16

CONCLUSION

Mr. Chairman, you and I and many witnesses before your Subcommittee have expressed our
belief that Medicare needs to leam from the private sector by expanding the range of managed
care choices available to our beneficiaries, giving beneficiaries the information they need to make
informed choices, and reforming how Medicare determines its payment rate to managed care
plans to incorporate local market forces. But these are complex problems and no one knows the
Tight solutions at this time. Fortunately, our demonstration authorities allow us to test how to
make these important and needed changes. We believe we have worked responsibly with experts
and affected parties to craft demonstrations that will allow us to move Medicare into the 21st
century.

I would be happy to answer any questions you may have.


37

Mr. McDERmorT. But it is nationwide. Nationwide, you are over-
paying.

Mr. VLADECK. The average payment is too high, but clearly, it is
too low in some communities and higher than too high in other
communities.

Chairman THOMAS. But you also have to say, rather than say the
Baltimore experience, the Maryland metropolitan area experience
gives you a swing of almost $200 between the highest and the low-
est AAPCC within that demonstration area, so the margin that an
HMO has to work with given the very short geographic differences
between that $200 difference means you really have a tough time
in certain areas offering anything that is reasonable and in other
areas you have enormous windfall.

Mr. VLADECK. As I think we have pointed out, in other instances,
the pricing differences within the Baltimore MSA are less than av-
erage for MSAs around the United States. In fact, one of the other
criteria we looked at and one of the other reasons we gravitated to-
ward Baltimore was because, as compared to the Los Angeles-
Riverside County market area or the metropolitan New York mar-
ket area, that $200 a month difference is less than it is in many
larger markets.

Chairman THOMAS. It just occurred to me, and I apologize, I did
not pick up on the subtleties, we will reexamine the HCFA travel
budget. [Laughter.]

Mr. VLADECK. I appreciate that——

Chairman THomas. I did not realize that was where you were
headed at the beginning.

Mr. VLADECK [continuing]. Your assertion of jurisdiction in that
regard, but I am not sure everyone feels that way.

Chairman THOMAS. I do learn, though.

Quickly, on the third party broker, what you learned, why you
are doing it, if you have changed it at all from past experience.

Mr. VLADECK. Let me just say that we first got into the question
of third party brokers in our meetings with private employers, par-
ticularly those who had sought to undertake relatively large scale
or rapid conversion of their retirees to managed care plans. We
clearly still have significant selection problems in the Medicare
HMO program. There are lots of reasons for it and I do not want
to imply motivation at all.

To some extent, perhaps entirely, that is a function of the charac-
teristics of beneficiaries in terms of who was interested in managed
care and who was not. But to some extent, I would assume that
if HMOs were rational and if those that were publicly owned were
protecting the interest of their stockholders, they would also shape
their marketing and enrollment activities in a way that is more
likely to attract better risks.

Particularly when you introduce the kind of dynamic to the mar-
ketplace that a lower price does, we are concerned about the extent
to which one of the responses to this change in price would be se-
lective marketing or selective enrollment. We have had a lot of ex-
perience with this issue on the Medicaid side, where almost half of
the States with Medicaid managed care programs are now using
third party brokers, and so we thought it was appropriate to test
it at this point.


33

And frankly, we and others are concerned that if we are too ex-
plicit about that difference, then the pressures on us will be over-
whelming to move immediately toward that price on the basic ben-
efit package. This is true not only in Baltimore, where there are
only 12,000 folks affected, but in southern California and south
Florida where there are hundreds of thousands of beneficiaries af-
fected. And as I said, at some point, we are all collectively going
to have to address what to do about the beneficiaries who are now
receiving more than the basic benefits at zero premium.

Mrs. JOHNSON. Yes, I appreciate that.

Mr. VLADECK But we do not intend to do that as part of this
demonstration.

Mrs. JOHNSON. But if you did—originally, 1 was sitting here
thinking, why do you not do that? Why do you not ask for the com-
petition at that level? I guess I do not clearly understand the rela-
tionship between the reimbursement rates that we have estab-
lished and a demonstration project. If you asked for competitive
bids at that level, that does not prevent you from continuing to re-
imburse the HMO risk contracts at the higher level for the higher
benefit package, but it might incentivize them to offer something
at the lower benefit package. Then the question is, what do you do
with the rest of the money? You could give beneficiaries the choice
of a rebate or of access to long-term care insurance or something
like that.

I understand that that is difficult. That is why I at least wanted
to know, why will you not let, then, plans offer more benefits for
the current price than an HMO does if they can? Why are you
going to anchor them to dollars when you do not anchor the HMO
risk contract with a dollar anchor?

Mr. VLADECK. If I understand correctly, and I have to ask the ex-
perts, under the tentative rules we have talked about for the first
competitive pricing site, once we establish the community standard
benefit package and once we establish the government price, we
are saying to plans whose bid price was higher than the price we
set that they have to make up the difference in a premium. How-
ever, if a plan bid below the price we set, then they can pocket the
difference or they can invest that into further benefits, and——

Mrs. JOHNSON. But, you see, I think since the project for us all
is only to slow the rate of growth of Medicare premiums, I do not
think the issue should be, how do we take back. The issue should
be, how do we clearly get the value for our dollar. If you go to the
market with the lower benefit package, too, retaining the current
reimbursement rate, then the problem you have is how do you re-
quire those plans to provide value for the dollars above the benefit
plan. If they do not want to provide value for that, then there are
some other options there. You could string them out.

But it seems to me that to go into the market with a competitive
pricing demonstration project that does not hit this pretty squarely
is going to leave us with a notch problem. It is better to address
that in the demonstration project now, knowing that we do not
need to cut the 95-percent rate. In fact, one of the things we did
in the Medicare Preservation Act was to beef up, perhaps irration-
ally—those of us from some parts of the country think it was done
irrationally—the rural AAPCC so that we do buy a good benefit


88

NAHU is strongly opposed to this approach, and urges that enrollment be the
responsibility of the plan itself and its representatives, as is currently the case with respect
to the Medicare HMO program and the choices demonstration project.

HCFA appears to be concemed that seniors will receive biased information and that only
the healthier risks will be recruited if enrollment remains with the plan. This concern can
be alleviated by allowing independent agents to participate. Independent agents provide
information on the alternatives available. They utilize their hands-on experience to walk
customers through the different options available and go over what might be best suited to
the customer’s own personal needs. They can answer questions based on real world
knowledge, not on the basis of an instruction manual, as would likely be the case for
employees of third party contractors. Third party employees would not be able to help
steer seniors to a particular plan which might best meet the seniors’ needs, because these
employees are instructed to be “neutral”. If they do steer seniors to a particular plan, they
could be accused of taking sides, and rightly so.

With regard to risk selection, independent agents do not have any incentive to risk-select.
They will receive a commission regardless of whether they sign-up healthy or sickly
Persons.

We believe it would be extremely shortsighted for the Medicare program not to take
advantage of the knowledge and expertise which professional health insurance agents can
provide, No one knows more about the contents of an insurance policy and its
applicability to the personal needs of a beneficiary than does an insurance agent. An
agent’s career success depends on such knowledge and understanding. An agent must
have this knowledge base in order to successfully go through the state licensing process.

As we move in the direction of providing seniors with more options under the Medicare
Program, they are going to need help in understanding the different plans. Simply
receiving a batch of printed materials is not going to do the job. They are likely to feel
overwhelmed. Only the professional insurance agent is going to be able to meet with
seniors in the privacy of their own homes and help them pick and choose from among a
range of options the plan which would best meet their needs. Seniors often have a familiar
agent they have used and relied on over the years, and thus have more confidence in
advice from such an individual than from strangers, such as government or company
employees.

Health insurance agents will also, as part of their service, act as intermediaries between the
beneficiary and the plan, assisting seniors with problems involving claim denial, billing
questions, etc. This service will be particularly beneficial to senior citizens, who may not
have anyone else to turn to for help in receiving proper payment for their medical needs.


42

AAPCC to begin with as the base from which you took the 95 per-
cent. So you created a uniform charge off of an inequitable base,
and I do not know that that gave us a whole lot to deal with in
that.

For example, I would much rather you went in and you said, all
right, here are your options. You are going to get 95 percent, 94,
93, 92, 91, or 90, we do not know which yet. What can you give
us for those prices, and then pick one kind of an approach. There
are a number of ways to deal with this. But my concern is, above
the average or the competitive bid structure, you can only play
with dollars, and that is a basic difference.

Now, let us move to the Medicare Choices demonstration, be-
cause I think from a model point of view, one, it is easier to deal
with. Two, it is also kind of exciting because you have a couple of
dozen areas that you are dealing with which will give us faster a
better understanding of the diversity that is out there.

Where are you in terms of the kind of different delivery models
and the risk payment adjustment models that we are playing with
here, or what do you hope to get out of the Choices demonstration
study?

Mr. VLADECK. Of the 25 sites or organizations of providers with
whom we are hoping to consummate Choices demonstrations, | am
trying, of course, to——

Chairman Tuomas. On those 25, if you simply threw them up on
a map of the United States, are there any obvious holes?

Mr. VLADECK. The answer is yes, I think, as Mrs. Johnson sug-
gested.

Chairman THOMAS. The Northeast?

Mr. VLADECK. The Northeast is underrepresented. I am trying to
visualize this. Philadelphia is more mid-Atlantic. There is nothing
north of Philadelphia except a rural provider in New York State
that is a very interesting model. So we have upstate New York
filled in there on the map.

Chairman Tuomas. OK.

Mr. VLADECK. I think we did pretty well in that regard. I believe
of the 25, only 2 are proposing to use the existing payment meth-
odology without some modification.

Now, there is a whole variety of sorts of modification. Some of
them want the existing payment methodology with just more so-
phisticated risk adjustors, and this will be our first empirical test
of the risk adjustors on which we have been working. Some of them
want to talk about a more shared risk kind of arrangement. Some
of them want to talk about a partial capitation or a partial risk
model, at least in the startup years. So we do—

Chairman THOMAS. And you are calling those risk corridors?

Mr. VLADECK. Risk corridors is what I would call shared risk.

Chairman THOMAS. Yes.

Mr. VLADECK. In other words, somewhere between cost and full
risk would be shared risk between the buyer and the seller. So
pretty much the full range of noncompetitively bid pricing sugges-
tions that have been analyzed seriously for Medicare capitated
plans are being tested in one or another of these sites.


10

increased steadily. In 1985, only 309,000 beneficiaries were enrolled in risk plans whereas today
over 3.6 million are enrolled in these plans, an increase of over ten-fold. Similarly, in 1985, only
32 risk plans contracted with Medicare. Today, 218 risk plans contract with Medicare.

‘There is general consensus among this Administration, the Congress, managed care plans,
beneficiary advocates, and other providers that the Medicare managed care program should keep
pace with private sector innovations while still ensuring that beneficiaries receive high quality
care. For our purposes today, let me cite three areas that receive frequent mention, First, many
believe that the types of managed care choices available to beneficiaries should be expanded to
provide as many options as the commercial sector does. Within our current statutory authority,
HCFA has recently expanded beneficiaries’ managed care options to include a point-of-service
option HMO. However, making additional choices such as provider sponsored organizations
(PSOs) or preferred provider organizations (PPOs) widely available to Medicare beneficiaries is
not possible under current law. Both the Administration and the Congress’ balanced budget
proposals include provisions which would allow Medicare to contract with these managed care
organizations on a permanent basis,

Second, there is agreement that beneficiaries need reliable, comparative information on the
managed care plans available in their local market areas in order to make informed decisions
regarding enrollment. Again, there is common ground in the Administration ond Congressional
proposals. Both plans would require the Secretary of Health and Human Services to disseminate
comparative information on managed care options at initial Medicare eligibility and during annual
open enrollment periods. The Administration's bill also requires that information on Medigap
plans be included in the comparative materials.

And third, most observers believe that the current payment methodology for managed care plans
is flawed and should be improved. Under current law, the payment methodology is based on the
Adjusted Average Per Capita Cost (AAPCC), generally referred to as "the AAPCC". Under the
AAPCC methodology, payment levels for HMOs are derived from the utilization and cost
experience in Medicare's fee-for-service population. There is general agreement that Medicare's
payments to managed care plans should be "delinked" from fee-for-service costs in particular
localities. In addition, recent research by HCFA confirms previous research findings that, because
the current payment methodology does not adequately take into account the better health status
of beneficiaries enrolled in Medicare HMOs, the Medicare program pays more for these
beneficiaries than it would if they had remained in fee-for-service Medicare.

Congress has given HCFA broad demonstration authority to test potential improvements with
which to address concerns like these, My testimony today will focus on two such demonstrations:
Medicare Choices and the Competitive Pricing demonstration


70

employers use their own administrator to intorm and assist retirees about the benefits
afforded by the company. Adding another layer of government bureaucracy will only add
‘© the confusion and possible distribution of misleading misinformation,

HCFA may require that HMOs in the demonstration suspend or waive their
current arrangements with employer groups who have retirees living in the service area,
‘The HMOs could not offer additional benefits to beneficiaries under any current
arrangements they may have with the beneficiaries’ employers. Employer groups. often
theough collectively bargained union contracts. require that health insurers customize
benefits to a very high degree, Employers, and therefore employees, will lose choice. By
Forcing employer groups into a single set of benefits, this demonstration project would
create an entirely impractical, unworkable situation, One of the largest employers in the
Baltimore area is the federal government, which has developed a very different pricing
formula, and is unlikely to allow any change for its Medicare eligible retirees.

A practicable approach to competitive pricing would be to waive employer groups
from the process, so that it would address only the individual market.

Baltimore is a very poor selection

HCFA has outlined, very generally, criteria it used in selecting Baltimore. I
‘would argue that, even if this were a well designed project, other sites around the country
‘would be more appropriate and that Maryland has "special circumstances” which HCFA
did not fully study or understand.

HCFA has said that the pilot should be conducted at a site at which the average
AAPCC is higher than the national average. Yet, Baltimore's average AAPCC is
$487.59, only $46.00 higher than the national average of $441.00. Several other sites
have much higher average costs and would therefore be more appropriate selections.

HICEA has said that it wishes to have a site that has a reasonably-sized Medicare
population, Baltimore's Medicare risk population is between 3 percent and 5 percent of
the total Medicare eligible population. Other sites around the country have higher
concentrations of Medicare beneficiaries than Baltimore, and should be far more likely
candidates under this criterion,

Perhaps the most important reason why Baltimore is not an appropriate site for
this project is that Maryland is the only state inthe nation that has an all-payor system for
hospital rates. HCFA has contended that the Maryland Commission in charge of the rate
setting system has said that the demonstration project will have no effect on the system.
This is not entirely true. The Commission has taken no position on the project. Tt does
say in its June 26 leer 1o Congressman Cardin that”... the presence of hospital rate
regulation would have to be considered when analyzing results from Maryland..." We
have the same questions about the generalizability of a Baltimore project. To our
knowledge, HCFA has not performed any analysis to show that the results from a rate-
setting state can be used to model potential results to a state without a rate-setting system
to the 49 states that do not have such a rate-setting system.

‘The Baltimore area is the first of three areas chosen to take part in the project.
Under the three-year pilot, expected to begin in early 1997, HMOs in the Baltimore area
will only be able to compete for Medicare business through this mandatory competitive
bidding process. Interested HMOs will submit bids to HCFA ona standard benefit
package they wish to market to Medicare beneficiaries. If, in addition, they wish to
market a more comprehensive benefit package. they also must submit a bid for that
package 10 HCFA. It is not clear why or what relevance this has to the Medicare
payment

Up to half of HMOs will be forced to charge higher premiums

Under the design, “losing” HMOs, those with bids above the HCFA payment,
would be forced to charge the Medicare recipient the difference. As a result, some, and
perhaps many, seniors will pay higher out-of-pocket costs. Today, seniots in most

PLEGALLEGISUSMCARETS? DOC


52

While we should be subject to stringent requirements and standards, we - and many other
delivery organizations that want to develop PSOs to serve seniors -- must be able to offer a risk
product without doing the administrative and regulatory contortions necessary to fit into a
regulatory system that recognizes only insurance companies as managed care providers.

‘The HCFA designation has given us a top priority with the Commonwealth's Departments of
Insurance and Health; it is making it possible for us to receive the necessary certificates of
authority to launch our Medicare Choices program within HCFA’s desired time frames. Without
this designation, this process would have taken years, not months.

‘The Medicare Choices program is demonstrating that PSOs can offer seniors the care they need
in an efficient and cost-effective manner.

ABILITY TO CONTRACT WITH THE GOVERNMENT IS CRITICAL

The ability of Crozer-Keystone to directly contract with government programs is critical to our
continued ability to provide high quality and innovative care to our communities. As you
continue your efforts to balance the federal budget, it is clear that the rate of annual increases
Medicare will be reduced. Combine these reductions with new insurance entrants into the field
of government-sponsored health care -- businesses taking anywhere from 15 percent to 30
percent off the top -- and you have a situation that could dictate reductions in service to patients.

And there is no guarantee that these entities, once in the Medicare business, will stay in. Several
HMOs in the Philadelphia area have recently said they are going to get out of the Medicaid
business because rates are getting too low. These are our patients in our communities. We aren't
going anywhere; we have to take care of them, and we want to do it with the best and most
efficient resources available in this era of fiscal constraint.

Many of the features of a PSO such as ours are being looked at in the Medicare Choices program.
In essence, PSOs can help reduce federal expenditures for Medicare by eliminating the insurance
middleman -- that 15-30 percent taken off the top by many managed care organizations, for
example. More importantly for patients and providers, PSOs are provider-run - clinical
decisions are made by providers and their patients, not by a faceless numbers cruncher at the end
of an 800 number.

CONCLUSION

Mr. Chairman, to balance the federal budget and tame the federal deficit, you must reduce the
growing cost of entitlement programs. Motivating Medicare beneficiaries to receive their care in
a provider-sponsored, managed care environment will cost Medicare less, improve the health of
beneficiaries, and build on long traditions of community-based health care delivery.

It will ensure that the dollars Congress allocates to support our seniors through Medicare is spent
on their care, and not on insurers’ profits. We hope the Crozer-Keystone Medicare Choices
program and the other provider-sponsored organization programs provide you with solid
evidence that this approach meets the dual objectives of higher quality and lower cost.

We at Crozer-Keystone feel fortunate to be chosen as part of this program. We are committed to
make it a success, because we believe that direct contracting is key to the future of health care for
many local health care providers. We commend this subcommittee for passing legislation last
year that would have allowed that to happen, and look forward to working with you to bring the
benefits of PSOs to more Americans by passing similar legislation at the earliest possible time.


50

STATEMENT OF
CROZER-KEYSTONE HEALTH SYSTEM
BEFORE
THE COMMITTEE ON WAYS AND MEANS
HEALTH SUBCOMMITTEE
Presented by
J. H, Micbael Agar
Vice President, Managed Care, Crozer-Keystone Health System
and
President, Health Plans of Pennsylvania, Inc.

Chairman Thomas and members of the subcommittee, my name is J. H. Michael Agar. I am vice
president for managed care for the Crozer-Keystone Health System and president of its wholly
‘owned subsidiary, Health Plans of Pennsylvania, Inc. (HPP). Crozer-Keystone is a finalist (one
of nine integrated delivery systems nationally) in the Health Care Financing Administration's
(HCFA’s) Medicare Choices demonstration program. We are extremely proud to have been
selected for this program and are working hard to make it a success.

BACKGROUND ON CROZER-KEYSTONE HEALTH SYSTEM

Crozet-Keystone Health System is a not-for-profit, integrated health system that provides a broad
continuum of care to 550,000 people in Delaware County and surrounding communities. Our
system includes 100 employed primary care physicians, three community hospitals, one tertiary
medical center and four long-term care facilities.

Health Plans of Pennsylvania is the system's managed care arm. It currently manages full-risk
patients from other payers and performs the tasks of premium sufficiency analysis, network
development and maintenance, customer services, provider training and relations and utilization
management. HPP is in the process of being licensed as a risk-bearing entity by the
Pennsylvania Department of Insurance.

As the elderly are the largest users of our medical, rehabilitative and social services, Crozer-
Keystone has made significant investments in ensuring that Medicare recipients have access to
those services. With the creation of the Crozer-Keystone Institute for Senior Health, our
programs and services take every aspect of the senior citizen's physical, mental and emotional
well-being into account. Our Silberman Center provides a variety of senior services including
adult day care, geriatric assessment, outpatient mental health services and physical therapy. The
Institute's ElderMed Program provides health education, wellness and outreach programs to
more than 40,000 members. Our $40 million, 180,000-square-foot Healthplex is a 21st Century
wellness, health and prevention center. Opening in September of this year, it will serve as the
focus of our wellness efforts.


56

STATEMENT OF
MEMORIALYSISTERS OF CHARITY HMO
BEFORE
THE COMMITTEE ON WAYS AND MEANS.
HEALTH SUBCOMMITTEE

Presented by
Timothy J. Ryan, CPA
Chief Financial Officer

Memorial¥Sisters of Charity HMO

Mr. Chairman and members of the Subcommittee, my name is Timothy J. Ryan and I am Chief.
Financial Officer of Memorial Sisters of Charity HMO, 1 also would like to introduce Dr. Albert
Braden, a health plan participating physician and Douglas X. Womer, Regional Vice President of
Sisters of Charity of the Incarate Word, who have accompanied me here today. We at
Memorial Sisters of Charity HMO have worked hard to develop a strong program, and I appreciate
having the opportunity to speak to you this morning about our commitment to the Medicare Choices
Demonstration.

Memorial¥Sisters of Charity HMO

Memorial¥Sisters of Charity HMO (MSCH HMO) is a provider-owned health plan and part of an
integrated health care delivery system jointly sponsored by two of the strongest, non-profit integrated
health systems in Southeast Texas: Memorial Healthcare System (MHS) and the Sisters of Charity
of the Incarnate Word Health Care System (SCH), Houston, Texas.

Both MHS and SCH have a long history of providing innovative and quality health care to special
populations, including Medicare, Medicaid, the under served, and residents of rural areas. In fact,
forty-five percent (45%) of admissions in MHS and forty-one percent (41%) of admissions in SCH
are Medicare and/or Medicaid beneficiaries. MHS and SCH have served the region for more than
9 and 130 years, respectively

MHS and SCH formed MSCH HMO with a significant start-up capital commitment to advance their
strategies for developing a truly integrated health care financing and delivery network. On
December 15, 1995, the Texas Department of Insurance granted MSCH HMO a license to operate
as an HMO. Subsequently, Memorial¥Sisters of Charity Insurance Company was granted its
insurance license on May 8, 1996.

MSCH Health Plans filed as an Integrated Delivery Network (IDN) in our original application to
HCFA for the Demonstration Project, submitted August 11, 1995. This [DN filing represented the
healthcare delivery organization and was appropriate due to the timing of the RFP and the post
application awarding of our HMO license by the State of Texas. Today MSCH HMO iis operational
and functional as an HMO with substantial reserves in excess of Texas Department of Insurance
requirements. Although MSCH HMO is structured as a “For Profit” Limited Liability Corporation
(LLC), our mission is to minimize administrative overhead and maximize the dollars available for
the delivery of care to the residents of Southeast Texas. We have worked closely with our physician
and hospital partners to develop a benefit plan and delivery system focused on the full continuum
of health care services including wellness/prevention programs to ensure timely and appropriate
access to care.

Although we just received our HMO license this past December we are ahead of our commercial
enrollment projections submitted in the Medicare Choices Demonstration application.

Project Management

MSCH HMO will administer the Medicare Choices Demonstration project. The use of the HMO
entity ensures HCFA that the assumption of risk under the demonstration program complies with
all Federal and State laws.


60

Chairman THomas. Did you find some of the questions were not
as responsive as you had hoped they would have been to what you
are trying to do?

Mr. AGaR. Fundamentally, I think that we know we have to be
held to the exact same standards as any other group going into this
business. I think the point where things turn is on how you define
statutory net equity.

For example, we have assets of about $380 million. Not one
penny of that is counted in our statutory net equity of our wholly
owned subsidiary and I think that is the area that needs work, be-
cause I do not think that is necessarily correct because we are pro-
viders of care. We are not intermediaries between the patient and
the providers of care.

Chairman THOMAS. One of the ongoing debates, and that is why
I am asking you the question, and Mr. Ryan, I will ask you in
terms of the Texas experience, is that I think it is very much an
open debate as to whether provider-sponsored organizations are a
distinction without a real difference or if, in fact, people who have
the professional skills are part of the structure and, in essence,
have a professional sweat equity commitment so that you do not
need the kind of financial profile that you would if you had to pur-
chase all of those services as an insurance company or another
structure. So we are trying to figure out if this is simply a different
folk running the show or if it is a different show.

You are telling me, Mr. Agar, that the tests that Pennsylvania
put you through were basically a test that an insurance company
would go through. Did they talk about the belief that since you
have a different makeup with the professionals as part of that risk
obligation structure that perhaps their financial profile analysis
was somewhat archaic or that they would have to rethink it?

Mr. AGar. At the very senior level of the department, that type
of thinking, along with the Governor, is taking place. But at the
operational level where people have to execute, they have to follow
the rules that are in place.

Chairman THOMAS. We are looking for sympathy and under-
standing. That is what we are looking for. We are not looking for
any bent rules.

Mr. Acar. At the bureaucratic level, not much. They understand
cash very well.

Chairman THOMAS. Yes. Old dogs, new tricks.

Mr. Ryan, do you have knowledge, or do any of the gentlemen
with you have knowledge? You already have a State licensure?

Mr. Ryan. Yes, sir. We have an HMO license and a separate in-
surance company license.

Chairman THOMAS. So you have all these different entities. You
fit in a little better.

Back to structure. Mr. Agar, are you going to. in the package
that you envision—I think I just have a little more of a working
knowledge of Mr. Ryan’s package because he laid it out and I used
it as an example—are you going to have beneficiaries have any out-
of-pocket expense contemplated?

Mr. AGAR. In the two major areas, let me give you a clear exam-
ple for physician visits and hospital visits. For physician visits in-
network, there is a $5 copay. For hospital, there is no charge. If


48

Crozer-Keystone is a not-for-profit integrated delivery system
that provides a broad continuum of care to the 550,000 residents
of Delaware County and surrounding communities. Health Plans of
Pennsylvania is the system’s managed care arm. It currently man-
ages full risk patients from other payers and is in the process of
being licensed as a risk-bearing entity by the Pennsylvania Depart-
ment of Insurance.

The elderly are the largest users of our medical, rehabilitative,
and social services. We have 95,000 Medicare beneficiaries in our
immediate area and we have made significant investments in en-
suring that Medicare recipients have access to those services. We
have created the Crozer-Keystone Institute for Senior Health, the
Silberman Center, and the Institute’s ElderMed Program serves
40,000 members who are provided with health education, wellness,
and outreach programs.

This rich array of services for the elderly, when combined with
Crozer-Keystone’s complete continuum of care, is why we know our
facilities, doctors, and hospitals can do the best job of integrating
and coordinating the care of our patients and of managing their
care to ensure quality while using the techniques of managed care
to increase efficiency and cut costs.

Our goal is to demonstrate that we can build on the existing re-
lationship with our senior community to overcome their concerns
about managed care and to focus on keeping them healthy while
providing superior service when they get sick. We are known in our
communities, we belong to our communities, and we are trusted by
our communities.

Crozer-Keystone’s Medicare Choices demonstration project is de-
signed to be another innovative and creative service to offer to our
senior community. It features zero premium. It has a point-of-
service option. Ours will be one of the first products available in
our area. We will also offer members a number of health education
opportunities with rewards to encourage healthy behavior.

We will do an annual health risk assessment on every member.
If the assessment shows that a member has diabetes, for example,
we will schedule the member for the system’s diabetes education
class. Upon successful completion of the class, the member will be
rewarded with enhanced benefits, such as eyeglasses, hearing aid,
or exercise program membership.

I want to point out that it would be extremely difficult for
Crozer-Keystone to offer a Medicare product in our market without
the HCFA designation. Currently, an insurance license is required
in Pennsylvania and in other States in order to offer a risk product.
However, we are not an insurance company. We are a provider-
sponsored organization. The HCFA designation has given us top
priority with the Commonwealth’s Departments of Insurance and
Health. It is making it possible for us to receive the necessary cer-
tificates of authority to launch our Medicare Choices Program with-
in HCFA’s desired timeframes. Without this designation, this proc-
ess would have taken years, not months.

The ability of Crozer-Keystone to directly contract with govern-
ment programs is critical to our continued ability to provide high-
quality and innovative care to our communities. As you continue
your efforts to balance the Federal budget, it is clear that the rate


20

the price that would be set competitively. Presumably, one of the
other ways it could respond, since the competitive price is sup-
ported by at least one competitor in the same market, is to become
more efficient in its operations or to reduce its overhead.

Chairman THOMas. Or to put it in a slightly different way, be-
come more attractive by becoming more standardized.

Mr. VLADECK. No, sir. I think——

Chairman THomas. I think that would be attendant.

Mr. VLADECK. I think the competitive advantage will be for the
plan that at the government rate can further expand its benefit
package at zero premium or the market-level premium. The plans
that can do that will be the plans that produce the standard pack-
age most efficiently.

Mr. CarDIN. Would the Chairman yield on that?

Competitive pricing presents a challenge to the managed care
community because there are no plans that operate in Baltimore
today that offer a sole option which charges a fee to the beneficiary.
That has not been successful competitively.

I think what the Chairman is raising is a concern that has been
mentioned frequently by the managed care operators and that is if
they come in with a bid that is higher than the competitive price
that is selected by HCFA, that operator is going to have an ex-
tremely difficult time operating in the Baltimore market because
their only option under the original configured pilot program is to
charge a fee to the beneficiary. It is at least perceived by the man-
aged care operators as unlikely that they could be competitive in
the Baltimore market if they have to charge a fee for the basic pro-
gram. Some operators are willing to charge a fee for a supple-
mental benefit, but for the basic benefit, they do not believe they
can be competitive.

You can look at it two ways. One, it may cause the managed care
operators to be very careful in the bids that they submit and to
submit the lowest possible bid. However, as the Chairman has
mentioned, the risk here is that there will be a significant number
of managed care operators that may be effectively unable to com-
pete in the Baltimore marketplace, giving a limited number of
choices to our seniors, and I think that is the tradeoff that we are
racing.

Mr. VLADECK. Let me say two things about that, if I may, Mr.
Cardin.

First, that concern is, in large part, why we explicitly rejected
the notion of setting the price at the lowest bid or even at some
mathematically determined function of the bids that are submitted.
It is our intention, and this is one of the things we are testing, to
try to set a price at such a level that there will still be significant
competition among enough plans that can maintain a zero pre-
mium for the standard benefit package. This is one of the things
we are testing. If none of the bids permit us to do that, then we
may not be able to proceed with competitive pricing. If all of the
bids come in at the same level, we may have a different kind of
legal problem, but that is one of the things we are trying to find
out.

Second, one of the reasons we picked Baltimore is because of the
average difference between the 95 percent of AAPCC that we are


38

Chairman THomas. Prior to turning it over to the gentleman
from Maryland, you have two additional competitive bid pricing
sites. We were listening to some of your criteria. My friend and col-
league from California indicated that he was still in the running,
based upon the criteria that you announced. Have you, in fact, set-
tled on the two additional sites?

Mr. VLADECK. No, we have not. We have a list. We have learned
from our experience in Baltimore. Once we identified potential
sites, we went to the industry at the national level and asked if we
could identify such a community, either from our list or theirs, in
which all of the plans would be willing to volunteer to participate
in such an experiment, since that would have been our preference.
We were unable to identify a city where that was the case. We
then——

Chairman THomas. Did you spend a lot of time on that search?

Mr. VLADEcK. I do not know how energetically they acted, but we
waited a number of weeks for the response. We have several other
sites in mind, but we have learned from Baltimore that before say-
ing anything in public, it is probably prudent and wise to consult
extensively with folks from that community. We have not yet begun
those consultation processes in any other community.

Chairman THOMAS. As you sharpen your model from the Balti-
more experience, I would urge you to touch bases with us as you
move forward to suggest areas that you might be looking at for
modification so we can follow the progress, as well.

Mr. VLADECK. We would appreciate that very much, sir.

Chairman Tuomas. Thank you.

The gentleman from Maryland.

Mr. CarDIN. Thank you, Mr. Chairman.

It might be useful, since Baltimore has been mentioned quite fre-
quently, to just share with the Subcommittee some of the conversa-
tions that have taken place in Baltimore. It is true that we were
not involved in the initial decision to select Baltimore and we have
raised significant objection to that process, but I want to com-
pliment HCFA in meeting with us and working with us since the
initial release of Baltimore being selected as the initial site.

I think it is clear from the testimony today that the current pric-
ing mechanism for the managed care plans needs to be changed,
that using 95 percent of an average rate that varies so greatly
among even small areas is not the best way to compensate for
bringing managed care to our Medicare beneficiaries. So we wel-
come looking at a new pricing mechanism.

Members of the Subcommittee have pointed out why Baltimore
would be good or bad. Many of the issues that have been raised
will be present regardless of what site is selected, and I think that
is clear. But there are two unique aspects to Baltimore that we
want to make sure are discussed before moving forward in Balti-
more, and one has already been mentioned. That is the all-payer
rate structure and whether the all-payer rate structure is the right
location for the first initial program.

The second is timing, and it has not been brought out yet, Mr.
Chairman, and I think it is important to point out that the Mary-
land Legislature approved a plan that will bring all Medicaid eligi-
bles into HMOs and enrollment will start in January of this year.


69

great part to the efforts of Congressman Cardin and the Maryland congressional
delegation

Project excludes Medigap fee-for-service carriers from pricing
formula

The project mandates that all Medicare-paticipating HMOs participate, yet it
‘excludes Medigap fee-for-service carriers from the actual pricing formula, Because only
9,000 of the 325,000 Medicare beneficiaries in the Baltimore area are enrolled in HMOs.
the project effectively addresses only the payers that serve less than 3% of the population.
‘A true competitive pricing formula would include the other 97% as well

Third-party enrollment broker is problematic

HCFA plans to contract with a third party enrollment broker to enroll and
disenroll beneficiaries. Health plans will not be permitted to enroll or disenroll
beneficiaries directly. Forcing enrollment through a third party enrollment broker is not
‘only unnecessary; itis fraught with logistical and operational problems that could lead to
confused Medicare beneficiaries and to added Medicare program costs. The third party,
which will have caused the problems, will remain unaccountable. The involvement of a
broker interrupts critical bond that HMOs establish with their members during the
cenroliment process. HCFA should limit its pricing demonstration project to pricing only
~ and leave enrollment to the HMOs, who over the years have worked with HCFA to
develop procedures and training programs that help the HMOs’ staffs handle the
‘operational details of enroliment and disenrollment. In fact, HCFA has extensive
guidelines advising on acceptable procedures and outcome-monitoring of our operations
in these areas,

We all have learned that the education of'a Medicare enrollee is crucial to a
satisfactory relationship in a health care network environment, Specifically important 1s
information on how to access services, when and where services are available, and how to
seek assistance if there are any problems whatsoever.

‘The issue is accountability. 1 believe that the HMO has responsibil
explaining its benefits, its delivery system, any limitations, and how its services can best
be used by the individual beneficiary. The value-added by an independent government
contractor that has no accountability to the HMOs is not clear. At the same time, it adds
an intrusive layer of govemment bureaucracy that seniors must go through. if the
purpose is general education, that is a function different from sales, enrollment, service,
and accountability for this continuum,

Pricing based on single, area-wide rate would skew bidding process

‘The program would establish a single payment rate for a seven county area whose
current AAPCCs range from a low of $407 to a high of $614. HMOs which serve
predominantly those counties in the low end of the range could submit winning bids that
are higher than their current program payments. Conversely, those which serve
predominantly counties at the high end of the range will be forced to bid at rates
substantially, and unfairly, below the current payment levels of their counties. This could
lead to marketplace distortion that could unfairly force HMOs to leave the Medicare
‘market entirely, limiting choice for the beneficiaries.

Retirement plans threatened

‘This enrollment process also will have a major impact on employers and the
relationship they have with their retirees. Applying this demonstration to beneficiaries in
‘employment-based groups is unworkable and again shows the lack of understanding and
analysis by HCFA of this important segment of the Medicare market. Many employers
negotiate customized benefit packages under collective bargaining agreements or other
‘employet-specific criteria. Furthermore, employers who operate nationwide usually offer
the same benefits company-wide. This project jeopardizes this relationship. Many

PUEGALLEGISIUSMCARETS2 000


ADMINISTRATION’S MEDICARE CHOICES AND
COMPETITIVE PRICING DEMONSTRATION
PROJECTS

FRIDAY, JULY 12, 1996

HOUSE OF REPRESENTATIVES,
COMMITTEE ON Ways AND MEANS,
SUBCOMMITTEE ON HEALTH,
Washington, DC.
The Subcommittee met, pursuant to notice, at 11:17 a.m., in
room 1100, Longworth House Office Building, Hon. Bill Thomas
(Chairman of the Subcommittee) presiding.
[The advisories announcing the hearing follow:]

(


72

Competition is clearly a goal of this Demonstration project. HCFA is negotiating
payment models that include partial capitation, capped fee-for-service payments. and
rates that blend payments between urban and rural areas so that Medicare beneficiaries
living in rural areas have more options. NYLCare’s HMO in Houston is looking into a
blended rating methodology.

Framework of Voluntary, Cooperative Innovation

The Choices Demonstration is clearly built on a collaborative approach
Participation is voluntary. The parameters of competition are not dictated by HCFA. they
are market driven. Choices health plan participants can compete on benefits and price.
They are not limited in how they can compete with Medigap insurers. These are the
attributes that shoutd be included in all HCFA demonstrations.

The Choices Demonstration stimulates entry of new health plans into the
marketplace This is in contrast to the Competitive Pricing Demonstration, which seems
destined to raise barriers, and may even support the exit of current Medicare risk
contractors,

‘An important element of the Choices Demonstration that we support is the focus
‘on new organizational relationships. Specifically, we believe that partnerships between
provider sponsored organizations and heaith insurance companies may be able to offer
new products to Medicare beneficiaries and new opportunities for providers to participate
in Medicare health care network programs. NYLCare's teaming with the Morgan Health
Group in Atlanta is evidence of our interest in exploring with HCFA the advantages and
disadvantages of altemative models.

Beneficiary versus HCFA

The principle difference between the two demonstration projects is the focal point
of competition. In Choices, the beneficiary 1s at the center and the beneficiaries’ interests
are being served. In the competitive pricing project, Medicare itself and its interests are
at the center. In Choices, HCFA is willing to move incrementally, with reasoned caution
about serving beneficiaries and saving Medicare dollars and working with the private
sector. With Competitive Pricing, the balance seems to swing in HCFA’s interest to save
dollars without sufficient concem for the beneficiary and without an understanding of
how Medicare managed care works.

Choices- Not a "cookie cutter” approach

HCFA js to be complimented on its vision in the design of the Choices
Demonstration. The 25 selected health care network plans are evidence of HCFA's
understanding of the importance of diversity and innovation as proposed by the
organizations. Of the 25 plans, 16 have proposed testing health risk adjustment methods
as a part of their payment approach, and 12 have proposed testing economic nsk sharing
with HCFA, While there is still much work to do to bring these proposals into
operational status, they are a clear indication of willingness by the plans to work with
HCFA. In tum, HCFA’s willingness to work with a wide variety of organizations on
complex delivery and financing issues shows a commitment to innovation that is crucial
for finding solutions to the problems that confront the Medicare program.

Conclusion

As more seniors move into Medicare health care networks, and as we continue to
age as a nation, more alternatives to the present system are needed, We believe that the
Choices Demonstration is an excellent beginning that has the support of private health
care networks in seeking solutions to very vexing problems, The Choices Demonstration
is well positioned to contribute new approaches. In sharp contrast, the Competitive
Pricing Demonstration, as presently constructed, will not contribute to solutions. and
‘could, in fact, do harm,

P WEGALLEGISWSMICARETS? 00C


71

‘Medicare HMOs pay little or no premiums. Next year, under this project, more than 50%
of the HMOs operating in Baltimore would be required to charge their senior members a
premium. Under the proposed plan, the senior citizen in a “losing” plan may face a
premium increase, experience unwelcome benefit reductions, and disrupt their continuity
of care by having to switch to another HMO. The “losing” HMOs should have the choice
of waiving that difference, particularly ifthe difference were so small that it would not be
cost-effective to charge and collect it, and would only be a nuisance to the Medicare
recipient.

Ultimately, the competitive pricing project would almost certainly have a perverse
Jong term effect of reducing both competition and patient satisfaction in Maryland
because it would impair the ability of HMOs to become economically viable in the
market place.

Data reporting requirements are cumbersome

HMOs would be requited to submit individually identifiable encounter data to
HCFA on an ongoing basis. It is unclear if HCFA systems will be in place to receive this
data, Serious problems currently exist with submission of data on the working aged
enrolled under Medicare risk contracts and HCFA resources are heavily committed to
preparing for implementation of the Medicare Transaction System (MTS). Systems for
receipt of encounter data will need to be carefully structured, and testing of the
transmission process will be essential. Additionally, we would question whether HCFA
considered, in its criteria, that the State of Maryland will require HMOs to submit
‘encounter data to the State. This raises questions of compatibility, redundancy, and
purpose. HMOs face the burden of keeping different sets of data for different members.

Tt also is not clear why this data is needed in a real time experiment. We could
submit encounter data in demonstration models to test bidding that simulates behavior
and costs, a much less disruptive approach,

Implementation deadline is unreasonable

Implementation is scheduled to begin in early 1997. The proposed schedule for
this demonstration exacerbates the problems above, leaving no time for participation of
‘many parties in their resolution. The period is so compressed that it may lead to rushed
implementation of the program before the HMOs can develop new benefit packages,
adapt to a new enrollment process, and install the new systems needed to comply with the
demonstration requirements. HCFA also needs time to develop many of these same
systems. Successful implementation of this competitive pricing project, wherever it is
conducted, will require the focused attention and commitment of all parties involved.

The time table outlined by HCFA will not make that possible for the project scheduled
for Baltimore, We are concerned that the project as proposed will affect Medicare
beneficiaries most of all -it has the potential to reduce choice, raise costs, and limit
‘access to options that are being promoted in other parts of the nation. We ask that this
Congress direct HCFA to stop this poorly designed project in its tracks and require
HCFA to start over and work with all the stakeholders in designing a project that will
work for senior citizens

Choices Demonstration Project

‘The Medicare Choices Demonstration project is another matter. HCFA solicited
applications from a wide variety of health care networks to test alternative payment
methods and to provide Medicare beneficiaries with more delivery system choices. The
objective of this demonstration is to evaluate the receptivity of Medicare beneficiaries to
‘a range of health care network models and to determine the long term viability of these
models. In this project HCFA asked for voluntary participation and selected participants
who were willing to try innovative approaches in risk sharing, certification requirements,
and quality monitoring systems. HCFA has indicated that, while Medicare money may
not be saved initially. the development of this framework that would cut costs over time.
‘The goal is to modernize Medicare and to offer more beneficiaries more choice.

PEGALLEGISWSMCARETS2 DOC


74

In our view, the purpose of a demonstration is to identify a basic
set of regulatory requirements that can then be applied to all plans
serving Medicare beneficiaries and not to develop a series of carve-
outs or special rules that deal with a particular organization’s idio-
syncrasies. Unless this is understood at the outset, HCFA will run
the risk of creating demonstrations that demonstrate little except
the advantages and failures of special treatment, potentially at the
expense of existing choices in the market.

For example, some States have found that waiving of solvency
standards for health plans participating in the Medicaid Program
allowed a market instability and some plans have gone bankrupt,
leaving Medicaid recipients without the appropriate health serv-
ices.

In deciding which applications to approve and which waivers to
grant, HCFA should take into account the impact that its decisions
may have on the competitive environment in specific markets. In
Houston, for example, one of the final candidates, as you have just
heard from, is a provider-based organization with whom my plan
contracts to provide services to a majority of our Medicare enrollees
in that market. If, for example, the 50-50 rule is waived for this
group, it would be allowed to enroll Medicare beneficiaries imme-
diately, giving the plan every incentive to market itself to the bene-
ficiaries it is already serving under contract with FHP.

It is important to note that rule changes in this case mean no
real change necessarily in the facilities that are available to serve
the Medicare population and will have marginal impact on the per-
centage of Medicare beneficiaries who may enroll in private plans.
This needs to be evaluated, obviously.

AAHP and FHP appreciates the opportunity to present our views
on this and I will be happy to answer any questions you have.

[The prepared statement follows:]


31

ance processes very intensively. Second, the PROs, the peer review
organizations, for years have had responsibility for monitoring the
quality of care in Medicare HMOs. It is only within the last few
years that they have begun to recognize the special characteristics
of HMO care and have begun to develop the tools and techniques
that are necessary to look at quality in an HMO setting, and that
will continue.

We will also continue some of the other monitoring we do of
disenrollments, of changes in patterns of enrollment, and of the
grievances and appeals of beneficiaries. That provides something of
an early warning system for us about quality.

So I guess that is a long answer when the correct short answer
is, we will keep in place our existing mechanisms while conducting
the Choices demonstration and the competitive pricing demonstra-
tion, and we will test new techniques based on expanded informa-
tion provided us by the plans and some research on quality meas-
urement we have been doing with the RAND Corporation, UCLA,
and folks elsewhere around the country.

Mr. Lewis. I know the Chairman will want to move to the whole
area of Choices, but it is my understanding that you will be work-
ing with one of the Medicare Choices projects in Atlanta.

Mr. VLADECK. Yes, sir.

Mr. Lewis. [ would be very much interested in learning more
about what is going on there.

Mr. VLADECK. Perhaps, in addition to a very short answer, we
can arrange a separate briefing, if you would like, to go into sub-
stantially greater detail. But so far we have had very limited Medi-
care managed care activity in Atlanta. Atlanta, like much of the
Southeast, has been relatively late to large-scale commercial enroll-
ment.

Perhaps because of that, a number of HMOs, insurers and
provider-based organizations in Atlanta, saw the Choices dem-
onstration as a way to get into managed care while, at the same
time, addressing some of the concerns they have about payment
mechanisms, or risk, or the nature of the insurance market or
other matters concerning which the existing laws seem to create
problems for them.

We still have a concern, I have to tell you, with some issues hav-
ing to do with the relationship between our program and the poli-
cies of the State Department of Insurance and the Insurance Com-
missioner, and we are working very intensively with them to try

Mr. Lewis. What you have in Atlanta, is this considered a modi-
fied provider service network, or——

Mr. VLADECK. We actually have a sort of an array of participants
in Atlanta. Some of them are insurance-based organizations. Some
of them are provider-based organizations. We have some existing
HMOs that are seeking to change the way they do business for
Medicare. We have the organization based at St. Joseph’s Hospital,
which is very much a provider-based system, although they are in
partnership with an insurance company. We have the Georgia Bap-
tist Health Care System, which is almost purely a provider-based
system.


17

Chairman THOMAS. Thank you very much, Bruce.

Ordinarily, we operate by a fairly strict 5-minute rule as we go
through this. But I think there is probably less partisan concern
on this issue than anything we have discussed. So I am going to
try to maintain as flexible a structure as I can so that we can get
the information on the record that will be helpful to us in under-
standing some of the rationale behind the choices that HCFA made
and, in fact, beginning at the beginning, the statutory authority
that HCFA has.

The reason I would start off questioning that way is because in
January of this year, you were quoted in a BNA article that you
thought you needed additional authority to carry out the kind of
demonstration that you are interested in. In the President’s fiscal
year 1997 budget package, there was a request to amend the exist-
ing statutory demonstration authority to specifically permit waiver
of section 1876.

Let me say at the beginning, I personally believe that, given the
broad demonstration authority that is on the books, you have the
ability to do it, but obviously since the statement was made and
the President’s budget asked for specific authority, I think it is
worthwhile for you to explain why that occurred.

Mr. VLADECK. I appreciate the opportunity to do that, Mr. Chair-
man.

Let me first say that we have been advised by our Office of Gen-
eral Counsel that section 402(A)(1\(a) of the 1967 amendments to
the Social Security Act provides, in their view, a more than ade-

uate authority to proceed with demonstrations of this sort. None-
theless, there are at least three reasons why we sought specific leg-
islative authorization for such a demonstration.

The first is, as you might note from the design of the Medicare
competitive pricing demonstration, in the President's bill both this
year and last year, we argued very strongly that in order to get a
fully functioning, level playingfield, fair market for Medicare bene-
ficiaries, we had to include Medigap or Medicare supplemental poli-
cies under the same set of rules as capitated plans. It is clear that
the existing authority does not extend to Medigap where our regu-
latory oversight authority is very limited. A statutory authorization
might permit their inclusion in such a demonstration.

Second, it has been our experience relatively routinely in the
past, that as we sought to proceed with a demonstration, one or
more affected parties sought to intervene through the judicial sys-
tem to prevent it. While we think we would ultimately prevail
under existing law, we believe that a much more explicit, specific
recent congressional authorization would place us in a stronger po-
sition and save us steps in the event of litigation.

Third, frankly, we are just always more comfortable when we
have a specific congressional expression of interest in moving in a
particular direction than when we do not. Since all of these issues
were very much addressed in the proposed legislation, we thought
we should not try to hide from the Members of Congress or anyone
else our intention to proceed in this direction.

Chairman Tuomas. And obviously, with the degree of change in
this kind of a demonstration project, especially in the competitive
pricing one rather than in the Choices one, although to a certain


23

For a variety of reasons, it is probably not appropriate to go
through the entire process of naming names of all the other metro-
politan areas we looked at, but there are certain characteristics
that Maryland does not have or Baltimore does not have. Just for
example, we have a metropolitan area that is all within one State
in Baltimore. Lots of the bigger metropolitan areas are not.

We have a metropolitan area where, compared to others, the var-
iation in costs between inner city and the immediate suburbs is not
as great as they are in some of the Northeastern cities. The Balti-
more MSA does include some more outlying areas, which is a prob-
lem we are trying to address.

We could go on and on with the list, and I would be happy to
go through City x has all these characteristics, but on the other
hand, it does not have these characteristics.

Mrs. JOHNSON. Mr. Vladeck, if I may, I am looking at a letter
from the Health Services Cost Review é mmission in Maryland in
which they say a more salient question is whether the results from
a demonstration in an area with hospital rate regulation will be
generalizable to areas without hospital rate regulation. Managed
care organizations in other States have one cost reduction strategy
unavailable to Maryland plans, the ability to negotiate hospital dis-
counts.

Barbara Kennelly and I have a very nice urban/suburban area
that did not get the right to go ahead with this kind of a dem-
onstration, so there are succinct urban areas available that do have
this.

Negotiating discounts is not just a matter of cost shifting. It is
a matter of incentivizing institutional settings to learn from the
private sector many of the cost control mechanisms that, frankly,
have not been common in nonprofit hospitals and now are being
adapted.

Furthermore, many of the cost control mechanisms that can be
best used in hospitals are dependent upon having a far better and
more integrated care system for postacute care. So if you are going
to look at managed care network development, I honestly do not
see how you can do that well excluding hospitals, not only from the
point of view of costs but from the point of view of integrated care
and continuity of care and varied settings of care.

So I am very concerned about that, and I am apparently not the
only one. Apparently the Baltimore rate commission was also con-
cerned about the applicability of the results you are going to get
from Baltimore to other systems across the Nation. They say that
specifically in this letter to you.

Mr. VLADECK. Again, Mrs. Johnson, every area has unique char-
acteristics and there is no single site or even a small number of
sites from which one could safely generalize everywhere in the
country.

Mrs. JOHNSON. I understand that. It is just that Maryland is the
only State left in the Nation that does rate regulation. Connecticut
went through it for many, many years. We felt very strongly that
we had overwhelming evidence of its downside. It did not work for
us. It cost money, it did not save money.

So it is concerning to me that with so few demonstrations you
would pick a site that is so different from the way the rest of Amer-


19

standing of the methodology—you do not just lock in the price, you
lock in, in essence, the package.

Mr. VLADECK. The base package, sir.

Chairman THOMAS. The base package that was out there con-
structed in the competitive way. If they are above the price in
terms of the competitive package, which, I believe, all of them
waive any of the costs, which is an attractive way to get people into
the program. But do they also add additional benefits, drugs and
perhaps vision? That if they are above that competitive price, the
only area you let them make adjustments in is requiring the bene-
ficiaries to pay the difference.

You do not allow the plans to make adjustments in the package
during the demonstration period, and it just seems to me, of what
value is a demonstration of a competitive pricing package if the
only variable is to add cost to the beneficiary without allowing the
plan to mix and match those bonus benefits that they thought were
attractive at one time but which obviously could be adjusted to
keep them attractive, notwithstanding the higher price.

I understand the need to control the parameter of a test, but
what you have done is basically thrown out, to me, the key ingredi-
ent of the HMO model for competitive price testing, and on that
basis one would say, Look, I am above the number. You will not
let me adjust the benefit package. It is dollars only. I am a loser.
Iam out of the game.

I do not know how you do not wind up dwindling to the one who
either knew how to play the game or wound up lucking out. It is
like ten little Indians. You will start off with a number of pro-
grams, but because you do not let them do what inherently they
need to do to be competitive in the marketplace, the only adjust-
ment being price, I do not see how you wind up with a significant
study on competitive pricing.

Mr. VLADECK. Let me make two responses to that, if I may, Mr.
Chairman.

Chairman THOMas. Yes.

Mr. VLADECK. The first is, all of the experts and others we have
talked to about this issue in preparation for this——

Chairman THOMAS. Let me say at the outset, as we get into
these, the reason I am doing all this is that I am criticizing the fact
that you do not have a perfect plan.

Mr. VLADECK. Yes.

Chairman THOMAS. Everybody needs to understand that.

Mr. VLADECK. And I hope you will understand that I am not sug-
gesting that we do have a perfect plan yet.

If you are going to establish a competitive price, one of the criti-
cal issues is that it be for a standard product, that you are not com-
paring prices between apples and oranges, to use the conventional
metaphor. If consumers are to make choices among different plans,
then you have to separate out the question of what the price is for
something that is standardized versus the prices for additional
things which could still be offered in the marketplace at additional
cost.

Second, I think it is a little bit oversimple to suggest that a plan
can respond only by reducing its benefits package if it has an exist-
ing cost structure that at a given level of benefits is in excess of


32

One of the nice things about the way this program is evolving in
Atlanta is that we have different kinds of organizations, all of
which have been involved in health care in the Atlanta area over
the last several years. Some are from the provider side, some from
the insurance side, and all of them are seeking to provide a com-
prehensive range of choices in that market. We are kind of excited
by the prospect.

Mr. Lewis. I must tell you that St. Joseph’s and Georgia Baptist
are two great providers and institutions in the heart of the city.

Mr. VLADECK. We are very pleased by the kind of response we
got from Atlanta and we are looking forward to being very actively
involved there.

Mr. Lewis. We have something coming up in Atlanta in the next
few days.

Chairman THOMAS. You do?

Mr. Lewis. It is a little game going to be getting underway a
week from today, you know.

Chairman THOMAS. It is kind of exciting.

Mr. Lewis. Thank you, Mr. Chairman.

Chairman THomas. Thank you.

The gentlewoman from Connecticut.

Mrs. JOHNSON. Thank you, and thank you, Mr. Vladeck, for your
patience and perseverance through all of this. Having worked
through some of this in our work on the Medicare Preservation Act,
I know that it is almost hopeless for those of us who have to spend
only periodic times dealing with this, and yet it is extremely impor-
tant that we figure out how to do it.

I am concerned about this aspect of your competitive pricing
demonstration project. I hear what you are saying about not want-
ing to go into the market with a premium that is lower than you
are already paying people in that market for a zero premium risk
contract which provides actually more than Medicare benefits. You
seem to have a good grasp of how much of the money you are pay-
ing those HMO risk contracts goes for the basic benefit plan under
Medicare and how much goes for additional benefits.

Under that 95 percent of AAPCC reimbursement rate for the
HMO risk contract, you are able already to factor out what is the
basic benefit plan cost and what is the additional cost. Why do you
not just go into the market at that level and let people see how
much more they could provide? Then you really get a sense of com-
petitive pricing. Why would you limit those who provide additional
benefits to only dollar issues rather than benefit issues?

Mr. VLADECK. Mrs. Johnson, I mean this as a compliment and
I hope you will understand it as such. That is exactly the question
the Office of Management and Budget raised with us as we worked
on designing this demonstration.

I think we are giving serious thought to the idea of actually ask-
ing for two bids from each plan, one for the existing market-level
benefit package and one for the standard Medicare benefit package.
The concern is that we do not want to leave current enrollees worse
off, so we want to set a price that will buy, at least from some of
the plans, the current benefit package, not just the basic benefit
package.


14

plans do not encourage healthier beneficiaries to enroll and discourage sicker beneficiaries from
enrolling in their plan. In addition, while we believe that favorable selection into Medicare HMOs
results in part from beneficiary self-selection, we are interested in learning if using a neutral third
party has an effect on favorable selection into Medicare HMOs.

Another reason third party enrollment is an important part of this project is that HCFA's recent
focus groups have found that Medicare beneficiaries would prefer having access to a third party
(as opposed to a plan trying to "sell them something") when learning about and/or making
managed care choices.

Several years ago, HCFA successfully piloted a beneficiary education and third party enrollment
program in Portland, Oregon. In fact, some of the Oregon plans continued to contract with this
third party after the demonstration ended. Third party enrollment is a mechanism used by many
public and private sector purchasers, such as 22 State Medicaid programs, the CALPERS
program, which covers over | million California state and local government employees, and many
large employers.

Market-Based Rate Setting. Under this demonstration, Medicare's payment rate will be based
on bids submitted by all Medicare managed care plans in the demonstration site. Plans would bid
ona "community standard" benefit package, representing the most commen plan offered in the
area. The rate derived from bids will replace the current AAPCC rate. The same demographic
factors now applied to the AAPCC (age, sex, Medicaid, and institutional status) will be applied to
this market-based rate to adjust payment to establish the payment rate for individual beneficiaries
in the first year of the demonstration. HCFA plans to apply new risk adjustment methodologies
after the first year

We have not determined yet precisely how we will set the Medicare payment based on submitted
bids. We are committed to assuring that beneficiaries have access to more than one plan at the
current premium level. For example, if most or all of the plans in the demonstration site are
currently offering a "zero" premium option, we would set the Medicare payment rate so that
several plans could continue to offer such an option.

Site Selection

In determining potential demonstration sites, we targeted those areas with a relatively high
‘AAPCC rate, relatively low Medicare managed care penetration, and enough Medicare HMOs to
make competition feasible. We are confident that we have been thorough and carefull in gathering.
together the resources appropriate to design the demonstration. However, we realize that we

made a important mistake after we identified Baltimore as the most appropriate initial site for this
demonstration. We did not adequately consult with interested parties at the local level.

Under Mr. Cardin's leadership, HCFA is now in the midst of a series of meetings, chaired by the
Congressman, with others from the Maryland Congressional delegation, Baltimore managed care


86

Working Effectively with the Health Plan Industry

Benova's experience is that an enrollment contractor can work very effectively with
participating health plans and assist health plans to meet their goals. A third party
can assist health plans by saving them money, by enrolling informed beneficiaries
who are more likely to stay in their chosen health plan longer, and by heightening
awareness of the managed care industry, increasing HMO enrollment.

Before a demonstration, it is typical for the enrollment contractor and the sponsoring
agency to engage in a planning process to work out operational details, and create the
type of partnerships needed. Our experience is that these relationships are successful.

Conclusion

The concept of operating an open enrollment with the opportunity for consumers to
receive comprehensive and unbiased information is found in many studies outlining
how to improve the Medicare program, and in many of the proposed pieces of
Medicare legislation. We are pleased to have this opportunity testify to our support
for this concept.


73

Chairman Tuomas. Thank you very much, Ms. Boesz.
Ms. Newport.

STATEMENT OF JANET NEWPORT, VICE PRESIDENT,
GOVERNMENT PROGRAMS, FHP, INC., COSTA MESA,
CALIFORNIA; ON BEHALF OF THE AMERICAN ASSOCIATION
OF HEALTH PLANS

Ms. NEwport. Good afternoon, Mr. Chairman and Members of
the Subcommittee. Thank you for the opportunity to come here
from California to testify at your hearing.

FHP is a multistate Medicare risk plan. We have almost 400,000
members in 8 States. We have been a longstanding Medicare par-
ticipant in the Medicare risk program.

Today, I am testifying on behalf of the American Association of
Health Plans and my testimony focuses on the Medicare Choices
demonstration. Before I delve into my comments on the Choices
demonstration, I would like to make a general observation.

We believe that managed care must be a part of the long-term
solution of the Medicare financing issues that we all face, just as
managed care has been an extremely important and effective part
of the quality improvement and cost containment achieved in the
private sector. Competition among health plans and providers has
been and will continue to be a key part of this. As long as the Med-
icare system developed to achieve competition establishes level
playingfields for health care competition, then managed care can be
an active part of the solutions we all seek.

In testimony before this Subcommittee nearly 1 year ago, AAHP
stated that, “Medicare can best be strengthened by giving bene-
ficiaries the same kinds of choices that are already available to mil-
lions of working Americans, including Federal employees and Mem-
bers of Congress.” We believe that the Choices demonstration, if
carefully structured, can be the first step in the process of updating
the Medicare Program to offer these choices.

In that same testimony, however, we urged Congress to hold all
Medicare health plan options to strong and comparable standards,
not just to ensure fairness and a level playingfield for competitive
plans but also to ensure that all beneficiaries can be assured that
regardless of the option or the type of benefit they choose, their
health plan has complied with a set of requirements which have
been structured to ensure that their health care needs and inter-
ests are protected.

While we understand that demonstrations are designed to test
various theories, and in this case new choices, the potential
changes in some of the rules and procedures need to be carefully
evaluated. The underlying purpose of a particular requirement
should be carefully considered before waiving it in a particular
case. HCFA should ask whether alternative safeguards are in place
and whether beneficiaries will enjoy the same level of protection
under a waived regulation as they do under current policy.

As AAHP warned in last year’s debate, the greatest risks to Med-
icare reform lie in its initial stages. It will not take many failures
to discredit new initiatives in the eyes of the public. We believe
that this is also true for reforms implemented through demonstra-
tion projects.


58

All of these standard benefits come at no additional cost to Choice 65 members beyond their
Medicare Part B monthly payment.

Alternative Forms of Reimbursement

MSCH HMO has agreed to utilize the Johns Hopkins University/The Lewin Group (formerly Lewin-
VHI) ACGIPACS risk adjustor mechanisms. During the first year of the demonstration, MSCH
HMO will accept risk payment derived from the AAPCC in the same manner as any risk contracting
HMO or Competitive Medical Plan, MSCH HMO will work with HCFA to gather data and test the
risk adjustor system. In the second year, upon review, MSCH HMO will activate the risk adjustor
mechanism and the resulting capitation payment.

MSCH HMO is not seeking reinsurance from HCFA, nor will it be asking for a risk-sharing
arrangement or partial fee-for-service payment. MSCH HMO believes its proposed straightforward
pricing approach will allow HCFA to engage in a very clean test of the risk adjustor mechanism over
a diverse service area.

MSCH HMO Is Ready To Launch The Demonstration

We would like to recognize the help of U.S, Senator Kay Bailey Hutchinson and her staff to get a
HCFA site visit review as soon as possible due to our state of readiness. We are disappointed that
we have not been able to confirm an actual date for a visit. Memorial Healthcare System and Sisters
of Charity of the Incarnate Word Health Care System have committed the resources necessary to
launch the Medicare Demonstration Project immediately and remain committed to offering managed
care choices to the senior residents of Southeast Texas while supporting HCFA endeavors to control
medical costs for the Medicare eligible population.

‘Again, thanks for the opportunity to discuss this important project with you. I will be happy to
answer any questions that you may have.


6

tration witnesses and those providers who will have their own criti-
cal comments, I am sure, concerning which way these programs
move.

Thank you.

Chairman THOMAS. Thank you. As usual, any Members who
have additional written statements will be a made a part of the
record, without objection.

Our first witness is Hon. Bruce Vladeck, Administrator of the
Health Care Financing Administration. Bruce, welcome. Your writ-
ten testimony will be made a part of the record and we can begin
the proceeding in any way you see fit.

STATEMENT OF HON. BRUCE VLADECK, PH.D., ADMINIS-
TRATOR, HEALTH CARE FINANCING ADMINISTRATION

Mr. VLADECK. Thank you very much, Mr. Chairman. I will just
give a very brief oral statement summarizing some of the points in
my written statement. I do appreciate the opportunity to appear
before you today, focusing on two programs that are central to our
agenda of expanding the managed care choices available to Medi-
care beneficiaries while maintaining the existing structure of pro-
tections on quality and consumer choice.

Without inserting myself into the dialog between the Chairman
and the Ranking Member, I would add that the administration be-
lieves there is considerable common ground between the Medicare
reform proposals supported by the Majority in this Congress last
year and those proposed by the President and supported by essen-
tially all of the Democrats. We would hope that even as the legisla-
tive clock continues to tick forward that there would be an oppor-
tunity to rebegin the discussions to identify those areas of common
ground so that we can move more quickly to address some of the
longer term problems of the Medicare Program.

Having said that, let me get to the more specific subjects at
hand. Permit me to begin by noting that HCFA’s use of its dem-
onstration authorities has had a profound effect on the evolution
and success of the program for many years. Medicare’s hospital
prospective payment program, its hospice benefit, its other preven-
tive benefits, and the Medicaid home and community-based waiver
program all began as demonstrations. Of course, our current man-
aged care programs are very much rooted in a series of demonstra-
tions that began in 1980.

Since 1985, when we moved from the demonstration mode to the
operational mode for managed care, we have experienced more
than a tenfold increase in the number of Medicare beneficiaries en-
rolling in risk plans, and a sevenfold increase in the number of
plans with which we have contracts. Nonetheless, I think there is
a common ground and considerable consensus that the Medicare
managed care program has not kept pace with some of the changes
that have occurred in the private sector.

There are three areas of particular focus. First, there is wide be-
lief that the types of managed care choices available to Medicare
beneficiaries should be expanded. Second, there seems to be gen-
eral consensus that beneficiaries need reliable, comparative infor-
mation to assist them in making informed decisions about their
choices. And third, there does seem to be almost universal consen-


29

Mr. VLADECK. Let me just try this one more time. We are now
paying a certain amount of money per month in Baltimore which
the plans see as an attractive price because they are still entering,
and they are providing the basic benefit package plus about 70 dol-
lars’ a month worth of extra services.

We believe that if we set the price at the current cost of provid-
ing Medicare benefits, then a plan would need either to reduce its
expenses by $72 a month per member or reduce the package of
what it is providing or increase its premiums. We believe—and it
is one of the reasons why we are not prepared to just dump this
all in the market—that the way most markets would work is that
those plans that had a strong base of existing members who were
tied to physicians and health systems they like would transfer
those costs to the beneficiaries and the others would reduce bene-
fits, because that is what is happening in the private market.

If we were going into an area in which anything above the basic
Medicare benefit package was already being paid for by requiring
a premium from beneficiaries, then people would not be worse off
as a result, and that would be fine. But in the majority of markets
where the existing prices have led to additional benefits and no
premiums, it is very hard to do this and not leave beneficiaries
worse off.

Mr. McCrery. This whole thing is hard, and again, I commend
you for trying to swim through all this and reach some logical con-
clusion, and I will cease after this——

Mr. VLADECK. One of the things I think we have made clear all
along is that if we live long enough to get an initial site up and
running, we do intend to test competitive pricing in several sites.
We have always reserved the right to fine tune and alter and
change the model as we develop experience moving from site to
site, and we will certainly take very much to heart all the issues
that you have raised as we think about how a second generation
or second model might be constructed.

Again, this is hard, and I think those are all very real kinds of
concerns and questions. I hope circumstances permit us to test a
variety of different approaches over a relatively short period of
time.

Chairman THOMas. We have a number of —

Mr. McCrery. One closing comment. It seems to me that if we
could somehow wave a wand and figure out what the true value
in price terms of the current fee-for-service Medicare package is,
then we ought to just say to the market, we are going to pay this
much per person and let the market respond as to the benefit pack-
age over and above the basic package that we all think should be
required. That is, to me, the best way to see how the market is
going to work, and if you can get efficiencies, which we are all look-
ing for, the market will provide those, not the government. So, to
me, that is—and maybe that is what you are trying to get out of
all of this, but it just seems to me to be rather a convoluted way
to do it.

Mr. VLADECK. Mr. McCrery, I think that is what Congress
thought it was doing when it set the AAPCC at 95 percent of the
community fee-for-service price. I think they either had an exagger-
ated perception of our ability to adequately adjust for risk or just


65

STATEMENT OF CHRISTINE C. BOESZ, VICE PRESIDENT,
GOVERNMENT PROGRAMS, NYLCARE HEALTH PLANS, INC.

Ms. Boesz. Thank you, Mr. Chairman and Members of the Sub-
committee. My name is Christine Boesz and I am the vice presi-
dent of government programs for NYLCare Health Plans. NYLCare
is a wholly owned subsidiary of the New York Life Insurance Co.
and we currently have 5 Medicare risk contracts serving over
65,000 Medicare beneficiaries in approximately 6 States.

I want to thank you for the opportunity to appear to discuss with
you the Medicare demonstration programs that are currently under
development. We are involved in both of them. We believe that one
is well designed and collaborative and that one has some serious
flaws and is a mandatory program. I want to contrast these two.

NYLCare is completely supportive of finding ways to improve
Medicare through these demonstration projects. While we are
proud of the health care that we provide to Medicare beneficiaries,
we are acutely aware of the deficiencies in the present system of
providing coverage to America’s elderly. We see the problems as
highly complex and the solutions as equally complex, but we do be-
lieve that carefully targeted demonstration projects are ways, and
perhaps the only ways, to test emerging new ideas. We are also
acutely aware of the difficulties that are faced by the Federal Gov-
ernment in determining a fair price to pay for the health care serv-
ices,

NYLCare is not just theoretical in its support. As I mentioned,
we have been selected both in Houston and in Atlanta to try two
of the Choices. We have also been selected in Baltimore through
the competitive prices, so we will talk a little bit about that.

First, I want to turn to the Baltimore situation. There, we be-
lieve that the HMOs are being forced on a mandatory basis to get
engaged in a project that is seriously flawed. We believe that this
has come about because the project was developed without partici-
pation of the affected people. HCFA has only just begun to meet
with HMO representatives, and that has been due in great part to
the efforts of Congressman Cardin and the Maryland congressional
delegation, and we certainly thank them for their efforts.

One of the problems that we see, very briefly—they were dis-
cussed at length this morning, so I will be brief, is that only ap-
proximately 3 to 5 percent of the Medicare beneficiaries are cur-
rently involved. We are actually excluding 97 percent of the Medi-
care market in terms of how the pricing is established.

We certainly believe that the third party enrollment broker is
very problematic in that the involvement of a broker interrupts the
critical bond that an HMO must establish with their members dur-
ing the enrollment process. We believe that if HCFA goes ahead
with the pricing demonstration, it should be pricing only, that it
should leave the enrollment to the HMOs, who, over the years,
have actually worked with HCFA to develop procedures and train-
ing programs that guide us in this effort.

In fact, HCFA has extensive guidelines advising HMOs on how
to market, how to protect the beneficiaries, and they actually mon-
itor these processes on a very regular basis. The value added by an
independent government contractor that has no accountability to



67

tion, more alternatives to the present system are needed. We be-
lieve that the Choices demonstration is an excellent beginning. It
has the support of private health care networks in seeking solu-
tions to very vexing problems. The Choices demonstration is well
positioned to contribute new approaches. In sharp contrast, the
competitive pricing demonstration, as presently constructed, will
not contribute to the solutions and, in fact, could do harm. I thank
you very much.
(The prepared statement follows:]


68

‘STATEMENT OF CHRISTINE C. BOESZ
VICE PRESIDENT FOR GOVERNMENT PROGRAMS
NYLCARE HEALTH PLANS, INC.

‘Mr. Chairman, members of the Subcommittee, my name is Christine Boesz, and |
am the Vice President for Government Programs for NYLCare Health Plans. NYLCare
is a wholly-owned subsidiary of New York Life Insurance Company. New York Life is
‘one of the country’s five largest tie insurers with policyholders from every stare and with
over $74 billion in assets, NYLCare 1s a national health care company praviding health
care coverage to 3.5 million Americans in every state. These health coverages are
provided through health maintenance organizations (HMOs), preferred provider
organizations (PPOs), and indemnity insurance. NYLCare’s HMOs currently provide
benetits under Medicare risk contracts to more than 65,000 senior citizens across the
nation, a number that has doubled in the last year.

Thank you for the opportunity to appear before this subcommittee to discuss two
Medicare demonstration programs under development by the Health Care Financing
Administration (HCFA), the “Competitive Pricing” and “Medicare Choices” projects.
These two demonstrations offer a contrast in two approaches -- one well designed and
collaborative and one with flaws and mandatory. I will discuss the contrasts between the
vo.

NYLCare is completely supportive of finding ways to improve Medicare through
demonstration projects. While we are proud of the health coverage we provide to
Medicare beneficiaries, we are acutely aware of the deficiencies in the present system of
providing coverage to America’s elderly. We see the problems as highly complex. and
the solutions as equally complex. Carefully targeted demonstration projects designed to
explore new ways of providing health coverage to senior citizens are a sound way ~
pethaps the only way ~ to test emerging ideas. We also are acutely aware of the
difficuties faced by the federal government in determining a fair price to pay for health
services needed by the elderly.

NYLCare’s support of Medicare demonstration projects is not merely theoretical
We have been selected to participate as 2 finalist in two of HCFA’s “Chosces” programs.
a selection we consider an honor. The first is our plan in Houston, and the second is @
teaming arrangement with the Morgan Health Group in Atlanta, 1am excited about the
possibilities presented by these programs, which I will address in greater detail tater in
this testimony.

However, we have grave concems about HCFA’s proposed competitive pricing
program scheduled to begin in the Baltimore, Maryland area on January 1, 1997, We
believe that the proposed project will hurt Medicare beneficiaries and will Timit the
expansion of Medicare health care network options in Baltimore and the surrounding
areas.

I will first discuss our concerns about the Competitive Pricing Pilot program, and

will then address the “Choices” program.

Competitive Pricing Pilot Demonstration Project

HCFA has proposed a competitive pricing pilot project that would force HMOs to
‘obtain Medicare business based on a mandatory competitive bidding process. Under this
process, HCFA would determine the price Medicare will pay HMOs for serving its
beneficiaries. The goal of the demonstration is to test methods to replace Medicare's
often criticized HMO payment system -- known as the adjusted average per capita cost
(AAPCC) ~ with a system that more fairly reimburses HMOs for services provided
Medicare beneficiaries. The first site chosen for this project is Baltimore

Project developed without participation of affected people

We believe the design process for that program has substantial flaws. This
problem results from a process of developing the demonstration project that included no
input from the effected parties, namely seniors, businesses, health plans, and physicians.
All of these affected parties learned about this project just two months ago, in the
beginning of May. HCFA has only just begun meeting with HMO representatives, due in

PWEGALLEGISWSWCARETS200¢


26

quality and consumer protection, and we will not hear any of that
from the HMOs testifying today.

The bells and whistles that they add to these packages I will not
say are of no concern to HCFA or to us, but that is not what you
pay for. You have something ia there that says if they are over,
they have to offer extra benefits, but the fact is that, in law, we
are charged with providing a basic package of benefits. So if HMO
A wants to offer eyeglasses and whatever else, that really is not
our issue. They are marketing gimmicks, for the most part. They
use these additional frills to attract beneficiaries. As you indicated,
in some markets, those have become almost standardized addi-
tions, but you still are not required to pay for them, as I under-
stand the law.

So what you want to accomplish, and this is a rhetorical ques-
tion, is to find a way for you to price that basic package, be it in
San Francisco or Baltimore or Wapakoneta, Ohio, so that you have
a way to, either through bidding or through some other calculation,
price the basic package. The quality and consumer protection is-
sues probably are mostly to protect the consumers from unscrupu-
lous insurance peddlers, and perhaps some physicians, I do not
know, but that is an issue that ought to apply evenly in whatever
market you are in.

So the idea of whether or not plans have to charge extra or cut
benefits, it really does not make any difference to what you are try-
ing to do in the experiment, unless I am missing something. I think
there is pretty universal agreement, we are paying too much under
the AAPCC. We are too high. You are looking, I think, for a logical
and empirical way to get that lower. How low, you do not know,
I suppose. Am I missing something here?

Mr. VLADECK. No. In fact, I think that is very helpful, Mr. Stark,
in helping to explain this issue a little bit further, or to try to ex-
plain it, because all this stuff is very complicated. But there are
two problems going on that are interrelated and, I think, that are
involved in this conversation.

In theory, the AAPCC payment to an HMO is supposed to cover
the basic Medicare benefit package. In fact, because we are paying
too much in most of the markets in which we have Medicare
HMOs, beneficiaries, for no additional premium, are receiving addi-
tional benefits.

Mr. Stark. Right.

Mr. VLADECK. The question is, and this is a question we all
talked about last year, how do you get from here to there since
there are several million Medicare beneficiaries out there at the
moment who, by opting into HMOs, have gotten additional benefits
at no cost to themselves because we are overpaying the HMOs. The
fact is that if you had a more efficient and equitable mechanism
for pricing HMOs, those beneficiaries would not be getting as gen-
erous a set of benefits at the price they are now paying.

At some point, it is likely that, as a matter of policy, we are
going to have to address this question. It is not a decision we are
going to make, and it is not a decision we are going to make using
our demonstration authority. That is a decision that Congress and
the executive branch are going to have to make together: What to


78

Chairman THOMAS. Thank you both very much.

You were here earlier, I assume, while we were talking to Mr.
Viadeck. So 1 hope some of your concerns were expressed by our
questions, because, obviously, we have the same concerns. If you
are going to take the time and the enormous energy to set up dem-
onstration projects, you would hope that you would have the ability
to get some results that you had, one, a level of confidence in, and
two, you could replicate in other areas.

If you will indulge me for just 1 minute. I represent a very rural
area, high desert, and the Bureau of Land Management wanted to
run a test in the desert because in the spring, there is some green
grass that grows briefly and then various sheepmen petition to be
able to run their sheep on the desert where the grass is. There was
some concern about the damage that may be done to the desert tor-
toise, and we believe the crows coming in from the population in-
trusion do far more damage. But the test that BLM wanted to run
was that they created a number of styrofoam shells that looked like
tortoises and they wanted to set the styrofoam tortoises out and
then have the sheep go out into the desert and eat the grass to see
what reaction sheep would have to tortoises.

Most of us know that tortoises, not being warmblooded, when the
sun comes up, go hide under rocks and in their burrows and come
out and move around. So I met with the sheepmen and we had a
discussion about the conditions under which we would allow this
experiment to occur and the first condition that the BLM would
have to agree to would be that we would allow them to put the
styrofoam tortoises out if they would allow us to put styrofoam
sheep out, and then we could run a test that we thought was equi-
table and reasonable as to what was going on.

I think, in part, that is what you are saying. The concern that
I had, especially in this larger demonstration model, is that if we
are waiving all of these rules and some of these programs are suc-
cessful, the only answer I got from Dr. Vladeck was that we hope
within 3 to 5 years we have changed the rules so that these people
who got the advantage under the rule would be, in fact, conforming
with the rule at that time. That is probably not the best answer
that he gave me from the number of answers that he gave me,
some of which were very good.

So I, too, have a very real concern about the usefulness, and the
point that I am going to continue to make to HCFA is that if every
time you run one of these programs you waive the 50-50 rule,
maybe it is time to waive the 50-50 rule. Get rid of it. We did that
in the legislation that we offered because we thought maybe it was
a rough model for quality at one time, but it is clearly an impedi-
ment.

Perhaps, Ms. Newport, you can give us an example, if you have
any, of real world problems, if you are not going to get a waiver
on the 50-50 rule, of decisions you have to make in the real world
to live with the 50-50 rule as you try to run your business versus
not having to worry about the 50-50 rule.

Ms. Newport. Thank you. I really appreciate the opportunity.
We have been a longstanding opponent of waiving the 50-50 rule
or getting rid of it. We obviously have had more of a welcome re-
ception on that position in recent years than we had before that.


WAYS AND MEANS SUBCOMMITTEE ON HEALTH
PAGE TWO

FOCUS OF THE HEARING:

The hearing will focus on the key aspects of the design of the Medicare Choices
demonstration, including selection criteria for health plans, designation of test markets, and
review of the Government's testing of new methods for paying participating health plans, such as
competitive bidding for the offering of Medicare coverage by private health plans.

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

Any person or organization wishing to submit a written statement for the printed record
of the hearing should submit at least six (6) copies of their statement, with their address and date
of hearing noted, by the close of business, Friday, July 26, 1996, to Phillip D. Moseley, Chief of
Staff, Committee on Ways and Means, U.S. House of Representatives, 1102 Longworth House
Office Building, Washington, D.C. 20515. If those filing written statements wish to have their
statements distributed to the press and interested public at the hearing, they may deliver
200 additional copies for this purpose to the Subcommittee on Health office, room 1136
Longworth House Office Building, at least one hour before the hearing begins.

FORMATTING REQUIREMENTS:

‘Bach statement presented for printing ta the Common by a witness any writen statement or exhib eubuted for the printed record or xy
‘wrstn comments in response ta & requect for writan comments mast conform to the guidelines listd below. Any statement or exhfbit not
‘compliance with these guidatines wil not be printed, hat willbe malntained in the Commitee Ges for review and us by the Commie.

4 ‘At sistemeats and any aceompanyiog exit for prating mutt be typed in engteepace on logalstas paper and may not exceed a
‘otal of 10 pages tcloding attachments

2 Contes of wha a exhib wil nat be for pratng. stead, exhibit ahold be
‘roferapead and quote or paraphrased. All exhibit material wot meeting thove specications willbe maltiined ta the Commitee Mes for review
‘and uae by the Commies,

2 -Avimeas appearing a a publle hearing. or submitting a statement forthe record of a pable hearing, or subenting written
‘comments ln reqponse 1 a publiahed request for comment by the Commitee, mest include on his statement or eubaiasion a tof al cleats,
eraons, or organizations on whose bekalf the witnea appears.

‘ Avupplemental shoot wos: accompany each statement Ling the name, fal address, a tlophons amber where the witss or he
| rroneatative may be reached anée topical ooine or tmmmary of the commeats and recommendations inthe full statement. This
‘supplement aheot wil oot be incinded inthe printed record.

‘The above rectrictons and tinlttions apply oaly to matartal beng submicad for printing, Statements and exhibits or supplementary materi
seeaodvolety for detrtion to the Members, the press and the publeenrtg the cooree ofa public hearing may be submited tx othe forms.

Note: All Committee advisories and news releases are now available on the World Wide
Web at 'HTTP://WWW.HOUSE.GOV/WAYS_MEANS/ or over the Internet at
GOPHER.HOUSE.GOV, under 'HOUSE COMMITTEE INFORMATION’.

wanes


ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

SUBCOMMITTEE ON HEALTH
FOR IMMEDIATE RELEASE CONTACT: (202) 225-3943
July 2, 1996
No. HL-20

Thomas Announces Hearing on the
Administration's Medicare Choices and
Competitive Pricing Demonstration Projects

Congressman Bill Thomas (R-CA), Chairman of the Subcommittee on Health of the
Committee on Ways and Means, today announced that the Subcommittee will hold a hearing on
the Health Care Financing Administration's (HCFA) demonstrations regarding Medicare health
plan choices and competitive pricing. The hearing will take place on Friday, July 12, 1996, in
the main Committee hearing room, 1100 Longworth House Office Building, beginning at
10:00 a.m.

In view of the limited time available to hear witnesses, oral testimony at this hearing will
be heard from invited witnesses only. Witnesses will include representatives from HCFA,
private health plans, and independent experts. However, any individual or organization not
scheduled for an oral appearance may submit a written statement for consideration by the
‘Committee and for inclusion in the printed record of the hearing,

BACKGROUND:

Currently, Medicare beneficiaries are provided health insurance coverage principally
through a Federally administered, public fee-for-service program. However, beneficiaries are
also able to receive their Medicare benefit through enrollment in private health maintenance
organizations and other plans that contract with HCFA. At present, over 4 million Medicare
beneficiaries, out of a total of 37 million, have chosen to receive their Medicare benefit through
enrollment in privately administered health plans. These privately administered plans frequently
offer advantages to Medicare beneficiaries in the form of reduced financial liability for cost-
sharing with respect to deductibles and copayments, or in the form of enhanced benefits relative
to the basic Medicare benefit package offered through the public program.

Comprehensive legislation to further the objectives of expanding the availability of
privately administered plan offerings to Medicare beneficiaries, and making available to
Medicare beneficiaries the latest innovations in benefit design that are enjoyed by workers in
employer-sponsored health plans and through the purchase of private health insurance, were a
‘major part of the Medicare provisions in the Balanced Budget Act of 1995, which was vetoed by
the President.

Last year the Administration announced that it would conduct a "Medicare Choices"
demonstration designed to explore ways to expand the availability of managed-care plans for
Medicare beneficiaries and to test new ways for the Federal Government to pay private health
plan contractors for the provision of health insurance coverage to Medicare beneficiaries.

In announcing the hearing, Chairman Thomas stated: “Expanding the range of choices in
health plan designs available to Medicare beneficiaries continues to be an essential objective of
this Congress. | am extremely interested to see that the Administration is now pursuing
proposals advanced in the Congress last year and look forward to exploring in some depth the
‘Administration's design and conduct of the Medicare Choices demonstration.”


15

plans, beneficiary representatives, Baltimore business representatives, and representatives of the
State government. The purpose of these meetings is to discuss the issues and concerns raised by
these parties, something we should have done earlier, but are glad to be doing now.

Td like to take this opportunity to thank Mr. Cardin for his positive and constructive action after
Baltimore was announced as the first potential demonstration site and to reiterate Secretary
Shalala's commitment that we will not proceed with the demonstration members of the
Maryland delegation are comfortable with the demonstration's design and timetable.

ion of Dern: ion's

The design and implementation of this demonstration is a complex undertaking and, hence, there
are many areas where misunderstandings can occur. While it would not be possible to cover all
areas, I would like clarify some of the demonstration's parameters.

First, no plan would be excluded on the basis of its submitted bid. The purpose of the bidding
process is simply to set the Medicare payment amount on the basis of the managed care
marketplace, rather than using the AAPCC rate. Indeed, the use of the phrase “competitive
pricing" in lieu of "competitive bidding” is intended to convey that we are only setting the price,
not using the bidding process to exclude any interested parties.

Second, beneficiaries will have the option of remaining in fee-for-service Medicare or enrolling in
a managed care plan. No action on the beneficiary's partis required to stay in fee-for-service
Medicare. The beneficiary's enrollment in a managed care plan will be completely voluntary. The
contractor conducting third party enrollment will not be rated or compensated based on the
number of beneficiaries enrolling in a managed care plan. The purpose of the education and
information is to assure that beneficiaries understand all their options.

Third, managed care plans will be able to market to potential enrollees as they do today through
mailings and radio, newspaper, and television advertisements. Their ability to deliver their
message to potential enrollees will not be hampered. This demonstration simply provides
comparative information on plan choices so that beneficiaries will be able to make informed
choices and conducts enrollment and disenrollment through a neutral party, instead of through the
plans.

Finally, the managed care industry has for many years expressed an interest in experimenting with
a metropolitan statistical area (MSA) wide rate, and we had indicated that we would consider
using one MSA-wide payment rate. However, concems have been raised that this could
discourage plans from providing services to individuals in Baltimore City, which has the highest
county-specific rate in the region. We have indicated that we are flexible on whether to use one
rate for the Baltimore MSA or to adjust the bid for county differences.


5

Chairman THOMAS. The Subcommittee will come to order. Today
the Health Subcommittee will examine the Clinton administra-
tion’s managed care demonstration initiatives for Medicare. After
almost 4 years in office, it is noteworthy that the administration
has recognized that the Medicare Program must be modernized.

Medicare has much to learn from developments in the private
sector, obviously. These demonstration initiatives indicate a new
willingness on the part of the administration to borrow from the
successes of the private health care market and provide Medicare
beneficiaries additional high quality, less expensive health care
choices. In light of Medicare’s fiscal crisis, it is not coincidental that
the administration is now adopting an agenda for Medicare which
offers beneficiaries the types of choices that were included in the
bill this Congress passed in its efforts to save Medicare. It is just
too bad the President chose to play politics with Medicare and veto
that bill last year.

It should also be mentioned that concerns have been raised about
specific aspects of these demonstration initiatives. Personally, I am
reserving judgment about these initiatives and I look forward to
learning more about the details of the demonstration program from
the administration as well as hearing the views of interested par-
ties from the health care insurance fields.

It is my expectation, however, as the demonstration program is
developed it will be designed to bring private innovations and re-
sources to bear for Medicare beneficiaries in a real market setting
rather than simply extending the long arm of government into pri-
vate health care delivery. Additionally, we do not want Medicare
as it evolves beyond simple old-fashioned fee-for-service insurance
to cause unneeded distortions or dislocations in health care deliv-
ery by the manner in which the government provides for private
sector coverage of Medicare beneficiaries.

The demonstration initiatives, I think, reflect a significant step
forward by this administration. Nevertheless, I would hope the ad-
ministration will pay close attention to today’s discussions and at
least be receptive to making any midcourse corrections which
might be indicated by information generated by this hearing.

T recognize my colleague from California, the Ranking Member,
Mr. Stark, for any opening remarks he might make.

Mr. Stark. Thank you, Mr. Chairman, for holding this hearing
on the various Medicare managed care demonstration projects. I
agree the administration is to be congratulated for pursuing
projects to test ways to improve Medicare. I am not sure that the
criticism of the administration at this point is warranted.

These demonstration projects simply attempt to test the kinds of
ideas that were in the House-passed budget bill, with the all-
important difference that the administration’s proposals include
some consumer and quality protections against massive balance
billing. Unlike our House plan, the administration does not lock
seniors into plans for 1 year at a time and cut traditional Medicare
so that providers will end up forcing people into these untested
plans.

There is a right way and a wrong way to make change, and I
think the direction in which the administration is moving is going
in the right way. I look forward to hearing from both the adminis-


87

Statement of the National Association of Health Underwriters

y
David K. Kehl
Senior Director of Government Affairs

1 appreciate having this opportunity to present the views of the National Association of
Health Underwriters regarding the Medicare Demonstration Projects.

NAHU represents nearly 13,000 health insurance agents and brokers, serving the
insurance needs of over 100 million Americans.

Many of our members handle Medicare supplement policies, and have established a good
working relationship with their senior clients. Unfortunately, because of what appears to
be an anti-agent bias in the Health Care Financing Administration, the services of agents
are not available to seniors under the Medicare HMO program.

We have two concerns which we hope can be addressed as part of the effort to expand the
availability of choices and options to our senior citizens.

First, in the implementing instructions governing the current Medicare HMO program,
contained in the HMO Manual for the Medicare Select program, “HCFA strongly
discourages the use of Medicare marketing representatives who are not employees of
your health plan.” In essence, HCFA is telling the plans that they should not use
independent agents.

Last year, in recognition of the important services independent agents can provide to
seniors, the Ways and Means Committee included language in the committee report for
the Medicare Preservation Act which would basically have overridden the HCFA.
directive. The language stated:

“With respect to marketing and enrollment, it is the Committee’s intent to allow
independent agents acting on behalf of MedicarePlus organizations to explain
the plan’s benefits and limitations and to accept enrollment forms from
individuals electing the product.”

Since this legislation never became law, the existing HCFA directive still governs, and in
the absence of any directive to the contrary, will evidently be applicable to the Medicare
Choice demonstrations. We strongly urge that the directive be lifted overall, and certainly
with respect to these demonstrations, so that the plan participants will not be intimidated
from utilizing the services of independent agents.

Secondly, HCFA’s plan to use third party contractors to conduct all enrollment activities
in the competitive pricing demonstration project will effectively preclude a role for agents.


80

there, so that they do not have to spend money, but how could you
then have people who are in the State, in the community, in the
metropolitan statistical area planning a model for that area and
not factor in the concerns that you have and the amazing state-
ment to me from the gentleman from Maryland that the State was
planning on moving its entire senior structure into a market which
admittedly was just relatively few thousands out of a multihundred
thousand senior market? How does that happen?

Ms. Boesz. I am sorry, Mr. Thomas. I cannot explain what
HCFA’s thinking was on that. Mr. Cardin’s point was that the
State is moving the Medicaid Program, not the seniors.

Chairman THOMAS. But some of them are seniors.

Ms. BoEsz. Some of them are seniors, yes, that is true.

Chairman THomas. And you do not have as mature an HMO
market for Medicare or the seniors, and the sheer impact, either
freezing it under that demonstration program or, in fact, folks
electing not to be in the market, has got to have an impact on the
State’s ability to move into that area.

Ms. Boesz. And it will. It absolutely will have an impact, and
that concerns us.

Chairman THomas. I think the reason I asked the question was
that staff told me that you may have had some experience with
HCFA in your professional career in the past?

Ms. Boesz. Sir, I have. Yes. I did have some experience, but I
still cannot explain this particular phenomena.

Chairman THOMAS. Could you give, just for the record, the basis
of your experience? If it was a brief few months, then obviously you.
do not have the ability to understand HCFA.

Ms. Borsz. My experience with the Agency was over the last 10
years. I was in the managed care program and I was the Director
of the office that handled the managed care risk contracts.

Chairman THOMAS. How long have you been away from HCFA?

Ms. Borsz. One year.

Chairman Tuomas. It is amazing, what happens in 1 year some-
times.

Ms. Boesz. Yes.

Chairman THomas. I want to thank both of you. Obviously, this
Subcommittee, clearly on a bipartisan basis, is concerned. We want
these demonstration programs to be a success. Frankly, I think the
Choices one, notwithstanding the concerns about the waivers, be-
cause that is going to give us at least an opportunity to see the
pluses and minuses of the waivers in removing or not removing,
but the study model for the Choices is far superior to the competi-
tive pricing, which, to me, is another one of those gigantic mis-
nomers which attempts to create a competitive pricing model by
freezing at one time a model that may or may not have been com-
petitive and then not allowing the participants to adjust to the new
competition.

We are hopeful that we can work with HCFA in improving that
model, not for the other two sites but before they impose it in the
Maryland area. I guess my confidence is that in Dr. Vladeck’s testi-
mony, he indicated that Mr. Cardin had final say and that no other
demonstration programs would go forward until Mr. Cardin OK’d
the Baltimore area program. I guess I am jealous, but I think that


83

TESTIMONY OF
LISA ADATTO, VICE PRESIDENT, PRINCIPAL
BENOVA, INC.

FOR THE SUBCOMMITTEE ON HEALTH
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
JULY 12, 1996

Mr. Chairman and Members of the Subcommittee:

am pleased to submit this testimony for today’s hearing record on behalf of Benova,
Inc., the nation's oldest and most experienced firm serving as enrollment brokers for
health plans for Medicaid and Medicare programs. I am vice president and a founding
principal of the company.

In this testimony, I will explain why Benova urges this committee to support the
demonstration project proposed by the Health Care Financing Administration (HCFA),
as a result of our considerable experience with unbiased, third-party educational and
enrollment programs. We believe these programs can help meet our nation's health
care objectives, including better control of health care costs.

Benova, Inc. is a corporation founded in 1982 and based in Portland, Oregon. We
have approximately 225 employees and offices in Oregon, Connecticut, Oklahoma,
California, Ohio and Virginia. We are an enrollment contractor who has worked
extensively with state Medicaid programs, employers and HCFA to provide unbiased
third party education and enrollment services, and consulting services in designing
prototype education and enrollment programs.

As noted, we support the HCFA demonstration projects, and believe that a model
program incorporating unbiased information and enrollment is highly worth testing.
We are convinced a third party enrollment program is technically feasible, cost
effective, and provides a better level of service to beneficiaries. In addition, we
believe that use of a third party will assist in meeting national health care objectives
both by driving competition and by reducing biased selection into managed health care
plans, Our belief is that third party enrollment contractors can work effectively with
the HMO industry and assist HMOs in meeting their enrollment objectives.

We believe that the reason that managed care has been so successful in reducing
health care costs in market sectors other than Medicare is that the marketplace has
created conditions for effective competition. Highly sophisticated purchasers, such
as employers and state governments, drive competition through a bidding process.
Consumers, such as employees, are given comparative information and are thus well
informed about available options which further drives competition. On both the
demand and supply sides, competition works.

In the Medicare program, competitive forces are not working as effectively and costs
remain high. On the supply side, health plans do not need to bid for services; instead
they are paid automatically, based upon historical data driven by fee-for-service
payments. On the demand side are uninformed consumers who don't know which
options are available. With the growing number of options and complexity of the
Medicare program it is very difficult to make comparisons or even understand the
competitive advantages of one option versus another.


21

paying the plans and their costs of producing the basic Medicare
benefit package—not the community standard package, but the
benefit package with deductibles and without the additional bene-
fits. We estimate that there is a difference of almost $75 a month
at the current time between what we are paying for the standard
package and what it is costing the average plan in the Baltimore
market to produce that.

We think that $900 a year, depending on where we set the price,
ought to offer a considerable opportunity for plans which may have
initially bid above the price to still provide the community benefit
package at a lower rate and at zero premium.

Chairman Tuomas. But, Bruce, you introduced the Baltimore
question, and it seems to me that you can find that kind of pricing
differential in a number of communities.

Mr. VLADECK. Yes, sir.

Chairman THOMAS. So that cannot be the primary reason you
chose Baltimore. My problem is that if, in fact, the way you are set-
ting up your structure, and I agree you have to pare away reality
to get some comparisons, it sounds to me like efficiency and cost
cutting are two of those that you are focusing on as key factors.
Why in the world would you choose the largest population commu-
nity in a State which denies those plans one of the most effective
and primary cost cutting tools, which would be hospital rates, given
the uniqueness, as the gentleman from Maryland reminds me al-
most on a daily basis, of the single-payer system in Maryland?

I guess if we are looking for a place to test this business of cost
cutting and efficiency, you have tied not one but almost both hands
behind these organizations’ backs, given the uniqueness of the loca-
tion. So there has to be a reason why you chose Baltimore, and do
not tell me it is because that is where your headquarters is.

Mr. VLADECK. We thought about that, because this is a very
staff-intensive process, and we do not have a lot of-———

Chairman THOMAS. You mean that is the reason?

Mr. VLADECK. No, it is not the reason.

Chairman THOMAS. All right.

Mr. VLADECK. But it was a consideration. This is a very staff-
intensive process, as some of the Members know, and we do not
have any travel money this year. But the issue of the rate setting
is, as you know, and as I am reminded every day in this job, every
community is unique on some dimension or another. No two are ex-
actly alike.

We think in some ways, again, from the point of treating some-
thing as an experiment, that the hospital rate setting program in
Maryland clearly has not in any way deterred or delayed the devel-
opment and expansion of managed care in the private sector in the
State of Maryland. It certainly is not an obstacle to the State’s
moving ahead with a very ambitious Medicaid managed care pro-
gram. It certainly has not, under the current rules, discouraged
HMOs from seeking to enter the Medicare business in Maryland.

We have formal communication as well as informal communica-
tion from the folks at the rate setting commission, who are very
comfortable with this demonstration. Now, it is true, we have
picked a site in which the HMOs have one less tool with which to
lower their costs than they do in some other communities, although


ADMINISTRATION'S MEDICARE CHOICES AND
COMPETITIVE PRICING DEMONSTRATION
PROJECTS

HEARING

BEFORE THE

SUBCOMMITTEE ON HEALTH

OF THE

COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES

ONE HUNDRED FOURTH CONGRESS
SECOND SESSION

JULY 12, 1996

Serial 104-71

Printed for the use of the Committee on Ways and Means

ae

U.S. GOVERNMENT PRINTING OFFICE
38-430 CC WASHINGTON : 1997

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

ISBN 0-16-054923-x



84

The proposed HCFA demonstration will test new methodologies for driving
competition. Given the urgency of national budget issues, we recommend that the
demonstration go forward with the support of this committee

Enrollment Broker Benefits for the Medicare Consumer

Service improvements occur in two ways. By providing "one stop shopping” an
enrollment contractor is allowing beneficiaries a rational method of leaming about
which health plan options are available, how the programs work, and how they differ.
In addition, an unbiased third party is able to prevent fraud and abuse by offering
straightforward information without pressure or inaccurate claims.

‘There is much evidence that prospective Medicare beneficiaries have a difficult time
understanding the Medicare program, how fee-for-service and managed care programs
work, and how the health plans offered in any area differ. Consequences of the
confusion are low HMO enrollment, misunderstandings about how to use health
insurance. and irrational purchasing. Almost all studies of the Medicare program
indicate that HCFA should provide more information to beneficiaries and promote an
informed choice.

At this time twenty-two states have purchased enrollment contractor services or are
in the bidding process to acquire these services for their Medicaid programs. States
have found that use of the broker is a cost-effective and efficient method of educating
recipients about the health plan choices available to them, Without a broker, states
have found, even when managed health plan choice is mandatory, up to 50% of
enrollees into state Medicaid programs do not make a choice at all and must be
assigned to a health plan. Benova's experience is that with information 90% of state
recipients make an informed choice. Enrollment contractors can be equally effective
in a voluntary environment where beneficiaries choose between fee-for-service and
managed health care. In fact, because without information many beneficiaries are
likely to do nothing, the provision of information through a contractor can increase
enrollment in managed care just by raising its visibility.

Description of Enrollment Contractor Services

Enrollment contractors operate as many other brokers (travel agents for example) or
retail establishments do. They pull together a set of competing products (health plans
in this case) into a convenient venue for choice, and they offer a single point of
purchase to the consumer.

Typical services include mailing written materials such as brochures, booklets and
comparison charts, call centers offering live operators trained to answer questions and
walk consumers through the choice process, seminars, one-on-one "choice
counseling” and enrollment processing. In many cases, the enrollment contractor can
replace services provided by individual health plans and reduce expenditures spent on
education and enrollment.

Technical Feasibility/Industry Experience

The enrollment contractor industry is working effectively with private and public
employers, with health care purchasing alliances, and is especially well established
with state Medicaid programs, At this time, 22 states have purchased enrollment
contractor services or are in the bidding process to acquire the services.


44

Chairman THOMAS. Three to five? My biggest fear is you are
wildly successful. We have created all of these incubator models.
We have nursed them through early infancy and childhood. Are we
going to require them somewhere along the way to mature into a
structure that would meet the standards if it were not for the test?

I mean, if we are successful in some markets and then walk
away, you have a model that could not exist in the real world that
has thousands of beneficiaries plugged into it. What is your exit
strategy, I guess is what I am saying.

Mr. VLADECK. That is an issue we always have with demonstra-
tion programs.

Chairman THOMAS. Yes, but this one may be-——

Mr. VLaADEcK. And I think the answer is, if we have not 3 to 5
years from now managed to change the law on Medicare managed
care, the exit strategy for these projects will be, in some ways, the
least of our problems.

We have had a lot of experience working with this Subcommittee
and with other parts of the Congress. In fact, this type of situation
came up the last time I was before this Subcommittee. We have un-
dertaken demonstration projects because there was an apparent
consensus of a broad direction in which public policy ought to
move, but a lack of certainty about the details; and so we set out
to test something. For whatever reason, the public policy process
did not move as quickly or in the direction, and we so have, for ex-
ample, four social health maintenance organizations which every-
body likes, which have enrollees who are very happy and well
served, for whom we have to keep extending the demonstration au-
thority. That is a risk inherent in this process.

Chairman THOMAS. Or waivers, as we have discussed.

Mr. VLADECK. Or waivers. That is a risk that is inherent in the
demonstration process.

Chairman THoMas. And then the problem of the inevitable fail-
ures of those models that are not as successful as we would like.
Since they came into existence by virtue of the incubation structure
anyway, are you planning on requiring those who are otherwise
real world to absorb the expense of bringing those beneficiaries
back into the structure, or is Medicare going to assist in dealing
with those failures so that there is no financial risk for people who
are otherwise doing what you have told them to do in the real
world?

Mr. VLADECK. No. I think it is fair to say, although maybe it is
not a fair policy, that all of the organizations that are participating
in the Choices demonstration are at full risk for the basic failure
or success of the program. For example, they are at risk to the ex-
tent that they may invest substantial resources in developing a
new payment method, or substantial resources in enrolling a lot of
folks in a PPO which does not then become permanent, or in a risk
adjustor which is then discarded. We have never promised and are
not in a position ever to compensate them for any of the losses as-
sociated with that.

Chairman THomas. In attempting to look at these new models,
have you had any discussion with any groups or entities about dif-
ficulties with other aspects of the law, antitrust or other areas, that
you can begin to build some understanding of perhaps some adjust-


8

beneficiaries do not need to take any action to continue their cur-
rent coverage and that the materials are there for information pur-
poses.

The second component is third party enrollment and counseling.
The independent third party contractor doing beneficiary education
will also conduct all HMO enrollment and disenrollment activities
and staff a toll-free counseling call center through which it will pro-
vide information to beneficiaries. This component of the demonstra-
tion reflects the trend among many private and public payers and
responds to feedback we have received from beneficiaries indicating
they would prefer having access to a third party when learning
about or making managed care choices.

The third component is market-based rate setting. Under this
demonstration, Medicare’s payment rate will be based on bids sub-
mitted by all Medicare managed care plans in the demonstration
site. Plans will bid on a standardized benefit package representing
the most common denominator plan offered in the area. The rate
derived from these bids will replace the current AAPCC. We have
reserved the right to set the rate at a level that will assure that
beneficiaries have access to more than one plan at the current com-
munity level of premiums.

In determining potential demonstration sites, we targeted those
markets with relatively high AAPCC rates, relatively low Medicare
managed care penetration, relatively healthy private sector man-
aged care penetration, and enough Medicare HMOs to make com-
petition feasible. In this process, however, we made one important
mistake. After we identified Baltimore as the most appropriate ini-
tial site, we did not adequately consult with interested parties at
the local level.

Fortunately for us, Mr. Cardin has shown some exceptional lead-
ership in calling together for a series of meetings, which he has
chaired with others from the congressional delegation, representa-
tives of State government, representatives of Baltimore’s managed.
care and other health care providers and the business community,
as well as beneficiary groups to help us work through the issues
raised by the demonstration. These meetings provide a level of re-
assurance that we will not proceed until we have convinced most
of the affected parties that what we are doing makes sense and has
addressed their needs and concerns.

In conclusion, Mr. Chairman, you and I and many witnesses be-
fore this Subcommittee over the years have expressed the belief
that Medicare needs to learn from the private sector by expanding
choices, helping beneficiaries to make informed choices, and re-
forming our managed care payment methodology. Each of these is
a complex task with no obvious solutions. We are fortunate that
our demonstration authorities allow us to test a variety of ways of
making these important changes as we move Medicare into the
21st century.

Of course, I am happy to answer any questions you might have.
Again, I appreciate the opportunity to appear before you today.

[The prepared statement follows:]


7

sus that our payment methodology, the so-called AAPCC which
bases payment on our experience in the fee-for-service population,
needs to be delinked from fee-for-service costs in a particular com-
munity.

Changes along these lines were incorporated, again, in all of the
Medicare reform proposals which were considered by the Congress
last year. In the absence of signed legislation, our broad dem-
onstration authority allows us to test potential improvements in all
of these areas. I will focus today on two demonstrations, our so-
called Medicare Choices Program and the competitive pricing dem-
onstration.

First, on Medicare Choices. The goal of Medicare Choices is to
provide beneficiaries with additional delivery system choices, and
especially to address the problem of the unavailability for most
beneficiaries of Medicare managed care choices in rural areas. We
are using the Choices demonstration to pilot test new options
which will give us experience and expertise in a wide variety of im-
plementation issues, if and when appropriate changes in the pro-
gram are enacted.

After a process that began with 372 expressions of interest, we
now have 25 award candidates: 9 provider service organizations, 8
provider-owned HMOs, and 8 other managed care organizations,
including 5 in rural areas. They represent a range of alternative
payment options, including risk corridors, partial capitation, and
blended payments. We expect all 25 of these plans to be certified
and ready to enroll beneficiaries by the beginning of next year;
some, we hope, will be ready well before then.

Should we be authorized in the future to contract on a perma-
nent basis with PPOs or with PSOs directly, the lessons learned
from Medicare Choices will significantly facilitate implementation.

Second, on competitive pricing, for years health care financing
experts, including many in the HMO industry, have encouraged us
to move from our current payment system to a more market-based
rate. However, it is not at all obvious how to set market-based
prices for Medicare managed care. There is a complex series of
questions, and the best methodologies are not immediately obvious.

Recognizing the need to seriously examine this approach and
how complicated it is, we have invested significant resources in de-
veloping a demonstration project. We worked with a number of out-
side contractors; we consulted with experts both from the academic
sphere and from the industry. We conducted a number of surveys
and focus groups on issues of consumer information and plan en-
rollment in order to design this demonstration.

It has three essential interrelated components: Beneficiary edu-
cation, third party enrollment and counseling, and market-based
rate setting.

In beneficiary education, we will contract with an independent
third party to prepare and distribute educational materials to all
Medicare beneficiaries in a specific market. These materials will
explain the features in both Medicare fee-for-service and managed
care and will provide comparative information on managed care
plans as well as on Medigap options. They will not advocate man-
aged care or fee-for-service Medicare, and certainly not any particu-
lar plan in comparison to others. They will also clearly state that


57

In delivering health care services, MSCH HMO benefits from the broad geographic coverage of its
extensive hospital and provider network. MSCH HMO has established an infrastructure to manage
the “risk” physicians and hospitals are undertaking through: (I) obtaining reinsurance protection
(2) the installation of a multi-million doliar information system to provide data on the delivery
and assessment of care (3) physician participation as members of the HMO Board of Directors
and (4) a physician directed medical management process. MSCH HMO is a network model
primarily contracting for physician services through a number of Physician Organizations (PO). The
physician-governed POs reflect the established patterns of treatment in the communities served by
MHS, SCH and affiliated hospitals. This network includes 27 hospitals and more than 1,200
physicians to potentially serve a Medicare population estimated at 432,000.

Chosen By HCFA

MSCH HMO was selected as a final Medicare Choices candidate because it met the criteria
requested in the Department of Health and Human Services’ Request for Proposal. In addition,
MSCH HMO agreed to the following:

+ Develop an urban/rural delivery component;

+ Offer a Self-Referral Option allowing out of network benefits when members
choose to see physicians other than their selected Primary Care Physician;
and

+ Participate in the test phase of alternative reimbursement mechanisms.

MSCH HMO was notified on April 15, 1996 of its selection by the Health Care financing
Administration (HCFA) for a site visit for the Medicare Choices Demonstration Project. MSCH
HMO is the only HMO selected by HCFA to serve Harris County, Texas (Houston) which includes
more than 256,000 Medicare beneficiaries. In addition to Harris County, MSCH HMO will provide
health care coverage in fourteen other Southeast Texas counties.

MSCH HMO is truly excited about being involved in the Medicare Choices Demonstration Project.
‘We have spent a great deal of time and resources in preparing for this project and have established
a positive working relationship with HCFA. This is an excellent example of the federal government
‘working with private industry for one common goal -- providing senior citizens with quality health
care in a cost-efficient manner.

MSCH HMO will provide the benefits of Medicare managed care to beneficiaries who have
historically been excluded from membership by current HMOs operating in the Houston area
because of residencies outside of the HMOs marketing service area,

MSCH HMO's proposed benefit structure will incorporate several features to make its Choice 65
plan appealing to Medicare beneficiaries:

* elimination of Medicare deductibles and coinsurance;
. nominal copayments specific to certain services;
‘+ removal of Medicare's limits on numbers of covered hospital and skilled

nursing facility days;

+ enhanced benetits with a preventive/weilness emphasis and an outpatient
prescription drug benefit; and

+ annual vision and hearing exams with benefits for eyeglasses and hearing
aids.

‘Also included as part of MSCH HMO’s standard Choice 65 plan is a Seif-Referral Option which
allows members limited access to providers other than their selected Primary Care Physician (PCP)
for consultative services and diagnostic testing. In addition to PCP access, the Self-Referral Option
offers an attractive element of physician choice.



40

I think HCFA understands now that perhaps what they thought
was a typical kind of a project, although innovative and novel, has,
in fact, generated a great deal of interest. These folks are not try-
ing to make sure it fails, but, in fact, to try to make sure that it
succeeds, because decisions that are partially overdue need to be
made, and frankly, as we were going through our look at changes
in the program, we were desperately searching for the kinds of
tools that you will be looking for in these demonstration programs.
Had we had them available, a risk adjustment mechanism, an abil-
ity to compare and contrast in a way that would allow us a dollar
profile, we all believe we could have done a much better job in try-
ing to restructure. So we are very interested in a positive way in
what you are doing.

Do you want to go into the competitive bidding, because we are
going to go to Choices right now.

Mr. McDermott. Could I just ask one thing on this?

Chairman THOMAS. Yes. Go ahead.

Mr. McDermott. Mr. McCrery asked a question about why you
did not go into the market, and Mr. Cardin just said something
which triggered a thought in my own mind. My father is 91, went
to church and came back with an envelope from an HMO that had
been handed to him by one of the other people there. And my fa-
ther said, “She said to me, ‘Ask your son if this is good for me to
get into.’”

One of the things that I would like to hear you talk about is
what the downsides of competitiveness are and what consumer pro-
tections exist for Medicare beneficiaries enrolled in HMOs. Mr.
McCrery was suggesting maybe we should just let the market be
a little freer. It is sort of managed competition, if you will, and you
did it for consumer protection reasons, I suppose. I do not know.

Mr. VLADECK. Let me, if I may——

Mr. McDermott. Because people 91 years old may have a hard
time deciding on which HMO to join.

Mr. VLADECK. Let me respond, not exactly to your question but
to the illustration, in a sense. We find, through formal opinion re-
search as well as just through people we talk to less formally, an
enormous desire on the part of beneficiaries in those communities
where there is a lot of managed care marketing going on for help
in figuring this out. That is where the third party information is
needed—not just the videos or the brochures that are done by a
third party, but the counseling, the 1-800 number, the neutral
party who will tell people, if you want to do x, here is what you
want to do. Here is the upside and the downside of each of these
choices.

In terms of the risks, there are three, I think, and Mr. Lewis got
to some of them. Obviously, we want to have an absolute floor that
we are continually raising in terms of the benefits and the quality
of service and protection of beneficiaries. We believe in continuous
improvement, not only on our own part, but on the part of the peo-
ple from whom we buy services. We think one of the dynamics of
better quality measurement, which is certainly true in the most
successful private sector firms, is that once you think you can
measure your quality performance, you keep raising the bar all the
time. Those are sort of preconditions.


81

Mr. Cardin has waived that power so that Dr. Vladeck does not
have to get his approval. I have told him to retain it for a while
so we will be able to work with those interested parties who, I be-
lieve, have very real concerns, because all of us want a successful
program.

This sounds to me like not only will we not be able to use the
data as extensively as we would like, but the location of the dem-
onstration may, in fact, leave a toxic waste site in terms of health
care delivery that we would not want to participate in.

I want to thank you both very much.

Ms. Newport. Thank you.

Ms. Borsz. Thank you, Mr. Thomas.

Chairman THOMAS. The Subcommittee stands adjourned.

{Whereupon, at 3:25 p.m., the hearing was adjourned.]

[Submissions for the record follow:]


28

want them to bid based on their expectation of what all their com-
petitors are going to do. And the best way to learn about that is
to look at what they did last year. So it has to be a very dynamic
process.

Mr. McCrery. Why would you not, though, just establish as the
basic plan the Medicare benefits that are specified in law today and
then allow the plans to offer whatever over and above that they
wish?

Mr. VLADECK. Because that would run a significant risk of leav-
ing a large fraction of those 12,000 beneficiaries who are now in
Medicare HMOs in the Baltimore area, worse off.

Mr. McCrery. What do you mean——

Mr. VLADECK. One reason we are not just turning it over to the
market is because real markets have downsides, and we are not
prepared to put beneficiaries significantly at risk for purposes of
testing a new approach.

Mr. McCrery. Why would they be worse off? Just explain that.

Mr. VLADECK. Because now, beneficiaries are getting about 70
dollars’ a month worth of additional benefits over and above the
Medicare standard benefit package because of the way we set our
prices at the moment. If we get bids for a price of the basic benefit
package, the plans that had the greatest need to stay in the market
would bid most of that $72 away and any beneficiary, to keep what
they now have, would have to pay a premium.

Mr. McCrery. Why could they not switch plans?

Mr. VLADECK. Because there would not be any plans in the mar-
ket at that point that could do it at zero premium.

Mr. McCrery. Why is that?

Mr. VLADECK. Because, as far as we know from the ACR, ad-
justed community rate, calculations and so forth, the supplemental
package is worth something like $70 a month and there are plans
that are currently providing the existing Medicare benefit package
for $70 a month less than where we would expect the bid price to
come out.

Mr. McCrery. Essentially, though, I think what you are saying
is you do not trust the market to work, so you want to build in gov-
ernmental parameters to make it work the way you think it should,
and———_

Mr. VLADECK. No, we think every market works in a way——

Mr. McCrery. That is a legitimate approach. I disagree with it,
but I think that is what you are saying. I just fail to see how you
can conclude that if you allow flexibility above the basic benefit
package of Medicare benefits that are required under law today,
you will not have a marketplace that responds to demands, and if
you already have in place seven plans that offer a benefit package
that is, in fact, above the required Medicare benefits today, I would
be very surprised if the market were to all of a sudden in toto drop
all of those extra benefits. Somebody is going to try to attract more
people by offering those benefits and then somebody else will have
to and somebody else will have to. That is how the market works.

Maybe I am missing something, but it seems to me that you are
concluding that the market will work in a way that I am not famil-
iar with.


45,

ments that need to be made in other areas of the law to better
allow these folks to do what they believe and you believe that they
would like to do?

Mr. VLADECK. Yes. One of the things we have not perhaps ade-
quately conveyed and that is relevant to both these demonstrations
but it is particularly relevant to part of the Choices demonstration
is how much learning about the implications of applying a theoreti-
cal concept in the real world occurs and how important that is both
to the provider community and to ourselves.

For example, all of us have spent an enormous amount of time
over the last year and a half in thinking about the implications for
policies, for laws, of provider-sponsored organizations and net-
works, their antitrust implications, their payments, and so on and
so forth, all of it around a set of hypotheticals.

Chairman THomas. And the risk, where does it fall and on who.

Mr. VLADECK. We hope that if we have half a dozen functioning
Medicare contracts with functioning provider service networks, that
the next time we are looking at broad policy, we will have some-
what more experience on which to base those discussions. Many of
those discussions will be around problems or issues or questions
that we do not anticipate at all at the moment, I would expect.

Chairman THOMAS. That, to me, will be the most successful as-
pect of it, that we find out what it is we did not expect to find out.

The gentleman from California.

Mr. Stark. Bruce, I just wanted to get on the record a clarifica-
tion. There was a story in the New York Times on Monday dealing
with the issue of HMO financial incentives to doctors to not order
tests or refer patients to specialists. I think that the headline was
inaccurate. So the question I pose to you is to ask, is it not correct
that you have not shelved the proposed rules but you intend to put
them into effect?

Mr. VLADECK. I believe there was a double negative in the ques-
tion, so let me just try to answer not with a yes or no.

Mr. Stark. Please.

Mr. VLADECK. On March 28, we published a final rule with com-
ment having to do with physician incentive arrangements in man-
aged care plans, and there were a variety of effective dates associ-
ated with those requirements. For the provision of stop-loss insur-
ance for physicians capitated under certain kinds of arrangements,
we have agreed that it is a better reading of the law that the effec-
tive date of implementation should be January 1, 1997, rather than
May 28, 1996. Other than that, we have changed none of the poli-
cies or specifics or decisions that are contained in that final rule
of March 28.

Mr. Stark. So those regulations will go into effect?

Mr. VLADECK. They will go into effect on a rolling basis, depend-
ing on the various effective dates of the various provisions.

Mr. Stark. As was published —

Mr. VLADECK. As was published on March 28.

Mr. Stark. And you will enforce them vigorously?

Mr. VLADECK. Vigorously.

Mr. Stark. Like a Doberman pinscher?

Mr. VLADECK. I am not sure that is the analogy I would particu-
larly propose.


27

do with those 3 million folks who are now getting additional bene-
its.

For purposes of this demonstration we are going to take the mar-
ket’s benefit package at the current market price, which is our
AAPCC, and see, if we lower that price, how many plans are able
to stay in that market at that package. That is exactly correct.

Mr. Stark. Thank you.

Chairman THOMAS. The gentleman from Louisiana.

Mr. McCrery. Thank you, Mr. Chairman, and thank you, Mr.
Vladeck.

I want to commend the administration for at least attempting to
broaden their horizons with respect to Medicare and the delivery
of health care to senior citizens in this country. But this whole dis-
cussion reminds me of a discussion of industrial policy, where the
government attempts to guess what the market is and what the
market demands and create policy to make it happen.

I am just wondering how much we will learn from these dem-
onstrations and if we will learn the right things, because you do
seem to be, with all of your parameters and your guidelines, lock-
ing in a market situation. And as you know, the market seldom
locks itself into anything. It is fluid. It changes from day to day,
much less year to year, and you have, I think, a 3-year demonstra-
tion project where you are going to lock in a market circumstance
that happens to be in place now.

I just want to urge you to reassess the flexibility that you allow
those players in the marketplace during this demonstration. I am
afraid if we lock in what we perceive to be the market for 3 years,
we may not learn the right things. We may, in fact, think we learn
that this does not work and the market cannot work when, in fact,
we have not allowed the market a chance to work.

Under our plan, of course, we had a lot more flexibility. The mar-
ket was pretty wide open, as a matter of fact, and I think we would
have learned more under our proposal than we will under yours.
But admittedly, I do not know enough about yours to say that to
a certainty, so I am willing to listen some more and I do commend
you for your efforts to try to learn how to open up Medicare.

But those are my concerns and I just wonder if you have any
thoughts about those.

Mr. VLADECK. I appreciate that, sir. Let me just say, we are not
seeking to lock anything in for 3 years. What we do is we abso-
lutely reserve the right to redefine the benefit package or the price
from year to year as the bidding process evolves.

The trick about the standard package really has to do with how
to get the right kind of bidding process going. If people who bid too
high can play games with their product after the price is estab-
lished, then that is like saying that when HCFA goes to buy com-
puters and specifies Pentium PCs with 20 megabytes of RAM, a
producer who came in with a bid over our price could say, Let us
just give you one with 16 megabytes and we will meet your price.
In any bidding process, you have to define the standardized prod-
uct of what the bid is for.

But it is a 1 year at a time situation, absolutely. In competitive
pricing you want competitors in the marketplace to look at what
the others are doing. You do not want them to collude, but you


64

around since 1981 and has been fully at risk under the Uniformed
pervices Family Health Plan. So this is more of the same business
for_us.

Chairman THOMAS, Thank you.

The gentlewoman from Connecticut.

Mrs. JOHNSON. Thank you, Mr. Chairman.

Mr. Agar, I notice that in your testimony, you mention that if
you had not had the HCFA designation, you really could not have
gotten into serving Medicare beneficiaries because you could not
have gone through the contortions necessary to deal with the State
regulatory system. I thought that was really interesting. Why is
that?

Mr. Acar. It is not so much the contortions. It is just that, like
many State insurance departments, they are overwhelmed with ap-
plications and this was a way to get their attention and focus and
cooperation so we could move through the exact same process they
put the insurance companies through but do it in a reasonable
amount of time.

Mrs. JOHNSON. So it is not that you do not have to go through
the State process, but the State process is geared to insurance com-
panies and managed care plans and you did not fit?

Mr. Acar. No. It is just that——

Mrs. JOHNSON. Would it have been harder for you to go through?

Mr. Acar. It is just that you cannot necessarily get their atten-
tion. There is a fair amount of feeling that the insurance companies
do not want to see providers getting in this business. There may
be some pressures there.

Chairman THOMAS. I would tell the gentlelady, we talked about
this briefly and one of the points that Mr. Agar made—he is afraid,
not to tell you what he told me, because he does not want to repeat
himself, but you need to know it, because she has been involved
and she missed your testimony—that in dealing with the Penn-
sylvania Insurance Commission, the top people and the Governor
were understanding of the slight differences. The bureaucrats down
who check the boxes wanted to check the insurance company boxes.
We do not care what you call yourself. Meet these requirements.
The folks up top were more understanding, so that there was a
willingness to facilitate.

Mrs. JOHNSON. Thank you. That was interesting and I enjoyed
your discussion. Thank you for being here today.

hairman THOMAS. Thank you very much.

Do any of you have any final comments?

Mr. Acar. Thank you very much.

Mr. Ryan. Thank you.

Chairman THOMAS. Good luck to you.

The second panel is Christine Boesz, the vice president for gov-
ernment programs, NYLCare Health Plans, and Janet Newport,
vice president of government programs of FHP. I want to thank
both of you for coming and your patience.

Any written testimony that you have will be made a part of the
record and you may now inform us in any way you see fit in the
time you have.

Ms. Boesz.


***NOTICE -- CHANGE IN TIME***

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

SUBCOMMITTEE ON HEALTH

FOR IMMEDIATE RELEASE CONTACT: (202) 225-3943
July 11, 1996
No. HL-20-Revised

Change in Time for Subcommittee Hearing on the
Administration’s Medicare Choices and
Competitive Pricing Demonstration Projects

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
Administration’s Medicare Choices and Competitive Pricing Demonstration Projects
scheduled for Friday, July 12, 1996, at 10:00 a.m., in the main Committee hearing room,
1100 Longworth House Office Building, will begin instead at 11:00 a.m.

All other details for the hearing remain the same. (See Subcommittee press release
No. HL-20, dated July 2, 1996.)


18

extent it applies there, as well, you are going to be setting up a
situation in which existing contractors may choose not to partici-
pate and you will be creating new ones that currently could not
exist without the agreement in the demonstration project.

I am interested less right now in your entrance structure—we
will talk about that in 1 minute—than I am in your exit structure,
if people choose to leave. I did not see this in your testimony and
I assume you have contemplated the downside. Obviously, in mar-
kets such as the Baltimore area, you have such a small number of
folks that you are dealing with, you may have problems down the
road, 3 to 5 years, in a market expected to expand significantly of
its own accord that probably does not need the full structure of a
demonstration project.

But have you sat down with the folks who modeled this to figure
out what happens with the confusion and disruption for the bene-
ficiaries if somebody pulls out?

Mr. VLADECK. We have talked about that and we have given it
a lot of thought. To take an example, it contributes to our selection
of Baltimore as a desirable initial site. In Baltimore, we have seven
HMOs with either existing or pending contracts with the Medicare
Program. At the moment, they serve a total of slightly fewer than
13,000 Medicare beneficiaries. So it is our feeling that if, as a re-
sult of the prices established in a competitive process, several of
them withdrew from the market, there would still be available to
beneficiaries a broad range of choices among competing plans.

Now, there is a risk, obviously, that some number of beneficiaries
would not be able to stay in the same plan if a particular HMO
chose not to renew its contract because of the new price. But again,
there are a small enough number of folks involved so that we be-
lieve we have done what we can to minimize the risk.

Obviously, anytime we seek to reduce prices in any service Medi-
care pays for, there is always the risk that certain providers will
drop out of the program.

Chairman THomaS. I guess, Bruce, I am less concerned about
that. If it is truly competitive and they cannot compete, I have no
problem with that. That is what we are looking for.

My concern is that you have set up an artificial structure in
order to run a demonstration in which someone complies with all
of the rules but cannot compete, given the way in which you have
artificially changed the market, and who then feels they must leave
and understands, then, there is no ability to come back in within,
what is it, a 5-year period? How do you justify refusing a contract
to someone who, except for the demonstration project that you have
imposed on the area, would otherwise meet the criteria and could
compete?

Mr. VLADECK. The only basis that I could see, Mr. Chairman, for
a plan that otherwise would seek a contract refusing to participate
is that they thought the price was too low.

Chairman THOMAS. We will get into that as we talk about specif-
ics, because I do not think it is just price that concerns a number
of people about the way in which you may wind up modeling it.

For example, as you set up what you believe to be the competi-
tive bid in the competitive pricing demonstration, you then lock in
not just—and correct me anywhere if I am wrong in my under-


82

STATEMENT OF CHIEF MASTER SERGEANT JAMES D. STATON, USAF (RET.)
EXECUTIVE DIRECTOR
AIR FORCE SERGEANTS ASSOCIATION

Mr. Chairman and distinguished committee members, thank you for this opportunity to
participate in your deliberations on expanding managed-care options for Medicare
beneficiaries. Although your focus is primarily on private-sector options, there is a
demonstration program that you could support that would affect hundreds of thousands
of Medicare-eligible military retirees. I am speaking of Medicare subvention.

Under current law, military retirees are thrown out of TRICARE, DOD's health care
program, upon reaching age 65. Although AFSA is unhappy about important aspects of
the program, it still represents a less expensive alternative when compared with other
health care options. Unfortunately, the only other option available to over-64 military
retirees is Medicare. Military retirees are the only federal retirees who lose their health
insurance at age 65. Some retirees may still use Military Treatment Facilities on a
"space-available" basis, but with the downsizing of the military infrastructure, even the
Department of Defense (DOD) admits that all of that care will eventually be eliminated.

These changes are in stark contrast to the fact that all retirees were promised, in exchange
for a lifetime of service, they would receive free, lifetime health care in the military health
system. However, even the replacement of that promise, TRICARE, with its cost-shares
and enroltment fees, pushes them out at a certain age. That is discriminatory and morally
wrong.

The most widely accepted alternative is Medicare subvention. With subvention, over-64
retirees could use Medicare to cover the cost of participating in TRICARE Prime, an
HMO program. However, because of budget-scoring technicalities, it has been difficult
to obtain even a demonstration program of subvention. While there is some agreement
within the administration that statutory language is not needed, it would simplify matters
to have that language.

There are two bills, H.R. 3142 and H.R. 3151, that would authorize subvention
demonstration programs. Even as these bills languish, DOD and the Health Care
Financing Administration (HCFA) are in negotiations to work out the details of a
subvention demonstration. Any subvention authorization language must come out of the
Ways and Means Committee. I urge this subcommittee to approve a demonstration project
and push for its approval in the full committee.

With subvention, DOD would charge HCFA 93 percent of the average cost of care for
Medicare patients in a given region. That is after DOD covers the $1.2 billion worth of
health care for Medicare-eligibles that it now covers annually. This is a complete winner
for DOD, HCFA, the beneficiaries and the taxpayers. Mr. Chairman, quite frankly, there
is no good reason for subvention not to happen.

Mr. Chairman, AFSA believes that the time to act is very, very soon. With Congress
planning to adjourn in early October, it is imperative that you and others on the committee
work for approval of legislative language that would allow DOD and HCFA to go forward
with a subvention demonstration. Military retirees deserve far more than they have
received, and no less than this.



55

to providers other than their selected primary care physician for
consultive services and diagnostic testing. In addition to PCP ac-
cess, the self-referral option offers an attractive element of physi-
cian choice and we believe that it allows our members a little peace
of mind, that they are not trapped inside an HMO.

During the first year of the demonstration project, we will shad-
ow price the Johns Hopkins University/Lewin Group risk adjustor
mechanisms. We will be paid from the AAPCC in the same manner
as any risk contracting HMO or competitive medical plan. Memo-
rial Sisters of Charity HMO will work with HCFA to gather data
at no cost to the government and test the risk adjustor system to
ensure that it works. In the second year, upon review, MSCH HMO
will activate the risk adjustor mechanism and the resulting capita-
tion payment.

We are not seeking reinsurance from HCFA, nor will we be ask-
ing for a risk sharing arrangement or a partial fee-for-service pay-
ment. We believe that our proposed plan is a straightforward pric-
ing approach which will allow HCFA to engage in a very clean test
of the risk adjustor mechanism over a diverse service area.

We are ready to launch the demonstration project. I would like
to thank you, Chairman Thomas, and the Subcommittee for the in-
vitation to speak. I would like to thank Congressman Archer and
his staff for their hospitality and support. Memorial Health Care
System and Sisters of Charity of the Incarnate Word Health Care
System have committed the resources necessary to launch the Med-
icare demonstration project immediately and remain committed to
offering managed care choices to the senior residents of southeast
Texas while supporting HCFA’s endeavors to control medical costs
for the Medicare-eligible population.

Thank you again. I would be happy to answer any questions you
may have.

[The prepared statement follows:]


79

For example, FHP is in an ongoing effort to expand our risk con-
tracting program. When we do go into a new market, the require-
ment that we have to have a base commercial enrollment, notwith-
standing years and years and years of experience and a good track
record in running the risk contract benefit program for our mem-
bers, forces us to start all over again. It does artificially limit the
choices to beneficiaries that otherwise could be made available in
a market much more quickly.

We do have systems in place to assure quality. We do have sys-
tems in place to inform beneficiaries fully of the choices and op-
tions that we provide within our program, which is not just one-
stop shopping. We have several types of benefit programs we can
offer. So I think it just is an artificial barrier to choice in markets.

Also, for example, if we have participation in Medicaid Programs
in some areas, that works against expanding our choice into Medi-
care because both of those count against you, if you will, if you
wanted to open up a different product line, if you want to call Med-
icare risk a product line. So I think it—the 50-50 rule—is just an
artificial barrier to choice.

Chairman THomas. Ms. Boesz, do you have any comments at all?

Ms. Boesz. I would agree with Ms. Newport in the sense that we
have a number of new starts, particularly in States like Maine and
in North Carolina, where we are in a joint venture with Duke Uni-
versity where we are being called upon to do Medicaid. It limits our
ability to get into the Medicare risk contracting because of the
Medicaid constraint. So it is a barrier.

Chairman THoMAas. Of the waivers that were discussed, obvi-
ously, the 50-50 rule, the 5,000 minimum, and the State licensure,
what we heard from Mr. Vladeck that it was not as difficult as they
might have thought initially in terms of the State license aspect
and that what we got was basically bumping the queue to allow
them to be processed sooner. Our discussions when we were con-
templating moving into the Federal level was a degree of opposition
from insurance commissioners or the appropriate agency in the
State to some of these newer structured entities.

If you had to create a hierarchy of waivers between, say, the 50—
50, 5,000, or the jumping the queue on the State licensure, could
you give me which one is the most valuable, maybe, from a busi-
ness point of view that you do not have to meet?

Ms. Newport. I think having a 50-50 waiver would be the most
valuable.

Chairman THOMaS. The 50-50 would be one?

Ms. Newport. Yes. I think that we go into States all the time
and just as part of doing business, some States have larger stand-
ards, if you will, in terms of the breadth and depth of the applica-
tion you have to send in. Some are less so. Licensure requirements
differ all over the board, but more States are becoming more so-
phisticated about that. But that is not something that is not dupli-
cated in the HCFA application process.

Chairman THOMAS. Ms. Boesz, I am having some difficulty un-
derstanding how HCFA, in its former multiple locations in the Bal-
timore area now and its very nice—I am trying not to call it a Taj
Mahal—in its very nice new building in Baltimore, and the reason
they were interested in part, I guess, in Baltimore, is that they are


85

‘There are numerous firms providing enrollment contractor services. With experience
in six states, and a 12 year history, Benova is one of the most experienced enrollment
contractors. However, several companies offer services to multiple states; a recent bid
by Pennsylvania for enrollment contracting attracted bids from eight different firms.

Successful enrollment contractors are technically sophisticated and experienced in
both communications and processing of enrollment transactions. They are well
equipped to handle enrollment data from multiple plans and transmit the data to the
sponsor be it a private employer or a public agency. Enrollment contractors are able
to adapt their systems, to the varying demands of each region, and mix of health plans.

Elimination of Biased Selection

‘One of the key concems about the managed care program for the Medicare population
is that it doesn't appear to save money. This contrasts with the private sector and the
Medicaid programs which have seen significant savings through managed care. There
is some evidence that a biased (or healthy) population joins managed care plans, while
sicker beneficiaries stay in fee-for-service. This can happen naturally, as beneficiaries
with extensive provider networks choose to maximize their flexibility by staying in
fee-for-service. It is also possible that health plan marketing practices encourage
biased selection by targeting the most healthy segment of the population. This
targeting could occur by the subtle messages portrayed by the pictures on health plan
brochures, by highlighting benefits that attract the most healthy, and by overt sales
practices.

Enrollment contractors will have no incentive or interest in biasing selection to or
away from managed care. It is a key hypothesis to be tested that the use of a third
party can reduce biased selection, and contribute to the use of managed care plans to
reduce Medicare health care expenditures.

‘Cost Effectiveness of Third Party

It is extremely expensive for the insurance and HMO industry to educate and enroll
Medicare beneficiaries into their programs. HMO executives tell us that it can cost
up to $700.00 per member to enroll a new member. Much of the effort is duplicative
as health plans spend millions to take enrollment from one plan to another. Medicare
anticipates spending around $10.00 per beneficiary on the enrollment contracting
service. This is consistent with enrollment contracting services in the Medicaid
program

One of the key hypothesis to be tested by a demonstration is whether a third party can
provide administrative efficiencies. However, some efficiencies are apparent. For
example, prudent use of the Medicare beneficiary list will eliminate the need to
recreate the list for marketing purposes. Giving the Medicare beneficiary basic
information about how the program works will eliminate the need for this to be done
by each health plan and sales agent. Third party enrollment can eliminate the
duplication of these processes. And beneficiaries who have made an informed choice
are more likely to remain with their chosen health plan which will reduce the number
of times that beneficiaries will need to be reeducated about their options and, from the
perspective of the health plans, this lengthens the revenue stream associated with a
new sale.


62

moving into both the Pennsylvania and the Houston area. Have
you had any feedback from any of your “competitors” or other folks
in the area about the fact that you do not have to comply with ordi-
nary rules, or “How did you get in? Can I get in?” Has there been
any discussion among folks in terms of this particular program?

Mr. Acar. I am not aware of any. No, sir.

Mr. Ryan. We have not had any discussions. I do think that
there is a quid pro quo. We are providing a lot of data. We are pro-
viding ourselves as a guinea pig to use the risk adjustor payment
mechanism and that does entail a bit of risk that the payments will
be less and that we will end up with less funds and less resources
to provide that care.

Chairman THOMAS. How are you structuring yourself to deal
with that financial risk? Are you using any of your other entities
as a support or a fallback?

Mr. Ryan. What we refer to as our parent——

Chairman Tuomas. You are going to assume, and I agree with
you, a relatively large financial risk on the Medicare enrollment.
How are you dealing with that?

Mr. RYAN. We are sharing the risk with our providers. We have
organized physician groups and the hospitals have organized. In
Texas, you must separate those in risk sharing arrangements.

Chairman THOMAS. Right.

Mr. Ryan. Those providers will be sharing the risk. We will be
providing a tremendous amount of information that will allow them
to be effective in sharing that risk.

Chairman THOMAS. Can you spend a minute or two talking about
how you determined the shared allocation on the risk basis in
terms of the providers? Is there a set percentage? Is there a respon-
sibility? Is there a specialty area? How do you deal with assigning
risK:

Mr. RYAN. We did go through a responsibility grid that is about
26 pages long. We had the actuaries involved to determine what
the traditional fee-for-service payment structure would look like
and how services, how they have traditionally been delivered and
how that allocation of resources traditionally.

Chairman THomas. I assume there was a discussion about how
that really is not real world, and if we are going to look at it, we
should look at it differently?

Mr. RYAN. We instructed our actuaries not to use the pie in the
sky method but to actually get down and look at who is giving the
care.

Mr. Womer. There is a further test on that, because when the
health plan then sends the contracts down to the hospital providers
and the physicians, we then send that same data out to then an-
other set of actuaries, independent of the health plans, and they
come back, because we have to justify to the physicians that there
is an equitable distribution of risk and capitation following that
risk. So there are a couple of checks on that methodology.

Chairman THoMas. Did you learn anything from this process
that you did not know that may or may not be applicable to your
other activities in terms of the relationship of providers in the
structure?


35

have today as the basic package and the supplemental being the
additional services that are bought beyond that.

What I do not understand is you are talking about a basic pack-
age and additional benefits. Are these “additional benefits” the
same as the supplemental package that seniors buy from AARP or
somebody else?

Mr. VLADECK. Let me try to explain, Dr. McDermott. Some of
this really is a regional difference.

Chairman THOMAS. Bruce, as you answer that question, though,
would you put some percentages on it, because I know it is not 100
percent that purchase some kind of additional coverage. If you
could go through if you are able, the percentage of beneficiaries
that purchase Medigap policies and the percentage eligible for ad-
ditional cost-sharing or premium contributions because of Medicaid
eligibility, so we have an idea of the universe.

Mr. McDerRmorr?. He wants to make it more complicated.

Mr. VLADECK. Let me start with the following and I hope these
folks here will hit me or something if I get any of these numbers
badly wrong.

Chairman THomas. I apologize for trying to make it more realis-
tic rather than complicated.

Mr. McDermott. Complete.

Mr. VLADECK. The issue is as follows. If you take the benefits to
which Medicare beneficiaries are entitled under the law with the
existing very significant copayments and deductibles and caps on
how many hospital days can be covered and so forth, that is what
we refer to as the basic Medicare benefit package.

All but about 12 percent of Medicare beneficiaries purchase or
have purchased for them some additional coverage. About 10 per-
cent of beneficiaries receive additional benefits through HMOs,
which is where most of this last discussion focused.

About three-quarters of Medicare beneficiaries purchase or have
purchased for them supplemental insurance policies, Medigap poli-
cies with the ten varieties, all of which pay most of the coinsurance
and deductibles for covered services and relieve some of the limita-
tions on the utilization. Variations in policies largely have to do
with additional benefits of which prescription drugs are the most
important and the most expensive, rather than reduced out-of-
pocket expenses.

About 12 to 15 percent of Medicare beneficiaries have very exten-
sive coverage of their copayments and of additional benefits by vir-
tue of their eligibility for Medicaid, and then about 10 percent——

Me McDermott. So their Medigap policy is essentially Medic-
ald:

Mr. VLADECK. Medicaid, that is correct.

Mr. McDERMOTT. Yes.

Mr. VLADECK. And then about 10 or 12 percent of beneficiaries
have no additional coverage at all.

Mr. McDermott. So they are simply bad debt to the system in
whatever place.

Mr. VLADECK. Or they are paying out of pocket. They tend to be
very much concentrated in the income band immediately above
Medicaid eligibility. These are primarily folks who cannot afford
supplemental insurance policies.


15

STATEMENT OF JANET NEWPORT
AMERICAN ASSOCIATION OF HEALTH PLANS

Mr. Chairman, | am Janet Newport, Vice President of Government Affairs of FHP, Inc.,
testifying today on behalf of the American Association of Health Plans (AAHP). AAHP
(formerly GHAA/AMCRA) represents more than 1000 HMOs, PPOs, and similar health plans.
Its member companies are dedicated to a philosophy of health care that puts the patient first by
providing coordinated, comprehensive health care. Together they care for more than 100 million
Americans, FHP has a long history of serving Medicare beneficiaries under the Medicare risk
contracting program. Today, we serve 391,000 beneficiaries in eight states.

We very much appreciate the opportunity to participate in today’s hearing and to share our views
on the Medicare Choices Demonstration currently under development by the Health Care
Financing Administration (HCFA).

During last year's debate over Medicare reform, the Association took the position that the
program must be modemized to reflect the dramatic developments that have occurred in the
private sector since Medicare was enacted over 30 years ago. In 1995, fee-for-service is no
longer the predominant approach to coverage in the private sector. More than 60 percent of all
working Americans with private health plan coverage now receive their care through HMOs and
other organized systems of care. By contrast, only about 11 percent of today’s Medicare
beneficiaries are in HMOs.

In testimony before this subcommittee nearly a year ago, AAHP stated that *Medicare can best
be strengthened by giving beneficiaries the same kinds of choices that are already available to
millions of working Americans, including federal employees and members of Congress." We
believed it then, we believe it now, and we believe that the Medicare Choices Demonstration, if
carefully structured, can be the first step in the process of updating the program.

In that same testimony, however, the Association also urged the Congress to hold all Medicare
health plan options to strong and comparable standards -- not just to ensure fairness and 2 “level
playing field” for competing plans, but also to ensure that all beneficiaries can have the same
confidence in their health plan regardless of the option they choose.

‘The current Medicare standards for risk contractors are designed to ensure that organizations
entering the Medicare program have the organizational structure and operational capacity to
provide health care to Medicare beneficiaries -- over the long haul, not for a year or two, While
‘we understand that demonstrations, by their very nature, involve temporary changes at least to
some rules and procedures, the underlying purpose of a particular requirement should be
carefully considered before waiving it in a particular case, Current standards include
requirements on:

+ Finaneial resources ~ Solvency and capitalization standards are designed to ensure that
Medicare contractors have the financial strength and stability to provide care to the
Medicare beneficiaries they enroll. Capitalization standards are particularly important for
new plans, because it is common for new organizations that provide as well as pay for
health care services to sustain losses in their early years of operation. This is due in part
to the fact that they must absorb the start-up costs of creating a delivery system and the
infrastructure that supports it. In addition, adequate solvency standards are particularly
critical under the Medicare program because Medicare beneficiaries use services more
frequently and intensively than younger populations.

+ State licensure -~ In addition to meeting federal Medicare program requiremeits, plans
must be licensed in States in which they operate. This adds a level of local accountability
to the federal regulatory safeguards that apply.

+ Quality improvement systems — Plans must have systems to monitor and assess
‘quality of care and must provide mechanisms for a plan's providers to work together to
address areas in need of improvement. Such systems include utilization review to ensure
the appropriateness of services provided to beneficiaries. Clinical decision making is the


36

In the HMO side of Medicare, the rules for the risk contracts do
not allow plans that provide the basic benefit package for a cost
less than we pay them to pocket that difference. They are required
to use that difference either to provide additional benefits at no ad-
ditional charge or to buy down the part B premium, which is an
out-of-pocket expense for beneficiaries that has not been part of
this discussion, or some combination of both. About 60 percent of
the Medicare HMOs provide the standard Medigap policy plus
some additional benefits without any additional premium to bene-
ficiaries because they are filling that gap between what they are
being paid and their costs of producing the basic package.

Mr. McDErRmotvT. So they produce the basic Medicare package
and then they buy—essentially, they are buying a Medigap policy.
I mean, that is what that money is. The “additional benefits” are
a Medigap policy for 60 percent of the people.

Mr. VLADECK. For 60 percent of the plans.

Mr. McDermott. The plans.

Mr. VLADECK. Sixty percent of the plans with which we have con-
tracts is actually a higher proportion of beneficiaries, because, obvi-
ously, the so-called zero premium plans are the most attractive.
But this is almost purely a regional phenomenon. In those parts of
the country where the AAPCC, our basic price, is high by whatever
measure, most of the HMOs are providing additional benefits at
zero premium. That includes southern California, most of Florida,
and many of the Northeastern cities. In those areas——

Chairman THomas. So another way of saying it, though, so peo-
ple can come through the back door, is that at the 95 percent of
AAPCC, the HMO can give you all of the basic benefits, we can
throw in a Medigap policy, and we do not charge you any premium
and maybe put drugs in, as well.

Mr. VLADECK. That is correct.

Chairman THOMAS. That is the other way of looking at it.

Mr. VLabECK. That is correct. And in the Twin Cities——

Mr. McDermott. And Seattle.

Mr. VLADECK [continuing]. And in Seattle and in Portland and
in those few rural communities that have Medicare HMOs, in order
to get the basic Medicare benefit package through an HMO, a bene-
ficiary has to pay a significant premium or the HMOs do not want
to have risk contracts with us at all and exercise the option they
still have under the law to be reimbursed on a cost basis. This is
increasingly the case in the Twin Cities.

So that is why there are about three separate layers of complica-
tion associated with this question, because in the high AAPCC
areas, like Baltimore or like southern California, we have three
sets of issues. One is that beneficiaries currently get expanded ben-
efits at no additional cost to themselves if they enroll in an HMO.
Second, we think that occurs in part because we are paying too
much in our rate in those communities. But third, one of the argu-
ments for why we are paying too much is the argument we hear
from people from Seattle or Minneapolis, that we are paying too lit-
tle in those communities. Yet we also tend to believe, and I think
the savings taken in legislation suggests that we are, on average,
overpaying at 95 percent of AAPCC.


51

This rich array of services for the elderly, when combined with Crozer-Keystone’s complete
continuum of care, is why we know our facilities, doctors and hospitals can do the best job of
integrating and coordinating the care of our patients, and of managing their care to ensure quality
while using the techniques of managed care to increase efficiency and cut costs.

HCFA’s designation of us as a Medicare Choices finalist, coupled with the national publicity
surrounding the awards, gives the program an imprimatur that engenders a spirit of enthusiasm
and cooperation both within and outside of Crozer-Keystone.

Our goal is to demonstrate that we can build on our existing relationship with our senior
community to overcome their concems about managed care, and to focus on keeping them
healthy while providing superior service when they get sick. We are known in our communities.
We belong to our communities. We are trusted by our communities.

MEDICARE CHOICES PROGRAM

‘Crozer-Keystone’s Medicare Choices demonstration product is designed to be another innovative
and creative service offered to our senior community. There are 95,000 Medicare beneficiaries
in our immediate market and more than 650,000 in the greater Philadelphia region. Under the
Medicare Choices program, our Medicare plan will offer three special features:

1) Zero premium, The beneficiary who enrolls in our plan will pay no additional premium
to the Medicare program.

2) Point-of-service option. Ours will be one of the first point of service products available
in our area, It's a flexible benefit plan that allows beneficiaries to choose from an
extensive number of in-network physicians, with an option to use any physician of their
choice with a modest co-payment. Market research indicates that this will be an
attractive benefit.

3) Rewards for healthy behavior, We will also offer members a number of health
education opportunities with rewards to encourage heaisny behavior. For example, we
will do an annual health risk assessment on every member. If the assessment shows that
a member has diabetes, we will schedule the member for the systems diabetes education
class. Upon successfll completion of the class, the member will be rewarded with
enhanced benefits such as eyeglasses, a hearing aid or exercise program membership.

It would be extremely difficult for Crozer-Keystone to offer a Medicare product in our market
without the HCFA designation. Currently, an insurance license is required in Pennsylvania and
other states in order to offer a risk product. However, we are not an insurance company. We are
a provider-sponsored organization (PSO) -- a group of local health care providers joined together
to deliver high-quality health care in our community.


24

ica runs their health system, and maybe because of Maryland’s
unique geography and the structure of their health care industry.
I do not know that, but I am concerned about your decision here.

Mr. McDermott. It would seem to me what I am hearing, Mr.
Vladeck, is that you have picked the wrong site, and the reason
given for that is that Baltimore is not like anyplace else in the
United States. It has a hospital rate setting mechanism. I
would——

Chairman THomas. I would tell the gentleman that is not the
only reason, but that is one reason.

Mr. McDermorr. A major reason, and that is the reason submit-
ted in the letter from the local area. You cannot generalize off of
us because we are different.

Chairman THOMaS. Right.

Mr. McDermott. I suspect that you are going to run into the
same buzz saw any place that you select as long as you have a pro-
vision that after HCFA selects the rate, anybody who is above the
rate has to charge a premium. I think that is the real reason the
Maryland HMOs do not want to get in and compete. They do not
want the market to set rates. The HMO people, I think, will resist
being put into a competitive position where they have to submit a
bid and then if they are too high, they have to charge their cus-
tomers a premium. I think you just have to face that fact right
now, that no matter where you go in the country, you are going to
run into the same buzz saw from the HMO operators.

Mr. VLADECK. If I may, Mr. McDermott, let me just say that I
think every community is unique in one dimension or another. The
marketing companies spent a lot of time trying to find a demo-
graphically typical census tract so they could test Olestra. We went
through a somewhat analogous process at the much larger unit of
analysis of the metropolitan area, which is the market for HMOs.
There is not a representative community for the Medicare Program
for these purposes, so that is true.

If I may just comment on your other observation, this is not an
issue we have encountered solely in the case of HMOs. It is true
that in many aspects of the Medicare Program, folks endorse in
principle the concept of greater marketplace competition or more
market-based pricing. Yet when we have tried to introduce com-
petitive pricing for durable medical equipment items, for example,
or clinical laboratory services, which were much more homogeneous
than HMOs, the existing providers opposed it. Across a wide range
of the sorts of things that Medicare purchases, in every instance,
the existing providers have opposed market-based pricing.

So we are very much cognizant of this opposition in the provider
community.

Chairman Tuomas. I stand in awe at my friend from Washing-
ton’s ability to divert just enough off of the target to miss it. I do
not disagree with anything that has been said in terms of people
trying to compete in the marketplace, but again, the concern is the
uniqueness of the packages that the HMOs offer, and they are
shaping those packages based upon their belief of where they want
to be able to outdo one another in a competitive structure. What
you are doing is creating a demonstration which homogenizes them
to a very great extent, to the point-——


54

Our mission is to minimize administrative overhead and maxi-
mize the dollars available for the delivery of health care. We do not
have stockholders. We do not have to send dividends or report our
earnings off to people outside of our community. Our mission and
our goal is to provide the quality care and provide the tools avail-
able for our providers to deliver quality care to our members.

On project management, the MSCH HMO will administer the
Medicare Choices demonstration project. This gives us flexibility
regardless of the regulatory rules. The use of the HMO entity en-
sures HCFA that the assumption of risk under the demonstration
program complies with all Federal and State laws.

In delivering the health care services, the MSCH HMO benefits
from broad geographic coverage of its extensive hospital and pro-
vider network. Our parents’ hospitals and physicians are very expe-
rienced in the delivery of very high quality care. MSCH HMO has
established the infrastructure to manage the risk that the physi-
cians and hospitals and other providers are undertaking.

The HMO will have to support the providers in managing this
risk, and we have four major ways that we do that. We obtain rein-
surance protection so that for catastrophic cases, we will have
other entities with very substantial resources there to provide help.

We have an installation of a multimillion dollar information sys-
tem to provide data on the delivery and assessment of care. This,
we feel, is a very integral part of our ability to be able to manage
the risk. It can identify those individuals who need special care. My
predecessor on the panel mentioned diabetes and our information
system will be able to identify from claims those individuals who
have diabetes and send out reminder notices to notify the providers
that we need to make appointments and we need to get those peo-
ple in to be able to deliver special care to them.

We were chosen by HCFA because we met the criteria that was
requested. We have developed an urban and a rural delivery com-
ponent. We wili cover 15 counties in southeast Texas, 14 which are
considerably rural. We will participate in the test phase and imple-
ment an alternate reimbursement mechanism. We have been noti-
fied that MSCH was selected for the award and are currently
awaiting a confirming site visit, and that is our current status.

MSCH HMO is truly excited about being involved in the Medi-
care Choices demonstration project. We spent a great deal of time
and money in preparing for this project and have established a
positive working relationship with HCFA. This project allows
MSCH to shorten the length of time that it would have taken us
to get our goal, and our goal is to provide the care, and it is the
common goal of providing senior citizens with quality health care.

With our rural service areas, MSCH HMO will provide the bene-
fits of Medicare managed care to beneficiaries who have historically
been excluded from membership by current HMOs operating in the
Houston area because of residencies outside of the HMO’s market-
ing service areas. Earlier in the day, Mr. Vladeck spoke of the dis-
crepancies between the AAPCC in urban and rural areas.

Some of our attractive features, I think you went ahead and
mentioned those earlier, so I will skip over that.

Also included as part of our MSCH standard Choice 65 health
plan is a self-referral option, which allows members limited access


63

Mr. Ryan. I think we are learning a great deal all the time as
we go along, and it has been a very interesting process to get a
large number of people, from the Sisters of Charity organization,
from the Memorial Health Care Organization, from physician
groups, together and talk about the common problems, because, es-
sentially, these people have delivered health care in a microcosm
or kind of separately.

The patient walks into their office. They do everything they can,
and then they send the patient on. What we are trying to do is
make sure the people have information as to what has happened
to that patient before, what does that patient need now, and what
is the result that we want.

Chairman Tuomas. Mr. Agar, any similar or dissimilar experi-
ences on the risk? How are you dealing with the risk question?

Mr. AGar. In a very similar manner, through actuaries based on
what has actually been spent in the past and what we think we
can do through utilization management. We have several years of
experience with full risk Medicare contracts with other payers,
where they pass the risk down to us and then we manage it. That
gave us the insight and the experience to go forward with this proc-
ess.

Chairman THOMAS. I would be interested in comparing the two
profiles that you come up with.

Mr. WoMER. Mr. Thomas, this is not our first endeavor into risk.
We have many contracts with the insurance companies for both
commercial and Medicare risk, so our position——

Chairman THoMas. I understand that, but the way you spin it
off is slightly different, is it not?

Mr. WoMER. No——

Chairman THOMAS. It really is not?

Mr. WomeR. No.

Chairman THomas. Good.

Mr. WomeR. The models are consistent. The models are consist-
ent by what primary care physicians take as the risk, what the
specialists do, what the hospitals do. They are very consistent be-
cause what you are looking for when you are dealing in risk is to
aggregate lives to offset adverse selection. So you want to keep
your models as consistent as possible and that way all the provid-
ers in the community know exactly what the routine of care should

Ye.

Chairman THOMAS. Some of our discussion in dealing with pro-
vider-sponsored organizations was that in the assignment of risk,
if it was something that was slightly different and the focus has
been shifted, that you would have either some new concerns or a
desire to redistribute the traditional structure. But you feel that
basically there was nothing new there.

Mr. WoMER. Yes, sir.

Chairman THOMAS. It was just a mechanical, in essence, ar-
rangement and the signoff is that everybody agrees that what you
are doing is appropriate with a third party check that, in fact, you
are OK?

Mr. Womer. That is correct. And Sisters of Charity, as an orga-
nization, has been dealing with a government at-risk program, the
Uniformed Services Treatment Facilities. That program has been




43

Chairman THOMAS. On the side of structure, you obviously want
to get as much innovation as possible so you are providing for a
number of waivers for groups that might come in.

Mr. VLADECK. Actually, the waivers are primarily of two kinds,
relative to our existing rules.

Chairman THomas. Obviously, 50-50.

Mr. VLADECK. They are of two kinds. The 50-50 rule and the
5,000 minimum commercial enrollment rule are the only major cat-
egories I can think of. There will be some——

Chairman THOMAS. One of the things we ran into as we were
looking at the Choices structure was the fact that you have existing
State licensing structure that may or may not allow for some de-
gree of diversity. My assumption is you are going to allow for mod-
els that would not otherwise be real world if they had to go
through the licensing.

Mr. VLADECK. That is correct, although we are actually finding,
at least in some of the States, that the perceived rigidities of the
State licensure process are not as great as had been perceived. In
other words, we have reserved the right to contract with an entity
that does not have a separate State license as an entity. On the
other hand, everybody is better off if the entity is appropriately li-
censed in the State, and as I suggested in my colloquy with Mr.
Lewis, in Georgia and in Pennsylvania and in several of the other
States, our involvement has caused the State insurance commission
or the State insurance department to respond more flexibly than
the providers initially perceived they might.

Chairman THOMAS. So we have a group of folks who may or may
not conform to certain rules but clearly probably get certain rules,
like the 50-50, and they are moving into the two dozen markets
and they are going to obviously be in competition with folks who
have met all those other standards. Some of them will already be
entities that are dealing with risk contractors under the other
rules. Where are you going to deal with, for want of a better term,
cannibalism, piracy, their structure taking from an existing struc-
ture that they service beneficiaries, because they know about them
and can almost do a fairly decent selection if they have a hospital
profile on them.

Mr. VLADECK. Real markets—I do not mean to sound sort of silly
about this—but real markets are messy. What we are seeing, for
example——

Chairman Tuomas. But we are creating an advantage for this
entity by waiving the rules. It is not a real market.

Mr. VLADECK. Except the alternative way of saying that is we
are reducing barriers to entry that are created by our existing rules
and thereby not acting in a protectionist fashion toward existing
participants in the market. As a transitional

Chairman THomas. I accept that. It is going to be messy and
there are going to be some painful areas and some people are going
to complain.

Mr. VLADECK. Yes.

Chairman THomas. I have a bigger question, and that is, what
is it, a 5-year study?

Mr. VLADECK. Choices, I think the contracts, which are annually
renewable, are three to five, depending on the market.


41

The third thing, and the hard thing, has been that as you put
economic pressure on the system, how do you structure the market.
in such a way that providers’ responses have to be in the direction
of getting more efficient or getting better, rather than in the direc-
tion of reducing what they are providing for that price or finding
a way to shift it to someone else, either in out-of-pocket costs or
in noneconomic costs, such as waiting times, difficulties getting
through on the phone, whatever, to the beneficiary.

That is the hard part, and if you put the question at that level,
it is one that every large purchaser has all the time and one that
we have lived with not only in the managed care setting, but in the
other areas of Medicare where we have tried to reform payment.

One of the issues on prospective payment for hospitals was, if
you lower the price, what is going to happen? The answer appeared
to be, to a considerable extent, hospitals raise their prices to folks
who are not constrained, and when they ran out of those folks, hos-
pitals began increasing their productivity, which was what we had
hoped to get 10 years ago.

So the issue is when you reduce the price you pay to someone,
there are a lot of different ways he can respond. How do you chan-
nel circumstances so the response is in the direction of greater effi-
ciency or a better product rather than in the direction of a reduc-
tion in the quality or the diversity or the characteristics of what
is being provided? One way you do that is by putting a floor on
what is provided in qualitative terms as well as in benefit package
terms, but the other way has to do with the way in which you
structure the bidding process. That is what we have been trying to
figure out.

Mr. McDermott. Thank you.

Chairman THOMAS. Let me explain part of my problem with that,
using DRGs as an example. Clearly, on diagnostically related
groups, you have a narrow band, but you basically put a dollar
amount on it and then let them figure out how to accomplish what
was required within that dollar amount.

To me, a better analogy to the HMO market would be to say,
This is what we have to spend. What can you do for us? Under-
standing the basic package is a given, what can you do for us at
that price, and let then the HMO figure out how they make the ef-
ficiencies or offer various products.

By your predetermining that efficiency is the goal that you are
shooting for, and locking all of the other variables into place, I do
not know that since we are now outside of a narrow, defined group
to the larger picture that all we get are people dropping out of the
marketplace. Because the only way I can make an adjustment
under that model is to add dollars, and dollars is the most impor-
tant motivator. That is back to my original concern about that
model that you structured, and I understand the difficulties.

Mr. VLADECK. I would argue that the model you are suggesting,
where we say, Here is our price, is very close to what we have been
doing over the last 10 years. When we tell HMOs, You must pro-
vide the basic benefit at that price and provide whatever else you
want; that is what we have been doing under the AAPCC.

Chairman THOMAS. I understand, but the dart you threw landed
at 95 percent and you built in the problem of the difficulty of the


66

the HMOs, who serve the Medicare enrollees, only adds an intru-
sive layer of government bureaucracy that seniors must go through.

We are also concerned that the pricing is based on a single
areawide rate and that it very possibly could be skewed because of
the current range of the AAPCC. We are willing to work with
HCFA on finding a way to handle this problem, but the way that
it is designed right now does not give us any securities in that
area.

We also want to point out that in the third party broker arena,
it is very problematic in that employers have collective bargaining
agreements and other employment contract areas that this will
interfere with.

You talked extensively this morning why Baltimore is a poor se-
lection. We believe that because of the hospital rate setting system,
there is no generalizability to other States. Hospital costs represent
approximately 56 to 57 percent of our costs, and so, therefore, we
are limiting what we are actually competing on with respect to

rice.

p The data reporting elements are cumbersome and we believe that
HCFA does not have the systems necessary to handle the various
types of data that they are asking us to submit.

Given all of these concerns, the implementation deadline is sim-
ply unreasonable. We are concerned that the project, as proposed,
will affect the Medicare beneficiaries most of all. It has the poten-
tial to reduce choice, raise cost, and limit access. We are asking
that you ask HCFA to stop the process and to work with us, as we
will work with you, in designing a better competitive bidding
project.

Very quickly, let me turn, if I may, to the Choices to point out
some of the differences that we believe exist. Choices is also a com-
petitive product. It is a competitive demonstration that involves
new payment models. The difference is that the framework is vol-
untary. It is a cooperative, collaborative effort between us,
provider-sponsored networks, and HCFA. The Choices demonstra-
tion stimulates entry of new plans into the marketplace, unlike the
competitive pricing demonstration, which we are afraid will raise
barriers and may even support the exit of some of the players.

We think that an important element of the Choices demonstra-
tion is that it focuses on new relationships between the various
parties that need to be involved. We think that these relationships
will offer new products to Medicare beneficiaries and new opportu-
nities for providers to participate in new products.

The major difference, in summary, that I want to point out be-
tween the two programs is the position of the beneficiary versus
HCFA, and that is the principal difference. In Choices, the bene-
ficiary is at the center and the beneficiary’s interests are being
served. In the competitive pricing project, HCFA itself is at the
center and the balance seems to swing over to HCFA’s interest to
just save dollars without sufficient concern for the beneficiary. I
want to point out that Choices is not a cookie-cutter approach and
it certainly shows the willingness of HCFA to work with the indus-
try and vice versa in a very collaborative effort.

In conclusion, I would like to say, as more seniors move into the
Medicare health care networks and as we continue to age as a Na-


n

MEDICARE CHOICES

The purpose of Medicare Choices is to test the receptivity of Medicare beneficiaries to a broad
range of managed care delivery system options and to evaluate the suitability of these options for
the Medicare program. Our goal is to provide beneficiaries with additional delivery system
choices and to increase options available to beneficiaries in rural areas. In addition, the Medicare
Choices demonstration will help to develop approaches to a wide range of implementation issues-
~ including payment methods, certification requirements and quality monitoring systems--which
would be associated with some of the new Medicare managed care choices piloted in this
demonstration. In developing the design specifications for Medicare Choices, HCFA and its
contractor consulted extensively with interested parties including managed care plans

In order to minimize unnecessary investment of resources by applicants, HCFA used a two-step
application process to select the managed care plans participating in the Medicare Choices
demonstration. HCFA first asked plans to submit a pre-application statement of interest and a
brief project description. After reviewing the pre-applications, HCFA then requested selected
organizations to submit more detailed proposals.

During the pre-application process, HCFA encouraged a broad range of managed care
organizations, including PPOs, PSOs and HMOs, to submit innovative managed care proposals,
such as point-of-service and primary care case management systems. We also encouraged
applicants to propose alternative payment methodologies such as risk corridors and blended
capitation payments and to indicate a willingness to test risk adjustment methods.

HCFA targeted nine cities as well as rural areas. The nine target cities were Hartford, CT;
Sacramento, CA; Jacksonville, FL; Atlanta, GA; New Orleans, LA; Columbus, OH, Philadelphia,
PA; Louisville, KY; and Houston, TX. These sites represent areas with high managed care
penetration in the commercial sector but low Medicare HMO penetration. We also accepted
innovative pre-applications from interested organizations outside these target areas. We received
372 pre-applications, representing nearly every State in the nation,

From these 372 pre-applications, HCFA selected 52 managed care plans for further consideration,
we requested these plans to submit final applications to HCFA by December 15, 1995. Plans
invited to submit final applications offered a wide range of managed care delivery models and
proposed a variety of payment methodologies.

We selected "award candidates” based on geographic factors, innovation of design, and ability to
meet eligibility requirements. We selected 25 award candidates for final consideration ~ nine
PSOs, eight provider-owned HMOs or providers with HMO partners, eight HMOs or other
managed care organizations.

The 25 award candidates submitted a variety of payment proposals -- thirteen requested 95% of
the AAPCC, five requested risk corridors around the AAPCC, seven requested other payment


53

Chairman THOMAS. Thank you very much, Mr. Agar.
Mr. Ryan, et al.

STATEMENT OF TIMOTHY J. RYAN, VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER, MEMORIAL SISTERS OF CHAR-
ITY HEALTH PLANS, HOUSTON, TEXAS; ACCOMPANIED BY
ALBERT BRADEN, III, M.D., REGIONAL MEDICAL DIRECTOR,
UNIFORMED SERVICES FAMILY HEALTH PLAN, SISTERS OF
CHARITY OF THE INCARNATE WORD HEALTH CARE SYSTEM,
HOUSTON, TEXAS; AND DOUGLAS X. WOMER, JR., VICE
PRESIDENT, MANAGED CARE AND BUSINESS DEVELOP-
MENT, SOUTHEAST TEXAS REGION, SISTERS OF CHARITY OF
THE INCARNATE WORD HEALTH CARE SYSTEM, HOUSTON,
TEXAS

Mr. Ryan. Thank you. Chairman Thomas, I am Timothy J. Ryan.
I am the chief financial officer of the Memorial Sisters of Charity
HMO in Houston, Texas. I would also like to introduce Dr. Al
Braden, a health plan participating physician, and Doug Womer,
the regional vice president for the Sisters of Charity of the Incar-
nate Word of Houston, Texas, who have accompanied me here
today.

We at Memorial Sisters of Charity have worked hard to develop
a strong program and I appreciate the opportunity to speak to you
this morning about our commitment to the Medicare Choices dem-
onstration project.

Memorial Sisters of Charity HMO is a provider-owned health
plan and that is part of an integrated health care delivery system
and that system is sponsored by two of the strongest nonprofit inte-
grated health systems in southeast Texas, Memorial Health Care
System and the Sisters of Charity of the Incarnate Word Health
Care System.

Both Memorial and Sisters of Charity have a long history of pro-
viding innovative and quality health care to special populations, in-
cluding Medicare and Medicaid. We have a commitment to commu-
nity service, and this shows in that 45 percent of our admissions
in Memorial and 41 percent of the admissions in Sisters are for
Medicare or Medicaid beneficiaries. Indeed, our organizations, our
parent organizations, as we refer to them, have been around in the
region, Memorial for 95 years, and Sisters of Charity of the Incar-
nate Word, 130 years.

Both of our parents organized the HMO and organized what we
refer to as the health plans, which includes an HMO, where we ob-
tained the license in December 1995 and an insurance company,
where we obtained the license in May 1996, and a management
company so that they could pursue their mission to provide quality
health care to the residents of southeast Texas.

The MSCH health plans filed as an integrated delivery network
in our application for HCFA for the demonstration project submit-
ted in August 1995. This filing was really a representation of who
we are and what we are. We are primarily deliverers of health
care. We have organized ourselves in such a way to be able to pur-
sue our mission to deliver health care and to be able to engage in
the business of delivering health care.


59

Chairman THOMAS. Thank you very much, Mr. Ryan.

Both of you were here when we talked to Bruce earlier.

Mr. AGar. Yes.

Chairman THOMAS. So you got the drift of the group's focus. I
think you appreciate that we were looking at it obviously as practi-
tioners rather than any kind of a partisan structure. So the ques-
tions that I would ask I think any of the Members would be inter-
ested in. Just because there is one of us, do not think that you are
going to be slighted on the questions. I guess if I had to choose one
to be here, I would probably choose me.

Mr. Agar, you talked about the benefit of being in the demonstra-
tion program because it allows you to, in essence, short circuit the
procedures in the State of Pennsylvania for getting licensed. Both
of you really are PSOs, right, in terms of structure, although you
call yourself an HMO from a delivery service. Mr. Ryan, are you
basically a PSO?

Mr. Ryan. Yes. Our organization is primarily interested in the
delivery of health care services.

Chairman Tuomas. Right. You may or may not know, we wres-
tled with this whole business of how to take this new entity in a
different world under our legislation and deal with insurance com-
missioners, given the broad range of experience and interest and,
frankly, sophistication, to a certain degree, of all of the States’ in-
surance commissioners. We came to the conclusion that really, to
make these work, if you created them, you were going to have to
have some kind of a Federal role—these were Republicans who
came up with the idea that you had to have a Federal role in terms
of approval.

Mr. Agar, you said it was months rather than years. What was
the kind of working relationship with the Pennsylvania Commis-
sion? Was it, we have to do it because HCFA said we did, so you
could be in the demonstration project but do not come back here
in the real world and expect to get what you are getting, or was
it a kind of a learning curve, where you were talking about what
you were trying to do, they were interested and wanted to try to
work with you?

Mr. Acar. Basically, the only thing that is short circuited is time
in this process. We are going through all the steps anyone else
would have to go through. But being a demonstration program that
HCFA had a timetable for, they were willing to work with us to
do this in time to—

Chairman THomas. And I am looking more to the attitude of the
people you were working with at the State level. They were sup-
portive —

Mr. AGar. Yes. They were very supportive and had worked very
hard to do this.

Chairman Tuomas. And the kind of questions they asked were
reasonable and appropriate, not-——.

Mr. AGaR. They were all the questions they ask of an insurance
company.

Chairman THomas. Right.

Mr. AGar. For example, we have——


13

HCFA conferred with many experts when designing the demonstration's bidding process,
including consultants at Abt Associates, a firm with a long history in health care financing policy;
academics recognized as authorities on competitive pricing at the University of Minnesota;
additional consultants with expertise in managed care; and other technical experts, including
representatives of the managed care industry and the beneficiary population.

In developing the education and enrollment aspects of the demonstration, we worked with
BENOVA (formerly knows as "Health Choice"), a contractor specializing in marketing and
consumer education in the private and public sectors, We also convened two expert panels
specifically to help develop the education and enrollment design specifications, one comprised of
managed care plans and the other of beneficiary-oriented representatives. In addition, another
contractor, Research Triangle Institute, conducted numerous focus groups in several sates to
determine beneficiaries’ preferred methods of receiving information on health insurance options
and their response to prototype educational materials. We also conducted 35 individual
interviews with Medicare beneficiaries in four locations to more carefully examine their reactions
to the prototype educational materials and to determine whether beneficiaries understood the
most important elements included in these materials.

Components of the Demonstration

‘The competitive pricing demonstration focuses on two of the three concerns outlined in my
introduction: altering the payment methodology for Medicare managed care plans and improving
the ability of beneficiaries to make informed choices about their Medicare options. The

demonstration has three essential and interrelated components: beneficiary education, third party
enrollment and counseling, and market-based rate setting

Beneficiary Education. HCFA will contract with an independent third party to prepare and
distribute a comprehensive set of brochures to all Medicare beneficiaries in a specific market
explaining the features of Medicare fee-for-service and managed care programs. The printed
materials will highlight issues to consider when choosing between these two delivery systems. The
‘materials will also include a chart comparing the benefit packages and premiums for all Medicare
managed care plans in the beneficiaries' local market area in addition to comparisons of Medigap
options. It will also include a list of HCFA-sponsored education seminars and informational
videos and the number of a toll free counseling call center. The materials will not advocate
managed care or fee-for-service Medicare. The materials will clearly state that the beneficiary
does not need to take any action and are intended only to provide information.

Third Party Enrollment and Counseling. The independent third party contractor will also
conduct all HMO enrollment and disenrollment activities and staff the toll free counseling call
center. This neutral third party will provide objective information to Medicare beneficiaries who
call seeking more information on their Medicare choices, as well as enroll beneficiaries who want
to choose a managed care plan by mail or by telephone. In the comeetitive environment of this
demonstration, managed care enrollment through a neutral third-party will help to ensure that


CONTENTS

Page
Advisories announcing the hearing ........ 2
WITNESSES

Health Care Financing Administration, Hon. Bruce Vladeck, Ph.D., Adminis-
trator een 6
American Association of Health Plans, Janet Newport 73
Crozer-Keystone Health System, J.H. Michael Agar 47
FHP, Inc., Janet Newport . 73
Health Plans of Pennsylvania, Inc., J.H. Michael Agar 47
Memorial Sisters of Charity Health Plans, Timothy J. Ryan 53
NYLCare Health Plans, Inc., Christine C. Boesz ... 65

Sisters of Charity of the Incarnate Word Health Care System, Douglas x
Womer, Sr .... 53

SUBMISSIONS FOR THE RECORD

Air Force Sergeants Association, Temple Hills, MD, James D. Staton, state-
ment ..... 82
Benova, Inc., Portland, OR, Lisa Adatto, statement . 83
National Association of Health Underwriters, David K. Kehl, statement . 87
Premier, Washington, DC, James L. Scott, letter ... 90

ap


34

package, and then slow the rate of growth in that benefit package
so you put pressure on that benefit package that is offering more
than Medicare benefits, which is why people will crosswalk into it.

So I do not want to cut those benefits; that is our current reim-
bursement rate. But I do not see your demonstration plan structure
giving us the information we need about what the competition
would be if we reimburse for the benefit structure, knowing that
we also are capable of reimbursing for more than the benefit struc-
ture. So I just leave you with those thoughts. I know you hear what
Iam concerned about.

Then let me ask you one other question about the Georgia mar-
ket. In many parts of the United States, because this is true of
Connecticut and not true of Boston. I do hope one of your dem-
onstrations will be in Boston. I do not know whether it is. I know
Hartford did not get one.

_Mr. VLADECK. No.

Mrs. JOHNSON. That is really unfortunate, because they went
from one to four zero premium plans in 3 years and they have the
long experience of the Harvard HMO and that is too bad. That
would have been useful, because the Northeast is a different kind
of environment.

But in the underdeveloped managed care plan areas, could you
not start there with the basic benefit plan premium, so you do not
have the two-tiered system? Do you have any HMO risk contracts
in Atlanta?

Mr. VLADECK. We do have some existing ones. In some of the
low-rate areas where we have been in the Medicare HMO business
for a while, like the Pacific Northwest or the Twin Cities, we have
publicly supported legislation to raise their payment rates on the
theory that the way the current system was working was perhaps
inequitable to them. So to go into those markets in the first round
and to say, We want to drive down the price by the use of the mar-
ketplace, did not strike us as a particularly wise strategy.

Mrs. JOHNSON. No, but it does make it even more important in
terms of the usefulness of these results that in that market, you
have a price that is only package oriented, but that you have in
other markets, like in the Northeast, you have a way of making
comparability. So you have to do something about having a price
that is package oriented, that is current Medicare benefit oriented
or you will not have comparability. How you deal with the dispar-
ity} I think, is a better problem to try to resolve temporarily than
not to have the competition or the competitive experience of the
Medicare basket rate.

Thank you, Mr. Chairman.

Chairman THOMAS. The gentleman from Washington, I think,
wanted to inquire.

Mr. McDermott. Listening to Mr. McCrery and Mrs. Johnson
and myself and all the rest of us, I would like to ask a couple of
definitional questions, because I have a little problem here. A sen-
ior citizen today, if they get Medicare, they receive the services
under that plan, and then they can buy a supplemental policy. This
supplemental policy can be a cheap one or a fancy one, depending
on how much money they have or what they think their health
needs are going to be. So I think of the Medicare package that we


16

responsibility of the plan's health care providers, and it is through their efforts that quality
is evaluated and sustained.

+ Delivery system -- Plans must demonstrate that they have provider networks in place that
will afford access to needed services for all enrolled beneficiaries.

+ Marketing - Plans must comply with fair marketing practices to ensure that,
beneficiaries have the opportunity to make informed choices among the options available
to them,

+ Management systems - Administrators must be prepared to operate in many arenas ~

member services, provider relations, enrollment and disenrollment procedures, coverage
decisions, premium development, regulatory compliance, and other basic functions that
support a delivery system.

+ Information systems ~- Plans must have data systems to carry out enroliments and
disenrollments and 1o provide information on beneficiary satisfaction, the utilization of
services, and other aspects of plan performance.

+ Enrollment composition (50/50 rule) -~- While the 50/50 rule, which requires plans to
have a minimum commercial enrollment, is not a particularly good proxy for quality, it
has assured some equivalence between plans available to Medicare beneficiaries and
those available to the rest of the population.

After considering the underlying purpose of these requirements, HCFA should ask whether
alternative safeguards are in place and whether beneficiaries will enjoy the same level of
protection under the waiver as they do under current policy. As we wamed during last year’s
debate, the greatest risks to Medicare reform lie in its initial stages, and it will not take many
failures to discredit new initiatives in the eyes of the public. We believe that this is as true for
reforms implemented through demonstration projects as it is for legislative initiatives.

In deciding whether to waive a particular requirement, agency officials should also ask
themselves whether they would be prepared to extend the same treatment to other Medicare
contractors if the demonstration is ultimately judged a success. In our view, the purpose of a
demonstration is to identify a basic set of regulatory requirements that can then be applied to all
plans serving Medicare beneficiaries ~ not to develop a series of “carve outs" or special rules that
deal with a particular organization's idiosyncracies. Unless this is understood at the outset,
inappropriate waivers may be granted, and HCFA will run the risk of creating demonstrations
that “demonstrate" little except the advantages and failures of special treatment. For example, in
some instances states have applied lower solvency standards to Medicaid plans than to plans
serving commercial members. The resulting financial instability of some of these plans has
jeopardized health care services for Medicaid beneficiaries.

Finally, in negotiating contracts with demonstration participants and deciding which waivers to
grant, HCFA should take into account the impact that its decisions may have on the competitive
environment in specific markets. Even if the geographic areas selected by the agency had
relatively low Medicare HMO enrollment, this would not necessarily mean little disruption ;
would occur if a Choices Demonstration entered one of these areas.

In Houston, for example, one of the final candidates is a provider-based organization with whom
my plan -- FHP -- contracts to provide services to our members. If the 50/50 rule is waived in
‘order to permit this group to enroll Medicare beneficiaries immediately, it will have every
incentive to market itself to the beneficiaries it is already serving under contract with FHP, rather
than to seek out new enrollees. And if greater flexibility on benefits and favorable financial
terms are added to the built-in advantage provider-based groups have because of their existing
relationships with Medicare beneficiaries, it may well succeed. The result will be a shifl of
enrollment from FHP, which has invested substantial resources to enter the Medicare market in
Houston, to a newly recognized organization —- but with no real change in the facilities that are


22

I think the Maryland folks would tell you that is because the rate
setting commission process in Maryland has already gotten savings
as substantial as any the plans could achieve on their own.

Mr. McDerRmoTT. Mr. Chairman?

Chairman Tuomas. I am less concerned about the difficulties of
doing it in Maryland, and I know the gentleman from Maryland
has had some great concerns not only in the way it was set up and
who was involved but what may occur within the State. That is not
my concern.

My concern is that if this is a test and we are only going to have
three of these locations, the primary one you have chosen, the ini-
tial one, the one that is going to be focused on a lot, has a structure
so different than anywhere else that I am trying to determine how
much value for purposes of comparison with other areas in the
country choosing Baltimore in Maryland with the all-payer rate on
the hospital structure will help us in terms of the value of this
demonstration across the United States. That is my concern. I will
leave the difficulty in Maryland to the gentleman from Maryland.
I am concerned about the universal value of the demonstration
project because of that.

Mr. McDERMOTT. Go ahead.

Mr. VLADECK. Do you want to add to this, because I could re-
spond to Mr. Thomas.

Mr. McDermott. I do not understand what the argument here
is, why that makes it more difficult in Baltimore. In an HMO, you
have physicians’ services and you have nursing services and you
have in-home health services along with a variety of other things
and you have hospital services. This is one setup in which the hos-
pital services are factored out of the equation, so you can see
whether the cuts can be made in the provider services, whereas in
San Francisco or in some other place, there is no fix, so maybe the
costs can be cut in hospitals.

I think Baltimore is a good place to have an experiment because
it is the only place in the country where you have the hospitals
factored out. That is not an issue in their ability to cut costs. I
might be mistaken in my understanding, but——

Mr. VLaDECK. Let me, if I just might——

Mr. CaRDIN. Before you respond, if I might, I want to disagree
with the premise by both the Chairman and Dr. McDermott in that
it seems to me that managed care companies advertise that they
save money by managing care, not by discounting. I just take ex-
ception to the fact that discounting saves money. I think it just
shifts the costs of the services in the country and a good managed
care company will save money by managing care and utilization
and not by seeking to get a discounted service.

I would hope that, particularly when we look at the way the Fed-
eral Government buys services, that we would be as competitive as
anyone else in what we pay.

Mr. VLADECK. Thank you. If I may just add a point, we spent a
lot of time on this issue. There are no three metropolitan areas in
the United States which one could claim in this instance, or prob-
ably most others, were representative of the circumstances in the
Medicare Program throughout the country.


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, Jk, 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, lowa JOHN LEWIS, Georgia

SAM JOHNSON, Texas LF. PAYNE, Virginia

JENNIFER DUNN, Washington, RICHARD E. NEAL, Massachusetts
MAC COLLINS, Georgia MICHAEL R. MCNULTY, New York

ROB PORTMAN, Ohio
JIMMY HAYES, Louisiana
GREG LAUGHLIN, Texas
PHILIP S. ENGLISH, Pennsylvania
JOHN ENSIGN, Nevada
JON CHRISTENSEN, Nebraska
PHILLIP 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

a


46

Chairman THOMAS. I was going to say a Saint Bernard, but that
is OK. [Laughter.]

Mr. Stark. Thank you very much for that clarification.

Mr. VLADECK. Thank you, sir.

Mr. Stark. I thank the Chairman.

Chairman Tuomas. I think the gentleman from Washington has
a parochial question.

Mr. McDermott. We will not get into which dogs we look like,
right? [Laughter.]

You are preparing to do a demonstration project in Seattle,
which I am eager to see the results of, but it roughly looks to me
that the purpose of this project is to develop a better set of risk ad-
justors. Is it possible to do that? What I do know is that you are
having some difficulty in getting enough participants to actually
have a study. You had four HMOs that said they would come in
and then one dropped out and so now you are down to three. If
anybody else drops out, it is not a good demonstration. Is that a
fair assessment of what is happening?

Mr. VLADECK. I think that is entirely true and it gets back to the
question of keeping volunteers in these programs. It is both true
and ironic that in those communities in the United States that
were the earliest to experience widespread managed care penetra-
tion, both in the private sector and Medicare, many of the best es-
tablished plans have the most difficulty coming up with new data
systems and new informational processes that have to be part of
any kind of demonstration.

Mr. McDeRmor?. Are you saying because they are so lean and
mean that they do not have the money to give you the kind of en-
counter data you want, or are you implying something else?

Mr. VLADECK. No. I am really implying that the older group
model plans traditionally did not maintain encounter data, in part
Because they were not in the fee-for-service business, whereas the
newer IPA kinds of plans or some of the insurance-based plans that
came out of a different world were much more likely to have
encounter-specific data from the outset. That has been part of the
issue.

Mr. McDermott. Does that suggest, then, that the design of
your model is one that will exciude all the not-for-profits that start-
ed a long time ago and really will only be accessible by those new
HMOs that have come on in the last 6 or 7 years?

Mr. VLADECK. No. With the help of the largest, oldest, most so-
phisticated nonprofit plan in the Seattle area, we had hoped to test
various ways of getting at encounter-level information to permit us
to test that whole idea and find out whether we really needed to
have it, whether there are other ways to get that information, how
standardized we need it, and so forth.

But I think it is safe to say that we cannot envision a fair test
of any change in the market in the greater Seattle area without
Group Health, to be specific, because they are so significant a pro-
vider to our beneficiaries. We have been working very closely to try
to develop a demonstration that makes sense for all the plans and
still meets some of our needs for information and still keeps the
plans interested.


30

overshot the mark by a little bit in their desire to encourage entry
of managed care plans.

Chairman THOMAS. It was an attempt to figure out where we are
supposed to be. We did that with a number of standards in the en-
vironment and the rest, and then as you get closer to it, you take
a look at how realistic you are and you try to adjust, and that is
what you are doing.

Obviously, we still want to talk about the Medicare Choices dem-
onstration. The study structure there, frankly, is a whole lot easier
and, I think, better, and we will get to that.

I want to introduce one additional complication as we go along,
because no one has mentioned the third party broker structure
rather than the plans themselves enrolling, and, of course, I think
the plans sometimes think that rather than just a pure sales job,
there is an educational job about the new culture in which someone
is about to enter and they believe that is an important aspect of
getting people off on the right foot. The third party broker may or
may not provide that beyond the pure education.

So at some point, we want to spend just a little bit of time talk-
ing about that, what experiences we have had, if there have been
adjustments in this third party broker structure as opposed to
other models that you have seen. But other Members want some
comments about the competitive bidding and I believe the gen-
tleman from Georgia, Mr. Lewis, wanted to get in for 1 minute.

Mr. Lewis. Thank you very much, Mr. Chairman, and Mr. Chair-
man, I will be very brief.

Mr. Administrator, first of all, let me congratulate you for trying
to be creative. I think you are taking the right approach. It is good
to try new ideas, but they must be tried first on a small group with
a lot of flexibility so that our seniors will not be harmed. I think
well-thought-out demonstration projects are good and necessary
first steps. I would especially like to compliment you on your efforts
to develop a way to provide seniors with impartial information
about the health plans that are available.

It is my understanding that some of these demonstration projects
will focus on improving monitoring the quality of care provided.
Could you discuss some of these ideas?

Mr. VLADECK. The monitoring of the quality of care, sir, is that
the question?

Mr. Lewis. Yes, sir.

Mr. VLADECK. There are several dimensions to that. As part of
our evaluation of the Choices demonstration projects, we have been
working with the RAND Corporation to develop new technologies
or processes by which, from a standardized information set col-
lected at each encounter between a patient and the health care sys-
tem, we could develop sort of a computerized early warning and
monitoring system. We hope to have that system ready to test at
about the same time that the first of the Choices sites begin oper-
ation.

That will be in addition to, not to the exclusion of, our existing
quality assurance techniques. Our existing techniques take essen-
tially two forms. First, we have very detailed requirements for the
internal quality assurance processes that the plans themselves
maintain; and we monitor their operation of those quality assur-


39

We are using a third party contractor to bring in the Medicaid pop-
ulation, so there will be a significant change in the Maryland HMO
community. There is a great deal of concern by our State as to
whether they can have a successful integration of the Medicaid
population into HMOs at the same time that there is a Medicare
pilot program moving forward. That issue is being presently ad-
dressed by HCFA and the State of Maryland.

I might tell you, it is anticipated that the legislature in January
will be considering expanding that program to include also long-
term care, so it is a significant change taking place in Maryland.
There is concern as to the capacity of the State and the managed
care operators to handle a pilot program all at once and we need
to keep this Subcommittee informed as to how those discussions
are progressing.

The other issues that have been brought up, I think, are very im-
portant. We have talked about the competition and competitive
pricing. That is going to be true wherever this type of a pilot pro-
gram is started and we need to make sure that, in fact, we will
have competition and a significant number of plans offered to our
seniors.

The AAPCC rate differential in Baltimore concerns me because
it would be very easy to go and try to enroll a person, an elderly
person who lives right across the Bay Bridge, where the AAPCC
rate is so low, where you are going to be now using an average rate
which would reward significantly a plan that enrolls individuals in
that area. This is true in Baltimore, but I believe is true in many
other areas.

The consumer protection issues, the use of third party brokers,
these are all matters that need to be fully addressed before moving
forward with a pilot program regardless of where that pilot pro-
gram takes place.

The integration of our seniors who currently have multiple op-
tions available and the confusion that will just normally be associ-
ated with any new program need to be addressed. In Baltimore, we
are one of the sites that have a waiver, where our seniors currently
are receiving more benefits than just the normal Medicare benefits
under a cost program. That is present in five locations in the coun-
try. We want to make sure the seniors that are enrolled in that
program are not confused with this new effort.

So there are a lot of problems that have been raised that will
occur regardless of what site a pilot program moves forward with
that need to be addressed before we move forward.

So, Mr. Chairman, I appreciate your giving me, at least, this op-
portunity to explain to the Subcommittee. I want to thank HCFA
for the close working relationship that we have now established. It
seems to me that if we proceed in Baltimore, there will be some
modifications to what has been already advertised. It is extremely
important that this Subcommittee be kept informed of what is hap-
pening in Baltimore, or other sites, because I do think an awful lot
depends on this program being done in a successful manner if we
are going to be able to move forward in giving more options to our
seniors in managed care. Thank you.

Chairman THomas. I thank the gentleman for his comments.


89

Finally, it should be remembered, from a consumer protection standpoint, that agents must
be licensed by the state. They are currently tested by each state for competency, undergo
a criminal background check and a fiscal responsibility check, and must take education and
continuing education courses prior to becoming licensed or having a license renewed.

Will these standards be applied to third party contractors or HMO employees? Many
states currently do not require licensing for employees of insurance companies or managed
care plans. The result is an unlevel playing field in which employees with little insurance
knowledge may give misleading or faulty information.

In conclusion, we believe that independent, licensed, professional insurance agents are best
equipped to bridge the gap between Medicare beneficiaries and new Medicare choices.
When it comes down to relying on unlicensed company employees or unlicensed
employees of government-financed third party contractors, versus licensed, experienced
professional agents free of charge to the government, why not allow agents the
‘opportunity to show how they can make the programs work for our senior citizens?


25

Mr. McDermott. In—

Chairman Tuomas. Just 1 minute. To the point that above the
competitive bid, not below, above the competitive bid, the only op-
tion is the price change, except for what you call the internal effi-
ciencies and the rest.

We are going to hear testimony, for example, from the Memorial
Sisters of Charity Health Plans. They, in their testimony, outline
their HMO program. They are very proud of the fact that they
eliminate the Medicare deductibles and coinsurance. They have
nominal copayments specific to certain services, removal of Medi-
care’s limits on numbers of covered hospital and skilled nursing fa-
cility days, enhanced benefits with a preventive wellness emphasis_
and an outpatient prescription drug benefit, and an annual vision
and hearing exam with benefits for eyeglasses and hearing aids.

That is the package they have shaped that they think is a good
market package. If they wound up in your study above that com-
petitive bid, do you not think, to get a true feeling for a competitive
structure for HMOs, they ought to be able, if they are above the
competitive bid, to adjust that package?

Mr. VLADECK. Mr. Thomas, the package that we have defined for
the Baltimore demonstration is the package that all the plans are
offering in the existing market.

Chairman THoMas. I understand that.

Mr. VLADECK. The market has produced convergence of benefit
packages. That is what the existing market does, it drives the
plans toward convergence of packages. All we are saying is, we
want to set a price based on the standard package in the existing
market.

Chairman THOMAS. But what you are doing is taking an existing
market, determining what you believe to be the competitive price,
whatever formula you use, and then telling people, the next year,
that is the competitive price. And your mix of last year, if it does
not bring you to that competitive price, cannot be changed if you
are above it except to add dollars.

Mr. VLADECK. During this period.

Chairman THomas. If I knew that that was what was going to
occur, the whole essence of the HMO operation is I will make an
adjustment on the vision or the hearing. I will change it because
the market has now changed. You are changing the market by vir-
tue of coming in, arbitrarily setting a “competitive price” based
upon last year’s model and telling everybody this is now the model.
You keep saying “we,” government is going to come in and freeze
the market. It may have been a competitive market at one time,
but you do not allow the competition to see where the shifts will
occur if you are above the competitive price except in the dollar
game, which to me is not worth much of a study.

Mr. Stark. Mr. Chairman.

Chairman THomas. Certainly, the gentleman from California.

Mr. Stark. Bruce, let me just come back to see whether I think
we may be getting a little off the issue here. The demonstration,
as I thought I understood it, has two principles. One is to figure
out a way for the government, HCFA, to pay a managed care plan
for the basic plan. Now, there may be some reasons you have to
pay for more, but for the basic plan. And two, to cover issues of


90

PREMIER

duly 26, 1996

Chairman Bill Thomas
Subcommittee on Health
Committee on Ways and Means
U.S. House of Representatives
1136 Longworth HOB
Washington, D.C. 20515

Dear Chairman Thomas:

I am writing today in strong support of HCFA‘s planned
competitive pricing demonstration for Medicare risk contracts.
The demographic realities that the aging of the Baby Boom
generation will ultimately force on the Medicare program demand
all reasonable alternatives to reduce expenditures and improve
program efficiency be seriously considered. Using competitive
pricing, or competitive bidding, to determine Medicare payment
rates for capitated contracts, laboratory services, durable
medical equipment, and even selected high cost and high volume
surgical procedures is a promising cost containment approach that
deserves testing and evaluation.

There are many design issues involved in any complex
demonstration. HCFA should work cooperatively with existing
health plans and emerging provider sponsored networks in
resolving specific demonstration design questions as they might
arise. Holding hearings on the demonstrations allows for open
review of HCFA’s procedures. HCFA should carefully review and
respond to all concerns raised by the providers before proceeding
with the demonstration. But, we should not let the special
interests use this process to deter the need to move forward with
this demonstration.

Mr. Chairman, my statement of support for the competitive pricing
demonstration is made knowing full well how painful a truly
competitive health care market place will be. There is enormous
excess capacity in all elements of the current health care
delivery and financing systems. Although competition, based on
price and quality, is the best mechanism to squeeze out this
excess it will be painful. ‘The Medicare program provides a
statutory entitlement for beneficiaries, not for providers or
plans. That fact is too often ignored in policy debates.

Sincerely,

{

President, Premier Institute
Washington, DC
Pri and nerd compas



STATEMENT OF BRUCE C. VLADECK
ADMINISTRATOR
HEALTH CARE FININCING ADMINISTRATION
DEPARTMENT OF HEALTH AND HUMAN SERVICES.

INTRODUCTION

Good morning. I am pleased to be back to testify before this subcommittee. As was the case last
time I appeared before you, my subject today involves demonstration projects of the Health Care
Financing Administration (HCFA). Last time, the subject was long-term care. Today, my
testimony will focus on two projects -- the Medicare Choices demonstration and the Competitive
Pricing demonstration ~- central to our agenda of expanding managed care choices available to
Medicare beneficiaries while improving our payment methodologies.

BACKGROUND

Over the past three decades, HCFA's use of its demonstration authorities has had a profound
impact on the evolution and success of the Medicare and Medicaid programs. Through support,
development and testing of innovations in payment, delivery, access and quality, HCFA has
contributed significantly to major program reforms and improvements. Let me just mention a few
examples.

As the result of a program of research and demonstrations begun in 1976, Medicare moved in
1983 from cost-based reimbursement for hospital care to a prospectively determined per case
payment based on diagnosis. The prospective payment system saves billions of Medicare dollars
annually while the Diagnostic Related Group (DRG) classification system on which itis based is
used today by half of the State Medicaid programs, CHAMPUS, and many private insurers,
managed care plans, and other countries.

‘When the hospice movement was still in its infancy, HCFA initiated a Medicare and Medicaid
demonstration to determine whether hospice could maximize patient autonomy during the last
weeks of life and allow terminally ill patients to die with as much dignity as possible and relatively
free of pain. Largely as a result of this successful demonstration effort, legislation established
hospices as authorized Medicare providers. In 1994, about 270,000 Medicare beneficiaries used
hospice care.

Beginning in the mid-1970s, HCFA sponsored a series of innovative Medicare and Medicaid
demonstrations throughout the country to test the use of community-based services as substitutes
for more costly institutional long-term care. These demonstrations served as the framework for
the legislation authorizing the Medicaid waiver program under Section 1915(c) of the Social
Security Act, under which home and community-based services may be covered.

HCFA's managed care programs were also rooted in extensive demonstration efforts. Beginning
in 1980, HCFA tested the use of capitation payments for HMOs participating in Medicare. This
pioneering effort demonstrated to plans, Congress, and the executive branch that HMO-
participation in Medicare on a capitated basis made sense for both beneficiaries and the program.
Since HCFA implemented the Medicare managed care program in 1985, both the number of
beneficiaries enrolling in risk plans and number of risk plans contracting with Medicare have


61

they decide to go out of—they can self-refer out-of-network for phy-
sicians. They have to pay $35 a visit. They can go to any hospital
they want if it is precertified based on medical necessity and the
charge there will be $375.

Chairman THomas. Per—

Mr. AGar. Per stay.

Chairman THOMAS. Per stay?

Mr. AGar. Per stay.

Chairman THOMAS. As an out-of-service—

Mr. AGaR. Out-of-network.

Chairman THoMas. | am asking you this question, Mr. Ryan, be-
cause you exhibit a profile of a more generalized question that I
asked Mr. Vladeck on a demonstration project and it should not,
obviously, carry any implication that I believe it may occur, but it
nevertheless is part of the problem of trying to set up a demonstra-
tion project. You folks already are risk contractors, is that correct?

Mr. RYAN. Yes, sir.

Chairman THOMAS. And you are proposing to go into a dem-
onstration program by changing in any degree the structure that
you now have as a risk contractor?

Mr. RyAN. No. I do not think we are going to change any of our
structure, per se. The demonstration Choices project offers us the
opportunity to achieve our goal or achieve our mission in a way—
because our goals are similar. HCFA wants to—

Chairman THomas. No. I understand. What I want to find out
is that if you have a beneficiary who is already under a risk con-
tract arrangement——

Mr. RYAN. I am sorry. I misled you. We do not have a Medicare
risk contract. We have the HMO license and the insurance com-
pany. We are out marketing to commercial enrollees, and if the
Medicare Choices project had not come along, we would have pur-
sued a CMP.

Chairman THomas. OK. And you are getting a 50-50 waiver?

Mr. RYAN. We have included a 50-50 waiver in our application.

Chairman THOMAS. But if you were to create some kind of a joint
structure or if HCFA were to look at your overall operation as you
move into the Medicare area, could you meet a 50-50 requirement
if they looked at your overall business practice as you moved into
the Medicare, and why are you seeking a 50-50 waiver given the
business profile you already have?

Mr. RYAN. When we filed our application for the Medicare
Choices demonstration, it was August 1995. We did not have the
HMO license or the insurance company at the time. I believe that
if we started today, we would meet the 50-50 waiver. But the rule
that the 50-50 waiver is intended—the object of that rule is really
to make sure that you do not have the creation of a separate sub-
standard health delivery —

Chairman THomas. No. I understand the history of it, and it may
have been needed at one time, but a lot of us think it is an anach-
ronism, which is interesting, because every time we try to do a
demonstration project, we waive the 50-50 rule and then we re-
quire it out in the real world when probably it is an anachronism.

You folks obviously talk to other people in your marketplace and
they are becoming aware that the demonstration project will be


77

available to serve the Medicare population and little impact on the percentage of Medicare
beneficiaries who enroll with private plans.

AAHP appreciates the opportunity to present our views about the Medicare Choices
Demonstration. If it is crafted with care, we believe that this initiative can be a positive first step
in the process of updating the Medicare program and expanding the options available to
Medicare beneficiaries. We look forward to working with all concemed to assure its success,
and I would be pleased to answer any questions you may have. Thank you.


47

Mr. McDERMoTT. Just so I can understand why you selected Se-
attle, was it the long history?

Mr. VLADECK. No. I believe this was largely a self-selected ——.

Mr. McDeErRmoTTr. They came forward and said——

Mr. VLADECK. Again, 3 years ago, we went to what was then the
Group Health Association and said, we share your discomfort with
the AAPCC. We are interested in testing changes to it and basi-
cally said, we will approve any budget-neutral demonstration that
protects beneficiaries and tests any other payment method. The Se-
attle project was the most developed and sophisticated one we got,
and even that is barely budget neutral.

Mr. McDErRMmoTT. So they described the-—

Mr. VLADECK. This was something that was initiated by the
plans in Washington State themselves.

Mr. McDermott. They put it together and brought it to you and
you approved it, and then the people sort of figured out that they
did not have the capacity to produce the data that they had prom-
ised.

Mr. VLADECK. I do not want to jump to that conclusion. We are
still working on that.

Mr. McDERMOTT. All right. Thank you.

Thank you, Mr. Chairman.

Chairman Tuomas. If there are no other questions, I want to
thank you very much, Bruce.

We have a series of votes on the floor and I think the most effi-
cient way to deal with this will be to recess the Subcommittee until
2 p.m. Those who need lunch or want lunch can get it at that time,
and if there are any inconveniences by virtue of moving the rest.
of the panels back, please let me know and we will try to accommo-
date you. Otherwise, the Subcommittee stands in recess.

[Recess.]

Chairman THomas. The hour of 2 having arrived, the Sub-
committee will reconvene.

The first panel, Mr. Agar, Mr. Ryan, Dr. Braden, Mr. Womer,
thank you. I apologize. Sometimes control of the time is not our
own.

I would tell all of you that any written testimony that you may
have submitted will be made a part of the record and you may
begin to inform the Subcommittee in any way you see fit for the
5 minutes that you have available. We will begin with Mr. Agar
and then move across the panel.

STATEMENT OF J.H. MICHAEL AGAR, PRESIDENT, HEALTH
PLANS OF PENNSYLVANIA, INC.; AND VICE PRESIDENT, MAN-
AGED CARE, CROZER-KEYSTONE HEALTH SYSTEM, MEDIA,
PENNSYLVANIA

Mr. AGAR. Thank you very much, Mr. Chairman.

Chairman Thomas and Members of the Subcommittee, my name
is Michael Agar. I am vice president for managed care for the
Crozer-Keystone Health System and president of its wholly owned
subsidiary, Health Plans of Pennsylvania. Crozer-Keystone is a fi-
nalist in HCFA’s Medicare Choices demonstration program and we
are very proud to have been selected and are working hard to make
it a success.


49

of annual increases for Medicare will be reduced. Combine these re-
ductions with new insurance, entrance into the field of government-
sponsored health care, businesses taking anywhere from 15 to 30
percent of the premium for their own use, and you have a situation
that could dictate reductions in service to patients.

And there is no guarantee that these entities, once in the Medi-
care business, will stay in. For example, several HMOs in the
Philadelphia area have recently said they are going to go out of the
Medicaid business because the rates are getting too low. These are
our patients in our communities. We are not going to go anywhere.
We have to take care of them and we want to do it with the best
resources available and with the most efficient use of these re-
sources possible in this era of fiscal constraint.

In conclusion, we at Crozer-Keystone feel fortunate to be chosen
as part of this program. We are committed to making it work be-
cause we believe that direct contracting is the key to the future
successful health care delivery for many local health care provid-
ers. We commend the Subcommittee for passing legislation last
year that would have allowed that to happen and look forward to
working with you to bring the benefits of PSOs to more Americans
by passing similar legislation at the earliest possible time.

_ Thank you very much. I would be happy to answer any ques-
tions.

{The prepared statement follows:]


12

models such as partial capitation, blended payments, or capped fee-for-service payments. Sixteen
of the 25 indicated an interest in testing a risk adjustment method. Five of the 25 award
candidates are located in rural areas.

Award candidates are currently in the final steps of the Medicare Choices demonstration award
process, which includes negotiations regarding payment methodology. Once these remaining
details are worked out, HCFA will review plans to determine whether they meet standards
regarding access, beneficiary protections, financial solvency, and quality assurance. While
generally expecting plans to meet current law standards for Medicare HMOs, HCFA will evaluate
plans participating in the Medicare Choices demonstration on a case-by-case basis.

HCFA expects plans to be certified and ready to enroll beneficiaries in 1997, but some may be
ready to enroll beneficiaries sooner.

Both the Administration and the Congress support expanding Medicare managed care choices to
include PPOs and PSOs and support similar provisions regarding PSO State licensing , solvency,
and quality requirements, In the past, demonstrations have provided valuable information on
implementing such program expansions. If HCFA is authorized in the future to contract with
PPOs and PSOs on a permanent basis, the lessons learned from the Medicare Choices
demonstration will significantly facilitate and accelerate implementation.

COMPETITIVE PRICING DEMONSTRATION

As I mentioned earlier, the current payment methodology for managed care plans is flawed and
should be improved. For years, health care financing experts encouraged Medicare to move from
our fee-for-service based method to one that relies more on a “market-based” payment rate. The
managed care industry appeared to agree as well. The Group Health Association of America
(now the American Association of Health Plans) testified before this Subcommittee in February
1995 that "payment rates are tied to the Medicare fee-for-service costs in a given area, and do not
give the Medicare program the benefits of market dynamics present in the private sector." GHAA
further stated that "Medicare payments to health plans should eventually be 'market-based’." In its
1995 Annual Report to Congress, the Physician Payment Review Commission (PPRC)
recommended that "payment rates for Medicare health maintenance organizations established
through competitive bidding ultimately should replace payment rates based on adjusted average
per capita costs in markets with a sufficient number of HMOs bidding to achieve price
competition."

However, developing a market-based rate is a complex endeavor and the best methodologies are
not immediately obvious. Recognizing both the need to seriously examine market-based rate
setting and the intricacy of the task, about two years ago HCFA began to invest significant
resources in developing a demonstration which we refer to as "competitive pricing.”