59

Financing is the key, however. Multiemployer plan trustees must maintain a
proper balance between the beneficial needs and wants of all participants, on the one
band, and the available funding to backup benefit promises on the other hand.

‘An arrangement under which the Medicare program provides funding to a
multiemployer plan for Medicare-cligibles’ benefits may provide the means for more
plans to maintain and expand retiree coverage. Such an arrangement would give
retirees the advantage of a “one-stop shop" for all of their health care benefits — a shop
with which they are familiar and which is familiar to them, and which may also be
providing them with life insurance and other types of benefits. Most importantly, of
course, a retiree’s or older worker's multiemployer plan is an organization over which
the covered population, through their union representatives on the board of trustees,
have an equal say in plan management, and which, under the joint stewardship of the
labor and management trustees, is dedicated exclusively to serving the interests of its
participants and beneficiaries. Coverage could be seamless as the individual moves
from active employment into retirement. Savings from efficiencies could be used to fund
early retiree coverage, and to ease the pressure on active workers to generate
contributions to finance retiree coverage.

Financing is, of course, a key concern, both to the government and to the plans.
In managing multiemployer plans, the trustees are not running a business in which they
are free to take big risks in the hope of achieving big gains. They are nothing more, and
nothing less, than fiduciaries of a fund that must be administered in a way that
maximizes the benefits of those it covers. Because Medicare has provided the lion’s
share of health coverage for the over-65 population for so tong, multiemployer plans —
like other private sector payors ~ do not have a reliable independent base of experience
from which to estimate the potential cost of folding that age group back into their basic
coverage. Initially, a fair amount of trial and error will be needed to cost out these
programs and, as noted, plan trustees do not have much room for error!

To attract multiemployer plans to such a voluntary arrangement, various
concerns (mostly relating to financial risk) will have to be addressed, including:

+ Pricing — How much will Medicare pay the plan? Will the amount vary by
location and demographics of the eligible group? On what basis will
Medicare’s payments to the plans increase? To what extent, if any, do
cost-savings from favorable experience have to be shared with the
government? To what extent, if any, will Medicare provide guarantees
against plan losses?

+ Design ~ To what extent will plan trustees have flexibility to design the
benefit package and delivery systems for Medicare eligibles as well as
other participants? To what extent can the plan link Medicare benefits
and supplemental benefits? Will plans be free to cutback benefits if
Medicare benefits are cutback? Could a plan use Medicare funding to
finance early retiree coverage?

+ Regulation ~ To what extent will plans be required to comply with
Medicare regulations on top of ERISA’s regulatory scheme? Does the plan
gain Medicare law protections (e.g, limit on physician charges)? How, if
at all, would the Medicare Secondary Payor program apply with respect to
the plan’s active workers who are Medicare eligible?

We believe that there is much to be gained for all parties ~ Medicare eligibles,
multiemployer plans and their participants as a whole, and the Medicare program ~ if
an arrangement that satisfactorily addresses all of these concerns can be designed.

Thank you.


123

Good morning, ladies and gentlemen:

Most people who oppose socialized medicine do so on the grounds
that it is moral and well-intentioned, but impractical; i.e., it is a noble
idea—which just somehow does not work. I do not agree that socialized
medicine is moral and well-intentioned, but impractical. Of course, it is
impractical—it does not work—but I hold that it is impractical because it
is immoral. This is not a case of noble in theory but a failure in practice;
it is a case of vicious in theory and therefore a disaster in practice. So
I'm going to leave it to other speakers to concentrate on the practical
flaws in the Clinton health plan. | want to focus on the moral issue at
stake. So long as people believe that socialized medicine is a noble plan,
there is no way tu fight it. You cannot stop a noble plan—not if it really
is noble. The only way you can defeat it is to unmask it—to show that it
is the very opposite of noble. Then, at least, you have a fighting chance.

What is morality in this context? The American concept of it is
officially stated in the Declaration of Independence. It upholds man’s
unalienable, individual rights. The term “rights,” note, is a moral (not
just a political) term; it tells us that a certain course of behavior is right,
sanctioned, proper, a prerogative to be respected by others, not inter-
fered with—and that anyone who violates a man’s rights is: wrong, mor-
ally wrong, unsanctioned, evil.

Now, our only rights, the American viewpoint continues, are the rights
to life, liberty, property, and the pursuit of happiness. That’s all. Ac-
cording to the Founding Fathers, we are not born with the right to a trip
to Disneyland, or a meal at McDonald’s, or a kidney dialysis (nor with
the 18th-century equivalent of these things). We have certain specific
tights—and only these.

Why only these? Observe that all legitimate rights have one thing in
common; they are rights to action, not to rewards from other people.
The American rights impose no obligations on other people, merely the
negative obligation to leave you alone. The system guarantees you the
chance to work for what you want—not to be given it without effort by
somebody else.



25

Mr. McCrery. Thank you, Mr. Maher.
Mr. Salter.

STATEMENT OF CHARLES G. SALTER, DIRECTOR, EMPLOYEE
BENEFITS, GENCORP, FAIRLAWN, OHIO

Mr. SALTER. Mr. Chairman and Members of the Subcommittee,
my name is Charles G. Salter, director of employee benefits of
GenCorp. I am also pleased to serve on the board of directors for
the Association of Private Pension and Welfare Plans, an associa-
tion I am sure each of you are familiar with, with their construc-
tive and thoughtful assistance in legislative matters affecting pen-
sions and health care.

GenCorp is a technology-based company in Fairlawn, Ohio, with
positions in aerospace/defense, automotive and polymer product
markets. We cover approximately 26,000 employees and depend-
ents in our employee medical plans and approximately 21,000 retir-
ees and dependents under various retiree medical programs.

a representative of a plan sponsored by a self-insured em-
ployer and an employee benefits professional, my intent today is to
encourage you in your further exploration of the ways in which em-
ployers can participate constructively in the Medicare Program.

Like many other emplyers, we are engaged in examining the fea-
sibility of contracting with HMOs that have risk-sharing contracts
with Medicare. Briefly stated, I wish to encourage you in the fol-
lowing specific areas:

Congress should encourage the expansion of managed care with-
in the Medicare Program. Managed care should be positioned to en-
hance the quality of health care delivered to Medicare beneficiaries.
Congress should seek to attract more HMOs to participate in the
Medicare risk-sharing program. Congress should encourage the
participation of employer groups in the HMO risk-sharing program.

First, the experience of employers like GenCorp indicates that
the strategy of managing health care produces better results than
the passive use of the unmanaged fee-for-service system. Working
with health care providers and network managers, such as HMOs
or insurers, employers have driven the employee group health mar-
ketplace in the direction of organized systems of care that focus on
the course of a patient’s treatment, the coordination of necessary
care, and attention to the overall allocation of scarce resources. The
extension of these advances to Medicare beneficiaries should be en-
couraged and expanded.

Many managed care concepts and innovations have been devel-
oped and honed in the marketplace for active employees. Requiring
health care providers and managed care networks to be responsive
to the needs of plan participants and the employer/payers has lit-
erally transformed the marketplace for private employer groups in
the last 7 to 10 years. It is not merely an economic phenomenon.
Most successful employer managed care programs are focused on
improving the quality of health care delivery. Good financial re-
sults typically follow efficient delivery of quality health care serv-
ices. This model has much to offer the Medicare population, par-
ticularly in the areas of disease management, wellness, care of
chronic health conditions, and the continuity of care.


154

‘However, MSAs are untested, and it is not clear that they will either lower costs or improve
access to services.

What are MSAs and How do they Work?

Medical Savings Accounts are tax-exempt savings accounts modeled on Individual
Retirement

wings
‘Accounts that employed individuals can use to pay for health-related
State MSA laws generally create incentives for people to set up these accounts

by exempting from state taxes the money contributed to these accounts. MSAs work like
this:

Employers can purchase a standard health insurance plan with a low deductible ($250
= $500 annually per person) or a catastrophic health insurance plan with a high
deductible ($3000-$5000 annually per person). Because most people will not have
health care costs higher than several thousand dollars, the premiums for high
deductible catastrophic health insurance plans are much lower than for plans with
low deductibles.

‘An employer sets up a MSA for employees who want to participate in this type of
plan and deposits, in pre-tax dollars, an amount equal to the difference between the
cost of a standard low deductible plan and a catastrophic high deductible plan. The
self-employed can also set up a MSA.

Employees can use the money in their individual account for health care expenses.
When the high deductible is met, the insurance company then pays the bills. If
money is left in the account at the end of the year, it can be withdrawn and used for
other purposes or carried over with accrued interest into the next year.

‘The CCD has several major concerns about MSAs:

‘The catastrophic health plans that are purchased in conjunction with MSAs can
impose pre-existing condition limitations and can refuse to cover persons with certain
health conditions or disabilities,

Catastrophic health plans with high deductibles often do not provide the
comprehensive coverage needed by persons with serious illnesses or conditions.
‘Some of these plans have lifetime or per condition limits of only $100,000.

‘The American Academy of Actuaries has estimated that persons with high health
expenses will experience major increases in out-of-pocket costs with MSAs. MSAs
may also increase out-of-pocket costs if the amount employers contribute to the MSA
is not sufficient to cover the annual catastrophic deductible. Additionally, the
combined cost to the employer of an MSA contribution and the catastrophic heath
plan premium may not be less than the cost of a standard health plan.

If large numbers of individuals choose MSAs plus catastrophic health plans, the
health insurance market will be further segmented, reducing the size of the
‘population pool needed to spread risk adequately.

MSAs will likely lead to adverse selection because they will be utilized primarily by
‘younger, healthier people who do not anticipate a need for health care. Persons who

health care expenditures, those who need comprehensive coverage, and
those who are older and at higher risk for needing health care are likely to remain in
standard low deductible health insurance plans. Individuals with MSAs could also
change to a low-deductible plan when they become sick or anticipate medical bills
(eg., childbirth expenses), thus exacerbating the problem of adverse selection.

Adverse selection will lead to higher premiums for

le insurance unaffordable both for employers and individuals who want to
purchase ines policies


149

upon request. The intention is to provide true discounts for those with limited incomes. The
Board's recommended fee ranges would protect wealthier patients from being over-charged.
Uiatvprced crclans would have to be ehie to justify that feea to patients. Caps on feos end
the mandatory use of sliding scale fees could be instituted if-e voluntary sliding sc
adequately control fees.. Sliding scales might be able to be used for hospital exp
percentage share for costs was graduated according to income (e.g.,-citizens earning $30,000
might only pay 5% of hospital bills up to a catastrophic limit appropriate for their income, while
‘those earning $300,000 might pay 60% of all bills up to an affordable catastrop!
Under this svetem: a) the insurer's liability is limited by the fixed reimbursement, b)
patients and providers, due to a co-payment scaled to the patient's income, become cost- and
ilization-conscious, c) patients could “comparison shop” and have freedom of choice, and d)
h procedure (the fixed
‘a truly free market based

pr
reimbursement), yet would retain some independence to compete
upon training, talent, reputation in the community, and fees.

8. Regional Boards could regulate purchases of expensive machinery; perform outcome studies;
focus on fraud and incompetence, rather than micromanagement; and settle disputes between
Patients, providers, and insurers.

9. Government support for building hospital-based and free-standing primary care centers would
reduce emergency room visits and encourage primary care use.

10, Outpatient psychotherapy would cover individual, group, and marital/couple/family
treatment, as allowing children, adults, or families to remain in distrass is harmful and costly to
‘our country. Coverage for 40-50 sessions/year is recommended, as: a) 85% of patients use
less than 26 sessions, even with liberal benefits and no UR (utilization review, b) liberal
‘outpatient benefits reduce inpatient costs and, thus, overall mental health costs, and c)
preventing the 15% of patients who need long-term psychotherapy from receiving it may

s costs and harm patients and their families. UR can be used to provide
additional sessions beyond the annual limit for those who demonstrate strong psychological
and/or medical need’ AND financial need. UR would not intrude on session content or personal
information. Inpatient treatment would require UR, but at reasonable intervals. Medication
hospitalization,
half-way houses, and group homes would be supported to reduce inpatient costs and the costs,
to society of inadequately treated mental health needs. There would be no limit to inpatient
care for the seriously mentally ill (schizophrenia, bipolar disorder, major depression, severe
borderline personality disorder, etc.), but appropriate UR would be utilized. Patient education
would be developed to explain mental health problems, different forms of treatment and
psychotherapy, and the educational requirements of different types of clin

11. UR, or at least denials of benefits, would be done by licensed, practicing professionals who
independent of the insurer, and who have training comparable to that of the treating
. UR would focus only on those procedures known to be over-utilized.

12. Incentives in the form of partial premium rebstes could be used to encourage patients to
refrain from submitting smaller claims.

13. Claims procedures would be simplified and standardized, and claims could be submitted
ither by patients or providers.


COMMITTEE ON WAYS AND MEANS
BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois SAM M. GIBBONS, Florida

BILL THOMAS, California CHARLES B. RANGEL, New York
E. CLAY SHAW, Jr., Florida FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut ANDY JACOBS, JR, Indiana

JIM BUNNING, Kentucky HAROLD E. FORD, Tennessee
AMO HOUGHTON, New York ROBERT T. MATSUI, California
WALLY HERGER, California BARBARA B. KENNELLY, Connecticut
JIM McCRERY, Louisiana WILLIAM J. COYNE, Pennsylvania
MEL HANCOCK, Missouri SANDER M. LEVIN, Michigan
DAVE CAMP, Michigan BENJAMIN L. CARDIN, Maryland
JIM RAMSTAD, Minnesota JIM McDERMOTT, Washington
DICK ZIMMER, New Jersey GERALD D. KLECZKA, Wisconsin
JIM NUSSLE, Jowa JOHN LEWIS, Georgia

SAM JOHNSON, Texas L.F. PAYNE, Virginia

JENNIFER DUNN, Washington RICHARD E. NEAL, Massachusetts

MAC COLLINS, Georgia

ROB PORTMAN, Ohio

PHILIP S_ ENGLISH, Pennsylvania
JOHN ENSIGN, Nevada

JON CHRISTENSEN, Nebraska

PuiLup D. MoseLey, 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 BENJAMIN L, CARDIN, Maryland
JOHN ENSIGN, Nevada JIM McDERMOTT, Washington
JON CHRISTENSEN, Nebraska GERALD D. KLECZKA, Wisconsin
PHILIP M. CRANE. Illinois JOHN LEWIS, Georgia

AMO HOUGHTON, New York
SAM JOHNSON, Texas

ab


119

May 23, 1995
Sir:

It has come to my attention that Congress will be debating the issue of
medical savings accounts. I'm writing to make known my belief in and
support of medical savings accounts -- provided that they are voluntary
and tax-free.

| believe such accounts would be a step towards restoring a free
market in health care. As with all other commodities the free market
works to bring prices down while at the same time improving the overall
quality of products and services. This is what the American people need.

Sincerely,

Craig K. Barber

321 Gonzalez Dr.

San Francisco, CA 94132
(415) 587-9083


expect to see from MSA's

Conclusion

Based on my first-hand experience with the Medical Savings Accounts at RCI and exhaustive
research on health care alternatives, [ tell you that MSA's work! I strongly believe there is not
another health insurance program offered that compares to the MSA concept when it comes to
providing a high level of employees benefits. employee satisfaction, cost control, freedom of
choice, and administrative efficiency

MSA‘s can and should play a major role in reducing health care costs and improving health care
delivery nationally It's time to expand MSA’s as the choice for providing health to all Americans.
If the Federal government authorizes tax deductible status for MSA's, we will see them flourish
for employees. employers, individuals. Medicare and Medicaid


152

People who are eligible for SSDI may return to work. If they are covered under a
large group health plan (Le, for 100 employees or more), Medicare is the secondary
payer for health care expenses. A large group health plan cannot treat any individual
it covers differently simply because they have a disability and have Medicare
coverage. If the person with a disability is not covered by his or her employer's plan,
Medicare is the primary payer and the employer may not provide or subsidize
supplemental coverage, except for items and services not covered by Medicare.

‘What is Covered?

Medicare is the largest single purchaser of hospital care, physician services, and
rehabilitation services. While people with disabilities require access to the full range
of health services, rehabilitation services are of particular importance. The range of
inpatient and outpatient rehabilitation services covered by Medicare includes physical
therapy, occupational therapy, speech therapy, recreational therapy, durable medical
equipment, and orthotics and prosthetics.

These services may be provided in a number of locations, including:
rehabilitation hospitals or units in general hospitals;
skilled nursing facilities;
comprehensive outpatient rehabilitation facilities;
rehabilitation agencies;
private offices; and
patient's homes through the services of a home care agency.

Medicare is the single largest payer of medical rehabilitation services in the United
States, accounting for an average of 40% of revenues in rehabilitation hospitals and
more than 50% in rehabilitation units in hospitals.

Issues and Concerns
Potential Reductions in Medicare Services

The House and Senate Budget Resolutions propose between $256 and $282 billion in
Medicare cuts over the next 7 years. Currently, Medicare does not cover important
services such as outpatient prescription drugs and most preventive and

services. As a result, many Medicare beneficiaries ~ even those with Medigap
policies ~ have high out-of-pocket expenses. For those without Medigap policies,
including many individuals on SSDI, out-of-pocket expenses are even higher. Further
budget cuts in Medicare will result in benefit cuts and increases in out-of-pocket
payments.

Low Reimbursement Rates and Cost-Shifting to Private Payers

According to the Physician Payment Review Commission, Medicare pays physicians
approximately 70% of their charges. Health care providers and hospitals Rave
traditionally shifted the shortfall in Medicare payments onto private health insurance
payers. Deep cuts in Medicare funding will further exacerbate this problem. The
Medicare program has already been cut significantly ~ nearly $200 billion since 1980,
and most recently, by $56 billion in 1993. Singling out Medicare for additional
spending reductions will likely result in continued cost-shifting to businesses and
Privately insured individuals as hospitals and physicians try to recoup lost revenues.


719

The dreadful truth is that Medicare is a pyramid scheme founded on deceit. Seniors think
they have paid for their benefits. In reality, current workers are paying for them, and in addition,
must bear the brunt of the cost-shifting and price inflation caused by Medicare.

It is time to admit that we cannot repair the Medicare building and shift our attention to
the people trapped inside. Medicare traps patients and those who care for them into government
dependency.

‘We must immediately allow people who are able to do so to escape from Medicare. This
will unload the stresses on the system fo some extent, to the benefit of those who remain trapped.

The first step, which would actually save money for the Federal Treasury, is to unplug the
safety valve provided by the private market:

(1) Encourage private contracting outside the system. For such services,
no Medicare claim is filed.

(2) Repeal price controls. This means to allow balance billing so that the
marketplace can compensate for Medicare reimbursements that do not cover
costs.

The long-term solution is to phase out taxpayer-financed medical insurance for retirees.
This requires fixing the problem in the rest of the medical system.

‘What Congress must do, and can do without cost to the Treasury, is to reform a basic
inequity in the federal tax code.

The tax code should not punish Americans for paying for medical care af the time of
service or for buying individually owned, portable insurance. Because of the tax code, most
Americans prepay for medical care through employer-owned insurance. Such insurance cannot
even be transferred to a different job, much less into retirement. It diverts a large fraction of the
medical dollar to the pockets of middlemen and leads to wnflated pnices and overutilization.

Medical savings accounts and individually owned catastrophic insurance should receive
the same tax treatment as employer-owned comprehensive coverage, which is really a tax-free
substitute for a wage increase,

Medical savings accounts allow patients to benefit from cost-saving decisions. Because
patients are spending their own money, they consider costs in their decisions. This type of market
pressure tends to drive down the |. Companies that have tried
medical savings accounts have found that their medical costs have actually decreased,

In contrast, "managed care" can at best claim to “contain” expenditures by reducing the
quality and quantity of services. The patient bears the costs of rationing (inconvenience, poorer
care, and loss of choice) but receives none of benefits of saving,


15

High quality health care is the most cost effective care.

Our overriding priority has been on the development of high quality delivery systems. We have
found that by emphasizing the quality of care, we can also lower costs. This quality control is
obtained by focusing on the primary care physician. That physician can direct all of the care of
an enrollee and the enrollee's family. Coordinating this activity helps the physician to improve
the consistency of care given each patient.

We emphasize quality of care in many ways, Here are some examples

» As we started our health centers, Deere & Company developed an alliance with the Mayo
Clinic for the continuous improvement of Disease Management Strategies, a series of
clinical practice guidelines used by physicians in the health centers. These important
guidelines allow health care professionals to create the best treatment protocols for certain
hhigh frequency, high cost diseases. These guidelines help the physician to deliver
consistently high quality care but do not mandate the treatment plan

‘We have three strategies already in use at our health centers. They include guidelines for
asthma, diabetes and high blood pressure. A total of 11 have been designed and will be
implemented

Other diseases targeted include heart disease, depression, chronic headaches, lower back
pain, breast cancer, gallstones, abnormal uterine bleeding and abnormal Pap smear

+ We are now deploying an Electronic Medical Record system which allows our physicians
to track all key aspects of the care given to a patient, The system assists the physician in
coordinating the care of each patient. The use of technology allows physicians to identify
chronic disease pattems and act to prevent health care problems, This technology provides
a tool for more consistent care.

» Im our staff model health centers, Deere & Company handles the management and
administrative functions. This frees the physician to focus on patient care, We provide
data about each physician's practice that can be used by the physician to improve the
quality of care provided

» In choosing physicians, we review more than a dozen indicators to assure that the
physician will practice medicine with a program and patient philosophy consistent with
our own.

‘The success we have experienced at Deere in managed care comes from our practical, day-to-day
recognition that the highest quality health care is also the most cost effective health care

tmerships which take ‘ket-based approach can impact cost.

Employers, hospitals, physicians, community alliances and managed care companies are
responding to the need to control health care costs while not compromising quality of care. For
instance, Deere health care costs increased by two percent in 1994 which includes the cost for
retiree supplemental plans with a slightly older workforce. Our cost last year was approximately
$2000 per covered individual. We believe this is the only meaningful way to measure this cost
since a cost per family can vary significantly because of family size. We also know there
currently is no meaningful data available nationally on a per covered person basis.

We have not removed choice to achieve these results for enrollees from Deere, other companies
and in our government programs. Employers have told us they prefer to give employees a choice


128

“right.” To call it a right when the recipient did not earn it is merely to
compound the evil. It is charity still—though now extorted by criminal
tactics of force, while hiding under a dishonest name.

As with any good or service that is provided by some specific group
of men, if you try to make its possession by all a right, you thereby
enslave the providers of the service, wreck the service, and end up de-
priving the very consumers you are supposed to be helping. To call “medi-
cal care” a right will merely enslave the doctors and thus destroy the
quality of medical care in this country, as socialized medicine has done
around the world, wherever it has been tried, including Canada (I was
born in Canada and I know a bit about that system first hand).

1 would like to clarify the point about socialized medicine enslaving
the doctors. Let me quote here from an article | wrote a few years ago:
“Medicine: The Death of a Profession.” [The Voice of Reason: Essays in
Objectivist Thought, NAL Books, © 1988 by the Estate of Ayn Rand and
Leonard Peikoff.]

“In medicine, above all, the mind must be left free. Medical treat-
ment involves countless variables and options that must be taken into
account, weighed, and summed up by the doctor’s mind and subcon-
scious. Your life depends on the private, inner essence of the doctor's
function: it depends on the input that enters his brain, and on the pro-
cessing such input receives from him. What is being thrust now into the
equation? It is not only objective medical facts any longer. Today, in
one form or another, the following also has to enter that brain: ‘The DRG
administrator [in effect, the hospital or HMO man trying to control costs]
will raise hell if I operate, but the malpractice attorney will have a field
day if I don’t—and my rival down the street, who heads the local PRO
[Peer Review Organization|, favors a CAT scan in these cases, I can’t
afford to antagonize him, but the CON boys disagree and they won’t
authorize a CAT scanner for our hospital—and besides the FDA prohibits
the drug I should be prescribing, even though it is widely used in Europe,
and the IRS might not allow the patient a tax deduction for it, anyhow,
and I can’t get a specialist’s advice because the latest Medicare rules


134

W.W1IL This is because if one’s expenses for any commodity are covered by a
huge anonymous group rather than by that individual, the individual has no
incentive to contain his spending. When all the individuals within such a
group are mutually relieved of responsibility, the result is a form of mutual
plunder. Every individual within the group ends up spending more than he
would have as an individual because he is able to pass along almost all of his
costs to the others, while all the other individuals in the group similarly
increase their spending because they are able to do the same. Thus, the
amount of spending by each individual within the group increases much
more so than it would if each individual was directly responsible for his own.
costs. In addition to this absolute increase in individual spending, it is the
combined increased demand on a limited supply that leads to radically rising
ices.
Ps This increase in the prices of medical services resulting from the
collectivization of costs following W.W.II led to the third major step towards
socialized medicine in the U.S., the imposition of the Medicare and Medicaid
programs in the 1960s. These programs were instituted to make the
increasingly expensive medical care more affordable to the poor and the
elderly. However, since such programs represent an even further
collectivization of costs than collectivized insurance, drawing their funding
as they do from the entire body of taxpayers rather than from a smaller body
of insurance holders, they have lead to the pricing of medical care beyond the
reach of the uninsured middle class. As a result, their implementation has
lead to the current call for complete socialized medicine.

Ironically, of course, the problems that socialized medicine is supposed
to solve are all problems stemming from the previous steps the government
has taken towards socializing medicine. Specifically, there have been several
consequences following from the concept of a need-based right to medical care
and the collectivization of costs to finance it which have acted to raise the
price of medical care.

First, of course, is the increase in prices which necessarily follows when
one is able to bid on a limited supply of goods and then pass the expense off to
an anonymous group. Such bidding on government-supplied goods leads
inevitably to government-imposed price controls and rationing as the only
possible means of controlling costs, followed thereafter by the government's
further refusal to allow anyone to bid the price up any further even using
their own money.

Second is an increased demand for medical care, in the form of
increased visits and increased services.

Third is the recent phenomenon of irrational standards for malpractice
and radically increased malpractice awards. This follows from the notion that
if medical care is a right, then a right to medical care as such means a right to
the best medical care available. As a result, providing a patient with anything
less than the best, most expensive medical care comes to constitute
malpractice, whether or not the doctor is being compensated to provide such
care. Fear of malpractice lawsuits has lead to the new phenomenon of doctors
practicing “defensive medicine,” i.e. conducting medically unnecessary tests
to provide a record for their defense in the event of a lawsuit. Defensive


74

‘The Congressional Budget Office estimates that Medicare enrollees with private
Medigap insurance shielding them from Medicare deductibles and co-payments use
about 24% more services than those who do not have such coverage and face the cost-
saving incentives of these deductibles and co-payments.

‘A 1992 study by the National Center for Policy Analysis estimated that ifthe public
generally switched from traditional third party insurance to MSAs, the resulting cost
‘control incentives and competition would reduce health spending by about 30%.*

‘+ Another study by the health consulting firm of Milliman and Robertson estimated that
the cost control incentives and competition created by MSAs. if generally adopted in the
private sector, would reduce national health care spending by $600 billion over 5
years.

© A recent Cato Institute study estimated that if MSAs were generally adopted, leaving
traditional third party payment insurance 10 cover 25% of total health costs, the cost
incentives and competition created by MSAs would reduce health costs by about 40%
per year.

‘© Another Cato Institute study examined the experience of employers across the country
‘who were already adopting MSAs. The resulting cost-savings for those employers
‘would be more than enough in the case of Medicare to hold program costs within
targeted growth limits, Indeed, cost-growth for almost all of these employers was zero
oreven negative.”

Such cost savings would result forthe elderly who used MSAS for theit Medicare
coverage, enabling them to obtain their benefits within the growih-capned payments they could
withdraw from Medicare *

Indeed, such an MSA structure would offer improved benefits and quality for the elderly:

The MSA catastrophic insurance would provide unlimited coverage for all expenses
‘over the deductible, unlike Medicare benefits, which are limited in duration and do not
provide full catastrophic coverage.

«The above MSA model would cap all annual out-of-pocket expenses, unlike Medicare,
which does not cap out-of-pocket payments, Indeed, the estimates from the actuaries
indicate that the MSA could cap out-of-pocket contributions and expenses from the
elderly at less than $2,000 per year.

‘© Through the MSA. the elderly could avoid the increasing rationing under Medicare,
which is reducing the quality of their care and their access to care.

‘This proposal achieves the targeted cost controls for Medicare, essentially by giving the
elderly direct control over the program's funds. Retirees can consequently profit by wise use of
those funds. By avoiding unnecessary expenses, they can each pay themselves a large rebate each
‘year under the MSA option. When they get sick, this reform would also allow them to escape the
‘increasing rationing of health care under Medicare. Instead, they would be free to choose the
doctors, hospitals, treatments, and benefits they want. Moreover, the MSA actually offers better
benefits than Medicare. These and other benefits of the reform for the elderly would make the
necessary reductions in program expenditures politically possible.

» Congressional Budget Office, “Reducing the Deficit Spending and Revenue Options.” Washington. DC
February, 1995. p. 287,

“John C. Goodman and Gerald L. Musgrave. “Controlling Health Care Costs with Medical Savings Accounts,”
INCPA Policy Report No, 168, National Center for Policy Analysis, Dallas, Texas, January, 1992.

> Litow, Milliman and Roberson, “Financia Impact of Medical Savings Accounts on Health Care Spending inthe
Federal Budget.” Counil for Affordable Health Insurance, October 1993.

Stan Liebowitz, “Why Health Care Costs Too Much,” Cato Institute, Washington, D.C. Policy Analysis No.
211, June 13, 1994

* Beier J. Ferrara, “More Than a Theory: Medical Savings Accounts at Work.” Caio Insitute, Washington. DC.
Policy Analysis No. 220, March 14, 1995

* Note. however. that even if such savings were somehow not fully achieved, that would not affect whether the
necessary budget savings were achieved, a those savings would result from the $% growth cap onthe funds at
ould be withdrawn from Medicare in any event. The only result would be thatthe withdrawn Medicare funds would
buy les in private benefits than otherwise
"See Peter Fara and Jo C. Goma, "Medial Savings Accouns for Media.” Bi Analysis No (60
Nauonal Center for Poliey Analysis, Dallas, Texas, Apa 17,



32

Mr. McCrery. Thank you, Mr. Salter, and thank all of you for
your excellent testimony.

Now I am going to ask Mr. Ensign if he would like to inquire of
the witnesses.

Mr. ENSIGN. Thank you, Mr. Chairman.

I want to explore some of these ideas you talked about. Mr. Van
Bell, you talked about saving $500 per year. I think that all of you,
through a lot of the innovations you have done through your com-
panies and with some of the coalitions, have been able to bring the
costs down in some cases, in some cases slowing the rate of growth
similar to what we are talking about doing with the Medicare pop-
ulation.

In Mr. Stark’s opening testimony, he talked about severe cuts in
Medicare spending. I want to address that issue because | think it
is a very important issue. The other day we had a person that was
in charge of the University of California health care systems, and
they talked about savings, over $650 per year per enrollee. Because
of the innovations they had done, they actually had savings that
much per year.

I asked the question, and I am asking you the same question, do
you consider the savings through innovation, and all of you men-
tioned that you had improved quality and not decreased the level
of satisfaction from your enrollees. Do you consider those cuts?

Mr. VAN BELL. I would certainly be happy to try to respond to
the question. I don’t believe that our retirees or the Medicaid eligi-
ble in the State of Iowa that are in our program would look upon
our innovations as cuts. I believe that they would look upon them
as enhancements to the quality of the care we provide.

In a number of initiatives surrounding our disease management
strategies with the asthmatic population, we are beginning to see
some real benefits through the education process, teaching these
patients how to use peak flow meters and manage their own condi-
tions so they are not needing to run to an emergency room at 3
o’clock in the morning. These kinds of innovations, we believe, are
going to clearly enhance the quality of care.

People have told us that they feel they are in control and they
are managing their care much more efficiently with the primary
physician that they are now a part of, in a relationship.

Mr. ENsIGN. What Mr. Stark said this morning, though, you just
cut their benefits because you are spending less money. You are
saving money by not going to the emergency room. That is a cut.
Just because you are giving them better care, that doesn’t mean
anything, I guess. That is a cut.

Mr. VAN BELL. Well, I can’t really represent what was said ear-
lier. I can only say what we are doing, and I look upon it as a way
to improve the quality of care, and that is really one of my mis-
sions. If I am saving money in the process that can be used for
other types of care or other services in this country, then that is
a positive that flows from this activity.

Mr. ENSIGN. Mr. Stark also mentioned in his testimony about
maybe these companies getting involved with the retirement popu-
lation do not have the purest motives at heart when they are try-
ing to get involved with this type population.


103

Mr. FERRARA. Let me explain how that would work. It is not just
the MSA that is risk adjusted, it is the whole private option. In
other words, what we are proposing is people each get to take a
share out of Medicare each year. They have the freedom to choose
that and buy anything in the private sector they want: HMOs,
MSAs or anything. That share they get to take is what is risk ad-
justed.

In other words, if you are younger and healthier, there is less
you take to go and buy either an HMO, an insurance policy, or an
MSA. If you are older and sicker, you get to take more because it
will cost you more anyway to go out and buy and pay for that.
Then this helps to avoid any adverse selection problem, because
people are taking with them the money that reflects the risk that
they are taking with them.

Chairman THOMAS. So, basically, it is going to be distributed to
each according to their need?

Mr. FERRARA. According to their risk, is how I would put it. Dis-
tributing to each according to their risk.

Chairman THOMAS. But risk is, in essence, need; isn’t it? The
risk of what?

Mr. FERRARA. Of health expenses.

Chairman THomas. Of health expenses. Health expenses for two
people if they are different, one needs more money than the other;
that is why you are risk adjusting.

Mr. FERRARA. But risk may not be the same as need in all cir-
cumstances, and it really is risk that you are adjusting for here.
The key thing is this avoids the adverse selection.

Chairman THOMAS. So, to each according to their risk?

Mr. FERRARA. Yes.

Chairman THOMas. From each—it is a payroll tax, right? So, peo-
ple who make more will pay more into it?

Mr. FERRARA. During their working years, yes. During their
working years.

Chairman THomas. From each, according to their ability, in
terms of making money. Then it will be distributed to each accord-
ing to their risk, which is need.

Mr. FERRARA. That is what Medicare is doing today. This is Jane
Orient’s point.

Chairman Tuomas. I can think of all the people filing out there.
Somebody probably recalls the phrase from each according to their
ability, to each according to their need.

Mr. FERRARA. But that is what Medicare does today.

Chairman THomas. That is what you are proposing in your con-
cept.

Mr. FERRARA. Well, no, that is what Medicare does today; it
takes from each according to their tax payments and gives to each
according to their need. It pays them for the health expenses that
they need.

So, we are devising a program that is within the Medicare con-
text. Of course, it addresses those issues, and that enables you to
say to your elderly constituents, we are still fulfilling the function
that you are looking to fulfill with Medicare.

Chairman THOMAS. I am just saying that I may lose the battle
with my friend from Louisiana not on a socialist argument but on


39

in terms of accountability, it may be best to have the health plan,
the accountable health plan, be the one bearing that risk. Indeed,
that is the business that John Deere Health Care is in, to be an
accountable health plan.

Mr. VAN BELL. There clearly are differences. First of all, we feel
very strongly that health care is local. Our environments are very
different, where Chrysler would be located and maybe where Deere
is located with a number of its facilities. I also need to preface any
remark by indicating it has been 5 years and that is not really a
problem because of HCFA, it has been a combination of a lot of
things that had to be dealt with.

We believe with health care being local that we can work with
those providers very effectively. We know that most of our retirees
domicile in the community in which they work when they retire.
We have been in this business for about 20 years. We have a
database of retiree costs, at least supplemental costs. The situation
was significantly different looking at Chrysler and John Deere.

Now, there are applications, I am sure, very similar to ours in
other parts of the country where a MIG might very well work.

Mr. HouGuTon. Mr. Chairman, could I just ask one more quick
question?

Gentlemen, since you are not willing to accept the succulent offer
of Mr. Cardin here on the 3.9 percent, I must assume, therefore,
that you are going to be able to control your costs over the next
5 years below that. Is that right?

Mr. VAN BELL. I don’t know as anyone really knows what is
going to happen with costs over the next 5 years. I know we will
negotiate additional labor contracts in that period of time. I have
no idea what might be envisioned in labor negotiations that might
impact retiree costs. I have no idea what might happen at the
State or Federal level. It is very, very difficult to try and forecast
what those costs are.

What I try to do is to manage those costs as well as I possibly
can with a quality thrust. Our whole effort, we really believe that
enhancing the quality of care is going to reduce the cost of that
care. Everything we do, our physicians that are on staff in our cen-
ters, our work with Mayo, all are directed to do that. We believe
the payoff is in managing that cost. The peripherals out there,
many things I cannot control.

Mr. HouGHTON. Thank you, Mr. Chairman.

Mr. McCrery. Thank you, Mr. Houghton.

Mr. Van Bell, if you can, let us explore some of the negotiations
that have been taking place with HCFA over the last several years.
I am going to try to characterize the interests of HCFA and the in-
terests of John Deere and you tell me if it is a proper characteriza-
tion and then let us expound on it.

HCFA, I assume, is concerned that if they give you a capitated
rate for folks in your HMO that you will get the low-cost employees
into your HMO and the high-cost employees will stay in the fee-
for-service and Medicare will have to reimburse them on a fee-for-
service basis.

Your concern, I would assume, is that if you accept a capitated
payment, you don’t want to get all the high-risk patients in your


64

are spent, and MSAs provide employees with the financial incen-
tive to stay healthy.

Our company is pleased with MSAs because we are able to offer
an increased level of benefits and are reducing costs at the same
time. By putting the consumer back in the loop, health care ex-
penses are kept to a minimum. Paperwork is significantly reduced.
Payments are not subject to the scrutiny of reasonable and cus-
tomary determination, preexisting conditions and other administra-
tively burdensome reviews. I know of no other program that pre-
sents such a win-win situation for both employer and employee.

Companies from across the country call me daily to seek informa-
tion about MSAs and how well they work. Workers—I should say
organizations—such as Crown Northrop, Quaker Oats, Danville,
Ohio schools, United Mine Workers of America now provide MSAs
and hundreds of others are considering the program.

At RCI we envision a great future for MSAs. If the Federal Gov-
ernment authorizes medical savings accounts and grants them tax
deductible status, these programs will thrive. MSAs would be of-
fered by a greater number of insurance companies, allowing for
more competition, better pricing, greater portability and more
widespread savings on the part of employees for their future health
care needs. Paperwork expenses would be slashed drastically be-
cause employees and retirees could use their MSA card like a uni-
versally accepted credit card. The MSA credit card-type system will
reduce paperwork costs from 30 cents of every dollar to 6 cents of
every dollar spent on health care.

MSAs would be a natural replacement for Medicare. Individuals
accumulate their MSA nest egg through the years and, by age 65,
could have $200,000 or more, assuming an average accumulation
of $1,000 a year since age 21 at a 6 percent interest rate. That indi-
vidual could then purchase a super MSA from an insurance com-
pany with a $200,000 deductible for the remainder of their life at
a very economical rate.

The challenge in acceptance of medical savings accounts nation-
ally is merely getting the public to understand the concept and ad-
vantages of a program and for the government to implement MSAs.
I envision the education process to explain what MSA means as
being no different than the evolution of HMO. Ten years ago that
was an unknown. Today HMO is a household word, and that is the
kind of growth and potential we could expect to see from MSAs.

Based on my firsthand experience with medical savings accounts
at RCI and exhaustive research on health care alternatives, I can
tell you that MSAs work. I strongly believe not another health in-
surance program offered compares with the MSA concept. MSAs
can and should play a major role in reducing health care costs na-
tionally. If the Federal Government authorizes tax deductible sta-
tus for MSAs, we will see them flourish. Now is the time to expand
MSAs as the choice for providing health care to all Americans.

Thank you.

(The prepared statement follows:]


148

MANAGED COOPERATION
‘A Medical/Mental Health Care Plan
An Idea for the future
(revised 2/14/95)
1, The success of a health care plan will depend on the value system upon which it is based.
Cooperation seeks solutions that enhance and are fair to all parties involved.
2, Managed Cooperation optimally balances patient choice and freedom with responsiblilty,

instills provider responsibility to the patient, end engenders cost- and utilization-consciousness in
Patients and providers.

3. Managed Cooperation can be written in both single and multiple payer versions.

4. Benefit design would encourage patients and providers to be conscious of costs. When little
oF no co-payment is expected at the time of service, patients may not be motivated to question
a provider's fees or suggested procedures. External controls (gatekeepers, case managers, and
utilization reviewers) may then be called upon to do this, reducing patient control over their care.
It is important, therefore, for patients to be financially responsible for their care at the time of
service to the extent that out-of-pocket expenses are significant enough to the patient that the
patient questions providers about fees and recommendations, but not to the point where
out-of-pocket costs are burdensome and present a barrier to treatment for those with limited
incomes. Sliding scales for premiums, fees and co-payments, deductibles, and catastrophic
limits are all possibilities under Managed Cooperation,

5. We suggest a gradual phase-out of employer involvement in health care. When employers
buy coverage, they may, understendal \k to control the care given, limiting the freedom of
citizens to make their own treatment decisions, in privacy, with their chosen clinicians. Since
the money used by employers to buy insurance really comes out of the employees’ income, we
encourage a return of this money to employees in the form of income so that they may buy and
own their own policies. This returns control over health care choices and decisions to the
individual citizen, The possibility of an individual mandate might be considered.

lye

6: Managed Cooperation relies upon regional cooperation. Cost-containment procedures as
described below would be carried out by Regional Boards made up of consumer advocates,
professionals, government representatives, and insurers {if a multiple payer plan is used).

2 Annually or every other year, Regions! Boards would recommend fee ranges and insurance

Is for each procedure and send this information to consumers, clinicians, end
insurers {the government if single payer systems are used or to insurance companies if a multiple
payer system is used). Insurers would set dollar amounts for ach procedure's reimbursement.
Providers would set f ferably on a sliding scale, stert minimally above the
reimbursement, up to @ reasonable “full fee." The co-payment Would be the difference between
the reimbursement and the fee for the patient's income level, and could be legally waived if
necessary. Clinicians would provide current and prospective patients with their fee schedule



35

basis. I suspect that if you are talking about, all right, we are going
to therefore mandate everybody to take on not only——

Mr. CarpIn. I will do it voluntarily. Will you step forward and
volunteer to take——

Mr. MAHER. I think my testimony makes clear all of the reasons
why you would find a lot of apprehension in the employer commu-
nity for the employer to assume that risk.

Mr. CarDIN. Panderstand that.

Mr. Mauer. I think I have set some alternatives here. There are
people in the business called HMO plans who are in the business
of assuming risk, and there is no reason why HCFA and employers
cannot contract with them.

Mr. CarDIN. The difficulty is that unless you take the full group,
you run into the—

Mr. MAHER. Selection problem.

Mr. CaRDIN. The selection problem. We know that is one we have
not been able to come up with a satisfactory solution for. Maybe,
you all have the answer to that. We welcome your suggestions. We
are still trying to figure out how to deal with selection.

The bottom line is this: Can the business community, which has
been successful in dealing with health care by better educating
your enrollees and developing better ways of offering additional
choice to your employees, can you take on more of this responsibil-
ity, at a 3.9 percent annual growth, without diminution of the ben-
efits or additional cost?

I think the answer is—and you were pretty direct—you would be
pretty reluctant to accept that kind of responsibility.

I don’t know if either of the other two witnesses want to com-
ment or not.

Mr. VAN BELL. I would quickly add that I don’t believe we know
the answer to the question. There are so many variables when you
look at our population versus, say, Chrysler’s or anyone else, trying
to understand how you would do it. We as an HMO are looking into
seeking a risk contract as we speak. Some of the work we are doing
with a MIG addresses——

Mr. CarDIN. That doesn’t assume all your employees.

Mr. Van BELL. Pardon?

Mr. CaRDIN. That doesn’t assume that everyone will join the risk
contracts.

Mr. VAN BELL. No, I am talking about the commercial aspect of
John Deere Health Care. The risk.

Mr. CarDIN. I’m sorry.

Mr. VAN BELL. There are so many variables that we would have
to understand, plus the administrative activities. Seeking a risk
contract, as I understand it, is probably a year’s proposition at the
very best. So, there are a lot of things that go into that decision,
and it is very difficult. The variation from different parts of the
country. It is so difficult to answer that question.

Mr. CarpDIN. Thank you.

Mr. SALTER. I can say that at GenCorp we certainly believe this
whole issue is a national issue; probably needs to be spread in
some form over the economy as a whole.

What I think each one of us, independently, has said is that
managed care has worked at our companies. If you have a level


67

‘Companies from around the country call me daily to seek information about the Medical Savings
Account concept and how well it works. Numerous organizations including Crown Northrop.
Quaker Oats, Danville, Ohio Schools. United Mine Workers of America and Forbes Magazine
now provide MSA's to their employees and hundreds of others are considering the program,

ision for MSA‘

At RCI we envision a great future for MSA's, If the Federal government authorizes Medical
Savings Accounts and grants them tax deductible status, these programs will thrive. MSA's
would be offered by a greater number of insurance companies allowing for more competition.
better pricing, greater portability and more widespread savings on the part of employees for their
future health care needs. Participants will accumulate large nest eggs in their MSA to be used for
health care upon retirement

envision a dramatic reduction in health care expenses nationally with MSA's, mainly because the
consumer is involved in cost control. Additionally. administrative/paperwork expenses would be
slashed drastically because employees and retirees could use their MSA card like a universally
accepted credit card. Use of the MSA “credit card system” will reduce paper work costs from
$.30 of every dollar spent on health care to $.06 of every dollar.

Providers would be paid on a monthly basis, with the insurance company merely debiting their
account and sending them one statement. Participants would also only receive one consolidated
statement from the insurance company showing their activity for the month.

MSA's will also help eliminate the very costly government programs of Medicare and Medicaid
Concerning Medicaid, the government would give an individual on welfare an MSA voucher
which could be taken to an insurance company of his or her choice to get an MSVinsurance
policy. If that individual has money coming to them at the end of the year, it will be held until
they find a job, providing them with another financial incentive to seek work

Eventually MSA's would be a natural replacement for Medicare. Individuals accumulate their
MSA nest egg through the years and by age 65 could have $200,000, assuming an average of
$1000 is accumulated per year since age 21 at 6% interest. That individual could then purchase a
“super MSA" from an insurance company with a $200,000 deductible for the remainder of their
life at a very economical rate

The major challenge to implementing Medical Savings Accounts nationally and gaining
acceptance from employees, employers and Medicare/Medicaid participants is merely getting the
public to understand the concept and advantages of such a program and having the government
implement MSA's, This can be readily addressed. [ envision the education process to explain
what MSA means as being no different than the evolution of the HMO. Ten years ago it was an
unknown, today HMO is a household word. That's the kind of growth and potential we can


104

a political argument about letting seniors spend their money, but
I think you are going to have a very difficult time on a political ar-
gument telling two seniors that one is going to get a whole lot more
money on a risk-related basis than someone else.

That may be the case today, but when you strip it from all of the
various levels of discussion and you simply say y gets this and x
gets this, plus a factor on the risk selection, once again it is rel-
atively easy to conceptualize and create a structure which seems to
be equitable, but to take that and attempt to put it into political
reality is a much, much more difficult thing to do.

So, when you just sit there and say we are going to take the
MSA and MSA is going to be risk adjusted —

Mr. FERRARA. Well, it is not the MSA that is risk adjusted. It is
the voucher amount that you would draw from Medicare.

The reason why I think that this would not be a political problem
is because the amount each is withdrawing is reflecting what they
would have to pay to buy coverage in the private sector. A person
who has a serious illness has to pay a lot more to buy this coverage
than a person who does not have an illness. So, that is why I think
that this would be seen as equitable and that they would not cre-
ate——

Chairman THOMAS. Would the illness be treated differently and
in a different expense in a different health care structure?

Mr. FERRARA. Would it be treated differently? I don’t think so.
The point is, if you are dealing with one person who does not have
the illness and one person who does, the person who does not have
the illness can buy insurance a lot more economically than the per-
son who does have the illness. So, what I was suggesting—~

Chairman Tuomas. But if the person who has the illness, and it
is going to cost more for in a fee-for-service program than it would,
for example, in an HMO program, shouldn’t we have the right to
say you should go to where it is the cheapest to get the service?

Mr. FERRARA. He can go to an HMO under my proposal, if that
is what he wants. He can go to anything he wants. He can take
the risk-adjusted voucher out of Medicare; he can go to a current.
employer plan, a former——

Chairman Tuomas. Is the risk adjusted to the lowest possible
health plan cost out there?

Mr. FERRARA. No, no, no, it reflects the costs that are going to
be incurred by the plan that takes him. So, that it is an actuarial
estimate based on his expected health costs, and you look at factors
like-——

Chairman THOMAS. So, one plan will take him for $3,000 and an-
other plan will take him for $4,000. Which is the amount that
should be paid?

Mr. FERRARA. You don’t pick the amount based on what the plan
charges. You pick the amount that he takes in his vouchers based
on his expected health costs. He then takes the voucher amount
and sees what can I buy on the market. An HMO will come along
and say, we can take that and give you better benefits. The MSA
says, we can take that and give you an MSA and you can withdraw
the money at the end of the year. A former employer may say, we
have another bargain.


126

on haircuts, we must limit the permissible type of hair styles; bureaucrats
begin to split hairs about how many hairs a barber should be allowed to
split. A new computerized office of records filled with inspectors and red
tape shoots up; some barbers, it seems, are still getting too rich, they
must be getting more than the share of the national | so barbers.
have to start applying for Certificates of Need in order to buy razors,
while peer review boards are established to assess every stylist's work,
both the dishonest and the overly honest alike, to make sure no one is tuo
bad or too good or too busy or too unbusy. Etc. In the end, there are lines
of wretched customers waiting for their chance to be routinely scalped by
bored, hogtied haircutters some of whom remember dreamily the old
days when somehow everything was so much better.

Do you think the situation would be improved by having haircare
cooperatives organized by the government?—having them engage in man-
aged competition, managed by the government, in order to buy haircut
insurance from companies controlled by the government?

If this is what would happen under government-managed hair care,
what else can possibly happen—it is already starting to happen—under
the idea of health care as a right? Health care in the modern world is a
complex, scientific, technological service. How can anybody be born
with a right to such a thing?

Under the American system you have a right to health care if you can
pay for it, i.e., if you can earn it by your own action and effort. But
nobody has the right to the services of any professional individual or
group simply because he wants them and desperately needs them. The
very fact that he needs these services so desperately is the proof that he
had better respect the freedom, the integrity, and the rights of the people
who provide them.

You have a right to work, not to rob others of the fruits of their
work, not to turn others into sacrificial, rightless animals laboring to
fulfill your needs.

Some of you may ask here: But can people afford health care on their
own? Even leaving aside the present government-inflated medical prices,



45

TESTIMONY OF MATTHEW STOVER
NATIONAL ASSOCIATION OF MANUFACTURERS

Mr. Chairman and members of the Subcommittee, I am Matthew J. Stover, President
and Chief Executive Officer of NYNEX Information Resources Corporation, an information
service company which is a subsidiary of NYNEX Corporation. NYNEX has 67,000
‘employees and 63,000 retirees worldwide. 1am also a member of the National Association
of Manufacturers Board of Directors and I chair NAM’s Employee Benefits Committee. 1
‘am testifying today on behalf of the NAM. I am accompanied by Sharon Caner, Vice
President of NAM's Human Resources Policy Department.

‘The NAM would like to thank you and your colleagues, Mr. Chairman, for taking
leadership tole in the Medicare debate. The April 3 report of the Board of Trustees of the
Federal Hospital Insurance Trust Fund concerns us all. As you know, the Trustees
essentially told you that Medicare Part A, if left unchanged, would be insolvent by 2002.
‘The NAM agrees that the present Medicare system needs to be restructured and we are
pleased to be given the opportunity to participate in the debate.

Your concept of “seamless coverage," in which the federal government would make
payments to employers who retain their Medicare-eligible retirees in their health plans is an
innovative response to the crisis in the Medicare system, Employers would assume the risk
of these retirees and manage their care with the same tools employers have been using to
successfully manage the care of their active workers. The NAM urges this committee to
consider the following principles as it modifies Medicare:

* Provide incentives for greater use of managed care;

* Maintain quality health care for employees, retirees and Medicare

beneficiaries;
‘+ Seek solutions that reduce the escalation of medical costs as a whole;
© Avoid initiatives that result in cost-shifting;

* Continue to pursue market approaches fo ensure access to quality medical

care for all Americans.

Today, I would like to discuss the following matters with you. First, I will provide a
general background on employers and retiree health coverage. I will then discuss the NAM
Principles for Medicare reform. I will conclude with a discussion of the issues that will
concern Medicare beneficiaries, the federal government and employers should the Congress
move forward to develop the seamless coverage concept.

1. Background - Employers and Retiree Health Coverage

A. — Early Retiree Coverage. Many employees retire before they are eligible for
Medicare. To understand how Medicare might be integrated with employer-provided
‘coverage, it is important to examine health care coverage for this group of retirees.

In 1992, slightly over half -- 52 percent of employers surveyed by the benefits
consulting firm A, Foster Higgins, provided health care benefits to their retirees under age
65. This figure was down from 64 percent in 1987. Manufacturers, according to the
Employee Benefits Research Institute (EBRI), provided the bulk of this coverage with
approximately 64 percent (in 1991) of manufacturers making health insurance available to
retirees aged 51 to 61.

Firm size is the major predictor in determining if a firm provides retiree health
benefits. A 1993 survey, reported by EBRI in its most recent
Benefits, showed that in firms of 10 to 49 employees, only 8 percent provided health
insurance coverage to retirees under age 65. By contrast, in firms of 20,000 or more
employees, 84 percent provided health insurance coverage to such early retirees. Given
these statistics, it seems likely that larger employers would be the employers most interested
in participating in a seamless coverage system. Most firms (68 percent) that provided health
coverage for retirees under 65 require that the retiree pay the entire premium. Only eleven
percent of responding firms shared the cost with the early retiree.

B. _ Medicare-Eligible Retirees. Medicare is the primary payer of benefits for
retirees aged 65 and over. Employer benefits are secondary. In 1993, 10 percent of
‘employers surveyed by A. Foster Higgins provided health insurance to their retirees aged 65
and older. Only 22 percent of those employers paid the entire cost of this coverage. The
‘most common type of coverage was a Medicare coordination of benefits (COB) plan. Under
the COB method, the private plan pays the difference between the Medicare payments and
the total charge, as long as that difference is Jess than the total amount the private plan would



87

he ace tor Pate Pnvscians

ASSOCIATION OF AMERICAN PHYSICIANS AND SURGEONS

Volume 51, No.6 Sune 1995

CAN MEDICARE BE. SAVED?

Speaker Gingrich i setting the agenda. and Medicare is a
the top for the next tew months With great. political
astuteness, Gingrich lobbed the bail into Bill Chiaton's cour
With equal savvy and lightning speed, Clincon slammed it
back

They both kaow where che “thied cal in American
politcr’ is, and neither wants to touch wt. What politician
Could survive the credit for bringing dows the federal bulding
fof Medicare, the great shining showcase of the Welfare State
tnd governmentiunded medicine?

‘On the other fand, everyone wants credit for saving,
Medicare—including physicians. Aad something must be done.

TE building 1s ta touble, one needs to send in men ia
bard hats to examine the toundations

Let's sev aside the various Reports, Plans, Bills, Opinion
Surveys, and “Trial Balloons—and take a hard look at che
foundations of Medicare. Here are the rock-solid indisputable
facts that every American needs to know:

Medicare Part A is built on 2 first-dollar tax on wages
‘Out of every dollar an American earns, 2.9 cents goes to
Medicare Part A. No one may lawfully earn money 10
buy milk for the children, a train ticket to work, oF
insurance for himself, without paying. that tax firs.
‘Americans who earn $20,000 pay $880, those who earn
$206,000 pay $5800 co Medicare Par. A.

Medicare’ Part B premiums are about 75. percent
subsidized by general tax funds. Uninsured working
‘Americans are paying part of the premiums of wealthy
retirees.
‘The tax is-not enough; bankruptcy. is
Receipts fom the payroll tax already all abou
shor of covering current Part A outlays
‘The tax cannot be increased enough to keep politicians
promises. Increased longevity plus decreased ferility
Yields a demographic By 2040, the Medicare
payroll tax alone would consume between 106 and 20.26
reent ofall wages to maintain present benefits, Long
Bloc ax cater ite that high, capital ad labor will move
to places where they can earn a decent rewurn. U forced to
remaia, their productivity will be misimal

‘The dreadful troth s that Medicare is 3 pyramid scheme
founded on deceit, Its ike a poorly constructed building chat
straddles a major lau.

‘The answer to the question in the tide is simply "Noy
Medicare in its present form cannot be saved.” That is simply
2 fact, nota wish or a statement of political philosophy.

‘next question is what to do about st. One approach
is vo deny the magnitude of the problem and offer « pastable
ftostrum. Appealing but dangerous solutions include changes
{nthe top management along with schemes that paper over the

1 $22 billion

«racks with price controls.

Those in power know that they cannot repair the
problem, but they hope to postpone the day of reckoning so
hace does not otc on ther watch. Or tey wimp wth to
delegate te responsibilty so that someone else will be bl
Torthe debacle “Private” entities, namely “managed” care, are

ular candidates, Let thee skien a fat share of gross receipes
irom the top for playing the heavy and taking the beat

“Managed care” may be called a “matket-bases” of
private” Solution, but those terms ate in Orwellian
Newspeak, As documents of the Clinton Health Care Tabk
Force acknowledge, enterprises that exercise powers belonging
to government, ot that are under pervasive. government
contel are private nly i ame of form. Medicare LEMOs
ate funded by the government and act as an arm of the
government. But their falure will be construed asa failure of
the marketplace and asa reason for frank government takeover.

"Another approach isto call for the outright, immediate
repeal of Medicare. This would be about as ttresponsible as
ddynamiing an unsound building while people ae inside.

“The humane and rational approach isco shift our attention
from saving the building co saving the people who are trapped
int

“The frst sep isto avoid further damage from loading on
additional costly regulations, The second is to unload the
Counterproductive stresses. that already exist {the Clinical
Laboratory Improvement Act, restrictions on balance billing,
claims filing when no reimbursement is expected, etc). Next
{sto protect as well as possible the most vulnerable patients
who cannot find asstance outside the system. Most important
1 to evacuate in an orderly manner those who are willing and
able tg eve and smulanegsly to allow the development of
sound structures to replace the failed Medicare system,

Persuading people that they should leave a heavily
sabsiged progam wil got be ially when they
themes ae Benn aed ic provide tei. Pemading
young persons that they should not enter is somewhat easier
Finding the means for them to do so, given present levels of
taxatioe, is the diffcuh par.

Under polities as usual, Congress will study plans to
remodel the top floor, The Hea care rangement ners
sale Bak he a nts, whe ting poly ta

‘Meanwhile, the rel roppor for the srt i crum-
bling—the support of workers. Their ability to produce
drained by taxes and regulations, and their anger grows as they
see the legacy that awaits them.

‘Choices are stark: we can tell che truth and rescue the
people—or wecan lie and do nothing to mitigate the inevitable
ollapse.

AAPS News, fune 1995 1


8

is 6 or 8 percent, the young healthy people, and adds tremendously
to the costs of those who are sicker and need to spend more in the
medical delivery system.

It is not fair. It flies in the face of any kind of social insurance
or commercial insurance. It robs money from the insurance pool,
which the Chair is already complaining is going broke, and is an
idea that is right up there with sun spots.

I want to ask, or I want people to keep in mind that in the
Chairman’s budget the Medicare growth will have to be limited to
meet the budget projections to under 4 percent, perhaps 3.7 or 3.8
percent. I would like these companies who suggest that they might
like to continue operating their retirees’ programs to tell us today
if they could survive if the increased payments that they could
make was limited to under 4 percent—3.8 or 3.9—if we do not have
to adjust for adverse selection. I don’t think they can do it.

I think if they combine the idea of continuing to maintain Medi-
care beneficiaries in their retirement plans, with the budget reduc-
tions that are being discussed, and very likely to happen, that the
idea will lose its attractiveness.

I hope they will have a chance to review that today for us as we
hear the ideas being presented.

Thank you, Mr. Chairman.

{The prepared statement follows:]


THE POTENTIAL ROLE FOR EMPLOYERS,
ASSOCIATIONS, AND MEDICAL SAVINGS
ACCOUNTS IN THE MEDICARE PROGRAM

THURSDAY, MAY 25, 1995

HOUSE OF REPRESENTATIVES,
COMMITTEE ON WAYS AND MEANS,
SUBCOMMITTEE ON HEALTH,
Washington, DC.
The Subcommittee met, pursuant to call, at 10 a.m., in room
1100, Longworth House Office Building, Hon. Bill Thomas (Chair-
man of the Subcommittee) presiding.
(The advisories announcing the hearing follow:]

m


150

May 22, 1995

Mr. Phillip Moseley

Majority Chief of Staff

House Ways and Means Committee

1102 Longworth House Office Building
Washington, DC 20515

Mr. Moseley,

I am strongly in favor of passing a bill to institute
MEDICAL SAVINGS ACCOUNTS. It is the only way to take
responsibility for myself and provide for my medical future.
It’s voluntary, tax free and it gives me the right to choose
what kind of health care I want and when.

Remember---~ HEALTH CARE IS NOT A RIGHT
Sincerely,
palhten (oan

Kathleen Conn
1548 Middle Ra.
E. Greenwich, RI 02818


42

Mr. SALTER. Yes.

Mr. VAN BELL. Mr. Chairman, one additional comment I would
make. It may sound a little unusual, but it is really to our benefit
if we can get the people with the greatest illnesses in our plan, be-
cause we then can more effectively manage that care and the sup-
plemental benefits that we provide, the pharmaceutical, the drug
costs, if you will.

So, it may sound a little unusual, but trying to encourage the
sickest, if you will, into our managed care program would be bene-
ficial to Deere in managing its supplemental cost.

Mr. McCrery. Thank you, gentlemen, for your comments. We
appreciate your testimony.

We now call up the second panel. Matthew Stover, president and
chief executive officer of NYNEX Information Resources Corp., and
he is here on behalf of the National Association of Manufacturers
and accompanied by Sharon Canner, vice president, human re-
sources policy department, National Association of Manufacturers;
James S. Ray, counsel, National Coordinating Committee for Multi-
employer Plans, and he is accompanied by Judith Mazo, counsel.

Thank you for joining us today, and like the previous panel, any
written prepared remarks that you have will be entered into the
record and we would ask you to summarize your testimony in 5
minutes. When the yellow light comes on, you will have about 1
minute to conclude. When the red light comes on, if you would just
attempt to reach a conclusion.

Mr. Stover.

STATEMENT OF MATTHEW STOVER, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, NYNEX INFORMATION RESOURCES
CORP., ON BEHALF OF NATIONAL ASSOCIATION OF
MANUFACTURERS, ACCOMPANIED BY SHARON CANNER,
VICE PRESIDENT, HUMAN RESOURCES POLICY DEPART-
MENT, NATIONAL ASSOCIATION OF MANUFACTURERS

Mr. Stover. Thank you, Mr. Chairman, Members of the Commit-
tee. I am Matthew Stover, president and chief executive officer of
NYNEX Information Resources Corp., the information services sub-
sidiary of NYNEX Corp. NYNEX employs 67,000 active individuals
and we have 63,000 retirees, for all of whom we provide approxi-
mately $640 million in annual medical coverage. I am also a mem-
ber of the board of directors of the National Association of Manu-
facturers and chair the NAM’s employee benefits committee.

NAM would like to thank you and your colleagues for taking a
leadership role in the Medicare debate. The NAM agrees the
present Medicare system needs to be restructured and we are
pleased to be given the opportunity to participate in your search for
the best restructuring solutions.

Your concept of seamless coverage in which the Federal Govern-
ment would make payments to employers who retain their Medi-
care-eligible retirees in their health plans is an innovative response
to the crisis in the Medicare system. Employers would have the op-
tion to assume the risk of these retirees and manage their care
with the same tools that we have been using to successfully man-
age the care of active workers.


161

May 21, 1995

Larry Salzman
7500 Parkway Dr, #304
La Mesa, CA 91942

Mr. Phillip Mosley
Majority Chief of Staff

House Ways & Means Commitee
1102 LHOB

Washington, DC 20515

Dear Mr. Mosley,

Asan American I have a strong interest in the future of freedom for our nation, As such,
the recent debate concerning the adoption of socialized medicine is of grave concern to me
Fortunately, reason has temporarily prevailed on this issue. The real problems with our medical
system which gave rise to President Clinton's ill-conceived solution, however, still exist. Costs
have skyrocketed, many Americans do not have access to medical care and worse, doctors have
come increasingly under control of onerous regulation - replacing the sanctity of their scientific
judgment with the edicts of beauracrats and hospital administrators.

The above looms ominous in my desire for reliable, affordable, innovative medical care for
me, my family and others I care for. I believe that freedom breeds prosperity and that prosperity
is the prerequisite of innovation, affordability and reliability - in medicine as in all other human
endeavors, The solution to our medical woes, therefore, must begin with the extension of
freedom to this vital human need. Tax-Free Savings Accounts for individuals wishing to provide
for their own medical expenses is a healthy first step toward extending freedom for medical
consumers and providers. Please seriously consider the adoption of this modest first step into @
free medical marketplace as you deliberate over how to solve the real problems with the medical
system in the United States.

a


73

health status. Consequently, those who are older and sicker would receive more from Medicare to
purchase private coverage. ‘Those who are younger and healthier would receive less, reflecting the
lower amounts they would be charged for such coverage. This would prevent adverse selection
problems, since retirees who leave the program would only take the share of funds that actuarially
feflects theit own risks.

‘The key is that these amounts that could be withdrawn from Medicare each year would be
Testricted to grow by no more than 5% per year. So for those who chose the private options,
Medicare spending would grow no faster than the budget targets,

Another provision would ensure that for anyone who chose to stay in Medicare, spending
would also grow no faster than budget targets. An upfront deductible would be added to the
Medicare benefit structure. The deductible would be set at whatever amount necessary each year to
‘ensure that the rest of the program for those staying in the current system would not grow faster
than 5% per year.

Consequently, Medicare overall would be assured of growing no faster than 5% per year,
‘meeting the budget targets.

‘The MSA Option

‘The MSA option in the above reform plan would enable the elderly to get even better
benefits and health care than under the current Medicare system, while staying within the budget
targets. That is because the powerful incentives of the MSAs would control costs while other
features of the MSA option would actually improve benefits and the quality of care.

‘Under the MSA option, the retiree would use part of the funds from Medicare to purchase
insurance covering all expenses over a high deductible, say $3,000 - $4,000 per year. The
remaining funds would be saved in the MSA and used to pay medical expenses below the
deductible. The retiree could then withdraw any remaining MSA funds atthe end of the year and
use them for any purpose,

Health insurance actuaries have estimated for the NCPA that the amounts the elderly could
withdraw from Medicare, plus the amounts they are already paying out-of-pocket for health care
and supplemental Medigap insurance, would be enough to pay for the insurance and put $3,000 -
$4,000 in the MSA for expenses below the deductible.!

Under this structure, the elderly choosing the MSA option would effectively be spending
their own money on health expenses below $3,000 - $4,000 per year. This would make them
fully cost conscious consumers of health care for such expenses. They would consequently seek
to avoid unnecessary or overly costly care, or any care where the costs exceed the benefits.
Perhaps more importantly, because of this new consumer cost concer, doctors and hospitals
‘would compete to teduce costs to atiract consumers trying to preserve their funds.

Several studies show that for those who used the MSAS. these incentives would quite
Likely produce savings more than sufficient to hold costs within the 5% per year growth rate
targeted under the budget for Medicare:

‘+ The prestigious Rand Corporation conducted a rigorous scientific study of the health
expenditures of 2,500 families from 1974 to 1982. The families were each provided
‘with one of four different insurance plans, ranging from a zero deductible and all health
expenses paid, to 5% of the first $1,000 in expenses paid, and 100% after that. The
families with no deductible mcurred 53% more in hospital expenses, and consumed
63% more in doctors’ visits, drugs, and other health services, than the families with the
highest deductible. Yet, the study also found no difference between these families in
health outcomes.?

‘© Overall, these Rand studies indicate that families today with a deductible of about
‘$3,000 would consume 30% less health care than families with no deductible — with
no adverse effects on health.

See Peter J. Ferrara and John C. Goosiman, “Medical Savings Accounts for Medicare,” Brief Analysis No, 160,
National Center for Policy Analysis, Dallas, Texas, April 17. 1995,
* Joseph Newhouse, eta. “Some Interim Results from a Controlled Trial of Cost Shang in Health Insurance,”
[New England Journal of Medicine, December 17, 1981


82

much more. They are also young. They have had no experience in the health-care market. They
sign up, and the company says we'll provide health care. They didn't care what kind of plan, as,
long as they knew they had health care for their family. They went from paycheck to paycheck.
‘Their educational level was low, they had no economic background, they weren't inclined to ask
questions, and we certainly didn't tell them anything they didn't want to know.

From the managed-care company's standpoint, the more people we could sign up, the
better. Every person enrolled means more revenue generated. So we went in and sold this
program as quickly as we could. Some of you may have long dissertations with your insurance
man or with your attomey. Our average appointment with a management team was one hour.

‘We wanted to present everything and get out of there before they had time fo ask any
questions. And as long as a CEO was looking at the bottom line, it was a go. We probably sold
between 85 and 90% of the plans we approached.

1 look back on that and I think ] resembled a used-car salesman. This runs great, looks
good, here it is, take the keys, gimmie $100.00, it's yours, your outta here. The problem is, 1
didn't tell you that it's probably only going to get you about three blocks down the road, you're
lucky.

When we sold to physicians, our point was to join now or somebody else would. We said
we've only got slots for four family practice docs in our list of physicians here so you know if you
don't sign, Dr. Jones down here will and of course if he signs and you don't and you have patient
that all work for John Doe company over here, he gets all of those patients automatically, It
doesn't make any difference whether they want to go to him or not, that's where they are going to
go if they want their services paid for.

We preyed upon poorly educated employees. If they were hesitant at all, we'd go out on
the factory floor as we were walking out and say "Wait a minute, if youre really not sure this is a
plan for you, let's ask this guy over here running this mill." We'd pull the guy off the mill and say,
“Listen young man, how much do you pay for health insurance for your family? How would you
like to pay 1/3 of that? Oh, and you pay 20% on top of that? Oh, well, how would you like to
pay $10.00?

‘Now, you only have to hit one man on the floor or possibly two, and the word would go
through that company. There is a health insurance pian available that is only going to cost one
third of what people are paying now and $10.00 a visit. The plan is sold, They will not dare tum
your plan down because they will have a revolt from the employees if they do.

We gave people limited information conceming the panel of physicians. People would
ask, "Well, is my doctor on the panel? Could I go see my family doctor?”

“Well, we are currently negotiating with a number of physicians to join our panel and
actually we are talking to Dr. Jones, your physician, and he has shown some interest.”

T hadn't even been to see the man yet. That's the way the system works. Don't answer any
question up front, and don't answer them straight. Make a quick sale to the employer, and do it by
selling it to the employees first, if necessary.

Then I changed jobs. I went from selling HMOs to working in a private office in which
the physician 1 worked with signed up for a number of HMOs. He got caught in the crunch: "If
you don't sign. the doctor down the street will. You've got 4000 patients, we own 1200 of those,
can you afford that loss in income with three kids in college?" Those were the types of things that
were told to the physicians. When the physician I worked for refused to sign up for an HMO, we
lost 300 patients overnight. That's a pretty good chunk out of a single physician family practice
group. That's a significant cut in income.


THE POTENTIAL ROLE FOR EMPLOYERS,
ASSOCIATIONS, AND MEDICAL SAVINGS
ACCOUNTS IN THE MEDICARE PROGRAM

HEARING

SUBCOMMITTEE ON HEALTH
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTH CONGRESS
FIRST SESSION

MAY 25, 1995.

Serial 104-49

Printed for the use of the Committee on Ways and Means

ee

U.S, GOVERNMENT PRINTING OFFICE
2A AB CC WASHINGTON , 1996

For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington. DC 20402

ISBN 0-16-053614-6
a



108

program as well as in the private sector: fee-for-service medicine and third-party payments.
Increasing Medicare coinsurance and deductibles is an attempt to deal with the third-party
payment factor. Introducing capitated services, such as those called for in the Medicare
Risk Program, is one method of dealing with the fee-for-service medicine factor. To date,
the federal government has done very little to deal with the factor of third-party payments
to control health care costs. Its efforts at producing savings through capitated managed
care have not been fully successful.

High deductible plans represent a way to deal with the issue of third-party payments.
Direct payments by patients for a portion of the cost of their health care services are a
proven method of creating behavioral changes among both providers and patients,
resulting in substantial reductions in health care costs.

When patients and providers perceive that they are spending other people's money, they
do not concern themselves with either the price or the quantity of services provided. Even
the relatively modest cost-sharing provisions of the Medicare program have a substantial
impact on the utilization of health care services by Medicare beneficiaries. Research
conducted by the Health Care Financing Administration's Office of the Actuary on the
Medicare Current Beneficiary Survey found that, even when controlled for self-reported
health status, Medicare beneficiaries who did not have Medigap plans, and who were thus
fully subject to Medicare's cost sharing provisions, have significantly lower overall health
expenditures.’

Table 1 indicates the differences in health care spending between Medicare beneficiaries
without Medigap plans and those with employer-sponsored Medigap plans. Individuals
who are fully subject to Medicare cost sharing (i.e., they are not covered by an employer-
sponsored Medigap plan) cost the Medicare program substantially less than individuals
who are not fully subject to Medicare cost sharing

Tate 1
Medicare Spending Per Beneficiary for Aged 65 and Older Population, based on Self-Reported Health Status
and Coverage by an Employer-Sponsored Medigap Pian

death Status Medicare Oni Emolover Sponsored Madigan Pian Ratio
Excelent $705, s12i7 172.6%
very Good 3905 31.490 184.6%
[Coo sua soser 137 0%
Fai 32.462 33.238, 1314%
Poor $4604 $6477 138.3%

‘Source Health Care Financing Review.

‘Approximately 80 percent of Medicare beneficiaries have either Medigap plans or Medicaid to
cover Medicare coinsurance and deductibles.



131

Chuck Braman
76 Carmine St., #3-D
New York, NY 10014-4346

May 23, 1995

Mr. Phillip Moseley

Majority Chief of Staff

House Committee Ways and Means

1102 Longworth House Office Building, (LHOB)
Washington, DC 20515

Dear Mr. Moseley:

I would like to let all of my representatives in
Washington know that I strongly favor the idea of tax-free
medical savings accounts, like IRAs; voluntary, tax-free, no
compromises! For a summary of the reasons why I favor a fully
free market in medical care, please see the enclosed 7 page
summary of "The Real Right to Medical Care vs. Socialized
Medicine.”

Sincerely

unl) 2—

Chuck Braman


159

P, Michael Hutchins
911 North Road
Carlisle, MA 01741

22MAY95S

Mr. Phillip Moseley

Majority Chief of Staff

House Committee Ways and Means

1402 Longworth House Office Building, (LHOB)
Washington, DC 20515

Mr. Moseley:
The institution of medical savings accounts would be an important step towards giving

back some control over their future to the people who are the heart and engine of this
country (those who produce the wealth that they need to live).

No medical system can work, long term, that is built upon a foundational structure that
puts primary emphasis on entities other than the beneficiary paying for medical care.
Before our wonderful, unequalled medical system is destroyed, please work to establish
at least this tiny island of sanity.

Sincerely,

P Mubat Hobe

P. Michael Hutchins




103

Additionally, research shows that not only are health care costs higher because of third-
party payments, but heaith care costs increase faster because of third-party payments.
A forthcoming Health Affairs article, co-authored by Mark Freeland, Ph.D. and Al Pedron,
Ph.D., shows that the acceleration in the rate of growth in heaith care expenditures in the
United States has been highly correlated with the shift toward third-party payments. This
research shows roughly that every ten percentage point shift from out-of-pocket payments
to third-party payments results in an increase in the annual rate of growth in health care
costs of about 2 percentage points, and this accelerated rate of growth persists for about
ten years. This is an important finding because it provides the potential key to reducing
the rapid growth of health care costs in the United States.

POTENTIAL ROLE FOR MEDICAL SAVINGS ACCOUNTS

Medical savings accounts (MSAs) could play an important role in facilitating the
introduction of high-deductible plans into the Medicare program and reducing Medicare
outlays substantially.

Illustrative Example

A plan could be developed that would require Supplementary Medical Insurance (SMI)
enrollees who volunteered to switch to a high-deductible pian (with a $1,200 deductible)
and who volunteered to forego the purchase of Medigap policies, to pay a $4.00 monthly
SMI premium, compared with the current monthly payment of $46.10. They would be
allowed to deposit their $505.20 annual premium savings in an MSA tax free. Money
withdrawn from the MSA for expenditures other than health expenditures would be taxed
as Social Security income. {f all SMI enrollees joined this plan, ensuring no favorable
selection, the savings to the government in the SMI program could be $5 billion in the first
year alone, according to estimates by HCFA's Office of the Actuary. Alll of these savings
would arise from behavioral changes alone, rather than merely shifting costs to
beneficiaries or reducing payments to providers.

Potential Impact of Risk Segmentation

Risk segmentation is an important factor that would need to be considered if an MSA with
a high-deductible “true” catastrophic plan (including Medicare HI benefits) were offered as
an optional Medicare benefit plan. Risk segmentation can be generally defined as a
situation where beneficiaries of differing health status systematically choose to enroll in
different plan options. It is very important to give careful actuarial attention to plan design
and to the administration of enrollment and disenrollment in the options in order to


30

continue to attract HMOs in all regions of the country into the risk
sharing program.

| will leave it to the HMO community and managed care networks
to identify those technical factors that may need to be revisited in order
to increase managed care enroliment under Medicare. Generally,

rent Medicare risk sharing program. Under the HMO tisk
sharing program, HMOs contract with HCFA on a capitated basis to
provide at least the full Medicare benofit package, usually aiong with
additional supplemental benefits. This has led, however, to the
development of an HMO Medicare product focused on individuals,
rather than groups. The individual nature of this product contributes
to the labor intensive way In which HMOs must market, enroll and
administer their Medicare members. It also leads to the final
suggestion | wish to offer you; Increased employer Involvement in
enrolling retirees in Medicare risk sharing HMOs can help bring greater
group-related efficiencies and greater retiree acceptance to this aspect
of the Medicare program.

» Continue to encourage the participation of employer groups in the
HMO risk sharing program.

increased employer participation in the Medicare risk sharing
marketplace can have several benefits for Medicare beneficiaries,
employers and the government. Current and future Medicare
beneficiaries will be more willing to enroll in Medicare risk sharing
HMOs if their employers are actively invoived in reviewing and
monitoring these plans. No amount of HMO marketing and advertising
can compete with the positive effect of a communication from the
retiree's former employer introducing the managed care concept and
the potential benefits of participating in a managed care network or
HMO. As | Indicated earlier, approximately 80% of our employees are
already participating in managed care programs; therefore,
continuation of managed care into retirement will be anticipated and
considered the norm.

Employers also are able to negotiate improved plan designs from
risk sharing HMOs by seeking supplemental benefits and improved
pricing arrangements for employer groups. This existing flexibility in
the risk sharing program is sometimes not even fully understood by
HMOs that have risk sharing contracts with Medicare. As sophisticated
purchasers of health services, employers involved in this market place
can bring about product innovation by HMOs and greater value to
retirees.

Experience with enrolling active employees in managed care
programe has aiso taught employers what needs to be communicated
to participants in order for their decisions to be well informed and for


89

Mr. McCrery. Yes. It is your opinion that the effect on total ex-
penditures would be the same as the effect on the non-Medicare
population?

Mr. FeRRaRA. Yes. I think if you look at the cost distribution, as
a matter of fact, under Medicare, you will find that most people—
say, you had a deductible of $4,000 in the medical savings account,
the great majority of people would not go above that every year—
and HCFA has these numbers; if you look at that distribution, I
bet it is on the order of 80 percent probably never go above that—
and you would have the same incentive effect that you have got
with the non-Medicare population. People are spending their own
money; they don’t want to waste it.

There is another factor that comes into play here that people
often overlook. Because the people are concerned about not wasting
money, the doctors and the hospitals for the first time really com-
pete on cost. Today, they don’t compete on cost because the patient
is not choosing them on the basis of cost; the patient is choosing
them only on the basis of quality. The patient doesn’t care about
cost because Medicare or the insurance company is paying for it.

When the patient starts choosing on the basis of cost as well as
quality, they will compete on cost as well as quality; they will come
up with ways to tell the patient, here is how you can do it for less.

Mr. McCrery. You think that principle holds true with the Med-
icare population?

Mr. FERRARA. Yes.

Mr. McCrery. Dr. Orient, have you thought about this difference
between the Medicare population, the non-Medicare population and
the effect of MSAs on each?

Dr. ORIENT. Well, the Medicare population is an artificial distinc-
tion caused by the existence of the government-funded program
past the age of 65. Otherwise, they are human beings and they
have a continuum of needs as younger people do.

Mr. McCrery. But they are elderly folks. When they are over the
age of 65, they do have, on average, greater demands for health
care; is that not correct?

Dr. ORIENT. Yes, that is correct. Mr. Ferrara, I think, has ad-
dressed that question.

Mr. McCrery. So, it is not an artificial distinction exactly. It is
obviously an arbitrary distinction at 65, but it is not an artificial
distinction, it is a real distinction. I am just curious, have you
given any thought to the effect of medical savings accounts on the
population, the universe of people above 65? Would it be the same?
Would it act the same as those under 65? Is it more dangerous be-
cause of the greater health care demands?

Dr. ORIENT. I think clearly it would work the same way; and peo-
ple over the age of 65, they are adults, they are capable of making
prudent decisions about their medical care and, in fact, they do
take cost into consideration when they know that there will be an
out-of-pocket cost that they themselves have to pay.

Yet they also are extremely interested in their health, and I
think they make wise decisions and it has been shown, certainly
in younger population with MSAs that they may, in fact, tend to
obtain more preventive care when it is their own money they are
spending, or saving if they get the care at a propitious time.


84

weekends. That 800 number would ring incessantly. | have even called it myself and let it ring
60 times and not had an answer. That’s what happens to your patients.

‘Now, what about transporting a patient by ambulance? Suppose Mrs. Jones calls you says
“My husband fell down the stairs, and I think he broke his hip." You can't just say, "Okay, we'll
cal] the ambulance, and we will see him in the emergency room." They have to call and get that
approval for that ambulance, and you have to be sure they have done it. And many HMO's don't
cover ambulance transportation, so it's an out of pocket expense.

Specialists care. Now we get down to what gets into the physicians pocket. Your
capitated, you've got 400 patients in your panel, your capitated at $5.00 a piece and so you've got
this set income that's going to come in, $2000.00. Okay now, we forgot to tell you though that
we are going to keep 10% of that off the top for a catastrophic fund, that's in case somebody has
to have a bypass or something like that. So, we are going to withhold that amount of money.

This is a true story. You go in to see your physician, I had an 18 year old girl who came
in with acute onset of a heart murmur and chest pain. She came in, I said “look we ought to send
you to see the cardiologist". Well, we had to call and get approval to send her to the cardiologist.
Not a major problem with this one HMO, worked pretty well. The only problem was that we
paid for the cardiologist, it comes out of our capitation find.

I was lucky, the doctor I worked with didn't look at dollars, he looked at patients, he took
care of her, he sent her.

There were other doctors I know that worked in the same area that did not refer patients
because they had to pay for it. If you have somebody that does not have a life threatening
condition, we had a 35 year old female with new onset seizures who we attempted to refer. We
had to try, according to the HMO panel, at least three anti-seizure medications before she could be
referred to a neurologist. They would not pay for an EEG, they would not pay for a
neurosurgeons evaluation or neurology evaluation until she had been tried on at least three clinical
drugs.

And then you run into the panel. If you have a patient (the same May, 1995 lady with the
seizures) who we did try three drugs on and then we attempted to get an EEG because it was
"expensive" and that is determined by each individual HMO (how costly a test is) it has to 20
before the approval panel. You have to submit a form to go to the panel.

Well, if you're lucky, the panel meets weekly. Unfortunately, ours met monthly to begin
with, because it was small. So you submit a consultation form to the panel with the clinical
information on it and request permission to send this lady to an out-of-panel neurologist and have
an EEG done.

Unfortunately, on the panel you have one physician (who we were lucky was an intemist,
who was fairly well versed), you have an accountant and you have a CEO or CFO of the HMO.
Well, he doesn't care. She's not related to him and he is not married to her, so, as far as he is
concemed that's another body and he is looking at expenses. So, each’person has a vote on
whether or not that person gets that test done.

You have an accountant and a CEO that votes no and an M.D. that votes yes. Even in
good conscious this guy is losing. It happened three times before we got this lady transferred.
These are honest stories on a stack of bibles people - I swear.

‘Again, strict criteria for patient care, you have to meet certain criteria before you can
transfer a patient. I worked in a cardiology group for awhile at a large hospital in Nevada, It was
near the State line. We used to get patients over from a large HMO out of Sacramento. They
would come over, they'd had an angiogram done. They did have chest pain, they had been


12

ployers, hospitals, physicians, and MCOs are responding to the
need to manage cost while enhancing the quality of care.

Some examples: Deere health costs, which include supplemental
costs for retirees, increased 2 percent in 1994. Deere costs equate
to approximately $2,000 per covered person per year, which we be-
lieve is the only true method to measure cost. In 1994, we tripled
the number of Iowa counties in which we served the Medicaid pop-
ulation. This program began in 1986 and now has 23,000 clients.

Our quality improvement program, such as the asthma disease
management strategies, are being used with this population. We
are encouraged by our recent success with the asthmatic popu-
lation enrolled in our health centers. With overall success of the

rogram, according to the Iowa officials, we are saving the State
$500 per year per enrollee, and we voluntarily returned $3.5 mil-
lion to the State last year.

These changes could not occur without patient satisfaction. Three
years ago our enrollees rated our service the best in the country,
according to a leading consumer magazine. In 1994, the Gallup or-
ganization researched our patients. Gallup compared us to 64 other
health plans. Our patients scored us significantly higher than the
national composite in key areas of patient satisfaction. Enrollee
satisfaction in our staff model center was at 94 percent, or 6 per-
cent higher than our IPA model. This suggests to us that we are
able to offer choice, and yet see satisfaction levels above 90 percent
in our most tightly managed care model. We believe we are adding
value.

I would like to briefly speak to the issue of the Medicare insured
group demonstration project we nave been working on with Health
Care Financing Administration, HCFA. Our involvement began
when I chaired the OHMO National Industry Council in the late
eighties. Former Secretary of Health and Human Services, Richard
Schweiker, created the council to foster the development of HMOs.

The Medicare Insured Group, MIG, would be a 5-year demonstra-
tion project which would provide a savings to the Medicare Pro-
gram by enrolling Deere retirees in our managed care programs.
The post-65 retiree would continue to have a choice of plans but
there would be incentives to move to the managed care programs.
John Deere Health Care, through our health plans, would manage
the care, paid for by Medicare, and we would also manage the sup-
plemental benefits Deere provides this group.

While there have been many delays, we believe this concept can
work and we are hopeful that the demonstration project can move
forward. By utilizing some of the tools I have already mentioned,
such as Disease Management Strategies, DMS, and Electronic
Medica] Record, EMR, we believe we can add value in managing
the care and cost of this important population.

In closing, we believe that many of our programs can be made
to work in the general Medicare population. Our experience with
the Iowa Medicaid Program suggests it can work. Quality improve-
ments in cost savings continue in that group. Current Deere em-
ployees, upon retirement and becoming eligible for Medicare, by
and large, remain in our managed care programs. We also continue
to see high levels of patient satisfaction.


54

considers these to be "employer contributions," the reality is that the employer's
contributions are substitute wages for labor received. Instead of putting this money into
the worker's paycheck, the employer pays it to the health and welfare plan to finance
benefits coverage for the worker and his family. Covered workers are well aware of the
cost of health care coverage; they pay the cost by accepting employer contributions in
lieu of cash wages. They know that they are paying the full cost of their health care
coverage. They do not need a new law or tax to motivate them to hold down health care
costs to the extent possible,

For example, the nature of collective bargaining in the building and construction
industry is that the total compensation package cost is negotiated with the employers,
and the workers, through their union, decide how to allocate the total hourly rate among
cash wages, pensions, health and welfare, apprenticeship and training, and other
beneficial programs. An increase in the contribution rate for the health and welfare
plan means less in wages, or less in pension plan contributions, or less in contributions
to another benefit plan. This process makes the workers very sensitive to increases in
the cost of health care coverage.

From the plan’s perspective, financing depends upon the level of covered work, as
well as the collectively-bargained contribution rate. That is, the plan generally receives
employer contributions only for hours worked in employment covered by a collective
bargaining agreement. If the level of covered work declines, plan income declines. The
per hour contribution rate set by the collective bargaining agreements usually cannot be
increased unless and until the labor-management parties negotiate a new or modified
‘agreement, A multiemployer plan cannot simply reach into the corporate treasury of an
employer, in contrast to single-employer corporate plans.

Over the years, the labor-management boards of trustees of our plans, with
professional assistance, have designed health and welfare programs that balance the
benefit needs and wants of the covered workers with the financing that can be provided
by the collectively-bargained contributions. To balance these factors, the trustees have
developed various eligibility rules, benefit packages, and operational practices tailored
to their particular circumstances. For example, plans have developed various systems
for continuing coverage during gaps in employment and into retirement. These systems
include *hours-bank* arrangements under which a worker’s hours of covered employment
are “banked* and used to pay for benefit eligibility during periods of unemployment.
‘Other systems use eligibility periods during which a worker's covered employment builds
credit towards benefit eligibility in a future period (e.g., covered employment in the first
quarter earns the worker benefit eligibility for claims incurred in the second quarter).

By pooling the contributions of many employers into a central fund,
multiemployer health and welfare plans enjoy economies of scale in administration as
well as enhanced purchasing power in dealing with health care providers and insurers.
Multiemployer plans are prototype purchasing cooperatives, Many of our plans are self-
funded. Many others insure some or all of their benefits with commercial carriers or
other health insurers. Some of our plans have in-house administration, although most
use professional third-party administrators who answer to the plan’s labor-management
board of trustees.

Participating employers are advantaged in that they are required to do little
other than submit their periodic contributions to the plan with verifying information.
The employers need not become involved in plan administration or plan design. These
functions are the responsibility of the plan’s labor-management board of trustees and
the professionals they hire.


96

To get the full weighing of cost against benefits, you have to
allow them the freedom of choice to spend it on health care, as un-
limited as possible at the end of the year. Any way you restrict
that, you are undermining the economic incentive to try to weigh
costs against benefits. You are reducing the rewards they get for
not spending money on health care.

The whole idea behind MSAs is to give people incentives not to
spend money on health care, and it is not to give people more
money to spend on health care.

Mrs. JOHNSON. I do understand the economic analysis, Mr. Fer-
rara, but my time has expired so I can’t pursue this any further.

Chairman THomas. Thank you.

I believe Mr. McCrery wants to speak but before he does, Mr.
Ferrara, one of the things that we do around here is look at eco-
nomics in terms of not only real-world context but also, in terms
of a political-reality context. I understand your argument about
weighing health care costs versus other uses for the money. I found
out a long time ago that one of the first things you have to do
around here is get a program started before you have a program.
I was on the floor, not able to be with this Subcommittee for a por-
tion of the time, as we were in the process of moving toward a con-
ference committee with the Senate on Medicare Select. You cannot
imagine what was said on the floor on such a modest little pro-
gram.

Your example that you just gave would allow me, unfortunately,
in a political context to say what Mr. Ferrara wants to do with the
taxpayers’ money, with the Medicare Program is to give the senior
the choice between an RV or necessary medical attention. We know
that is a phony argument. That, in essence, is what you are setting
up in terms of an open-ended MSA account to be expended for
whatever purpose someone wishes to expend that money for in an
attempt to equate, in a pure economic sense, health care costs.

I found out a long time ago that you don’t legislate in a vacuum
and you do have to legislate in political reality. So, one of the
things that we will be looking for as a Committee moving forward
is a medical savings account program which not only creates an op-
tion or a choice for an individual from other structured programs,
but has a modicum of a chance to pass. We have to deal with politi-
cal realities as well as all other things being equal economic re-
ality.

So, I guess what I am politely trying to say to you is that your
colloquy with my colleague from Connecticut, although it may score
points in terms of an academic argument over economics does not
advance our cause of finding a politically salable approach to medi-
cal savings accounts.

So, we are going to have to examine Mr. Erhart’s comment very
carefully about saying if you do carry over money, what you are in
essence doing is moving toward self-insuring yourself by the accu-
mulation of funds in an MSA to be spent only for medical purposes,
and that may very well be the best world that we can reach, be-
cause to do otherwise would be not to have any medical savings ac-
count option, and I believe that the former is a better choice than
the latter.

Mr. FERRARA. May I address that?


75

‘Other Reform Features
(Other features of the reform proposal would include the following:

‘+ The private plans offered as an altemative to Medicare would have to cover the same
medical services and treatments as Medicare.

‘© The private plans would have to accept anyone from Medicare for coverage to
participate in the system,

‘© Those who chose a private plan could go back to Medicare after one year, but not
before. The could switch to another private plan that would accept them at any time,
‘but those plans again would not be required to accept them from another plan


36

playingfield, there is absolutely no reason why it cannot work na-
tionally. When we talk about cuts, we are really talking about cuts
in waste, cuts in inefficiency.

Our companies are not in the position to continue to invest in
waste. Quite the opposite. We are trying to cut that. That, in turn,
relates to improved service and improved quality, and so forth.

So, I believe what we are really saying is that quality costs less
and the only way you get to quality is to begin to measure what
you do. Right now we are not doing that in our health care delivery
system.

Mr. McCrery. Thank you, gentlemen. Thank you, Mr. Cardin.

Since, Mr. Cardin’s questions are always so penetrating and elic-
it such enlightening information, and because he has no help on his
side today, I allowed him to go further than we normally would.

Mr. Christensen.

Mr. CHRISTENSEN. Thank you, Mr. Chairman.

Let’s just go over some Medicare facts in terms of the spending
per senior citizen this year and in terms of medical benefits re-
ceived. Currently, we are spending $4,800 per Medicare recipient.
In year 2002, we are going to spend $6,400 per Medicare recipient
in terms of medical benefits received. That is a $1,600 increase.

Listening to Mr. Stark speak, it would seem as if we are bringing
an end to Medicare as we know it. These “Mediscare” tactics that
have been promulgated by the liberals in this House is really dis-
gusting, and we keep hearing it from our friends on the left. It
doesn’t help us get to a solution of the Medicare problem.

Clinton’s own trustees, as you know, have stated that Medicare
goes bankrupt in the year 2002. It is growing at a 10-percent
growth rate. We are going to slow it down to 6 percent. But yet,
to listen to Mr. Stark and others speak, innovative and novel ideas
are not what we need at this time.

My question would be regarding the Democrats’ big government
experiment with health care last year that was soundly rejected by
the American people. Where were each of your companies on this
approach to solving health care last year? And then I have a follow-

up.

ive VAN BELL. We followed the legislation throughout the proc-
ess and we felt very strongly that the private sector held many of
the solutions. We were very concerned about the creation of alli-
ances and more government intervention with our programs

We felt very strongly that we should continue to work to unleash
the private sector in health care. We felt a number of the innova-
tions that we had embarked on and invested in to improve the
quality of care would probably not continue if we moved in that di-
rection. So we were terribly concerned with the direction of legisla-
tion last year.

Mr. MAHER. Our company believes that the health cost in this
country and the cost shifting that is inherent in this country will
really never be fully resolved until you get all people in this coun-
try covered. As a result, there were many aspects of the Health Se-
curity Act, including the goal of getting everyone in this country
covered that we supported.

To the extent the country decided that it wanted to continue with
a public-private system as opposed to a fully tax supported system,


48

from government to business would be unpopular and would not address the fundamental
neue of reducing the overall rate of growth in health care costs.

It would be administratively difficult for self-insured employers to accept payments
‘iirectly from the government for the provision of health care benefits. A more attractive
arrengersent from the perspective of employers may be for the government payments to go
4ire"ly <0 the managed care plan, which would then bear the risk.

2. FAS 106. Another issue to consider is Financial Accounting Standard
‘AS 106), which went into effect for most companies in 1993. This standard requires
companics that sponsor retiree health plans to record unfunded liabilities for future
‘ares on their balance sheets. The standard increases balance sheet liabilities for
corvorctions that have large retiree populations and/or generous health benefit plans. To the
extent C22: any payment did not adequately compensate employers for their retirees’ health
care vests, the FAS 106 rule would make these employers appear to be less attractive
snvesteients and adversely affect their competitiveness.

3. Continued Budget Cutting. The environment of government
downsizing and deficit reduction may make many employers leery of participating in this
vcavept of seamless coverage. Congress may decide to reduce payments to employers in
futore years. Such a reduction would leave employers with a costly and unsustainable
burcen 2s more of their employees become Medicare-eligible. This would induce fear

program. In fact, anticipation of the budget cuts that are being considered by Congress may
be eraugh to discourage many employers from participating in this new seamless system in
the first place.

4. Employers and Risk-Contract HMO’s. Some employers are already trying
tictease retiree participation in managed care plans by encouraging their retirees to join
siry-contract HMO’s. These HMO’s which contract with HCFA to treat Medicare-eligible
reive-s ssually have a special expertise with Medicare beneficiaries. Under Medicare risk
contrscts, an HMO receives 95 per cent of the average per capita rate reimbursed under
conventional Medicare coverage for each of its Medicare members, and it must absorb any
losees if its costs to provide care to those members exceed that rate, The few employers that
cessfully led more of their retirees to enroll in risk-contract HMO’s have lowered
ir supplemental premiums and often provided their retirees with more comprehensive
coverage, all within the construct of existing law.

‘or example, NYNEX and seven other large employers are participating in the
Flovida Medicare Risk Coalition, which is designed for employers with large retiree
popt>uons in Florida. The employer members of the Coalition, which began January Ist of
this yeas, together have 27,000 Medicare-eligible retirees in Florida.

‘The Coalition contracted with four Florida HMO’s to promote a voluntary conversion
to :nanaged care. So far, only a few hundred of the retirees have made the switch. For each
re.iree iiiat has switched, his or her former employer will save from $500 to $2,000,
depending on how much the employer had been spending on supplemental coverage. If the
go-cvumment redesigns the HMO payment formula in the risk program, it too could save
‘money from the current Medicare risk contract program.

{V.  Conelusion
‘Mr. Chairman, let me conclude by again saying how pleased the NAM is that you
and your colleagues are focused on the Medicare system and exploring ways to restructure
the program. The NAM commends you for your efforts. Our comments today are offered
to ve nclpful and highlight issues that will need to be considered when developing a seamless
coverage system,
"The growth in the rate of health care expenditures cannot be sustained, particularly in

ic programs. Restructuring of the Medicare system needs to be a top priority for
F288, particularly in light of the Trustee’s report on the looming crisis.
The NAM agrees that more retirees should be covered by cost-effective and quality
managed care plans. There will be, as with any major restructuring of a system, technical
‘sere “hae must be considered but the overall concept of employers and the government
Work'iig together to reduce waste and inefficiency in our nation’s health care system is one
the NSA! very much agrees with.

‘gain, NAM urges this Subcommittee to consider the following principles as it

ow pul
this Co



117

From its humble beginnings in 1949, the Eastern Group Trust has developed the reputation for
consistently good service, fair dealing, and funding stability within the scope of medical care
plans.

Primarily organized to respond to the short-term disability income responsibilities under New
Jersey statutes, the Group Insurance Trust has expanded its variety of coverages to include group
term life, accidental death and dismemberment, weekly disability income, long-term disability
income, six medical plans and a dental plan.

‘The major objectives of the Group Insurance Trust have been to use plan designs that are easily
understood by participating employees and to provide as much stability in funding as can be
obtained in a rapidly inflating market place of medical care. The program is run as an
“experience rated contract" with State Mutual, with surplus funding available for reallocation to
reduce future premiums paid by employers and employees.

Directed by a seven-member Board of Trustees, elected by plan participants pursuant to the
requirements of Section 501(c)(9) of the Internal Revenue Code, the Group Insurance Trust is
managed by staff employees. This staff is responsible for sales, installation, certificate and
identification card issuance, billing and collection of premiums, payment of claims and providing
Trustee and insurance carrier reports.

Approximately 230 employers participate in providing innovative plans which provide $11
million per year in benefits to the industry's employees.

D. Western Agriculture

Agriculture in the Wester U.S., particularly California and Arizona, is highly seasonal, with
fruit, grape and vegetable production supplying over half of the entire U.S. consumers’ needs, as
well as providing major exports which assist the nation’s international balance of trade.

Traditional insurance carriers, and all current HMO organizations, declined in the past to provide
medical coverage for the 350,000 employees of this vital industry, due to their seasonal
employment, wage levels, and predominantly Spanish-speaking language needs.

Four major farm organizations provide virtually all of the health benefits for these seasonal
employees, using association designed and operated programs. Self funding is a critical
component of these benefit plans, due to the reluctance of the usual insurance market to offer
coverages.

The largest of these programs, Western Growers Association, provides benefits to 18,000
employees, offering free choice of medical provider as well as managed care plans.

Grouping the buying power of its 2,000 participating members, Western Growers has been able
to negotiate discounts from hospitals which saved 46% on billed charges on 1992, and saving
over $4 million dollars for farm employers and their employees. The association's plans average
20% discounts in contracting doctor's fees and elimination of “usual and customary” problems


53

hospital, sickness, death, disability, and related benefits2/ Workers covered by
multiemployer plans are employed throughout the Nation in industries as diverse as
building and construction, retail, food, clothing, textiles, transportation, service, mining,
entertainment, hotel and restaurant, and maritime.

But for multiemployer plans, most of these millions of Americans would be
uninsured and at risk for financial ruin in the event of a serious illness. The seasonal,
Intermittent, and mobile employment patterns that characterize these industries would
prevent the workers from obtaining health benefits coverage absent a central pooled
fund through which portable coverage is provided to workers as they move from one
participating employer to another. In addition, most employers in these industries are
small and would not maintain their own employee health plans, particularly for
transient or short-term workers.

For example, a building tradesman may be employed by a particular employer for
only a day, a week, a month or a few months to work on a specific project, and then
move on to work on another employer's project, and thereafter another, etc. Between
Jobs, he or she might be off work for a day, a week, a month, or longer. A building
tradesman might work for scores of different employers over his or her working life, with
periods of unemployment between jobs. Most construction employers would not
maintain their own employee health plans, particularly for transient workers, if they did
not participate in our multiemployer plans. In fact, very few non-union contractors
maintain health plans for their employees. The non-union segment of the bullding and
construction industry is among the worst of all industries in terms of health care
coverage. In contrast, virtually all union workers who are employed on jobs covered by
collective bargaining agreements have health care coverage for themselves and their
dependents.

For several decades now, our multiemployer health and welfare plans have been
accommodating these employment patterns by providing a central fund through which
portable coverage is provided to workers as they move from one participating employer
to another. In effect, all of the participating employers ~ scores, hundreds, and even
thousands of employers -—- are treated as a single employer for purposes of providing
health and welfare benefits coverage to workers and their families.

Multiemployer health and welfare plans are financed, in reality, by covered
workers through their labor. Collective bargaining agreements typically require
signatory employers to contribute to a particular health and welfare plan at a set
dollars-and-cents rate for each hour worked by a covered worker. While the law

2 A maskiemploye heath and welfare plan, often referred as @ “Taft-Hartley plan,” is:
* oust fund established through labor management collective bargaining and pursuant to the
Labor Management Relations ("Taft-Harley") Act of 1947 by one or more labor unions and
‘more than one employer of the union-represented workers;
. inistcred by @ joint Board of vith equa! labor and. rpm

© providing medical, hospitalization, and other health-related benefits, as well as death, disability
‘end sicknezs benefits, to covered workers and their dependents; and

+ financed by employer conrivutions which are collecively-barained between the sponsoring
tenlon(s) and the participating employes.

These soucue eqinrnts ae imposed by Section M2(5) of he Te Haley Act [29 US.C
ses. ‘Multicmployer health and welfare plans are also repulated by the Employee Retirement Income
‘Act (ERISA) as employer welfare benefit plans. A muuttiemployer plan is not a “multiple employer

‘or a "MEWA" within the meaning of ERISA.


138

into the program since it was inaugurated is substantially less than is typically
drawn out.

Alternately, those over 65 should be given a choice of signing away
their rights to Medicare and social security in exchange for exemption from
all taxes (excluding sales taxes) such as personal, interest and dividend, and
estate and gift taxes. Besides increasing personal freedom and personal
revenues, such a measure would result in increases in government revenues,
since Fovernment spending would be reduced, while people who otherwise
would have been encouraged to retire would be encouraged to work and save
(as well as pay sales taxes), which saving would act to increase capital
accumulation and ultimately production.

As a measure to eliminate artificial increases in costs, licensing laws
could be liberalized by the method of allowing those holding higher medical
licenses to extend the benefit of their licenses to those holding lesser medical
licenses, whom they could also train if they deemed such training necessary.
As a secondary benefit, such a measure would also act to increase the incomes
of all those involved by virtue of opening up a market previously not served.

As a second measure to eliminate artificial increases in costs, hospitals
and the uninsured should be sxempted from all government regulations and
interference from such agencies as the DHHS, SSA, NLRB, EPA, OSHA, etc.,
and by granting them the right to agree to mutually binding standards of
malpractice. Further savings could be realized by allowing physicians to open
new hospitals serving such patients, by allowing existing hospitals to practice
price discrimination toward such patients, and finally, by creating a

eregulation Agency, whose purpose and powers would be limited to
repealing existing regulations.

The above represent strategies which should be used to oppose the
Clinton plan. If, however, the Clinton plan is enacted into law, a different,
two tiered strategy should be applied. First, there should be a call for
legislation introducing the unrestricted right to practice medicine outside of
the government's control for those who value that right. Then, after this is
achieved, there should begin a fight to end all remaining socialized medicine
on behalf of those who do not wish to be forced involuntarily to pay for the
health care of others.

Such a fight on behalf of freedom in health care is what is needed
immediately as part of the larger fight on behalf of freedom, individualism,
and capitalism.


49

reforms Medicare:
‘* Provide incentives for greater use of managed care;
© Maintain quality health care for employees, retirees and Medicare

beneficiaries;
© Seek solutions that reduce the escalation of medical costs as a whole;
© Avoid initiatives that result in cost-shifting;

© Continue to pursue market approaches to ensure access to quality medical
care for all Americans
We look forward to working with you in the months ahead and congratulate you on
your vision in seeking innovative ways to remedy the Medicare crisis. Mr. Chairman, 1
‘would be happy to answer your questions or those of any other member of this
subcommittee.


78

TESTIMONY
of the

ASSOCIATION OF AMERICAN PHYSICIANS AND SURGEONS,
INC

to the Subcommittee on Health
‘Committee on Ways and Means
U.S. House of Representatives

Presented by: Jane M. Orient, M.D.
Executive Director

May 25, 1995

The Association of American Physicians and Surgeons thanks you for the invitation to
participate in this discussion. We cannot, however, in good faith, propose a plan to save
Medicare, That's because we understand it is a serious offense to lie to Congress.

The fact is that the handwriting is on the wall. You can look at the figures yourselves, or
you can read the 1995 report of the Medicare Trustees. Medicare has been weighed in the balance
and found wanting. Next year, it will be wanting around $30 billion. The gap between income
and expenditures will increase progressively, and the trust fund will be exhausted long before the
baby boomers retire.

In 1967, Frederick B. Exner, M.D., a former Secretary of the Association of American
Physicians and Surgeons wrote: "Medicare can never be sound...The projected tax increases
when the plan was adopted should be enough to scare us even though they failed to scare the
Congress; but actually they will provide only a fraction of what the expenses are sure to be.” {In
1966, the maximum Medicare HI tax was only $46.20 per year.]

‘The truth is that Medicare was built on an unsound foundation and straddles a major fault.
‘The foundation is crumbling, and the building is about to be hit by a major earthquake: the
demographic dislocation of baby boomer retirement.

‘The structure cannot be fixed by remodeling the executive suite and hiring a new
management team. If all Medicare patients were forced into HMOs, the structure would still
collapse, and the private sector would be blamed. Medicare HMOs would also help to destroy
the rest of the medical system. The reasons are graphically described by physician's assistant Jim
Moris in the appendix to our written testimony. From his position as an insider, selling HMO
product, he describes the deceptions and rationing forced on employers, patients and physicians
alike.


88

Chairman THomas. Thank you very much, Doctor.

If it was not said previously, any written statements that you
have will be made a part of the record, without objection; and if
you will entertain some questions, I will call first on the gentleman
from Louisiana, Mr. McCrery. He is someone who is very interested
in medical savings accounts.

Mr. McCrery. Thank you, Mr. Chairman. You are right, 1 am
very interested in medical savings accounts.

Chairman THOMAS. Not that the others of us aren’t. You just
show exceeding interest.

Mr. McCrery. Well, I wouldn’t say so, but I think appro-
priate——

Chairman THomas. Appropriate.

Mr. McCrery [continuing]. Interest. In fact, a bill that I intro-
duced last year would have done, I think—well, wouldn’t have done
exactly what Mr. Ferrara recommended, but it—in fact would have
gone further because it would have given tax-favored status only
to medical savings accounts, high deductible options and managed
care arrangements so that the traditional, first-dollar-type insur-
ance policy would no longer be tax favored. That is how radical I
am in trying to shift the population into some arrangement that,
in fact, does encourage personal responsibility and involvement of
the patient in his own care. That was only for the non-Medicare
population.

Today we are talking about the Medicare population, which is, I
must admit, a different situation, and it is one that I have not
given a whole lot of thought to, frankly, until now. I am interested
in the observations of all of you with regard to the Medicare popu-
lation.

Is it not true that the Medicare population is far different from
the rest of the population in terms of their likely medical needs?
It seems to me that we must analyze the effect of medical savings
accounts on that population separate from the rest of the popu-
lation because of those differences.

I gather you disagree with that. Tell me, if you do disagree with
that, why it is not true.

Mr. FERRARA. Well, I—the elderly have higher average costs, but
in other respects, I think it is the same. The higher average costs,
that just reflects the price of coverage. That is—and it seems to me
that is—all the actuarial principles and all the market principles
and everything else is the same. It is just that you have a some-
what higher incidence and you need somewhat more funds to cover
the actuarial risk.

That is accounted for in everything I said. Medicare is already
paying for that. So, the money—there is already money in the sys-
tem to cover that.

The elderly are already paying for a lot of out-of-pocket expense.
A lot of them are buying additional insurance out of pocket. The
actuaries have looked at this and indicated to us that for what
Medicare is already spending and what the elderly are already
spending, you can fund the medical savings account that would
produce all these benefits I described.


43

In summarizing my written statement today, I would like to dis-
cuss the NAM’s principles for Medicare reform, highlight several
trends in employer-sponsored health coverage, and conclude by not-
ing several specific concerns of beneficiaries, government, and em-
ployers.

The NAM urges this Committee to consider the following prin-
ciples as it modifies Medicare: That any modification should: (1)
provide incentives for greater use of managed care; (2) maintain
quality health care for employees, retirees, and Medicare bene-
ficiaries; (3) seek solutions that reduces escalation of medical costs
for the Nation as a whole; (4) avoid initiatives that result in cost
shifting; and finally, continue to pursue market approaches to en-
sure access to quality medical care for all Americans.

Consistent with these principles, the NAM board of directors
adopted a resolution on Medicare and Medicaid in February of this
year. Within that resolution, the NAM supports efforts to reduce
our Nation’s budget deficit, however, we believe that unilateral
across-the-board reductions in the Medicare and Medicaid Pro-
grams should be avoided because they are likely to exacerbate cost
shifting to the private sector and individuals. The challenge for
business individuals and the government is to reduce the total cost
of health care, both public and private.

Specifically, the NAM supports restructuring Medicare with an
emphasis on greater use of quality managed care, which delivers
higher value by encouraging more efficiency and the wiser use of
services. Cost containment is important to all Americans and it is
very important to many NAM companies that provide broad medi-
cal benefits and are forced to compete internationally with compa-
nies that do not incur similar expenses.

Consistent with this, the NAM commends you for proposing ways
to restructure Medicare and for exploring opportunities to increase
the use of managed care for Medicare beneficiaries. As you consider
a role for employers in the Medicare system, it is important to note
a few facts. While 97 percent of NAM members provide health cov-
erage to active workers, only 61 percent of all working age Ameri-
cans receive employment-based coverage. In addition, 52 percent of
employers surveyed provide early retiree benefits, in 1992, down
from 64 percent in 1987. So, there is a trend downward in the cov-
erage of retirees.

According to the Health Care Financing Administration, 75 per-
cent of Medicare beneficiaries have private insurance to supple-
ment Medicare while 38 percent have employer-sponsored coverage.
So, we see that employers are disengaging themselves from the re-
tiree health system. In fact, between 1987 and 1992 it reduced
from 57 percent down to 46 percent.

In considering the creation of a seamless health care option for
Medicare beneficiaries, the benefits and costs of Medicare-eligible
retirees, the Federal Government, and the employer community
must be considered. Medicare-eligible retirees would benefit from
greater access to quality managed care plans offered by former em-
ployers, particularly if this allowed them to remain in their current
managed care plan. However, Medicare-eligible retirees may have
some geographic difficulty gaining access to employer-sponsored
plans because they may not be located where the retiree is living.


129

prohibit a consultation with this diagnosis, and maybe | shouldn’t even
take this patient, he’s so sick—after all, some doctors are manipulating
their slate of patients, they accept only the healthiest ones, so their aver-
are coming in lower than mine, and it looks bad for my staff
Would you like your case to be treated this way—by a doctor
who takes into account your objective medical needs and the contradic-
tory, unintelligible demands of some ninety different state and Federal
government agencies? If you were a doctor could you comply with all of
it? Could you plan or work around or deal with the unknowable? But
how could you not? Those agencies are real and they are rapidly gaining
total power over you and your mind and your patients. In this kind of
nightmare world, if and when it takes hold fully, thought is helpless; no
one can decide by rational means what to do. A doctor either obeys the
loudest authority—or he tries to sneak by unnoticed, bootlegging some
good health care occasionally or, as so many are doing now, he simply
gives up and quits the field.”

‘The Clinton plan will finish off quality medicine in this country—
because it will finish off the medical profession, It will deliver the doc-
tors bound hands and feet to the mercies of the bureaucracy.

‘The only hope—for the doctors, for their patients, for all of us—is for
the doctors to assert a moral principle. 1 mean: to assert their own
personal individual rights—their real rights in this issue—their right to
their lives, their liberty, their property, their pursuit of happiness. The
Declaration of Independence applies to the medical profession too. We
must reject the idea that doctors are slaves destined to serve others at the
behest of the state.

I'd like to conclude with a sentence from Ayn Rand. Doctors, she
wrote, are not servants of their patients. They are “traders, like every-
one else in a free society, and they should bear that title proudly, consid-
ering the crucial importance of the services they offer.”

The battle against the Clinton plan, in my opinion, depends on the
doctors speaking out against the plan—but not only on practical grounds—
rather, first of all, on moral grounds. The doctors must defend them-

age c¢
privil



113

designing special plans to meet the financial needs of their members.

pooling health risks within organized industry groups.

gathering employee data.

collecting and disseminating information on health care quality, cost and resource
allocation.

‘+ communicating with members and employees.

+ administering of benefit programs.

All Americans should have equal access to high quality, cost-effective health care through health
plans offered under a competitive market system. Employers within the U.S. employment-based
system should have the flexibility and freedom to select the most effective organizational
mechanisms available for delivering health services. Association plans have proven for years to
be such a vehicle.

Let's consider association plans in light of the various "reform" proposals. Associations are
uniquely structured to be a part of a new or revised health care delivery system. That is because
they are already structured to represent their members in other areas. They possess the
infrastructure, administrative mechanisms and experience to unify employers and employees into
effective consumers of health services.

Employers who join purchasing groups or cooperatives organized by associations can offer
employees access to high quality private health coverage at lower costs, and with an expanded
number of options.

Associations already offer a wide variety of approved health plans and managed care
arrangements (insured arrangements, Blue Cross/Blue Shields, HMOs, self-insured) to employers
and employees. Associations can also distribute information, provide price data, and offer
qualitative comparisons between health plans.

Associations also develop common statistical databases by major industry and professional
groupings. This assists such plans in administering for claims, premium contributions and
utilization of health care services,

In summary, qualified and functioning industry-based associations have been successfully
providing comprehensive health benefit programs, as well as many other services, to their
members for more than fifty years. The administrative systems, expertise in negotiation, data
collection and communication are all in place and operational today, not in some theoretical
planning scenario,

Il. CONSUMER ACCOUNTABILITY & ASSOCIATION HEALTH PLANS

A primary reason why health care spending is out of control is that most of the time, when we
enter the medical marketplace as patients, we are spending someone else's money. Economic
studies — and common sense ~ confirm that we are less likely to be prudent, careful shoppers if
someone else is paying the bill. Association plans have been dealing with these concems since
health care costs started spiraling in the 1970's. Plan design, member education and provider


122

‘This taik was delivered under the auspices of
Americans for Free Choice in Medicine
ata Town Hall Meeting on Health Care
Red Lion Hotel, Costa Mesa, California

December 11, 1993

Copyright 1994 by Leonard Peikott

LEONARD PEIKOFF is a philosopher and the foremost interpreter of
the philosophy of Ayn Rand. He has taught philosophy at Hunter Col-
lege, Long Island University, and New York University. He is ae
author of Objectivism: The Philosophy of Ayn Rand, the definitive e+ 2
ment of Ayn Rand's philosophic system. Dr. Peikoff's speech, “+ 1¢
Forgotten Man of Socialized Medicine: The Doctor,” was presenter’ io
the Congress of Neurological Surgeons in 1988 and to athet physics. s”
groups throughout the United States aud Canada. A transcrigh
talk was published in Clinical Neurosurgery, Vol. 36.



127

the answer is: Certainly people can afford it. Where do you think the
money is coming from right now to pay for it all—where does the govern-
ment gets its fabled unlimited money? Government is not a productive

‘ganization; it has no source of wealth other than confiscation of the
citizens’ wealth, through taxation, deficit financing or the like.

But, you may say, isn’t it the “rich” who are really paying the costs of
medical care now—the rich, not the broad bulk of the people? As has
been proved time and again, there are not enough rich anywhere to make
a dent in the government’s costs; it is the vast middle class in the U.S.
that is the only source of the kind of money that national programs like
government health care require. A simple example of this is the fact that
the Clinton Administration’s new program rests squarely on the backs
not of Big Business, but of small businessmen who are struggling in
today’s economy merely to stay alive and in existence. Under any social-
ized program, it is the “little people” who do most of the paying for it—
under the senseless pretext that “the people” can’t afford such and such,
so the government must take over. If the people of a country truly couldn’t
afford a certain service—as e.g., in Somalia—neither, for that very rea-
son, could any government in that country afford it, either.

Some people can’t afford medical care in the U. S. But they are
necessarily a small minority in a free or even semi-free country. If they
were the majority, the country would be an utter bankrupt and could not
even think of a national medical program. As to this small minority, in a
free country they have to rely solely on private, voluntary charity. Yes,
charity, the kindness of the doctors or of the better off—charity, not
right, i.e., not their right to the lives or work of others. And such
charity, I may say, was always forthcoming in the past in America. The
advocates of Medicaid and Medicare under LBJ did not claim that the
poor or the old in the ’60’s got bad care; they claimed that it was an
affront for anyone to have to depend on charity.

But the fact is: You don’t abolish charity by calling it something else.
If a person is getting health care for nothing, simply because he is breath-
ing, he is still getting charity, whether or not President Clinton calls it a


151

TESTIMONY OF CONSORTIUM FOR CITIZENS WITH DISABILITIES

The Consortium for Citizens with Disabilities (CCD) is « working coalition of over a
100 national consumer, service provider, and professional organizations, which
advocate on behalf of persons with disabilities and their families. Since 1973, CCD
has advocated for federal legislation, regulations, and funding to benefit people with
disabilities. Fifty of the these organizations comprise the CCD Health Task Force,
which works to enact comprehensive healthcare leisaton that will meet the needs
of persons with disabilities and chronic illnesses, and their families. This testimony is
presented on behalf of the Task Force.

People with disabilities include individuals with physical and mental impairments,
conditions or disorders, and people with acute or chronic illnesses, which impair
their ability to function. Lack of adequate and affordable health care coverage is a
critical issue for many persons with disabilities and chronic illnesses, who have

firet hand the myriad problems with the current system of private
insurance. In particular, they are subjected to the many discriminatory practices of
the health insurance industry, which either refuses to insure them outright, or will
only issue a policy with a pre-existing condition exclusion.

‘The Importance of Medicare for People with Disabilities & Chronic Ilnesses

Millions of people of all ages with disabilities and chronic illnesses depend on
Medicare for health care coverage. The Consortium for Citizens with Disabilities
(CCD) Health Task Force has major concerns thatthe deep spending cuts to the
Medicare program being considered by Congress will have a significant negative
impact on beneficiaries, particularly people with disabilities We are also

that encouraging Medicare beneficiaries to join managed care programs will limit
their choice of providers, and will not achieve the proposed savings since many of
these managed care entities will seek primarily to enroll lower risk beneficiaries.
‘Additionally, we believe that the use of vouchers by Medicare recipients would lead
to adverse selection and would undermine the social insurance basis of the Medicare
Program.

Who is Covered?

In 1994, approximately 4.2 million adults under age 65 with disabilities were enrolled in
Medicare.

People with disabilities under age 65 who meet the eligibility criteria for the Social
Security Disability Income (SSDI) Program can qualify for Medicare health care
coverage after a two year waiting period. SSDI is a social insurance program paid for
by Social Security taxes of workers and their employers. Eligibility for disability
benefits is based on the number of years worked, and the amount of the benefit is
based on a person’s earnings.

Examples of individuals who are eligible for Medicare through the SSDI program
include:

A 30 year old man who sustained a spinal cord injury in a car accident;
a 45 year old woman with multiple sclerosis; and
a 52 year old man with Alzheimers Disease.

People with severe disabilities who have limited work histories, but who were
disabled prior to age 22, may also be eligible for SSDI on the basis of their parents’
work history. For example, a 35 year old man with severe mental retardation who
has never held a job and who is dependent on his parents, can receive SSDI benefits
both while his parents are alive and after they are deceased.


155

‘There is no evidence that MSAs will make consumers more cost conscious when they
are seriously ill. Physicians ~ not consumers — determine what treatment is needed.
If surgery is recommended, consumers don't look for the cheapest surgeon, they look
for the best surgeon.

‘Some individuals may forgo preventive and early intervention services if they are
allowed to use money left in their MSAs at the end of the year for

‘A majority of Americans are enrolled in some form of managed health care plan. It is
unclear whether MSAs can be coordinated with these plans. Those opposed to
managed care view MSAs as a means to maintain the market for indemnity insurance
and fee-for-service health care delivery.

Experience with MSAs is very limited. Iti not clear whether they wil result in
savings. Some analysts predict that any potential system cost savings will be
Slimisated by the additonal costs quired to administer MSAS.

Most importantly, the CCD Health Task Force believes that allowing employers and the self-
employed the option of etablishing tx deductible MSAs in conjunction with Nigh deductible
catastrophic insurance

coverage is not the solution to our nation’s health system problems

because:

MSAs do not address the need for insurance by millon of working Americans whose
employers will not contribute to the cost of health insurance; and

MSAs do not address the need for insurance by millions of low-income individuals

who are self-employed or unemployed and who cannot afford to buy health
insurance.

Should you require additional information regarding this document or the CCD Health Task Force
position, lee contact one of the hee CCL Co Char ited bow,

Janet O'Keeffe Peter Thomas Kathy McGinley

‘American Psychological ‘Atapute Cntion The Arc (Association for
Association Retarded Citizens)

202-336-5934 shr4s6-6550 202-785-3388


CONTENTS

Advisories announcing the hearing .....
WITNESSES

Association of American Physicians and Surgeons, Inc. Jane M. Orient, M.D.
Chrysler Corp., Walter B. Maher .

GenCorp, Charles G. Salter .
John Deere Health Care, Inc., Richard J. Van Bell
National Association of Manufacturers, Matthew Stover
National Center for Policy Analysis, Peter J. Ferrara ....
National Coordinating Committee for Multiemployer Plans, James S, Ray,

and Judith F. Mazo...

NYNEX Information Resources Corp.,
RCI Co., Tom Erhart .....

SUBMISSIONS FOR THE RECORD

American Academy of Actuaries’ Medicare Work Group, statement
American Society of Association Executives, statement ...
Barber, Craig K., San Francisco, CA, letter ......
Blair, Michael J., Woodland Hills, CA, letter and attachment
Braman, Chuck, New York, NY, letter and attachment ......
Ciccolella, Ann, Austin, TX, letter :
Coalition ‘of Mental Health Profess
statement and attachments
Conn, Kathleen, E. Greenwich, Ri, letter .
Consortium for Citizens with Disabilities, statement
Fahrner, Thomas, Santa Clara, CA, letter...
Hurt, Mark A., M.D., Chesterfield, MO, letter
Hutchins, P. Michael, Carlisle, MA, letter .
Lewis, John, E. Greenwich, RI, letter
Salzman, Larry, La Mesa, CA, letter .
Shore, Karen, Coalition of Mental Hea
statement and attachments .
Solomon. Henry L., New York,

‘Karen Shore,

letter...

ath


145

provide. itis imperative that the federal government allow the States to regulate this
industry. ERISA laws were not intended for health care, They were intended for pension
plans. if employer involvement were phased out, employers would not abject to state
fegulation of health insurance plans.

Allow states the flexibility to experiment with a variety of health care plans.

'@) Encourage the States and regions to develop insurance plans that involve “freedom
‘with responsibilty." MSA's attempt to do this.

) There are many ideas yet to be devised and written down (e.g., see “Managed
Cooperation,” item F, below). Please do not lock Americans into any particular form of
system, as this will prevent better ideas from being formulated and implemented.

D) Summary:
‘There are many problems that have already occurred in the private sector under
managed care. These problems generally involve the loss of consumer freedoms to make
their own treatment decisions, in private, with their chosen clinician. In mental health, the
industry has changed the “standards of care" to substandard care.

In general, we urge Congress to institute some insurance reform and to allow the
‘States to regulate the managed care industry. We urge Congress to increase choice of
plan for Medicare beneficiaries and others, and to pass legislation that enables the
development and implementation of programs that offer altematives to managed care and
managed competition, especially those that re-institute a true free market for the actual
consumers of care. We support plans which retain consumer freedom while containing
costs by providing incentives for consumers to be cost- and utilization-conscious, thus,
‘expecting some financial responsibility from the consumer, according to the financial
‘means of the consumer.

E) Vignettes from Managed Mental Health Care - see pages 7 & 8.

F) "Managed Cooperation:"_A Medica/Mental Health Care Pian - see pages 9 & 10.

‘These pages contain ideas ("Managed Cooperation’) designed by the Coalition. Many
of these ideas could be helpful in designing systems of cost-containment that put the
‘consumer of care back in charge of his/her own treatment.



106

It is an idea I think that is exciting. It is something new. It does
do what I think most of us believe is the real answer, and that is
get the consumer directly involved in the decisionmaking process in
health care. They are ultimately the solution.

I want to thank you folks for your presentation today.

Any questions from the other members on the panel? Thank you
very much and the Subcommittee stands adjourned.

(Whereupon, at 1 p.m., the hearing was adjourned.]

[Submissions for the record follow:]


66

At the end of the year, employees receive any money remaining in their MSA or carry it over to
next year’s MSA. This is the incentive to be conscientious consumers of health care. Employees
have a direct role in seeing that their health care dollars are spent wisely. This also provides
employees the incentive to take care of their health and utilize preventative health care to avoid
costlier procedures

Employees use only one MSA health ID card to pay for all of their medical, prescription, dental
and vision expenses

We find that our employees shop around for their health care needs and what better way to
control costs than through free enterprise? A managed care system, PPOM, is an added feature
our employees may choose to utilize to lower their medical expenditures,

Our employees are proud to point out that they have saved money by comparing costs. They
often save $50 to several hundred dollars to routine procedures, and one employee even bragged
that he saved $2.59 on a prescription by comparing costs

After the first year of our MSA program, nearly 75% of our employees received money back.
and the average amount returned annually is over $1000 per employee. Since there is
currently no tax advantage to rolling the remaining money over to next year's MSA, most
employees elect to take the cash option Since the average employee only spends approximately
$1000 on health care annually, the majority of employees will have a surplus in their MSA.

Employees are enthused and excited about MSA'a because:

+ They have the freedom to go to any doctor, hospital or pharmacy they would like
+ They have the opportunity to receive a significant amount of money back at year-end.
+ They control has the health care dollars are spent

They can build up a pool of money in their MSA to pay for health care at retirement or
when they are out of work.
+ MSA's provide employees with a financial incentive to stay healthy.

RCL is pleased with MSA's because:

+ We were able to increase the level of benefits to employees while reducing our health
insurance by nearly 15%

+ Putting the consumer back into the loop keeps health care expenses to a minimum

+ Paperwork is significantly reduced - Since 75% of our employees don't spend more that,

the amount in their MSA, these payments are not subject to the scrutiny of reasonable and
customary determination, pre-existing conditions and other administratively cumbersome
reviews. The expenses are simply paid out of the MSA!

+ Future premium increases will be reduced because the premium base is lower with the
higher deductible

I know of no other program that presents such a win/win situation for employer and employee!


52

TESTIMONY OF NATIONAL COORDINATING COMMITTEE FOR
MULTIEMPLOYER PLANS (NCCMP)
AS PRESENTED BY JAMES S, RAY AND JUDITH F. MAZO

Mr. Chairman and Members of the Subcommittee:

On behalf of the National Coordinating Committee for Multiemployer Plans
(XCCMP), its affiliates, and its Chairman, Robert A. Georgine, we are pleased to have
‘this opportunity to share with you the interest of the multiemployer plan community in
‘exploring cost-effective means by which Medicare-eligible employees, retirees and thelr
spouses who are covered by multiemployer health and welfare plans can look to those
multiemployer plans for both their Medicare benefits and any other coverage —
supplemental, for retirees, or primary for active workers ~ that the health and welfare
lan provides. We believe that arrangements for the multiemployer plans to deliver that
kind of "seamless" coverage can be worthwhile for the beneficiaries, the plans and the
ULS. taxpayers. We would appreciate the further opportunity to submit to the
‘Subcommittee at a later date a more detailed proposal for such “one stop shopping” In
considering the specifics, we have a fundamental guiding principle: its must be designed
to help, not hurt, our plan participants. This means that Medicare-eligible participants
‘aud beneficiaries must be assured of coverage at least as good as what the current
Medicare program offers, and the program must not imperil the plans’ ability to
<ontinue providing the other participants with good health coverage at moderate cost.
We believe this to be do-able.

To assist you in understanding the perspective from which we approach this
question, let us first describe the NCCMP, the nature of multiemployer plans, and the
<ancerns of multiemployer plans and the millions of families they cover with regard to
the current health care system,

The NCCMP

‘The NCCMP is a non-partisan, non-profit organization of multiemployer pension,
ind welfare plans and their labor-management sponsors. The NCCMP was

hed in 1975 to represent the legislative, regulatory, and legal interests of the
smployer plan community ~ 2 community composed of thousands of plans, more
than ten million American workers and their families, and tens of thousands of labor-
management sponsors.

‘The national, regional and focal benefit plans aMiliated with the NCCMP cover
workers in a variety of industries including building and construction, food and
commercial, transportation, service, clothing, textiles, bakery and confectionery,
entertainment, and maritime.

Since the enactment of the Employee Retirement Income Security Act of 1974
“ERISA), the NCCMP has provided guidance to Congress, the Labor Department, the
Internal Revenue Service, the Pension Benefit Guaranty Corporation, other government
agencies, and the courts on # wide variety of legislative, regulatory and legal issues of
concern to the multiemployer plan community. The organization’s contributions to the
development of employee benefits law with regard to muttiemployer plans has been
~eblicly recognized on many occasions by Congress, by administrative agencies, and by
the Supreme Court.

ment, health, and income security of millions of Americans depends
jued existence and well-being of multiemployer plans ~ an express
legislative finding of Congress itself!

Nature of Mulsiempl We

Among the proudest achievements of collective bargaining is the decades-old.
nationwide system of joint labor-management multiemployer health and welfare plans
‘that provide more than ten million Americans workers and their families with medical,

Y See Muttiemployer Pension Plan Amendments Act of 1990, Public Law 96-364, Section 3(0).


101

help to prevent you from getting a serious illness, but not because
they save money. Most senior citizens really are quite sensible and
prudent. They didn’t live to be 65 years of age by not taking care
of their health.

Mr. CHRISTENSEN. You are with the physicians and surgeons. I
have heard some people in Omaha talk about the fact that the spe-
cialists are not happy with a managed care approach to solving
Medicare because they are going to see the gatekeeper theory; the
primary care physician lock them out of seeing that patient that
they need to see.

A lot of specialists have complained to me they don’t want to go
to a managed care solution with Medicare. Do you see that with
your membership or have you experienced that personally?

Dr. ORIENT. Well, forget about what the specialists feel about it.
Think about the patients. The patients are being locked out of see-
ing a physician who can solve their problem for them, and they are
given the runaround and have to go to committees and go to the
primary doctor who cannot help them over and over again as a
means of rationing. ——

Mr. CHRISTENSEN. So, you think there is some truth to that.

Dr. ORIENT. Oh, I think there is. I think you should look at it
from the patient’s perspective. They are the ones who are being de-
prived of the services that they could benefit from.

Mr. CHRISTENSEN. OK. Thank you, Mr. Chairman.

Chairman THomas. Mr. Erhart, I am a new employee. I have just
received my medical savings account card. There is some writing
on the front that I am not completely familiar with, and I turn the
card over and there is the well-known fine print on the back side.
Explain to me what the fine print means.

On the front side there is a PPOM, and there is Claims Pro. The
fine print says, see certificate for exclusions and other terms of cov-
erage. Managed care services program requirements. Medical
precertification is required at least 7 days prior to admissions, sur-
gery, or home health care.

Now, PPOM is the Preferred Provider Organization of Michigan.
Do you have a contract with them? The company has a contract
with them?

Mr. Eruart. Yes, that is correct. I appreciate your bringing that
issue up because that is one of the features of our program that
we have integrated into the MSA merely as an option, where if em-
ployees do choose to go to one of the PPOM providers, they are as-
sured of a negotiated rate that is very, very competitive.

Chairman THomas. Because you do have a non-PPOM provider
contact point on the back of the card as well. So, the employee has
a choice to go into a preferred provider structure or stay outside
of it?

Mr. Eruarr. That is correct.

Chairman THomas. Are you familiar with International Paper’s
program? I sat in the other night with the Speaker discussing it
with them just very roughly. International Paper examines the doc-
tors in the area and develops a fee schedule that they believe is an
appropriate one. They provide a lot of background information on
the doctors, their degrees, number of years they have practiced, the
number of times they perform certain procedures, and so forth.


26

Next, one of the hallmarks of the movement of employer plans
toward managed care has been a focus on improved quality in the
health care system. Among the lessons we have learned in manu-
facturing, as well as in delivering health care benefits to our em-
ployees, is that illusive concepts such as health care quality can be
reduced to identifiable elements. The relative presence or absence
of these elements can serve as indicators of the quality of network
management and ultimately the quality of health care delivery.

The coalescence of health providers, network managers, insurers,
and other professionals around such benchmarking activities as the
HEDIS, Health Plan Employer Data and Information Set, measure-
ment tool and the collaborative efforts of employer-led initiatives
like the Cleveland Health Quality Choice program are evidence of
marketplace activity that is having success and positive impact on
improving the quality of care and reducing cost.

Both, the government and the private sector have substantial fi-
nancial obligations with regard to retiree medical coverage. Ap-
proximately 40 percent of all Americans receive their health care
benefits from self-insured employer-sponsored plans. It is clear that
both parties have a significant interest in seeing that quality im-
provement continues to be a hallmark of managed care as it is in-
troduced to the Medicare population.

My message to you today, simply put, is that quality costs less.
Incorrect diagnoses, improper treatments, unnecessary service, and
the inappropriate setting for care are, by definition, not quality.
The key is identifying a reasonable consensus view on quality indi-
cators, communicating that view to managed care organizations,
and then driving the change.

Today, less than 10 percent of Medicare beneficiaries are enrolled
in managed care for the receipt of their benefits. Despite increased
efforts by HCFA and the HMO community, the level of participa-
tion is far below the level of participation in the pre-65 population.
At GenCorp, the figure in managed care is close to 80 percent.

I will leave it to the HMO community and managed care net-
works to identify technical factors that may need to be revisited in
order to increase managed care enrollment under Medicare. Gen-
erally, however, I would call your attention to one significant char-
acteristic of the current Medicare risk-sharing program.

Under the HMO risk-sharing program, HMOs contract with
HCFA on a capitated basis to provide at least the full Medicare
benefit package, usually along with additional supplemental bene-
fits. This has led, however, to the development of an HMO Medi-
care product focused on individuals rather than on groups.

The individual nature of the product contributes to the labor in-
tensive way in which HMOs must market, enroll, and administer
their Medicare members. It also leads to the final suggestion I wish
to offer to you today. Increased employer involvement in enrolling
retirees in Medicare risk-sharing HMOs can help bring greater
group related efficiencies, greater retiree acceptance as well

Increased employer participation in the Medicare risk-sharing
marketplace has several benefits to the beneficiaries, employers,
and the government. Current and future Medicare beneficiaries
will be more willing to enroll in Medicare risk-sharing HMOs if


22

undertaken with the Health Care Financing Administration (HCFA) to determine
whether Medicare and empioyer retiree heaith costs could be controlied, enrollee
satisfaction enhanced, while maintaining quality of care.

Following a lengthy analysis by Health Data Institute (HDI), in 1989 Chrysier and the
UAW concurred with HDI's recommendation not to pursue a MIG demonstration at that
time. Several matters contributed to this decision, not the least of which was that we
were in the relative infancy of this concept, the number of unknowns were legion, and
the risks to MIG sponsors were great.

More specifically, given that the demonstration was to be voluntary for retirees (i. the
retiree could choose to opt in to the MIG program or retain traditional Medicare
coverage), Chrysler and HCFA were unable to satisfactorily resolve questions
concerning risk selection and other uncontrollable risks.

Further, the issue of MIG administrative costs was a significant one. The cost to
Medicare to administer its fee-for-service plan is significantly less than the costs an
‘employer must incur to administer a comprehensive managed care plan, even for a
very large group Not only were ongoing MIG administrative costs anticipated to be
higher, but since Chrysler was not in the health insurance or HMO business,
significant start-up administrative costs were projected. To achieve lower operating
costs would require significant systems investments amortized over long periods and
large enrollments, neither of which were assured Chrysler and HCFA were also
unable to resolve this issue

Given Medicare's favorable provider payment arrangements, we sought to enable the
MIG to have the same terms available to it, We were unable to secure such an
agreement with HCFA

Another issue we confronted was the fact that certain managed care initiatives, to the
extent they impacted the number of participating providers, could impact MIG
enrollment and risk selection. If benefits over and above those provided by the
combined Medicare/Chrysler benefits were to be provided by the MIG to spur
‘enroliment, Chrysler would have to bear the cost of such benefits with no assurance of
offsetting savings. In this regard, it should be noted that Medicare was to retain 5% of
the cost of an experience rated capitated payment. Accordingly, if additional benefits
were to be provided, the MIG would have to generate efficiencies great enough to
exceed the combined cost of the additional benefits, Medicare's 5% retention, and the
additional costs of administration, if it were to reduce costs for the MIG sponsor.

There were also several uncertainties in 1989, including uncertainties about the then
recently enacted Medicare catastrophic coverage law and how it might impact the
MIG, and uncertainties about future Medicare cost containment initiatives, including
the 1989 recommendation by the Physician Payment Review Commission to change
the way Medicare reimbursed physicians.

Current Environment

To say the least, much has transpired since 1989 insofar as health care financing is
concerned. Medicare has continued to tighten its provider reimbursement policies to
the extent that, for a comparable MIG project to save money today, it must rely almost
exclusively on utilzation-related savings. Further, some progress has been made to
achieve utilization reductions within indemnity plans, so some of the “low hanging frut”
has already been plucked, Nevertheless, managed care stil presents savings
opportunities for Medicare and for employers providing Medicare complementary
benefits.

Another difference in today’s environment compared with 1989 is the reality of FAS
106, Financial Accounting Standard 106, which went into effect in 1993, requires


105

He goes out and looks to see what he can get for that, whatever
it is, $5,000, $6,000 or $7,000 he has taken out of Medicare and
he looks to see what is the best deal he can get from all of those
alternatives.

Chairman THomas. I have to walk through a couple of models as
we move forward on this.

Dr. Orient, on your first page, I am trying to remember the exact
language, I will paraphrase it, but you are not a fan of HMOs.

Dr. ORIENT. No, sir.

Chairman THomas. In fact, they are undermining, I think was
the word. If we are urging, especially with MSAs, if we are urging
a free market of choice in this structure, should we, based upon
your belief in terms of HMOs, allow those as a choice for people
to select? Should they continue to exist?

Dr. ORIENT. I have no objection to them being a choice, but I
think that any of the advantages that were given to them, such as
subsidies on startup or requirements that employers must offer an
HMO if they offer any other kind of insurance, that those should
be eliminated and we should truly have a level playingfield.

Chairman THOMAS. Good, that helps in terms of the direction you
are going on the HMO. I have no problem with eliminating sub-
sidies that create advantages for one particular model over an-
other, including examining current antitrust laws which were built
for the 19th century production of things and not necessarily the
delivery of services, where perhaps communication would produce
a better product rather than lack of communication among profes-
sionals.

So, I am interested in a broad-based removal of subsidies to any
kind of a structure. I am sure I will run into my political realities
in pursuing that one as well.

T want to thank the panel very much. Obviously, some folks have
thought very much about integrating this kind of a concept into our
health care system, including the seniors, which, on first blush,
frankly, a lot of people are taken aback when you talk about a
medical savings account for seniors, given the profile the gen-
tleman from Louisiana discussed, which might be slightly higher
for seniors, that you are arguing is not necessarily so.

Mr. Erhart, I want to thank you for giving us an example of a
real world opportunity. I noticed in your testimony a number of
other companies are inquiring about your structure. Do you have
an organization or an association of companies that are sharing in-
formation about medical savings accounts or is this so new you are
just finding each other now?

Mr. ERuart. It has been very informal up to this point.

Chairman THomas. My assumption is, since there is an associa-
tion for every possible existing relationship, that by next year we
will have a medical savings account employers association.

I am looking forward to the experiences, especially on a geo-
graphic basis, on a regional basis, since we have found a lot of dif-
ferences in terms of health care practices across the country. It will
be interesting to see how this integrates either in terms of a pre-
ferred provider structure or other operations in other parts of the
country.


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25-398 (168)


34

The Republican-passed budget in the House provides for an an-
nual increase in Medicare over the next 7 years of 5.4 percent.
Now, if you adjust that for the demographic changes that are an-
ticipated, that would be approximately a 3.9 percent per capita in-
crease over the next 7 years.

The question that I would like to focus on, would you be willing
to assume the responsibility of all of your retirees who have
reached the age of Medicare eligibility, and assume full responsibil-
ity for their health care costs with the Federal government paying
to you the current per enrollee federal cost for Medicare, adjusted
annually by 3.9 percent? Can that work?

One of the difficulties we have on optional plans is, we run into
the problem of potential adverse selection or cherrypicking, how-
ever you want to refer to it, and there is a tendency for the more
disabled seniors to stay in fee-for-service under Medicare and not
to come into a managed care environment.

So, my question is, if the system were so designed that every per-
son that is in your plan remains in your plan on reaching Medicare
eligibility, and the Federal Government were to pay you that sum
of money, is that a feasible alternative? Understanding, of course,
that we would require that the benefit levels not be reduced or the
cost to the seniors increased as one of the ways of bringing the
plans into balance.

Who wants to tackle that? Are you willing to assume that re-
sponsibility?

Mr. MaHeR. I will start. Mr. Cardin, there are a lot of employers,
including our company for a sizable number of our retirees, that
have already taken the step the Congress is trying to take, that is,
by trying to limit our future liability for cost by just assuming that
we are going to pay x dollars, perhaps inflated each year by some
amount, and, in essence, the risk gets transferred, in this case to
beneficiaries. For a lot of the reasons set forth in my testimony, I
think that you will find a lot of apprehension in the employer com-
munity about the proposal that you mentioned.

Let me get to the larger question, and that is businesses in this
country today, if they are going to succeed in a global economy
must operate with a continuous improvement mentality, setting
breakthrough objectives and then, hopefully, meeting them; and
setting new breakthrough objectives. The objective should not be
whether it is reducing the rate of growth or cutting Medicare costs,
it is trying to get the job done as efficiently as possible.

Given all of the indicators of excess in the health care delivery
system in this country, I am not prepared to say that 3.9 percent
is not doable.

Mr. CARDIN. The question is would you be willing—how would
you feel if legislation were crafted that required you to assume this
responsibility without diminution of benefits to the seniors or with-
out additional cost to the seniors, guaranteeing you the funds that
I said? How would Chrysler feel about that? Would you support
that legislation?

Mr. Mauer. Well, first off, 1 think you saw the attitude of the
great bulk of the employer community in the last 2 years when the
subject was taking on the risk for active employees on a mandated


115

Approximately 85% of those associations sponsoring insurance programs for their memberships
have formal, written agreements with insurance carriers, agents, or brokers.

These agreements can guarantee the association's right to continuing and complete information
‘on the program, including loss statistics, premium income, insurer profit and expenses, and
member participation, from participating insurers.

Much of this specific information, needed to design benefit plans and respond to members’ needs,
would not be available to employers from a governmentally operated health purchasing alliance
or cooperative. Currently, association plans use this information to assist their members.

ASAE and the Aon Specialty Group's Risk Management Services consulting unit, Washington
D.C. are producing the 1993 Association Insurance Program Guide and Survey Repert. This
publication contains how-to instructions for implementing and managing a successful program,
as well as statistics from our broad survey (conducted in fall 1992) of ASAE members.

Iv. EXAMPLES OF ASSOCIATION SPONSORED PLANS, AND HOW THEY
BENEFIT EMPLOYEES.

A Taft-Hartley and Multi-Employer Plans.

There are thousands of Taft-Hartley multi-employer health plans covering more than eight
million workers and dependents in industries as diverse as building and construction, clothing,
textiles, transportation, services, retail, maritime, food, hotel and restaurant, mining,
entertainment, and light manufacturing, Anywhere from two to 2,000 or more separate
employers may contribute to a single plan.

These plans provide continuous health benefits coverage to workers as they change employment
from one contributing employer to another. This portability or “seamless” coverage is essential
for workers in mobile, seasonal industries like building and construction, entertainment,
fongshoremen and agriculture, Without a central plan covering all of his or her work for multiple
employers, such a worker would not have health benefits coverage.

These multi-employer plans enjoy economies of scale in administration, and combined
purchasing power, not available to individual or small employers. Participating employers are
required to do little other than submit their periodic contributions to the plan with verifying
information. All of the plan design and administrative functions are generally performed by the
plan trustees with professional assistance. This eliminates any need for a participating employer
to maintain its own plan administration work force.

Over the decades of their existence, these multiple employer plans have developed eligibility
rules, benefit packages, and financing and collection methods tailored to meet the employment
patterns, needs and practices of their particular industries.

These plans have developed industry-specific systems for maximizing coverage, given the
employment patterns of the industry and the financing needs of the plan.


136

Clinton’s plan envisions a “National Health Board” that would decide
what kind of care would be provided by what methods. Regional alliances
would tax away the employee-financed health insurance premiums from
medical payroll taxes imposed on small companies to pay HMO-styled
insurance companies. (Large corporations of 5000 employees or more would
be allowed to constitute themselves as “corporate alliances” and pay these
insurance companies directly.) The managed competition referred to by
Clinton, which is essentially a form of government-controlled monopoly,
refers to the choice, to be made by the regional alliances, of which insurance
companies are to be allowed to compete in which markets. Consumers would
then choose among these remaining companies. All these insurance
companies would offer uniform benefits and operate under the guidance of
the NHB.

As the 37 million new, presently uninsured individuals are brought
under socialized medicine, demand for health care would increase
correspondingly, and yet at the same time Clinton plans to cut current
medical spending by $200 billion or more. The only possible outcome of this
situation would be shortages and rationing. More expensive procedures
would be performed less, fee-for-service practitioners would be controlled and
monitored, and the patient's choice of doctors would essentially be lost
because the demand for their time will so greatly exceed their supply. The
physician’s new protection against malpractice lawsuits, irrespective of the
outcome on the patient, will be his adherence to “Practice Guidelines,”
bureaucratic rule books provided by the government detailing minimum
standards of treatment.

Areas of medical care likely to suffer would include medical technology
(which bureaucrats would not be likely to encourage), and new drugs, whose
profitability Clinton is already fighting to restrict. In addition, if the practice of
other countries which have instituted socialized medicine is any indication,
cutbacks for the aged would be likely, because they demand extensive care and
have few years left as voters.

The reduction in administration costs promised by Clinton would
essentially represent a reduction in service, and would itself be offset by the
new administration costs for the 37 million new individuals who would be
joining the system.

‘Under such a system, the profit motive would be turned against itself
because the source of profit under a flat fee system derives from the
withholding of care. When combined with the fact that the patient is
prohibited from offering his own money to pay for his own care, the result is
that the doctor's self-interest becomes set against the patient's self-interest. As
under Communism, security is lost because the right to buy what one needs is
lost. In place of the individual's calculations of self-interest are the
government's considerations of such things as the level of its spending for
medical care in relation to its gross national product.

The Free Market Solution
The free market solution to the crisis of rising medical costs is the
restoration of the rational right to medical care: the complete removal of
government interference between the buyers and sellers of medical care and


58

inclading multiemployer health plans, to provide primary coverage for Medicare eligible
workers.

‘This government cost-shifting Is particularly troubling because It taxes only those
of us who have health insurance or other health plan coverage. And, this tax
discourages health plan coverage, driving more people into the ranks of the uninsured
whose health care costs, too, are shifted to the shrinking pool of persons with health
plan coverage. This effect is directly opposite of the direction in which national policy
should be traveling. Clearly, Medicare and Medicaid costs need to be contained, but not
through taxation of only persons with health plan coverage. A fairer means of
financing~ that also reaches those employers who do not provide health plan coverage
for employees — needs to be found.

In short, our workers and their families are generally pleased with their health
and welfare plans; plans which have been custom-designed for them and which they
control through collective bargaining and through the plans’ boards of labor-
management trustees. But, health care cost inflation and cost-shifting beyond our
control is undermining the plans and our workers’ standard of living, while placing
them at an unfair competitive disadvantage.

Retiree Benefits and Medicare

‘As mentioned earlier, the majority of multiemployer health and welfare plans
provide some coverage for participants who are retired and drawing retirement benefits
from a related multiemployer pension plan, Practice varies by industry, geographic
area, and plan size. Most often, this coverage applies to all retirees (and thelr
dependents) — under age 65 as well as Medicare eligibles. Some plans limit coverage to
early retirees as a bridge between coverage as an active worker and Medicare eligibility.
Coverage for Medicare eligibles is designed to supplement Medicare coverage.

Retiree coverage is usually financed (subsidized) at least partially by the
collectively bargained contributions generated by the labor of active workers. Employers
are not required to contribute to multiemployer plans on behalf of retirees, but only for
the work performed by active workers covered by a collective bargaining agreement.
However, a portion of these contributions is used by the plan to finance coverage for
retirees.

In addition, most plans require a retiree to make a contribution (self-pay)
towards the cost of his or her coverage as a condition of maintaining the coverage. Of
course, coverage is voluntary for retirees.

Inasmuch as retiree coverage is subsidized by current collectively-bargained
contributions, declines in contribution-generating work by active workers creates
financial pressures on retirees’ coverage ~ as well as on actives’ coverage. Cutbacks in
retiree coverage or increases in retiree contributions may result from rednctions in
covered work. Such necessary changes are harder on early retirees who are not yet
eligible for Medicare.

Multiemployer plans would much prefer to expand retiree coverage ~ if they
could work it out financially. There is a strong feeling of commitment and loyalty to
long-service members, and a desire to maintain their affiliation with the union that
sponsors the plan. There is # sense that they have earned health coverage in their
retirement years because contributions made during their work careers helped to fund
coverage for earlier retirees.



112

reported by Prudential, the largest health insurance carrier in the U.S. In addition, of the 779
associations surveyed, more than 1.9 million lives were covered.

Extrapolated against all associations in ASAE, this data suggests that ASAE member
associations may be directly involved in the collection of approximately $21 billion in annual
health care premiums ~ more than the ten largest insurance companies collectively generate in
premiums. When examining lives covered, the extrapolation would mean that at least 10 million
lives are covered by association plans.

Under the current U.S. health care system, association plans provide significant health care
coverage to a substantial number of small employers throughout the nation and in a large cross-
section of U.S. industries. Many of these small employers are located in rural areas which are
underserved by managed care providers. These employers have sought and received the buying
power and protection of qualified association plans which provide access to quality, affordable
health care. The ASAE survey uncovered three significant facets of association-sponsored plans:

+ Of those associations offering plans, the average penetration of membership
(percentage of members participating in the association health plan) is a
significant 27%. This is a clearly important member service at these
associations.

+ 49% of associations with plans have a trust agreement in place. This is a strong
indication of the sophistication level of such plans and the degree of effort that
is being made to closely manage the programs.

+ The vast majority of plans (86%) are funded on a fully-insured basis. This runs
counter to the common stereotype of the underfunded MEWA about to go
bankrupt and leave thousands of policyholders with unpaid claims.

The importance of the widespread geographic coverage of association health plans can be seen
from a study supported by a grant from the Federal Agency for Health Care Policy and Research,
which concluded that "reform of the U.S. health care system through expansion of governmental
managed competition is feasible in large metropolitan areas. But, smaller metropolitan areas and
rural areas would require alternative forms of organization and regulations...” "A substantial
number of people live in areas that fall outside” the realm of managed competition, said Richard
Krfonic, an assistant professor of Community and Family Medicine at the University of
California at San Diego.

In 19 states, the majority of the population lives in areas of less than 180,000 persons, where
hospital services must be extensively shared. In 42 states, 20% or more of the population lives in
such areas. And, while 23 states and the District of Columbia have at least one metropolitan area
arge enough to support three HMOs, the study found, in only 10 states do the majority of people
live in such areas. Association plans are active in all of these areas currently, which
demonstrates their viability and market orientation.

Association plans also have extensive experience in:


76

Chairman THOMAS. Thank you very much, Mr. Ferrara.
Dr. Orient.

STATEMENT OF JANE M. ORIENT, M.D., EXECUTIVE DIRECTOR,
ASSOCIATION OF AMERICAN PHYSICIANS AND SURGEONS,

Dr. ORIENT. Mr. Thomas, I am executive director of the Associa-
tion of American Physicians and Surgeons. Our association thanks
you for the opportunity to participate in this discussion.

We will not claim to have a plan to save Medicare, because it is
a serious offense to lie to Congress. The fact is that the hand-
writing is on the wall. You can read it for yourselves in the 1995
Report of the Medicare Trustees. Medicare has been weighed in the
balance and found wanting. Next year, it will be wanting about $30
billion. The gap between income and expenditures will increase
progressively, and the HI, Health Insurance, Trust Fund will be ex-
hausted long before baby boomers retire.

In 1967, Frederick Exner, a former secretary of our association,
wrote, “Medicare can never be sound. The projected tax increases
when the plan was adopted should be enough to scare us even
though they failed to scare the Congress; but actually they will pro-
vide only a fraction of what the expenses are sure to be.” In 1966,
the maximum Medicare HI tax was only $46.20 a year.

The truth is that Medicare was built on an unsound foundation
and straddles a major fault. The foundation is crumbling and the
building is about to be hit by a major earthquake: the demographic
dislocation of baby boomer retirement.

The structure cannot be fixed by remodeling the executive suite
and hiring a new management team. If all Medicare patients were
forced into HMOs, the structure would still collapse and the private
sector would be blamed. Medicare HMOs would also help to destroy
the rest of the medical system. In the appendix to our written testi-
mony, physician’s assistant Jim Morris, from his position as an in-
sider selling HMO products, describes the deception and the ration-
ing forced on employers, patients and physicians.

Medicare is a pyramid scheme founded on deceit. Seniors think
that they have paid for their benefits, but in reality current work-
ers are paying for them and, in addition, must bear the brunt of
the cost-shifting and price inflation caused by Medicare.

It is time to admit that we cannot repair the Medicare building
and to shift our attention to the people who are trapped inside.

Medicare traps patients and those who care for them into govern-
ment dependency. We must immediately allow people who are able
to do so to escape from Medicare. This will help to unload the
stresses on the system.

To unstop the safety valve provided by the private market, we
should encourage private contracting outside the system for which
no Medicare claim is filed.

We must also repeal price controls and allow balance billing so
that the marketplace can compensate when Medicare reimburse-
ments do not cover the cost.

The long-term solution is to phase out taxpayer-financed medical
insurance for retirees. This requires fixing the problem in the rest
of the medical system.


28

TESTIMONY OF CHARLES G. SALTER
GENCORP

Mr. Chairman and members of the Subcommittee, my name is
Charles G. Salter, Director, Employee Benefits of GenCorp.

GenCorp is a technology-based company located in Fairlawn,
Ohio, with strong positions in aerospace/defense, automotive and
polymer product markets with net sales of $1.7 Billion in 1994, We
cover approximately 26,000 employees and dependents in our
employee medical plans and approximately 21,000 retirees and
dependents under various retiree medical programs.

As a representative of a plan sponsored by a self-insured
employer and an employee benefits professional, my intent today is to
encourage you in your further exploration of the ways in which
employers can participate constructively in the Medicare program. Like
many other employers, we are engaged in examining the feasibility of
contracting with HMOs that have risk sharing contracts with Medicare.
Briefly stated, | wish to encourage you in the following specific areas:

. Encourage the expansion of managed care within the Medicare
program.

The experience of employers like GenCorp indicates that the
strategy of managing health care produces better results than the
passive use of the unmanaged fee-for-service system. Working with
health care providers and network managers, such as HMOs or
insurers, employers have driven the employee group health
marketplace in the direction of organized systems of care that focus on
the course of a patient's treatment, the coordination of necessary care
and attention to the overall allocation of scarce resources. The
extension of these advances to Medicare beneficiaries should be
encouraged and expanded.

Many managed care concepts and innovations have been
developed and honed in the marketplace for active employee group
health benefits. Requiring health care providers and managed care
networks to be responsive to the needs of plan participants and the
employer/payers has literally transformed the marketplace for private
employer group hesith coverage in the last seven to ten years. This is
not merely an economic phenomenon. Most successful employer
managed care programs are focused on improving the quality of health
care delivery; good financial results typically follow efficient
of quality health care services. This model has much to offer to the


94

I wonder if you have given that any thought, and have you any
proposed solutions?

Mr. FERRARA. Well, Congresswoman, let me suggest that the pro-
posal, the way I described it, addresses this concern in the most
powerful way and that all other micromanagement is not nec-
essary.

Look, if the person only has an option to take out of Medicare
the funds that will buy an insurance policy covering everything
over $4,000, and then $2,100 is put in their funds, which is—in
their MSA, which is what actuaries are telling me could be done,
basically that $2,100 could be used for prescription drugs, can be
used for medical—for checkups, for preventive care.

You are addressing their problem. You are having people who are
saying I am going to the doctor, he is prescribing these drugs, I
can’t afford to pay for them.

Mrs. JOHNSON. The problem is, Mr. Ferrara, if you allow them
to withdraw at the end of the year what is left, you are not doing
that. If they preserve that money, then the next year they get that
and they can use it for whatever they want.

Mr. FERRARA, Right, but listen—I am sorry, what I am trying to
say is, if you give people a savings account of $2,100 that they can
use to buy prescription drugs, you are giving them a big advantage
over the current system. They will then have the money available.

Now, as—but apart from that, you have to leave them the free-
dom of choice to make their own decisions. The government should
not be telling them, you have to use it for this or you have to use
it for that. They make their own decisions about their own prior-
ities; and you are going—if you limit what they can use the funds
on, you will undermine the incentive to control cost, because——

Mrs. JOHNSON. I think you are missing my point. If the govern-
ment is going to actually give people money for the purposes of
health, we have some responsibility to see that that money is used
for health. If a senior uses that money for other than health pur-
poses, just because they are on a very low income and they are des-
perate, then they get sick, they will go to the hospital and we will
take care of them.

Now, since the taxpayer ultimately has the obligation to pick up
the cost—and we do, we are a humane society; we are not going
to turn them away because they spent their medical savings ac-
count on something else. So, I don’t think you can take quite as
casually as you are taking the fact that people might choose to
spend the medical savings dollars in other ways and, particularly,
refuse to spend it in health prevention ways that would minimize
their costs in the future.

Then, the other thing, the numbers that you use, $4,000 cata-
strophic and we are going to give them $2,100, that means they are
exposed to a $1,900 expenditure. For a person on a $7,000 or
$8,000 income—and there are lots of them out there; any public
school retiree in Connecticut who is about 70 is retired on $500 a
month; that is what they are retired on—and no Social Security.

My understanding is—well, you say that is not right. I have had
a teacher stand there and say my husband taught Latin in the
local high school all those years. Maybe they couldn't.


The Honorable Pete Stark
May 25, 1995

Hearing on the Potential Role of Employers, Associations,
and Medical Savings Accounts in the Medicare Program

Thank you, Mr. Chairman.

| understand that the purpose of today’s hearing is to assess the potential
role of various parties, and certain insurance products, in the Medicare program
~- a benign enough topic for a hearing.

While it may or may not be the intention of the Chairmen, | am afraid that
we are heading down a troublesome path for the Medicare program. We seem
to be looking for ways to break-up the Medicare population into numerous sub-
groups. If! were creating a short-title for legislation, 1 would call it “The
Medicare Beneficiary Partition Act.” Unless we are careful in how we proceed,
we may very well end-up carving up the beneficiary pool with retirees in plans
sponsored by former employers; young, well seniors in HMOs; the healthiest of
Medicare recipients selecting medical savings accounts; and the sickest
remainder in whatever is left of traditional Medicare coverage.

Yesterday, in the Subcommittee's hearing on Medicare HMO enrollment,
the Chairman of the Prospective Payment Assessment Commission said that
Medicare was beginning to run the risk of becoming a very different program
depending upon where a beneficiary happens to live. -

We are asking for trouble if we attempt to divvy-up the Medicare
population beyond our ability or willingness to adjust the per capita payments to
correspond to the health care needs of the various beneficiary groupings. If we
go further down the road of sub-dividing the Medicare population before we
figure out how to adjust the Medicare capitated payment appropriately, we will
make the adverse selection problem worse.

For example, a proposal is floating around that would have retirees
remain in their former employers’ plans and receive a capitated payment from
Medicare. | have no problem with capitated payments, nor with providing
beneficiaries with an additional health coverage option. But ! do have a
concem that we are already losing an average of 6% for every Medicare
beneficiary that enrolls in an HMO. The percentage of retirees with employer-
provided health insurance coverage has been declining dramatically — from
over 60% in 1985 to under 40% today. Why would employers now want to take
‘on the whole liability of the over-65 population? | suspect because there are
big bucks to be made. And as happened with HMOs, the bucks to be made are


77

What Congress must do and can do without cost to the Federal
Treasury is to reform the basic inequity in the Federal Tax Code.

The Tax Code should not punish Americans for paying for medi-
cal care at the time of service or for buying individually owned,
portable, true insurance. Because of the Tax Code, most Americans
prepay for medical care through tax-favored employer-owned ar-
rangements which arrangements cannot even be transferred to a
different job much less into retirement. It diverts a large fraction
of the medical dollar to the pockets of middlemen and leads to in-
flated prices and overutilization.

Medical savings accounts and individually owned catastrophic in-
surance should receive the same tax treatment as employer-owned
comprehensive coverage, which is really a tax-free substitute for
wages. Medical savings accounts allow patients to benefit from
their cost-saving decisions because when patients are spending
their own money, they consider costs, and this type of market pres-
sure tends to drive down the price paid per service rendered. Com-
panies that have tried medical savings accounts have found that
their medical costs have actually decreased.

In contrast, managed care can, at best, claim to contain expendi-
tures by reducing both quality and quantity of services. The patient
bears the cost of rationing, inconvenience, poorer care and loss of
choice, but receives none of the benefits of savings.

Patients own their medical savings accounts; managed care com-
panies own patients.

Medicare is socialized medicine. We must replace socialism with
free enterprise. Because free enterprise works, all Congress needs
to do is to remove the impediments, the most important of which
is that Americans have to earn about twice as many dollars after
taxes to wrest control of their medical care from employers and
third parties.

The long-term cure for American medicine, including Medicare,
is tax equity. The short-term symptomatic treatment for Medicare
is, let the people go.

The Medicare experiment provides one more demonstration that
socialism doesn’t work. We have no choice but to replace this failed
and unjust system. If we act promptly, we can ease the transition
to free enterprise and minimize the pain for those who are trapped
in this misguided social engineering project.

You have heard about the financial foundations of the system.
Let me say one word about the moral foundations. Free enterprise
is morally right; socialism is morally wrong. Money given in Medi-
care benefits is first taken from those who earned it. That—in the
words of a former Congressman named David Crockett—money is
not yours to give.

[The prepared statement and attachments follow:]


83

Now, what happens when you do sign up for an HMO and the other doctors don't? You
get all their patients. Then you have more patients than you can handle. People can't get in to be
seen. We started losing patients because they couldn't get appointments. We had patients that had
been members of that practice for eight and nine years who were now seeking physicians further
and further out of town because they could call and be seen that week. Our patient load got to the
point that we were scheduling patients two and three months in advance.

Another selling point for doctors is the capitation. The idea is to get 300 patients on your
panel, knowing that only 5% of the population is really ill. Well, I'm not sure who has worked in
family practice, but let me explain what actually happens. If you tell 400 patients that they can
come to the doctor and be seen for $10.00 or less, you can bet that a good portion of those are
going to show up-far more than 5%. It makes it harder and harder for the sick patient to get in to
be seen, So they start going outside the system. What happens if they go outside the system?
They don't have any insurance.

"Well, that was on page 42 in the fine print that said that if you didn't see your family
physician first, then you have to pay for the service out of pocket."

“You mean you didn't call us and ask? Oh, well I'm sorry that’s on page 43, it says call
this 800 number” (which of course is always busy).

If a patient goes outside the system and to a (please pardon the terminology) doc-in-the-
box, and he says, "Well, look, you've got this bad heart murmur and you should go see the
cardiologist," the patient generally makes an appointment to see the cardiologist. But he wasn't
referred by his family practice doc, and he has no coverage. So now he's faced with a bill for
$1200 - $1500, and no coverage.

We had patients go through this. We had a doc-in-the-box next door, two doors down
from our office. We had people go in there. They would walk into our office, and our
receptionist would say “I'm sorry Mrs. Jones, our next opening is next Thursday."

“Well, I'm sorry, but I need to see somebody today."

The patient could walk right out in the parking lot and see the sign that says "M.D. on
duty" and walk in. She doesn't know any better, she doesn't care at that point, not until the bills
start rolling in. And the insurance company doesn't care, the HMO doesn't care. They say, "I'm
sorry-you didn't follow the guidelines, and we're not paying for anything.” And they don't. The
next thing you know, I have to see Mrs. Jones in the office with chest pain because she just got
this $1200 bill from the cardiologist. She thought she had insurance, so she called the insurance
company, but they refused to pay. She's down to her last $5 fixed May, 1995, income after she
pays her rent and her groceries.

‘One of the other problems we had was with patients who had to travel a long distance
One of the HMOs we signed up for was in Reno. We worked in Gardnerville, Nevada, which is
about 65 miles south. We were one of the first family practice docs to sign up with this HMO, so
we had people driving 65 miles for their routine office care when there were obviously « large
number of family practice doctors in an area like Reno or Sparks that were more than willing to
see them.

Many of these patients were elderly. Some were sick children who cried for 65 miles on
their way to see us. If the patient wanted to see somebody other than the family doctor on the
panel, or wanted to go to the ER, he had to get prior approval. Try to get approval after 5:00 at
night or on a weekend. [t doesn't happen. Any number of HMOs, including the one that | was
involved with, had five or six operators on during the day, but only one operator at night and on


** NOTICE — CHANGE IN LOCATION **
ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

SUBCOMMITTEE ON HEALTH
FOR IMMEDIATE RELEASE CONTACT: (202) 225-3943
May 17, 1995
No. HL-11-Revised
hange ii ‘ion for
Ith S i i ial
Rol rT ciatis nd Medi i
i Medicar ram

Congressman Bill Thomas (R-CA), Chairman of the Subcommittee on Health of the
Committee on Ways and Means, today announced that the Subcommittee hearing on the
potential role for employers, associations, and medical savings accounts in the Medicare
program, which was originally scheduled for Thursday, May 25, 1995, at 10:00 a.m., in
Room B-318 of the Rayburn House Office Building, will be held instead in the main
Committee hearing room, 1100 Longworth House Office Building.

All other details for the hearing remain the same. (See Health Subcommittee Advisory
No. HL-II, dated May 9, 1995.)

ooeeed


M1

WRITTEN STATEMENT OF
AMERICAN SOCIETY OF ASSOCIATION EXECUTIVES

1575 Eye Street, N.W., Washington, D.C. 20005
Telephone: (202) 626-2703

ASAE is pleased to have this opportunity to present testimony before the Subcommittee on
Health of the House Ways and Means Committee regarding the importance of association plans
in health care reform.

ASAE is a professional society of over 22,000 association executives representing more than
10,700 national, state, and local associations. Most of our members work for associations with
less than 10 employees. ASAE's members represent tax exempt organizations, mostly under
Internal Revenue Code Sections 501(c)(6) and 501(c)(3).

i INTRODUCTION

The future of association sponsored health plans is in serious doubt, as our nation debates health
care reform. Many proposals for a single payor system, or a managed care system with exclusive
health purchasing alliances or cooperatives may deny a role for plans which associations now
offer or operate for their members.

Associations have for many years sponsored employer group health plans as viable mechanisms
for pooling risks along functional and industry lines. Associations have also increased the
market leverage and buying power of small employers as consumers of health care services.

The association plans were generated by, and composed of, employers which participate directly
in the decision-making process and management of their association health plans.

For more than fifty-five years, association-sponsored health plans have been providing millions
of people with an effective way to protect themselves and their families against financial
catastrophe. Association plans have enabled these millions of citizens to have access to quality,
affordable health care, which was often denied to them through the available market. Today,
thousands of U.S. trade and professional employer associations provide health coverage benefit
programs to industry groups representing millions of employees and their dependents,

In an October 1992 survey of Nation's Business readers, 13% of the respondents polled reported
they purchase their health plans through industry associations (90% of the respondents were
employers with less than 100 employees).

According to a national survey of trade and professional associations conducted by ASAE and
William F, Morneau & Associates, 779 of 6,300 associations reported health premiums paid in
1991 of $6.2 billion. This amount is larger than the total annual health care premium income


81

SPEECH
Presented by
Jim Morris
to the
ASSOCIATION OF AMERICAN PHYSICIANS AND SURGEONS, INC
Regional Conference in Boise, Idaho

May 6, 1995

Td like to start with a little history about myself: I have been a physician's assistant for
about 20 years. For part of that time I was in the military, which obviously has the worst type of
socialized medicine. I took care of runny noses and sore throats at all hours of the day and night.
Iwas awakened one moming about 2:00 a.m. for a gentleman who presented to the Naval
Emergency Center for acne. So, as all cases, I got up and saw him and suggested that he take
some tetracycline and so forth.

Then I said, "I have a question for you.”

“What's that?” he responded.

“Have you ever heard of terminal acne?" I asked.

“No, is this terminal?”
"Wake me up at 2:00 o'clock again and it will be.”

‘One of my past positions was as part of an HMO team. I was one of those people that
went out and sold the program to companies, to doctors, to hospitals. This was a real eye opener.
Td like to tall you the methods we used to sell HMOs,

First, we were instructed in how to talk to employers. The first thing you talk to
employers about is reduced cost. We told them that their employees were paying $320.00 a
month for insurance for their families and that we could do it for $90.00 a month. When
employees went to the doctor, it would only cost a $10 copayment.

Weil, we just happened to forget to tell the employers that since it only cost them $10.00
0 go to the doctor, they'd probably go more often, losing more time on the job, The other thing is
that we forgot to tell them that people were going to snap the program up, and after that they
would be ours.

If I came to any of you and told you the bottom line was that instead of $320.00 a month
to take care of your wife and two kids, its only going to cost you $90.00 a month, which program
would you sign for? Of course, the program looks great on paper.

We talked to the employers about how they could sell the program to the employees so
that the company could save money. We'd help.

Usually we would go into plants that made wood products or were involved in
agriculture. It’s very easy to sell to their employees. They're working for minimum wage or not



107

Subcommittee on Health
Committee on Ways and Means
United States House of Representatives
Potential Role for Employers, Associations,
and Medical Savings Accounts in the Medicare Program Hearing

Written Testimony for the Record
Submitted by the
American Academy of Actuaries’
Medicare Work Group

June 8, 1995,

The American Academy of Actuaries provides technical actuarial expertise
to public policy makers and maintains the actuarial profession's standards
of qualification, practice, and conduct. Academy members include actuaries
from all practice specialties: health, life, pensions, and property/casualty.

Academy committees and work groups offer expert testimony, provide
technical information, comment on proposed legislation, and work closely
with federal and state officials on insurance-related issues. The Academy's
Department of Public Policy coordinates the work of committees and work
groups with the needs of public policy makers.

This testimony is intended to be an objective analysis of issues surrounding
Medicare and medical savings accounts. It is not intended to favor one
position over another.

GROWTH IN MEDICARE HEALTH CARE COSTS

The financial problems of the Medicare program are, at this point, so large that there will
have to be substantial changes made in the program in order to preserve Medicare for
future generations of beneficiaries. According to the 1995 Annual Report of the Board of
Trustees of the Federal Hospital Insurance Trust Fund, to place income and expenditures
in balance even over the next 25 years will require either an immediate 30 percent
reduction in expenditures, an immediate 44 percent increase in the Hospital Insurance (Hl)
tax rate, or some combination of both.

To achieve such reductions in Medicare costs in the least detrimental way, innovative ways
to reduce program costs will need to be put into piace. These innovations will need to deal
with the two factors which, in combination, are driving up health care costs in the Medicare


92

most everybody’s plan in one form or another. I would like to see
them as part of the solution.

I want to thank Mr. Erhart for being here. 1 am not surprised
that your company is using MSAs in leading the innovative deci-
sionmaking process here with health care reform. As most of the
people in this room know, RCI is one of the leading companies in
terms of producing police cruisers and electric car batteries for the
21st century.

This is a company owned by our colleague, Richard Chrysler,
who has been on the forefront; and Dick, I want to thank you. I
appreciate your leading the charge in this area.

Dick was kind enough to present all of us with our own medical
savings account card, and I think it is a process that we need to
look at very closely. Michigan has done something with your inno-
vative Governor up there to help the process along with MSAs and
maybe, Mr. Erhart, could explain what Michigan and Governor
Engler have done that we might try on a national basis.

Mr. Eruart, Yes, thank you.

Michigan has authorized medical savings accounts to be tax de-
ductible, and it has helped very much, although it is just a part of
the puzzle. We feel that, more importantly, if we can do the same
thing at the Federal level it will have much greater impact.

Now, at the State level, for businesses or individuals that have
medical savings accounts established, the funds that they pay out
for medical benefits from these medical savings account programs
are tax deductible and, in fact, if they—if the individual chooses to
roll over their remaining MSA at the end of the year, then those
funds remain tax deductible. I think because of that, in the long
run that is where we feel the role of Medicare would be satisfied,
because the individual over the years would build up this large
nest egg of funds.

That is how we would address—we would call it the super MSA,
for example, and as I mentioned, the individual would be able to
purchase this high deductible insurance program, a high deductible
Insurance policy that would protect them and it would be extremely
economical if they built up $100,000, $200,000 or more throughout
the years. We feel that that would handle the Medicare issue and
the various cost concerns that are being brought up today.

Mr. CHRISTENSEN. You came to that $200,000 in your written
testimony figure by an employee entering the market at age 21, at
6 percent interest, putting $1,000 away in their medical savings ac-
count over their working life?

Mr. ERHART. Yes. That is based on our experience and what we
have seen with our employees in the relatively short time that we
have had the program, but we feel that is very representative of
what will be accomplished in the future.

Mr. CHRISTENSEN. So, your employees have been able to put
money away, you found. You found your costs have been reduced.
Do you really believe that we could transfer this type of innovative
thinking into the Medicare field?

I mean, I know that my colleague from Louisiana, who I agree
with on almost everything, didn’t mean to infer that people still
aren't cost conscious at age 65, because I truly believe they are
very cost conscious and very careful in how they spend their dollars


60

Mr. McCrery. Thank you very much for your testimony.

We have a vote on the floor, and since I am the only one who
has not voted, I am going to recess the Subcommittee for just a few
minutes. If you will just stay where you are, someone will be back
to open the Subcommittee for questions. Thank you.

The Subcommittee is in recess.

(Brief Recess.}

Mr. ENSIGN. It is just us.

Mr. Ray. Is it something we said, Mr. Chairman?

h Mr. ENSIGN. I happened to be the only one left walking over
ere.

Let’s start off by talking a little bit about one of the problems as-
sociated with Medicare costs. Most of the medical expenses are ex-
pended in the last months of a person’s life; and the problem there
is that a lot of the expense is not for the benefit of the patient. I
mean, when a lot of the care is given, it is totally hopeless care.
The chances of the outcome being positive are virtually nil; and we
know a lot of that money and services that could be going to help
healthy patients is not there because the resources are taken up
by those kinds of situations.

If employers were involved with the Medicare population, how
would you foresee—because hospice care is something that is done
so well in this country, and sometimes it is the best thing that peo-
ple would choose for themselves if they had the capacity to make
that decision for themselves. A lot of times these patients are on
life support systems, or they do not have the ability to make those
kinds of decisions for themselves.

How would you design a system that would, allow for or encour-
age people to set up living wills, or whatever it is, so that at that
point we aren’t spending the bulk of the health care dollars in this
country on patients that, first of all, wouldn’t want it spent on
themselves?

Mr. STOVER. You know, there are a couple of ways to approach
that question; and one way verges on the theological, and I am not
going to take that approach.

I think the other one is to really look at the experience we have
had over the last few years and say, it is more an issue of how do
we give people more choices. I think a lot of the outcomes from a
standard way of dealing with people toward the end of their lives
has been, well, there has been one system and there has been one
set of expectations and that is sort of what the overall health care
system has allowed.

When you speak of hospices, | think what we have seen over the
last—you want to say 4, 5, 6 years, is there have been more HMOs,
as there have been more alternative ways of looking at how medi-
cal care can be delivered, and then you get some different answers.
It really gets down to individuals having a choice in how they
would like to manage things and becoming more involved in defin-
ing for themselves what they view value to be in terms of their
medical care. That is not always a price issue, and it is not always
a “how many tests can you run” issue, but a sort of “how do you
feel about the care that you are receiving,” “how does that relate,
not just to you, but the involvement of your family members and
where they are living” and so on and so forth.


56

compelled by cost pressures to cutback benefits, tighten eligibility rules, and Increase
out-of-pocket payments by covered workers. Workers are less secure about their
coverage, especially if they have been unemployed for a period, as many have.

‘The economic recession in some industries, like the building and construction
industry, itself is a product, in part, of health care cost inflation. As health care costs
consume ever-increasing portions of government budgets and private sector resources,
Jess money is available for investment in public and private building and construction
projects. This means fewer jobs for our covered workers and less income for our health
and welfare plans.

‘While we have struggled with these pressures to maintain responsible health
coverage for covered workers, our non-union competition has gained an unfair
competitive advantage. Non-union employers have found a way to shift the cost of
medical treatment for their employees and families onto the backs of our health and
welfare plans and covered workers; a way to cut their costs and increase ours.

Most non-union employers against whom our employers compete do not provide
health plan coverage for their employees or their employees’ families. If the employer
provides any, it is inadequate coverage. This social irresponsibility gives the non-union
employer an immediate cost advantage over responsible union employers who contribute
to our multiemployer health and welfare plans.

‘This unfair competitive advantage is multiplied when the employer's uninsured
worker or his family needs medical treatment. Lacking insurance coverage, they have no
regular doctor, but rather go to hospital emergency rooms for treatment of minor and
major ailments; the most expensive place to get treatment. And, when the worker Is
unable to pay for the treatment, the cost is passed onto our multiemployer health and
welfare plans in the form of higher hospital bills, higher insurance premiums, or State
uncompensated care taxes and assessments.

In other words, our covered workers are being compelled by the current system to
pay twice for health care: once for themselves and their families, and a second time for
the non-union workers who take our jobs and their families. Government statistics show
that the vast majority of the millions of uninsured Americans are workers or dependents
of workers. The cost of health care for these millions ~ and for millions more who are
underinsured ~ is being unfairly shifted to employers and workers who do maintain
adequate health plans, penalizing us for being socially responsible.

Government ~ at the State, as well as the Federal, level — is a major player in the
cost-shifting game that unfairly inflates the cost of health care and health plan coverage.
Concern about State regulation and taxation increasing the cost of maintaining a
multiemployer plan is at the core of our longstanding support for ERISA preemption of
State and local laws relating to employee health, welfare and pension plans. As recently

observed by the United States Supreme Court in New York State Conference of Blue
Cross & Blue Shield Plans v. Travelers Insurance Co., 63 U.S.L.W. 4372 (April 26, 1995),
the

‘basic thrust of the [ERISA] preemption clause, then, was to
void a multiplicity of regulation in order to permit the
nationally uniform administration of employee benefit plans.

[Congress intended] to ensure that plans and plan sponsors
would be subject to a uniform body of benefits law; the goal
was to minimize the administrative and Gnancial burden of


18

Mainstreaming Medicare beneficiaries with other patient populations is clearly possible
and beneficial. Managed care plans have proven their value in providing lower costs and
higher quality. Managed care is, however, only one tool among an array to manage health
care cost and enhance quality.

‘There are important considerations in introducing more choice into the Medicare program,
especially when the choices will include managed care programs. Here are some final thoughts
about our current strategy for the MIG project

‘The MIG does not contain any monetary inducements for retirees to enroll in one of the
managed care programs, However, we have designed the project to encourage enrollment
in the MIG.

We will closely parallel our current options to enrollees. The Medicare eligible will be
automatically enrolled in the MIG.

We believe retirees who currently enjoy the benefits of managed care will want to enroll
in the MIG project. Our provider panels, our facilities, our commitment to quality, our
enrollee satisfaction and our benefit levels have served as inducements in the past and will
continue to be attractive under the MIG.

Retiree participation in HMOs has increased over time. This appears to be because of the
‘growth in the participation of active employees. As our employees retire, they stay with
the benefits and delivery systems to which they have grown accustomed. And as the
Gallup Survey showed, they are very satisfied with their current plans.

Deere has traditionally supplemented the Medicare benefit to cover virtually all medical expenses,
and provided it at little or no charge to retirees. Because of this, there are only subtle reasons to
choose managed care Retirees have nevertheless chosen the HMO options. We believe this
mereasing success is based on their perception of the quality of care, the coverage for preventive
measures and the freedom from paperwork

Encouraging choice in the Medicare program is important. Designing the choices to encourage
high quality, cost effective health care will be a foundation for success.


47

would benefit from greater access to quality managed care plans offered by their former
employers, particularly if this allowed them to remain in their current managed care plan.
They could remain with the same doctors they had before they became Medicare-cligi
and they would be familiar with the plan’s procedures.

‘Medicare-eligible retirees may have some difficulty gaining access to employer-
sponsored managed care plans. First, 1o make educated decisions about their health care,
‘employees need to be adequately informed of their options. Providing this information to
retirees may place an increased administrative burden on the former employer. ‘There may
also be geographic issues to consider. The former employer's managed care plan may not be
located where the retiree now lives. In this situation, remaining with the former employer's
‘managed care plan would not be a viable option.

Retirees who are "snowbirds” — that is, they live in one, usually warm place for
some or all of the winter and elsewhere for the rest of the year -- often cannot enroll in
“closed panel” HMOs. This model HMO does not cover the cost of care outside the HMO.
Using a provider outside the network is prohibited. These individuals could enroll in their
employer-sponsored open pane! HMO"s, which permit visits to a provider outside the HMO,
but the cost of using a non-network provider may be prohibitive.

B. Considerations for the Federal Government, If the former employer who
successfully manages the Medicare-eligible retirees’ care is allowed to retain any savings,
employers with healthier retiree populations are more likely to be attracted to this seamless
coverage concept. ‘These employers could expect to successfully manage their retiree’s care.
This trend will leave the higher-cost retirees in traditional Medicare plans. As a result, the
federal government would save less than anticipated because greater savings would result
from moving the less healthy Medicare populations into managed care arrangements, not the
healthier ones.

‘The solution to this favorable selection issue may unfortunately be more government
regulation, which runs counter to the expressed philosophy of many members of Congress
and the NAM. The solution may be a risk adjustor that incorporates some measure of health
status. Such a system would pay employers accurately for the risk that their retirees
represent, thereby bringing government costs down. However, implementing such a risk
adjustment may be prohibitively expensive and administratively burdensome for many
employers and their health plans. As a result, it may fall on the government to bear the cost
of a risk adjustment system.

Another factor to consider is that Medicare enjoys lower administrative costs, asa
percentage of total spending, in administering fee-for-service payment than the private sector
does in administering managed care plans. According to HCFA, in 1988, the administrative
‘costs of the Medicare program were 2 percent of total program costs, but were 5.5 percent
for the large group market -- firms with more than 50 employees. Employers who provide
‘expanded coverage 10 their retirees may require additional funding to cover their higher
administrative costs.

Increased government regulation and bureaucracy may be needed to monitor the
solvency of an employer's health plan and the proper use of payment from the government to
the employer. This raises both a jurisdictional and a cost-benefit issue. Under the Employee
Retirement Income Security Act (ERISA), the Department of Labor has general oversight of
how private employee benefits plans are administered, but the Health Care Financing
Administration (HCFA) administers Medicare. No matter which agency monitors such a
process, regulations would be needed to protect Medicare beneficiaries whose former
employers stopped providing health benefits or became insolvent. Monitoring the
transactions and solvency of private plans, although necessary, would create additional
government regulations and costs. The costs and benefits of this additional regulation would
need to be further analyzed.

C. Considerations for Employers

1. Seamless Coverage Must Be Voluntary. The concept of seamless
coverage raises a number of issues for employers. First, a seamless coverage system should
be voluntary for both the employer and the retiree. Since 1974, the Employee Retirement
Income Security Act (ERISA) has given employers the ability to structure their benefit
‘packages according to the needs of their employees and retirees. The voluntary ERISA~
system has been crucial to the ability of employers to find innovative and creative ways to
provide cost-effective, quality health care benefits. Clearly, any mandate or shift in costs



51

pricing. How much will Medicare pay to the plan? To what extent,
if any, do cost sharings or do cost savings from favorable experi-
ence have to be shared with the government?

Design. To what extent will plan trustees have flexibility to de-
sign the benefit package and delivery system for Medicare eligibles
as well as our other participants?

And regulation. To what extent will plans be required to comply
with Medicare regulations on top of ERISA’s regulatory scheme?

We believe that there is much to be gained for all parties, Medi-
care eligibles, multiemployer plans and their participants as a
whole, and the Medicare Program itself, if an arrangement that
satisfactorily addresses these concerns can be designed.

Mr. Chairman, we thank you, and Judy and I are prepared to an-
swer any questions you may have.

[The prepared statement follows:]


80

Patients own their medical savings accounts. Managed care companies own patients.

Medicare is socialized medicine. We must replace socialism with free enterprise. Because
free enterprise works, all Congress needs to do is to remove the impediments, The most
important impediment is that Americans have to earn about twice as many dollars, after taxes, to
wrest control of their medical care away from their employers and third parties.

The two word description of the long-term cure for American medicine, including
Medicare, is "tax equity."

‘The three-word description for the short-term symptomatic treatment for Medicare is: “let
people go."

‘The Medicare experiment provides one more demonstration that socialism doesn't work.
We have no choice but to replace this failed and unjust system.

If we act promptly we can ease the transition fo free enterprise, and minimize the pain for
those who are trapped in this misguided social engineering project.


142

e) A recent Harvard study (James Hegarty, MD, at McLean Hospital, Boston, as
reported in Newsday, "Study: Managed-Care Squeezes Hospital Stay," 5/24/95) showed
that there has been a dramatic increase in re-hospitalizations of psychiatric patients under
managed care due to premature discharges. The average length of stay (LOS) at McLean
in 1989 was 45 days. By 1994, due to managed care, the average LOS was 15 days.
‘There was a concomitant increase in the number of people readmitted within a month, from
(0% in 1989 to 21% in 1994, and an increase in patients who were minimally improved or
discharge than at admission, from 4% to 18%.

f} The industry is ignoring 100 years of development in the field of psychotherapy and
is creating standards for treatment that are substandard.

5. Many managed care provider contracts contain “non-disparagement clauses," prohibiting
the provider from saying anvthing negative about the managed care company to the patient or
‘anyone else, often preventing providers from making the consumer aware that he/she is not
receiv er care.

Consumers are prevented from accessing professionals who follow their ethics and
refuse to sign such agreements, as these providers will not be included on the MCO's
panel. Also, this can mean that it a panel provider believes that the MCO's
recommendations would be harmful to the patient, the provider may not tell this to the
beneficiary. The consumer should have the right to know his/her providers opinions of
treatment decisions made by the MCO, especially if the provider believes that the MCO's
decision is not in the patient's best interests. Also, these clauses prevent managed care
abuses from reaching the press and legislators.

6, Baten may ft hat hey must fit for benefis when they ra fl when thelr eneray
n getting well.
Patients never know whether or not their treatment will be covered until they become ill.
Since providers may be at risk if they advocate for the consumer, this leaves consumers
often having to spend their energy on advocating for themselves when needed treatment is
being denied. Patients who do not have the ability, self-confidence, or energy to advocate
{for themselves may be seriously under-treated. Often, mental health patients are too
derpressed, anxious, of too humiliated by their problems to advocate for themselves. With
providers being at risk for unemployment if they advocate for their patients, there may be
no one left to advocate for the elderty patient, especialy i family is uninvolved or lives far
away.

7. Under managed care, many providers fear doing what is right for the pati the
ons
Since the MCO's now decide which providers will be able to continue working, many
have been frightened into silence. Many feel too powerless to protest poor treatment of
‘consumers to the MCO, the press, or to their legislators. When New York State's

‘Assembly held hearings on managed care in January, 1994, several providers told me they
were too afraid of being identified by the MCO’s to testify. Their fear was that they would
be ejected from the networks, refused referrals, or that their patients would be refused
future sessions. These very real threats put the consumer at risk, especially in mental
health, where patients usually do not advocate for themselves, and especially with the
‘elderty patient, who may not be able to advocate for himvherself.

ore is s s fer
care, be tan MCO or an individual provider, eens whatever money is Nol spent on treatment
‘This is especially destructive when mental health is under-capitalized.

‘a) MCO's keep money that is not spent on treatment. Corporate profits are soaring
beneficiaries are prohibited from receiving care for chronic and ongoing problems
and are being discharged from hospitals prematurely.

) Even capitated contracts that are made between employers and providers directly,
bypassing MCO's, are problematic. One Califomia therapist told me that she was called by
a capitated plan and told that she would receive approximately $235 for each patient they
send her. Obviously, if she performs one session only, she does very well. She still does
‘well if she performs only two. Obviously, if the patient requires 10 sessions, she is
receiving poor wages (with no benefits) for someone with a doctorate or even a master’s
degree. If the patient requires 40, 50, or more sessions, it becomes ludicrous. Thus,
there is a strong incentive to under-treat, and clinicians may simply not be able to afford to



135

medicine is estimated to account for more than one-third of the total cost of
health care in the USS. today.

Fourth is an intense demand created for prohibitively expensive new
technology. Traditionally in medicine, as well as in any other field, new
technology does not raise costs; initial buyers, who must pay out of their own
pocket, are few, allowing the item to slowly develop a market as experience is
gained in producing it, during which time its cost falls while its quality
improves. Since costs for medical technology are collectivized, however, new,
prohibitively expensive technology, which individuals would not be able to
afford if they had to pay out of their own pockets, is demanded universally as
a matter of right.

Fifth, prices are collectively bid up on patented drugs which need not
fear competition, while at the same time prohibitions against price
discrimination prevent lower-priced versions of the same drugs from serving
the market of the uninsured. (in addition, of course, FDA regulations greatly
increase the development time of drugs and further inflate their prices.)

Sixth, lack of profit and loss incentives causes wasteful spending on
expensive equipment. The government responds to such wastefulness by
such means as requiring a “certificate of need” before it will authorize such
expenditures. As a result, expenditures often end up being restricted on
necessary as well as unnecessary equipment.

Seventh, government-imposed cost-controls on public patients leads to
cost-shifting to private patients, which becomes necessary in order for
physicians and hospitals to make up their losses. (Such cost controls include
categorizing treatments into “diagnostic related groups,” (DRGs)—categories
for which the government pays a flat fee, no matter what the actual cost of the
treatment, which could be more or less than the fee according to the
individual circumstances.)

Eighth, the bureaucratic controls imposed by the government in order
to contain the costs increase costs by increasing paperwork and administrative
costs.

Finally, government safety, environmental, and labor regulations
increase the cost of medical care, probably even more so than in other fields,
because of the separation of the buyer from the seller, which buyer is
therefore less likely to be aware of and to protest such interference.

Most ironically, and above all, the need-based right to health care and
the collectivization of costs required to pay for it eliminates the real, rational
right to care in the instances where those who would be able to afford to buy
medical care now cannot do so.

The Clinton Plan
The original, rational right to medical care, the right to buy the medical

care one needs from willing providers, has become almost impossible to
exercise now. Under the Clinton plan it would be made completely illegal.
The “Health Security Preliminary Plan Summary” imposes criminal
penalties “for the payment of bribes or gratuities to influence the delivery of

ealth services and coverage.’ Under the Clinton plan dependence on the
government would be made absolute, as everyone would be compelled to
join a government-approved insurance plan.



13

With the emerging tools of care for physicians, DMS and EMR,
we believe our managed care efforts are moving from the tradi-
tional component management of care to managing the continuum
of care. This is the real value added.

We are confident after nearly 20 years of working to improve our
managed care programs that they have proven their value in pro-
viding enhanced quality while managing cost. We believe the Medi-
care population will embrace managed care as they learn the value
added, as have many Deere retirees. By encouraging choice within
the Medicare population, we can build on one of our key principles:
High quality health care is the most cost effective care.

Thank you.

[The prepared statement follows:}


137

the complete removal of all government interference which makes medical
care more expensive than it otherwise would be.

Under the free market, the cost of medical care would be determined by
the Prevailing supply of talent, the state of capital accumulation, the state of
technology, the profit motive and the freedom to compete for patients, and
the ability to practice price discrimination.

The elimination of licensing would result in the greatest possible
supply of talent, while at the same time broadening the range of services

fered. The lower end of the market could be served to a large degree by
nurses, pharmacists or paramedics providing the particular services in which
they are qualified but currently prohibited from performing. To the extent
certification is desired, it would be provided by professional degrees, and by
certificates which could be provided by private organizations.

In a free market, medical insurance limited to providing for
catastrophic illnesses would out-compete collectivized insurance because it
would be so much less expensive. Such limited insurance would include an
annual deductible in excess of all routine medical expenses, thereby leaving
the individual incentives to control cost. Always, the operative standard in a
private system would be the benefits to the individual patient's life, as judged
by the patient himself by considering potential medical treatments in relation
to his other needs.

Toward a Free Market in Medical Care

Of course, the simplest solution to establish a free market in medicine
would be to abolish all government intervention in medicine in one stroke.
Since such a solution is unlikely to be enacted, however, a gradual solution is
the best alternative, provided that it uses as its standard the eventual goal of
the complete abolition of government intervention from medicine.

The focus of such a solution would be on the plight of the uninsured,
and would approach cost reduction from two mutually reinforcing sides: the
elimination of the artificial increase in demand for medical care, achieved by
income tax reform and Medicare reform, and the elimination of the artificial
increase in costs of medical care, achieved by the liberalization of licensing
laws and the reduction of hospital costs.

As an income tax reform, employees should be given a choice between
employer-financed medical insurance (which is currently not taxed), and an
equivalent tax-free increase to their annual income, which, matching the
current cost of employer-fnanced medical insurance, would average around
$5000 per family. Such a choice would create a strong incentive for
individuals to purchase less expensive insurance with a high deductible,
which would be limited to covering catastrophic illnesses, and which at
current market prices would cost about $2000 annually per family. The
difference in the costs of these two kinds of insurance could be used to pay the
deductible in the event such a need arises.

As a second reform, wealthy Medicare patients could be made to pay a
substantial deductible before their coverage would begin and a copayment of
costs beyond some maximum limit. Such a measure would not be
unreasonable, as the amount of money those eligible for Medicare have paid


55

‘These financial advantages are even greater for the many multiemployer plans
that are multi-state in coverage. Many multiemployer health and welfare plans cover
workers, dependents, and/or retirees in multiple States. Some multiemployer plans are
national in coverage. Fortunately, because of federal preemption under the Employee
Retirement Income Security Act (ERISA), most of our multi-state plans are not subject
to regulation by the States; although ERISA preemption is belng dangerously diluted by
recent court decisions, some of which have narrowly construed ERISA to allow State
taxes relating to plans, and some of which have read ERISA too broadly to strike down
State laws that Congress intended to preserve. The cost and operation of multiemployer
plans, If not their very existence, would be adversely affected if the plans were subject to
multiple, inconsistent regulation by the States in addition to Federal regulation. Indeed,
even intra-state plans would be adversely impacted if the State could regulate and tax
them. Every dollar spent by a plan on regulatory compliance and administration is
worker's dollar, and a dollar that cannot be returned to covered workers in the form of
benefits.

Among the unique characteristics of multiemployer plans is the involvement of
the covered workers in their health coverage. The plan’s financing is the subject of
collective bargaining between the workers’ union and their employers. And, the design
and operation of the plan is, by law, controlled by a board of trustees, half of whom
represent the covered workers. As mentioned above, the workers? influence is reflected
in the benefit packages provided by plans, which are typically custom-designed to meet
the needs and wishes of the workers, within the confines of what the particular plan can
afford with the collectively-bargained contributions generated by the covered workers’
labor.

Many multiemployer plans provide health benefits coverage to retirees and pay
all or a substantial portion of the cost from contributions generated by the active
workers’ labor. This retiree health coverage reflects the reality that many covered
workers are engaged in heavy physical labor that wears down their bodies and drives
them from the workforce earlier. These members have earned a secure retirement
without fear of financial catastrophe if they become ill or are injured without health
benefits coverage.

Beyond health benefits coverage, multiemployer health and welfare plans provide
an array of other valuable employee benefits such as disability, sickness, and death
benefits. But for multiemployer plans, most covered workers and families would not
have access to such benefits for all the same reasons that health benefits coverage is
effectively available only through multiemployer plans.

Problems With The Current Health Care System

Our system of multiemployer health and welfare plans is a proud achievement in
self-reliance and labor-rasnagement cooperation. We are most reluctant to invite
additiona’ government regulation that would unnecessarily disturb our successful system
by injectiug more costs. But, there are forces in the current health care system that are
beyond our control snd threaten the security of our participants’ health and welfare
coverage. Only action by the Federal Government can effectively address these forces.

Inflation in the cost of bealth care and insurance has cut severely into wages.
Labor-management bargainers have had to shift increasing amounts of wages into
health and welfare contributions to offset cost increases. In many cases, cash wages
have been frozen, with negotiated increases being redirected into the health and welfare
plans to keep them adequately funded. In some areas, pension plan contribution rates
have been reduced by the bargaining parties, and the "savings* rechanneled to the health
and welfare plans. Many health and welfare plan boards of trustees have been


ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

SUBCOMMITTEE ON HEALTH
FOR IMMEDIATE RELEASE, CONTACT: (202) 225-3943
May 9, 1995
No. HL-11

Thomas Announces Hearings on

In i ind. rOvil
Medicare Beneficiaries
— Private-Sector Lessons to be Sought ~
Congressman Bill Thomas (R-CA), Chairman, Subcommittee on Health of the
‘Committee on Ways and Means, today announced that the Subcommittee will hold a series of
hearings to explore increasing and improving options for Medicare beneficiaries, with a focus
on private-sector successes.

The hearing dates and subjects are as follows:

Tuesday, May 16, 1998: Experience in Controlling Costs and Improving
Quality in Employer-Based Plans

Wednesday, May 24, 1995: Medicare HMO Enrollment Growth and
Payment Policies

Thursday, May 25, 1995:

‘and Medical Savings Accounts in the Medicare
Program

‘The bearings on May 16 and May 24, will be beld in the main Committee hearing
room, 1100 Longworth House Office Building, beginning st 10:00 a.m. The bearing on
May 25 will be held in room B-318 of the Rayburn House Office Building, beginning at
10:00 a.m,

Oral testimony at these hearings will be heard from invited witnesses only. Witnesses
will include health policy experts, representatives from the health care industry, and employer
groups. However, any individual or organization not scheduled for an oral appearance may
submit a written statement for consideration by the Committee or for inclusion in the printed
record of the hearing.

BACKGROUND:

‘According to the 1995 report of the Board of Trustees, the outlays of the Medicare
Hospital Insurance (HI) trust fund will exceed income beginning in 1996 and the HI trust
fund is projected to run out of reserves in 2002, using the intermediate set of assumptions.

To keep the HI trust fund in actuarial balance for 25 years would require, in the
absence of spending restrain, an immediate 44 percent increase in the payroll tax rate. As a
result, xes on a person earning $20,000 would be increased by $260 annually and a person
‘earning $30,000 per year would see their taxes hiked by $390 a year. Those who make
$75,000 a year would pay an additional $975 in taxes every year.

In the report, the Board of Trustees called for “prompt, effective, and decisive action”
to put the HI trust fund into balance.

(MORE)


72

TESTIMONY OF PETER J. FERRARA
NATIONAL CENTER FOR POLICY ANALYSIS

‘The govemment’s own latest annual report for Medicare established beyond contention that
the program must be fundamentally reformed. As has been widely noted, the report indicates that
Medicare will likely run short of funds to pay promised benefits within 7 years, by 2002. But
‘what has not been as clearly reported is how big the financial gap becomes. Without change,
paying all promised benefils to today's young workers would require:

‘¢ Tripling the current total Medicare payroll tax of 2.9%;

‘+ Increasing the annual Medicare premiums paid by the elderly relative to income to the
equivalent of almost $4,000 per elderly couple per year in today’s terms:

‘+ And still running an annual deficit in the program of over $250 billion in constant 1995
doilars, larger than the entire federal deficit today.

For those who say they oppose any change in Medicare benefits, this effectively is their
reform program for Medicare.

‘And all of this 1s just under the so-called intermediate projections in the report. Under the
so-called pessimistic projections, which many top experts think are more realistic or at least mote
prudent, the problem is much worse.

This financial disaster will occur even though Medicare is already effectively rationing
heath care forthe elderly to rece coms, Medicare pays doctors and hospitals only about 70% of
the costs of the services provided under the program. This is leading to lower quality care and
reduced access to care for many patients. In addition, Medicare pays the same fees, regardless of
the quality of care provided. ‘This encourages lower quality. less expensive care. The Medicare
payment sysiem also allows hospitals fo make more net income by decharging patients earlier
regardless of health condition. Evidence suggests that resulting premature discharges have harmed
some patients.

Medicare is also slow to approve new medical technologies, leaving the elderly without the
latest and best treatments and care. For example, Cochlear implants are lar superior to previous
technology for treating some types of hearing loss. But the elderly under Medicare are stuck with
hearing aids because Medicare doesn’t pay for the more costly implants.

‘All of this is apart from the problems of the general federal budget. and the need to reduce
the total federal deficit. But unlike Social Security, Medicare is already running deficits
contributing to the federal deficit. This year, Medicare alone will add over $50 billion to the federal
deficit, about one-fourth of the total deficit. By 2000, Medicare will be increasing the federal
deficit by over $100 billion in today’s dollars. By 2010, Medicare alone will be running a deficit
almost as large as the entire federal deficit today. And, again, this is all just under the intermediate
projections. Clearly. we cannot bring the total federal deftcit under control without controlling,
these deficits under Medicare

Indeed, by the year 2000 Medicare alone will constitute 13% of the entire federal budget,
If Medicare is exempted from spending restraint along with Social Security, interest on the national
debt (which is constitutionally protected), and the defense budger as proposed by Clinton (which
has already been cut sharply), then about two-thirds of the total budget in that year would be
shielded from spending reductions, The rest of the government would then have to be cut by one-
third to balance the budget.

But how can Medicare spending be restrained? Fortunately, a Medicare reform plan with
‘rue popular appeal that would accomplish this has already been developed by free

conservative organizations, ted by the National Center for Policy Analysis im Dallas. This,
[proposal was designed so that it would be assured of achieving the cost control targets for
Medicare included in the budget resolution adopted last week by the House. That resolution calls
for reducing the annual rate of growth of Medicare from 10% to 5%.

Under the proposal, the elderly would each be free to withdraw their share of Medicare
spending each year and use it to purchase private coverage of their choice instead, including an
MSA option, HMO plans, employer plans, or traditional insurance. The share each retiree could
withdraw from Medicare would be risk rated to reflect the retiree’s age, geographic location and


27

their employers are actively involved in reviewing and monitoring
those plans.

Employees are also able to negotiate and improve plan designs
from risk-sharing HMOs by seeking supplemental benefits and im-
prove pricing arrangements for employer groups. Experience with
enrolling active employees in managed care has also taught em-
ployers what needs to be communicated to participants in order for
their decisions to be well informed and for a managed care program
to be successful.

At GenCorp, we are currently participating in an employer coali-
tion lead by a national benefits consulting firm, Towers Perrin.
This coalition of over 70 employers is exploring the offering of se-
lected risk-sharing Medicare HMOs to over 1.5 million Medicare-
eligible retirees. We recently completed the first phase of analysis
in which we identified the areas where our retiree population, com-
bined with others in the coalition, have a geographic match with
current risk-sharing HMOs. The response of HMOs so far is en-
couraging. We are hoping to negotiate and approve meaningful sup-
plemental benefits on favorable terms in addition to the required
Medicare package.

We believe that employer involvement in the process will contrib-
ute to higher than average retiree enrollment and satisfaction with
the selected HMOs involved. This is a developing example of the
positive role that employers committed to the benefits of managed
care can play in connection with the Medicare Program.

I thank you for the opportunity to testify today, and I would be
pleaseu to respond to any questions you might have.

(The prepared statement follows:]


70

have the right to withdraw from Medicare each year would be tar-
geted to grow no faster than the budget target, whether it is 5 or
6 percent or whatever. So, everyone who exercises this option and
leaves Medicare for the private sector would take an amount each
year that grows no faster than the budget target.

In addition, we are advocating that for people who stay in Medi-
care that an automatic up front deductible be added to the Medi-
care benefit structure each year of sufficient magnitude so the rest
of Medicare does not grow faster than the budget target of 5 or 6
percent or whatever it is.

So, here you have a plan that is guaranteed to meet your budget
targets regardless of any other factor.

Now what is intriguing about this, from our perspective, is the
medical savings account option, because that will enable people to
meet these budget targets while still getting better benefits than
even Medicare offers them today. Let me explain how that would
work.

We have had actuaries estimate this for us and what they have
indicated is that if you take the amount of funds that can be with-
drawn from Medicare through this program each year, the amount
the elderly are already spending out of pocket for medical expenses
and for health care, private supplemental health insurance, the
amount they are already spending on average, there is enough in
that pool to buy an insurance policy covering all expenses above a
deductible of $3,000 to $4,000 and still put $3,000 to $4,000 in an
account; and they could use the funds in that account to pay for
medical expenses below the deductible of $3,000 or $4,000. So, they
are entirely covered by either insurance or savings in the medical
savings account. Whatever they don’t spend by the end of the year,
they could then withdraw and use for any purpose.

I think that is very important to protect that freedom of control.
That provides the most powerful incentive because now people have
the money; it is their money. They now have great incentives to
control costs, like you have heard from the prior witness. In fact,
what is fascinating about this—and this was a perfect example,
employers across the country are already adopting these medical
savings accounts. They are achieving bigger reductions in their cost
increases than is targeted in the House budget from Medicare.
They were doing more than reducing growth from 10 to 5 percent.
They are often reducing growth from 15 percent down to zero per-
cent and even less.

What that shows is that, with the MSA option, people can
achieve the targeted cost reductions while still maintaining their
benefits. Under this medical savings account structure that I have
defined, they have better benefits than under Medicare. They have
unlimited catastrophic coverage for all expenses over the coverage,
over $4,000. They have a cap on out-of-pocket expenses. If they
have the MSA, they only have to pay up to the deductible and also
they get money from Medicare in that account to help pay those
expenses below the deductible. All they have to pay out of pocket
is the difference.

Actuaries have estimated for us that would be about $1,900 a
year today. So, in other words, the MSA option is offering people
a cap on out-of-pocket expenses they don’t have under Medicare,


146

‘Original Viguettes (#1)
“Managed Mental Health Care
‘(Revised 12/18/93)

‘The following vignettes are summaries of managed care (MC) cases, Decisions about who can be in treatment,
bow long treatment can continue, what type of treatment patients can have, and who can provide it, are being made by the
‘MC companies. While they state they are basing decisions on “medical necesiy,* the companies cannot be free of a need
tw themselves be profitable. Unfortunately, the cases below are not atypical.

‘Ten year-old "Susie" was involved in a tragic and frightening accident. She and one parent escaped, but the other parent
‘and her sibling died. *Susie* became mute, and began drawing pictues of a lite girl with a noose around her neck,
‘The surviving parent brought "Susie" to their HMO. "Susie" began therapy, but her pictures became increasingly darker
symbolic indication of deepening depression and increasing suicidal risk). After the ninth session the parent found
Susie” about to make a silcide attempt. This was reported tothe therapist (who had not yet eared a master's degrec)
atthe 10th session. This HMO therapist concluded treatment with the 10th session, stating that "Susie" “should be"
finished. *Susi* was stil mute and suicidal. Fortunately, the pareat had some money available to pay for therapy
without insurance coverage. The pareat asked & friend for a referral outside the HMO and found a psychiatrist who
offered a reduced fee. "Susie" was seen three times/week for 18 months. It took {2 months before "SusieTM began to
‘speak again.

this was enue by inadequately etd depression

. "ane, depressed and suicidal woman, had finally lef ber physically abusive husband. She called her MC company
for permission to begin therapy and fora referral, The request was refused. The reason given was that "domestic
‘violence isa social problem, not a psychological problem.

4, “Sean,” an adolescent boy, asked to be in therapy. His mother called the MC company for permission for him to begin
‘therapy and fora referral. "Sean stated he would not be comfortable seeing a male therapist. No list of nerwork
therapists is published, so the mother could not find an appropriate referral herself. The company agent refused to offer
the name of a female therapist, though there were many in the network in that area. Despite many protests by the
‘mother, the agent gave only names of male therapists, stating: “Listen, if you're sick, it doesn't matter who you see.
‘And if you don't take the names I gave you, I can't belp you anymore.*

5, "Rosa," a young mother with 3 young children, cus her wrists. Her HMO approved only 8 sessions. Te therapist
believes her symptom is due to feelings of anger at the responsibilities of motherhood. As the oldest of 9 children
‘herself, “Rosa” had been over-burdened with responsibility as a child, for her own mother was unable to care for the
‘children. Without appropriate treatment, "Rosa" will not likely understand the reasons for her distress. She will likely
continue to cut her wrists, possibly escalating to serious cuts. The potential for child abuse is also present should “Rosa*
begin directing her anger outward instead of toward herself.

6. "Henry." a middle-aged man with a childhood history of being severely humiliated, requested treatment due 10
{interpersonal problems, including di i
they spent much time discussing what the therapist should write. The report was written and more sessions were

‘authorized, but "Henry* never returned for treatment When the therapist called him, "Henry" said that the experience
of having to divulge information to the company was too humiliating for him.


63

STATEMENT OF TOM ERHART, VICE PRESIDENT, HUMAN
RESOURCES, RCI CO., BRIGHTON, MICHIGAN

Mr. ERHART. Thank you. I am Tom Erhart, vice president,
human resources, for RCI, an automotive specialty manufacturer in
Brighton, Mich. I would like to relate to you the terrific experiences
our company and employees have enjoyed with medical savings ac-
counts, MSAs.

One year ago we replaced our traditional employee insurance
program, which offered a very high level of benefits and was fully
company paid, with the medical account program. MSAs are an ex-
tremely cost-effective way to offer health care benefits to employees
because they put the consumer, the employee, back in the process.

Employees are free to choose where they want to go for their
medical care. They make choices based on the quality of care pro-
vided and the cost of such care. Even though employees have a
higher level of benefits with the MSA than our previous health pro-

ram, our annual health benefit costs were reduced from $4,800 to
$4200 per employee, a 14.3 percent savings. For a business with
200 employees, this amounts to an annual savings of $120,000 per
year; and we don’t even anticipate a premium increase for the sec-
ond year of our program.

The MSA program at RCI works very simply. An employee with
dependents receives an MSA of 1,700, a single employee receives
1,200. This MSA is provided by the company. RCI then purchases
a health insurance policy with a $2,000 deductible for employees
with dependents and $1,500 for single employees.

This insurance policy pays 100 percent of all covered medical ex-
penses after the deductible is met, no employee copay. Employees’
maximum amount of out-of-pocket expense is $300 per year, the
difference between the MSA and the deductible, and employees
only have this out-of-pocket expense after their MSA is expended.

At the end of the year, employees receive any money remaining
in their MSA or carry over to next year’s MSA. Since there is cur-
rently no tax advantage to rolling the remaining money over, most
employees elect to take the cash option. This is an incentive to be
conscientious consumers of health care.

Our employees use only one MSA health I.D. card to pay for all
their medical, prescription, dental and vision expenses. We find
that our employees shop around for their health care needs; and
what better way to control costs than through free enterprise? A
managed care system is an added feature that our employees may
choose to utilize to lower their medical expenditures.

Our employees are proud to point out that they have saved
money by comparing costs. They often save $50 to more than sev-
eral hundred dollars on routine procedures. One employee even
bragged that he saved $2.59 on a prescription by comparing costs.

After the first year of our MSA Program, nearly 75 percent of our
employees received money back and the average amounted annu-
ally to over $1,000 per employee. Employees are enthused and ex-
cited about MSAs because they have the freedom to go to the pro-
vider they would like. They have the opportunity to receive a sig-
nificant amount of money back at year end or build up a pool of
money in their MSA to pay for health care, retirement, or when
they are out of work. They can control how their health care dollars


20

great enough to exceed the combined cost of the additional benefits,
Medicare’s 5-percent retention, and the additional cost of adminis-
tration if it were to reduce the cost for the sponsor of the dem-
onstration.

Now, to say the least, much has transpired since 1989 insofar as
health care financing is concerned. One major change in today’s en-
vironment is the reality of financial accounting standard 106 re-
garding retiree health expensing. Employers providing retiree
health benefits are more than ever acutely sensitive to such costs.
They now have an even greater incentive to reduce those costs, but
they also have incentives to avoid taking on new risks and liabil-
ities: Witness the decline in the number of employers providing re-
tiree health coverage.

Nevertheless, for employers who continue to provide coverage, it
is clear that both they and Medicare have an interest in reducing
the cost of retiree health care. Now, whether this will translate into
employer interest in entering into risk arrangements with HCFA
will depend on a number of factors, not the least of which is the
company’s aversion to doing anything likely to increase its retiree
health cost or risk.

Now, in this regard, forecasted Medicare cost escalation and Part
A shortfalls during the post-2002 period, portend further Medicare
cost reduction efforts which may deter employers from participat-
ing in a demonstration where they assume the risk. Now, while
such cost reduction efforts will undoubtedly be required, we would
hope the primary focus will be on assuring that providers of care
are committed to a continuous quality improvement process elimi-
nating all semblances of waste in the system. The goal should be
to reduce the cost of health care for all payers, public and private,
rather than shifting costs from the public to the private sector.

Despite all of this, opportunities do exist for employers and Medi-
care to work together to realize retiree health care savings. For ex-
ample, many employers offering managed care options offer plans
developed by Blue Cross/Blue Shield, commercial insurance compa-
nies, and well-recognized HMOs. These plans, in turn, contract
with providers. HCFA could negotiate risk arrangements directly
with the managed care plans covering Medicare benefits, while the
employer could negotiate an arrangement with the plan covering
employer-provided complimentary benefits; and, by doing that,
meet the combined objectives of Medicare, the employer, and the
beneficiaries share.

In conclusion, Mr. Chairman, reforming the Medicare Program to
incorporate an extensive offering of managed care options available
to the employee population is a long overdo means to reduce the
rate of growth in Medicare spending. Both our Federal budget defi-
cit and our high rate of national health spending pose a major
threat to sustained economic growth in the future. While solving ei-
ther or both problems will not solve all of our country’s economic
and social problems, they are interrelated and solving them will be
essential if we are to offer future generations of Americans the op-
portunities we all have enjoyed.

Thank you.

[The prepared statement follows:]


37

if we were going to rely on employers to provide coverage for people
who worked, the great bulk of people do that, we did support the
fact that all employers should be required in some way to contrib-
ute to the cost of health care in this country.

We supported reliance on competition in terms of health plan de-
sign as opposed to a fully rated regulated system. Because we
think that competition, in terms of solving the cost problem, if it
is competition versus full rate regulation, you are better to have
some blend of both rather than having a fully rated regulated sys-
tem. Because, clearly, the marketplace has shown that you can get
efficiencies in the system. We are starting to see the introduction
in some European countries experimenting with HMOs, and so
forth, even within their budgeted systems.

We did support a requirement that all employers in some way
participate in the system, because my company, for example, and
the manufacturing sector in general, is paying about 28 percent ad-
ditional in health costs because of cost shifting. A great deal of that
is because people in our industry, in manufacturing and other large
industries end up not only paying for their employees, but also
spouses of their employees who have jobs elsewhere. It is just, in
our sense, not a fair way of distributing costs.

Mr. CHRISTENSEN. Mr. Salter, also, I would like you to address
whether your company has experimented with MSAs at all?

Mr. SALTER. No, we have not. I have a comment on that, though.
T think it is interesting, I had a chance to explore the issue as far
as allowing individuals through MSAs, for example, to purchase
their own health care. It gets to the subject or the topic of innova-
tion in health care.

It is interesting, It is not very innovative if you look at somebody
who is selling an appliance in a store. They have a price tag, and
they even have a consumer report that will rank all the quality.
T think what we have said today is that we really would like to see
the force of the markets unleashed at producing efficiencies in the
system.

There is no consumer report on health care. Quality is assumed
in the system. That is dangerous because we have already recog-
nized we have measured some. There is a large variance in quality
within even communities. Price is very difficult to obtain. There-
fore, if you are purchasing based upon value, and value typically
is some tradeoff between quality of a product and the cost of that
product, that is not available in the health care system.

So, really, consumers today cannot go out there and, quote, shop
for their health care. I think if we had something like that, it
would perhaps go a ways toward helping with MSAs.

Mr. CHRISTENSEN. You are exactly right, and we had a panel yes-
terday, including, among others, Stuart Altman, who summed it up
perfectly about the HCFA and the health care system delivery we
have now for the Medicare. His quote was, we are talking about
efficiency here. That, unfortunately, sums up our system.

Thank you, Mr. Chairman.

Mr. McCrery. Mr. Houghton.

Mr. HOUGHTON. Thank you, Mr. Chairman. Just a couple of
questions, one specific and one a little broader.


157

Mark A. Hurt, MD
36 Four Seasons Ctr, Ste 334
Chesterfield, MO 63017-3103

Ta (19 4944878
FAX (214) 4942680
Blectone Mad Adaresses:
Manttunaalcom
May 23, 1995
Mr. Phillip Moseley
Majority Chief of Staff

House Committee Ways and Means
1102 Longworth House Office Building, (LHOB)
Washington, DC 20515,

RE: Medical Savings Accounts
Dear Mr. Moseley:

itis my understanding that the debate on the question of medical savings accounts (MSA's)
is going to happen soon. | would like my statement of support for MSA's read into the
Congressional Record for consideration by the Congress. | will call you at (202) 225.3625
on May 25 to follow up.

Health care costs are a major concer of Americans today. No one, whether he is for,
against, or undecided on the moral-political issue of individual rights or one's "right" to
health care, considers health care costs a debatable issue; everyone acknowledges that
costs are going up almost exponentially. Furthermore, the driving force behind health care
costs is acknowledged almost universally: costs are related directly to the supply and
demand of goods and services. The reason that health care costs are so high today is
because there is a constant high demand for all types of health care that must be filled by
Telatively few, highly skilled, highly regulated (by government) providers, and paid for
directly or indirectly by the government. The net result: costs that are ever increasing.

In recent years, there have been attempts to curtail the rising costs of health care,
principally through managed care vehicles in the private sector, supported by the implicit
and explicit threats of even more government regulation. With the Republican Contract with
America and its aftermath, there has been a movement by the Congress to apply similar
managed care methods to Medicare and Medicaid. This alone is not a rational solution to
the problem. One cannot advocate, in good conscience, the use of goverment force to
make people pay into a system all their lives and then suddenly invoke managed care
tactics to make it difficult, if not impossible for them to obtain medical care, presumably that
they have already paid for. Thus, medical savings accounts should be available to all


57

complying with conflicting directives among States or
between States and the Federal Government to prevent the
potential for conflict in substantive law requiring the
tailoring of plans and employee conduct to the peculiarities
of the law of each jurisdiction..."

63 US.LW. at 4375.

Despite this recognition of the essential protective purposes of ERISA
preemption, the Supreme Court created a large loophole in these protections by its
decision in the Travelers case. The Court ruled that ERISA does not preempt New York
State’s law requiring hospitals to impose surcharges (amounting to up to 24%) on the
bills of patients covered by commercially-insured health plans, even though the State law
exempts from those surcharges patients who are insured by a Blue Cross/Blue Shield
plan and certain other patients. The imposition of such surcharges on self-funded
health plans is at issue in the case on remand to the lower courts,

‘The Travelers decision appears to have cleared the way for States to impose
discriminatory surcharges -- taxes, really — on hospital and other provider bills to shift
the cost of uncompensated care for uninsured workers to insured workers, and to
control such fundamental plan decisions as whether to insure (and, If so, with what
insurer) or whether to self-fund benefits. The impact of the Travelers decision will be to
drive up the cost of health care even further as States seize on health plans as a source
of public revenues and as a dumping ground for the cost of care provided to uninsured
persons in the State.

State officials do not want the political heat created by general tax increases to
pay for charity health care for uninsured workers and families. So, they impose hidden
taxes on workers who do have health plan coverage ~ an approach that discourages
health plan coverage and exacerbates the uninsured and cost-shifting problems.

‘The Travelers loophole was preceded by another Court-made loophole in the
protections which ERISA preemption was designed to provide. In
Insurance Co. v. Massachusetts, 471 U.S. 724 (1985), the Supreme Court ruled that
ERISA does not preempt States from dictating what benefits must be included in every
health insurance policy, including policies sold to ERISA-covered plans. In effect, States
can — and do, extensively ~ mandate the benefits and services to be provided by any
insured health plan. Hundreds of State laws so mandating health benefits and services
have been enacted under the authority of the Metropolitan Life reading of ERISA
preemption. And, in response, many multiemployer plans and employers alike have
dropped insurance coverage and undertaken to self-fund benefits to avoid the costs and
governmental control imposed by mandated benefit laws. The Travelers decision may
provide States with the means for retaliating against these plans and employers —
through taxation; indeed, discriminatory taxation.

‘The Federal Government, too, plays a major role in the cost-shifting aspects of
health care cost inflation. Changes in the Medicare and Medicaid programs often have
an indirect, but predictable and costly, impact on multiemployer health and welfare
plans. Congress has a record of achieving savings in these public programs by shifting
4 portion of their costs to private sector plans like ours. Reimbursement rates for
hospitals and doctors who treat Medicare and Medicaid patients have been reduced by
congress with the realization that these care providers tend to recoup such reductions by
raising their rates for private, insured patients ~ workers with multiemployer plan
coverage. Another example of cutting public program costs at the expense of private
health plans is the Medicare Secondary Payor program that requires private plans,


23

companies providing retiree health benefits to accrue the-cost of such benefits during
the years employees provide services. Prior to FAS 106, the expense recognized for
these benefits was based primarily on the cash expenditures for the period during
which the benefits were provided. it is clear that FAS 106 sent a wake-up call to
corporate America on the future cost of retiree health benefits. Employers providing
retiree health benefits are, more than ever, acutely sensitive to such costs. They now
have an even greater incentive to reduce these costs, as well as ample reason to
avoid taking on new liabilties.

According to a 1994 study released by KMPG Peat Marwick, Retiree Health Benefits:
‘The Uncertainty Continues, employers’ offering of retiree health benefits continues to
‘shrink, even among the largest firms. According to this study, "Corporate Amenica is
against the wall on retiree health coverage, and firms are taking dramatic measures in
response.” It goes on to say, however. that employers are not necessarily out of
options:

"there are considerable opportunities for decreasing the burden of retiree
health coverage on a firm's balance sheet. Managed-care plans, flexible benefit
plans, and defined contribution health plans are just @ few of the ways
employers may be able to significantly reduce their retiree medical liabilities
while still providing some level of retiree health coverage.”

It is clear, therefore, that both Medicare and employers have a shared interest in
reducing the cost of retiree heaith care. However, whether this will translate into
‘empioyer interest in entering into risk arrangements with HCFA will depend on a
number of factors, not the least of which is a company’s aversion to doing anything
likely to increase its retiree health costs or its risk. In this regard, employers must
take cognizance of the fact that, according to recent testimony earlier this month
before the Senate Budget Committee by Henry J. Aaron , Director of Economic
Studies, The Brookings Institution, budget projections indicate that while Medicare
outlays, absent change, are scheduled to rise from $1768 in 1995 to well over $300B
in 2002, they are scheduled to rise further to over $400B by 2005. Likewise, trust
fund projections for Medicare Part A indicate that while the cash flow deficit is
expected to hit $50B in 2003, it will grow to $1008 in 2008. Given such forecasts,
continued Medicare cost reduction efforts will likely be required if the federal budget is
to remain in balance without resorting to tax increases. This prospect may deter many
‘employers from participating in a MIG like arrangement Further, as efforts continue to
reduce Medicare outlays, a primary focus should be on assuring that providers of care
are committed to a continuous quality improvement process, eliminating all
semblances of waste in the system, and meeting best practice benchmarks. The goal
should be to reduce the cost of health care for all payers, public and private, rather
than shifting costs from the public to the private sector.

Alternatives

Notwithstanding the above, opportunities exist for employers and Medicare to work
together to realize retiree health care savings. For example, many employers offering
managed care options, offer plans developed by Blue Cross Blue Shield, commercial
insurance companies, and well recognized HMOs. These plans, in tum, contract with
providers, While these managed care plans often incorporate benefit administration
techniques developed in concert with the employer, HCFA could seek to negotiate a
risk arrangement directly with the managed care plan covering Medicare benefits,
while the employer could negotiate an arrangement with the plan covering employer
provided complementary benefits. In this way, the retiree would be able to remain in
the same heaith system. subject to the same or similar cost containment rules
applicable during pre-Medicare years, free of the administrative hassle retirees coping
with both Medicare and a former employer's claims processing procedures must
endure, and both Medicare and the former employer could realize health care savings.


144

©) Some MSA plans are combined with MCO's. Again, this penalizes consumers for
using out-of-network clinicians, which limits their choice of providers, especially for those
with a imited income,

R St

) Phase out employer involvement in health care. It no longer works. For employees,
premium money actually belongs to the employee, fori is taken from his/her wages.
Retum this money to the employee so that employed citizens can purchase, own, and
control their own health care plans. Under Medicare, and for citizens with limited incomes,
beneficiaries should be expected to pay a portion of their premiums, based on their
incomes, with government paying the balance

b) Retum the three basic rights consumers have lost under managed care (choice,
privacy, and decision-making). Employees lost these rights because we now
employers to pay for insurance, and because employers needed to cut costs once the
Patient became separated from the consequences of their decisions under the
fee-for-service system. Citizens have been separated from the fact that itis their money to
begin with and the grater the separation the less care they tke wth that money.

care o whatever extent ney can affor’ fo be 20.
|) Medicare beneficiaries with adequate incomes would buy their own pians, or at
least pay for a portion of their premiums. Goverment would pay that portion of the
premium which is unaffordable for the Medicare beneficiary or other citizens.
ii) Benefit design must create incentives for patients to be cost- and
utlization-conscious, without restricting access to care and other freedoms
4) Individval mandates might be considered. Car insurance is required of all who
drive, not just of all who have accidents. Why can't health insurance be required of all who
live, not just those who get sick? While we might wish to protect the freedom of the citizen
NOT to be insured, all citizens must then pay for emergency care and follow-up treatment
when an uninsured individual requires treatment he/she cannot afford out-of-pocket.

3. Protect quality care and consumer freedoms by encouraging citizens to buy and own their
‘own insurance plans. Allow a 100% tax deduction for all citizens buying their own health care
plans
All citizens deserve the tax break now given to employers, especially those who are
‘self-employed or unemployed, which may include a large number of Medicare
beneficiaries. Also, itis important for a government to encourage people to take care of
themselves, so they will be less dependent upon the government for services. The more
health insurance coverage one owns, the less dependent one willbe on the government
for care.

4, Guarai ity of health care plans,
5. Prohibit "pre-existing condition” barriers to treatment.
ue 's 10 “Point-of- Service”

Unfetered access to specialists is Crucial for tose who are i

7. Guar ht of all citizens, including Medi ficiaries, to “contract
with providers of their choice.

In the case that a health plan denies reimbursement for a particular service, the citizen
must still be allowed to purchase health care he/she believes is necessary. The MCO
might be making incorrect decisions. Medicare beneficiaries cannot currently purchase
psychotherapy except from Medicare providers. if Medicare comes under managed care,
beneficiaries will also frequenty be denied more than a handful of psychotherapy sessions,
‘as is already happening to the general population. Most MCO's are only allowing “cris
‘care, and are prohibiting true forms of psychotherapy. We cannot make it legal for
Medicare beneficiaries, or anyone else, to obtain genuine psychotherapy.

8. Allow the States to requiate the managed care industry.
‘a) With a true “free market" system, in which the citizen has the ability to make his/her
‘own health care decisions while being given incentives to be cost-conscious, tnere will be
ess need for regulation than there is under managed care.
b) Managed care plans frequently short-change the patient, and often prevent
providers from advocating for patients and from delivering the best care they know how to



90

Mr. McCrery. Thank you, Mr. Chairman.

Chairman THOMAS. Thank you Mr. McCrery.

The gentleman from Nevada, Mr. Ensign.

Mr. ENSIGN. Thank you, Mr. Chairman.

First of all, I would like to compliment whoever your employer
is, Mr. Erhart. He has just done a terrific job on this, his foresight
and forward thinking on choosing this option for your employees.

I would like to address Mr. Ferrara, first; you mentioned the risk
assessment. Who would do the risk assessment? How often would
that be done? And I guess whoever would do it, are they capable
of doing that?

Mr. FERRARA. Well, this would be—-HCFA would determine how
much there—each individual is going to withdraw.

Mr. ENSIGN. I was afraid you were going to say HCFA, but go
ahead.

Mr. FERRARA. They would do it on the basis of a few objective
factors. I am not expecting them to examine each elderly person
and give them a number. They have a lot of data about distribu-
tional cost by age, distributional cost by geography, and they would
look at a few objective factors for health status, whether the person
is—a cancer patient or a heart patient would have a different risk
profile than someone who doesn’t have cancer or hasn’t had a heart
attack in the past year or something like that—disabled. There are
a few other major things. They could advise us as to the—as to the
factors to be considered

Last year it was suggested by the Clinton administration that
they could—they were going to risk-adjust every health plan in
America. So, they seem to think that they had some technology to
be able to do that.

Now, this is different, because then, that proposal—because here
the government is paying for it already, it is a matter of how much
the government is going to pay in each circumstance. So, it doesn’t
involve the same complications as the one they were proposing last
year. By their own implication, by what they were proposing to do
last year, they were suggesting that they could have the technology
to do this.

It doesn’t need to be precise, down to the nth percentile. If you
do some risk adjustment to get relatively close, then you will avoid
the adverse selection problem.

People say, what if all the healthy people leave? If this is done
right, then that wouldn’t present the same risk. It wouldn’t present
a problem because they would take money that reflects their risk
and enough would be left for the people who are remaining in Med-
leare.

Mr. ENSIGN. The other problem that I have—because the concept
sounds great. As a practicing veterinarian, we operate basically
with medical savings accounts because we operate in a free market
where people are paying out of their pocket, and that is the concept
that you are trying to bring in here, bringing the consumer back
into the marketplace.

Veterinary medicine is incredibly competitive. We do well. We
still make a decent living, but our costs have been way below infla-
tion for 20 to 30 years, providing better and better service every
year. I support the concept.


44

The Federal Government may overestimate savings from this
concept, particularly if the only employers who choose to partici-
pate are the ones with, “healthier retirees.” Greater savings would
result from moving the less healthy Medicare populations into
managed care arrangements, not the healthier ones. The solution
to this issue may, unfortunately, not be found without more gov-
ernment regulation, looking at risk adjustor systems and also look-
ing at increased government regulation and review to monitor the
solvency of employer's health plans and the proper use of pay-
ments.

Employers will insist that the seamless coverage concept be vol-
untary for both the employer and the retiree. Clearly, any mandate
to shifting cost from government to business would be unpopular
and would not address the fundamental issue of reducing the over-
all rate in the growth of health care costs. It is of note that some
employers already are trying to increase retiree participation in
managed care plans by encouraging their retirees to join risk con-
tract HMOs. These are HMOs that contract with HCFA to treat
Medicare-eligible retirees.

'X and seven other large employers are participating in
Florida in a Medicare Risk Coalition which is designed for employ-
ers with large retiree populations in Florida. The employer mem-
bers of the coalition, which began on January 1 of this year have
approximately 27,000 Medicare-eligible retirees in Florida and we
have contracted with four Florida HMOs to provide a voluntary
conversion to managed care. So far, a few hundred of these retirees
have elected to make the switch this year.

Let me conclude by saying again how pleased the NAM is that
you and your colleagues are exploring ways to restructure and im-
prove Medicare. The NAM commends your efforts. Our comments
today are offered to be helpful and highlight issues that will need
to be considered in developing a seamless coverage option. NAM
agrees more retirees should be covered by cost-effective and quality
managed care plans. Of course, there will be, as with any major re-
structuring of a system, technical issues that must be considered
in the final approach, but the overall concept of employers and gov-
ernment working together to reduce waste and inefficiency in our
Nation’s health care system is one with which the NAM very much
agrees. Thank you.

(The prepared statement follows:]


85

admitted to their hospital to their HMO facility and evaluated. Their chest pain was calmed
down, they were doing fairly well on their nitrates, they went ahead and did an angiogram.

One gentleman in particular had two 75% lesions and one 70% lesion and was 76 years
old. His HMO said, “Gee, we don't do anything under 80% lesions for starters and secondly we
don't do anybody over 70 either”, Well it doesn't make any difference if this gentleman
chronologically looked like he was 60 and not 75 or 76, but "Wwe just don't do those lesions, so,
you know, sorry"

Its kind of like socialized medicine in Canada. These people would come over to our
area, Reno, and they would check in the Emergency Room to see how busy things were, go
across the street fo the park and run up and down in the park in three piece suits until they had
chest pain and then walk back across the street and get admitted in the emergency room.

Since they crossed the State line, they were out of their service area, they could be
admitted on an emergent basis and treated as necessary without prior approval. I've seen it more
than once. I can give you three names. I mean, this is not, out of the ordinary, this is common.
It’s common practice.

‘When you talk to people that are trying to sell HMO’s to physicians, the first thing they
sell the physician is, especially on a capitation program, is that this is a get rich quick scheme, as 1
eluded to earlier “we are going to sign up 400 patients for you because this guy down the street
won't sign up with us and we are going to capitate you at $5.00 to $10.00 to $12.00 a piece,
whatever it takes to get you to sign up. So -you are going to get this 2, 3, 4, $6000.00 a month no
matter if you only see one of these people off this panel." Well again, since it only costs them
$10.00 to come in, you are going to see a lot more than 1 or 2%. We signed up a 400 patient
panel, we averaged 120 of those people a month.

The people that get rich off HMO's is the management. As the Wall Street Jounal stuff
was demonstrated recently, those are the people taking home the money, not the physicians in the
street, Initially you think you are going to get paid for doing little or nothing - doesn't work - you
get beat into the ground.

You are no longer a patient advocate. You start having to protect yourself. You start
having to protect your income because you've got kids in college. You've got a house to pay for
and all at once, you're not thinking about the patients well-being, you start thinking about your
pocketbook and as Dr. Goltry alluded, that is the wrong direction to head.

Patients lose their choice. If you send a patient to a cardiologist or to a neurologist and
you have a neurologist assigned on the pane! who you really have some doubts about. Well,
‘maybe he's not quite as aggressive as you would like and so forth, doesn't make any difference, if
he is on the panel that’s where your patient goes - once you get approval.

Ithappens many times. The problem you run into is that you may have 20 family practice
docs on a partel and one neurologist. Even though there are five or six in town, there is only one
on the panel. So, again, try and get a patient in.

It was not uncommon to call for cardiology or neurology services and find out that it was
a three to six month wait to get an appointment and then that's an initial evaluation appointment -
that’s not for any services. Then they have to tum around and reschedule again three months later
to get in to be seen for their follow-ups. It happens commonly. You get in medicine by proxies.

I alluded to panel choices. The panel decides what's going to happen to your patient, not
you. As Dr. Goltry said, I am a physician assistant, | work with M.D.'s, D.O.'s and so [ tum my
choices over to the physician to make the ultimate choice in how the patient is treated and where
they go, I assist in that care. But, [ was trained basically to take care of the patient the best way I


62

Mr. Ray. Mr. Chairman, if I could underscore that comment, one
of the unique parts of our Taft-Hartley plans is, we do have port-
ability, by definition, with a group of employers who are signatories
to collective bargaining agreements. You get seamless coverage as
you move from job to job with different employers who are bound
by the collective bargaining agreement to contribute.

Mr. ENSIGN. One of the other aspects I would like to explore just
a little bit, and that is when you are getting into a situation of as-
suming too much risk, the risk where you are getting the patient
populations that are going to jump on board and potentially bank-
rupt your company; the Medicare population as a whole obviously
is a very large population. It can be spread out over a very large
population.

How do you avoid the cherrypicking, but also avoiding the poten-
tial massive risk if you get a higher percentage of AIDS cases or
diabetic cases or whatever; to stop cherrypicking results when you
have a system set up in its totality that has incentives and dis-
incentives to do things that would otherwise make the system
work?!

I think the earlier panelists have talked about the issue of qual-
ity as being very important, and if we set up options in which peo-
ple can select quality care in a number of different ways, so that
there is not a perception that the value for me as an individual for
getting medical care from this provider is less than it is going to
be over here, then you are not going to drive to cherrypick situa-
tions like that.

So, I think that it is not an either/or, employers or the govern-
ment—let’s look at how we set up something with the flexibility so
that positive outcomes can come from individuals either way.

Ms. Mazo. You obviously have put your finger on the hardest
question and that is why I think it has to evolve over a period of
time. We are also not cherry picking because we are working with
a population we know that we have been taking care of up until
age 65. Often their health traits and the problems of their family
are—they may be sort of linked to the industry in which they have
been working.

Just as we can begin to get a sense of what the costs are going
to be once people reach age 55 and 60 from what the costs have
been when they were 35 and 40 and 45, over—I can’t say that the
first 3 years of this program we are going to have excellent predic-
tors. Within some period of time we will begin, and we will be
building on a base of knowing how they have been operating up
until this date.

Mr. ENSIGN. I would like to thank the panel very much for your
excellent testimony and call the next panel forward.

We have Tom Erhart, vice president, human resources for RCI
Corp. from Brighton, Michigan; Peter Ferrara, senior fellow, Na-
tional Center for Policy Analysis; Jane Orient, a medical doctor, ex-
ecutive director of the Association of American Physicians and Sur-
geons, Inc.

Mr. Erhart, why don’t you proceed. You have 5 minutes. When
there is 1 minute to go, the amber light will appear; and if you
could keep your remarks around 5 minutes, we would appreciate
it. Thank you


86

know how and to use all of the knowledge that I have and I have been at this for 20 years. So, for
me to tum around and fill out a form to send and let two financial people and one doctor decide
what's going to happen to the patient goes against my better well-being and it definitely causes
some ulcers.

There is some question in HMO panel programs now where a panel decides on medical
care as to whether or not you are open for litigation. Whether you have not exercised your
medical knowledge to the best care of that patient. There are two cases pending in California, that
Tam aware of, where a doctor is being sued because he did not refer a patient because the panel
told him he couldn't.

Referral fund, as I allluded to earlier. A certain percent of your capitation goes back into
referral fund. Again, this is dependent upon the contract you sign, but the ones I was exposed to
this is what happened. ‘That money then comes out of that referral fiund, if you send a patient to a
cardiologist, or so-forth for further care. Dependent upon whether or not that care exceeds that
fund, it may or may not come out of your capitation fees.

So, instead of us getting a $3000.00 a month check, it was common for us to get $1500.00
‘or $1700.00 from the HMO because we spent more than what we were supposed to spend for
specialty care. Again, the doctor I worked with was more concerned about his patients than his
checkbook. There is something called a catastrophic fund. That is a certain percentage of your
income that goes into a fund to cover those patients that need a bypass or that have to have
chemotherapy or a transplant, etc.

‘What happens to those doctors involved in the HMO when there is no money left. What
happens if you happen to be in that unlucky group that has three five vessel bypasses and a kidney
transplant that year? There is no money left.

‘The question is, who is responsible? The physician I worked with in Nevada had a case
where we just happened to be the unlucky people. We were involved with a group of family
practitioners that grossly exceeded our funding because we have two five vessel bypasses out of
our group and a renal transplant and so did a couple of the other physicians. That doctor ended up
paying, even though he signed out of the HMO, even though he quit, because those expenses were
incurred while he was still a member. He ended up paying for five years after that because those
expenses he was liable for.

If any of you really contemplate joining an HMO, read your contract very carefully.

There is something in there about how long you are liable for expenses and also how long for
patient liability. If you are de-selected, if you should be so lucky if you happen to make the error
of signing up, and find out whether or not you are still liable for expenses, even though you have
been de-selected, how long the contract period goes.

Thave worked in family practice and in a cardiology group which were both HMO
involved. I have been involved with four HMO groups as a provider and one HMO corporation
and it is the worst thing that [ have ever done in my life. As Dr. Goltry alluded to, it's perverse,
it's inhuman, it takes away physician choice, it takes away patient choice and it ruins what we
were all taught to do.


121

HEALTH CARE
IS NOT A RIGHT

by
Leonard Peikoff


124

The right to life, e.g., does not mean that your neighbors have to feed
and clothe you; it means you have the right to earn your food and clothes
yourself, if necessary by a hard struggle, and that no one can forcibly
stop your struggle for these things or steal them from you if and when
you have achieved them. In other words: you have the right ta act, and to
keep the results of your actions, the products you make, to keep them or
trade them with others, if you wish. But you have no right to the actions
or products of others, except on terms to which they voluntarily agree.

To take one more example: the right to the pursuit of happiness is
precisely that: the right to the pursuit—to a certain type of action on your
part and its result—not to any guarantee that other people will make you
happy—or even try to do so. Otherwise, there would be no liberty in the
country: if your mere desire for something, anything, imposes a duty on
other people to satisfy you, then they have no choice in their lives, no say
in what they do, they have no liberty, they cannot pursue their happiness.
Your “right” to happiness at their expense means that they become rightless
serfs, i.e., your slaves. Your right to anything at others’ expense means
that they become rightless.

That is why the U.S. system defines rights as it does, strictly as the
rights to action. This was the approach that made the U.S. the first truly
free country in all world history—and, soon afterwards, as a result, the
greatest country in history, the richest and the most powerful. It became
the most powerful because its view of rights made it the most moral. It
was the country of individualism and personal independence.

Today, however, we are seeing the rise of principled immorality in
this country. We are seeing a total abandonment by the intellectuals and
the politicians of the moral principles on which the U.S. was founded.
We are seeing the complete destruction of the concept of rights. The
original American idea has been virtually wiped out, ignored as if it had
never existed. The rule now is for politicians to ignore and violate men’s
actual rights, while arguing about a whole list of rights never dreamed of
in this country’s founding documents—rights which require no earning,
no effort, no action at all on the part of the recipient.


31

a managed care program to be successful. Success in these programs
te measured by participant understanding and acceptance, not by
coercion. Employer involvement in enrolling retirees in risk sharing
HMOs that the employer endorses can lead to lower disenroliment by
retirees from risk sharing HMOs.

At GenCorp, we are currently participating in an employer
coalition led by a national benefits consulting firm, Towers Perrin. This
coalition of over 70 employers is exploring the offering of selected risk
sharing Medicare HMOs to over 1.6 million Medicare-eligible retirees.
We recently completed the first phase of analysis in which we identified
the areas where our retiree population, combined with others in the
Coalition, have a geographic match with current risk sharing HMOs.
The response of HMOs so far is encouraging; we are hoping to
negotiate improved and meaningful supplemental! benefits on favorable
terms in addition to the required Medicare package. We believe
employer involvement in this process will contribute to higher than
average retiree enrollment and satisfaction with the selected HMOs
Involved. This is a developing example of the positive role that
employers committed to the benefits of managed care can play in
connection with the Medicare program.

- Thank you for the opportunity to testify today. | would be pleased
to respond to any questions you may have.


156

To: Mr. Phillip Moseley May 224, 1995
Majority Chief of Staff
House Committee Ways and Means
1102 Longworth House Office Bldg (LHOB)
Washington, DC 20515

From: Thomas Fahrner
1174 Fremont St
Santa Clara, CA 95050-4816

Re: Medical Savings Account

Mr. Moseley,

I strongly support the idea of voluntary tax free medical
savings accounts. I urge you to support the passage of such medical
savings account legislation. I think it is a step in the right
direction. It moves us closer to a system in which each person is

responsible for their own medical care.

Sincerely,

Dhere Faber

Thomas Fahrner
h (408) 246-4976
w (408) 946-2304



7

iven this option or just those beneficiaries entering into the plan?

hould this be a one-time option for beneficiaries? Should they be
allowed to disenroll at some point from the MSA and reenter tradi-
tional Medicare?

I look forward to hearing from our distinguished witnesses about
the MSA concept for Medicare and how we might answer some of
these questions as well as the role of employers and unions. Today,
this Subcommittee, is to look at new and novel ways to create a
better Medicare for all seniors.

And I would yield to the gentleman from California, the Ranking
Member.

Mr. StTaRK. Thank you, Mr. Chairman, and I am sure we are
going to hear some very novel ideas today. I understand the pur-
pose of the Chair’s hearing is to assess the potential of various
ideas to improve the Medicare Program.

While it may or may not be the Chair's intention, I am afraid we
could head down a troublesome path for Medicare and its bene-
ficiaries. If I were going to create the short title, I would call it the
Medicare Beneficiary Partition Act. It reminds me a little bit of
what is going on in Eastern Europe. Unless we are careful, we will
end up carving up the Medicare beneficiary pool with retirees in
plans sponsored by the former employees, young, well seniors in
HMOs, the healthiest in medical savings accounts, and the sickest
staying in the traditional fee-for-service coverage.

Yesterday, the chairman of the Prospective Payment Assessment
Commission said that Medicare was beginning to run the risk of
becoming a very different program, depending upon where a bene-
ficiary happens to live. I think we are asking for trouble if we at-
tempt to divvy up the Medicare population beyond our ability or
willingness to adjust the per capita payments to correspond to the
health care needs of the various beneficiary groups.

If we go down the road of subdividing the Medicare population
before we know how—and we do not—to adjust the Medicare
capitated payment appropriately, we can just mess up the one good
system that works in this country. I would urge my colleagues,
while they have the votes and the will to do whatever they choose
to Medicare, it is fragile and could easily literally be destroyed by
capricious experiments when we do not have either the data or any
experience in trying some of these areas.

have no problem with capitated payments or providing bene-
ficiaries with additional health options, but I do have a concern
that we are already losing an average of 6 percent for every Medi-
care beneficiary that enrolls in an HMO and the percentage of re-
tirees with employer-provided health insurance has been declining
from over 60 percent today to 40 percent. Why in heaven’s name
would employers want to take on the whole liability of the over 65
population? Only, I suspect, because they can make some money
and help pay for the under 65 population.

As has happened with HMOs, the bucks to be made are not nec-
essarily from efficient operation, but from cherrypicking the health-
iest beneficiaries or denying services to the very sickest.

A more extreme example is medical savings accounts, but | think
that any empirical evaluation and any reasonable disinterested
study will show that it benefits, to a small percentage, I think it


139

May 22, 1995
Phillip Moseley

Majority Chief of staff

House Committee Way and Means

1102 Longworth House Office Bldg (LHOB)

Washington 0c 20515

Please have this read into today’s Congressional Record.

I (and many people who are not writing) favor Medical Savings
Accounts. Like IRAs, these MSAs would be a fair way to solve the
health crisis in a way that is fair to everybody -- gradually
phasing out medicare. Contrary to popular belief, health care is

mot a right.

These MSAs should be voluntary, and tax-free.

Thank you.

Sincerely
—

nod
Ann Ciccofella
3710-4 Meredith St.

Austin TX 78703


147

manifesting
‘increasing manic symptomatology, including spending spres. Restarting Lithium, which had been helpful inthe past,
now led to an organic brain syndrome. Tote Lope wader hs MC plan, “Sees ‘would have had to enter the MC
‘company’s

‘8, “Barbara* was in individual and group therapy before a MC company took over her insurance. She bad been sexually
* abused by her grandfather in many horrifying ways between the ages of 5 and 12. She was also abused by a neighbor at
‘age 12. Marital sex was accompanied by terrifying flashbacks of the abuse. The therapist was told by a reviewer 10
“bury it along." Unfortunately, the symptoms had worsened because "Barbara" was given a new assignment at work

She was jus “allowing company oly.” Cros etme, i addon individ! esmen, i ofenexrency
‘important for sexual abuse survivars. .

‘9. “Linda” was in treatment for about 1 1/2 years before a MC company took over. "Linda" was unable to tolerate
anti-anxiety medication, but did respond to psychotherapy. ‘Toward the end of the second year, “Linda* witnessed her
122 year-old daughter being bit by a car, leaving her a quadriplegic. *Linda's" symptoms increased dramatically. She
‘was likely manifesting signs of Post Traumatic Stress Disordes. The therapist called the reviewer for permission to
continue treatment. The therapist was told: "Well, doctor, let me tel you something. We are going to cut you off - be
prepared - its coming dawn the pike sooa!”

10, “Also” had been sally buted by two of Br bothers for ever years ding childhood. She wa raped as a2
adolescent, and battered throughout her first marriage. Sbe was in group and individual therapy. Group therapy was
{ater denied by the MC company. When the therapist, a recognized expert in treatment of sexual abuse, told the
reviewer that the literature speaks tothe importance of individual and group therapy for optimal treatment, the reviewer
said: *Listen, we are not interested in providing optimal treatment. We are interested oaly in providing that which is
absolutely medically necessary."

n. Bu is usualy in consol of his anger, but when be lots his temper, be threatens his progunt wie wth a loaded gun.

was encouraged to complete the work in 8-12 sessions. Although the reviewer agreed this was &
Topica ‘case, he stated that itis not the company’s policy to provide long-term treatment,

12, “ennifer” in her late 30s, noticed pain in one breast, though she found no lump on self-examination. Her HMO
doctor also found no lump. "Jennifer," suspecting a problem, asked for mammography, The doctor, who also acted as
"gatekeeper," stated that the HMO does not pay for mammography for women under 50 unless there isa physical
finding upon examination, With this refusal, Jennifer" had a mammogram outside her HMO at her own expense, The
‘test showed breast cancer. Sbe decided to suc the HMO. Distressed by the cancer and the refusal of the HMO to provide
‘the services she deemed necessary, *Jennifer* requested psychotherapy to deal with the stress. ‘The HMO refused to
authorize psychotherapy for her.


153

Difficulty in Finding Physicians who will Accept Medicare Patients

‘As managed care plans have increased their share of the health insurance
marketplace, they have been able to negotiate lower rates from health care providers
who are less able to shift costs to private payers. Further reductions in Medicare
reimbursement rates would put additional financial pressure on providers. As a
result, fewer doctors and other health care practitioners may be willing to provide
care to Medicare beneficiaries.

‘The magnitude of these recent cuts has already had a negative affect on many
Medicare beneficiaries, who are having difficulties finding physicians willing to treat
them. People with disabilities and chronic illnesses develop long-term relationships
with particular providers to help maintain their optimal health status. Medicare
funding cuts which force providers to discontinue providing services to these
vulnerable individuals may have serious effects on the quality of their health care
and their health status.

Recommendations

Given the pending insolvency of the Medicare Part A Trust Fund, and the escalating
costs of the Part B program, the CCD Health Task Force recognizes that the
financing problems in the Medicare program must be resolved. However, any action
taken by Congress to address these problems must not jeopardize the Medicare
program's guarantee of affordable health insurance protection for people over 65 and
adults with disabilities. In particular, we are concerned that spending cuts not
reduce necessary health services or lead to increased deductibles and copayments for
Medicare beneficiaries.

We believe it is inadvisable to cut Medicare further or to restructure the program
without simultaneously addressing the larger systemic problems in the US. health
care system. Medicare’s problems are symptomatic of the general failure of the US.
to guarantee affordable health insurance protection for all individuals. Attempting to
fix Medicare's problems alone could lead to unintended negative consequences, not
only for Medicare beneficiaries, but for the health system generally.

MEDICAL SAVINGS ACCOUNTS

Many Members of Congress believe that Medical Savings Accounts (MSAs) have the
potential to reduce health care costs and increase the number of Americans with insurance.
‘There have been suggestions that MSAs be implemented not orly in the private sector but in
the Medicare program as well.

‘The Consortium for Citizens with Disabilities Health Task Force has major concems with the
emphasis presently being placed on Medical Savings Accounts as a solution to our health
system’s problems of access and affordability. The use of MSAs is not only untested, but
also has the very strong potential for making comprehensive health insurance les afoedable
for persons with disabilities and serious chronic illnesses. Because of our many concerns, which
are discussed below, and in the absence of other reforms, the CCD Health Task Force does not support
the establishment of MSAs as either an incremental reform or as a solution to the health care problems
{facing millions of uninsured and underinsured individuals in the U.S.

Supporters of MSAs state that:

* _MSAs will allow the marketplace, not the government to address the cost and access

that the lower cost of catastrophic health insurance will lead more employers to offer
health insurance.

‘+ MSAs will lead to lower administrative costs because insurance companies will only
be involved with claims higher than the deductible amount.


46

have paid in the absence of Medicare.

in 1991, the Health Care Financing Administration (HCFA) found that approximately
75 percent of Medicare beneficiaries had some form of private insurance to supplement
Medicare. Approximately 38 percent supplement Medicare with employer-sponsored private
insurance.

It is important to note that the number of Medicare beneficiaries with employer-
sponsored supplemental coverage declines with age. The 1991 Medicare beneficiary survey
showed that employer-sponsored coverage is at its highest among beneficiaries ages 65 - 69
(415 percent). The number drops steadily until reaching a low point of 15.5 percent
covered under employer-sponsored plans for beneficiaries 85 or older.

This trend is troubling, We are here today to discuss the potential role for employers
in the Medicare system. At the same time, employers are disengaging themselves from the
retiree health care system. As the number of Medicare beneficiaries with employer-
sponsored health coverage continues to decline, due to forced reductions by many large
ceniployers and business decisions to reduce retiree benefits, creating a role for employers in
the Mericare system will be more challenging.

C. Managed Care and Employer Health Care Costs. Many employers have
Found ianaged care to be a crucial component in their efforts to control their health care
‘costs and provide quality, cost-effective health care to their employees. More than 90
miliien Americans are now enrolled in some form of managed care. In fact, HMO
enrollment alone has nearly doubled since 1986 to 50 million people in 1994. The
Congressional Budget Office reports that the most effective HMO's -- group and staff model
HIMO's -- can reduce employers’ health care costs by 22 percent compared to typical
indemnity plans. In contrast, approximately 8 percent of Medicare beneficiaries -- 2.3
mullion -= were enrolled in HMO’s as of December 1994.

M1. NAM Principles

In February 1995, the NAM Board of Directors approved a resolution on Medicare
and Medicaid, The NAM supports efforts to reduce our nation’s budget deficit; however,
unilateral across-the-board reductions in the Medicare and Medicaid programs should be
avoided because they are likely to exacerbate the cost-shifting to the private sector and
individuals. The challenge is for government, business, and individuals working together to
reduce the total costs of health care, both public and private.

Specifically, the NAM supports restructuring Medicare with an emphasis on greater
use of quality managed care, which delivers higher value by encouraging more efficiency and
wiser use of services, Strategies to accomplish this goal should include reducing barriers to
managed care, promoting innovation, and fostering competition among program providers.

Given our Board's resolution, we commend you, Mr. Chairman, for proposing ways
to restructure Medicare and for exploring opportunities to increase the use of managed care
for Medicare beneficiaries. Current health care expenditures by the government, businesses
and individuals cannot be sustained. The United States devotes a much larger portion of its
GN? to health expenditures than do other industrialized nations. The NAM supports a
reduvtion in the rate of growth in overall health care costs for all payers. Cost-effective
purchasing and management of care will be critical. At the same time, any solution must
maintain quality health care for employees, retirees and Medicare beneficiaries. ‘The solution
should not shift costs. [tis in the nation’s best interest if the solution reduces the rate of
growth in all health care spending without resorting to cost-shifting.

Further, as background, long-standing NAM policy suggests the following guidelines:
Public programs (Medicare and Medicaid) should be structured to distribute the burdens
equitably between the public and private sector and among consumers, payers, and health
care providers. Cost-conscious consumer behavior should be encouraged through greater
cost-sharing and other incentives. Cost-conscious provider behavior should be encouraged
through measures such as prospective payment systems and at-risk arrangements.

a. Lins

In considering the creation of a seamless health care system for Medicare
beneficiaries, the benefits and costs to Medicare-eligible retirees, the federal government and
the employer community should all be considered.
Considerations for Medicare-Eligible Retirees. Medicare-cligible retirees



6

Chairman THoMas. The Subcommittee will come to order.

I want to welcome all our friends to our hearing on the potential
for employers, unions, and medical savings accounts to add to the
Medicare Program. As I said yesterday at the Subcommittee hear-
ing, this Subcommittee is going to undertake a major effort to
make Medicare a better program, both to improve its insolvency
and to provide better choices for beneficiaries.

Today we will examine how we might provide options through
former employers and through medical savings accounts. In addi-
tion to that, labor unions, I believe, are a very fruitful area of new
endeavors.

Last week we heard from a series of employers about their suc-
cessful efforts to control their health care costs and improve the
quality in the coverage they provided for their workers and fami-
lies. For instance, the Pacific Business Group on Health reported
a successful effort in negotiating a nearly 10-percent reduction in
HMO, health maintenance organization, premiums for their mem-
bers in 1995.

I would like this Committee to explore how we can tap into that
kind of creative energy by employers on behalf of Medicare bene-
ficiaries and the Medicare Program. I believe we must find a way
to allow employers to play a more defined role in Medicare cov-
erage so that beneficiaries can stay with the plan they had as
workers, and if they like it and it is cost effective for the program.

Clearly, this kind of change raises many questions: What would
be the payment rate for Medicare in that situation? How would we
define an employer’s retirees? What would we do about retirees
who want to stay in the Medicare fee-for-service program?

I am pleased that the list of witnesses in our first two panels,
who will address the concept of an employer role in Medicare, have
a background that will allow us to ask the kinds of questions that
I just outlined and more. I am also pleased that our last panel will
address an equally exciting concept, and that is the medical sav-
ings account for Medicare beneficiaries.

Clearly, one very promising approach to cost control and quality
health care is medical savings accounts. With medical savings ac-
counts, MSAs, as they are called, a person has the protection of a
very high deductible for significant health expenses. They also have
the freedom to make wise choices with their money in a medical
savings account because it is their money and their choice.

This option is apparently working very well already for one com-
pany, the RCI Corp. of Michigan. We will hear from that company’s
director of benefits about how they have successfully instituted a
MSA Program for their workers, and I believe Members of the Sub-
committee have already been enrolled in that particular health pro-
gram by virtue of the cards that we have received.

We need to explore how we might make a MSA option available
to Medicare beneficiaries as well. There are some serious questions
that must be answered before we proceed: What is likely to be the
premium for the high deductible coverage for an average senior
beneficiary; how much would that leave in an account for medical
expenses each year; in addition to a number of other questions.
Who would sponsor MSA accounts and high deductible insurance
and who would regulate it? Should all Medicare beneficiaries be


40

HMO under a capitated rate and have the better risk stay in fee-
for-service.

Is that the tug and the pull that has been taking place?

Mr. VAN BELL. I don’t know it is fair to characterize it as a tug-
ging and pulling, but I would say that trying to understand what
the rate ought to be is the question. We have been working with
HCFA in very positive ways to try to determine what the appro-
priate rate is, looking at the Deere experience, looking at the coun-
ty experience, looking at national experience.

We have engaged the help of Deloitte & Touche as we work
through this and in attempting to come up with what is appro-
priate. Obviously, the MIG has a 5 percent savings right off the
top, on whatever rate you establish for the beginning of the dem-
onstration for the Medicare Program. There also is a cap on what
we would be able to retain if, in fact, we do generate the savings
that we believe are there through local involvement, local control.

I believe that the rate setting will be established. I think it is a
question of making sure that we have the appropriate risk and re-
ward relationship put together.

Mr. McCrery. And where are you right now?

Mr. VAN BELL. We are really in the final stages of reviewing
where we are on rates. We have had some dialog in the last few
weeks. We expect that we will be sitting down with HCFA very
shortly.

Our goal would be to do that, to continue to visit with the UAW,
United Auto Workers. We have brought them along as this process
has evolved over the last several years. It has been in phases, if
you will. Factfinding, rate setting, and education. Our goal would
be that we would start that MIG sometime the end of this year or
January 1, 1996. That is at least the objective set in place.

Again, I will assume that we can work through the rate-setting
issues. I assume that we will have continued endorsement from the
UAW to do the demonstration.

Mr. McCrery. Well, are you basing your assumptions on a nor-
mal or average group or are you trying to get more specific than
that and analyzing who your participants are going to be?

Mr. VAN BELL. The work that we have been doing is a dem-
onstration in one community where Deere has a major presence. It
is in the quad city, Moline, where our corporate office is located.
About 350,000 people reside in that community and we have a good
concentration of retirees that live there.

We are trying to understand the experience of that population,
which is data that HCFA has. We would only have supplemental
data. What the county rates are versus national rates and trying
to understand how the Deere population stacks up in there so we
can set the rate that is appropriate and HCFA then in fact is
incented with their 5 percent and we are incented to perform the
kinds of things I mentioned earlier we are working to do.

Mr. McCrery. Will all of your retiree population participate?

Mr. VaN BELL. In that community they would be placed in the
MIG, but could elect to opt out of that program if they so elect. It
is my understanding that that is acceptable as to how we would do
it.


120

MICHAEL J. BLAIR

22216 Victory Boulevard #C-303 Woodland Hills, CA 91367-1807
VIA FEDERAL EXPRESS Wednesday, May 24, 1995

Philip Moseley

Majority Chief of Staff

House Committee on Ways and Means
1102 Longworth Office Building
Independence and New Jersey Avenues SE
Washington, DC 20515

Dear Mr. Moseley:

I wish to enter a written statement into the printed record of the upcoming
hearings on Medical Savings Accounts. My statement takes the form of this letter
and the pamphlet Health Care is Not a Right. Six copies of each are enclosed.
Please acknowledge in writing.

Your committee’s hearings will no doubt deal with the practical and legal
aspects of Medical Savings Accounts. My plea is that you openly discuss the
moral aspects, too. Where does morality fit in? The pamphlet will explain.

In brief, when proponents speak of the “right” to health care, there is no
escaping the conclusion that some citizens must therefore provide that health care
to others. For when someone has a right to a service, someone else must provide
it, correct? Otherwise, the “right” is being violated. “Must” in this context
means “without choice.” Thus, the claimant controls the services of the provider
because the provider must give those services on demand.

There is even an American precedent for such a relationship. At one time,
a person (A) was entitled to any and all services provided by another person (B).
The law was so specific that in fact, A owned B. The institution was slavery.
Shakespeare wrote, “A rose by any other name, would smell as sweet.”
Similarly, slavery by any other name, would be as wrong.

My guiding principle is that there is no dichotomy between the
moral and the practical. Giving citizens personal control of their own health
care spending—and giving doctors personal control of their own lives—is not
only what is more efficient; it is also what is right.

/mjb Michael J. Blair
Enclosures


19

Mr. McCrery. Thank you, Mr. Van Bell.
Mr. Maher.

STATEMENT OF WALTER B. MAHER, DIRECTOR, FEDERAL
RELATIONS, CHRYSLER CORP.

Mr. Mauer. Thank you, Mr. Chairman and Members of the Com-
mittee. My name is Walter Maher. I am director of Federal rela-
tions for Chrysler Corp., and we appreciate the opportunity to be
here today to discuss this important issue.

Chrysler firmly believes that anyone sponsoring a health plan,
whether an employer or a government, can achieve savings without
sacrificing quality if those benefits are delivered by selective man-
aged care plans as opposed to traditional fee-for-service indemnity
plans. And as such, we commend the Committee for examining all
the options that are available to increase substantially the number
of Medicare beneficiaries enrolled in such plans.

Now, given the current low rate of enrollment of Medicare berie-
ficiaries in managed care plans and the potential savings inherent
in increasing that number, real opportunities exist to achieve Medi-
care savings and help reach balanced budget objectives.

Increases in Medicare managed care enrollment wil] alse help
strengthen the hand of employers as they seek to achieve greater
efficiencies from the health care system. In short, working in tan-
dem, the public and private sectors can bring about reduced health
care costs for our country, help bring those costs more in line with
the costs prevailing in other leading countries, and in the process
enhance American living standards, American competitiveness, and
free up funds to help our country meet its other pressing needs.

Prior to 1989, I was Chrysler’s director of employee benefits.
With the cooperation of the unions representing many of our em-
ployees, we had put into place a series of successful innovative
managed care programs designed to reduce the cost of the health:
care programs covering our employees and our non-Medicare retir-
ees. During the latter half of the eighties, we entered into a cooper-
ative research project with Health Care Financing Administration,
HCFA, to determine whether Medicare and employer retiree health
costs could be controlled, enrollee satisfaction enhanced, while
maintaining quality of care.

Based on the recommendations of Health Data Institute, which
conducted the study for us, in 1989 we decided not to pursue a
demonstration project at that time. We were in the relative infancy
of this concept, the number of unknowns were legion, and the risks
to any company sponsor were great. More specifically, the parties
were unable to satisfactorily resolve questions concerning risk se-
lection and other uncontrollable risks.

The issue of the demonstration project’s administrative cost was
a significant one. To achieve lower operating costs would require
significant investments amortized over long periods and large en-
rollments, neither of which were ensured.

We were also unable to secure an agreement with HCFA to per-
mit the demonstration project to use Medicare’s favorable provider
payment arrangements.

Finally, if additional benefits were to be provided to spur enroll-
ment, the demonstration project would have to generate efficiencies


14

TESTIMONY OF RICHARD J. VAN BELL
JOHN DEERE HEALTH CARE, INC.

T would like to thank the members of the House Ways and Means subcommittee on health for
this opportunity. I am President of John Deere Health Care, which is a wholly-owned subsidiary
of Deere & Company. Deere & Company, of course, is best known for manufacturing John Deere
farm machinery.

Deere & Company currently employs approximately 34,000 individuals worldwide, Health care
benefits are provided to these employees, 17,000 Deere retirees and the beneficiaries of both
groups In 1994, Deere & Company spent $222 million to provide health and accident coverage
to employees and retirees

Twenty years ago, the company decided the cost of health care services provided to its employees
and retirees could be better managed and the quality of care could actually be enhanced. After
successfully starting two small Health Maintenance Organizations for our own employees, we
were approached by other employers that they too would like to use the same techniques to
impact the quality and cost of their own health care benefits

‘Today John Deere Health Care offers health management services and managed care programs
to Deere & Company, other companies and government agencies in Illinois, Iowa, Wisconsin and
Tennessee, We serve the needs of over 300,000 members through two subsidiaries - Heritage
‘National Healthplan and John Deere Family Healthplan

We have gained considerable experience with government programs and with the Medicare
population. Of the 17,000 Deere retirees for whom we currently provide health care benefits,
more than 9,000 are Medicare-eligible, Just over half of those individuals choose to be covered
in our managed care programs. We have 2100 retirees who reached age 65 in the past three
years. Of those in managed care, 95 percent of them choose to remain in our managed care
programs

In addition, we provide health care coverage to approximately 40,000 Medicaid recipients. More
than half of those are enrolled in the state of Iowa, There we have gained considerable success
in providing quality health care at lower costs for patients in this population. We hope to see
similar success in the TennCare project in Tennessee.

We have traditionally offered our managed care products through an Independent Physician -
Model HMO named Heritage National Healthplan. In the past two years, Deere has opened three
staff model health centers and will open four more by the end of 1995. These health centers are
‘managed as a primary care, staff-model HMO named John Deere Family Healthplan, The health
centers were opened as part of a strategic alliance with the Mayo Clinic. We received the
endorsement and full support of the United Auto Workers to open these centers

The number of employers using our managed care services has grown from 290 just two years
ago to over 700 today. Deere employees and retirees now represent about twenty percent of our
total enrollment.

Our success has been built on three basic principles. We have applied these principles to other
government programs with great success, and no doubt they could be applied to Medicare as
well.

+ We believe that high quality health care is the most cost effective care.

* We believe that costs can be lowered significantly when employers, providers,
government and managed care companies create partnerships that utilize a market-based
approach,

+ We believe that patient satisfaction and education are of utmost importance.


‘The Board of Trustees also expressed "great concern” about spending growth from the
‘Supplementary Medical Insurance trust fund. As noted by the Board of Trustees in the 1995

“In spite of evidence of somewhat slower growth rates in the recent past,
‘overall, the past growth rates have been rapid, and the future growth rates are
projected to increase above those of the recent past. Growth rates have been so
rapid that outlays of the program have increased 53 percent in the aggregate
‘and 40 percent per enrollee in the last 5 years."

Medicare insurance coverage remains largely as it was originally enacted in 1965:
‘traditional fee-for-service indemnity insurance with beneficiary cost-sharing requirements to
control utilization.

However, private health insurance has evolved substantially since that time. More and
more privately insured Americans are enrolled in managed-care plans, such as Health
Maintenance Organizations (HMOs) and Preferred Provider Organizations. According to the
Group Health Association of America (GHAA), some 56 million Americans were enrolled in
HMOs in 1994, up from 36 million in 1990, and 65 percent of people with employer-based
health insurance plans were enrolled in some form of managed-care arrangement, according to
the KPMG Peat Marwick Health Benefits in 1994 (October 1994).

Moreover, managed-care organizations have recently been successful in slowing the
rate of growth of premiums. In 1995, on average, HMOs are expected to reduce their per
person premiums by 1.2 percent, according to GHAA.

Some private employers have also begun to offer their employees Medical Savings
‘Accounts. Such accounts allow employees and their dependents to control their health care
dollars. providing sirong incentives for cost conscious spending.

Medicare beneficiaries can enroll in HMOs under the risk contracting program and
other managed-care arrangements, but, due to certain features of the program, managed-care
remains a relatively small part of Medicare, with only 8 percent of the beneficiaries enrolled
in managed-care plans as of December 1994, Medicare beneficiaries are also not currently
able to enroll in any kind of Medical Savings Account.

FOCUS OF THE HEARINGS:

The hearings will focus on successful private-sector approaches at controlling costs and
improving quality and an exploration of how such approaches can be made more available to
increase choices for Medicare beneficiaries.

‘The hearing on Tuesday, May 16, 1995, on "Experience in Controlling Costs and
Improving Quality in Employer-Based Plans” will review the approaches employers have
taken to improve the cost-effectiveness and quality of their coverage for their employees, the
issues and problems encountered as these approaches were implemented, the effectiveness of
these approaches, and lessons the Federal Government can lear from these private-sector
experiences.

‘The hearing on Wednesday, May 24, 1995, on "Medicare HMO Enrollment Growth
and Payment Policies” will investigate the reasons for increasing beneficiary enrollment in
Medicare risk contracting HMOs, and current and alternative HMO payment methods,

The hearing on Thursday, May 25, 1995, on "The Potential Role for Employers,
‘Associations, and Medical Savings Accounts in the Medicare Program" will explore issues
involved in enabling employers and associations to offer Medicare coverage to former
‘employees and members, respectively, and the potential role Medical Savings Accounts could
play in the Medicare program.

(MORE)


132

THE REAL RIGHT TO MEDICAL CARE
VS. SOCIALIZED MEDICINE
(Summary of George Reisman article by Chuck Braman)

The Medical Crisis and the Need for
Radical Procapitalist Reform

For decades the cost of health care, unlike the cost of other economic
goods, has risen relative to prices in general and to people's incomes. The cost
of health care is now so high that a radical reform is necessary. The current
type of reform being advanced by the Clinton administration, however, is an
anachronism. It is, to be exact, the enactment of a full system of socialized
medicine, a system based on the mistaken and discredited tenets of Marxism,
which will aim to reduce the cost of our partially socialized medical system by
means of its full socialization accompanied by price controls and rationing. In
contrast, the real reform necessary to reduce the cost of health care would be
one based on opposite premises, i.e. one based on the tenets of capitalism,
tenets which in this century have reached their fullest development in the
political philosophy of Ayn Rand, and in the economic theory of Ludwig von
Mises. The radical reform necessary is based on the movement away from
government interference and toward individual freedom.

The Right to Medical Care and the
Causes of the Medical Crisis

The root cause of the runaway cost of medical care is philosophical.
The cause is the current perversion of the concept of rights, a perversion
which underlies the laws which have been passed, the consequences of which
are responsible for the current crisis.

The correct concept of rights is based on the individual's right to life,
which right includes the right to take the actions necessary for sustaining
one’s life. Rather than being a claim to goods to be provided by others, it is an
injunction against the whole rest of society to leave one free so that one may
produce the values which one’s life requires. Such a right can only be violated

y the initiation of physical force, so that under such a concept of rights the
initiation of physical force is abolished, and cooperation among people is
achieved through voluntary trade rather than the forced transfer of wealth
from one person to another. On a social and economic level, in a division-of-
labor society, this right, the right to life, is exercised by selling one’s goods or
labor (what one produces) for money to buy another's goods and labor (what
another produces). Applied to medical care, this means that the right to
medical care is the right to all the medical care one can buy from willing
providers. Such a right is exactly what is currently violated by medical
licensing legislation and all regulations and legislations that artificially raise
the cost of medicine, because all represent different forms of the government
initiating, or threatening to initiate, physical force against producers and
traders who themselves have not initiated physical force, and thus physically
restricting their right to produce and trade.

In contrast to the concept of rights described above, which Dr. Reisman
refers to as “the rational concept of rights,” is the concept of rights put forward


110

minimize the impact of risk segmentation. Ignoring risk segmentation could lead to higher
overall federal government costs—not substantial cost savings.

Individuals’ Ability to Meet High-Deductible Requirements

In deciding whether to introduce high-deductible plans for Medicare beneficiaries, an
important policy consideration is whether beneficiaries choosing the high-deductible plan
would make provisions to ensure that they have adequate financial resources to meet the
deductible requirement. Some policy makers might want to require beneficiaries wanting
to enroll in the high-deductible plan to prove that they have adequate financial resources
to meet the deductible. Other policy makers might feel that this would be unwarranted
interference with beneficiaries’ freedom of choice.

CONCLUSION

Ifthe above factors are thoughtfully considered, and MSAs are carefully implemented, they
may provide powerful incentives for potentially containing costs in the Medicare program.
Members of the Academy's Medicare Work Group are available to discuss these and
related issues.


69

Chairman Tuomas [presiding]. Thank you very much, Mr.
Erhart.
Mr. Ferrara.

STATEMENT OF PETER J. FERRARA, SENIOR FELLOW,
NATIONAL CENTER FOR POLICY ANALYSIS

Mr. Ferrara. Thank you, Mr. Chairman. My name is Peter Fer-
rara, and I am a senior fellow at the National Center for Policy
Analysis.

We all know why we are here. We are here because the Medicare
Program is not only going bankrupt; it is finally collapsing in a
most disastrous manner. President Clinton’s own trustee’s report
shows, if you study carefully the data that is published, that in
order to pay all the promised benefits by the time today’s young
workers retire, under current policies if the benefits are not
changed, you would require at least tripling the payroll tax under
Medicare, increasing the deductibles paid by the elderly under
Medicare to the equivalent of $4,000 per year per elderly couple
and you would still be running a deficit of $250 billion in the Medi-
care Program in today’s 1995 dollars, which is bigger than the en-
tire Federal deficit.

I would submit to you that this effectively is Mr. Stark’s plan,
Mr. Gephardt’s plan, Mr. Clinton’s plan, the plan of anyone who
says they are not going to make any changes in Medicare benefits.
Their plan is to triple the payroll taxes, raise the deductible pre-
mium to $4,000 per couple and run a deficit in the Medicare sys-
tem bigger than the entire deficit. That is what is going to happen
according to President Clinton’s own report if changes aren’t made.

I am here today to present a proposal which—to address this
problem, which I think can address it in a very appealing way. The
proposal I am presenting that is advanced by my organization, the
National Center for Policy Analysis, has broad support from many
other groups that many of you worked with in the past, including
the Cato Institute, the United Seniors Association, the Seniors Coa-
lition, the National Taxpayers Union. Citizens For a Sound Econ-
omy is helping me with this and many other groups you all have
worked with in the past.

Let me try to explain how this works. The broad concept is
encaptured by medical choice. Elderly recipients under Medicare
would have the freedom to withdraw their share of funds of Medi-
care from Medicare each year and use it to buy anything in the pri-
vate sector that they want. They could buy an HMO, coverage from
an HMO. They could buy coverage from a current or former em-
ployer plan. They could buy traditional insurance, but also they
could buy a medical savings account to receive their coverage. The
amounts they could withdraw from Medicare would be risk ad-
justed, based on age, geographic location, health status, so those
who are relatively younger and healthier would take less if they
left for the private sector. Those who were older and sicker would
take more and the system would be protected from any adverse
problems because people are just taking the share of funds that are
represented by the risk that they present.

This proposal is designed to meet the budget targets, without
question. The amounts that people withdraw from Medicare each—


24

In this regard, it should be noted that it has been the existence of ERISA which has
facilitated the growth and development of high quality, cost effective employer
sponsored heaith plans, the very plans you seek to enlist to help control the rate of
growth in Medicare outlays. For this reason, both the federal government and
employers have a mutual interest in preventing the adoption of anti-managed care

proposals.

In addition, to assure Medicare does realize savings from the expansion of managed
care enrollment, it appears that, in addition to revising the program to provide a
reason for a Medicare beneficiary to want to enroll in a managed care plan, Medicare
must also develop a risk adjusting technique to guard against risk selection. Based on
testimony this Committee received earlier this year from Bruce Viadeck, HCFA
Administrator, the Adjusted Average Per Capita Cost (AAPCC) method HCFA uses to
pay Medicare risk contractors (not MIGs), is not adjusted for the health status of the
enrollee. As a result, managed care currently costs the Medicare program rather than
achieving savings, as these plans appear to attract the healthier members of the
‘Medicare population. While negative for Medicare, beneficiaries enrolled in some of
these plans receive additional benefits at no cost to them (which often serve as the
incentive for them to join the plan in the first case), If Medicare wishes to achieve
savings and increase enrollment in managed care plans, this cannot continue.

‘Conclusion

Mr. Chairman, reforming the Medicare program to incorporate the extensive offering of
managed care options available to the employed population is a long overdo means to
reduce the rate of growth in Medicare spending. Efforts to achieve Medicare savings
which rely mainly on constrained provider fees, and which ignore the savings
‘opportunities presented by managed care, often end up shifting costs to private sector
payers and doing little to reduce overall national health spending. Both our federal
budget deficit and our high rate of national health spending pose a major threat to
sustained economic growth in the future, While solving either or both problems will
rot solve all of our country's economic and social problems, they are interrelated, and
solving them will be essential if we are to offer future generations of Americans the
‘opportunities we have enjoyed


143

‘reat patients property due to under-capitation. Its the bias of the corporations that people
should only require 1-3 sessions. This is not reality.

¢) Itis true that under the fee-for-service system, there was some incentive to
over-treat the patient. However, not all providers over-treated, as wise clinicians knew that
they would receive future referrals from patients whom they treated appropriately. Also,
under a fee-for-service system, it a consumer feels that he/she is not being treated
property, he/she can easily leave that clinician and find another. Further, a system of
‘appropriate co-payments, when used by the insurers, encouraged congumers to be cost:
and utilization-conscious.

8. Despite cl
solion” there fs

‘@) Managed competition is really about the sinaion of competition. As
consolidation continues, only a few large insurers will remain.

) In several areas, the industry aiready controls 90% of the market. Where managed
care squeezes out fee-for-service plans, there is no competition for managed care itself. A
lack of competition always bodes poorly for quality.

©) A free market for the patient would mean that the patient is the one who would
determine what care is needed, determine the value of that care, and choose freely from all
who are qualified to provide that care. Managed care does not allow the patient these
liberties. As managed care becomes an arrangement betwaen employers or governments
and the insurer, and the “consumer” becomes the employer or government, for they pay
the premiums, the “free market” exists between the MCO and the payor. Under managed
care, the MCO determines who will receive what kind of treatment, for how long, and who
can deliver it. The true consumers of care, the patients, as well as the body of
professionals who could administer care, are kept out of the “marketplace.”

d) The managed care industry controls both supply and demand in regard to health
care services. MCO's have deciared that there is an over-supply of mental health
professionals. This is predicated, however, on the industry's assumption that only brief
forms of crisis-oriented therapy are needed, and that few people need treatment. This is
not based upon true demand, which would be based upon the citizens’ requests for care.
Although fee-for-service is a “subsidized” market, its stil based on @ more true supply and
demand than under managed care. Under a fee-for-service system which had, in recent
years, Seen extremely high co-payments for psychotherapy, the demand for services was
‘ar greater than what is allowed under managed care. There wil soon be a drastic,
shortage of mental health professionals and other providers, for the number will be based
‘on what the managed care industry “needs,” not upon what our citizens need. This will
affect our entire society.

©) Recommendations:

1. Allow Medicare beneficiaries to choose among a yariety of health plans, including
fee-for-servi Medi in 7 Ys, and ar if at
rently exi be

‘a) Medical Savings Accounts (MSA) are attempts to return the rights of the "free
market” to the actual consumers of health care. incentives are provided that make the
consumer cost- and utlization-conscious. Up to the catastrophic limit of the MSA, the
‘consumer retains the right to choice of provider, the right to privacy, and the right to make
hisiner own treatment decisions,

b) There are some problems with MSA's, however:

i) Beyond the catastrophic limit, the consumer retains freedom of choice, but loses
privacy snd the right to make his/her own treatment decisions, as treatment may be
Subject to utilization review. However, because there are no panels, and MCO’s can't
threaten the providers with unemployment, providers are free to advocate for patients.

i) The standard MSA contract writen by the Golden Rue Insurance Company, has
a limit on mental health services of $10,000 per year per individual. This is ger
‘adequate for a patient requiring only psychotherapy, but not for one requiring @ aay
‘treatment program or hospitalization.

i) There is some concem that MSA's will not be appropriate for those who are
tunable to be responsible for their funds. This may affect soma of the elderly. It may be
necessary to arrange for @ relative to make MSA decisions or, when there is no such
relative close by, for a consumer case manager (not a case manager contracted by the
insurer) to do 80.



10

not necessarily from efficient operation, but from being able to cherry-pick the
healthiest beneficiaries.

A second and more extreme example is medica! savings accounts. The
potential for adverse selection posed by injecting an MSA option into Medicare
is enormous.

A study just released by the American Academy of Actuaries found that, for
the under-65 employer-covered population, the selection effect as a result of
adding an MSA option to employees’ health insurance choices could end-up
increasing the standard, low-deductible premium by 60%. For the Medicare
population, where high health care costs are even more concentrated in a small
percentage of the pop-ulation, the adverse selection problem will be even greater.

These are only projections, though. MSAs today are a theoretical
concept without foundation. The few insurers that offer any sizable number of
MSA-like plans will not let me, or the American Academy of Actuaries, take a
look at what they are actually offering.

Program. We should take extreme caution when using the Medicare population
to prove or disprove some economist's latest theorem.

Providing Medicare beneficiaries a range of options is something |
continue to favor. And as we know, there is no employer in the country today
that provides the range of health insurance options to the range of Americans in
the variety of locations as does the Medicare program. But every potential
option we may provide beneficiaries is not necessarily a healthy one.

Just some words of caution as we work to make a better Medicare.
Thank you.


141

2 Bi the right to make theit i

2) The MCO may pre-determine that all or most patients are to receive brief
/hospitalizations and brief, crisis focused psychotherepy, regardless of patients need. This
is based on decisions about money, not treatment and consumer need.

b) The MCO often requires reports from the treating clinician and then takes over
treatment decisions. The patient and his/her clinician may be powerless to decide the
course of The sense of pow 85 and the prevention of to proper
treatment may increase a patient's symptoms, especially depression and anxiety.
Hospitalization or intensive psychotherapy for a particular patient may be deciared “not
medically necessary.” even though the standards of practice in the professions would
clearly show the need for treatment.

©) What is “medically necessary" varies from one MCO to another, as it generally has
more to do with costs than with care.

) Many MCO's will only authorize three or four psychotherapy sessions at a time,
leaving the beneficiary and provider unable to know how long their work will be able to
cantinue. Anxiety often rises before each "approval" and session time is often spent on
discussing the MCO, rather than on the problem for which the patient sought treatment,

e) Some MCO's deny funds for psychotherapy if the patient refuses medication. This
is because medication may produce a fast relief of symptoms, even though it may actually
{ail to correct the actual problem. This then allows the MCO to discharge the patient
without investing much money. in general, there is concem that too many of our elderly
are already over-medicated. Otten, they are considered too old to make changes and not
‘good candidates for psychotherapy, which is not necessarily true. This puts the elderly at
increased risk of over-medication. Further, there is a bias among some physicians and
scientists toward medication and away from “talk therapies,” but this may reflect litle more
than an honest bias and the difficulty of forcing “talk therapy” inta the molds of empirical
science. Patients may have a strong need to talk out their problems, yet their voices do not
count under managed care.

3. mer .

Because reports must be submitted to the MCO by the provider in order for the MCO to
determine whether or not continuing care is “necessary,” information that should not leave
the treatment room must be given to the MCO, which may store it in their data banks,
Psychotherapy patients often require privacy over information involving personal problems
Many consumers are not at all comfortable allowing such information to be divulged, but
may have to sactfice reimbursement if they withhold this information. Under Medicare
psychotherapy providers are not permitted to treat beneficiaries outside the plan. Thus,
those requiring privacy or those with paranoid conditions may be forced to forego needed
treatment due to inappropriate cost-containment techniques that may be suited to
“industry,” but not to human services.

4 may be grossly under-treating consumers of mental

08 it Because itis illegal for therapists id

beneficiare isuMers who nee bey
tates may be im cobtainin. ri

a) Many MCO's provide a grossly inadequate model of "short-term therapy.”
“solution-oriented therapy," “crisis intervention,” or “stablization," or they may state that
thay only treat the “acute phase” of a problem, refusing to pay for proper treatment for
“chronic” or “ongoing” problems. This is a standard that would never be tolerated in
medical care, and should not be tolerated in mental health care, Examples of MCO
literature stating these limits can be provided to the reader.

b) Many patients need time to build trust in the clinician and to tel their story. Patience
and understanding from the clinician are as necessary as advice. The clinician needs to
spend encugh time with the patient in order to know if the problem goes deeper than the
surface “presenting problem.” These things are too often impossible under managed care.

¢) MCO's are misusing research data by not speaking to the limits of the research in
order to support their bias toward short-term treatment.

) Even though the literature in many MCO plans may state that beneficiaries may
have “up to 20 sessions” in a year, often times the companies’ reviewers are told never to
allow more than a few sessions (see vignettes), or providers are wamed that if they
average more than a few sessions per patient, they willbe ejected from the panel or
refused further referrals. Thus, the provider may be too afraid to give the consumer the
treatment that is needed.



29

Medicare population, particularly In the areas of disease management,
weliness, the care of chronic health conditions and the continuity of
care.

> Use managed care to enhance the quality of health care delivered
to Medicare.

One of the halimarks of the movement of employer plans toward
managed care has been a focus on improved quality in the delivery of
health care benefits. Among the lessons we have learned in
manufacturing, as well as in delivering health care benefits to our
employees, is that elusive concepts such as health care quality can be
reduced to identifiable elements. The relative presence and/or absence
of these elements can serve as indicators of the quality of network
management and ultimately the quality of health care delivery. The
coalescence of health providers, network managers, insurers and other
professionals around such benchmarking activities as the HEDIS
measurement tool and the collaborative efforts of employer-ied
Initiatives like the “Cleveland Health Quality Choice" program are
evidence of marketplace activity that is having success and positive
impact on improving the quality of care and reducing cost.

Both the government and the private sector have substantial
financial obligations with regard to retires medical coverage.
Approximately 40% of all Americans receive their heaith care benefits
from self-insured, employer sponsored plans. it is clear that both
parties have a significant interest in seeing that quality improvement
continues to be a hallmark of managed care as it Is introduced to the
Medicare population. My message to you, simply put, is that quality
costs less. Incorrect diagnoses, improper treatments, unnecessary
services and Inappropriate settings for care are, by definition, not
quality. The key is Kdentifying a reasonable, consensus view on quality
Indicators, communicating that view to managed care organizations
and then driving the process in our roles as payer through continual
quality Improvements.

> Attract more HMOs In the Medicare risk sharing program.

Today, less than ten percent of Medicare beneficiaries are enrolied
in managed care programs for the receipt of their Medicare benefits.
Despite increased efforts by HCFA and the HMO community, this level
of participation is far below the level of participation of the pre-45
population in managed care. Among active eligible employees, more
than 60 percent are enrolled in some type of managed health care
system. At GenCorp this figure is closer to 80%. The employers who
moved in this direction, some of them many years ago now, have
enjoyed the benefits slong with the risks of being pioneers. in similar
fashion — that is, to drive marketplace change for Medicare
beneficiaries — | suggest you focus on those policy changes that will


98

Mr, McCrery. To use for common, everyday health expendi-
tures?

Mr. FERRARA. Right.

Mr. McCrery. Do they get that cash in hand or is it in an ac-
count somewhere that they draw on, or how do you envision this?

Mr. FERRARA. Say they want to do this with XYZ Insurance Co.
The account and the insurance—it goes to the insurance company.
For the first year, they can only use it on health expenses. So, if
they have a health expense, they send the form to the account and
they will pay them back for it. What we would do is have that
health expense be as broad as medical expenses are defined under
the Internal Revenue Code.

Mr. McCrery. You would not allow those folks to spend that
cash on nonhealth care expenses in the initial year.

Mr. Ferrara. Right. Right.

Mr. McCrery. OK. I think Mrs. Johnson may have been think-
ing that they are able to spend that money on going to the movies
and whatever during that year.

Mr. FERRARA. Right.

Mr. McCrery. You don’t envision that?

Mr. FERRARA. No, no, no, no.

Mr. McCrery. You are saying at the end of the year, if they have
any money left, then they can spend it on going to the movies or
whatever they want, because they get another $2,100.

The mechanics, though, we would have to figure out, because if
you give somebody cash——

Mr. FERRARA. You don’t give them cash. The insurance company
holds it until the end of the year. At the end of the year, you would
say give me a rebate on the remaining funds.

Mr. McCrery. So, you are with us there. We would have to fig-
ure that out.

I disagree with Mr. Thomas’ analysis of the politics of this. In the
old Congress, I think he may have been right; in the new Congress,
I think there is a distinctly different flavor of philosophy that
might lend itself to passing something like this. It depends upon
the intelligence of the individual, and the individual operating in
his own self-interest rather than some government plan that di-
rects the individual in certain ways.

So, I disagree with him, but as a compromise, what we might
consider is allowing the individual to get any money over and
above the amount of the deductible, or the out-of-pocket cap, as
long as that individual has sufficient money in his account to cover
the deductible. He could use any excess at the end of the year.
That might be a compromise that would help.

Mr. FERRARA. I think that would work. I think it is important—
it is very important not to say you can only spend it on health care.
It is not going to work. It would be worse than doing nothing.

Mr. McCrery. I am in total agreement with you there, except
with the under 65-year-old group. Frankly, I think it is possible to
tell them you must keep any excess in that account until you reach
age 59 1/2, or whatever. At such time you can then withdraw it for
any other purposes. Until that age you would have to spend it on
health care only and it would accumulate, tax free, in that account,
like an IRA, individual retirement account.


140

1 fessi Ine.
P. 0, Box 438, Commack, NY 11725 Phone/Fax: 516-424-5232

Testimony
Karen Shore, Ph.D., Executive Director
1966 Ashley Place, Westbury, NY 11590
516-997-3390

A) Introduction:

Tam submitting testimony on behalf of the Coalition's approximately 1250 members
‘The Coalition is a national, grass-roots organization, made up of clinicians from all mental
health disciplines and consumers of mental health care, their family members, and their
advocates, The Coalition is working with approximately 24 regional "affiliated groups" that
have no legal tie to the Coalition, though some have taken out memberships. Thus, ! am not
officially testifying for these groups, but do want the Subcommittee to know that several of
these groups are state or regional Coalitions (MA, NY, NJ, PA, DE, MD, NC, GA, TN, IL, OH,
‘CO, CA, WA, MO) that have been inspired by our Coalition or that formed prior to our forming
(November, 1992), have similar goals, and are attempting to work together. Each of these
‘groups may have dozens, hundreds, or thousands of members.

| am testifying because of plans to increase the number of Medicare beneficiaries to be
enrolled in HMO’s and other forms of managed care. The Coalition formed specifically
because of the decline in quality of mental health treatment brought by managed care
‘organizations (MCO's). MCO's also have a strong impact on the abilty of professionals to
deliver proper care. The problems of managed care have the most impact on beneficiaries
who need treatment, as opposed to those who are generally healthy. Thus, a larger
percentage of the Medicare population covered by MCO's than of the general MCO population
will experience these problems, as our elderly generally require more treatment than does the
general population.

In this testimony, | will outine the problems we have seen in delivery of services under
MCO's in the private sector and will offer recommendations. We cannot assume that Medicare
beneficiaries will receive better care under MCO's than those in the private sector,

B) Problems lanaged lealth Care for Con: and Providers:

1 ns lo fr se clinicians and treatment facilities.

‘a) MCO's increasingly limit their provider list to providers who demonstrat.
‘willingness to perform short-term treatment, whether or not its truly appropriate, and on
their wilingness to do so without complaint. Thus, the pool of providers available to the
consumer may exclude those who would perform or advocate for quality care.

b) Primary care providers often must act as gatekeepers and may limit access to
psychiatrists and to psychotherapists. Often, there are financial penalties if primary care
providers make “too many" referrals. Corporate profits are often more important than the
‘consumer and treatment. Primary care physicians are asked to do “counseling,” but do not
hhave the training to do real psychotherapy.

¢) MCO panel limitations often cause the consumer to travel a great distance for their
care, which could be especially burdensome for the elderly, and may prevent needed care.

‘¢) Consumers may have to change clinicians often as plans drop providers and merge
with other MCO's, or as the consumer changes health plan. Continuity of care and the
building of trust in the clinician are impeded. Continuity of care and trust may be
particularly important for the elderly, who often are more in need of ongoing treatment than
the general population,

€) Clinicians are impeded in their ability to make the best referral possible due to panel
restrictions preventing them from referring “out-of-network.”

) Generally, psychiatrists and other doctoral-leval clinicians, and even master's leve!
linicians, may be prevented from performing psychotherapy by MCO's, as MCO's often
search for the “cheapest” clinicians. One MCO reportedly has begun using bachelor's evel
counselors rather than professionally trained master's and doctoral level professionals.
When beneficiaries cannot receive reimbursement for treatment by clinicians with
advanced training, quality of care is compromised.

'9) Patients hospitalized in a non-network hospital in an emergency may be forcibly
transferred to a network hospital before they are well, impeding recovery and possibly
increasing symptoms.

fh) Even if the MCO offers out-of-network benefits (Point-of-Service Option), consumers
with limited incomes may be unable to access out-of-network providers, as they are
financially penalized for doing so. This may affect the elderly in large proportions due to
the large percentage on limited incomes.



91

I do have another concern that a lot of the costs are consumed
in the last few months of a person’s life. It is difficult to determine
when those last few months are going to be, but, Dr. Orient, I am
sure you would agree there are times when you have a very high
probability that what we are doing here is useless treatment, and
if the person was able to make that decision, would probably deny
the treatment in a lot of those cases. How do we, with these medi-
cal savings accounts as an option, develop systems where people
are empowered to make those decisions prospectively about those
last few months of their lives.

Mr. FERRARA. We have some ideas to try and address that aspect
of the problem, but they are not really in this—in this proposal we
are offering you today and how to basically extend the medical sav-
ings concept to more catastrophic illnesses. They reflect the idea
that insurance will pay a certain percentage or a certain amount
of cost, and you determine if you want to spend more or if you want
to pay less.

It gets to be—it is a pretty complex thing, and we really haven't
advanced that. There are ways to try to address that, but what I
want to submit to you is the medical savings account, the way it
is designed, is getting big cost reductions that are more than big
enough to do the job that you have got before you now, when you
are talking about reducing the rate of growth from 10 percent to
5 percent. Even without this more advanced version that we are
still exploring to try and address the problem you are talking
about. where employers have been adopting this, they are getting
cost reductions reducing 15-percent growth to zero-percent growth
or cutting the cost by 20 or 25 percent.

I think the emphasis should be, let’s get these cost savings that
are on the table and achieve what we can. That will is very large
and addresses the immediate problem.

Let me say one more thing about the risk adjustment. The same
kind of concept was advanced in the report that the Committee, led
by Mr. Shays, released at the time the House Budget Committee
report was released. They have a report on Medicare. Representa-
tive Miller, Representative Largent, Representative Shays—there
was a fourth one in there—they had a system: age, demographic
location, disability and ERD status. They had a way of approaching
this.

So, I would submit, with a few objective factors, you can get a
workable system that gets you close enough so that it will function;
and then any—when you are dealing with large numbers of people,
some of them will cost far more than were risk assessed, most of
them will cost less, and on average you get enough numbers that
it will work out for both Medicare and the insurers.

Mr. ENSIGN. My time is up, I see.

Thank you, Mr. Chairman.

Chairman THOMAS. You are welcome.

The gentleman from Nebraska, Mr. Christensen.

Mr. CHRISTENSEN. Thank you, Mr. Chairman. Thank you for this
panel. [ am also a strong supporter of MSAs. Dr. John Goodman,
with the NCPA, has been out there in the forefront for some time
leading the discussion on this, and now this year they are in al-


11

Mr. McCrery [presiding]. Thank you, Mr. Stark.

We would like to call the first panel to the witness bench: Mr.
Van Bell, Mr. Maher, Mr. Salter.

Gentlemen, thank you for joining us today. We have Richard J.
Van Bell, president of John Deere Health Care, Inc.; Walter B.
Maher, director of Federal relations for Chrysler Corp.; Charles G.
Salter, director of employee benefits for GenCorp, Fairlawn, Ohio.

Thank you for joining us today, gentlemen, and any written
statements that you have, if you would like to present those to the
Committee, they will be included in the Committee in their en-
tirety. We would ask you to summarize your testimony in about 5
minutes.

So, Mr. Van Bell, if you would start we would appreciate it.

STATEMENT OF RICHARD J. VAN BELL, PRESIDENT, JOHN
DEERE HEALTH CARE, INC.

Mr. VAN BELL. I would like to thank the Chairman and other
members of the House Ways and Means’ Subcommittee on Health
for the opportunity. My name is Richard Van Bell and I am presi-
dent of to n Deere Health Care, which is a wholly-owned subsidi-
ary of Deere & Co., better known in the marketplace as John
Deere.

Deere provides health care coverage to approximately 110,000
employees, retirees, and dependents. In 1994, Deere spent $222
million to provide coverage for this group. In this group there are
approximately 17,000 retirees, of which 9,000 are Medicare eligible,
and over half of this group elects to be covered through the compa-
ny’s managed care plans.

Over the last 3 years, 2,100 Deere retirees have reached age 65,
of which 95 percent elected to remain in the company’s managed
care plans. Overall, John Deere Health Care provides managed
health care services to over 300,000 enrollees through its two
HMOs, Heritage National Health Plan and the John Deere Family
Health Plan. Eighty percent of these enrollees are non-Deere com-
mercial clients.

The John Deere Family Healthplan, a primary care staff model
health center, was established through a strategic alliance with the
world renowned Mayo Clinic, and with the endorsement and full
support of the United Auto Workers.

Our success has been built on three basic principles: High quality
health care is the most cost effective care; costs can be lowered
when employers, providers, government, and managed care organi-
zations create partnerships that utilize a market-based approach;
patient satisfaction and education are of utmost importance.

Our overriding priority has been the development of high quality
delivery systems. We focus our efforts on the primary care physi-
cian to coordinate the care. Working with Mayo physicians, we are
implementing disease management strategies, a series of practice
guidelines to best treat high frequency, high cost diseases. We are
also deploying an electronic medical record which will provide our
physicians an important tool to track all patient care and specifi-
cally these chronic diseases.

These tools, along with data, provide the physician greater con-
trol of care which we believe will enhance the quality of care. Em-


97

Chairman THOMAS. Sure.

Mr. FERRARA. Let me make this suggestion as to political reali-
ties.

Surely it will be more politically appealing to say to people they
can take the remaining funds at the end of the year and spend it
on whatever they want, rather than say to them, you can take the
funds and only spend it on these few things that the government
says you can spend it on. So, the —

Chairman THomas. I understand your argument. I have carried
it out in a number of different forums. That may be appealing in
one context; it is a political anathema in another context.

All I am saying is that the vigorousness with which you argue
your position, I understand it, but it may not be a possibility of cre-
ating a system, one step that allows you to spend it only for medi-
cal purposes.

And, for example, one of the questions that I was going to ask
Mr. Erhart is, what happens if someone accumulates and rolls over
the surplus funds in their MSA and does it year after year after
year; and if one is as healthy as a horse and never expends their
money from their MSA and they then die in an automobile accident
or otherwise, is that money theirs? Does it go into their estate?

Mr. ERHART. That is how I would envision it, yes. It would go
into their estate, possibly it could be used for their beneficiary’s
health care, it could be designated for that use only; or I think that
is something that could be explored further.

Chairman THomas. OK, Mr. Ferrara, there is an area that we
can work on. You and I will work together to try not to have an
intergenerational requirement on a carryover on MSA to be spent
only for medical purposes, so we can break this chain at least on
the generational level and we may then be able to bring it back
from that generational level.

What we are doing is trying to simply respond to you in a short-
hand way the concerns that we might have about a theoretical ap-
proach which would be granted in a theoretical environment. Un-
fortunately—perhaps fortunately—we do not operate in a theoreti-
cal environment.

The gentleman from Louisiana.

Mr. McCrery. Thank you, Mr. Chairman.

Mr. Ferrara, let me try to clarify what we are talking about here
in terms of the availability of money in an MSA for expenditure by
the holder of the MSA. You are saying that the person would get
how much in cash?

Mr. FERRARA. What | have seen from actuaries estimating this,
you can—one thing you could do is buy a policy covering all ex-
penses over $4,000 and have about $2,100 left-—

Mr. McCrery. How much cash would they get?

Mr. FERRARA. | don’t know. It is either looking at the amount
you withdraw from Medicare, on average, but what they are telling
me is, the amount they can get out of Medicare would be enough
to pay for a policy covering everything over $4,000 and put about
$2,100 in the account each year.

Mr. McCrery. $2,100 in cash?

Mr. FERRARA. Each year.


102

They then tell the employee that they will pay 100 percent of what
they believe to be an appropriate fee, if they would go out and tell
the doctor that, well, this is what we believe is the appropriate fee.

They used to have a health care benefit where the employee
would pay 20 percent, and if they worked hard they would save the
company 80 percent and they would save themselves 20 percent.
By talking about, in essence, a voucher of 100 percent, the em-
ployee feels a little more strongly about negotiating that price,
since they don’t pay anything if they are able to get it at that price.

The company then spends about a half an hour with the em-
ployee on a video talking about how you are supposed to discuss
this with the doctor and the rest. It is basically using the company
as an information base to empower the employee to get a good
price.

Do you do anything working with the employee to empower them
a little bit about information, beyond I guess what the normal em-
ployer would do in terms of informing employees; that would kind
of give you an argument as to the fact that the company is assist-
ing them in getting the best possible price with their medical sav-
ings account moneys?

Mr. ErnartT. Well, certainly. I have conversations with employ-
ees on a formal and informal level on an ongoing basis, and really,
that is what the MSA is all about, is educating people to know how
to be wise and conscientious consumers; how to shop for the best
medical care, both from a quality and cost standpoint. We see that
as the concept becomes more widespread and well-known, that that
education process is going to become even easier.

Chairman THomas. Obviously, you now have empowered every
single employee to go out there and get the best deal possible.
Some people will, frankly, do a better job than others. Do you have
any kind of a clearinghouse for information, so that someone who
is looking for a lead, or does not feel they have gotten a good price,
and can get a feel for what others have gotten?

Do people tend to brag about the fact that they got a good price
on something? Is there a way to disseminate that information
among employees that would make all of them better shoppers?

Mr. ERHART. Well, people do brag about the fact that they have
achieved a cost savings. There is no question about that.

As far as a clearinghouse, that is not something we have estab-
lished at this point, but it is an excellent suggestion that I think
would be very worthwhile.

Chairman THomas. I just think the key is sharing information.
When someone has had a real world experience, that kind of infor-
mation needs to get around.

Mr. Ferrara, in your testimony you talked about risk——

Mr. FERRARA. Yes, sir.

Chairman THOMAS [continuing]. Adjusting and MSA. There was
some discussion there but I don’t completely understand this. I
have two people, two males, widowers, same age, next door to each
other, both former steelworkers, one has a very serious health
problem, the other one does not.

Now, we are going to give the one who has a serious health prob-
lem more money; is that how we are going to risk adjust on indi-
viduals?


118

for patients using contracting physicians. WGA has contracted for 9% below-wholesale drug
costs for its medical plans.

The association also operates a licensed and admitted workers’ compensation company in
Arizona and California, and has integrated on-the-job and off-the-job medical benefits for over
10 years, preventing “double-dipping” and making the coordination of benefits easy.

‘The association offers flexible benefit plans, which have been very well received by seasonal
farm workers. It also offers services by medical providers in Mexico for those workers near the
U.S. border, and for those workers with families in Mexico.

These are but a few examples of the thousands of association-sponsored medical plans offered by
nonprofit member associations of ASAE.

Vv. ASAE POSITION

Congress and the Administration has recognized the need for employers and individuals to join
together in pooling their buying power. Association plans have been doing just that for over 55
years, and can provide a major service to our nation by being allowed to continue.

Association health plans would welcome many of the insurance reforms currently proposed such
as portability, open enrollments, and limitations on preexisting conditions.

ASAE supports the basic goals of health care reform, which would provide quality, affordable,
accessible health care for all Americans. ASAE further believes that association health care
plans possess many years of proven experience in the delivery of benefits through purchasing
coalitions. As such, association health care plans can lead the way to the reform goals of
providing the efficient delivery of quality health care to more citizens.


65

TESTIMONY OF TOM ERHART
RCI, BRIGHTON, MICHIGAN

Medical Savings Accounts at RCI

I would like to relate to you the terrific experiences our Company, RCI and its employees have
enjoyed with Medical Savings Accounts (MSA's)

RCL is an automotive specialty manufacturer located in Brighton, Michigan. One year ago we
replaced our employees traditional health insurance program which offered a very high level of
benefits and was fully Company paid, with a Medical Savings Account program. MSA's are an
extremely cost effective way to offer health care benefits to employees because they put the
consumer, the employee, back in the process. Employees are free to choose where they want to
g0 for their medical care. They make choices based on the quality of care provided and the cost
of such care Eventhough employees have a higher level of benefits with the MSA than our
previous health insurance program, our annual health benefit costs were reduced from $4800 to
54200 per employee, a 14.3% savings For a business with 200 employees, this amounts to an
annual savings of $120.000 per year! We do not even anticipate a premium increase for the 2nd
year of our program

‘The MSA program at RCI works very simply. An employee with dependents receives a MSA of
$1700 and a single employee receives $1200. This MSA is provided to employees by the
Company. RCI then purchases a health insurance policy with a $2000 deductible for employees
with dependents and a $1500 deductible for single employees This insurance policy pays 100%
of all covered medical expenses after the deductible is met - no employee copay! Employees
maximum out-of-pocket expenses $300 per year, the difference between the Medical Savings
Account and the deductible. Employees only have out-of-pocket expenses after their MSA is,
expended.

CLAIM EXAMPLES

(Assume a $1700 MSA and $2000 Annual Deductible)

Annual Medical Claims less than MSA amount

MSA $1700

Medical Expenses (doctor visits, prescriptions. x-rays. 5.500
hospital charges)

MSA payout at year-end $1200

Medical Clai tl

Medical Expenses (doctor visits, prescriptions, x-rays, $5000
hospital charges)

Paid from MSA -$1700

Employee out of pocket expenses $300

Paid by Health Insurance $3000


71

unlimited catastrophic coverage, yet while achieving the budget
targets.

So, let me just make one more point. I heard Mr. Stark present
what I have to insist is a very uninformed presentation of what
medical savings accounts are. Under our proposal, anyone from
these private sector options would have to accept everybody from
Medicare that wanted to join. You could not just come in and say,
we will only take a few healthy people; you have to accept every-
body who would come.

My estimate of the number of people—ultimately, the potential
for MSAs is—I will put my number out; it is 90 percent, I estimate,
is where the people—based on how people are choosing MSAs in
the private sector.

The last thing I want to say is, let me suggest to you that you
should not be in the business of, increasing managed care enroll-
ment in Medicare or reducing costs by greater use of managed care
or emphasizing managed care over anything else. There must be a
level playingfield. All the options should be out there, and the em-
phasis should be on freedom of choice; and I think in terms of ap-
pealing to the grass-roots who are—try to support what you are
doing here, MSAs, which really appeal to the idea of greater power
of the people, what we are really doing here by this proposal is tak-
ing control of the program, and the funds, away from just the gov-
ernment, the doctors and the hospitals that control it today and
shifting the power back to the people, to the elderly recipients
themselves.

Thank you very much.

[The prepared statement follows:]


16

in health care plans, to allow the individual employee to choose the health care plan best suited
to their specific situation, This system works when pricing of the various plans is reflective of
the teal market situation, We believe partnerships create plans which allow the interests of
patients and employers to be met

Partnershivs also work in government programs. In 1994, we tripled the number of Iowa counties
where we serve the Medicaid population. In this program, government served as a catalyst for
change. Because of concerns by the State of Iowa, private sector alternatives were sought and
developed, We first became involved with this project in 1986. Today 23,000 Medicaid enrollees
in Jowa receive health care coverage through our managed care program. The history of our
project 1s as follows:

+ When the State identified the need, we first worked with local providers to create a
partnership that was committed to meeting the challenge.

+ We believed in one concept then that we maintain today. All patients are part of the
mainstream in our system, Our quality improvement initiatives are targeted to improve
the care provided to all patients Our managed care programs and services are used with
all patient populations.

As an example, this year we are targeting children with asthma with our Disease
Management Strategies. Our intervention with these patients will aim to improve the
child's health status, Children in our Towa Medicaid population will be included in the
project, We will most likely provide financial savings to the State of Iowa by ensuring
that a consistent and proper treatment plan is in place for this chronic illness.

> Annually, the State of Iowa pays five percent less than they would outside our program.
In addition, two years ago we voluntarily returned an additional $3.5 million to the State
of Jowa, According to lowa officials, our program is saving the state $500 per year per
anvollee.

We also are gaining valuable experience in state-mandated reform by participating in the
TennCare program in Tennessee. We currently have 17,000 enrollees in the plan and have put
in place some of the same strategies used in our lowa experience.

In addition, we have 10,000 members enrolled through a Medicare cost contract and are working
on development of a Medicare Insured Group (MIG) demonstration project with the Health Care
Financing Administration

Our involvement with the MIG project started when I chaired the OHMO National Industry
Council in the late 1980s. This council was created by Richard Schweiker, former Secretary of
Health and Human Services. The Council met to enhance and encourage the development of the
managed care industry. Through this council, Deere & Company, along with others, envisioned
a program to encourage more post-65 retirees into managed care.

The five-year demonstration project would provide for a five percent savings to the Federal
Medicare program for each enrolled participant in our managed care network. The post-65 retiree
would cortinue to have a choice in plans. But we believe there would be strong incentives for
the post-65 year old retirees to move to managed care programs.

This concept continues to be of interest to us and we are moving forward to put this
demonstration project in place We believe the MIG project will provide better value to the
Medicsre enrollee and allow us to work more effectively with the providers.

In all of this experience, I would underscore the importance of all patient care being delivered
in the same manner. No group of patients should be treated differently than another,


160

May 22, 1995

Mr. Phillip Moseley

Majority Chief of Staff

House Ways and Means Committee

1102 Longworth House Office Building
Washington, DC 20515

Mr. Moseley,

I am strongly in favor of passing a bill to institute
MEDICAL SAVINGS ACCOUNTS. It is the only way to take
responsibility for myself and provide for my medical future.
It’s voluntary, tax free and it gives me the right to choose
what kind of health care I want and when.

Remember---- HEALTH CARE IS NOT A RIGH'

Sincerely,

gfhn Lewis
| 1548 Middle Rd.
. Greenwich, RI 02818


99

For the elderly, for folks over 65, I agree with you. I think you
have to let them spend it at the end of the year. Maybe we could
work a compromise that would satisfy Mr. Thomas’ socialistic
Jeanings and the realities of the new Congress at the same time.

ORIENT. It is interesting that you object to the senior citizen
hen able to buy an RV, but no one objects to the HMO pocketing
the profits.

Mr. McCrerv. I don’t object. You are talking to Mr. Thomas.

Chairman THomas. Obviously, I am not going to advance a third
party argument anymore. I was trying to offer options in terms of
political realities.

l also find it somewhat interesting, Mr. McCrery, that you do fall
back on the usual IRA argument, where it has to be included for
a specified reason to spend out only, otherwise there are various
penalties, loss of interest, time-certain amounts, which are the old-
fashioned IRAs.

When you talk about a medical savings account, I think most
people would examine that and say that it is an account to be used
for a particular purpose, and you named it a medical savings ac-
count for that purpose, when, in fact, it is not a medical savings
account, as you have described it, except for the first year, which
you are now going to require them to keep it for a medical savings
account. After that, I don’t know exactly what it is, since you can
spend the money for anything you want.

We will have to get into the Tax Code and what that means and
how it is reported. It gets a bit more complicated if, in fact, you
are going to create a one-way street one year and a two-way street
the next year; and somebody gets married to someone else who has
a new MSA, which is a one-way street MSA the first year and they
exhaust their money. Can they borrow it? I am just trying to get
practical when you get in the real world with people who live real
lives. We have been dealing in a very neat, singular economic world
about a theoretical discussion.

It is more complicated than we are currently making it out to be.
Not so complicated that it is not a very attractive alternative to
any other rogram out there right now.

Mr. McCrery. For those of us, Mr. Chairman, who have thought
about this for a long time, there are answers to all those objections.
In fact, I agree with Mr. Ferrara, that when you put those kinds
of economic interests in play, you are going to get the desired re-
sult; that individuals operating in their own self-interests will ac-
complish the desired results.

Chairman THomas. I have no doubt that there are answers to
questions, whether they are good answers.

Mr. McCrery. Oh, yes.

Chairman THomas. Sufficient answers.

Mr. McCrerv. Yes.

Chairman THOMAS. The gentleman from Nebraska.

Mr. CHRISTENSEN. Mr. Ferrara, I agree with your economic anal-
ysis as far as incentives go. As a free market believer J think that
is the correct way to go.

Mr. Erhart, you suggest that the money should stay within the
medical savings account for medica] purposes only and not be used
for other purposes. Would you tend to agree or disagree, then, with


21

‘TESTIMONY OF WALTER B. MAHER
CHRYSLER CORPORATION

Mr, Chairman and members of the Committee, my name is Walter B. Maher. I am the
Director - Federal Relations for Chrysler Corporation. Thank you for inviting me to
‘appear here today to discuss employers and the Medicare program, and spectfcally
the provision of Medicare coverage to former employees.

Chrysier Corporation produces cars, trucks, minivans and sport-utity vehicles for
customers in more than 100 countries. It has been in business for seventy years, We
employ over 120,000 people worldwide, almost 100,000 of whom work in this country
Chrysler provides health benefits for its employees, retirees and dependents of both
groups. In 1994, we spent over $800 million for this coverage.

Chrysler firmly believes that anyone sponsoring a health benefit plan, whether it be an
employer or a government, can achieve savings, without sacrificing quality, if those
benefits were delivered by selective managed care plans as opposed to traditional fee-
for-service indemnity plans. As such, we commend this Committee for examining all
‘options to increase substantially the number of Medicare beneficiaries enrolled in such
plans,

We also believe that, as Congress sets about the essential task of balancing the
federal budget by a date certain. it is most appropriate that action be taken to reduce
the rate of growth of federal Medicare expenditures. Given the current low rate of
enroliment of Medicare beneficiaries in managed care plans, and the potential savings
inherent in increasing that number, real opportunities exist to achieve Medicare
savings and help reach balanced budget objectives. Increases in Medicare managed
care enrolment will also strengthen the hand of employers and other private sector
health plan sponsors as they seek to achieve greater efficiencies from the health care
system. In short, working in tandem, the public and private sectors can bring our
country's health care costs more in line with costs prevailing in other leading countries,
and in the process enhance American living standards, enhance America's
‘competitiveness, and free up funds to help our country meet its other pressing needs.

Mc Insured Group Feasi

Prior to June of 1989, | was Chrysler's Director of Employee Benefits. While in that
position, one of my responsibilities was managing Chrysler's health care plans. As is
the case today, controling health costs was of the highest priority to Chrysler. Due to
the highly competitive nature of the global automotive marketplace, and the
significantly lower health costs in all other auto-producing countries, controlling health
costs is critical to our competitive success.

Prior to 1989, with the cooperation of the unions representing many of our employees,
‘we put into place a series of innovative managed care programs designed to reduce
the cost of the health care programs covermg our employees and non-Medicare
retirees. This included not only traditional HMO's and PPO's, but also PPO's designed
specifically for certain coverages, such as mental health and substance abuse cases,
as well as programs to reduce the cost of our fee-for-service indemnity plans As a
result of these efforts, Chrysler kept its rate of health cost growth well below that of
business in general

For retirees eligible for Medicare benefits, Chrysler provides coverage for services not
covered by Medicare that are covered by our plan for active employees. During the
latter haif of the 1980's, as part of our overall effort to better manage health plan
costs, Chrysler, in cooperation with the UAW, sought to develop a feasible strategy to
provide cost effective care for Chrysler retirees eligible for Medicare benefits. It was
hoped that it would be possible to demonstrate that a single, integrated Medicare
Insured Group (MIG) program would work better than two separate Medicare and
Chrysler complementary programs. Consistent with the framework provided by the
Omnibus Budget Reconciliation Act of 1987, a cooperative research project was


50

Mr. McCrery. Thank you, Mr. Stover.
Mr. Ray.

STATEMENT OF JAMES S. RAY, COUNSEL, NATIONAL
COORDINATING COMMITTEE FOR MULTIEMPLOYER PLANS,
ACCOMPANIED BY JUDITH F. MAZO, COUNSEL

Mr. Ray. Thank you, Mr. Chairman. I am accompanied by Judy
Mazo, who is also a member of the NCCMP’s professional staff, and
by Jack Curran, the NCCMP’s long-time legislative director. On be-
half of our chairman, Bob Georgine, let me express our apprecia-
tion for the opportunity to participate in this discussion.

For 20 years now, the NCCMP has been representing the inter-
ests of the more than 10 million workers and families who obtain
their health coverage through joint labor-management multiem-
ployer plans established by collective bargaining under the Taft-
Hartley Act of 1947. I should note, Mr. Chairman, that our popu-
lation of plan participants and beneficiaries is defined by coverage
under a collective bargaining agreement and not by health status.
So, there is no cherrypicking with regard to our plans.

Mr. Chairman, the multiemployer plan community is interested
in exploring cost-effective means by which Medicare-eligible em-
ployees, retirees, and their spouses, covered by our health and wel-
fare plans, can look to those plans for both their Medicare benefits
and other health, disability, and death benefits that our plans may
provide. We believe that arrangements for multiemployer plans to
deliver such seamless coverage, as workers move through active
employment into retirement, can be worthwhile for all parties:
Medicare beneficiaries, multiemployer plans, and taxpayers alike.

We would appreciate the further opportunity to submit to the
Subcommittee at a later date a proposal for such “one-stop shop-
ping” for multiemployer plan participants and beneficiaries.

In developing a proposal, we are guided by a fundamental prin-
ciple: They must be designed to help, not hurt, our plan partici-
pants. This means Medicare-eligible participants and Seneficiaries
must be assured of coverage at least as good as what the current
Medicare Program delivers, and the program must not imperil the
plan’s ability to continue providing other participants with good
health coverage at a moderate cost. We believe that this is doable
under certain conditions.

Financing is the key, however, both for the government and for
our plans. In managing multiemployer plans, the trustees are not
running a business in which they are free to take big risks in the
hope of achieving big gains. They are nothing more and nothing
less than fiduciaries of a fund that must be administered in a way
that maximizes the benefits of those it covers.

Because Medicare has provided the lion’s share of health cov-
erage for the over 65 population for so long, multiemployer plans,
like other private sector payers, do not have reliable independent
bases of experience from which to estimate the potential cost of fol-
lowing that age group back into their basic coverage.

Initially, a fair amount of trial and error will be needed to cost
out these programs. To attract multiemployer plans to such vol-
untary arrangements, various concerns relating mostly to financial
risk will have to be addressed. Among those are, number one, the


95

Mr. FERRARA. It is a better benefit than under Medicare. They
are better off with that proposal than they have got under Medi-
care, because you have got a cap on out-of-pocket expenses here of
$1,900. On Medicare now, there is no cap on out-of-pocket ex-
penses.

Mrs. JOHNSON. What do you spend down to Medicaid?

Mr. FERRARA. Apart from Medicaid, this is a better benefit struc-
ture than you have under Medicare on the cap of $1,900. Under
Medicare there is no cap. According to AARP, the average person
is spending about that much in out-of-pocket expenses already.

You have a better benefit structure under the MSA than you
have under Medicare because you are giving them a cap on out-of-
pocket expenses and unlimited catastrophic under $4,000, and a lot
of people are paying out of pocket today to get those benefits from
medigap insurance. You are offering them a better benefit package
with the MSA and an opportunity to actually benefit if they use
those funds wisely.

Let me suggest that what you are offering people by letting them
spend the money on what they want at the end of the year is a
reward for saving both the government and themselves health
costs.

Mrs. JOHNSON. I don’t differ with you that it is a better benefit
structure if you are going to max out. I do differ with you that it
is necessarily a better benefit structure under some circumstances;
but my primary concern is that there is an obligation on the part
of the Federal Government, if we provide subsidies, to see that the
subsidies create the behavior that we are requesting, and the be-
havior that we are requesting is that you spend the money on
health and you do it in a way that minimizes cost.

Mr. Ferrara. But the whole purpose——

Mrs. JOHNSON. I think you have to take into account in a medical
savings approach some obligation on the part of the medical sav-
ings accountholder to assure that they take certain health care ac-
tions that we know are necessary to prevention.

Mr. ERHart. I believe your concern could be easily addressed
merely by restricting the MSA expenditures for health care ex-
penses only. I wouldn’t see any problem with that. The money re-
maining in the person’s account at year end is still theirs, but they
must leave it there to pay for medical expenses in future years; and
I think that handles that approach.

Mrs. JOHNSON. That would go toward the $1,900 exposure next
year.

Mr. FERRARA. Excuse me, as a matter of economic analysis, that
won't work. If you can only spend it on health care, that won’t
work. It gives you no incentive to save on health care. As a matter
of economic analysis, that doesn’t work.

If you want to do this the way—as a matter of sound economic
analysis, you must allow an even playingfield choice between
health care and nonhealth care. That is the choice as a matter of
economic analysis you want to allow because what—what happens
now is people are overspending on health care because they are not
taking advantage of cost. They are not weighing cost against bene-
fits.


33

Could you, anybody on the panel, address some of the reasons
that you would want to be involved with the retirement population,
the Medicare population?

Mr. Mauer. I think the only reason a company would want to
get involved is the same reason that the government wants to get
involved, and that is to have a win-win situation. For that reason,
a company is not likely to want to get involved if they think the
deck is stacked against them and they are going to lose money,
very clearly for the reasons in my testimony. I would submit that
Medicare, likewise, should not enter into an arrangement if it
would lose money.

I happen to believe that, as you go down this path, which makes
an awful lot of sense in terms of trying to get more people in man-
aged care plans, that the current methodology that is used to pay
for these beneficiaries appears to be working against the govern-
ment. The last thing you want to do is to worsen the budgetary sit-
uation.

So, I would encourage the Committee to look into how the gov-
ernment pays to make sure that it is a good deal for the govern-
ment. The only way this is going to work is if it is a good deal for
both parties, and, frankly, it can be.

Mr. ENSIGN. Well, not as far as the rhetoric up here is concerned.
It is one or the other. I would agree with you. We need to change
our paradigm. We need to change our mindset, similar to what
business is doing in the United States with labor unions and man-
agement.

There are ways to have both parties win. I think the best way
for us is to design programs where the Medicare population and
the government both win.

Mr. VAN BELL. I would just add that in our health plans, on the
boards of our health plans, labor is represented and has been rep-
resented for 15 years. So, we have an ongoing dialog with labor.

As we look at managing the costs of our parent company, that
is one of our missions within John Deere Health Care. Our retirees
are an important part of that, as I mentioned. We believe that it
is important to manage all the supplemental benefits that we pro-
vide.

Beyond Medicare, we provide the pharmaceutical benefit, drug
benefits, vision, hearing, dental. All of those are components of cost
that we have to bear as a corporation, and we need to work on
managing those costs and that is part of our responsibility.

Mr. ENSIGN. My time is up. Thank you, Mr. Chairman.

Mr. McCrery. Thank you, Mr. Ensign.

Mr. Cardin.

Mr. CarDIN. Thank you, Mr. Chairman. Let me thank all three
of our witnesses, not only for their testimony, but for the ways in
which you have managed your health care for your respective enti-
ties. Very impressive testimony and very impressive results.

One of the purposes for today’s hearing is to explore the feasibil-
ity of looking to private employers to assume more of the respon-
sibility in Medicare, if we were to look at your employees once they
reach the age of Medicare eligibility, all remaining in your health
care plans.


133

by the Clinton administration, which Dr. Reisman calls “the need-based
concept of rights.” It is, in simplest essence, based the premise that wealth is
something that appears more or less causelessly—as opposed to being
produced by the effort of individual people who by that fact retain a right to
such property “and that the fact of any one person possessing a need for such
weal \ gives him a right to it.

ere were three cornerstones in the history of medical care in the
United States which have lead to the application of this premise in order to
pass laws which produced the runaway medical costs we face today. They
were (1) the government imposition of medical licensing laws starting in the
nineteenth century, (2) the government imposition of wage and price
controls during World War II, and (3) the government imposition of the
Medicare and Medicaid programs during the 1960's.

Medical licensing increases the costs of medical care by lowering the
supply of medical providers. Historically, it has been supported by doctors
because it is a means of increasing their wages by virtue of creating a
monopoly. As to the extent that is has actually raised the standards by which
medicine is practiced (which is limited, since the qualifications imposed by
licensing are largely arbitrary), it is through the means of reducing the
number of options available to consumers. This is because instead of the
market offering a full range of skilled practitioners offering various services
at various prices, it essentially must now offer only a higher range of skilled
practitioners offering this same range of services at a higher range of prices to

wer people. As a result, it primarily victimizes the poor, thereby playing
into the hands of those who advocate socialized medicine.

The second step towards socialized medicine in the U.S. resulted from
a string of events following the government imposition of wage and price
controls during World War II. It occurred because the government made a
single exception to its prohibition of wage increases during this period by
allowing employers to pay for tax-free medical insurance for their employees.
Because this was the only possible means of increasing wages (and therefore
the only possible means of competing for employees), and because the
individual employee's alternative to this insurance was taxed by the
government, the scope of coverage offered by this form of insurance, as
opposed to the traditional private insurance offered up to that point, was
artificially encouraged to be made comprehensive rather than to being
limited to providing only for emergencies. (In current dollars this form of
comprehensive insurance costs the equivalent of $5000/year per family,
whereas in current dollars the cost of coverage limited to medical
emergencies costs about $2000/ year per family.) Following World War I,
coercive labor unions made such insurance a standard part of their contracts.
The effects resulting from such employer-provided comprehensive insurance
are (1) a psychological mindset among employees, akin to that which exists in
socialist countries, that medical care is a right of employees that can be
provided essentially for free, and (2) an economic situation, akin to that
which exists under socialism, whereby all costs are borne collectively by a
group rather than by individual people.

Most significantly, the collectivization of costs resulting from such a
system is the leading cause of the continuous rise in medical costs since



7

Patient satisfaction and education is an important emphasis.

Change cannot occur if patient satisfaction is not maintained. Three years ago, our envalle~.caied
our services as the best in the country, according to research by a leading consumer maga..e
This rating came after many of our enrollees had seen dramatic change, moving to met.axed zar>
programs for the first time in their life. We managed this change with educational prvgrame and

ication. When you introduce more choice to Medicare participants, we beiiev: vou
‘must target patient education as a top priority

In late 1994, we commissioned the Gallup Organization to do research with our patients. Galluyy
compared us to a national composite database of 64 other health care plans. Our patients score
us significantly higher than the national composite in key areas of patient satisfaction. These
include:

+ Overall Satisfaction
‘+ Satisfaction as compared to their previous plan
+ Satisfaction with Customer Service

* Courtesy with Physician Office Staff

+ Overall Quality of Physician Care

+ Thoroughness of Physician

‘+ Satisfaction with the time the physician spends with the patient

There is a significant finding in this research. Overall enrollee satisfaction in the sta? mols!
health centers was six percent higher than in our Independent Physician Model HMO. Boti: scores
are very favorable. However, the 94 percent ranking in our staff model managed car: program
‘means that a population can be moved to a more tightly managed plan without decreasing patient
satisfaction. We have focused on improving the primary care physician's relationship wisi patients
in this model and it appears to be adding value from the patient's perspective.

We also believe strongly in education of all enrollees. We have developed many pro;,rams .. med
at specific groups to improve their health care. We have a New Generations program for won.en
who will soon be new mothers, In this program we have improved the rate of pregnant women
who seek care in the first trimester. We have also had significant success with other educational
programs targeted at diseases such as diabetes, cervical cancer and breast cancer

Can these same principles be applied to Medicar:

We have focused on quality of care in all of our programs. We believe in partesshi with all
of the stakeholders in the health care industry. We know patient satisfaction sho:d not be
jeopardized. These principles draw more people into managed care programs, even w.2 they are
given a choice. We believe these same concepts can work in the Medicare populat:o7:

» ur experience with the Medicaid program in Iowa clearly suggests it can work Quality
improvements and cost savings continue in that program, As we develop new strategies
to improve the quality of care, we are having an additional favorable impact ca health
care costs for that population

>» We can keep current employees in managed care programs as they become Medicare
eligible, Deere retirees report high levels of satisfaction with their care and with the
administration of the managed care programs.

ia Education of patients can attract other retirees not now in managed care. Our retiree
population continues fo grow in our managed care programs This education must be
focused on the quality of care provided.


61

So, I think that, clearly, if we have some more flexibility for peo-
ple to select some options——

Mr. ENSIGN. When would they select those options, when they
are signing up for their particular plan, or on an annual basis?

Mr. Stover. I think this is—really, when it comes to medical
care, it needs to be a lifelong education process. I think that is
something that a lot of us as employers or certainly with group
plans do a lot of education; and increasingly, we are providing
background on medical care so people can make informed choices
on a much better basis instead of just having, some faith as you
go into it that the system is going to take care of me.

Ms. Mazo. Of course, we are all working on a program, so we can
identify what is the last month of a person’s life. Until that time—
another feature, by the way, this is an equal problem from the
point of view of employer-funded plans at the beginning of life, a
major cost is enabling families to make decisions about damaged
babies and how far they go.

I think one of the things that a fund that has been involved with
the person following them all along—and the John Deere people
and the Chrysler people talked about this—is when you get into in-
dividualized, major case management, which is delivered by an in-
stitution that the person and the family trust, it can help the
choices that have to be made at the ultimate point. Choices and ad-
vice are given at an early point, but finally someone has to decide,
yes, this is what we believe is hopeless. This is what we believe is
not true life.

There always has to be an individual decision, and when it is
coming under the guidance and through a payer who has a per-
sonal involvement in the way—the way a union does, the way an
employer does with the person and their family, I think it may be
a little more credible and a little more useful than when it is just
coming from the government or from an insurance company.

Mr. ENSIGN. We—obviously, are in a situation where we don’t
have a choice about Medicare going on as it has in the past because
of the findings of the trustee report. Do we think that the Taft-
Hartley plans may be one of the answers to more efficiently deliv-
ering health care to the elderly than the Medicare Programs?

Ms. Mazo. Not all of them but some might be. I have to say that
the Taft-Hartley plans are not as far advanced, in general, as the
major corporations represented by NAM in their sophisticated use
of managed care, but they are moving in that direction; and they
capture a population which can’t be captured by the large corpora-
tions, and so they provide a useful supplement.

Just as business is in a position to do it now, I think the Taft-
Hartley plans, in fact, perhaps given the added incentive of the op-
portunity to maintain the connection with their retirees—in a
sense this option might also be an incentive to move them along
generally down the managed care path.

Mr. STovER. I might just add to that, I think what we are find-
ing in common is both the issues of portability and continuity that
we come back to. The Taft-Hartley plans allow them some continu-
ity. If we had more portability vis-a-vis the other kind of private
plans that are tied to a specific employer now, that would also help
ensure more continuity, which we think is a positive.


130

selves and their own interests as a matter of solemn justice, upholding a
moral principle, the first moral principle: self-preservation. If they can
do it, all of us will still have a chance. I hope it is not already too late.
Thank you.



114

involvement have been put to work to hold down health care costs. Most importantly, both
employers and their employees have been able to choose between different options.

Member identity with their association, and member control of programs help educate the
participants as to the costs and choices in health care, much more so than in traditional insurance
coverages.

Association plans are not a “third-party” phenomenon. Members realize that association plans
are, in reality, their own money and that "wellness" activities, as well as careful health care
purchasing save them money directly.

Ili. STUDY TRACES HISTORY AND EXTENT OF ASSOCIATION INSURANCE
PLANS

Sonie association executives mistakenly believe that association sponsorship of insurance
programs is a new phenomenon. In actuality, many such programs have been in existence for
over 55 years. The most successful association-sponsored programs are those that have
continually undergone change to adapt to evolving insurance and association management trends.

The health insurance industry has been in a "hard" market for many years. Member difficulty in
obtaining appropriate health insurance coverages has led many associations to adopt sponsored
health insurance programs.

More than 90% of the respondents indicated "member service" as the primary reason they
initiated programs.

Life and health programs appear to be generally attractive to associations with large individual
memberships and/or memberships comprising a large number of companies or firms, each of
which isas only a few employees. The increasingly difficult health insurance marketplace has
raade the sponsorship of health insurance coverages particularly attractive in recent years.

Those assuciations reporting life or health programs offered the following coverages:

medical insurance, 81.7%

jion care, 8.0%
«prescription plans, 8.6%
«dental care, 30.8%
accidental death/disab. 25.7%
sbasic life, 61.7%
«short-term disability, 29.7%
“long-term disability, 32.1%
supplemental life, 8.0%
ssupplemental AD&D, 74%

In looking at the variety of benefit plans associations offer, it is apparent that, if empowered and
encouraged by federal legislation, even more expanded programs could be offered.


116

Many of these plans cover employers in different states: State-by-state regulation, with its threat
of multiple, inconsistent rules, would adversely affect their efficient and economical operation.
ERISA's preemption provisions are intended to protect these plans from such conflicting
requirements.

These plans, operated by elected officers from industries and unions, are politically and directly
accountable for how the plan is operating and how much it costs.

For the associations and unions which sponsor these multiple employer health and welfare plans,
these plans are a proud achievement which provide health and income security benefits that
would otherwise be unavailable to their members. The contributing employers function as a
single employer through these plans for purposes of furnishing benefits and negotiating with
health care providers. They are as concerned about the covered workers and as innovative as any
single employer, if not more so, since there is more worker involvement in the design, operation
and financing of these plans than in any single employer plan.

If any of the health care reform proposals finally adopted allow large employers to opt out of the
purchasing system, these plans should be given the same opportunity under the same conditions.

B. Coca-Cola Bottlers' Association

Founded in 1914, the Coca-Cola Bottlers’ Association has operated a voluntary group health
insurance program since 1937. Smaller bottlers are pooled in a group, and larger participating
employers are experience rated and participate in some of the risk of medical claims.

The program now covers approximately 13,000 employees and 26,000 dependents.
Approximately 93 cents of every premium dollar goes to the payment of claims. This efficiency
is well above that of most insurance company or health maintenance organization plans. The
association's plan includes life insurance benefits which help keep costs of medical coverage
down.

The average cost per employee for the benefit plans is $2,600, well below the national average of
almost $4,000 per employee per year for conventionally insured plans, or even most self-funded
plans.

The association also offers an Ergonomics Program which allows employees to be assessed for
their physical ability to perform necessary work-related physical tasks, and helping to avoid on-
the-job injuries.

The association also provides access to HMO's, PPO's, utilization review, pharmaceutical review,
individual care management, and a wellness program to improve health of their members’
employees. Additionally, the association is able to negotiate performance guarantees in areas
such as claims turn around time, accuracy of claims payments, and customer service.

C. Eastern Material Dealers Association


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93

and they want to save as much as anybody at age 65. Wouldn’t a
program like this be able to be transferred to solving a lot of our
problems in the Medicare arena?

Mr. ErHart. There is no question about it. In addition to Medi-
care, Medicaid, the Medicaid Programs could also be addressed
with the government giving Medicaid recipients who are on welfare
a voucher where they would actually go out and purchase an MSA
policy from an insurer of their choice; and in fact at the end of the
year, if those Medicaid recipients are still not at work, then they
would not be entitled to the Medicare—or the MSA balance that
might be in there. We see it as possibly another way to encourage
people to go back to work, another financial incentive where they
wouldn’t have access to their remaining MSA funds until they had
a job.

Mr. CHRISTENSEN. Thank you, Mr. Chairman.

Chairman THomas. The gentlewoman from Connecticut, Mrs.
Johnson.

Mrs. JOHNSON. Thank you. I appreciate the good testimony of the
panel on a subject that is really very important to all of us. I do
have a concern about the application of this approach to the senior
population and let me describe it. There has been some discussion
in other sessions of structuring the medical savings account ap-
proach to take into account my concern, but I do want to share it
with you.

The average income among American seniors is $25,000 but, the
median income is just under $18,000. I can’t tell you how many
seniors have come to me with anguish in their faces because they
have gone to the doctor, but they can’t afford the prescription. We
have a lot of seniors who use going to the doctor as a substitute
for care, because what the doctor tells them to do they can’t afford
to do.

Now, they are making the choice, day in and day out often, not
to buy medication that they know will get them well because they
have to buy food. If you take any public employee in Connecticut
who is retired on a municipal pension or a teacher’s pension before
the time when those pensions also had Social Security, these people
are living on extremely small incomes.

Now, this kind of person could be lured into a medical savings
account very easily and they would use that money as a salary ex-
pander. They would not use it for health care; they couldn’t afford
to. The big thing in Medicare now for those who have tried to
micromanage from this Committee, the big frustration is that it
doesn’t cover prevention. It doesn’t cover the very services that
could lower our costs overall, and improve the quality of health
care for seniors. I worry about making this available without some
strings attached that in order to be eligible you have to have paid
for a basic physical or something like that; or if prescription medi-
cations are prescribed by your doctor, you must demonstrate that
you actually bought them and took them. I mean, at some point
you have to be accountable for spending this money in a way that
is prohealth, not just an income expander. This is an aspect of the
medical savings account in terms of its application to the senior
population that troubles me.


38

Specifically about John Deere. Is this correct, that you give retir-
ees the same health care coverage if they go outside the managed
care arrangements?

Mr. VAN BELL. Their benefit offering provides that they have ba-
sically the same package. There would be some enhancements
through our managed care program, effective case management,
some education in preventive medicine, and things like that. They
are very much the same plans.

Mr. HOUGHTON. OK. Now, the more general question really is,
the difference between the approach that Chrysler and John Deere
are taking as far as retirees.

If I understand it, Chrysler rejected the concept—working closer
with HCFA—to be able to blend the Medicare and the non-
Medicare expenses. It somehow did not work out. John Deere was
willing to do that, assuming, of course, that the whole push would
be more toward the managed care area, and you thought that that
was a good sort of common denominator. Why the difference in the
two approaches here?

Mr. VAN BELL. I will let Wally answer that and then I will try
to respond, too.

Mr. Maner. Two things. First, the time period. Our involvement
was 1988 and 1989. In addition to the uncertainties that I men-
tioned in my oral testimony today, my written testimony talks
about a lot of the other things on the table then. For example, at
that time the Medicare Catastrophic Act had just passed. The ques-
tion was how in the world is that going to impact our negotiations
with HCFA? The Physician Payment Review Commission had just
recommended to Congress a total overhaul in the way Medicare
paid physicians, which was probably going to be implemented, and
indeed was. How was that going to impact our arrangements?
Probably the biggest factor is that we are not in the HMO business;
John Deere is in the HMO business. They have been working on
this project with HCFA for 5 years and will likely start it, as I un-
derstand it, next year, 1996.

Being in the health plan business eliminates from consideration
a significant amount of the investment in administrative systems.
In other words, to a certain extent there is some sunken cost al-
ready there in an ongoing HMO that we don’t have, and we are in
the car and truck business and not in the HMO business.

So, the question to our management at that time, do we want to
make an additional investment in this type of system which, to
make sense, would have to be amortized over a long period of time
and over a large enrollment? The question: Are you going to be in
this demonstration for a long enough period of time and get enough
people in it to make it worthwhile? And those questions were just
not satisfactorily resolved.

Mr. HOUGHTON. OK.

Mr. MAHER. Conceptually, what I think is important, is we con-
tinue to believe that both companies offering complimentary bene-
fits and Medicare, both can gain if that Medicare beneficiary is en-
rolled in a good, efficient health plan. The question is: Who is going
to bear that risk?

I think one suggestion we have is there are businesses out there
in that business of managing health plan delivery. I suggest that,


158

‘Americans in order to bridge the transition from Medicare/Medicaid systems to a system
financed by individuals without using the government as a third party payer. The MSA is a
mechanism to phase out government interference into the medica! markets.

The MSA is a financial vehicle that is ethically sound, in contrast to Medicare, Medicaid and
the government's regulatory control of the private insurance industry. The MSA restores the
political and economic power of an individual to retain property he has already eamed: his
money. An MSA, like an IRA, allows a person to accumulate, tax free, a certain annual
amount of money for the purpose of paying for his health care as well as saving for his
future. It offers him the incentive of using accrued money to pay for his medical bills out of
pocket or, in the case of a medical crisis, it sets the economic stage favorable for the
development of a market for individual, high deductible, catastrophic medical insurance.

For those older individuals who have already paid into the Medicare/Medicaid system for
many years, they could receive whatever benefits of the system as it exists but, in addition,
could also begin sequestering their future earings into an MSA for any future medical
needs.

‘An MSA gives younger individuals an opportunity to take charge of their own health care
before their money is removed and funneled into a third party payer system such as
Medicare. Over the course of such an individual's life, he would be able to accumulate far
more than any Medicare/Medicaid system could ever offer him — without the bureaucracy.
More fundamentally, he could save his money under a system of political freedom and
voluntary action, rather than the current system of involuntary monetary expropriation via
taxation by the government.

Mr. Moselay, | implore you and the Congress to consider seriously the moral and medical
implications of MSA's for the future all Americans. It is morally right that a person in this
country be able to retain that which he has eamed. Happily, what is moral is also practical.
‘When people spend their own money in seeking goods or services, they have a powerful
Personal incentive to search for the best services available at the lowest price, which
ultimately will decrease the overall cost of providing health care to patients.

Health care that is “purchased at the price of individual rights and political freedom is

slavery. In reforming our health care system, we must reclaim America’s philosophical
foundation, which is individual liberty and its corresponding political-economic system:
capitalism.

ie ae

Mark A. Hurt, MD.


125

You are entitled to something, the politicians say, simply because it
exists and you want or need it—period. You are entitled to be given it by .
the government. Where does the government get it from? What does the
government have to do to private citizens—to their individual rights—to
their real rights—in order to carry out the promise of showering free
services on the people?

The answers are obvious. The newfangled rights wipe out real rights—
and turn the people who actually create the goods and services involved
into servants of the state. The Russians tried this exact system for many
decades, Unfortunately, we have not learned from their experience. Yet
the meaning of socialism (this is the right name for Clinton’s medical
plan) is clearly evident in any field at all—you don’t need to think of
health care as a special case; it is just as apparent if the government were
to proclaim a universal right to food, or to a vacation, or to a haircut. I
mean: a right in the new sense: not that you are free to earn these things
by your own effort and trade, but that you have a moral claim to be given
these things free of charge, with no action on your part, simply as hand-
outs trom a benevolent government.

How would these alleged new rights be fulfilled? Take the simplest
case: you are born with a moral right to hair care, let us say, provided by
a loving government free of charge to all who want or need it. What
would happen under such a moral theory?

Haircuts are free, like the air we breathe, so some people show up
every day for an expensive new styling, the government pays out more
and more, barbers revel in their huge new incomes, and the profession
starts to grow ravenously, bald men start to come in droves for free hair
implantations, a school of fancy, specialized eyebrow pluckers devel-
ops—it's all free, the government pays. The dishonest barbers are having
a field day, of course—but so are the honest ones; they are working and
spending like mad, trying to give every customer his heart’s desire, which
is a millionaire’s worth of special hair care and services—the govern-
ment starts to scream, the budget is out of control. Suddenly directives
erupt: we must limit the number of barbers, we must limit the time spent


100

Mr. Ferrara’s analysis that that would take away the incentive, or
what is your perspective on that?

Why or why not would it not take away the incentive to keep it
within the health care purchasing only?

Mr. ERHART. Well, I would tend to believe that it would not take
away the incentive to still be a conscientious consumer of health
care. Because the end idea is to have this built as a nest egg, as
an account for future health care. And, again, we are aiming at a
long-term solution for Medicare. I think that people would see that,
certainly, that it is going to benefit them in the long run in the
same way that they are putting money into IRAs these days to be
able to prepare for the future.

If they know that that is the way that their Medicare is paid for,
that their long-term health care needs are met is by accumulating
this amount, I think there would still be that incentive to save and
for this program to be effective and successful.

Mr. CHRISTENSEN. Have you experienced any of your employees’
foregoing preventive measures to put money in their own pocket
that should have gone through the preventive measures, that
ended up with a long-term illness or a catastrophic health care sit-
uation that could have been prevented earlier because of your plan?

Mr. ERHART. We have experienced exactly the opposite of that.
I have had a number of employees approach me and say that they
are going for a routine physical exam; they have not gone for one
in years because their traditional insurance program does not pay
for preventive health care. So, I have experienced exactly the oppo-
site of that.

Mr. CHRISTENSEN. Do you think that would be true of the Medi-
care population? Do you think preventive health care would also
take place there like you have experienced in your company?

Mr. ERHART. Absolutely. Especially through the years, as this
thing builds, and as people become more familiar with the concept
of it and how it works, that is how they are brought up through
the system, and I think that it would definitely be the case.

Mr. CHRISTENSEN. What about my penny pinching, conservative,
frugal mom who does not go to the doctor for a sniffle or a cold and
ends up deathly ill. Can’t you foresee something like that happen-
ing with the senior citizens?

I am playing devil’s advocate to some degree, because, believe
me, my colleague from California, when he comes in here he is not
for profit or he is not for any good innovative new ideas, like he
said earlier. He is content with letting the system go bankrupt. We
are going to try to fix it and come up with a system that is better
for everybody.

I am just trying to think through all the arguments that we will
see here later as we get closer to a decision on this.

Where do you see this, Dr. Orient?

Dr. ORIENT. I think physicians sometimes present to you an ex-
aggerated sense of their powers. It is perfectly rational for a senior
citizen or anybody not to go to the doctor when they have a cold.
There is nothing I can do to cure their cold or keep it from turning
into pneumonia.

Really, these preventive measures, in most instances, do not save
money for society. They are good for the individual because they


41

We would have to go into an exhaustive education process. Keep
in mind, a lot of our retirees already are in our managed care pro-
grams in that community.

Mr. McCrery. But if they have that option to get out of the
HMO, isn’t HCFA concerned that their high risk beneficiaries will
opt out and go for the fee-for-service?

Mr. VAN BELL. I have not personally been in a discussion where
that was mentioned. It may be that that is an issue that they will
raise with us, I don’t know.

Mr. McCrery. OK. One last question for Mr. Salter. If you want
to entice your retirees to join a Medicare HMO, how would you do
it?

Mr. SALTER. Well, probably the easiest way is an evolutionary
approach. We have, for example, close to 65 or 70 percent of our
active employees on the West Coast in HMOs now. Our biggest
challenge, obviously, is the challenge of change, and it takes some
time to get people used to the managed care concept.

I think any time that you run parallel systems where you are al-
lowing essentially two delivery systems to operate side-by-side, one
that allows, “total freedom of choice to go anywhere you want on
a fee-for-service basis and another, managed care system that has
restrictions on utilization, people with higher risk will tend to opt
for the fee-for-service system.”

The way we have expressed it at GenCorp, is that we are on a
continuum of care and we are moving from fee-for-service toward
full managed care. So, where GenCorp will ultimately spend its
money is in the managed care environment. It will become, I be-
lieve, prohibitively expensive for employees and then, later, as re-
tirees, to go into the fee-for-service system, if that is provided as
a choice at all.

I think you do it in an evolutionary manner. In the short term
your biggest problem is with change, changing purchasing behavior
and having confidence that the care that is delivered in the new
setting, the managed care setting, is equal to and, in fact, better
than the care that can be obtained by self-referral.

Mr. McCrery. So, I am inferring that when you say if they
choose to stay in fee-for-service it would become prohibitively ex-
pensive, that you are going to either reduce their benefits or in-
crease their coinsurance if they choose to stay in that form of serv-
ice?

Mr. SALTER. | believe that is necessary just as in other areas of
our business. Remember part of my message here today is that the
phenomena of having a price on an item with a quality indicator,
is not unique in this country, it is only unique that it is absent in
the health care delivery system.

Our company purchases a number of things on a wholesale basis.
When we do that, we are also allowed to set higher specifications
for the production of the services and products that we receive. So,
what we are saying is that if the company has determined after a
period of time that it can produce, it can purchase rather, a higher
quality product at lower cost, it only makes sense, then, if someone
chooses to continue to purchase retail, that the company charge the
differential.

Mr. McCrery. So, the answer is yes.