do not intend
to participate, accepting payment rates they would not
otherwise have agreed to, or turning away any beneficiary
enrolled in a PFFS plan.
This situation is particularly problematic for emergency
physicians who by law cannot turn away any beneficiary with a
real emergency. In addition, all physicians will be in danger
of violating PFFS billing rules they knew nothing of,
potentially generating a fraud investigation in the process.
Medicare beneficiaries could also be disadvantaged if they
choose what appears to be a large PFFS network only to discover
later that many of the network's physicians were ``deemed'' to
be participating and have now decided not to treat any PFFS
patient except in an emergency.
To make the PFFS program tenable and provide a fair test of
the defined contribution concept, the AMA believes that the
conditions under which deeming can be presumed must be limited.
We urge Congress to include amendments to this effect in any
Medicare+Choice package that it approves. At the very least, we
believe that deeming should never be presumed in any situation
where services were required under the Emergency Medical
Treatment and Labor Act.
Medicare+Choice plan accountability is another important
issue. Currently, we believe plans in this program are being
held to a lower standard than is applicable to the Medicare
fee-for-service program, especially with respect to payment
policy and timeframes. For example, while carriers that process
Medicare fee-for-service claims are required to pay 95% of
claims within 30 days, there are no deadlines for payments to
physicians who contract with Medicare+Choice plans that use
fee-for-service reimbursement. There is no reasonable
justification for this duality of accountability standards
between the Medicare+Choice and Medicare fee-for-service
programs. Medicare+Choice plans using fee-for-service
reimbursement or that make capitation payments should be held
to the same payment deadlines and policies as apply under the
fee-for-service program.
Finally, as plans pull out of the Medicare+Choice market,
resulting in a significantly more concentrated payer market,
there must be checks and balances in place to protect against
arbitrary health plan anti-patient actions and to increase
quality of care for patients by permitting effective advocacy
by their physicians. Physicians increasingly face enormous
health plan bureaucracies at the negotiating table, and are
thus not in a position to advocate effectively on behalf of
their patients. Thus, we strongly urge Congress to pass
legislation that would allow self-employed physicians and other
health care professionals to engage in joint negotiations with
Medicare+Choice plans without violating the antitrust laws.
Conclusion
The tax-based method of financing Medicare originally
envisioned is no longer sustainable. Putting Medicare on sound
financial footing requires a multi-faceted transformation of
the program's funding, actuarial design, and incentive
structure, as outlined above. We urge this Committee and
Congress to consider these proposals and to act now to fulfill
the promise of health care for the elderly in this country.
We appreciate the efforts of the members of this
subcommittee to explore approaches to Medicare reform, and also
appreciate the opportunity to present our reform proposal and
comments on the Medicare+Choice program. We are prepared to
engage fully in detailed discussions with this subcommittee and
Congress as we work to find a common solution.
Statement of Dr. John C. Goodman, President, National Center for
Policy Analysis
My name is John C. Goodman and I am president and chief
executive officer of the National Center for Policy Analysis.
The National Center for Policy Analysis is a non-profit public
policy research institute headquartered in Dallas, Texas. We
are internationally known for our studies on public policy
issues.
My remarks today are drawn from our most recent study on
Medicare and prescription drugs prepared for NCPA by Milliman &
Robertson, the nation's leading actuarial consulting firm on
health benefits.
The results of the Milliman & Robertson study indicate that
senior citizens could have comprehensive coverage for
prescription drugs in addition to other Medicare benefits--with
virtually no increase in personal costs--if private health
plans were allowed to administer the benefits.
Study Findings
The study finds that private health plans have the ability
to eliminate much of the waste and inefficiency in Medicare and
use the savings to cover the cost of prescription drugs not
currently covered. Specifically:
Because Medicare coverage is incomplete, seniors are
exposed to thousands of dollars in out-of-pocket costs; separate
analysis by the NCPA shows that last year 360,000 Medicare
beneficiaries faced costs in excess of $5,000.
To avoid the prospects of financial devastation, a
majority of seniors acquire private insurance to fill the gaps in
Medicare--either through a former employer (33 percent) or by
purchasing supplemental ``Medigap'' insurance (36 percent).
However, economic studies show that seniors with Medigap
insurance consume significantly more health care than those without the
insurance; moreover, much of the extra care is wasteful and arises
because when patients have first-dollar coverage they are less prudent
consumers of care.
In addition, most Medigap policies do not cover drugs and
many employer plans have incomplete coverage; as a result, patients and
their doctors have a perverse incentive to use doctor and hospital
services when less expensive drug therapy would have been preferable.
A private plan can potentially eliminate much of this
waste by providing a unified set of benefits with the same health care
dollars.
Currently, the 17 percent of Medicare beneficiaries who are
enrolled in a private HMO are enjoying more benefits at a lower
cost. However, because the government's method of paying
premiums to these private plans is highly imperfect,
discrepancies exist. The average HMO is probably overpaid.
However, a number have been underpaid--and those are the ones
that are leaving the market.
The NCPA study assumes that if seniors leave Medicare and
join a private plan, the plan will receive from Medicare a sum
equal to the amount Medicare would have spent. Thus, private
contracting occurs under conditions that promise no profit and
no loss for the government. The study concludes that:
Upon receiving an amount of money equal to the expected
amount Medicare would have spent on each senior plus an amount slightly
above what seniors currently spend on Medigap insurance, an HMO should
be able to provide comprehensive coverage, including coverage for
prescription drugs.
Seniors who want to exercise more choices should be able
to enroll in a fee-for-service plan with a high deductible and a
Medical Savings Account--in many cases for a premium that is
considerably less than what they currently pay for Medigap. The out-of-
pocket cost under these plans would vary, depending on the degree of
managed care, and would average about $1,200 a year--far less than the
unlimited exposure most seniors now face for the potential cost of
drugs.
In many cases, moving to a private plan would not only
provide coverage for prescription drugs, but would also generate
considerable financial savings; for example, the average senior who
currently has Medigap insurance would save more than $1,000 a year in
lower premiums and out-of-pocket costs.
Some Representative Cases
The following are representative cases for seniors with
different types of insurance coverage under the current system.
In all cases, the senior is assumed to continue paying the Part
B Medicare premium to the government. The results summarized
are depicted in the table that follows the discussion.
Case 1: A Senior With No Supplemental Coverage.--This
includes those without any Medigap insurance, employer-provided
insurance, risk contract, Medicaid coverage or direct subsidy
from the government. Given private alternatives, we assume that
this senior will buy a $3,000 deductible plan with no
coinsurance above the deductible and moderate to aggressive
managed care. That is, we assume that these people will tend to
buy the lowest cost coverage available. The MSA deposit in this
case is about $600. The result:
For no additional premium, the senior now has catastrophic
coverage for prescription drugs.
The senior's expected annual personal costs are now
substantially lower, leading to expected savings of more than $1,000
per year.
The senior's out-of-pocket costs are now limited to $2,400
per year, compared to an almost unlimited exposure under Medicare.
Case 2: A Senior With Supplemental ``Medigap'' Coverage.--
We have assumed these people own the Medicare policy Plan F,
which does not cover prescription drugs. Given private
alternatives, we believe they will tend to buy primarily middle
and higher cost coverage. Thus, we have assumed the average
premium will be the midpoint of plans with no managed care and
low to moderate managed care. The deductible is $3,000 with no
coinsurance above the deductible and the additional average
premium for this coverage (beyond money provided by Medicare)
is slightly more than $200 per year. The average out-of-pocket
expense for the new plan is estimated to be roughly $1,500,
compared to the average out-of-pocket expense with Medigap
plans of slightly under $1,200. The result:
For a private plan premium that is only a fraction of what
the senior currently pays, the private plan can provide catastrophic
coverage for all medical expenses.
The expected savings to the enrollee are more than $1,000
per year.
If the senior takes the amount he or she was spending on
Medigap insurance plus the average annual out-of-pocket expense and
subtracts the premium for the new plan, the remainder will equal
$2,546; if this amount is deposited in an MSA account, the maximum
annual exposure will be $454--compared to unlimited exposure for
potential drug costs under the current system.
Case 3: A Senior With Employer-Provided Supplemental
Coverage.--This coverage is provided by an employer to cover
benefits not covered by Medicare. These plans can vary
dramatically, but on average we have assumed that today's
coverage is consistent with medigap Plan F--paying all
copayments and deductibles for physicians' fees and hospital
expenses--and also paying 50 percent of all costs of
prescription drugs. Under the private program, we have assumed
that the employer can become the ``risk contractor,'' supplying
full coverage, or that the employee can apply the employer's
expected cost to some other private plan. We assume that the
new private plan will be pure fee-for-service with no managed
care plan. The deductible in this case will be $3,000 with no
coinsurance above the deductible and the additional average
premium for this coverage is expected to be roughly $500.
Results:
Whereas the senior previously faced unlimited exposure for
one-half of potential drug costs, there is now catastrophic coverage
for all health care costs.
Even though the senior obtains additional coverage, there
is actually a small reduction in additional expected costs.
If the senior takes the amount that was being spent on the
employer plan plus the average annual out-of-pocket expense and
subtracts the premium for the new plan, the remainder will equal
$1,552; if this amount is deposited in an MSA account, the maximum
annual exposure will be $1,448--compared to unlimited exposure for one-
half of potential drug costs under the current system.
Case 4: A Senior Enrolled In A ``Risk Contract'' HMO.--
These are plans that individuals may choose instead of coverage
through traditional Medicare. Currently, the government's
payment to the HMO is equal to 93.2 percent of the Medicare
Aged Adjusted Per Capita Cost. (Despite this discount, we
estimate that the average HMO is overpaid.) The payment to a
new HMO covering prescription drug costs is assumed to be
consistent with that for HMO Risk Contracts in the market
today, or roughly $5,500. The following table assumes that
Medicare continues to overpay the private plan. However, to be
consistent with the other cases and to achieve a no profit, no
loss effect on Medicare, we would need to reduce the payment
(and increase the seniors' premium) by about $400 per year. The
results:
For only $153 additional expected cost, seniors can have
comprehensive coverage for prescription drugs.
The tradeoff: seniors must accept small copayments (say
$10 for a doctor's visit, $10 to $15 to fill a prescription, etc.) in
order to discourage abuse, typical limits on mental health benefits and
a $50 copay for emergency room care.
However, for a small increase in expected expense ($153),
seniors will have traded away unlimited exposure to potential out-of-
pocket drug costs.
TABLE 1.--Opportunity to Obtain Prescription Drug Coverage: Comparison of Average Costs for All Health Care
Expenses for Seniors with Different Kinds of Coverage Today
----------------------------------------------------------------------------------------------------------------
Current Coverage
----------------------------------------------------
No ``Risk*
Supplemental Medigap Employer Contract''
Coverage Coverage Coverage HMO
----------------------------------------------------------------------------------------------------------------
Senior Costs Today:
Average Out-of-Pocket Expense............................ $1,406 $1,161 $667 $866
Private Plan Premium..................................... 0 1,611 1,370 150
----------------------------------------------------
Total Cost Today......................................... $1,406 $2,772 $2,037 $1,016
Senior Cost Under A Private Plan that Covers Prescription
Drugs:
Average Out-of-Pocket Expense (net of any MSA deposit)... 218 1,489 1,475 503
Private Plan Premium..................................... $0 $226 $485 $666
----------------------------------------------------
Total Cost With Private Plan............................. $218 $1,715 $1,960 $1,169
Savings With Private Plan (Private Plan Cost Minus Today $1,188 $1,057 $77 -$153
Cost).....................................................
----------------------------------------------------------------------------------------------------------------
*Assumes the voucher equals the same amount paid to HMO risk contractors today. However, to be consistent with
the other three columns and to achieve a no-profit, no-loss outcome to Medicare, both the risk contract amount
and the voucher need to be reduced (and senior premiums increased) by about $400 per year.