```

[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]

 
                      MEDICARE VETERANS SUBVENTION

=======================================================================

                                HEARING

                               before the

                         SUBCOMMITTEE ON HEALTH

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                              JULY 1, 1999

                               __________

                             Serial 106-16

                               __________

         Printed for the use of the Committee on Ways and Means

                     U.S. GOVERNMENT PRINTING OFFICE
60-137 CC                    WASHINGTON : 1999

                      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

Advisory of June 24, 1999, announcing the hearing................     2

                               WITNESSES

U.S. Department of Health & Human Resources, Robert A. Berenson, 
  M.D., Director, Center for Health Plans and Providers, Health 
  Care Financing Administration..................................     9
U.S. Department of Veterans Affairs, Thomas L. Garthwaite, M.D., 
  Acting Under Secretary for Health..............................    13
U.S. General Accounting Office, William J. Scanlon, Ph.D., 
  Director, Health Financing and Public Health Issues, Health, 
  Education, and Human Services Division; and Stephen P. Backhus, 
  Director, Veterans Affairs and Military Health Care Issues, 
  Health, Education, and Human Services Division.................    31

                       SUBMISSIONS FOR THE RECORD

Evans, Hon. Lane, a Representative in Congress from the State of 
  Illinois, statement............................................     8
National Association for Uniformed Services, Springfield, VA, 
  Benjamin H. Butler, statement..................................    48
Paralyzed Veterans of America, statement.........................    49
Retired Enlisted Association, Alexandria, VA, Mark H. Olanoff, 
  statement......................................................    51
Retired Officers Association, Alexandria, VA, Robert F. Norton, 
  statement......................................................    51

                      MEDICARE VETERANS SUBVENTION

                              ----------                              

                         THURSDAY, JULY 1, 1999

                  House of Representatives,
                       Committee on Ways and Means,
                                    Subcommittee on Health,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10:47 a.m., in 
room 1310, Longworth House Office Building, Hon. Bill Thomas 
(Chairman of the Subcommittee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                         SUBCOMMITTEE ON HEALTH

                                                CONTACT: (202) 225-3943
FOR IMMEDIATE RELEASE

June 24, 1999

No. HL-7

                  Thomas Announces Hearing on Medicare

                        ``Veterans Subvention''

    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 proposals to allow veterans hospitals and 
medical clinics to receive reimbursement from Medicare for providing 
care to Medidcare-eligible veterans. These demonstration proposals have 
been referred to as ``veterans subvention.'' The hearing will take 
place on Thursday, July 1, 1999, in room 1310 Longworth House Office 
Building, beginning at 10:30 a.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be limited to invited witnesses only. 
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:

      
    Current law generally prohibits other government agencies from 
receiving reimbursements for providing Medicare-covered services to 
Medicare-eligible beneficiaries. ``Subvention'' is the term given to 
proposals which would permit the U.S. Department of Veterans Affairs 
(VA) to receive reimbursement from the Medicare Trust Funds for care 
provided to Medicare-eligible beneficiaries at VA medical facilities.
      
    The VA serves millions of veterans each year in 172 VA hospitals 
and 439 VA outpatient clinics. Many of these veterans are eligible for 
Medicare, and the medical care provided by the VA to these Medicare-
eligible veterans is not reimbursed by Medicare. The goal of veterans 
subvention is to implement an alternative for delivering accessible and 
quality care to Medicare-eligible veterans, without increasing the cost 
to VA or to Medicare. In principle, Medicare-eligible military retirees 
who enrolled in the subvention program would get higher priority at 
military facilities than before, permitting them to get Medicare-
covered care from VA, a new alternative to retirees' current Medicare 
options. Subvention could allow VA to augment appropriated funds with 
Medicare payments and to use excess capacity where it exists. Medicare 
might gain because, under veterans subvention, Medicare would pay VA 
less than the rate paid to private medicare providers and managed care 
plans.
      
    In 1998, the U.S. House Representatives passed H.R. 4567, which 
included the Veterans Medicare Access Improvement Act of 1998. The 
Committee on Ways and Means approved similar legislation (H.R. 3828) in 
May 1998. Under those measures, veterans medical facilities would be 
permitted to receive Medicare reimbursement for health care services 
provided to Medicare-eligible veterans. The legislation also included a 
number of safeguards to ensure the Medicare Trust Funds are unharmed. A 
similar demonstration was established for Defense Departments 
facilities as part of the Balanced Budget Act of 1997 (P.L. 105-33).
      
    In announcing the hearing, Chairman Thomas stated: ``American 
veterans, especially those who are poor and suffer from service-
connected disabilities, should have access to quality health care in 
return for their service to our country. Last year, we passed 
legislation making veterans subvention possible. This has long been a 
high priority for America's vets. It should be a high priority for the 
U.S. Congress this year as well''
      

FOCUS OF THE HEARING

      
    The hearing will focus on various proposals to permit veterans' 
medical facilities to receive Medicare reimbursement for providing care 
to Medicare-eligible veterans. The Subcommittee will also consider 
proposals put forward by the Administration and other Members of 
Congress.
      

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 at least 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, 
July 15, 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 IBM compatible 3.5-inch 3.5-inch diskette in WordPerfect 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.
      

                                

    Chairman Thomas. The Subcommittee will come to order. It's, 
I guess, appropriate on the eve of the Fourth of July weekend, 
to have a hearing assessing the health concerns of America's 
veterans. So last year, the Subcommittee designed and passed 
legislation which would authorize veterans to receive the full 
continuum of Medicare services from hospitals and facilities 
operated by the Department of Veterans Affairs.
    The key was, of course, creating greater coordination 
between the Veterans Administration and Medicare under the 
concept of subvention, here veterans subvention.
    The Subcommittee's veterans subvention legislation was 
passed by the House as part of H.R. 4567 on October 10, 1998. 
However, since there was no corresponding action in the Senate 
before the end of the 105th, we have got to start this process 
all over again.
    And since the House's passage of the veterans subvention 
bill, there have been some new developments. First, the General 
Accounting Office has published a study of a similar subvention 
program tied to a Department of Defense health care system for 
military retirees. And we'll hear from the GAO today about the 
lessons that they have learned and we may need to apply to a VA 
subvention.
    They are not isomorphic, but they certainly have enough 
similarities that would require us to look carefully at the DOD 
subvention aspects reported by the GAO.
    Second, Health Care Financing Administration and the 
Department of Veterans Affairs have been working together and 
have recently signed a memorandum of agreement, which specifies 
the operating details of any possible veterans subvention pilot 
program. However, in order for this demonstration to begin, it 
requires congressional action.
    So we are going to hear today both from Health Care 
Financing Administration and the VA about how they envision 
veterans subvention working.
    Finally, Senate Finance Committee just, I believe last 
week, certain recently, has taken up the issue of veterans 
subvention, and we look forward to working with the Finance 
Committee and Chairman Roth in moving legislation, since, as I 
said, the House acted and the Senate didn't last year.
    In the past, when the Subcommittee has designed veterans 
subvention legislation, there have been several crucial issues 
that we thought ensured the success of the program.
    First, was the issue of the whether the appropriate method 
of reimbursement is fee-for-service or some sort of capitated 
arrangement, and the Senate has moved in a different direction 
than we had in the past. And that certainly will be, and should 
be a subject of discussion.
    Second, there is an issue of whether veterans subvention is 
best done at a limited number of sites or whether we have 
enough data to justify thinking of triggering a national 
program, at least for a particular profile of a veteran.
    And third, the Subcommittee wants to know, how does 
Congress ensure that the VA continues to maintain its current 
level of effort for Medicare-eligible veterans, since every 
veteran from World War II is now Medicare eligible?
    In an age of flat appropriations, with no accusations being 
made, we are very concerned about the limited funds of Medicare 
being added the Veterans Administration activities, rather than 
being substituted for.
    And, finally, a real concern is who the veteran is, which 
veterans ought to be allowed access to the program. 
Historically, there has been a profile of veterans known as 
category A, which were low-income or service-related disability 
veterans. Category C would be other veterans.
    The other concern that a number of us have is that, in 
looking at where the veterans hospitals have been located 
historically, where outpatient clinics have been built, and 
where veterans reside, there is a real concern about distances 
in terms of services that can be provided, and that the old, 
traditional structure simply is not adequate to many of today's 
veterans needs, especially Medicare-eligible veterans, given 
their age, and that that certainly should be part of any 
particular program.
    And before I yield to the gentleman from California to make 
whatever remarks he may make, I would just like to say that I 
was saddened by the news story that I found in yesterday's 
Washington Post on the Federal page in which Dr. Kizer has 
decided not to run the gauntlet a second time in terms of the 
abuse that he would be subjected to. And frankly, it is the 
Veterans Administration's loss; it is the Clinton 
administration's loss, and it is the country's loss that 
someone who has been so innovative in solving veterans health 
care problems would be subject to such abuse. And there is 
clear evidence that he would have been, that his reconfirmation 
would have been a painful process that he was not willing to 
endure.
    That is not in America's best interest, and in my opinion, 
certainly not in veterans best interests. And I just wanted to 
express my sympathy and concern that if good people like this 
aren't able to stay in government, we have got problems.
    [The opening statement follows:]

Opening Statement of Hon. Bill Thomas, a Representative in Congress 
from the State of California

    The issue of providing Medicare health benefits to 
America's veterans is a fitting topic for a hearing on the eve 
of the Fourth of July weekend. It is an issue that this 
Subcommittee has dealt with extensively in the past several 
years.
    Last year, the Subcommittee designed and passed legislation 
which would authorize veterans to receive the full-continuum of 
Medicare services from hospitals and facilities operated by the 
Department of Veterans Affairs. Creating greater coordination 
between the VA and Medicare is known as ``veterans 
subvention.''
    The Subcommittee's veterans subvention legislation was 
passed by the House, as part of H.R. 4567, on October 10, 1998. 
However, since there was no corresponding action in the Senate 
before the end of the 105th Congress, we must begin anew the 
legislative process this year.
    Since the House's passage of the veterans subvention bill, 
there have been a number of developments:
    First, the General Accounting Office (GAO) has published a 
study of a similar subvention program being operated for 
military retirees as part of the Defense Department's health 
care system. We shall hear from GAO today about lessons from 
that demonstration which may apply to VA subvention.
    Second, the Health Care Financing Administration (HCFA) and 
the Department of Veterans Affairs (VA) have been working 
together and have recently signed a Memorandum of Agreement 
which specifies the operating details of any possible veterans 
subvention pilot program. However, in order for this 
demonstration to begin, Congress must act. Today, we will hear 
from representatives from both HCFA and the VA about how they 
envision veterans subvention working.
    Finally, the Senate Finance Committee has recently taken up 
the issue and we look forward to working with Chairman Roth to 
move legislation this year.
    In the past, when the Subcommittee has designed veterans 
subvention legislation, there have been several crucial issues 
to ensuring the success of the program:
    First, there is the issue of whether the appropriate method 
of reimbursement is fee-for-service or some sort of capitated 
arrangement.
    Second, there is the issue of whether veterans subvention 
is best done at a limited number of sites or whether we have 
enough to data to justify thinking in terms of a national 
program.
    Third, the Subcommittee will want to know how does Congress 
ensure that the VA continues to maintain its current level of 
effort for Medicare-eligible veterans. In an age of flat 
appropriations, the VA might be tempted to shift some costs of 
care to the Medicare Trust Funds.
    Finally--and this has always been my over-riding concern--
there is the issue of which veterans should be allowed access 
to this new program. My own preference has always been to make 
low-income veterans the beneficiaries of this new program. 
These veterans used to be known as ``Category A'' veterans. In 
past years, the Administration has wanted to offer veterans 
subvention to Category C--all other veterans. I look forward to 
exploring the rationale for the Administration's position.
      

                                

    Chairman Thomas. I yield to the gentleman from California.
    Mr. Stark. Well, thank you, Mr. Chairman. I gather this is 
largely a repeat of last year's effort, and I would just say as 
I did last year, those of us veterans who support the effort 
for veterans, think about Bataan, Iwo Jima, I think Dr. 
McDermott was probably in both of those battles, but it is 
interesting that the Majority, that the Republicans, are mixed 
up as they usually are.
    Here we are----
    Chairman Thomas. Why is that?
    Mr. Stark. Well, just because it is strange, here we are 
supporting a system that is pure socialism, government 
medicine, socialized medicine, for those of us who fought to 
keep this country safe from communism. Now, we have free-market 
choices for Medicaid beneficiaries and for the poor, we have 
free-market choices for immigrants who never fought to protect 
our country, and here we are subjecting our veterans to 
socialism. I just don't understand it.
    Now, I do think the VA and the Department of Defense 
hospitals do a pretty good job, but--and I wish that America's 
43 million uninsured could be subject to the same degree of 
socialism that we subject our veterans to.
    But, in a more serious vein, the subvention bill has raised 
some questions the Chairman mentioned, quality, for these 
veterans. The payments will be less than what we pay the 
private sector Medicare HMOs. So maybe the quality can't be as 
good.
    Maybe we should just contract all this out, and maybe that 
would save money. According to the Breaux-Thomas bill, we will 
save a lot of money if we go into Medicare+Choice. Well, we 
will save some money, Dr. Garthwaite, if we take all your 
patients and put them in Medicare+Choice.
    I am concerned that this be carefully addressed. Many of 
the veterans have Medigap policies. And if they participate in 
the demonstration and, for whatever reason, it doesn't work out 
for them--transportation might be a great area. If you have got 
to go to Livermore, then nobody lives within 100 miles of the 
Livermore hospital. I used to live across the street from it, 
and you could shoot cannons down the road and never hit a car. 
And there is no bus service.
    They may decide that is inconvenient and want to go back, 
to say, some plan where Medigap--and they may have danger 
getting their Medigap, or trouble getting their Medigap 
policies back. And I think we should make sure that if they 
enter into these demonstrations, and, for whatever reasons it 
doesn't work out, they can be made whole with the benefits they 
would have had under Medicare.
    I look forward to exploring some of these issues and as we 
hear about the success of socialized medicine in the United 
States.
    Mr. Chairman, thank you for holding the hearing.
    [The opening statement follows:]

Opening Statement of Hon. Fortney Pete Stark, a Representative in 
Congress from the State of California

    Mr. Chairman:
    I gather this is largely a repeat of last year's effort.
    I just have to say, as I did last year, that I am glad that 
the Majority recognizes that government involvement in health 
care can be good. The VA system, of course, is pure socialism, 
and it is interesting to see Members want to expand a socialist 
health system, rather than have Veterans use the civilian 
Medicare system.
    I think the VA and DoD hospitals do a good job, and I just 
wish that all of America's 43 million uninsured could be 
subject to the same degree of socialism.
    These various subvention bills do raise questions about how 
we can guarantee quality care for these Veterans, in that the 
payment will be less than what we are paying private sector 
Medicare HMOs. I am also concerned that veterans who have 
medigap policies not be disadvantaged by participating in this 
temporary Demonstration project. There is the danger they may 
give up their medigap policies, and then have trouble getting 
them back at a decent price.
    I look forward to exploring these kinds of issues in the 
hearing and mark-up.
      

                                

    Chairman Thomas. I thank the gentleman, and I don't 
normally respond to the Ranking Member's comments, but last 
time I checked my history book, those veterans who fought at 
Bataan and Iwo Jima were fighting fascists, and not communists. 
But that is OK.
    Mrs. Thurman. Mr. Chairman.
    Chairman Thomas. That's about as accurate as the rest of 
the statement. And we will leave it at that. [Laughter.]
    Mrs. Thurman. Mr. Chairman.
    Chairman Thomas. Not usually responding to my colleague.
    Mrs. Thurman. Mr. Chairman.
    Chairman Thomas. I will tell the gentlewoman that normally 
the Chairman and the Ranking Member make opening statements, 
and any other Member that wishes to make an opening statement 
can do so in a written form, but as a new Member of the 
Subcommittee, if the gentlewoman has some point to make.
    Mrs. Thurman. Actually, it is not a point, but Lane Evans 
had asked me if I could put a statement, a letter, that he 
would like to have on the record.
    Chairman Thomas. Oh, absolutely. Without objection, the 
Ranking Member of the Veterans Committee's statement will be 
placed in the record.
    [The prepared statement follows:]

Statement of Hon. Lane Evans, a Representative in Congress from the 
State of Illinois

    Mr. Chairman, unfortunately, a very important meeting with 
the Administration deters me from appearing before the 
Subcommittee, but I want to thank you for holding this hearing 
and allowing my statement to appear in the record. Veterans' 
Medicare Subvention is an issue that the Committee on Veterans' 
Affairs explored in the 103rd, 104th and 105th sessions of 
Congress. We have learned much since we began to investigate 
the implications of Medicare Subvention for veterans, VA, and 
the Health Care Financing Administration. As the Democratic 
Ranking Member of the Committee on Veterans Affairs, I want to 
articulate the view of many on that Committee.
    In the first session of the 105th Congress, many Members 
joined me and Chairman Stump in supporting H.R. 1362. The bill 
enjoyed unanimous, bipartisan support on the Committee on 
Veterans' Affairs which reported the bill favorably to the 
House by voice vote on May 21, 1997. As you are aware, the bill 
was also referred to your Committee which has primary 
jurisdiction, but no further action was taken during that 
session of Congress and, unfortunately, the bill was never 
considered by the House. When the Senate voted on passage of 
the Balanced Budget Act of 1997, however, a provision similar 
to H.R. 1362 was included, but later died in conference.
    This year the Senate has also moved legislation which 
contains a provision similar to one in the Chairman's H.R. 3828 
which would authorize VA to serve as a provider to higher 
income (Category C) veterans who enroll in Medicare+Choice 
plans, but which also allows VA to establish a fee-for-service 
option for Category C veterans. The Senate measure, which 
passed as part of S. 4, does not include a program expansion 
for Category A veterans. Early in this session, Mr. Pickering 
and Mr. Moran, who serves on the Veterans' Affairs Committee, 
introduced H.R. 1347 which is similar to the Senate measure.
    Early in this session, Mr. Rangel, Mr. Dingell and I sent a 
letter to Chairman Archer asking him to include Democrats in 
developing any legislation to be considered by your Committee. 
Our request was simple: if you choose to address Medicare 
Subvention in the 106th Congress, please involve us in the 
process. We further outlined some key components that would 
better assure bipartisan support for such a proposal. Quoting 
from the letter to Chairman Archer dated January 26, 1999:

          ``First, Medicare Subvention should offer VA health care to 
        Medicare-eligible veterans who have not previously had access 
        to the system-it should serve as a new option for veterans with 
        Medicare coverage. Second, we believe legislation should ensure 
        that Medicare is able to reduce its expenditures for care 
        received by Medicare-eligible veterans who are treated by VA. 
        The legislation should not present a significant risk to the 
        Medicare trust funds, nor should it compromise the funding 
        Congress provides VA to care for veterans with disabling 
        conditions related to military service and medically indigent 
        veterans. VA should certify that it is able to provide care to 
        Medicare-eligible veterans at a cost not exceeding its 
        reimbursement from Medicare. If these criteria were met, 
        Members would have strong incentives to enact VA-Medicare 
        subvention legislation. We would be pleased to work with you in 
        developing such legislation.''

    Unfortunately, to date, I have not received a response to 
that letter and I am not aware of any response made to the 
other co-signers.
    My point in outlining this history is to convey both the 
long-standing interest of the Committee on Veterans Affairs in 
this issue and to identify another option, which enjoys 
widespread bipartisan support, for your Subcommittee's 
consideration. With all due respect, I believe the Senate 
passed version of VA Medicare Subvention is a much better bill 
than the bill which the House passed as part of H.R. 4567, the 
Medicare Home Health Act in the 105th Congress.
    Make no mistake, VA desperately needs new sources of 
revenue. If the President's Budget is enacted for FY 2000, VA 
will enter its fourth consecutive year with no real growth. Our 
Committee recommended a $1.7 billion addition to the VA Medical 
budget; Democrats recommended an even larger increase of $2.3 
billion. I hope that the Appropriators will enhance the funding 
we anticipate for FY 2000, but I am seriously concerned about 
this prospect if Congress does not break the caps imposed by 
the Balanced Budget Act.
    Concerned as I am about the prospects for an adequate 
appropriation, I am sure many of this Subcommittee's members 
share my concern that VA's costs are covered by fairly and 
accurately billing the Health Care Financing Administration. As 
the General Accounting Office will undoubtedly share with you 
today, DOD's experience urges caution in implementing Medicare 
Subvention. DOD has had more experience with administrating 
contracts for managed care than VA and VA's problems with 
billing and collecting from third party insurers are chronic 
and severe. The Senate bill would give all of us better 
assurance that Subvention was working for veterans, for VA, and 
toward the sustenance of the Medicare trust funds. It is a much 
more limited bill than H.R. 4567. It is a three-year 
demonstration pilot limited to $50 million dollars and 10 VA 
sites. The Congressional Budget Office (CBO) scored the bill at 
$70 million over the life of the demonstration. If you recall, 
CBO scored the provision in H.R. 4567 at $1.7 billion--a very 
big difference.
    Veterans prefer S.4. I have asked my staff to advise 
veterans' service organizations that your Committee is re-
engaging Medicare Subvention. Some veterans' groups have 
previously indicated that they have serious concerns that H.R. 
4567 would have compelled high-priority veterans who have been 
VA beneficiaries to enroll in Medicare and become its 
beneficiaries and, therefore, subject to the same premiums and 
copayments. Others share my concern that the Office of 
Management and Budget may be all too anxious to offset 
anticipated revenues from the VA appropriation. Many groups 
also express concerns about offering managed care, but not fee-
for service care as an option. In testimony before the Senate 
Finance Committee last month, Paralyzed Veterans of America 
said,

          Medicare-eligible veterans who are not currently receiving 
        services in the VA must be allowed the opportunity to over come 
        past VA disenfranchisement [by virtue of income] by 
        participating on an equal footing with current Medicare 
        beneficiaries, choosing either managed care or continued 
        participation in a fee-for-service arrangement.

    I share PVA's view that fee-for-service will allow a fair 
test. I also share the concern expressed by at least one expert 
in the American Geriatric Society's Proceedings, that managed 
care does not always allow chronically ill or disabled, elderly 
people who rely on specialized care, the best option for their 
health care.
    I want to urge your Subcommittee to take these concerns 
into consideration in identifying the appropriate legislative 
vehicle for Medicare Subvention. I want to thank Ranking Member 
Stark for keeping me and my staff apprised of the 
Subcommittee's proceedings.
      

                                

    Mrs. Thurman. Thank you.
    Chairman Thomas. And we have with us Dr. Berenson from the 
Health Care Financing Administration. He is the Director for 
the Center for Health Plans and Providers at HCFA, and Thomas 
Garthwaite, who is the Deputy Under Secretary of Health for the 
Department of Veterans Affairs.
    Dr. Berenson, any written statement you have will be made a 
part of the record, similarly with Dr. Garthwaite. And you may 
address us in any form you see fit in the time you have 
available.

  STATEMENT OF ROBERT A. BERENSON, M.D., DIRECTOR, CENTER FOR 
HEALTH PLANS & PROVIDERS, HEALTH CARE FINANCING ADMINISTRATION, 
          U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES

    Dr. Berenson. Thank you, Mr. Chairman, Congressman Stark, 
and other Members of the Subcommittee. I will just give a very 
brief opening oral statement. I have provided a written 
statement. Thank you for inviting us to discuss our Medicare 
subvention for beneficiaries eligible for veterans benefits.
    The Veterans Administration and HCFA signed a memorandum of 
agreement in May which details how the project would work, and 
we are eager to move forward as soon as legislation is enacted 
authorizing us to do so.
    Subvention has the potential to benefit all parties 
involved, most importantly, the beneficiaries who are eligible 
for both Medicare and military or veterans benefits. The 
Clinton administration strongly supports these demonstrations, 
and we are committed to meeting the challenges they present.
    We are focusing on two imperatives: protecting 
beneficiaries and protecting the Medicare Trust Funds. The VA 
demonstration would be modeled on a DOD demonstration that has 
been up and running since August 1998. It is important that 
they both rely on a coordinated care model. Focusing on 
coordinated care will promote higher quality care. It will 
limit costs and the administrative burden. And it will provide 
consistency between the two demonstrations, permitting us to 
learn more about how these demonstrations benefit the 
beneficiaries.
    Demonstration sites will--must meet all conditions of 
participation required of Medicare+Choice coordinated plans, 
except for those such as fiscal soundness rules that are 
clearly not applicable to the military or to the VA.
    The GAO has identified important concerns about the DOD 
demonstration, and its estimate of the level of effort that is 
critical to protecting the trust funds and ensuring that 
taxpayers don't pay twice for the same services.
    We are working to address these concerns with the DOD, and 
we are heeding the lesson learned in focusing more on data 
systems and the level of effort estimate up front as we move 
forward with the VA demonstration.
    We are committed to learning as much as we can from these 
projects. We have hired an outside contractor to assess the DOD 
demonstration's impact on costs, access, and quality, as well 
as any effects on providers and other Medicare beneficiaries in 
the surrounding community. We will have a similar evaluation 
conducted for the VA demonstration.
    We look forward to working with this Subcommittee, the DOD, 
and the VA as we continue. Together we can limit the risks and 
ensure top-quality care. And in the end, we should all benefit.
    Thank you very much.
    [The prepared statement follows:]

Statement of Robert A. Berenson, M.D., Director, Center for Health 
Plans & Providers, Health Care Financing Administration, U.S. 
Department of Human Resources

    Good morning, Chairman Thomas, Congressman Stark and 
members of the Committee, thank you for inviting us to discuss 
our demonstration for Medicare subvention involving our 
nation's veterans. I would also like to thank the General 
Accounting Office (GAO) for its valuable evaluation of the 
Department of Defense (DoD) subvention demonstration project, 
which provided information that is helping us to better plan 
for the Veterans Affairs (VA) subvention demonstration.
    In recent weeks we have been reminded once again of the 
contributions America's veterans have made to our country. We 
are committed to working with the VA to see if there is a way 
to improve their access to care while protecting the Medicare 
Trust Funds. The Clinton Administration strongly supports this 
demonstration. I want to update you on the status of these 
demonstrations and to explain the need to limit the Veterans 
Affairs demonstration project to coordinated care.
    The term ``subvention'' refers to Medicare paying for care 
provided at military, veterans or other federal facilities to 
Medicare beneficiaries. Medicare is precluded by statute from 
doing this. The Balanced Budget Act of 1997 authorized a 3-
year, demonstration for military retirees and an implementation 
plan for a similar veterans demonstration. Enrollment in the 
DoD demonstration began in August 1998, and we signed a 
Memorandum of Agreement with the Department of Veterans Affairs 
on the VA demonstration in May 1999. These demonstrations 
provide the opportunity to assess how a coordinated approach to 
subvention might improve efficiency, access, and quality of 
care for Medicare-eligible military retirees and veterans. In 
implementing the DoD demonstration and drafting the memorandum 
of agreement with the VA, we focused on two imperatives: 
protecting beneficiaries and protecting the Medicare Trust 
Funds.

                      DOD SUBVENTION DEMONSTRATION

    The DoD demonstration has valuable lessons to offer for the 
VA project. It creates a DoD-run HMO, TRICARE Senior Prime, in 
six sites for military retirees and their dependents who are 
eligible for Medicare. The TRICARE Senior Prime Option provides 
a full range of Medicare benefits to enrollees. Covered 
services include the standard Medicare benefits plus other 
TRICARE benefits such as pharmaceutical coverage. Enrollees 
agree to receive all covered services through TRICARE. DoD must 
spend as much for the care of those in the demonstration areas 
as it already spends on them, known as its ``level of effort.'' 
Prior to this, dually-eligible beneficiaries could only be 
treated at DoD facilities on a ``space available'' basis. After 
the DoD has met its level of effort, Medicare pays 95 percent 
of the rate it pays for Medicare+Choice plan enrollees, minus 
medical education, disproportionate share payments, and a 
portion of hospital capital payment costs. Medicare payments 
are capped at $50 million in the first year, $60 million in the 
second year, and $65 million in the third year.
    The GAO has raised two important concerns about the DoD 
subvention demonstration:
     DoD's estimates of its level of effort may be over 
or underestimated; and
     Data problems and payment issues could make the 
demonstration difficult to manage at both the national and 
local levels.
    We are working with the DoD to address these concerns, and 
hiring an outside contractor to help review DoD data and 
methodology.
    We have contracted with RAND, Inc., to evaluate the DoD 
demonstration, including the:
     impact on the costs to both the Medicare Trust 
Funds and DoD;
     whether there is improved access to care;
     any change in quality of care provided to the 
demonstration population; and
     any impact on providers and other Medicare 
beneficiaries in the surrounding community.
    We expect the first interim report on this evaluation this 
month, with a final report in December of 2001. The GAO will 
also conduct an evaluation for the HHS Inspector General.

                            VA DEMONSTRATION

    We are working toward implementation of a similar Veterans 
Affairs subvention demonstration, in preparation for enactment 
of legislation that would be required to authorize 
implementation. As with the DoD project, Medicare will pay for 
care in the VA health care system for Medicare beneficiaries 
who are also eligible for VA health care benefits. We believe 
this could provide more access to VA services for veterans, 
savings to the Medicare Trust Funds, and administrative 
efficiencies to both programs.
    The memorandum of agreement between HCFA and the VA is 
modeled on the DoD demonstration and, like the DoD 
demonstration, relies upon a coordinated care model. Medicare 
will reimburse the VA for health services provided by VA in a 
coordinated care model to Medicare beneficiaries who are 
Priority 7 veterans (generally those without a service-
connected disability who are above the VA income threshold). 
Beneficiaries who enroll in the demonstration will be able to 
use their Medicare benefits to obtain Medicare coordinated care 
services at VA facilities and other sites under contract to the 
VA. The VA organization will provide the complete range of 
Medicare benefits, and adhere to the conditions of 
participation and quality standards required of Medicare+Choice 
plans. As with the DoD, the VA will receive Medicare payments 
only after it surpasses its current level of effort for dual-
eligible beneficiaries in demonstration site facilities. After 
the VA meets its level of effort, Medicare will reimburse the 
VA at the rate of 95 percent of county-based Medicare+Choice 
capitation rates, excluding medical education, disproportionate 
share payment, and a portion of hospital capital payment costs. 
As we are able, we will risk adjust payments to take into 
account enrollee health status.
    We have taken care in designing this demonstration to 
protect the Medicare Trust Funds. If Medicare costs are more 
than they would have been without the demonstration, Medicare 
and the VA have agreed to take any necessary corrective action. 
For example, the VA may refund Medicare payments, we may 
suspend or terminate the demonstration, or we may adjust 
payments. To further insulate Medicare from financial risk, a 
``cap'' of $50 million a year will be placed on the total 
Medicare reimbursement to VA. Furthermore, the VA has agreed to 
open its facilities to audits by HCFA and the HHS Inspector 
General.
    We have addressed issues the GAO identified in its 
evaluation of the DoD demonstration in our planning of the VA 
demonstration. For example, as with the DoD subvention 
demonstration we plan to base the level of effort calculation 
on actual expenditures the VA made during a specified base 
period. We are working with the VA to make sure we have the 
information we need to make accurate and reliable payments 
based upon a valid baseline.
    Thus, we strongly believe that we have taken all possible 
steps to protect beneficiaries, the Trust Funds, and the VA 
from any potential adverse outcomes. And, as with the DoD 
demonstration, we will solicit a rigorous evaluation by an 
independent evaluator. Over the 3 years of the demonstration, 
the independent evaluator will monitor performance and collect 
data on:
     impact on the costs to either the Medicare Trust 
Funds or VA;
     whether there is improved access to health care;
     any change in quality of care provided to the 
demonstration population; and
     any effect on local health care providers and 
other Medicare beneficiaries in the surrounding community.

                      Focusing on Coordinated Care

    The DoD demonstration is limited to coordinated care by 
statute and, for good reasons, we have limited the proposed VA 
demonstration to coordinated care. This will:
     promote higher quality through better coordinated 
care;
     protect the Medicare Trust Funds;
     limit the administrative burden; and
     provide consistency between the two 
demonstrations.
    Under a coordinated care model, enrollees would obtain all 
services from or through the VA. This will ensure that all 
needed care is received from the appropriate providers who have 
access to patient records and other needed patient information. 
We believe it will help ensure that beneficiaries receive high 
quality, coordinated care. It will help the VA better 
anticipate costs and payment amounts, resulting in better 
planning and improved access to care. It also means the 
demonstration will more likely remain within the spending caps 
established in the memorandum of agreement, thereby minimizing 
the likelihood that participation will be curtailed later in 
the demonstration. And a coordinated care model also will 
better protect the Medicare Trust Funds by removing many of the 
unknowns and risks inherent in a fee-for-service model. 
Focusing on one model will also minimize the administrative 
burden. Our memorandum of agreement with the VA is similar to 
the one with the DoD and, our role is similar in both. 
Therefore, we can leverage the staff, resources, and lessons 
learned between the two projects. But that can only be achieved 
with some level of consistency between the two programs.
    I would like to alert the Committee that it does take a 
long time to implement a demonstration of this complexity. With 
the DoD demonstration receiving high-priority implementation 
treatment from both HCFA and DoD, it took between 13 and 17 
months to deliver services in sites after passage of 
authorizing legislation.

                               Conclusion

    Subvention has the potential to benefit all parties 
involved--the VA, Medicare and, most importantly, beneficiaries 
eligible for both Medicare and veterans' health care benefits. 
They should enjoy enhanced choice and improved service, which 
is the true ``bottom line'' in this effort. The President 
strongly supports this demonstration, and we are committed to 
meeting the challenges it presents and learning as much as we 
can about what would be necessary to expand such a program. We 
look forward to working with this Committee and the VA as we 
continue to seek to improve health care services available to 
our nation's Medicare-eligible veterans. It is critical that we 
limit the risk to VA and the Trust Funds, and ensure top 
quality care to veterans. In this regard, we recommend limiting 
the demonstration to coordinated care only, and stress the 
importance of allowing for about a 1-year implementation 
period.
      

                                

    Chairman Thomas. Thank you very much, Dr. Berenson.
    Dr. Garthwaite.

STATEMENT OF THOMAS L. GARTHWAITE, M.D., ACTING UNDER SECRETARY 
        FOR HEALTH, U.S. DEPARTMENT OF VETERANS AFFAIRS

    Dr. Garthwaite. Thank you, Mr. Chairman, Members of the 
Subcommittee. I want to thank you for the opportunity to 
testify on behalf of the Medicare subvention pilot at the 
Department of Veterans Affairs.
    VA has sought this authorization for a number of years, 
because we believe this would be beneficial to both the 
veterans who would like to use their Medicare benefits through 
the VA health care system and the Medicare Trust Funds 
themselves. We greatly appreciate your leadership on this issue 
in the 105th Congress.
    Medicare subvention is an issue of equity for Medicare-
eligible veterans. In VA's view, veterans should have the 
opportunity to use their Medicare benefits at VA health care 
facilities if they choose. Moreover, VA believes allowing 
veterans to have this option represents significant potential 
savings since VA has agreed to provide Medicare coverage 
services at a discount.
    So that the subvention pilot can be implemented 
expeditiously, we have worked with the Department of Health and 
Human Services and successfully designed a memorandum of 
agreement that establishes a foundation for a VA Medicare pilot 
that will serve as the framework of an implementation plan as 
we move forward in this effort.
    This agreement addresses concerns that have been expressed 
in the past about the financial risk of increased cost in 
Medicare Trust Funds and VA's capabilities to successfully meet 
Medicare requirements and operate as a Medicare provider.
    As you are aware, VA has undergone a significant 
transformation in our health care structure and our service 
delivery in these past few years. The infrastructure and 
processes now in place to enable VA to successfully meet--now 
enable VA to successfully meet all Medicare requirements.
    While training and education will still be required, we 
have made enough changes to have the faith that our health care 
managers have demonstrated that they can meet the challenges of 
the Medicare subvention legislation.
    On the administrative side, VA has experience in billing 
third-party insurance companies under the medical care cost 
recovery program. We do understand that we have some 
shortcomings in our documentation and coding, and have 
aggressively taken steps to address these concerns.
    Necessary changes will be implemented by September 1999, 
when we also implement a reasonable-charge billing structure 
similar to private-sector providers.
    On the clinical side, VA already offers a full range of 
services that must be offered under any Medicare Program. 
Services are available either directly at VA facilities or 
through contractual arrangements, since VA's contracting 
authority permits us to provide any services that are required 
and not readily accessible.
    We have universal primary care, and we practice coordinated 
care across the entire continuum of services. I believe that it 
is this coordination of care in which we manage the care 
itself, not just manage costs, that is critical in our 
evolution of health care and is critical in making the managed-
care model that has been proposed successful.
    Managed care has not done enough to make the care more 
coordinated and more convenient and more coherent, which is 
critically important to actually improving health care 
outcomes. If we focus on managing care to produce higher 
quality, then costs will decrease, for higher-quality care 
actually costs less.
    The Medicare pilot, which VA and HCFA are proposing, would 
be for dual-eligible veterans who are classified as Priority 7; 
that is those veterans with higher incomes who have no service-
connected disability or service-connected disability that does 
not entitle the veteran to compensation.
    Our MOA, memorandum of agreement, includes only a 
Medicare+Choice pilot. This is the direction that the VA health 
care has gone and has been heading in the last 3 years, and one 
which offers the best opportunity to provide comprehensive, 
coordinated care for our enrollees. This is also the mode of 
health care delivery which Medicare beneficiaries have 
increasingly been choosing.
    The current MOA does not include a fee-for-service option. 
VA's concerns are that adding a fee-for-service demonstration 
would limit VA's ability to coordinate all care that veterans 
receive and that a fee-for-service demonstration entails 
additional data requirements. Implementing both fee-for-service 
and coordinated-care demonstrations simultaneously would 
introduce greater administrative complexities and resource 
requirements.
    Nevertheless, as VA has attested to previously before 
Congress, including a fee-for-service option is not a deal 
breaker for us, it might be tougher, but we would rather get 
moving on this because we believe in it strongly.
    In conclusion, I am confident both the VA and Medicare will 
gain from this pilot experience. I want to assure the 
Subcommittee of the importance that VA places on this Medicare 
subvention initiative. VA will devote its energy and its 
resources to ensuring that the pilot is successful, both for VA 
and for Medicare, and that every veteran who comes to the VA 
will receive high-quality care.
    Again, thank you for the opportunity to appear here today. 
I will be pleased to answer any questions you or the 
Subcommittee might have.
    [The prepared statement follows:]

Statement of Thomas L. Garthwaite, M.D., Acting Under Secretary for 
Health, U.S. Department of Veterans Affairs

    Mr. Chairman and members of the Committee, thank you for 
the opportunity to testify on behalf of a Medicare Subvention 
pilot for the Department of Veterans Affairs. VA has sought 
authorization for Medicare reimbursement for a number of years 
because we believe this would be beneficial to both the 
veterans who would like to use their Medicare benefits through 
the VA healthcare plan and, importantly, to Medicare and the 
Medicare Trust Funds.
    Medicare Subvention is an issue of equity for those 
Medicare-eligible veterans who can use their Medicare benefits 
at Medicare-certified health care providers in the community, 
except at VA healthcare facilities. In VA's view, this 
represents significant potential savings since VA has agreed to 
provide Medicare-covered services at a discount, and we welcome 
the opportunity to test if the savings can be realized.
    VA and the Department of Health and Human Services 
successfully designed a Memorandum of Agreement (MOA) that 
establishes the foundation for a VA Medicare Subvention pilot 
and will serve as the framework of an implementation plan as we 
move forward in this effort. This agreement addresses concerns 
that have been expressed in the past about the financial risk 
of increased cost to the Medicare Trust Funds and VA's 
capability to successfully meet Medicare requirements and 
operate as a Medicare provider. When I discuss the MOA in more 
detail, I will cover the safeguards that have been included to 
protect the Trust Funds.
    First, however, I would like to address concerns about VA's 
ability to be a Medicare provider, by describing the 
fundamental transformation that the VA healthcare system has 
undergone in the last four years. I know that some of you are 
already aware of this transformation. However, for those who 
may not be as familiar with the VA healthcare system, I hope 
this gives you a new perspective on VA.
    In 1994, VA was a hospital centered healthcare system that 
had not kept pace with the changes in healthcare that were 
occurring in all of American healthcare. VA recognized that it 
had become an outdated, unresponsive, and inefficient 
healthcare system that could better serve its patients. To 
address these issues, the veterans healthcare system initiated 
a systemic and systematic effort to fundamentally re-invent 
itself. In the process, the Veterans Health Administration 
(VHA) has become the largest fully integrated healthcare system 
in the nation, delivering a full continuum of services. The 
effort has involved reengineering VHA's operational structure, 
streamlining its processes, implementing ``best practices,'' 
improving information management, reforming eligibility rules, 
expanding contracting authority, and changing the culture of VA 
healthcare. I can tell you today, without reservation, that no 
other healthcare system in the U.S. can match either the extent 
or rapidity of change that has occurred in the veterans 
healthcare system since our reinvention effort was launched in 
late 1995.
    To illustrate the nature of VHA's transformation, let me 
cite a number of facts and figures that attest to the nature of 
the improvement that has occurred:
     VA's now approximately 1,100 sites of care 
delivery have been organized into 22 Veterans Integrated 
Service Networks (VISNs) and these networks are now the 
system's basic operating unit.
     Beginning with about 10 percent of VA patients 
enrolled in primary care in 1994, universal primary care has 
been implemented, as well as universal telephone triage of 
``call centers.'' In a recent survey, almost 90 percent of 
patients could identify their primary caregiver.
     Since September 1994, 54 percent (28,195) of all 
acute care hospital beds have been closed.
     Compared to FY 1994, annual inpatient admissions 
in FY 1998 decreased 32 percent (288,398 fewer admissions), 
while ambulatory care visits increased by 35 percent (10.3 
million increase for a total of 35.8 million outpatient visits 
in FY 1998).
     From October 1994 through September 1998, bed days 
of care per 1,000 patients decreased 62 percent--from 3,530 to 
1,333.
     Cumulative levels of staffing have decreased 12 
percent (25,073) since 1994, even though we provided hands-on 
care to 520,000 (22 percent) more patients in 1998 than in 
1994.
     Ambulatory surgeries have increased from 35 
percent of all surgeries performed in FY 1995 to about 75 
percent of all surgeries now. Associated with this has been 
increased surgical productivity and reduced mortality.
     A new capitation-based resource allocation 
methodology (the ``Veterans Equitable Resource Allocation'' 
system) has been implemented and validated. This has brought 
much needed financial discipline to the system.
     Customer service standards have been implemented, 
customer satisfaction surveys are being routinely performed, 
and management is being held accountable for improving service 
satisfaction. Statistically significant improvements have been 
documented. In FY 1998, 65 percent of all patients, including 
psychiatric patients, reported the quality of their care as 
very good or excellent.
     A pharmacy benefits management program implemented 
in FY 1995, which includes a national formulary, has produced 
an estimated $347 million in annual savings simply on the 
purchase of pharmaceuticals.
     Other elements of a Commercial Practices 
Initiative are yielding tens of millions of dollars of savings 
in the acquisition of medical and surgical supplies, 
prosthetics, equipment and maintenance, renal dialysis, and 
support services. (Indeed, a number of GAO reports have 
documented VA's marked savings in this regard compared to 
Medicare.)
     Over 270 new community-based outpatient clinics 
(CBOCs) have been sited, or are in the process of being sited, 
from savings achieved in other areas. Many of these are by 
contract with private providers.
     Major initiatives have been launched to increase 
care management, end of life care, pain management, use of 
clinical guidelines, and home care.
     A multi-dimensional, process-and outcome-focused 
quality of care accountability framework has been implemented 
to ensure the consistency and predictability of high quality 
healthcare being delivered everywhere in the VA system, and VHA 
has been designated as a national laboratory for healthcare 
quality management by the National Partnership for Reinventing 
Government.
     Universal pre-admission screening and admission 
and discharge planning have been implemented, along with many 
other ``infrastructure'' and processes changes, such as a 
universal semi-smart identification and access card.
     Significant improvements in the quality of care 
have been demonstrated, and in a number of areas, VA's 
performance is significantly better than that of the private 
sector.
    I am proud of these accomplishments and anticipate that VA 
will continue to make significant gains as its transformation 
matures. I believe these changes demonstrate that the 
infrastructure and processes are in place to enable VA to 
successfully meet all Medicare requirements. Training and 
education will be required at our pilot sites so that our 
healthcare providers and administrators become fully 
knowledgeable about specific Medicare requirements. However, 
the success that VA healthcare managers have demonstrated in 
meeting the challenges of the past four years shows that they 
are up to the Medicare challenge. Implementation of the 
demonstration will require us to address a number of important 
administrative issues. HCFA's knowledge and experience in this 
area will be helpful in addressing the issues and setting an 
implementation timeline.
    VA already offers the full range of services that must be 
offered under any Medicare program. The services are available 
either directly at VA facilities or through contractual 
arrangements. VA's contracting authority permits us to provide 
any services that are required and not readily accessible. VA 
has experience in billing third-party insurance companies. 
Through internal reviews we have become aware of some 
shortcomings in our documentation and coding, and we have taken 
aggressive steps to address these concerns. Necessary changes 
will be implemented by September 1999, when we also implement a 
``reasonable charge'' billing structure similar to private 
sector providers. We are able to generate the Medicare required 
UB92's and HCFA 1500's, and implementation of our Decision 
Support System in all our facilities gives us an enhanced 
capability to track costs.
    On the clinical side, we have universal primary care, and 
we practice coordinated care across the entire continuum of 
healthcare services. I believe that in the coordination of 
care, we must manage care, not costs. It is becoming 
increasingly clear that the greatest failure of managed care 
has been that it has focused on managing cost, without actually 
improving care. Too often, managed care companies have 
addressed only the symptoms of the ills that afflict private 
healthcare; they have not addressed the basic pathology of 
fragmented, provider-focused and user-unfriendly services, and 
redundant and excess capacity. So far, managed care has not 
done enough to make care more coordinated, more convenient and 
more coherent (i.e., to manage care so that is actually 
improves outcomes). If we focus on managing care to produce 
higher quality, then costs will decrease, for I believe that 
higher quality care actually costs less.
    The importance of coordinating a patient's entire care is 
one reason that I advocate a Medicare+Choice model for the VA 
Medicare Subvention pilot. Through this model we can be sure 
that we have a well-managed, well-coordinated approach to our 
veterans' healthcare needs. VA's current use of coordinated 
care puts us in an excellent position to successfully operate a 
Medicare+Choice plan. In addition, VA's high proportion of 
elderly mirrors the population that would enroll in a VA 
Medicare+Choice plan.
    The Medicare Subvention pilot which VA and HCFA are 
proposing would be for dual-eligible veterans who are 
classified as Priority 7--that is, those veterans with higher 
incomes who have no service-connected disability or a service-
connected disability that does not entitle the veteran to 
compensation. If VA is unable to treat all eligible veterans 
because of resource constraints, Priority 7 veterans would be 
the first to be cut off from care. Although we have been able 
to offer healthcare services to this group of veterans in FY99, 
this is subject to an annual determination. The authorization 
for these veterans to bring their Medicare benefits to VA would 
assure them access on a continuing basis and improve equity of 
access during the duration of the demonstration. In many cases, 
Medicare subvention would allow VA to treat veterans who 
otherwise would be getting either fragmented care or no 
healthcare at all.
    Historically, the Priority 7 veterans have made up a 
relatively small proportion of those who use the veterans 
healthcare system--about 3 or 4 percent. Although the numbers 
have increased in recent years and continue to increase under 
our current enrollment process, the proportion of users is 
still slightly below 10 percent. Costs associated with the care 
of this group of veterans have been less than that of the 
higher priority groups since they tend to use fewer and less 
costly services. Nevertheless, both VA and HCFA realize that 
appropriated dollars have been spent to provide care for this 
population. For this reason, the Memorandum of Agreement 
contains a provision to establish a Level of Effort (LOE) which 
represents what VA has spent in the past to deliver Medicare-
covered services to these veterans. Payment from the Medicare 
Trust Funds will be made only after the LOE is reached. 
Although it is difficult to make precise LOE calculations, the 
estimates will be based on the cost data that are available. 
Because of the relatively small numbers of Priority 7 users, VA 
does not anticipate that the LOE will represent a substantial 
amount at any one pilot site.
    Our MOA includes only a Medicare+Choice pilot. This is the 
direction that the VA healthcare plan has been heading over the 
past three years and one which offers the best opportunity to 
provide comprehensive, coordinated care for our enrollees. This 
is also the mode of healthcare delivery which Medicare 
beneficiaries have increasingly chosen. The adoption of this 
approach does not preclude establishing a pilot in a rural 
area. I believe a rural site should be given consideration as 
it could provide some valuable insights for both VA and HCFA. 
Adding a fee-for-service demonstration would limit VA's ability 
to coordinate all care that veterans receive. A fee-for-service 
demonstration entails additional data requirements. 
Implementing both a fee-for-service and coordinated care 
demonstration would introduce greater administrative 
complexities and resource requirements.
    Several things should be said about the various concerns 
that have been raised in regard to risk to the Medicare Trust 
Funds as a result of the pilot. First, this is a limited pilot. 
The MOA is proposing that the demonstration be limited to eight 
sites or two Veterans Integrated Service Networks (VISNs). In 
addition, the cap on the reimbursement from the Trust Funds is 
$50 million annually. This does not mean that the risk to the 
Trust Funds is $50 million, as this represents compensation for 
services that VA is providing and that Medicare would have to 
reimburse any other Medicare provider to provide healthcare 
services to these same veterans.
    Moreover, there are provisions in the MOA that provide 
additional protections to the Trust Funds. In addition to the 
``cap'' on Medicare payments, there is the level of effort 
calculation, an annual reconciliation with the LOE, an end of 
year reconciliation to assure accurate payments and data 
calculations, and a mechanism to make adjustments or even end 
the pilot if ongoing analyses and evaluations identify 
unacceptable costs to either VA or to the Trust Funds. Beyond 
these safeguards, the payment, which VA has agreed to accept, 
represents a discount to the Trust Funds compared to private 
sector rates. The rate is based on 95 percent of Medicare 
normal payments to the private sector, along with exclusion of 
DME, IME, DSH, and two-thirds of capital. Compared to the 
annual national Medicare Trust Funds expenditures, I believe 
the VA Medicare Subvention proposal does not represent a threat 
to the Trust Funds, but offers an opportunity to realize 
savings. I am confident that both VA and Medicare will gain 
from this pilot experience. Our MOA includes requirements for 
several studies by the GAO and independent evaluators to 
measure the actual impact to the Trust Funds.
    In conclusion, I want to assure the Committee of the 
importance that the Secretary and I place on this Medicare 
Subvention initiative. VA will devote its energy and resources 
to ensuring that the pilot is a success--for both VA and 
Medicare--and that every veteran who comes to VA will receive 
quality healthcare. I am confident that both VA and HCFA have 
the desire, resourcefulness and expertise to work together as 
partners to achieve the objectives that are embodied in the 
Memorandum of Agreement and in the VA Medicare Subvention 
pilot.
      

                                

    Chairman Thomas. Thank you, Doctor.
    Dr. Garthwaite, what is the mission of the Veterans 
Administration?
    Dr. Garthwaite. We have four statutory missions, to provide 
high-quality health care to veterans, to produce research, and 
education, and to back up the Department of Defense in the 
national disaster medical system.
    Chairman Thomas. That's a statutory answer, but if you were 
to go out and tell someone why we still have a Veterans 
Administration, what is that the Veterans Administration is 
supposed to do that would justify a separate, Cabinet-level 
department status?
    Dr. Garthwaite. I think that gets to the issue raised by 
Mr. Stark as well.
    Chairman Thomas. Oh. Does it? Appreciate the observation.
    Dr. Garthwaite. I believe that there is a unique VA system 
for several very important reasons. One is that veterans have a 
higher proportion of certain diseases that are not well covered 
in the private sector.
    Chairman Thomas. Now how would that be addressed by your 
argument that this proposal was going to go to Priority 7, who 
are higher income, nonservice-disability veterans?
    Probably not meet that test, don't you agree?
    Next reason you would tell someone why there is a separate 
Cabinet-level department for veterans would be what? And if you 
catch my drift, you are going to have trouble finding a second 
one that justifies high-income, nonservice disability, as your 
reason for continued existence as a separate department at the 
Cabinet level.
    So why should you be separate? Running a separate health 
care system for people who otherwise will be getting health 
care, and are in fact doing both HMOs outside and, where 
convenient, using the VA, and they have no service-based 
disability at all.
    What is the justification for your continued separate 
existence or entering into an arrangement which draws those 
people who would otherwise be mainstreamed by choice into 
sustaining your system, which in terms of the core reason for 
its existence ought to be to help those people, in my opinion, 
to help those people who went in harm's way, sometimes not by 
their own choice, who have no wherewithal to get health care 
elsewhere because this society promised them we would take care 
of them and/or their disability is clearly service related?
    Yet virtually the entire thrust of your testimony, 
including the gratuitous fee-for-service option that you just 
said you would have no problem with, means what you are trying 
to do is run a parallel health care system with no rationale.
    And now I agree completely with my colleague from 
California. There is no reason for us to run, finance, or 
maintain a socialist system for higher income, nonservice-
disability folk who just happen to have been veterans.
    Dr. Garthwaite. If I could make a point about that, I 
believe we maintain the system for the people you describe, for 
those that are lower income and for those that have 
disabilities related to the service of their country. As we do 
that, we are required to maintain a level of services through 
both cost and doing enough services to maintain quality. It is 
easier to run that system and maintain the services that aren't 
provided in the private sector if we have enough patients going 
through the system to maintain its vigor.
    Chairman Thomas. All you got to do is just open your door 
and let anybody use the hospitals that chooses to use them so 
that you could compete with all the other hospitals. Then you 
could get--if you have quality, people will come to your door.
    But I have a really difficult time understanding how you 
are going to meet the mission of low-income, service-disabled 
veterans with a fee-for-service program. I mean, that group is 
the antithesis of folk who would be able to make use of a fee-
for-service program.
    Dr. Berenson, where is HCFA? The last time I think we 
talked, you folks were not real wild about a fee-for-service 
aspect for this, that we were looking at a coordinated care 
structure.
    Dr. Berenson. Well, we feel very strongly that it would be 
a mistake to proceed on a fee-for-service demonstration, that 
would be administratively very difficult. But more importantly, 
the emphasis of Dr. Kizer and what's happened in the last few 
years with the VA has been to promote coordinated care. It is 
consistent with the Medicare+Choice Program.
    And so we would feel very strongly that it is important 
that we demonstrate a Medicare+Choice-type approach and not a 
fee-for-service one.
    Chairman Thomas. Thank you. And I know you referenced it in 
your testimony, Dr. Garthwaite, that the VA has some 
shortcomings in its billing and accountability. And obviously 
we are going to have the GAO up in a minute, and I think that 
is probably, that is kindest way to put as I can think. There 
are some shortcomings.
    The real problem that a number of us have is your ability--
not that you wouldn't do it--but your ability to demonstrate 
that you would not take precious Medicare money and support 
higher income, nonservice-disabled veterans and reduce quality 
care elsewhere just to maintain what I clearly hear from you is 
an outreach program to try to keep people tied to the VA so 
that that Cabinet-level department can have a reason for being 
in existence.
    One of the concerns a number of us have is that the VA is 
headed in the direction of the Department of Agriculture, where 
every bureaucrat there has a farmer and one dies they cry 
because that means you may have to reduce the department. It 
doesn't make any sense for you folks to argue, in my opinion, a 
fee-for-service without the ability to show where every dollar 
that you currently spend is spent for Medicare-eligible 
veterans and how any dollar that we or HCFA transfers to you, 
would not displace one of those dollars.
    Now, how do you mean to respond to the GAO's criticisms, 
because, frankly, I believe unless you believe otherwise that 
the DOD criticisms are at least equally valid as applied to the 
VA. Or do you believe that you have a better accounting system 
than the DOD?
    Dr. Garthwaite. By the end of this fiscal year, we will 
have fully introduced a decision-support system by TSI and in 
every one of our medical centers, which gives us a 
significantly better handle where each dollar is spent and on 
which patients and for which services.
    We have been implementing this over the course of several 
years. Several of our networks are already up. And each of our 
facilities is entering data at the current time.
    I believe that we will be in a good position to begin to 
meet those needs. Data are always an issue for us, but I think 
we get better every day. And I think the DSS will help us do 
that. It has been a significant part of our negotiations, how 
to do the documentation of that data as well.
    Chairman Thomas. I will tell the gentleman, using the 
analogies, by the time this is off the ground, that is one of 
the reasons folks are required to do preflight checks, so that 
you don't see if you have oil pressure when you are off the 
ground. I will tell you that, clearly, one of the preflight 
checks will be whether or not you can have a clear ability to 
determine where costs are, costs centers and dollars allocated, 
before you start rolling down the runway.
    And it will not be a congressional decision. It will be 
accounting experts telling us that you in fact are able to do 
that which you cannot do now. We will not, if I have anything 
to do about it, go forward with the program that you hope you 
will have in place at the time it starts, the kinds of checks 
and balances that the GAO report says that you ought to have.
    The gentleman from California.
    Mr. Stark. Mr. Chairman, before I inquire of the witnesses, 
could I inquire of the Chair to see if our understanding is the 
same?
    Chairman Thomas. If I can respond.
    Mr. Stark. My understanding is that this bill, that I guess 
we are going to consider for a demonstration, has a $480 
million cost, for about 480 over 5 years and about $1.8 billion 
over 10 years, in that neighborhood. Are we on the same page?
    Chairman Thomas. No.
    Mr. Stark. OK.
    Chairman Thomas. And this was last year's bill. We don't 
have that yet.
    I believe the Senate's was about $200 million. I believe 
ours was around $300 million.
    Mr. Stark. Million over 5 years?
    Chairman Thomas. Yes.
    Mr. Stark. OK. And we don't have a pay-for as yet, is that 
right?
    Chairman Thomas. There is no bill. We had a pay-for in the 
last Congress, and, as the gentleman well knows, we will have a 
pay-for in this Congress. That is one of those preflight checks 
that are required.
    Mr. Stark. That leads me to my questions. I have a VA study 
that suggests that approximately--this is 1996 data, but I 
presume it hasn't changed a whole lot--in 1968 we had about 
60,000 VA patients over 65 who were also enrolled in Medicare 
HMOs. OK. They are going to the Veterans Administration for 
treatment but they are also at the same time enrolled in 
Medicare HMOs, which are paying the capitated rate for care.
    The VA says that the services that the VA provided to these 
veterans cost--and should have been covered by the HMOs--cost 
the VA $146 million. I don't know whether the Chair is 
following me or if witnesses are following me, but we are, the 
government is already paying because these veterans are 
Medicare beneficiaries, we are paying for their HMO premium. 
And yet they are coming back to the VA for treatment, which the 
HMO should give them. And somewhere--and these are VA's 
figures--about $146 million is falling through the cracks.
    My question to the witnesses is, Dr. Garthwaite, is this a 
close approximation? And if it is, why aren't we collecting or 
billing the managed-care companies for this money?
    Dr. Garthwaite. I am clearly aware of the study-analysis 
that you indicated. Yes, I think that with some nuances and 
discussions we are having with HCFA about the implications of 
this and what further things we can do about it, I would say it 
is probably pretty accurate. Currently, we rely on the veterans 
to tell us if they have additional insurance. So some do; some 
don't.
    Where we have worked out arrangements with HMOs in one or 
two places now in the country, we have been able to bill them 
successfully. But mostly we haven't without a prepaid agreement 
or arrangement with HMOs. We bill all other insurers for 
services rendered under our medical care cost recovery for 
nonservice-connected conditions. I think it is a major issue 
that we have coordination of Federal benefits.
    Mr. Stark. If we required that that be done, that would 
take care of paying for this, for a good part of this bill, 
would it not?
    Dr. Berenson, does HCFA have a problem with this?
    Dr. Berenson. Yes. Our staff is actually working with 
Elliot Fisher and his colleagues, the group who wrote the 
study, where we provided some comments back, where we think 
there may be some methodologic problems, but we are not 
disagreeing with the thrust of the study. Dr. Kizer and I had 
initiated some discussions to try to sort of figure out what is 
going on here, but I think it is a legitimate area that we have 
to pursue.
    Mr. Stark. And there is no procedural reason that we--do 
you need legislation to do this or this--I think we may hear 
from GAO later that we don't.
    Dr. Berenson. No. I don't believe so.
    Mr. Stark. You need encouragement. [Laughter.]
    Dr. Berenson. Let me just note that there is a general 
issue that we are trying to understand now with regard to the 
Medicare+Choice Program. Recently, the Inspector General issued 
a report that showed that a number of beneficiaries, when they 
moved back from Medicare+Choice to fee-for-service have very 
high rates of hospitalization. In this situation, when they 
have concurrent, dual eligibility, they may be electively going 
to the VA hospital on their own for surgery or maybe something 
else is going on related to the incentives at the managed-care 
plan.
    We are engaging in a survey on the first issue to try to 
figure out why beneficiaries are dropping out of plans and 
getting hospitalized in fee-for-service, and we really do need 
to understand whether the beneficiaries are exerting their 
choice to do this or whether something else is going on that is 
more of concern to us.
    Mr. Stark. I have a second pay-for, Mr. Chairman, if this 
one doesn't work. And that is, I assume, Dr. Garthwaite, that 
you are no longer treating any veterans from the early American 
Indian wars.
    Dr. Garthwaite. I believe that is true.
    Mr. Stark. Because, even though they may have lost those 
battles, they found a way to provide pharmaceutical 
prescriptions to about, I don't know, 250 million prescriptions 
a year, and they are able to sell these drugs at the same rate 
you're able to buy them. The Indians are entitled to purchase, 
under the Federal Supply Schedule, I think is the technical 
term, and because they can't resell them at a profit, they are 
charging a script fee of about $9. And, we don't know how much 
they are making. This is the Pequot Tribe, I believe, in 
Connecticut. Yes.
    Now, but for the noneligible, because they also can't sell 
at your low rate to nonfederally eligible, which is mostly 
Medicaid beneficiaries, but they are doing such a good job and 
have such a deep discount that they are able to buy at the HMO 
discount rate, which is also substantially below what we have 
to pay for these prescriptions.
    What about the VA taking a page out of the nations that you 
defeated and going in to provide pharmaceutical drugs? I mean, 
we are going to help you, is what you are after, help the 
veterans. How about you helping us, and opening up--you have a 
great pharmaceutical staff. You provide prescriptions, you 
purchase them, you are experts in it. You have got all the 
pharmacists on staff. The extra overhead of your operating a 
mail-order prescription for other Medicare beneficiaries 
wouldn't be very much, would it?
    Dr. Garthwaite. We would be happy to look at that. 
Absolutely.
    Mr. Stark. And if you made $9 a prescription, that could 
all go toward caring for us veterans. And nonveterans, like my 
mother, would be able to get a lower price on her 
prescriptions. We would have a win-win situation. You would 
make a lot of money providing a great service, and we would 
give you extra money for us veterans. And I just--if the 
Indians could do it, I surely would like to think that the 
Veterans Administration could do it.
    Will you take that under consideration?
    Dr. Garthwaite. Absolutely.
    Mr. Stark. Thank you, Mr. Chairman.
    Chairman Thomas. I thank the gentleman. If we could slip a 
lottery card into each one of those--[laughter]--then you would 
have matched the Indians across-the-board.
    Do we want to go vote and then come back, because the bell 
just rang? It's 10 o'clock. Somebody could get a short five in, 
but you have been shorted on your questions a number of times. 
Let's go vote and come back. Good. Because we may have some 
followup questions.
    The Subcommittee stands in recess.
    [Recess.]
    Chairman Thomas. The Subcommittee will reconvene.
    Does the gentleman from Louisiana wish to inquire?
    Mr. McCrery. Thank you, Mr. Chairman.
    Gentlemen, the various veterans subvention proposals are 
intended to have no net effect on Medicare spending. Is that 
correct?
    Dr. Berenson. We are working very hard to make sure both by 
requiring a level of effort from the Veterans Administration 
and putting a cap on how much money would be spent that we do 
not open up the trust fund to unanticipated spending.
    Mr. McCrery. And the Secretaries of HHS and VA are supposed 
to come up with ways to monitor the spending so that we might 
know what the effect is, is that correct?
    Dr. Garthwaite. Correct.
    Dr. Berenson. Yes. That is right, and that is where we will 
take advantage of what we are learning with the DOD subvention, 
about the need to have the accounting systems in place. But 
that is absolutely right.
    Mr. McCrery. Well, what happens if the Secretaries conclude 
that the program or the demonstration has caused Medicare 
spending to increase?
    Dr. Garthwaite. There is a cap. It would come into effect 
as well. There is a $50 million cap.
    Dr. Berenson. We would also have a very formal 
reconciliation process that would affect--each year we will 
find out what the amount is. And there would have to be a 
reconciliation and a reimbursement.
    Mr. McCrery. When you say reconciliation, you mean the 
capitation amount would be adjusted?
    Dr. Berenson. Yes. That is basically right.
    Dr. Garthwaite. I think, if you really think about this, 
the veterans who would opt to use this could go somewhere else 
and have that care as well. We are offering a discounted rate. 
So it would have to be someone who otherwise would choose not 
to use it because it wasn't convenient and now the VA made it 
much more convenient, or some other reason.
    Mr. McCrery. Most of the proposals that we are dealing with 
require the VA to develop data systems to measure those 
Medicare-covered services. Have you got some opinions as to the 
existing data infrastructure at VA facilities?
    Dr. Garthwaite. Is that for me?
    Mr. McCrery. Either.
    Dr. Garthwaite. Yes. As I mentioned previously, we have 
been hard at work putting into place what we call a decision 
support system, which is a computerized tracking system that 
relates costs and services and individual patients.
    So we have that in place in all our medical facilities and 
by the end of this year should have a full year's worth of 
data. The next real big issue is getting all of our staff 
trained to use the data to make decisions. And so that is what 
we are hard at work doing now.
    There are some networks that are very far ahead in this and 
do it very well. One of the criteria for picking places for the 
pilots will be that they can demonstrate that they can use the 
DSS system and that it is fully operational in their 
facilities.
    Dr. Berenson. Yes, from our point of view, we think these 
systems are going to be able to accept a capitation payment, 
account for level of effort, and collect the basic information 
we need to run something like the Medicare Choice Program, 
which has encounter data from hospitals which have diagnoses so 
that we can do the risk adjuster.
    But the kind of systems that would be needed for fee-for-
service billing for us, we don't think that the VA has 
capabilities of--right now. We are actually working with 
Trailblazers, one of the intermediaries from Texas, to try to 
help the VA get up to speed in claims processing so that they 
can bill Medigap insurers for services rendered. And we think 
it will be awhile before they will have the capabilities, which 
is another reason why we have concerns about a fee-for-service 
demonstration. We are working with the VA, so that they will be 
ready for a capitation-type demonstration.
    Mr. McCrery. Thank you. Thank you, Mr. Chairman.
    Chairman Thomas. Does the gentleman from Washington wish to 
inquire?
    Mr. McDermott. Thank you, Mr. Chairman. Listening to you 
and the Ranking Member and now the gentleman from Louisiana, 
maybe it is time to have a further discussion about a single 
health care financing system.
    Chairman Thomas. The gentleman's time has expired. 
[Laughter.]
    Mr. McDermott. I'd like to throw a little bit more wider 
net on this whole question of how you count. Until 1997, the 
AAPCC, and I am speaking here for Minnesota, Washington, and 
Oregon. The AAPCC, adjusted average per capita cost, rate was 
determined on the basis of 5 years' worth of historical per 
capita Medicare fee-for-service reporting.
    Medicare PCC rates also included provisions for medical 
education payments and for disproportionate share. With the 
advent of the amendments of 1997 and the balanced budget, we 
de-linked those AAP rates from local fee-for-service spending 
and set a minimum 1998 AAPCC floor rate of $367. We also made a 
number of changes to guarantee the minimum annual rate 
increases of 2 percent.
    We also carved out the medical education component, and 
unfortunately, these changes do not address what I think is the 
fundamental inequality in the calculations which Minnesota, 
Washington, and Oregon face, believing that no good deed goes 
unpunished.
    I am here to raise our cause again, as I did on the 
Medicare Commission. The trouble with that methodology is that 
it punishes cost-efficient markets with low AAPCC rates, with 
lower increases, while higher priced, inefficient markets 
receive increases well above the average.
    In 1997, Group Health of Washington, Seattle, from which a 
lot of the early data for which--from which people drew the 
conclusion that managed care was a good place to go. So we are 
looking at something that has been there for 50 years.
    Their average rate increase was 3.8 percent. The national 
per capita increase was 5.9 percent. So they have been 
efficient for 50 years and they are punished, not getting the 
national average when you have these changes.
    Counties across the State in my State have had increases as 
high as 8.9 percent, while for Group Health in King County, 
it's 3.8 percent. Currently, every county in Washington State 
is below the national average. King County is 8 percent, the 
national average. And the Medicare beneficiaries who are 
eligible for both Medicare and military Medicare coverage 
sometimes receive their care at military facilities. We have a 
number of them.
    Now that Madigan has been selected as a Medicare subvention 
demonstration, this will occur even more often than in the 
past. And to simplify the AAPCC calculation for all fee-for-
service costs of a given county are divided by the Medicare 
beneficiaries in that county.
    You take the cost, you take how many beneficiaries you are 
going to divide into it, and that is how you come up with it. 
It is a pretty simple--about a fourth grade division problem.
    The computation of that AAPCC includes all Medicare 
beneficiaries in the denominator. Everybody who is over 65 gets 
counted. However, since the facilities provide care to 
military-eligible beneficiaries, they do not report Medicare 
costs to HCFA. The numerator, that is the amount that is spent, 
excludes any cost Medicare beneficiaries receive in those 
facilities.
    And this results in an understatement of the AAPCC rates 
wherever there are military health care facilities. States and 
counties with significant military medical presence receive 
disproportionally low rates due to the methodological error in 
my view. While the national average AAPCC understatement is 3 
percent, in King County, it is 4.3 percent, and in Pierce 
County, which is Takoma, where Madigan is, 2.6 percent.
    Now, I would like to know what the administration's views 
are about revising that methodology, both for Medicare 
beneficiaries and the cost for all the Medicare services, 
including those that receive fee-for-service at the military 
facilities in that calculation.
    We hear all this talk about HMOs backing out because they 
are not getting enough. We hear that they are paid 6 percent 
too much. And there is all this stuff. But I know what the 
costs are that you don't cover in my State.
    I would like to hear how you are going to deal with this. 
Or do you intend to?
    Dr. Berenson. Specifically, in the demo or more generally?
    Mr. McDermott. More generally.
    Dr. Berenson. More generally----
    Mr. McDermott. The demo is going to be just another 
reflection of the problem.
    Dr. Berenson. Yes. Well, and more generally, I guess the 
President's proposal has a new approach to competitive pricing 
amongst the plans in which there will be adjustments for the 
cost, and that really should take into the kind of factor you 
are raising. In fact, this is relevant to the discussion we had 
earlier in not really knowing whether we are double paying or 
whether we are underpaying because of underreporting into the 
county rates that we are paying.
    I guess what I would say is that this is a real issue. The 
President's got a new proposal on the table this year for the 
Medicare+Choice plans for counties that have been getting lower 
increases because they have been efficient. In fact, it is 
going the other way. The blends in the BBA finally kicked in 
this year. So many of the counties that you have referred to 
are in fact getting much higher rate increases than the 2 
percent, which the high- payment counties get.
    It may not have been soon enough for a number of the HMOs 
who are announcing today whether they are staying in or not. It 
is unfortunate that it took to the third year of the blend for 
it to begin to have an impact. It is a very complicated issue, 
but I think we now need to look at the new proposal from the 
President to see if we can solve it in that context.
    Mr. McDermott. I think that you point out the real problem, 
is that today is D-Day. All the HMOs announce today whether 
they are going to participate or not. And my reading from our 
area has got a lot of people pulling out.
    They simply can't do it under the capitation rate that has 
been given to the northwest. And that, as I say, good deeds go 
punished. In this case, while we continue to put money out in 
other places, which may or may not have needs that they can 
justify, we actually can show that our costs are not being 
paid.
    I think it is going to be a big problem. If you don't deal 
with this--this would give us a little bit more, or a little 
bit more recognition of what is going on.
    Dr. Berenson. Well, again, for this year, because the blend 
kicked in really at the third year of the 5-year transition, 
there are some counties getting as much as 12 or 14 percent. 
One county is actually getting an 18-percent increase for next 
year's rates. Again, they are starting off of a low base, and 
it may not be fast enough for some of the plans.
    And I agree with you; it looks like there are going to be 
significant numbers of pullouts. And it looks like they will be 
occurring in the those counties that are not going to be in the 
high-payment counties as far as we can tell. That is a real 
problem.
    Mr. McDermott. I think, Mr. Chairman, we need really to 
look at this issue because it would be unfair to say that the 
Medicare+Choice Program isn't working if we have these kind of 
methodological things that are built in. And I think you and I 
and everybody wants the Medicare system to function 
efficiently, and I think we need to look at some of the 
wrinkles in it that we may or may not have created--not 
intentionally, perhaps, but we just didn't know what the 
consequences would be.
    Thank you.
    Chairman Thomas. The gentleman's points, I think, are very 
well taken. Unfortunately, when you run a bureaucratic 
structure with administered prices, you only get it right by 
accident. And clearly, in your area, it hasn't been done 
correctly.
    The idea that somehow under that government structure, you 
are now going to create a competitive model in which the 
government defines what a competitive price is, also in my 
opinion, does not get to the heart of the problem.
    The premium support model that the Medicare Commission 
offered was an integrated plan in which the real labor costs 
and medical utilization costs were incorporated in the price 
negotiated between plans, not the government with its 
arbitrarily drawn number and a plan, which is the reason for a 
number of plans dropping, but between plans on the real cost of 
offering the health care benefits would produce not only a 
product that would make that managed care more available in 
more areas of the country but, according to the actuaries, over 
the long haul, because of the competitive pricing model of the 
premium support and the ability for beneficiaries to choose a 
price in which there would be no out-of-pocket cost to them in 
a particular area, would wind up also with a savings to the 
system.
    That, in part, as a public service announcement in 
opposition to the gentleman's single-payer system.
    Mr. McDermott. Well, I tried, you know, not to get into 
going someplace you didn't want to go.
    Chairman Thomas. Nor did I, because I do want to reinforce 
the gentleman's position because this is exactly the problem 
with the current Medicare+Choice situation, compounded by an 
area that has had a history of HMO, compounded by significant 
military presence. In other words, the government is now paying 
twice, and they aren't even being counted once, which is the 
real problem with the way in which the structure is currently 
arranged.
    If, in fact, we could resolve the HMO-VA overlap payment 
problem, I think the first thing we ought to do with the money 
is direct it to those areas that have been denied because the 
money was counted twice and was not credited once. That would 
be an immediate corrective factor. For example, a 22-percent 
understatement is unfortunately typical of government, but 
absolutely unacceptable.
    Does the gentleman from Minnesota wish to inquire?
    Mr. Ramstad. Well, Mr. Chairman, the solution, certainly, 
it is not just Washington State and Oregon that's been so 
negatively impacted by the AAPCC formula, but also the third 
State which the gentleman mentioned, Minnesota, my own State.
    Senator Durenberger, who served with such distinction in 
the other body for so long and was truly expert on health 
care--still is expert on health care--used to say, and it is 
still literally true, that a Medicare beneficiary can receive 
2\1/2\ Medicare surgeries at the Mayo Clinic for every one in 
Dade County, Florida. That is just crazy. And the formula has 
been an unmitigated disaster, not for Washington State, Oregon, 
but also for Minnesota.
    Today, Mr. Chairman, Medica in Minnesota pulled out of this 
market. Several months ago, Blue Cross pulled out of this 
market. We are headed for an unmitigated disaster if we don't 
take the admonition of the Chairman and make some fundamental 
reforms, and I hope that we can address this problem sooner, 
rather than later, because too many--the health care of too 
many people is at stake. And we don't want our veterans to be 
similarly impacted.
    Thank you, Mr. Chair.
    Chairman Thomas. Any additional Members wish to inquire? 
The gentlewoman from Florida.
    Mrs. Thurman. Mr. Chairman, I want to get a little bit of 
feeling--I have two VA facilities in the district, one in Lake 
City and one in Gainesville.
    Chairman Thomas. Would the gentlewoman indicate whether 
they are VA hospitals or----
    Mrs. Thurman. They are hospitals.
    Chairman Thomas. The hospitals, not outpatient clinics?
    Mrs. Thurman. They are hospitals. Then I do have, though, 
several outpatient clinics as well, some of which have just 
come online, others have been established for a very long 
period of time.
    But one of the things that I am hearing from veterans in 
the district, and first of all, let me compliment you; I don't 
know of another program that has worked as well as our 
outpatient. And the biggest problem is they are growing too 
quickly and we don't have doctors enough to take care of the 
people we have. And it has been successful; it's a good thing.
    But where my concern lies, particularly as I know we are 
increasing in the VA patients, this personnel, we are hearing 
an awful lot of complaints about being understaffed. Because we 
have opened up ambulatory centers, we are not getting people to 
come from one area of the country down to another.
    Can you shed some light on that for us? And is there 
anything we can do to help in this? I know we closed some beds, 
but personnel are not getting to those places that are opening 
and we have a larger caseload, which was part of what we were 
doing with the changes.
    Dr. Garthwaite. You ask a very complex question, or at 
least the answer is complex. There are issues in moving money 
as we have changed the way we deliver care, moving personnel 
and money. When you go from inpatient to outpatient, you have 
to take inpatient-trained nurses and get them trained for 
outpatient. And if you go from a central location, a large 
hospital in one place, and try to go out in the community, then 
you have to either reduce personnel in one area and then add 
those resources back in another area.
    We have had some budgetary uncertainties with regard to 
next year's budget impacts, with regard to inflation. There are 
some specific issues in Florida which we have just discussed 
and have a recommendation to add some resources back to 
Florida. We are working that through the department based on 
hurricane and some other formula adjustments.
    So I think, for any given situation, it might be hard to 
dissect out which specific thing was happening. There are also 
issues across the country, which are local with regard to 
recruitment of specific types of personnel.
    So, in many areas of the country it is hard to find an 
orthopedic surgeon, it may be hard to find an occupational 
therapist in another area. And so, it is a combination of those 
factors, I believe.
    Mrs. Thurman. If we do Medicare subvention, is it going to 
impact us even more? And are we looking at this as any plan 
that we are putting together because it is wonderful to be able 
to expand, but it is a whole other thing to be able to provide 
the service.
    Dr. Garthwaite. Correct. Theoretically, we would be 
reimbursed in proportion to the amount of service that we 
provided. The challenge for us managerially would be any lag in 
ramping up capability if that were to be the case.
    The pilots are limited enough; it shouldn't be a problem, 
because I think there is always a little buffering capacity in 
any large system. But that would be something that we hoped to 
learn from the pilots and to guard against----
    Dr. Berenson. Yes. I was just going to say, we have in mind 
about eight sites.
    Dr. Garthwaite. Right.
    Dr. Berenson. And so I think we would pick some places that 
have or are in a better situation and more likely to succeed 
initially.
    Mrs. Thurman. Let me ask one other question. And this is 
another issue, and it may be taken care of because of some of 
the expansion. And I am not sure this is true. But the Medicare 
subvention would not go for veterans that are disabled and 
service connected.
    Dr. Garthwaite. Right.
    Mrs. Thurman. So, in some States, where there is a larger 
population of those veterans being served, which in fact 
Florida is, and we have looked at those numbers, and yet is 
still serving thousands of veterans--we have a huge veteran 
population, as you well know. So when we talk about the dollars 
from Medicare that would help us with this issue with people, 
but at the same time there will be hospitals in this country 
that will not get the same dollars because they won't be able 
to tap in to Medicare because they are serving many of these 
people but they are going to be opening up for some other 
areas.
    To keep in mind that it is a huge--and even our Veterans 
Affairs Committee in Florida has talked about this but there 
really has not been much or anything significantly done to help 
us understand and what potentially is going to happen there.
    Maybe more of a statement than a comment.
    Chairman Thomas. No, but I tell the gentlewoman that it 
goes directly to the heart of a significant portion of the 
controversy in that, with the historical mission of veterans 
hospitals having been geriatrics, and that they have been 
centers of excellence in dealing with burns, paralysis, combat-
related shock and the fatigue aspects, even substance abuse in 
a combat-related situation. And so, if in fact, we are going to 
maintain a separate system in which we are now funding $18 
billion a year, the concern would be that if your primary focus 
is going to be a fee-for-service to these higher income, 
nonservice-related-disabilities veterans for Medicare purposes, 
it is clear that we will have to change many of the fundamental 
medical directions of the veterans to be able to really 
adequately provide the service the folks are looking for--when, 
in fact, a lot of Medicare-eligible veterans are just looking 
for places just to fill their prescription drugs and get 
outpatient services more along the geriatric line than they are 
along the veterans line.
    That is why a number of us have real concerns about the 
thrust the VA is taking now. It looks like it is simply going 
for the bucks instead of meeting what had been a historical 
commitment by a Veterans Administration for America's veterans.
    Mrs. Thurman. Mr. Chairman, to get to the point of the drug 
issue, and I do believe that they are looking, because as 
almost all older Americans are looking for a place to buy drugs 
at a lower cost----
    Chairman Thomas. No. Actually, I meant substance abuse, 
but----
    Mrs. Thurman. Oh, OK. I thought you meant pharmaceuticals.
    Chairman Thomas. No. I meant substance abuse.
    Mrs. Thurman. OK. Thank you for clearing that up.
    Chairman Thomas. In fact, we ought to just talk about drugs 
and we really ought to talk about prescription drugs, although 
there----
    Mrs. Thurman. Well, if you would like to talk about 
prescription drugs, we have a great DOD that we are hoping will 
implement something for mail-order across the country, 
particularly for those veterans who are not around those VA 
hospitals and can't get their----
    Chairman Thomas. Well, there are a number of initiatives 
that, unfortunately, may not move forward with the departure of 
Dr. Kizer, which is too bad.
    Now, a final question before we move to the other panel, 
unless any other Member has an inquiry: Dr. Garthwaite, 
notwithstanding your testimony, which is standard testimony 
that this will save money, everybody else tells us, CBO 
included, that we have got to include $300 to $400 million for 
a 5-year demonstration. I think that fairly up front 
demonstration of the fact that nobody else believes it is going 
to save money. And you don't have the ability to determine 
where and how you are spending your money now, but you remain 
adamant that it is going to save money.
    I am more than willing to give you the parting shot on how 
you resolve these apparent discrepancies.
    Dr. Garthwaite. I would like to, first, just say that we 
are saddened by Dr. Kizer's departure, as you have expressed, 
and would note that I worked side-by-side with him for the last 
5 years and that we have carefully attempted to recruit people 
who had a common vision with Dr. Kizer's vision. And we believe 
that to the greatest extent possible, we will be continuing on 
in the same direction that Dr. Kizer set out for the 
department.
    Chairman Thomas. I just tell, Doctor, that I am tempted to 
quote a former vice presidential debate phrase about the fact 
that I know Dr. Kizer, and so forth, and so forth.
    Dr. Garthwaite. I didn't suggest that I was Dr. Kizer, but 
I do suggest that the team that Dr. Kizer helped put together 
was recruited based on a common set of shared principles and 
hopes for the future.
    I would just say that we have capped the amount of money 
that can move. We have really not added a new entitlement to 
these individuals; we have just added another place they can 
take that. If it is more convenient to their home, I suppose 
people who otherwise weren't making use of their Medicare would 
now make use of their Medicare. But, I think we need to do the 
pilot experiment to find out, and I think we have set up 
mechanisms by which we will be able to measure whether or not 
that is true.
    Chairman Thomas. Well, and, of course, that is the proof of 
the pudding. I want to thank both of you very much.
    And Dr. Berenson, as we move forward, especially with the 
provisions that the Senate has now included in the bill, we are 
going to need a lot of help to make sure that what the House 
and the Senate arrives at is in fact a sound proposal and it 
can be tested.
    Thank you both very much.
    And the next panel, once again a return engagement, for our 
friend, Dr. Bill Scanlon, is the Director of the Health 
Financing Systems at the General Accounting Office, and I 
believe as a resource, Mr. Backhus, who is the Director of the 
Veterans Affairs and Military Health portion of the U.S. 
General Accounting Office.
    Dr. Scanlon, your written testimony will be made a part of 
the record. You can address us in any way you see fit in the 
time that you have.

   STATEMENT OF WILLIAM J. SCANLON, PH.D., DIRECTOR, HEALTH 
  FINANCING AND PUBLIC HEALTH ISSUES, HEALTH, EDUCATION, AND 
 HUMAN SERVICES DIVISION, U.S. GENERAL ACCOUNTING OFFICE; AND 
  STEPHEN P. BACKHUS, DIRECTOR, VETERANS AFFAIRS AND MILITARY 
   HEALTH CARE ISSUES, HEALTH, EDUCATION, AND HUMAN SERVICES 
            DIVISION, U.S. GENERAL ACCOUNTING OFFICE

    Mr. Scanlon. Thank you very much, Mr. Chairman, and Members 
of the Subcommittee.
    We have actually submitted a joint statement, the two of 
us, and I would like to summarize it for you this morning. 
Stephen Backhus is the director of GAO's Veterans Affairs and 
Military health care area. And staff from both his area and my 
area are engaged in the evaluation of the DOD subvention 
demonstration as is mandated by the Congress in the Balanced 
Budget Act.
    Subvention, as you have indicated, has the opportunity to 
provide an alternative for delivering accessible and quality 
care to certain Medicare-eligible veterans and military 
retirees, hopefully, without increasing the cost of services 
for VA or DOD or to Medicare.
    It would allow both of those departments to supplement some 
appropriated funds with Medicare payments, and Medicare may 
gain if it is able to pay DOD and VA less than it would pay 
private providers and as long as Medicare is not paying for 
services that VA and DOD previously would have covered.
    These favorable outcomes are not guaranteed. There have, as 
we have heard this morning, been various proposals made for VA 
subvention. And in our written statement, what we have done is 
summarize them for you. What I would like to do today is focus 
on some of the lessons for the proposed VA subvention that have 
emerged from the implementation of the DOD subvention.
    First of all, the complexity of establishing a Medicare 
managed-care organization strongly suggests that sufficient 
lead time be provided to implement a VA demonstration. It took 
17 months for all the sites in the DOD demonstration subvention 
to become operational, despite considerable efforts by HCFA and 
DOD to expedite the process, and despite DOD's experience with 
managed care gained from its TRICARE Program. It would be 
reasonable, therefore, to allow 12 to 18 months to start a VA 
subvention demonstration, especially since VA, unlike DOD, does 
not have an established relationship with HMOs that can take on 
important tasks.
    Second, with subvention, adequate payment methods are 
needed to protect the Medicare Trust Funds. Under the rules 
established for the DOD demonstration, Medicare does not pay 
DOD until it has provided as much care as it had historically 
for Medicare-eligible retirees. The reason for this is to 
ensure that DOD wasn't paid twice for the same care, once from 
its appropriated funds and again by Medicare.
    While proposals for VA subvention include a similar 
requirement, the DOD experience suggests that operationalizing 
this concept involves considerable challenges. Most important 
is likely the development of an accurate estimate of VA's level 
of effort, which is needed to reduce the chance that Medicare 
would overpay or underpay.
    Third are data systems. They are critical to both the 
determination of payments and the management of programs. A 
prompt and thorough review of them with an eye to the needs of 
subvention would be immediately beneficial. DOD's data systems 
proved to be very problematic in calculating DOD's level of 
effort and may further hinder the demonstration sites' ability 
to manage care delivery.
    In addition, a number of issues are unique to the VA. VA 
needs to determine how to make subvention attractive to 
sufficient numbers of eligible veterans. At this point, all 
veterans can enroll to receive any of VA's comprehensive 
benefits, and they still remain eligible to use any Medicare-
covered services available from private providers.
    These veterans may see no advantages to being locked into a 
subvention managed-care plan and having to forego using other 
providers for some Medicare services. VA also needs to take 
steps to serve subvention enrollees without unduly crowding out 
other higher priorty veterans.
    In conclusion, subvention holds significant potential for 
giving veterans an additional option for health care coverage, 
for giving VA some additional funds, and possible for saving 
Medicare money.
    However, these outcomes are uncertain. The DOD's experience 
indicates that there are challenges to overcome to assure 
subvention is a success. Adequate planning and a soundly 
conceived design, sufficient, accurate and timely information, 
as well as adequate and appropriate incentives are all key 
elements. VA would increase its chances of successfully 
achieving subvention's goals by taking advantage of DOD's 
experience.
    This concludes our statement. We would be happy to answer 
any questions you may have.
    [The prepared statement and attachments follow:]

Statement of William J. Scanlon, Ph.D., Director, Health Financing and 
Public Health Issues, Health, Education, and Human Services Division, 
U.S. General Accounting Office; and Stephen P. Backhus, Director, 
Veterans Affairs and Military Health Care Issues, Health, Education, 
and Human Services Division

    Mr. Chairman and Members of the Committee:
    We are pleased to be here today as you review proposals for 
a Medicare subvention demonstration for the Department of 
Veterans Affairs (VA). The stated goal of VA subvention is to 
provide an alternative for delivering accessible and quality 
care to certain Medicare-eligible veterans, without increasing 
the cost to Medicare or to VA.
    Several VA subvention proposals resemble in many respects 
the current Department of Defense (DOD) demonstration. 
Medicare-eligible military retirees who enroll in the DOD 
subvention program are able to get Medicare-covered services 
from DOD. Similar proposals would allow certain Medicare-
eligible veterans to use their Medicare benefits at VA 
facilities. Subvention could allow VA, like DOD, to supplement 
its funds with Medicare payments. In principle, by paying VA a 
discounted rate, the Medicare program might save money, so long 
as it does not pay for services that VA previously would have 
covered.
    Although the DOD and the proposed VA demonstrations are 
relatively small, full-scale subvention programs could 
significantly affect the Medicare trust funds and the costs of 
VA and DOD. The 3-year DOD demonstration involves about 30,000 
enrolled retirees and limits Medicare payments to DOD to, at 
most, $65 million a year. By contrast, a nationwide DOD 
subvention program could potentially involve substantially more 
in Medicare payments. In VA, the potential size of a nationwide 
program may be even greater. There are about 9 million veterans 
aged 65 and older, and nearly all of them are covered by 
Medicare.
    Favorable outcomes for Medicare, VA, and DOD, as well as 
military retirees and veterans \1\ are not, however, 
guaranteed. For DOD subvention, the Balanced Budget Act of 1997 
(BBA) authorized a large-scale, 3-year demonstration and 
directed GAO to evaluate the demonstration's effects on access 
to care, quality, and the cost to DOD and to Medicare. We have 
recently reported on data quality and payment issues affecting 
the DOD demonstration and the potential for Medicare 
overpayments.\2\ We will be providing you with further interim 
reports on aspects of the demonstration. Our final results will 
not, however, be available until several months after the 
demonstration ends in December 2000.
---------------------------------------------------------------------------
    \1\ Military retirees are those who have completed a military 
career and are entitled to retirement pay. Veterans include all who 
served and who did not receive a dishonorable discharge.
    \2\ Medicare Subvention Demonstration: DOD Data Limitations May 
Require Adjustment and Raise Broader Concerns (GAO/HEHS-99-39, May 29, 
1999).
---------------------------------------------------------------------------
    Our testimony today focuses on a possible VA subvention 
demonstration and on issues that VA subvention raises. 
Specifically, we will compare the 1998 House Ways and Means 
Committee bill on VA subvention with the Senate Finance 
Committee proposal and discuss the unique characteristics of VA 
health care that bear on subvention. We will also discuss 
lessons learned from the design and early implementation of the 
DOD demonstration that may be relevant to the proposed VA 
demonstration.
    In summary, the 1998 House Ways and Means bill and the 
current Senate Finance proposal are similar in that both 
provide for time-limited subvention demonstrations in which 
Medicare pays VA at a discounted rate to care for veterans who 
are aged 65 and older and who are covered by Medicare. However, 
there are also significant differences between the two 
proposals. For example, the Ways and Means bill includes a 
permanent program for veterans in rural areas who have low 
incomes or severe service-connected disabilities, while the 
Finance proposal would establish two demonstration models--fee-
for-service and coordinated (managed) care--for lower priority 
veterans. Under any proposal, subvention holds several 
challenges for VA. It will be challenged to attract to a 
subvention coordinated care program veterans who currently 
enjoy a generous VA benefits package. VA will also need to 
strengthen its billing systems to operate a fee-for-service 
model and will need to ensure that veterans' access to 
services--whether or not they are in the demonstration--is not 
reduced. Learning from DOD's experience to date, VA will need 
sufficient time to implement a subvention demonstration--
officials at every DOD site told us that establishing the 
demonstration was more difficult than they had expected. DOD's 
experience also shows that VA payment methods must be carefully 
designed and implemented both to protect the Medicare trust 
funds and to promote cost consciousness and efficiencies at VA 
demonstration sites. Finally, as DOD's experience underscores, 
sound data systems are essential for managing and evaluating a 
subvention demonstration.

                               BACKGROUND

Medicare

    Most military retirees aged 65 and over are eligible for 
Medicare--a federally financed health insurance program for the 
elderly, some disabled people, and people with end-stage kidney 
disease. Medicare covers about 39 million beneficiaries and 
spends about $212 billion a year. Benefits include hospital, 
physician, and other services such as home health and limited 
skilled nursing facility care. The Health Care Financing 
Administration (HCFA) administers Medicare and regulates 
participating providers and health plans.
    Medicare was originally set up to reimburse private 
providers on a fee-for-service basis and to allow Medicare 
beneficiaries to choose their own providers without 
restriction. A newer option \3\ allows Medicare beneficiaries 
to choose among private, managed care health plans. Currently, 
17 percent of beneficiaries use Medicare managed care. In fee-
for-service Medicare, beneficiaries must pay a share of the 
costs for various services. Most Medicare managed care plans 
have only modest beneficiary cost-sharing, and many offer extra 
benefits, such as prescription drugs.
---------------------------------------------------------------------------
    \3\ BBA expanded this option to include plans in addition to health 
maintenance organizations and labeled it ``Medicare+Choice.''

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VA Health Care

    VA has traditionally provided a comprehensive array of 
health services to veterans with service-connected disabilities 
or low incomes. Since 1986, VA has also offered health care to 
higher-income veterans without service-connected disabilities. 
However, those veterans must make copayments for services. 
Overall, VA currently registers in its health care system over 
15 percent of the total veteran population of 25 million, with 
the remaining veterans receiving their health care through 
private or employer health plans or other public programs. Many 
of the veterans that VA serves also get part of their care from 
other sources, such as DOD, Medicare, and private insurance. 
The Administration has requested $17.3 billion for VA medical 
care in fiscal year 2000. To make up the differences between 
appropriated funds and projected costs, VA estimates that, by 
fiscal year 2002, it can derive almost 8 percent of the medical 
care budget from other sources, such as reimbursements from 
health insurers and, if subvention is enacted, from Medicare.
    Since the early 1990s, VA has shifted its focus from 
inpatient to outpatient care. At the same time, it implemented 
many of the principles of coordinated--that is, managed--care, 
emphasizing primary care, although many veterans use VA for 
only a portion of their care. In 1995, VA accelerated this 
transformation by realigning its medical centers and outpatient 
clinics into 22 service delivery networks and empowering these 
networks to restructure the delivery of health services.
    In 1996, the Congress passed the Veterans' Health Care 
Eligibility Reform Act that established, for the first time, a 
system to enroll veterans. Enrollment is, in effect, a 
registration system for veterans who want to receive care. 
Currently, registration is continuous--a veteran may choose to 
register at any time and start receiving services--although VA 
has the authority to limit the enrollment period if it chooses. 
The law established seven priority groups, with priority group 
1 the highest and priority group 7 the lowest. Priority group 1 
includes those veterans with the most severe service-connected 
disabilities; priority group 7 includes veterans whose incomes 
and assets exceed a specified level and who do not qualify for 
VA payments for a service-connected disability. Priority group 
7 veterans must agree to make copayments for health services.
    Each year, VA determines, on the basis of available 
resources, which priority groups will be eligible for VA care 
in the coming year. Currently, VA serves all seven priority 
categories, but in the future, that will not necessarily be 
true. Veterans in any of the priority groups are eligible for 
the VA Uniform Benefits Package, a comprehensive array of 
services ranging from hospital care to home health.
    Veterans remain free to get some or all of their care from 
other private or public sources, including Medicare. VA, on the 
other hand, is committed to serving all veterans within the 
priority groups it has designated for that year, although 
capacity varies by region.

DOD Health Care

    DOD received an appropriation for military health care of 
almost $16 billion in fiscal year 1999. Of that, an estimated 
$1.2 billion is spent on the 1.3 million Medicare-eligible 
military retirees. Under its TRICARE program, DOD provides 
health benefits to active duty military personnel and 
retirees,\4\ but most retirees lose their eligibility for 
comprehensive, DOD-sponsored health coverage at age 65. DOD 
delivers most of the health care needed by active duty 
personnel and military retirees through its military hospitals 
and clinics. DOD gives priority for care at military facilities 
to active duty personnel and to dependents of active duty 
personnel and those retirees under 65 who are enrolled in DOD's 
managed care program. Retirees who turn 65 and become eligible 
for Medicare can get military care if space is available 
(called space-available care) after higher priority 
beneficiaries are treated.\5\ Some military facilities have 
little or no space-available care.
---------------------------------------------------------------------------
    \4\ We use ``retirees'' to refer to military retirees, their 
dependents, and their survivors.
    \5\ A partial, unofficial exception to this rule occurs at teaching 
hospitals, where aged retirees with serious, persisting conditions are 
treated on an ongoing basis, in large measure so that medical residents 
can be given the clinical experience required.
---------------------------------------------------------------------------
    Since the early 1990s, DOD health care has shifted toward 
managed care. DOD established its own managed care plan, 
TRICARE Prime, which uses military providers, supplemented by a 
network of civilian providers. However, it is not available to 
retirees aged 65 and over.\6\ TRICARE Prime covers services of 
military physicians as well as civilian network providers by 
drawing on DOD's appropriated funds and premiums and copayments 
charged to some enrollees. In TRICARE Prime, DOD generally 
organizes the delivery of care on managed care principles--for 
example, an emphasis on a primary care manager for each 
enrollee. DOD has gained considerable experience with managed 
care, but it relies heavily on contractors to conduct 
marketing, build a network of providers, and perform other 
critical functions.
---------------------------------------------------------------------------
    \6\ Active duty members of the armed forces receive their health 
care through TRICARE Prime. Dependents of active duty military can 
choose among three DOD-run health plans that include TRICARE Prime. 
Retirees under 65 can pay a premium and ``buy in'' to TRICARE Prime.
---------------------------------------------------------------------------
DOD Subvention Demonstration

    BBA established a 3-year demonstration of Medicare 
subvention, to start on January 1, 1998, and end on December 
31, 2000. Within BBA's guidelines, DOD and HCFA negotiated a 
``memorandum of agreement.'' The agreement stated the ways in 
which HCFA would treat DOD like any other Medicare health plan 
and the ways in which HCFA would treat it differently. The 
agreement also spelled out the benefits package and the rules 
for Medicare's payments to DOD. After DOD and HCFA signed the 
agreement, they selected six demonstration sites. DOD estimated 
that it would be able to serve nearly 30,000 of the 
approximately 125,000 people eligible for both Medicare and 
military health benefits in these areas.
    The subvention demonstration made DOD responsible for 
creating a DOD-run Medicare managed care organization for 
elderly retirees. This pilot health plan, which DOD named 
Senior Prime, is built on DOD's existing managed care model. By 
enrolling in Senior Prime, Medicare-eligible military retirees 
obtain priority for services at military facilities--an 
advantage compared to nonenrollees. Senior Prime's benefit 
package is ``Medicare-plus''--the full Medicare benefits 
package supplemented by some other benefits, notably 
prescription drugs.
    BBA provides the basic rules by which, under the 
demonstration, Medicare pays DOD. First, Medicare is to pay DOD 
the Medicare managed care rate, less several adjustments and a 
5-percent discount for each enrollee. Second, in order to 
receive Medicare payments, DOD must at least match its baseline 
costs, or level of effort--that is, devote at least the same 
resources as it did in the recent past to providing care to 
retirees aged 65 and older. The memorandum of agreement 
translates these guidelines into a complex payment system. For 
example, it allows any demonstration site to earn monthly 
interim payments if its Senior Prime enrollment exceeds a 
threshold derived from the baseline level of effort. But at the 
end of the year, DOD can only retain a portion of these 
payments if that year's costs for the six sites together exceed 
the baseline level of effort.\7\
---------------------------------------------------------------------------
    \7\ These issues are discussed in greater detail in GAO/HEHS-99-39.
---------------------------------------------------------------------------

      PROPOSALS FOR VA DEMONSTRATION DIFFER BUT SHARE KEY FEATURES

    Although several proposals for a VA Medicare subvention 
have been developed recently, our analysis focuses on two: a 
House Ways and Means Committee bill (H.R. 3828) passed by the 
House in 1998 and a proposal adopted by the Senate Finance 
Committee on June 24, 1999. While similar in key respects, the 
two proposals also differ in several significant ways, 
including whether a VA subvention would include a fee-for-
service model and whether a permanent program--in addition to a 
demonstration targeting certain veterans--would be established 
in rural areas for higher priority veterans. The two proposals 
share certain features, including a managed care model (which 
the Finance Committee calls ``coordinated care'') for at least 
part of the subvention proposal, a demonstration targeting 
lowest priority veterans, and a cap on annual Medicare payments 
to VA under the demonstration.

H.R. 3828 (105th Congress)

    The House bill is distinctive in authorizing both a 
permanent subvention program and a demonstration project:
    -- The permanent subvention program would follow a managed 
care (or coordinated care) model. It would target VA's higher 
priority level veterans (for example, people with severe 
service-related disabilities or low incomes) in rural areas and 
could be continued indefinitely. It would begin with up to 
three sites, but more sites could be added after 2003. VA would 
have to maintain its level of effort--its historical resource 
commitment--to the targeted group of veterans in the sites. 
Medicare payments would be capped at $50 million the first 
year, $75 million the second year, and $100 million in 
subsequent years. No cap would apply if the program were 
expanded to more sites, subject to certification by the 
Department of Health and Human Services' (HHS) Inspector 
General (IG) that VA could measure its costs in a reasonably 
reliable and accurate manner.
    -- By contrast, the demonstration would be limited to 
veterans in the lowest priority level for VA care at no more 
than three sites and would deliver services for not more than 3 
years. One site would have to be an area previously served by a 
military health facility shut down in the military base closing 
process, known as the BRAC (Base Realignment and Closure) 
process. Unlike the permanent program, no rural sites are 
required. Medicare payments to VA under the demonstration would 
be capped at $50 million annually. The bill would allow 
requiring veterans to pay enrollment fees and copayments that 
could vary with income.
    For both the demonstration and the permanent program, the 
House bill emphasizes that, if practicable, VA should use its 
outpatient clinics. However, VA could still contract with 
private providers and health plans to supply services as 
needed.

The Senate Finance Proposal

    The scope of the Finance Committee proposal \8\ is in some 
respects narrower--its demonstration is limited to the lowest 
priority veterans (priority group 7, higher income veterans who 
mostly lack a service-connected disability). In other respects, 
it is broader--authorizing a test of two subvention models. The 
proposal would require VA to establish, first, a coordinated 
care model of subvention and, a year later, a fee-for-service 
model. It would authorize a VA subvention demonstration in, at 
most, eight sites but would require equal numbers of sites for 
the two models. The proposal would allow up to a year for 
implementing each model, which would operate for up to 3 years 
after enrollment started.
---------------------------------------------------------------------------
    \8\ The text of this bill is not yet available. Our description is 
based on a summary, prepared by Committee staff for the markup on June 
24, 1999, of the proposal contained in the Chairman's Mark. The 
Committee adopted the proposal.
---------------------------------------------------------------------------
    Medicare's rules for paying VA would resemble those in the 
DOD subvention demonstration: To guard against the same VA care 
being paid for by both VA appropriated funds and Medicare, the 
proposal would require VA to demonstrate maintenance of its 
effort on behalf of the demonstration population. HCFA would 
pay VA for the care of veterans in the demonstration only after 
VA exceeded its historical spending, or level of effort, for 
higher-income veterans.

Common Features of the Two Proposed Demonstrations

    The House bill and Senate proposal share certain common 
elements. In each, a VA subvention demonstration would include 
a managed care (or coordinated care) model and serve certain 
higher-income \9\ veterans (effectively, priority group 7) who 
are Medicare beneficiaries
---------------------------------------------------------------------------
    \9\ Those who exceed VA's income thresholds for cash benefits. For 
example, the current threshold for a single veteran without dependents 
is $22,351.
---------------------------------------------------------------------------
    --for a limited time period--3 years,
    --in a limited number of locations, and
    --in compliance with Medicare rules that HCFA applies to 
the private sector (although HCFA could waive rules that were 
inappropriate for VA).
    Regarding Medicare payments to VA,
    --HCFA would pay VA at 95 percent of the applicable 
Medicare rate paid to private providers or health plans--less 
certain exclusions, such as payments for disproportionate share 
hospitals and graduate medical education;
    --HCFA payments to VA would be limited to a predetermined 
annual amount, such as $50 million; and
    --VA must meet its previous level of effort in providing 
services to Medicare-eligible veterans.
    (For a more extensive comparison of the two proposals, see 
app. I.)

   VA DEMONSTRATION WOULD FACE CHALLENGES CONCERNING PARTICIPATION, 
                          BILLING, AND ACCESS

    A proposed VA demonstration holds several challenges. 
First, veterans may see no advantage in enrolling in a 
subvention managed care plan because everyone eligible for the 
demonstration currently has both VA and Medicare benefits. 
Second, VA's past difficulties in billing insurance companies 
suggest that VA may have difficulty billing Medicare for 
services provided to veterans. Finally, if subvention enrollees 
prove to be heavy users of VA services, they may crowd out or 
limit the access of other, higher priority veterans.
    For VA, an important issue to consider is whether veterans 
would enroll in a subvention managed care plan that would not 
give them significantly more services than they currently 
receive from VA and that would restrict their freedom to use 
other providers. Priority group 7 veterans-the only ones 
eligible for a subvention demonstration-can now obtain all 
services in VA's Uniform Benefits Package (although not always 
in a timely manner). Like Medicare, VA benefits cover a broad 
range, including inpatient and ambulatory medical and surgical 
care, certain plastic surgery, and durable medical equipment. 
VA benefits are particularly strong, compared to Medicare, in 
mental health care, comprehensive rehabilitative care and 
services, preventive services, and respite care. The VA benefit 
also--unlike Medicare--covers drugs. Copayments are generally 
no greater than under Medicare fee-for-service. Additionally, 
veterans who are eligible for Medicare can also get care from 
non-VA providers--either under fee-for-service or through a 
managed care plan--whereas, under subvention, members would be 
locked out of other Medicare plans and providers. If it needed 
to make subvention benefits more attractive, VA could either 
reduce copayments or increase benefits, but these actions would 
increase VA's costs.
    In the future, however, VA benefits, as well as the number 
of priority groups served, may be reduced. Paradoxically, the 
less generous the VA package for all veterans, the greater 
their incentive to participate in the demonstration because 
that would be the only way they could obtain the full range of 
VA care. VA is authorized to reduce its Uniform Benefits 
Package and stop serving lower priority veterans, including 
priority group 7. VA officials tell us that, due to resource 
constraints, VA may not serve priority group 7 veterans in the 
future and may reduce the benefits covered under the benefits 
package. If this happens, these priority group 7 veterans could 
only get VA services through a subvention demonstration and, 
hence, would probably be more likely to join the VA Medicare 
subvention demonstration.\10\ Furthermore, some VA officials 
have suggested to us that, to give priority group 7 veterans a 
reason to enroll, it may be necessary to exclude them from VA 
services--except through the demonstration.
---------------------------------------------------------------------------
    \10\ Since many veterans obtain only part of their care from VA, 
this still might not be sufficient incentive.
---------------------------------------------------------------------------
    Current proposals for a VA subvention demonstration, such 
as the Senate Finance Committee's, permit both managed care and 
fee-for-service sites. Of the two, fee-for-service appears to 
be easier to implement because it only requires VA to submit 
claims for covered services to HCFA for payment. It does not 
require the veteran to join a VA-operated managed care plan and 
forego access to other providers. However, in the past, VA has 
had difficulty in collecting from insurance companies because 
its bills have not had enough detail (for example, diagnosis, 
service, procedure, and individually identified provider).\11\ 
While VA is moving toward a system that will more closely 
approximate private sector billing procedures, its success 
remains to be seen.
---------------------------------------------------------------------------
    \11\ See VA Medical Care: Increasing Recoveries From Private Health 
Insurers Will Prove Difficult (GAO/HEHS-98-4, Oct. 17, 1997).
---------------------------------------------------------------------------
    The greatest concern in a VA subvention program--either 
coordinated care or fee-for-service--is that subvention 
enrollees could consume so many services that veterans in 
higher priority groups would be crowded out or their access to 
care restricted. This concern is particularly great in the case 
of VA, both because of its constrained resources and its 
current policy of not denying care to any veterans. VA's budget 
has been essentially flat for the last 3 years, and the 
President's budget proposes the same amount for medical care in 
fiscal year 2000 as was appropriated to VA for fiscal year 
1999. However, VA has not only restructured and moved resources 
from inpatient to outpatient care; it also increased the number 
of veterans served and is considering several expensive new 
initiatives, such as a hepatitis C program. One result has been 
pressure on resources and, in some areas, increased waiting 
times for appointments. Furthermore, according to its policy, 
VA does not deny care to any veteran, although veterans may 
have to wait longer to obtain the care. In the short term, if 
subvention absorbed more resources than a medical facility had 
available, waiting times for appointments would probably 
increase or care could be limited to certain facilities, which 
might be inconvenient for some veterans. It is unclear how much 
of an impact increases in waiting times or other types of 
decreased access would have on enrollees in the demonstration. 
VA would probably try to ensure that access was maintained for 
demonstration participants, since their continued participation 
increases VA resources.

       PROPOSED VA DEMONSTRATION CAN BENEFIT FROM DOD EXPERIENCE

    Taking account of DOD's experience in establishing a 
subvention demonstration could strengthen proposals for a VA 
demonstration. In particular, DOD experience shows that 
implementation is difficult and that enough time should be 
allowed to undertake the numerous steps needed to get a 
demonstration started. Furthermore, an adequate payment method 
is essential to protect the Medicare trust funds, and payment 
rules need to be as simple and straightforward as possible. 
Finally, accurate and reliable data systems are needed to 
manage demonstration costs and health care effectively.
    A detailed discussion of these issues is in appendix II. 
The following summarizes the main lessons from DOD's 
experience.
    --Time needed for implementation should be recognized. 
Officials at every DOD site told us that establishing a 
Medicare managed care organization was more difficult and 
required more effort than they had expected. Months into the 
implementation, they continue to encounter new issues. Even 
though the sites took 13 to 17 months after the legislation was 
passed to establish Senior Prime, hindsight suggests that the 
goals to get it running earlier were unrealistic. If a VA 
demonstration is authorized, it should have 12 to 18 months to 
implement its plans for the demonstration; both VA headquarters 
and sites would need that much time.\12\
---------------------------------------------------------------------------
    \12\ The Finance Committee proposal provides a year for start-up 
and initial implementation of the demonstration. It also would stagger 
the start of the two models: the fee-for-service model would start a 
year after the coordinated care model.
---------------------------------------------------------------------------
    --Payment methods need careful design and oversight. In any 
demonstration of Medicare subvention, adequate payment methods 
are needed to protect the Medicare trust funds. The DOD 
demonstration stipulated that Medicare would not pay DOD unless 
DOD had provided its Medicare-eligible retirees an amount of 
care exceeding its historical level of effort for these 
retirees. Under a VA demonstration, a similar requirement would 
be desirable. An accurate estimate of VA's baseline costs would 
reduce the chance that Medicare would overpay or underpay VA 
under a subvention demonstration.\13\
---------------------------------------------------------------------------
    \13\ The payment rules in the DOD demonstration are, at least in 
principle, adequate for the short term but would be undesirable for a 
longer-term program. A different payment method, with more 
understandable rules and viable for the longer term, would be need to 
be developed if the DOD demonstration were extended.
---------------------------------------------------------------------------
    DOD and HCFA also encountered difficulties due to (1) the 
complexity of the Medicare payment rules for subvention, (2) 
the definition and measurement of baseline costs, and (3) 
ambiguity about what sites could earn and whether earnings 
would be distributed to the sites. As a result of these 
factors, many DOD site managers and physicians have largely 
disregarded the uncertain gain in financial resources from 
possible Medicare payments and have focused primarily on 
implementation and patient care issues. Consequently, the DOD 
demonstration may not produce the full savings and efficiencies 
that are expected from managed care.
    DOD's experience can be used in designing a possible VA 
demonstration. First, payment rules should give VA and its 
sites greater certainty about their earnings. Second, if a VA 
demonstration had a level-of-effort requirement, the baseline 
costs should be for a period as close as possible to the start 
of the demonstration. This would minimize problems of comparing 
current and baseline costs. It would also facilitate audits of 
the data. Third, sites should be informed in advance what 
proportion (if any) of their Medicare earnings would be 
retained centrally or regionally.\14\
---------------------------------------------------------------------------
    \14\ VA calls the regional level a Veterans Integrated Service 
Network, or VISN.
---------------------------------------------------------------------------
    --Accuracy of data systems relies on agency commitment. 
DOD's experience shows that data systems are a point of 
vulnerability for a successful and credible program. Inadequate 
data quality can weaken the management of a demonstration and 
raise questions about reports of its favorable results. The 
extent to which data quality would pose an obstacle to a VA 
demonstration depends in part on how the payment rules are 
specified. Good data, consistent across sites, would also be 
needed to manage and evaluate the demonstration. Data quality 
problems would probably vary by site, with some sites having 
better data than others. The types of data systems needed would 
depend in part on the subvention model that is selected. For 
example, in a fee-for-service model, billing systems are 
critical. In general, solving data quality problems requires 
commitment and follow-through of agency management.
    In addition, DOD experience suggests that veterans in a 
potential VA subvention demonstration would benefit if VA were 
to develop a strategy to inform and assist them with their 
options after the demonstration ends. Furthermore, as Medicare 
enrollment in managed care plans is shifting to an annual open 
season, coordinating enrollment in and termination of the 
demonstration with Medicare's open season would help 
demonstration participants.

                        CONCLUDING OBSERVATIONS

    Subvention holds significant potential for giving veterans 
an additional option for health care coverage, for saving 
Medicare money, and for giving VA additional funds. However, 
these favorable outcomes are not guaranteed. We have identified 
several challenges, based on the particular characteristics of 
VA as well as the experience of DOD subvention. If a VA 
subvention demonstration were designed to take account of the 
issues we have raised, its chance for success would be greater. 
In particular, for a managed (or coordinated) care 
demonstration, veterans need to have sufficient incentives--
compared to the standard VA benefits--to enroll. For a fee-for-
service demonstration, VA needs adequate billing systems to 
ensure that it receives the money it earns. And, as with any 
demonstration, it will be important to protect both 
participants' and other veterans' access to care. DOD's 
experience with subvention to date shows the importance of 
sound data systems that consistently and accurately capture 
financial and workload data. It also underscores the importance 
of straightforward and easy-to-understand payment rules and a 
clearly defined level of effort that creates a level playing 
field for both VA and Medicare.
    Mr. Chairman, this concludes our prepared statement. We 
will be happy to answer any questions that you or other Members 
of the Committee may have.

GAO Contacts and Acknowledgments

    For future contacts regarding this testimony, please call 
William J. Scanlon at (202) 512-7114 or Stephen P. Backhus at 
(202) 512-7101. Key contributors to this testimony include Gail 
MacColl, Jonathan Ratner, Dayna Shah, and Phyllis Thorburn.
      

                                

Appendix I

COMPARISON OF 1998 WAYS AND MEANS BILL AND 1999 SENATE FINANCE PROPOSAL 
ON VA SUBVENTION

   Table I.1.--H.R. 3828 (105th Congress) and Senate Finance Proposal
                                 Summary
------------------------------------------------------------------------
                                               Senate Finance proposal
      H.R. 3828 (105th Congress) \1\                 summary \2\
------------------------------------------------------------------------
What would be authorized and who is
 targeted:
  --A demonstration project under which     A demonstration project
   Medicare would reimburse VA for care      under which Medicare would
   provided to veterans enrolled in          reimburse VA for care
   Medicare parts A and B who have no        provided to veterans
   service-connected disability and who do   enrolled in Medicare parts
   not meet VA's low-income threshold.       A and B who have no
                                             compensable service-
                                             connected disability and do
                                             not meet VA's low-income
                                             threshold
  --A program under which Medicare would    ............................
   reimburse VA for care provided to
   veterans enrolled in Medicare parts A
   and B who have service-connected
   disabilities or who are low-income and
   who live far from a VA medical center.
How would health care be delivered:
  To the extent practicable, VA would use   Fee-for-service and
   its outpatient clinics to provide         coordinated care model
   services under the program. VA may        consistent with
   enter into contracts and arrangements     Medicare+Choice
   with entities such as private             requirements
   practitioners, providers, preferred
   provider organizations, and health care
   plans to provide health care under the
   program or demonstration project.
How many health care delivery sites:
  --Up to three demonstration project       --Up to 4 coordinated care
   sites, at least one of which must         sites, at least one of
   encompass the area served by a military   which must be operated in a
   medical facility closed pursuant to a     predominantly rural area
   base closure and realignment act.
  --Initially no more than three program    --Up to four fee-for-service
   sites, but additional sites could be      sites, at least one of
   designated starting in 2003.              which must be operated in a
                                             predominantly rural area
                                            An equal number of sites
                                             would represent each model
When would demonstration or program begin
 and end:
  --Demonstration would begin Jan. 1,       --Coordinated care model
   1999, and end Dec. 31, 2001.              would begin Jan. 1, 2000,
                                             and end 3 years after
                                             enrollment begins or, if
                                             earlier, Dec. 31, 2003
  --Program would begin Jan. 1, 2000, and   --Fee-for-service model
   may continue indefinitely.                would start Jan. 1, 2001,
                                             and end the earlier of 3
                                             years after first
                                             enrollment or Dec. 31, 2004
Would the start of the demonstration or
 program be contingent on VA meeting
 certain requirements:
  Yes. HHS' Office of Inspector General     Yes. HHS' OIG must certify
   (OIG) must certify that VA and HHS have   VA has (1) cost accounting
   established a data-matching program to    systems for each
   identify veterans eligible for Medicare   demonstration site; (2)
   and entitled to VA benefits and have      reliable, accurate, and
   performed such a comparison.              consistent data across
                                             sites; (3) minimized the
                                             risk that VA appropriations
                                             will be used for
                                             demonstration; (4) the
                                             capacity at each site to
                                             provide benefits to
                                             sufficient numbers of
                                             targeted Medicare-eligible
                                             veterans; and (5)
                                             sufficient safeguards at
                                             each site to minimize
                                             reduction in quality or
                                             access to care to veterans
                                             (participating and not
                                             participating in
                                             demonstration.)
How would an eligible veteran participate:
  Participation in the program or           Eligible veterans must
   demonstration project is voluntary.       enroll in the
   Enrollment is implied.                    demonstration. Eligibility
                                             must be verified prior to
                                             receiving services
How much would Medicare pay to VA:
  95 percent of amount paid to              --Under the coordinated care
   Medicare+Choice organization (excluding   model, 95 percent of amount
   payments for medical education and        payable to Medicare+Choice
   disproportionate share and capital-       organization
   related payments to hospitals for        --Under fee-for-service, 95
   inpatient services).                      percent of Medicare rate
                                            Payments for medical
                                             education and
                                             disproportionate share
                                             excluded from
                                             reimbursements; one-third
                                             of capital-related costs
                                             included
Would there be a cap on Medicare
 reimbursements:
  Yes:....................................  Yes; $50 million for each
  --For demonstration project, not more      year of the demonstration
   than $50 million annually for 1999
   through 2001.
  --For program, not more than $50 million
   for 2000; $75 million for 2001; and
   $100 million for 2002 and each
   succeeding year but no cap if program
   expands to additional sites, subject to
   HHS' IG certification.
What would veterans be required to pay:
  For the demonstration project, veterans   (Not specified in the Senate
   may be required to pay enrollment fees    Finance proposal summary.)
   and to make copayments, which can vary
   based on income. Fees and copayments
   must be consistent with Medicare+Choice
   requirements, except as waived by HHS.
Would VA be required to maintain its
 historical level of health care services
 to Medicare eligible veterans:
  Requires that VA and HHS agreement        Yes. VA expenditures at any
   describe how maintenance of effort will   site must exceed an
   be implemented in both the                established baseline amount
   demonstration and program. However,       before Medicare
   only implementation of the program is     reimbursement will occur
   conditioned on VA reporting to the
   Congress and GAO on steps taken to
   prevent reduction in type or amount of
   health care services provided. An
   agreement entered into by VA and HHS
   would determine a base year against
   which VA must maintain overall the
   level of effort for services.
How would baseline level of effort be
 calculated:
  VA and HHS would jointly determine a      (Not specified in the Senate
   base year. VA would report to the         Finance proposal summary.)
   Congress and GAO on its methodology and
   basis for calculating level of effort.
Would Medicare requirements apply:
  Yes. Both demonstration project and       Yes. Coordinated care
   program must meet all requirements of     demonstration must provide,
   Medicare+Choice plans. (HHS may waive     at a minimum, Medicare
   any requirement if waiver reflects VA's   benefits under
   status as a federal agency and is         Medicare+Choice rules and
   necessary to carry out the program or     regulations, unless waived
   demonstration project.).                  by HHS for specific reasons
How would costs to Medicare be monitored:
  GAO would report annually on cost         Annual reconciliation
   increases to Medicare under               process to ensure no
   demonstration or program. If VA and HHS   increase in costs to
   conclude that demonstration or program    Medicare. GAO must report
   has increased Medicare spending, VA       annually on the extent, if
   must reimburse Medicare and adjust        any, to which costs to the
   future Medicare payments.                 Medicare program under the
                                             demonstration have
                                             increased
------------------------------------------------------------------------
\1\ The provisions of H.R. 3828 were incorporated into H.R. 4567, which
  passed the House on Oct. 10, 1998.
\2\ The text of this bill is not yet available. Our description is based
  on a summary of a proposal titled Chairman's Mark: The Medicare
  Subvention Demonstration for Veterans Act of 1999, prepared by the
  staff of the Senate Committee on Finance, June 24, 1999. The Committee
  adopted the proposal on that date.

      

                                

Appendix II

EXPERIENCE IMPLEMENTING DOD SUBVENTION DEMONSTRATION

    In implementing the subvention demonstration, DOD and HCFA 
completed numerous and substantial tasks. DOD sites had to gain 
familiarity with HCFA regulations and processes, prepare HCFA 
applications, prepare for and host a HCFA site visit to assess 
compliance with managed care plan requirements, develop and 
implement an enrollment process, market the program to 
potential enrollees, establish a provider network (for care 
that cannot be provided at the military treatment facilities), 
assign primary care managers to all enrollees, conduct 
orientation sessions for new enrollees, and begin service. The 
national HCFA and DOD offices developed a memorandum of 
agreement, spelling out program guidelines in broad terms. They 
also developed payment mechanisms, and translated the BBA 
requirement that DOD maintain its historical level of effort in 
serving dual eligibles into a reimbursement formula.
    HCFA accelerated review procedures and assigned additional 
staff so that timelines could be met. But these accomplishments 
were not without difficulties, and several issues remain that 
are likely to impact the demonstration's results. These include 
the extent to which payment rules can be made more 
understandable and workable and the extent to which DOD can 
operate successfully and efficiently as a Medicare managed care 
organization.

               Implementation Delayed by Several Factors

    In view of the steep learning curve that DOD faced--it 
started without any Medicare experience--it is not surprising 
that the demonstration did not start on time. BBA was enacted 
in August 1997 and authorized a demonstration beginning in 
January 1998. The first site started providing service in 
September 1998, and all sites were providing service by January 
1999. Officials at all DOD sites emphasized to us that the 
process of establishing a Medicare managed care organization at 
their facility was far more complex than they had expected. 
They noted several issues that caused difficulty during this 
accelerated startup phase, including the following:
    --Delayed notification to sites of their selection for the 
demonstration.
    --Difficulties in learning and adapting to HCFA rules, 
procedures, and terms for managed care organizations. For 
example, DOD had to significantly rework grievance and appeals 
procedures to comply with HCFA requirements.
    --Difficulties due to shifts in Medicare requirements. All 
sites started planning as HCFA was developing the new Medicare 
managed care regulations to replace the rules for the former 
risk contract managed care program. Consequently, the sites had 
to adapt to changed rules when they were published.

                        Capacity and Enrollment

    Sites vary significantly in (1) their capacity for caring 
for Medicare-eligible retirees, (2) how close enrollment is to 
capacity, and (3) what fraction of eligibles has enrolled. This 
variation suggests that potential demand for a subvention 
program is uncertain. Retirees' enrollment decisions reflect 
several factors--some, DOD may be able to influence; others, 
such as the extent of managed care presence in an area, are 
outside its control.
    In establishing their enrollment capacity-which effectively 
became an enrollment target-some sites were more conservative 
than others. Sites' assessment of their resources focused on 
the availability of primary care managers--physicians and other 
clinicians who both provide primary care and serve as 
gatekeepers to specialist care. Additionally, the national 
TRICARE office developed a model to show how many enrollees a 
site would need to meet its level-of-effort threshold and start 
receiving increased resources from subvention, and these 
results were made available to sites. Capacity varied from San 
Antonio, Texas, the largest site with four hospitals and a 
capacity of 12,700, to Dover, Delaware, which provides only 
outpatient care in its military health facility and set its 
capacity at 1,500.
    Many DOD officials and other observers expected that sites 
would be deluged with applications and would rapidly reach 
capacity, but this did not happen. One site has reached 
capacity, but only after several months. Other sites have 
enrolled between 46 percent and 92 percent of capacity as of 
the end of June 1999.
    As table II.1 shows, there is a four-fold difference in 
sites' enrollment as a percentage of eligibles in their 
catchment areas-from 8 percent (San Diego, California) to 36 
percent (Keesler, Mississippi). Several factors may explain 
this variation:
    --Enrollment in other Medicare managed care plans varies 
widely, from one site with a low percentage of eligible 
enrollees (San Diego)--where nearly 50 percent of dual 
eligibles are in private Medicare managed care plans--to two 
sites with higher percentages of enrollees (Keesler and 
Dover)--where no one is in managed care because no plans are 
available.
    --The availability of military care varies. Several sites 
emphasized in their marketing that retirees who did not enroll 
could not count on receiving space-available care. This 
information might spur retirees who prefer military care to 
enroll in Senior Prime. At other sites, space-available care 
was less of an issue. At these sites, prospective enrollees who 
believe that they can continue to receive space-available care 
may not see an advantage in enrollment but rather a 
disadvantage--especially because enrolling in Senior Prime 
locks them out of other Medicare-paid care.
    --Sites may differ in the amount of space-available care 
they have given in the past and in beneficiaries' satisfaction 
with that care. These factors could also affect the decision to 
enroll.
    --Some retirees expressed reluctance to enroll because the 
demonstration is due to end in December 2000. They also noted 
that they did not get information about how, after the 
demonstration ends, enrollees would transition back to space-
available care, traditional fee-for-service Medicare, or a 
Medicare managed care organization.

                                  Table II.1.--TRICARE Senior Prime Enrollment
----------------------------------------------------------------------------------------------------------------
                                                                               Enrolled              Enrolled as
                                                                                 as a                     a
                         Enrolled \1\                           Capacity \2\  percentage    Total     percentage
                                                                                  of       eligible       of
                                                                               capacity              eligibility
----------------------------------------------------------------------------------------------------------------
Madigan Army Medical Center, Wash.:
  3,313.......................................................        3,300      100.4%      21,709       15.3%
San Antonio, Tex.:
  11,638......................................................       12,700       91.6%      41,215       28.2%
Naval Medical Center, San Diego, Calif.:
  2,879.......................................................        4,000       72.0%      35,619        8.1%
Keesler Medical Center, Miss.:
  2,617.......................................................        3,100       84.4%       7,361       35.6%
Colorado Springs, Colo.:
  2,823.......................................................        3,200       88.2%      13,689       20.6%
Dover, Del.:
  685.........................................................        1,500       45.7%       3,905       17.5%
Totals:
  23,955......................................................       27,800       86.2%     123,498       19.4%
----------------------------------------------------------------------------------------------------------------
Note: Status as of June 21, 1999.
\1\ Includes only people who were 65 years old at the beginning of the demonstration.
\2\ Capacity at the beginning of the demonstration. Does not include capacity for those who turned 65 after the
  demonstration started.

                          Managed Care Issues

    The subvention demonstration for military retirees aged 65 
and over is a new endeavor that highlights challenges for DOD 
to operate as a Medicare managed care organization. The first 
is operational--putting in place procedures, organization, and 
staff to deliver a managed care product to these seniors. The 
second is economic and organizational--creating the business 
culture that reconciles delivering services to this illness-
prone population with cost-consciousness.
    DOD's reliance on contractors (like Foundation Health and 
Humana) has enabled it to accomplish key managed care tasks. 
DOD overcame obstacles in launching TRICARE Senior Prime as a 
managed care organization. Specifically, to establish and run a 
managed care plan requires infrastructure-the ability to market 
the plan, enroll members, and recruit, manage, and pay a 
provider network. In building Senior Prime organizations at the 
six sites, DOD has benefited from its TRICARE Prime experience, 
and from its contractors who help with or perform many of these 
tasks.\15\ Sites with well-established TRICARE Prime 
organizations that had worked with the same contractor for 
several years seemed to us to have a sizeable advantage in 
establishing Senior Prime. It is not yet known what effect 
DOD's extensive use of contractors will have on DOD costs for 
Senior Prime. But an expanded, permanent subvention program 
would require establishing and monitoring contractors at many 
new sites. That would make contractor quality, relationships, 
and costs a pivotal and uncertain feature of a potential DOD 
subvention program.
---------------------------------------------------------------------------
    \15\ The DOD sites relied on the TRICARE contractors for handling 
enrollment, claims processing, and network management. They have also, 
to varying degrees, assisted with the application, site visit, quality 
assurance, and utilization review areas.
---------------------------------------------------------------------------

                             Payment Issues

    DOD and HCFA have devised payment rules to meet the 
statutory requirement that Medicare should pay DOD only after 
its spending on retirees' care reaches predemonstration 
levels--that is, after it has met its baseline, or level of 
effort. These rules have added to the difficulty and the 
complexity of the demonstration. Furthermore, they have 
resulted in Medicare payments to DOD not being immediately 
distributed to the sites. As a result, DOD site managers tend 
to view DOD appropriations as the sole funding source for all 
Senior Prime care delivered at military health facilities; the 
managers are likely to consider Medicare subvention payments as 
irrelevant to their plans for dealing with capacity bottlenecks 
or other resource needs in TRICARE Senior Prime.
    The demonstration's payment system requires extensive cost 
and workload data--data that are often problematic and 
difficult to retrieve and audit. It also involves a complicated 
sequence of triggers and adjustments for interim and final 
payments from Medicare to DOD.
    Interim payments are made to DOD for care delivered at each 
site that is above a monthly level-of-effort threshold. A 
reconciliation after the end of the year to determine final 
Medicare payments can result in DOD returning a portion of 
those interim payments if the level of effort for all sites for 
the entire year is not reached. DOD would also return Medicare 
payments if data showed that the demonstration population was 
in better health than that allowed for in the Medicare payment 
rates, or if payments exceed the statutory cap ($50 million in 
the first year, $60 million in the second, and $65 million in 
the third).\16\
---------------------------------------------------------------------------
    \16\ The enrollment targets for each site reflect the statutory 
caps. Consequently, rebates (from DOD to Medicare) as a result of 
payments exceeding the cap are unlikely.
---------------------------------------------------------------------------
    Because of the potential for adjustments after the close of 
the year, the payment rules create some uncertainty for DOD. 
DOD cannot be certain that it will retain all--or even part--of 
the monthly interim payments at the end of the year. DOD has 
been slow to distribute interim payments to the sites, in part 
because some of the money may have to be returned to HCFA. This 
creates great uncertainty for DOD sites and means that care 
under subvention is currently paid for with DOD's appropriated 
funds. The demonstration's payment method differs significantly 
from the Medicare managed care payment system, in which 
payments are made at the beginning of the month to cover care 
delivered during the month.
    Based on experience to date with the demonstration, any 
payment approach for subvention must be even-handed (that is, 
it should favor neither HCFA nor DOD); straightforward and 
readily understandable; and prospective (DOD and its sites 
should receive payment in advance of delivering care to 
enrollees). The demonstration's payment mechanism, which relies 
on level of effort, is functional in the short term--although 
the calculation of level of effort has weaknesses.\17\ However, 
this payment mechanism may not be appropriate over the longer 
term for an extended or expanded subvention program. Moreover, 
a credible long-term payment system should start with a zero-
based budgeting approach: first, determining the cost to DOD of 
providing TRICARE Senior Prime care to dual eligibles and then 
deciding how much care will be provided from DOD's 
appropriations and how much from Medicare reimbursement.
---------------------------------------------------------------------------
    \17\ These issues were discussed more fully in Medicare Subvention 
Demonstration: DOD Data Limitations May Require Adjustment and Raise 
Broader Concerns (GAO/HEHS-99-39, May 29, 1999).
---------------------------------------------------------------------------
      

                                

    Chairman Thomas. Thank you, Doctor. When we were looking in 
the BBA 1997 legislation, at a subvention program, you are 
correct, DOD with Tricare seemed to be, interestingly enough, 
about a year or 18 months or 2 years ahead of the VA Vision 
Program.
    You just testified that it looks as though it needs to have 
another year to 18 months in terms of maturity, but the VA--the 
DOD subvention program has been going for sometime now and they 
still have some inadequacies. How comfortable are we that there 
has been a understanding of the problems with DOD, principally 
on an accounting basis, which the VA would face as well, and 
VA's learning curve in terms of what it needs to show before 
they could have a similar subvention?
    Mr. Scanlon. I think we have learned a lot from DOD in 
terms of the problems we face. We have not always mastered the 
solutions. In fact, in looking at level of effort in the 
reports that we have issued, one of the concerns is to 
ascertain more precisely what level of effort really is, it is 
impossible, given the data that were available and used by DOD 
at the time. And one of the potential options is to change the 
data that are used, to recalculate level of effort using more 
current data.
    We also, I think, have to recognize some very significant 
differences between the VA system and the DOD system. While we 
have learned in principle the importance of data, and accurate 
data, to setting level of effort and to being able to manage 
the program, we are starting out with an entirely different 
environment in the VA in terms of the challenges or the 
barriers or the obstacles that are going to crop up as we try 
to actually implement subvention.
    Chairman Thomas. Did you look at any of the data, because a 
lot of times you have data, but you don't look at it from a 
particular conceptual approach? But, clearly, this joint use by 
people who are otherwise eligible for the VA system in using 
HMOs under a Medicare structure provides us perhaps with a case 
study in choice. Did you find anything that popped out at you 
as to why a Medicare-eligible veteran would use particular 
services from the VA, notwithstanding the fact that they were, 
perhaps, getting the bulk of their medical services from an HMO 
arrangement, so that we could begin to understand what it was 
that they thought the VA had as an advantage? Because, clearly, 
one of the main problems with the VA is that more and more 
people believe that it does not provide a profile of medical 
services that your typical--and especially if the VA 
Administration is focusing on a higher income, nonservice-
related injury veteran--could provide.
    Mr. Scanlon. Mr. Backhus may be able to answer that more 
from the work that they have done, but in terms of subvention 
itself, we are now looking at some of the views of persons that 
enrolled in the DOD demonstration and those who did not enroll, 
and we will be able to have some information on that point, but 
I think not in great detail.
    We do know that for the general enrollee in a 
Medicare+Choice plan, there are times when they do seek 
services outside the plan because they may find the provider 
more convenient, or the plan--legitimately managing their 
care--may say, we do not want to provide you that service.
    Now, in the case of a veteran who is able to get that 
service for free from the VA--as opposed to individuals who 
don't have an additional HMO benefit covering that service--it 
is another factor that may play into that decision to use the 
VA rather than the HMO.
    Mr. Backhus. Mr. Chairman, you----
    Chairman Thomas. If you can go out of plan and it costs you 
nothing, that may be the ideal health plan.
    Mr. Backhus. Mr. Chairman, we have not specifically looked 
at that particular issue; however, I do know that from having 
spoken with many different VA hospital officials as well as DOD 
hospital officials, the same thing happens there by the way. 
There are military retirees who are over 65 who have enrolled 
in and so forth, and so forth. In many cases, they do approach 
the Medicare Choice HMO first for care. They are referred. 
That's where the idea----
    Chairman Thomas. So, in part, it is either a cost shift, if 
you put it in a crass, commercial, economic way, or it is, if 
you don't like what we have to offer, this is an alternative 
available to you?
    Mr. Backhus. Precisely.
    Chairman Thomas. The Senate added fee-for-service, which is 
not part of the DOD subvention. What is your attitude about 
their ability to deal with that issue, if in fact it is 
included, notwithstanding the adamant opposition by the Health 
Care Financing Administration to go to a fee-for-service beyond 
a capitated plan? Can it be done in the same timeframe?
    Mr. Backhus. Well, I don't think it can, no.
    Chairman Thomas. OK. That is more than enough. Thank you.
    Does the gentlewoman from Florida wish to inquire?
    Mrs. Thurman. I am trying to read your reports, since we 
just kind of got it in our packages this morning. So I am 
trying to catch up with this.
    But, particularly, I think on page 8 and 9, where you are 
kind of talking about in the future of VA benefits and what is 
going to happen, can you summarize that for me a little bit of 
what you see happening? I am kind of concerned when we are 
expanding and now we may be excluding and we might be, with the 
Priority 7 and the amount of resources that might be available. 
And maybe is some of it just due to the lack of what we put in 
our budget to take care of some of these issues as we do this?
    Mr. Backhus. Surely. I could try to explain that. VA has 
the authority to enroll as many of the seven priority groups as 
they think they have the resources to provide care for. This 
current fiscal year, fiscal year 1999, VA made the decision 
that they could enroll and provide care to all veterans in all 
seven groups.
    Therefore, that means that every veteran who wants to use 
the VA can enroll and begin immediately obtaining care. VA has 
to decide every year. There are significant concerns that the 
budget request for fiscal year 2000 does not contain sufficient 
money to enroll all seven priority groups for next year.
    It is not clear at this time what that decision from VA is 
going to be, but the implications are that should the VA 
decided to enroll all seven priority groups and finds itself 
with insufficient money to provide care, then the quality of 
that care begins to suffer. Waiting times increase. Particular 
care won't be denied but when veterans inquire and try to seek 
an appointment, rather than perhaps getting something in 30 
days it might be 50, 60, 70.
    There are indications this year, at this time, and in some 
places, veterans are already waiting half a year to get an 
appointment. The crunch for the moment seems to be in primary 
care. We all know that there is plenty of inpatient capacity 
because these buildings are big and were built many years ago 
and it doesn't----
    Mrs. Thurman. Would you say that every place, or are there 
some geographic areas where that may not be true?
    Mr. Backhus. It is clearly varied. Some places are much 
better than others, much more capable than others. There's a 
capacity----
    Mrs. Thurman. Just because of the demographic changes 
within a State?
    Mr. Backhus. That is what has happened. Historical funding 
has pretty much remained constant, yet the veterans, as you 
know, have moved to around the sunbelt, and that resource shift 
hasn't caught up. And the budget has been flat-lined for the 
last several years.
    Mrs. Thurman. The budget issue is one that--when you did 
and looked at this, particularly from the expansion of services 
to all veterans, and then looking at it from the subvention, 
but, just as importantly, as we have expanded into the free-
standing clinics, has that helped reduce some of this waiting 
or is that potentially something that could be helpful if there 
were more of those?
    Mr. Backhus. Those are obviously primary care.
    Mrs. Thurman. Correct. And you had said those were one of 
the larger areas we are having----
    Mr. Backhus. That has increased access tremendously for 
veterans. It has made the health care closer to where they 
live. And it has obviously increased the capacity. It has had a 
significant effect on VA's ability to meet that primary care 
demand. However, that money has to come from somewhere, and at 
the present time we estimate that one in every four dollars, VA 
health care dollars, is spent maintaining these large, huge 
medical facilities that are, in many cases, more than half 
empty.
    Mrs. Thurman. But would you consider these then in that 
context somewhat cost effective for delivery of service?
    Mr. Backhus. Absolutely they are. They appear to be.
    Mrs. Thurman. Thank you.
    Chairman Thomas. Thank you very much. One of the 
difficulties, of course, is that the VA runs a hospital system, 
but hospital folks sometimes are not the people making 
decisions in terms of how resources are used. And of course one 
of the problems is that Congress oftentimes intervenes.
    One of the difficulties is that now that the Senate has 
placed a fee-for-service aspect in what had been a broad-based 
attempt to assist and accommodate, you might look to the fact 
that not all VA hospitals are capable of offering a primary 
care, broad-based health package, and that if there are 
hospitals that are specialty hospitals, they would not be able 
to function in the capacity that a capitated plan would 
envision them to participate.
    And so, I believe there is a degree of motivation in 
including a fee-for-service plan to preserve hospitals that 
otherwise probably should not continue to be open if in fact 
the primary purpose of the Veterans Administration is to 
provide service to veterans who can otherwise not get health 
care service. That clearly has not been the direction.
    The Chair was wrapping up. Does the gentlewoman from 
Connecticut wish to inquire?
    Mrs. Johnson of Connecticut. No, thank you. I will review 
your testimony, though, because it is a subject I am interested 
in--just unfortunate that there is no time my schedule for it.
    Chairman Thomas. That is true, and frankly, this is not the 
first time we have visited the subject. It is probably not 
going to be the last.
    We are very dependent upon your analysis of whether or not 
these departments dealing with billions of dollars can, in 
fact, provide an accounting for the money that they spend. That 
is the key as to whether or not dollars shifted from the 
Medicare Program into either the Department of Defense or 
Veterans Affairs can have an assurance that it is being used 
for the purpose for which we would be providing it.
    And I would continue to rely on you, primarily, the 
Congressional Budget Office, but also the General Accounting 
Office to answer the question, if in fact, this is going to 
save money, how come we have to keep putting money up to pay 
for a program that clearly the accounting folks tell us will 
cost money?
    Thank you very much for your testimony. And the 
Subcommittee stands adjourned.
    [Whereupon, at 12:24 p.m., the hearing was adjourned.]
    [Submissions for the record follow:]

Statement of Benjamin H. Butler, National Association for Uniformed 
Services, Springfield, VA

    Mr. Chairman, The National Association For Uniformed 
Services (NAUS) appreciates the opportunity to present this 
statement concerning Medicare ``VA Subvention.''
    The National Association for Uniformed Services represents 
all ranks, branches and components of uniformed services 
personnel, their spouses and survivors. Our nationwide 
association includes all personnel of the active, retired, 
reserve and National Guard, disabled and other veterans of the 
seven uniformed services: Army, Marines, Navy, Air Force, Coast 
Guard, Public Health Service, and the National Oceanic and 
Atmospheric Administration.
    The overall purpose of NAUS is to support legislation which 
will uphold the security of the United States, sustain the 
morale of the Armed Forces, and provide fair and equitable 
consideration for all members of the uniformed services.

                         Medicare Reimbursement

    The National Association for Uniformed Services supports 
legislation to authorize Medicare reimbursement for heath care 
services provided to Medicare-eligible veterans in facilities 
of the Department of Veterans Affairs. Senator Jeffords has 
already introduced S. 445, which would require a VA Medicare 
Reimbursement Demonstration at 10 geographically disperse 
sites. We would like to see full Medicare reimbursement 
legislation passed promptly for both VA and DoD. If that cannot 
be done we would support a demonstration project. However, the 
longer we delay full implementation the greater the injustice 
to military retirees and eligible veterans.
    We are gratified that there is a growing understanding that 
offering discretionary veterans an opportunity to use Medicare 
to reimburse their VA care creates additional access and can 
actually save Federal tax dollars. NAUS believes this is a 
common sense proposal and deserves immediate enactment. It is 
consistent with efforts to streamline and share Federal 
resources, it is politically feasible, and is an excellent way 
of identifying savings for the Medicare Trust Fund. Study after 
study has shown that military and VA medical facilities provide 
significant savings over commercial medical providers which the 
veterans would otherwise use.
    Some features which we recommend be incorporated into VA 
Medicare reimbursement include:
    Demonstration Phase. Authority to expand the test after 
each 6 month period should be incorporated into the bill. The 
Department of Veterans Affairs Statistical Brief, Projections 
of the US Veteran Population: 1990 to 2010, states that an 
estimated 500,000 veterans die in the United States each year. 
Deaths of U. S. World War II veterans presently account for 
almost 3 of every 4 veteran deaths and are projected to peak at 
380,000 in 2001. A three year demonstration, then a lengthy 
review, could result in a delay of up to five years or more 
before a nationwide Medicare reimbursement program is in place. 
That is too late for these older veterans. They need help now. 
As quickly as cost savings are determined, the program should 
be expanded.
    Cost Sharing. We strongly recommend that cost sharing be 
waived for retired veterans. These veterans who served to 
retirement, many through 3 wars and the 45 year Cold War, were 
promised free lifetime medical care in exchange for a lifetime 
of service (See Exhibit B). With the closure of over 58 
military hospitals, downsized clinics, a chronically 
underfunded Defense Health Program, and cutbacks in personnel, 
hundreds of thousands of retired veterans have been abandoned 
by their employer, the Department of Defense. These veterans 
are the only federal retirees who lose their guarantee of 
employer provided health care at age 65. Many of these veterans 
have purchased ``Medigap'' policies. The VA has the authority 
to bill these policies and we do not object to that. However, 
to require this category of veteran to cost-share is wrong and 
should not be done. If the retired veteran has a ``Medigap'' or 
other policy, continue the current practice of 3rd party 
collections; but if he does not have a policy, then the only 
party billed should be Medicare, not the retired veteran.

                        Third Party Collections

    We strongly support a bill to revise the authorities 
relating to third party collections. We support allowing the 
DVA to keep the amounts collected for services provided by DVA 
medical facilities. Collections should be made at the level 
closest to the point of service for which the charge is made 
and the funds collected, in general, should remain there. This 
would provide an incentive to the facilities to provide 
service, attract patients and to collect for their services. 
The free enterprise system has been proven to be the most 
efficient means of allocating goods and services, certainly far 
more efficient than top down command economics. Collecting 
funds at, or close to, the point of service and leaving most of 
them there to help fund these services, would energize local 
DVA medical facilities, reward efficiency and performance, 
provide incentives that mirror the best results of free 
enterprise and greatly increase the efficiency of and patient 
satisfaction with the DVA hospital system and reduce 
administrative costs. The provisions in the draft bill to 
exclude these funds from any OMB estimates relative to required 
appropriations is absolutely essential, should be rigidly 
enforced, and requires constant vigilance.
    Finally, the National Association for Uniformed Services 
thanks this committee for its support of Medicare 
reimbursement, for holding this hearing and its interest and 
concern for our service members, their families and survivors. 
Mr. Chairman thank you again for giving us the opportunity to 
present this testimony today. I will be happy to answer any 
questions you have.
      

                                

Statement of Paralyzed Veterans of America

    Chairman Thomas, Ranking Minority Member Stark, members of 
the Subcommittee, the Paralyzed Veterans of America (PVA) 
appreciates this opportunity to testify, for the record, 
concerning the participation of the Department of Veterans 
Affairs (VA) in a Medicare subvention pilot program in 
cooperation with the Health Care Financing Administration of 
the Department of Health and Human Services.
    PVA is a congressionally chartered veterans service 
organization, representing over 18,000 members with spinal cord 
injury or dysfunction, whose mission is to be the leading 
advocate for quality health care for our members; promote 
research and education addressing spinal cord injury and 
dysfunction; ensure the availability of benefits earned through 
honorable military service; and to maximize the civil rights, 
opportunities, and independence of our members. As a veterans 
advocacy group, PVA stands ready to support the veteran 
community of more than 25 million men and women to ensure that 
each eligible veteran, and his or her dependents, receive the 
benefits earned through service to this country.
    Our testimony today is an attempt to reflect PVA's broader 
role and interest in preserving quality VA health care, not 
only for the veterans who are statutorily eligible for 
services, but also for the more than 4 million disenfranchised 
Medicare-eligible veterans aged 65 and over, who, because of 
the limited Medical Care Appropriation and their higher income 
level, are not eligible to receive health care services from 
the VA.
    The delivery of health care has changed dramatically over 
the last five years. The intense pressure to control costs, 
coupled with the rapid spread of managed care, has had an 
impact on every health delivery system in this country, 
including VA. As a hospital-based system with an aging 
infrastructure and patient population, the VA has not faired 
well under the constraints of a global budget capped by the 
limitations of the Balanced Budget Act of 1997. Meanwhile, the 
rapidly changing health care landscape of the last few years 
has made management of VA health care extremely challenging. 
Its leadership has worked tirelessly, if not always 
successfully, to move the delivery of health care away from an 
institutionally-based medical model to a more streamlined 
ambulatory care system. The greatest stumbling block to 
completion of this necessary revampment has been adequate 
resources. It should be noted that change, especially dramatic 
change such as system transformation, does not come without 
costs and committed investment. VA, unlike the private sector, 
cannot issue securities, borrow funds, or merge with other 
systems to find needed capital to finance what it needs to 
become to adequately serve and attract new veteran workload. It 
must rely on prudent management and legislative fixes.
    The VA, in P.L. 105-33, the Balanced Budget Act of 1997, 
was granted the authority to retain collections from third-
party payers. Although VA collection efforts have met with 
mixed success, this legislation has forced VA away from the 
outdated practice of averaging costs to the development of 
reasonable charges for services rendered to veterans--a 
universal billing practice demanded by all insurers and health 
plans. It is our understanding that VA will implement its 
reasonable charges billing system on September 1, 1999.
    VA has more than ten years of experience with shared 
services and has worked in partnership with the Department of 
Defense (DoD) and with local communities nationwide on a 
multitude of contractual arrangements for shared services. 
Monies obtained from sharing agreements have been used to 
augment and enhance services for veterans, while providing 
cost-effective care for DoD beneficiaries. Community 
arrangements have also created numerous opportunities to 
control costs through the shared purchase of expensive medical 
equipment and the development of other shared service 
arrangements. P.L. 105-33 enhanced VA's sharing authority. 
Together, these programs have laid the groundwork for VA's 
potential participation in Medicare subvention--an important 
aspect of VA's long term strategy to maintain a comprehensive 
and high quality health care system.
    Given that managed care is now a permanent and growing part 
of the health delivery landscape, it is essential that VA be 
able to play in that marketplace. Speaking for PVA and others 
in the veteran community, there is qualified support for VA's 
participation in the Medicare Subvention pilot. An important 
term of participation is that Medicare-eligible veterans must 
be offered the same participation opportunities as other 
Medicare beneficiaries, especially, the option to choose to 
come to the VA under a fee-for-service Medicare pilot, as well 
as the managed care pilot.
    Previous attempts to legislate VA Medicare subvention have 
included a fee-for-service component. It is fitting that 
present efforts also include this important provision. 
Medicare-eligible veterans who are not currently receiving 
services in the VA must be allowed the opportunity to overcome 
past VA disenfranchisement by participating on an equal footing 
with current Medicare beneficiaries, choosing either managed 
care or continued participation in a fee-for-service 
arrangement. Currently, the Medicare program allows 
beneficiaries the freedom to choose their service arrangement. 
Veterans must be permitted the same choice options. Just as 
current users of VA health care bring their third-party 
reimbursement to the VA, Medicare-eligible veterans should be 
allowed to freely participate in the Medicare program, which 
they paid into throughout their years of employment.
    PVA appreciates the constraints and potential problems that 
VA would face under a fee-for-service Medicare pilot option. 
However, it is the position of this organization that these 
barriers to participation are no greater and, in fact, are very 
similar to those posed under a managed care option.
    The inclusion of a fee-for-service option, would, as 
previously stated, offer choice and equal participation for a 
universe of more than 4 million Medicare-eligible veterans who 
have been disenfranchised from the VA solely by their income 
and the inadequacy of VA appropriations. In addition, the fee-
for-service option would also enable VA to develop comparative 
data on the two options.
    For either or both options to function successfully, 
Congress must require VA to institute data systems to track the 
costs and services provided to each eligible participant. This 
type of accounting is the accepted standard for successful 
health plans; no less should be expected of the VA. One of VA's 
greatest failings has been its inability to develop accurate 
cost data. This problem has been historically evidenced in its 
Medical Care Cost Recovery Program. VA's system of averaging 
costs has frustrated not only insurers and health plans, but 
has, in some cases, discouraged eligible veterans from using 
the system. Fear of being billed for non-service connected 
care, which is routinely covered in the community setting, is a 
strong deterrent to a veteran living on a fixed income.
    We view the current DoD TRICARE Senior Prime program as a 
first step in the realization of VA's potential successful 
partnerships. VA participation in Medicare subvention appears 
to be the next logical step in the provision of comprehensive, 
seamless care to veterans.
    We understand that VA is very eager to be part of a 
Medicare subvention pilot and is willing to participate in a 
managed care subvention no matter what the initial cost to the 
Department. It is for this very reason that we feel a fee-for-
service component should be added to the pilot. Understanding 
that the operation of the pilot must be cost-neutral to the 
Medicare Trust Fund, VA would be compelled to demonstrate that 
it can market, track, and operate a high quality system that 
will attract new users over its current level of effort. Recent 
articles on Medicare+Choice point to an undercurrent of 
dissatisfaction among providers and consumers in managed care 
communities. A VA fee-for-service model will allow for a useful 
comparison of what veteran consumers want and will use.
    We recognize that at the end of the three-year pilot the 
Health Care Financing Administration, VA, or both could view 
this effort as not worth sustaining. We urge this Committee to 
approve a VA Medicare Subvention program, and to make certain 
that this program includes a fee-for-service component.
      

                                

Statement of Mark H. Olanoff, Retired Enlisted Association, Alexandria, 
VA

    Mr. Chairman, Mr. Ranking Member, distinguished 
subcommittee members, the 100,000 members and auxiliary of The 
Retired Enlisted Association (TREA) appreciate the opportunity 
to present to you the views of the association regarding the 
proposed Medicare Subvention demonstration program to take 
place at Department of Veterans Affairs health care facilities.
    TREA has long supported the proposal which would allow the 
Department of Veterans Affairs to be reimbursed by the Health 
Care Financing Administration (HCFA) for treating Medicare-
eligible veterans. In fact, this program was listed as TREA's 
number one veterans benefit priority before a joint session of 
the Veterans Affairs Committee.
    Commonly referred to as Medicare Subvention, this 
particular program can accomplish two goals: one, the VA would 
benefit by being reimbursed by Medicare for providing care to 
veterans who may have received their care elsewhere. Two, it 
greatly improves veterans' access to health care. Presently, 
many older veterans are severely limited in their health care 
options. In particular, military retirees over the age of 65 
are forced out of the TRICARE system. These retirees were the 
ones who were promised free life-time health care if they 
served twenty or more years in the military. Servicemembers 
were not told that legislation passed in 1956 and 1966 
effectively eliminated that benefit. In fact, recruits up until 
1993 were being told of the promise of free medical care in 
return for a military career. However, no reference is made to 
the reality of base closure and hospital down-sizing and the 
impact on retiree health care such events have. Allowing those 
veterans to receive their health care at the VA will greatly 
expand the number of facilities a military retiree could turn 
to for care, thereby greatly improving the health care benefit 
offered to those who have served this nation.
    TREA is aware of the discussions regarding this proposed 
demonstration and whether or not it should be an HMO-style or 
Fee-for-Service style program. The members of this organization 
urge the members of this Committee, and their colleagues in the 
Senate, to pass this test in either form. While this debate 
goes on, veterans continue to lose health care options. 
Congress needs to act to protect veterans. TREA also urges this 
committee to adopt the position of their colleagues in the 
Senate which would allow for a three year demonstration to be 
preceded by a one year period for administrative set-up. The 
experiences of the Department of Defense regarding the 
establishment of their demonstration program should be heeded 
to ensure that the VA's program runs smoothly. Hospital 
certification alone consumed nearly one year of the DoD 
program. It is important that lesson be used to provide 
Medicare-eligible veterans with this benefit as quickly as 
possible.
    By establishing this program, in conjunction with the 
Veterans Millennium Health Care Act, those who served honorably 
in our nation's armed forces can be assured that quality health 
care will be available throughout their life. The emergency 
care, long-term care, eligibility reform and VA Subvention 
proposals will enable TREA, and other veterans service 
organizations, to encourage our members to receive their health 
care through the Department of Veterans Affairs. For too long 
the VA has only offered a partial benefit, discretionary long-
term care, no emergency care program, space available care. The 
proposals before Congress at this time guarantee that the VA 
will offer veterans a complete package and VA Subvention is, 
and will remain, a critical part of that.
      

                                

Statement of Robert F. Norton, Retired Officers Association, 
Alexandria, VA

                              Introduction

    The Retired Officers Association (TROA) is pleased to 
submit this statement to the Subcommittee on Health of the 
House Ways and Means Committee on Medicare Subvention for the 
Department of Veterans Affairs.
    TROA is the fourth largest military veterans organization 
with nearly 400,000 members. Our membership consists of 
veterans and survivors who are retired officers, active duty 
and National Guard / reserve officers of the seven uniformed 
services and their surviving spouses. Collectively, there are 
1.67 million military retired veterans who are eligible to use 
VA health care either as ``mandatory'' or ``discretionary'' 
veterans.
    As a founding member of The Military Coalition (TMC), TROA 
works closely with the 29 other veterans and military 
organizations in The Coalition. TMC represents the collective 
interests of over 5 million current and former members of the 
seven uniformed services, plus their families and survivors. 
TMC's Committee structure includes a Veterans' Committee which 
works veterans issues for The Coalition. This Statement, 
however, represents the views of TROA alone. TROA does not 
receive any grants or contracts from the federal government.

                               Background

    VA Subvention would permit Medicare funds to be used for 
Medicare-sponsored services to eligible veterans in VA 
facilities. VA Subvention continues to be TROA's highest 
veterans' health care legislative priority.
    The majority of stakeholders, including TROA, the other 29 
members of The Military Coalition, most veterans service 
organizations (VSOs), and the Department of Veterans Affairs 
(DVA), agree in principle on the need to test using Medicare 
funds for the non-service connected care of older veterans. The 
problem appears to be in the design of the test and related 
cost issues.
    Late in the last session of Congress, the Chairmen of the 
House Veterans Affairs Committee (HVAC) and the Subcommittee on 
Health of the House Ways and Means Committee reached an 
agreement to test subvention and to create a new program for 
certain veterans living in remote-areas. Under the ``remote 
access'' program, the VA would enter into agreements with 
health care maintenance organizations (HMOs) and other 
providers to provide care for Medicare-eligible veterans with a 
service-connected disability, injury, or illness. Medicare 
would reimburse the providers for the non-service-connected 
care and the VA would reimburse the providers for service-
connected care. The new program would run for three years and, 
if successful, would be extended or made permanent. The House 
passed the ``enhanced'' VA subvention bill but no action was 
taken on a Senate subvention proposal sponsored by Senators 
Rockefeller and Jeffords. The Senate bill would have authorized 
a subvention test but not a ``remote access'' program for 
disabled veterans as in the House bill. In the current session 
(106th Congress) a VA Subvention test has been endorsed this 
session by key Senate Committees.
    The Senate Finance Committee approved a test of subvention 
at eight VA hospitals, to be selected jointly by the Secretary 
of Veterans Affairs and the Secretary of Health and Human 
Services. TROA is pleased to note that the Senate proposal 
envisions testing subvention on a fee-for-service basis as well 
as the managed-care concept. Under the latter, retirees would 
have to enroll and agree to get all their care through the VA 
(VA would contract for care it couldn't provide in-house). 
Under the fee-for-service concept, the VA would be partially 
reimbursed for providing retirees care on a visit-by-visit 
basis, without requiring retirees to enroll. The Senate Finance 
Committee proposal envisions a four-site test of each concept.
    Each test allows the VA and Medicare up to one year for 
administrative setup, followed by three years of care delivery. 
The managed care program would start during calendar year 2000, 
and the fee-for-service test during 2001.

                       The Need for VA Subvention

    The fundamental issue regarding subvention is whether older 
non-disabled veterans who are already eligible for Medicare 
should be allowed to receive Medicare-sponsored services for 
non-service connected care in a VA facility.
    Today, many Medicare-eligible veterans use VA health care 
for some services and a Medicare HMO for the rest of their 
care. The result is inefficiency, duplication of effort, and 
inconsistency in providing health care to these veterans. As a 
growing trend, this practice may not be in the best interests 
either of Medicare-eligible veterans or of the government. A 
recent VA study revealed that the number of ``dual-eligible'' 
veterans--those who receive care from the VA and care from a 
Medicare HMO is ``increasing rapidly'' and correlates with 
national Medicare HMO enrollment rates in general--18%. The 
study showed that:
     VA patients covered by Medicare-HMOs already 
receive substantial amounts of VA care.
     Estimated Medicare payments to Medicare HMOs on 
behalf of ``dual-eligible'' veteran patients were $305 million 
in one year (FY 1996).
     For veterans covered by Medicare HMOs for a one-
year period (FY 1996), VA spending on Medicare services to 
those same veterans was $146 million.
    Medicare HMO enrollment trends reveal an interesting 
pattern when compared to the VA's funding model, known as VERA 
(the Veterans Equitable Resource Allocation). VERA is re-
directing VA resources away from parts of the country where 
Medicare HMO enrollments are rising significantly. In the 
Northeast region, for example, the proportion of Medicare 
eligible VA patients enrolled in Medicare HMOs is up 
substantially: Massachusetts--3.0% to 12.2%; New York--4.1% to 
4.9%; New Jersey--0.6% to 8.3%; Pennsylvania--2.3% to 13.2%.
    VERA distributions of VA funds, however, are down 
significantly in the corresponding VA service regions (VISNs) 
as shown below:

  VA Funding Trends in Certain Regions According to 'VERA' (FY 1996--
                                 1999)

     Boston (VISN 1)--8.0%
     Albany (VISN 2)--5.8%;
     Bronx (VISN 3)--6.9%;
     Pittsburgh (VISN 4)--2.0%;
     Baltimore (VISN 5)--11.0%.
    If Medicare funds were allowed to be used in VA facilities, 
the VA could provide health care directly to those who 
increasingly are turning to Medicare HMOs for care especially 
in parts of the country where VA capacity and resources ae 
being cut back. Whether veterans would choose VA care over 
their Medicare HMOs should be a research question from a VA 
subvention test. As important, a test could determine whether 
Medicare services can be offered at less cost in a VA setting.
    A VA Subvention test would also be useful in parts of the 
country where veteran enrollments and VERA distributions are on 
the rise. That's because Medicare funds could be used in a VA 
setting to pay for the care of the increasing numbers of older 
veterans eligible for Medicare. The study noted above showed 
that the proportion of Medicare eligible VA patients who are 
also enrolled in Medicare HMOs is significant in those areas 
where VERA distributions are increasing. The following table 
illustrates this:

                    Percent Medicare-Eligible Veteran Patients Also Enrolled in Medicare HMO
----------------------------------------------------------------------------------------------------------------
                                               % VA Patients
                   State                      Also Enrolled in          VISN LOCATION          VERA INCREASES FY
                                               Medicare HMOs                                         96-99
----------------------------------------------------------------------------------------------------------------
Arizona....................................               30.5  Phoenix......................             +16.8%
California.................................               34.7  San Francisco................              +8.8%
                                                                Long Beach...................              +4.0%
Nevada.....................................               24.8  (3 VISNs overlap)............
Florida....................................               20.7  Bay Pines....................             +16.1%
----------------------------------------------------------------------------------------------------------------
(Note: VISN areas of responsibility do not correspond with State boundaries). Texas, Washington, Colorado, and
  Louisiana also have experienced significant growth in the number of VA patients enrolled in Medicare HMOs and
  VERA increases to the corresponding networks.

    Authority to test VA Subvention would allow the VA and 
Medicare to evaluate whether Medicare funds could be used more 
efficiently in VA facilities where Medicare-eligible 
enrollments are increasing.
    The Retired Officers Association fully supports the concept 
of VA Subvention and we urge the Subcommittee and the full 
House Ways and Means Committee to approve the parameters for a 
VA Subvention demonstration as soon as possible.

                               CONCLUSION

    The Retired Officers Association deeply appreciates the 
work of the Chairman and the distinguished members of the 
Subcommittee on behalf of America's veterans including military 
retirees. They deserve assured and reliable access to Medicare 
services in VA facilities when they become eligible for 
Medicare.

                                   - 
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