59

-- broad congressional interest in expanding Medicare's use of
managed care, and

-- HCFA's recent steps toward undertaking demonstration projects
on expanded managed care options and improved Medicare HHO
pricing.

These factors lend a new momentum to efforts that would fix
Medicare's method of paying HMOs, to stem Medicare's losses under
the risk contract program, and then turn them into savings.

Our work drives home two points that would make success more
likely if the Congress pursues expansion of Medicare managed care
and better pricing of capitated health plans: First, one size
does not fit all--at least with respect to pricing capitated
health plans in Medicare. Market conditions vary too much and in
important ways, even among metropolitan areas. Second, details
matter. How programs are designed and implemented often means
the difference between success and failure.

As a result, we believe a sensible approach would
concurrently pursue the three major strategies--increasing price
competition among HMOs, making risk adjustors more accurate, and
correcting the pricing of HMO plans by modifying the existing
AAPCC approach. Moreover, by adopting a "try and track” stance,
Medicare could benefit from early action while gaining more
information on how well these strategies work and how they might
be better implemented.

In particular, we believe that HCFA should move quickly to
implement a better risk adjustor. Last year, we recommended that
HCFA promptly undertake demonstration projects on four risk
adjustors that we have identified as promising in accuracy and
administrative feasibility. Today the increased urgency of
fixing the HMO capitation rate may argue for an alternative
approach: HCFA could select one of these risk adjustors to
implement as a near-term fix. Meanwhile, HCFA could devote its
resources to refining and implementing a more sophisticated risk
adjustor. As another interim measure, HCFA could also increase,
in selected areas, the HMO 5-percent discount.

Finally, we believe that HCFA should move forward without
delay in implementing demonstration projects on competitive
bidding. By trying competitive bidding in different regions,
HCFA can obtain valuable information about how the structure of
the bidding process affects outcomes--such as the tradeoff
between maximizing HMOs’ incentives to submit low bids and
ensuring the widest possible choice of plans for beneficiari.
Moreover, Medicare can likely reap some of the potential gains
from competitive pricing of health plans.



128

* evaluation instruments for mental state and depression screening,
* an safety and health risk assessment of their home environment
* and others.

Results and recommendations from the team’s collaboration are retuned to the primary
‘care provider in an individualized plan for interventions and desired outcomes.

It's proving to be a very good system, but only 10 describe its intention and organization
leaves the patient out of the center Allow me to tell you about a what this has meant to
some of our Medicare members.

Mr. and Mrs. A had become progressively more worried about being able to stay
together and in their own home. Mrs. A, who is 81, was becoming more dependent on
help and her 79-year-old husband feared they would soon be separated by nursing home
walls. Mrs. A has diabetes, hypertension, cancer, glaucoma and a history of falls.
Progressive weakness, renewed falling episodes and memory changes caused her physician
to send her for a GEM evaluation

Because this team of trained, interdisciplinary members of our staffis able to approach the
patient from so many different perspectives in a coordinated fashion, information often
‘comes together that would be unavailable to the primary care provider in a normal setting.

‘The team’s results made it possible to diagnose Mrs. A's Parkinson's disease which had
bbeen masked by the rest of her complex condition The treatment plan was able to
‘effectively coordinate the already complex mix of medicines so that her Parkinson's 1s
being effectively managed without detrimental effect on the management of her other
health problems. In-home support was arranged and Mr. A was introduced to a support
‘group for care-givers.

‘Three months later Mr A's progressive arthritis and vision changes resulted in a GEM
evaluation for him as well, Early-stage Parkinson's was diagnosed in him and is now being
managed and an increased fall danger was noted in a gait evaluation. Podiatric care was
provided as a preventive measure,

In-home support is still in use by Mr. and Mrs. A. The key is that, in the face of complex
medical problems, they are still in their own home and maximizing the quality of life
together.

Mrs. B, who is 80, has a different but also complex set of medical problems. She suffers
from macular degeneration and is legally blind, she has gastric ulcers, has urinary
incontinence, she was anemic and her depression was growing

‘As a part of the in-home evaluation, our geriatric nurse practitioner discovered that she
had been seeing several physicians and had stockpiled, and was taking, 14 different
‘medications and using alcohol, It is not uncommon, as you may know, for older adults to
{et trapped into substance abuse in this fashion and they are unlikely to volunteer the
information to any one of the physicians they might be seeing

Mrs, B was admitted to a program at our psychiatric hospital to deal with her dependency
‘and her care plan is progressing.

Finally I'd like to tell you about Mrs, C, 88, who chose to leave our Medicare risk
enrollment,

‘She moved to Tueson reluctantly from her home in the northeast so that she could be
‘cared in the home of her daughter here. Her falls and memory difficulties, vision problems
and other conditions caused her to move She wanted, most of all, to remain independent
and in her own home,


25

percent to 7.4 percent. The failure to recognize the value of the services furnished by
VA and DOD facilities results in a capitated amount in some counties that is too low,
possibly discouraging plan participation.

The variability and uncertainty regarding the level of the AAPCC may discourage
some plans from participating in the program. Currently, about 25 percent of plans
operating in the private sector participate in Medicare’s risk contracting program. The
wide variation in payment rates at the county-level also provides incentives and
opportunities for plans to attract beneficiaries who live in counties with higher payment
rates and to avoid those in counties with low rates.

While fee-for-service spending may provide a useful benchmark to gauge the
level of the capitated payment, setting the rate at this level may not result in Medicare
achieving the savings, especially in high cost areas, that HMOs should be able to
achieve. In addition, this approach does not provide incentives for plans to compete
with each other to enroll beneficiaries at the lowest price. It also encourages plans to
participate in high cost areas, while discouraging participation in low cost areas.

COMPARING EXPECTED COSTS AND PAYMENTS

Medicare allows plans to choose to either return any difference between
expected cost and Medicare payments to the program or to provide additional
benefits, that otherwise would not be covered by Medicare, to the beneficiary. Not
surprisingly, plans opt to provide the benefits rather than returning the savings.

These policies limit Medicare savings and result in beneficiaries’ benefit
packages varying by plan and where they reside. ProPAC has recently completed a
preliminary analysis of the effects of these policies. Plans that wish to enter into or
continue risk contracts are required to submit an adjusted community rate proposal
(ACR) that calculates their expected cost (which include overhead and profits) to


154

2. Patients lose the right to make their own treatment decisions.

‘a) The MCO may pre-determine that all or most patients are to recaive brief
hospitalizations and brief, crisis-focused psychotherapy, regardless of patients need. This
is based on decisions about money, not treatment and consumer need.

b) The MCO often requires reports from the treating clinician and then takes over
treatment decisions. The patient and his/her clinician may be powerless to decide the
course of treatment. The sense of powerlessness and the prevention of access to proper
treatment may increase a patient's symptoms, especially depression and anxiety.
Hospitalization or intensive psychotherapy for a particular patient may be declared “not
medically necessary," even though the standards of practice in the professions would
clearly show the need for treatment.

) What is "medically necessary" varies from one MCO to another, as it generally has
more to do with costs than with care.

d) Many MCO's will only authorize three or four psychotherapy sessions at a time,
leaving the beneficiary and provider unable to know how long their work will be able to
continue. Anxiety often rises before each "approval" and session time is often spent on
discussing the MCO, rather than on the problem for which the patient sought treatment.

‘e) Some MCO's deny funds for psychotherapy if the patient refuses medication. This
is because medication may produce a fast relief of symptoms, even though it may actually
fail to correct the actual problem. This then allows the MCO to discharge the patient
without investing much money. In general, there is concem that too many of our elderly
are already over-medicated. Often, they are considered too old to make changes and not
‘good candidates for psychotherapy, which is not necessarily true. This puts the elderly at
increased risk of over-medication. Further, there is a bias among some physicians and
scientists toward medication and away from “talk therapies," but this may refiect litle more
than an honest bias and the difficulty of forcing “talk therapy” into the molds of empirical
science. Patients may have a strong need to talk out their problems, yet their voices do not
‘count under managed care.

3 i a
Because reports must be submitted to the MCO by the provider in order for the MCO to

determine whether or not continuing care is “necessary,” information that should not leave
the treatment room must be given to the MCO, which may store it in their data banks.
Psychotherapy patients often require privacy over information involving personal problems
Many consumers are not at all comfortable allowing such information to be divulged, but
may have to sacrifice reimbursement if they withhold this information. Under Medicare,
psychotherapy providers are not permitted to treat beneficiaries outside the plan. Thus,
those requiring privacy or those with paranoid conditions may be forced to forego needed
treatment due to inappropriate cost-containment techniques that may be suited to
“industry,” but not to human services.

4, MCO's rossly under-treating consi f mental he: re due to
at re

e e sme ed
MCO cictates may be prevented from legally obtain id

a) Many MCO’s provide a grossly inadequate model of "shor term therapy,”
"solution-oriented therapy,” “crisis intervention," or “stabilization,” or they may state that
they only treat the “acute phase" of a problem, refusing to pay for proper treatment for
“chronic” or “ongoing” problems. This is a standard that would never be tolerated in
medical care, and should not be tolerated in mental health care. Examples of MCO
literature stating these limits can be provided to the reader.

b) Many patients need time to build trust in the clinician and to tell their story. Patience
‘and understanding from the clinician are as necessary as advice. The clinician needs to
‘spend enough time with the patient in order to know if the problem goes deeper than the
surface "presenting problem.” These things are too often impossible under managed care.

¢) MCO's are misusing research data by not speaking to the limits of the research in
order to support their bias toward short-term treatment.

) Even though the literature in many MCO plans may state that beneficiaries may
have “up to 20 sessions” in a year, often times the companies’ reviewors are told never to
allow more than a few sessions (see vignettes), or providers are wamed that if they
average more than a few sessions per patient, they will be ejected from the panel or
refused further referrals. Thus, the provider may be too afraid to give the consumer the
treatment that is needed.



149

STATEMENT OF

AMERICAN SOCIETY OF PLASTIC
AND RECONSTRUCTIVE SURGEONS

to the

Committee on Ways and Means
United States House of Representatives

The American Society of Plastic and Reconstructive Surgeons (ASPRS) represents 97% of
the nearly 5,000 board certified plastic surgeons in the United States. Plastic surgeons
provide highly skilled surgical services which improve both the functional capacity and
quality of life of our patients. These services include the treatment of congenital deformities,
burn injuries, traumatic injuries, and cancer.

I. Background

Enacted in 1965, Medicare has proven to be a great success in improving the health status of
the elderly and disabled, keeping them in the mainstream of American medical care.
However, Medicare suffers budgetarily due to its fundamentally flawed financing structure
and erroneous budget projections.

According to an April 3, 1995 report by the Social Security and Medicare Boards of
Trustees, Medicare’s Hospital Insurance Trust Fund is projected to be insolvent by year 2002
and will pay out more than it takes in beginning in 1996. This warning comes after several
years of severe cuts in Medicare’s physician payments. Physicians account for 23% of
Medicare outlays, yet have absorbed 32% of provider cuts over the last decade. Even with
these levels of cuts, for years 1991-93, physicians have succeeded in actually holding down
volume incteases below projected levels, thus saving the program billions in projected
dollars.

In response to the recent insolvency projection and in an attempt to reduce the federal budget
deficit, Congress has begun to consider restructuring the Medicare program along with
further proposed reductions of $250-300 billion over the next seven years. Some are
projecting as much as $100 billion in savings to come from expanding managed care into
Medicare program, although the Congressional Budget Office (CBO) is skeptical about
managed care programs generating any significant amount of savings.

Il. Expanding Managed Care to the Elderly Population Will Not Result in Savings
for Medicare

‘A number of policy-makers and academics have cited the potential of managed care to
generate significant savings from Medicare and slow the rate of growth of the program.
Managed care is premised on the notion that effective case review can lower overall costs
without affecting the quality of care provided. However, it is highly unlikely that managed
care will be the panacea for Medicare's financial crisis nor does it adequately serve the
program’s bottom line.

In the private sector, managed care has produced one-time savings through provider
discounts, but has not slowed the long-term rate of growth of health care expenses. As for
serving an elderly population, studies have consistently shown that Medicare managed care
programs do not save the government money and do little to address the long-term problems


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, Iowa JOHN LEWIS, Georgia

SAM JOHNSON, Texas L.F. PAYNE, Virginia

JENNIFER DUNN, Washington RICHARD E. NEAL, Massachusetts

MAC COLLINS, Georgia

ROB PORTMAN, Ohio

PHILIP S. ENGLISH, Pennsylvania
JOHN ENSIGN, Nevada

JON CHRISTENSEN, Nebraska

PHILLIP D. Mosetey, 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

ap


119

Testimony of

Mr. Paul A. Zucarelli
President & CEO
PARTNERS Health Plan of Arizona
&

Senior Vice President for Managed Care
HealthPartners of Southem Arizona

‘My aame is Paul Zucareli, I am President and CEO of PARTNERS Health Plan of
‘Arizona and Senior Vice President for Managed Care with HealthPartners of Southern
Arizona, a community-based, integrated health organization, PARTNERS Health Plan
provides « variety of managed care services for more than 120,000 members in the Tucson
‘metropolitan fea and in rural counties of southern Arizona.

‘The term “integrated health organization (IHO)” may be new to some, so 1 will briefly
‘explain it in a moment, because an understanding of this evolving configuration of health
organizations can be very important to understanding some of the advances we believe we
are developing.

PARTNERS Ficalth Plan

‘Allow me first to briefly introduce PARTNERS Health Plan of Arizona, PARTNERS has
been providing managed care services in Arizona since 1986, We began as a cooperative
effort whose principal parties were an organization of several hundred independent
physicians in the Tucson area known as Southern Arizona Independent Physicians (SAIP)
and TMCare, a community-owned, not-for-profit health care provider which owns and
‘operates the area's largest hospital, Tucson Medical Center (TMC).

Following initial success in the commercial HMO marketplace and growth in our provider
network, PARTNERS introduced a Medicare Risk Plan, known as Senior Choice, in
1992. Current membership in PARTNERS’ senior plan is more than 13,000, which
represents approximately 10 percent of the area's total Medicare membership.

We are a full-service managed care company with products for individuals, large and small
‘groups, and point-of-service plans in place.

Like the growth of our commercial HMO options, our growth in Medicare risk
membership has been steady throughout the time that we have offered this option We
believe that the reason for this is our constant atention to the needs of the patient

in Health Organization (IHO)

Many observers of the development of HMO’s have, wisely, counseled that as we seek to
shape a system which is more economically responsible, we must not reduce the
importance of the patient or member and substitute the dollar as the center point of our
‘efforts, We believe that as our IHO forms into a truly integrated system, which places the
incentives of all service providers in alignment with what creates better health within the
‘communities we serve, we do the maximum to enhance both better care and economic

responsibility

This THO is HealthPartners of Southern Arizona, a not-for-profit, community-based
organization, It joins together the following organizations.

Southern Arizona Independent Physicians, with more than S00 medical care
providers, including both primary care and specialty physicians,

GHMA Medical Centers a primary care and multisspecialty group practice with
five major clinics throughout the ares and which is the physician group
responsible for introducing managed care into southem Arizona some 20 years
880,

Tucson Medical Center a 615-bed hospital with a 50-year reputation for
quality acute and tertiary care, and the other operating entities of TMCare
including the area’s leading behavioral health hospital;


68

sector. A number of us have ideas about how we would like to im-
prove the way the private sector works in terms of subsidies that
exist and distortions; but frankly, I think Medicare is so much
money and is in now a real financially fragile position that you just
can’t avoid trying to do fixes here, whatever it is you do elsewhere.

Mr. McCrery. Well, I would like to explore this more, but my
time is up. Maybe we will get back to it.

Chairman THOMAS. I think that is the answer.

Mr. McCrery. That is the answer, Mr. Chairman, but it is only
part of the answer. I mean, I don’t see how we do what Dr.
Wilensky said without some private sector reforms, insurance re-
forms, and so forth.

Ms. WILeNsky. I don’t want to discourage you from doing it. I
just don’t want you to believe that if you can’t do the second, you
would have no choice with regard to the first. I think you can’t not
do Medicare changes because of the pressures in the budget.

Mr. ALTMAN. We are both concerned about that. You can’t leave
Medicare unreformed.

Mr. McCrery. I agree. But if we do Medicare the way you just
suggested—which, by the way, is almost word for word what I have
suggested to some other folks—then I think we have to do some
private sector reforms. I think you have got to mesh the two; other-
wise, you have the same budgetary problems that we have got
right now.

Chairman THomas. I do think the problems with Medicare are
the same in the larger health care arena, and therefore, as long as
we keep the solution the same, it makes less difference to me
which one moves first. I just don’t want a fix for Medicare that is
artificial or doesn’t also address the larger concerns. You have got
to keep them together, and I don’t care which vehicle moves it first,
as long as the solution is what is agreed upon for both.

The gentleman from Nevada.

Mr. ENSIGN. Thank you, Mr. Chairman.

To follow up a little bit on what Mr. McCrery has talked about:
In Nevada, I held a Medicare task force, had HMOs at the table
and hospitals, teaching hospitals, physicians, AARP was there. We
had really a very, very diverse group, trying to get all the different
opinions at the table at the same time, trying to come up with
some possible solutions, and we will be holding these at various
times during the summer.

One fairly well agreed upon problem in the whole Medicare situ-
ation is HCFA. Virtually everybody said that what would be a
great place to start, is to eliminate HCFA in whatever way that we
could. But I think that brings up something that Mr. McCrery
talked about, and that is, the government is so involved with the
system and micromanaging the system that it creates a lot of its
own problems.

The reason I wanted to pursue that is to just continue the dialog
on this, do we foresee perhaps assigning risk to different individ-
uals based on their health status, which is being talked about over
on the Senate side as well as talking about some vouchers.

You know, based on your risk, now you get a voucher and you
go out there in the marketplace and you buy your own health care
coverage. Whether that is at 65, the medical savings account, or on


152

‘emergency and non-emergency situations, and for patients with chronic and temporary
conditions, as well as those with unexpected acute care episodes. Specialty care must
be available for the full duration of the occurrence, and not limited by time or number
of visits;

© Beneficiaries should have the ability to disenroll from managed care programs at any
time. This would provide an important incentive for plans to provide high quality
care;

© All plans participating in the Medicare program should be evaluated in a consumer
“report card” in part on the basis of the timeliness of access to specialty care and the
quality of that care as established through the credentials of the physicians and the
outcomes of their treatments; and

® Plans should provide potential enrollees with clear information about the services
covered and excluded, and information on patient satisfaction with the particular plan.

Vil. Conclusion

ASPRS is opposed to proposals to expand managed care to the Medicare population as such a
nove will not result in savings for the program, while risking the health of the elderly.

The Medicare program should be restructured to encourage personal responsibility in health
vare spending and decrease reliance on third-party payment. Enactment of MSAs is
mportant to accomplishing this objective.

Medicare patients enrolled in managed care should be provided with safeguards protecting
heir quality of care, access to necessary specialty services, and ability to disenroll from a
sarticular managed care plan.

ASPRS appreciates the opportunity to testify on the topic of Medicare before the Senate
Zommittee on Finance, and is available as a resource on this issue as the Committee
continues its work.


19

TESTIMONY OF STUART M. BUTLER, PH.D.
‘THE HERITAGE FOUNDATION

INTRODUCTION

Mr. Chairman, my name is Stuart Butler. { am a Vice President at The Heritage
Foundation, | appreciate the opportunity to address the committee on structural reform of
the Medicare system. | emphasize that the views I express are my own, and should not be
construed as representing any official position of The Heritage Foundation. In addition T
should note that my Heritage colleagues John Liu and Robert Moffit assisted me in the
preparation of this testimony.

Designed to operate as a federally run health insurance program for America's
elderly, Medicare was heralded by proponents to be a “[hlistoric measure and a fiscally
responsible bill." However, the Medicare program is now essentially bankrupt and the
continued quality of Medicare services is in doubt. According to the 1995 Trustees
Report, if Medicare is not reformed the cash flow of the Hi trust fund (Part A), which
finances hospital benefits for the elderly, will go into the red in fiscal year 1997 and the
fund will run out of money and become insolvent in the year 2002.7 The Report then
provides some sobering information on how payroll taxes (which finance the HI program)
would have rise to keep the program afloat, “To bring the HI program into actuarial
balance even for the first 25 years,’ a new 1.3 percent payroll tax would have to be
added on top of the current 2.9 percent Medicare payroll tax. Based on the Trustees
estimates for revenues under the current tax rate, this would raise payroll taxes — and
hence raising the cost of employing Americans — by an estimated $263 billion over five
‘years and $388 billion over seven years. For a worker earning $45,000 per year, it would
‘mean an additional payroll tax of $585 per year.

To achieve long-term actuarial balance of the HI trust fund without reforming the
program —- that, is to put it ona permanent sound footing —an immediate additional
payroll tax of 3.52 percent would need to be levied top of today's 2.9 percent rate. That
would raise taxes by $711 billion over five years and $1.050 trillion over seven Years.
The payroll taxes of a worker earning $45,000 would increase by $1,584 per year.

Moreover, this shortfall is only for the hospital program. Part B will require a
rapidly increasing subsidy from general revenues to continue paying for services.
“Growth rates have been so rapid,” explain the trustees, “that outlays of the program
have increased 53 percent in aggregate and 40 percent per enrollee in the last five years.
For the same period, the program grew 19 percent faster than the economy despite recent
efforts to control the cost of the program.” With the trustees’ “intermediate” estimates of
future program growth, the annual taxpayer subsidy will grow from an estimated $38
billion in this fiscal year to an estimated $89 billion in five years time and $147 billion in
FY 20045

Trying to hold down Medicare’s costs through price controls on health providers
and stringent regulations is no answer. Not only has this strategy failed to control costs in
the program, it encourages physicians and hospitals to "game" the government to make an
adequate living, rather than properly serving their patients. Moreover, price controls have

" House Speaker Jolin W. McCormack (D-MA), during floor debate in the U.S. House of Representatives
‘9n April 8, 1965,

"1995 Annual Report of the Board of Trustees of the federal Hospital Insurance Trust Fund, pp. 2.8

> 1995 Annual Report {Hi}, p. 27

* 1995 Annual Report of the Board of Trustees of the Federal Supplementary Medical Insurance Trust


15

be used (1) blended rates based on a weighted average of a capitation payment and fee-for-
service payment for actual health care services provided. using existing Medicare fees, and (2)
risk corridor payments that would adjust capitation rates in proportion to an HMO’s net financial
gains or losses exceeding established thresholds.

Although this is a promising solution, partial capitation could be difficult to administer. Before
this method is widely used, therefore, demonstrations are needed to test different models and
their data requirements for HMOs, and to develop needed information for setting risk thresholds
and risk sharing percentages.

Enrollment Policy. In addition to the changes in payment policy described above, the current
enrollment policy with its lack of coordination in enrollment periods may have contributed to
low enrollment and risk selection, The Commission is recommending that a more structured
enrollment process be established that provides for coordinated oper enrollment periods and
furnishes beneficiaries with objective, comparative information to allow them to make informed
choices for HMO enrollment. Permitting beneficiaries to disenrol! at the end of any month
allows them to leave managed care plans more freely than is common in the private sector and
may result in disenrollment when they require more services. This policy should be reevaluated,
weighing benefits of reducing opportunities for risk selection by locking beneficiaries in over
a longer period against the risk of beneficiaries being unable to “vote with their feet" in response
{0 poor service and quality.

The Rote of Cost Contracts. Cost contracts have long been made available for HMOs that do
‘not want risk contracts. While this flexibility has ensured that a range of options is available
to Medicare beneficiaries, it has also contributed to favorable selection for risk contracting
HMOs with increased costs to Medicare. In markets where competitive pricing is implemented,
cost contracts should not be available. If a choice of contracts is offered in other markets,
HMOs should be required to commit to the contract form they choose for more than one year.

Future Work

In addition to these recommendations, the Commission will be in a position to offer this
‘Committee and others in the Congress additional policy advice concerning Medicare managed
care options over the next few months, Among the many projects on our work plan are:

© Setting capitation payments for the risk contracting program. These analyses will
extend the Commission's previous work by identifying potential markets where
competitive bidding would be feasible, designing a bidding process and the
structure of premiums for high bidders, and considering how to establish payment
rates in areas where competitive bidding is not applicable. The Commission will
also update its assessment of risk adjustment methods. In addition, it will analyze
regional variation in benefits offered t0 Medicare HMO enrollees resulting from
the current structure of payment policy

© Structuring choices for Medicare beneficiaries. Questions of interest include the
range of arrangements that might be made available; whether there should be
financial incentives for beneficiaries to choose more cost-effective options and
how those incentives would be structured; identification of starutory barriers 10
managed care growth; and how to betier manage the fee-for-service sector of
Medicare including case management, bundled payments, and risk-based
carveouts.

© Access to care for Medicare beneficiaries. Building on the Commission's
previous work on access, a strategy will be developed for monitoring access for
those enrolled in managed care plans. In addition, a survey will be fielded to
explore beneficiaries’ willingness to enroll in managed care and to learn what
policy changes might facilitate enrollment


128

Chairman THomas. Well, this is another area that we need to get
into because, when you talk about Medicare, you wind up with a
certain profile of patients talking about Medicaid. And when you
talk about Medicaid with certain profile patients, you wind up talk-
ing about Medicare. And in Arizona, 100 percent of the folk are in
managed care on Medicaid and you are moving into a managed
care Medicare situation.

We did not talk about it with the first panel, but this is an anom-
aly that we have to focus on, and I would guess, given the profile
of Arizona and managed care and the seniors there, that you are
going to be one of the most heavily impacted areas.

Mr. Zucarelli, you mentioned this GEM, the geriatric evaluation
management. You mentioned a couple. First, the wife was afforded
the GEM Program, and then the husband. What triggers a geri-
atric evaluation? Have you got a profile, there are certain aspects?

Mr. ZUCARELLI. Right. We basically market the program through
the primary care physician and it is really to catch at the earliest
onset some of the chronically ill Medicare enrollees so that we can
provide more resources to the physician. It is usually people with
multiple conditions. I am not a physician so I won’t speak to the
clinical end.

Chairman THomas. For example, if you had a couple and both
were enrolled and it was triggered on one, wouldn’t you want to
just do the other one for a profile, or do you wait for certain symp-
tomatic aspects for a profile?

Mr. ZUCARELLI. It is based on the team’s evaluation. This exam-
ple happened to be a couple. But the primary care physician called
into the GEM Program and said I need the team to evaluate Mrs.
A. The concern was really—Mr. A, he was functioning well but he
was concerned that they were going to put his wife in a nursing
home. When his vision started failing and his arthritis progressed,
we did a complete evaluation, we picked up his gait problem in his
walk and gave him the podiatric services. But the fact is, we have
kept them together.

bne comment I would like to add, Mr. Chairman, concerns the
point-of-service product. I view the marketplace as evolving, and
one of the biggest fears Medicare beneficiaries have is this concern
that they are going to lose their choice of physician. We have seen
that on the regular HMO commercial side, and that is, people our
age used to HMOs and health plans because our employers have
migrated to them. We have a generational gap or barrier we have
to deal with and I would suggest a point-of-service plan is a means
to an end and a transitioning product.

Chairman THOMAS. Yes, there is no reason why we can’t elimi-
nate that barrier. That is obviously going to be one of the things
we looked at.

Dr. Block, you mentioned, and I believe Dr. Jacobs mentioned,
the comparison that when you began, it was a 2,000-hour bed rela-
tionship between the program and Medicare and you basically cut
it in half. In terms of that kind of behavior, obviously you are prob-
ably measuring quality slightly differently than other folk who tend
to measure quality by quantity.

Have you had any difficulties in either articulating or getting
people to understand the way in which you measure quality within


184

Subcommittee on Health
Committee on Ways and Means
United States House of Representatives
Medicare HMO Enrollment Growth and Payment Policies Hearing

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

June 8, 1995

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

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

INTRODUCTION

Over the past 20 years, the federal government has been attempting to control Medicare
health care expenditures, largely by limiting increases in the fee levels paid under the
fee-for-service system and by creating incentives for utilization reduction. To control
hospital costs, the Health Care Financing Administration (HCFA) has reformulated hospital
reimbursement to a diagnosis related group (DRG) system. The result has been a
significant reduction in the length of hospital stays. HCFA has recently switched to a
resource-based relative value scale (RBRVS) methodology to encourage the use of
primary care over specialized care in order to reduce aggregate physician service costs.

This testimony focuses on another approach used by the federal government for cost
containment—expansion of health maintenance organization (HMO) contracts for Medicare
enrollees.


74

Mr. ALTMAN. First of all, let me change your analogy just a little
bit.

Chairman THOMAS. Good. I am looking for a better one, one that
is 25 flavors.

Mr. ALTMAN. We will stick with the ice cream because that sort
of engenders a positive-——

Chairman THOMAS. Ice milk versus ice cream.

Mr. ALTMAN. No. As I mentioned in the testimony, let’s think of
the fee-for-service as sort of a half a sundae or minisundae. The
real sundae of today is to be in a managed care environment in a
high AAPCC area, because you get all of these extra benefits.

So what you have are three kinds of choices. You have the fee-
for-service, which is quite attractive; and then we bribe or encour-
age or incent—I think it is almost bribing—to put all this extra
stuff on to make people move into it. So in California and Arizona,
it is not surprising they are there, because they get all these extra
benefits because of the way the current system is structured.

And then you have the vanilla. What are you going to do? Take
away the true sundaes from the people that are in managed care
in very high AAPCC areas?

Ms. WILENSKY. This is one of the areas where I don’t quite agree.
I agree that it is an issue we hadn’t thought about, that there is
a lot more variation because spending is there, but if these people
weren’t in managed care plans, they would be just in that regular,
old, expensive fee-for-service and that would——

Mr. ALTMAN. That is not the issue. I don’t disagree.

Ms. WILENSKky. I think actually your analogy is a perfectly fine
one and the issue we ought to be asking ourselves—as a govern-
ment and as a taxpayer, we owe providing the cost of the plain ice
cream; we promised that. Those are the benefits and we ought to
make sure we do it and we do it at the cheapest place that we or—
not the cheapest, at a lower priced place to be able to get it.

It is—I could understand the attractiveness to you as a politician
to not have the chocolate sundae out there available, but it is the
wrong path for us to take. We want people to be able to choose
what they want. What we have to do is have the discipline as a
government to say, our job is to pay for the basics. We will do that,
and if you want to buy the chocolate sundae, we won't stop you,
but don’t ask us to pay for it.

That is really the change in thinking, and to take away the arti-
ficial barriers, I mean, it is ridiculous.

You said it very well. People in California are aging into Medi-
care in plans that they have been happy with. You can’t stay in
that plan because when you turn 65, you must go into the fee-for-
service world. You can’t stay in the plan because if your employer
only allows his employees or former employees in, that disallows
you from being in an HMO under Medicare rules. We absolutely
stop with these foolish rules, people continuing care in a seamless
way as they go from being 64 to 65. Now, that is dumb, but it is
going to take more than that in order to change this problem.

Chairman Tuomas. Then not even create an informational struc-
ture to find something else and have a payment system, as Stuart.
says, which isn’t rational at all within regions.


32

The first step is to change the way Medicare determines its capitated payment
mount, especially breaking the link to fee-for-service spending at the county level.
ledicare could avail itself of the competition that is occurring in the private market
nd require plans to compete for enrallees based on a premium bid from each plan for
te standard set of Medicare benefits. Medicare could then set its capitated payment
ased on the average price submitted or some percentage of it. Medicare also should
xplore approaches that use a process of negotiation. Such an approach may be
specially valuable in areas with a limited number of plans. Under any approach,
owever, Medicare can use its payments for comparable patients receiving care in the
‘e-for-service sector as a benchmark or ceiling in determining the capitated rate.
his benchmark, however, should be adjusted to reflect the services Medicare
aneficiaries receive from the Departments of Veterans Affairs and Defense that are
ot now included in the AAPCC.

The benchmark and the capitated rate also should not include Medicare's
‘aduate medical education, indirect medical education, disproportionate share, or
Jditional sole community hospital payments. Other mechanisms can be used to
stribute these payment to the appropriate facilities when they provide services to
edicare beneficiaries enrolled in the managed care program.

To assist plans that wish to participate in the program and to reduce the cost of
rolling Medicare beneficiaries, Medicare should establish mechanisms to help
iduce the cost of advertising. It may also need to require beneficiaries to pay more if
ey wish to stay in the fee-for service program. Such a requirement could be phased
‘over time.

In addition, the county should be eliminated as the geographic area used to
atermine the capitated amount. There are a number of alternatives that can be
¢sidered, including Medicare's current geographic groupings (metropolitan statistical
eas) used for hospital payment. The feasibility of combining counties to achieve a


103

CIGNA HealthCare of Arizona has been reviewed by the National Committee for
Quality Assurance (NCQA). NCQA, an independent non-profit organization in
Washington D.C.,accredits and evaluates managed care plans across the country to
ensure that the managed care industry maintains high professional standards. The
Phoenix Staff Model (employed physician) plan was granted a three-year
accreditation, the most favorable rating given to health plans by NCQA. Although
NCQA does not specifically review a plan’s Medicare performance, many of the
reviewed categories impact both commercial and Medicare members alike. These
include provider credentialing and recredentialing, review of the ambulatory medical
record, monitoring of adverse outcomes and sentinel events, preventive health
activities, outcome-focused improvement activitics and utilization management.

While NCQA approval is important to us, its rating only reflects a single point in
time. We at CIGNA, however, recognize that quality management is not a one-time
occurrence, but, rather, it requires continuous self-assessment and ongoing

ements. ‘Thus, we are actively engaged in several quality improvement efforts.
In August of 1993, the managed care plans of Arizona (including CIGNA), the Health
Services Advisory Group and the Arizona Peer Review Organization began to work
‘cooperatively to move from a quality “assurance" focus (e.g. removing “bad apples")
to a quality improvement” focus. The goal was to improve overall performance. For
example, the ambulatory medical record was reviewed for patients with diabetes, and
certain quality indicators were agreed upon. Subsequent reviews will provide
participating Medicare HMOs with feedback on how they are performing relative to
benchmark. Arizona health plans also have collaborated on several patient-oriented
publications, such as "Understanding Benign Prostatic Hyperplasia” and "Management
of Localized Prostate Cancer".

Additionally, CIGNA aggressively tracks patient complaints and Medicare appeals
through its Managed Care Service Center. We take patient complaints very seriously,
and the information is used to improve our services. For example, we now more
broadly define an out-of-area emergency to allow routine follow-up care, rather than
require a beneficiary to return to the geographic service area. CIGNA also tracks the
reasons why members choose to leave a plan and uses this information as the basis
for additional improvements.

While member satisfaction is high, opportunities for improvement remain. Some
‘our membership has suggested include:
© “Apoint-of-service option to allow access to specialists in the service area, which 1
© Coverage of routine care out of the service area (¢.g. coverage for Medicare
beneficiaries who live for nine months in the Sun Belt and who spend summers
in their home state — "snow binds").

MEMBERSHIP GROWTH

Realizing that we could effectively manage utilization patterns of the Medicare
population, we sought to increase membership. In June, 1993 we began offering the
Medicare risk product to employer groups which provide retiree coverage. These
employers have generally been pleased. The risk product allows employers to see
significant cost savings and lower long-term accounting liabilities for their over-65
populations, while keeping administrative expenses to a minimum. Because the
government is already paying the HMO for basic services, employers can offer a
Medicare risk plan for as little as $30 per month per person.

CIGNA regularly conducts focus groups to determine the potential market for the
Medicare Risk product, and to assess the needs and wants of Arizona seniors.

Although many seniors are not eligible or interested in a Medicare HMO duc to the
nature of their retirement benefits, others are underinsured, even with the purchase
‘of a supplemental product, and see a Medicare HMO as a way to obtain richer

benefits with foe out-of pocket ‘expenses. Promotional activities conducted by
CIGNA include television advertisements, print media, and direct mail. In addition,


39

Chart 5. Standardized Per Capita Rates of Payment for
Aged Enrollees in Selected Areas, 1995

Area Rate of Payment
Washington, DC-Maryland-Virginia
Washington, DC 540
Prince Georges County, MD 543
Montgomery County, MD 426
Manassas Park City, VA 464
Falls Church City, VA 408
Alexandria City, VA 407
‘Arlington County, VA 396
Fairfax City, VA 367
Fairfax County, VA 361
Twin Cities metro area
Ramsey (St. Paul) $380
Hennepin (Minneapolis) 363
Anoka 342
Dakota 334
Washington 324
Carver 285
Scott 277
Southem Florida
Dade 616
Broward 544
Palm Beach 473
Southem Califomia
Los Angeles 569
Orange 523
San Diego 459

Note: The 1995 U.S. per capita cost for aged enrollees is $401; 95
percent of the U.S. per capita cost is $380, which corresponds to
the standardized per capita rate of payment.

SOURCE: Health Care Financing Administration, Ottice of the Actuary.


164

Inadequate Benefits

‘A comprehensive benefits package is critical for people with disabilities, but all too often managed
care and other private insurance benefit packages are based on an acute care model For example

© Managed care plans typically cover only 60 days of rehabilitation and sometimes provide
no rehabilitation services at all

© Managed care plans rarely cover home and community-based health care services, such as
home nursing and personal assistance services, which often prevent multiple re-admissions
to acute care settings.

© Managed care plans often have annual and lifetime caps for certain conditions or
treatments (usually mental health and substance abuse)

© Enrollees are often denied benefits based on narrow definitions of “medical necessity”
because these definitions are based on the health care needs of the "average" person For
‘example, managed care plans often refuse to authorize physical therapy for people with
chronic conditions because such therapy would "maintain" rather than "improve" function

© Many plans refuse coverage of durable medical equipment, orthotics and prosthetics
(orthopedic braces and artificial limbs), and certain therapies, such as respiratory and
recreation therapy, which are important to maintain function and prevent secondary
complications.

© Definitions of durable medical equipment and prosthetics/orthotics are often restrictive.
This is a particular problem for individuals requiring customized medical equipment, such
as specialized wheelchairs and seating systems, and most types of orthotics and
prosthetics, which require specialized expertise and custom fitting and fabrication to the
unique needs of each patient.

© Drug formularies or other restrictive lists of covered pharmaceuticals are commonly used
by managed care plans. For some people with disabilities and chronic conditions,
particularly people with rare disorders, effective drug therapies may not be available in
managed care plans

‘managed care plan's network. Furthermore, continuity of providers is critical to people with
special health care needs who require specialized care sporadically over time. Some people with
chronic conditions, including individuals with mental illness, sustain great harm when forced to
disrupt existing relationships with providers.

Many people with severe or rare conditions can often only receive appropriate care at highly
specialized centers which may be affiliated with schools of medicine or teaching hospitals, or may
be free-standing centers with specialized treatment expertise. Examples of these conditions
include certain neurological and rare disorders, intractable pain, and a number of orthopedic
impairments requiring specialized assistive technology. Many managed care plans will not cover
care received at these centers.

Incentives to Underserve

‘Many managed care plans, particularly capitated plans, have built-in incentives to underserve
patients which can place persons with disabilities at significant risk, They may --

© pay nonsalaried physicians according to the numbers of patients served, which leads to
insufficient time and attention being paid to individual patients,


64

Mr. ALTMAN. Mr. Cardin walked in and he hasn’t heard, but I
apologize.

Chairman THomaSs. The gentleman from California.

Mr. Stark. Thank you, Mr. Chairman. I will just follow up on
what Stuart said.

We had—a year or two ago, Stan Jones, who was then a private
consultant to insurance companies, consulting with him on how to
find, within whatever was reasonable, healthy people, or how to
avoid unhealthy people—and I can’t remember where it was, per-
haps in my own district; but as somebody said, you want to try it,
try signing up one of these Medicare Select or Medicare HMO
plans over the phone. Just try. Try and not go to a meeting which
you have to come to before the company will sign you up. Where
is the meeting? Not near public transportation. Why is it at some
hotel, so that they are sure the people who get there can drive.

There are all kinds of subtle little ways that you exclude—now,
they are not so crass as to put it on the third floor and not have
an elevator, but—in which case I wouldn’t be able to sign up—but.
there is a cottage industry out there which saves these insurance
companies tons of money in doing it.

I would ask one question of Stuart and Gail. In all this selection,
if in areas where there is wide usage—in my district, 70 percent
of the people belong to staff model HMOs, 70 percent of the resi-
dents, not just Medicare. If one had community rating, open enroll-
ment and no medical underwriting strictly enforced, would you not
then, just through service, would there not be any risk selection?
It would seem to me you would just get an average of people—Gail
is saying no.

Ms. WILENSkY. The reason is that unless people evenly distribute
themselves among the competing HMOs in your district, and for
reasons that have nothing to do with what you have done, you hap-
pen to get 20 percent more of the AIDS patients or the chronic dia-
betics or the potential Alzheimer’s or whatever, and you get paid
on average, you will get hurt. As long as there is choice among
plans——

Mr. Stark. Somebody said that if you got more than a couple of
thousand members at some level, that this—we were discussing
this in self-insurance—at some level, that selection sort of evapo-
rates as you get to be a fairly big plan.

Ms. WILENSKY. I think that there is less of a problem the larger
the group. That is why it has always been harder to do bundled
payment for doctors or outpatient services than it is for the inpa-
tient sector. Because health care spending is so concentrated, I
really believe risk selection and risk adjustment, which I am a lit-
tle more confident we can do, is a problem. But the bigger the
group, the smaller the problem.

Mr. Stark. Is there anything wrong with requiring nonage-relat-
ed premiums for seniors? It seems to me to be—well, first of all,
it prevents chicanery among salesmen for lowballing seniors into
coming into a plan, then kicking up the premium as they get older.
But if you follow the fact that they will get sicker and more expen-
sive as they get older, and perhaps they are on limited assets, they
will dissipate that as they get older, that if the price they have
going in at 65 remains the price throughout their lifetime, that


148

also allows enrollees the flexibility to opt out of the provider network if they pay a little
more for this option.

Consumer and Provider Due Process

Plans should set forth procedures to be followed in the resolution of disputes with
enrollees about required services and the adequacy of those provided by the plan.
Grievance mechanisms should be timely and fair.

Grievance and appeals procedures should:

a) be available to both enrollees and providers, including timely review of a service
denial;

b) be clearly communicated to all parties;

©) require independent second opinions to be obtained promptly when covered
benefits are denied for any reason;

d) require an expedited appeals process Jeading to a decision within 72 hours of the
initial complaint.

Arrangements with Providers

Plans should enter into agreements and other arrangements to ensure an appropriate mix,
number and distribution of qualified health professionals to adequately provide for the
plan's benefit package.

Utilization Management Protocols

Utilization review should be performed by qualified personnel knowledgeable in the field
in which a coverage decision is being made. Qualified health professionals, including
rehabilitation providers and other specialists, should be involved in the development and
implementation of utilization review procedures and practice guidelines.

Consistency

Plans should be consistent in the information required, i.c., data elements and methods
of analysis, evaluation criteria, assurance of non-discrimination among classes of
providers, uniform quality and utilization standards, outcomes assessment, assurance of
access, fair and adequate reimbursement, consistency of record-keeping requirements.

Case Management

Life plans (long term care planning) should be developed for individuals with chronic or
catastrophic conditions in consultation with the individual and family members.


35

assuring quality of care widely available to its beneficiaries, rather than relying on
arbitrary enrollment percentages.

Finally, Mr. Chairman, the Medicare program needs to move quickly to improve
its ability to adjust payment rates to reflect differences in the health status of Medicare
beneficiaries. Although coordinated annual enrollment and other plan requirements
can help to reduce the ability of plans to favorably select the healthiest enrollees, this
will continue to be a problem that will reduce the amount of Medicare savings from its
managed care program.

CONCLUSION

Medicare's current managed care policies have several serious problems that
have limited plan participation and beneficiary enrollment and kept the program from
achieving the savings that are possible. These policies allow risk plans the
opportunity to select healthier enrollees as well as individuals who reside in areas
where Medicare's capitated payments are higher. They also allow beneficiaries the
opportunity to return to the fee-for-service sector when they believe that is to their
advantage. Further, beneficiaries who live in relatively high cost areas are rewarded
for joining such plans with additional services that are not otherwise covered by
Medicare. Beneficiaries residing in relatively low cost areas do not get these added
benefits, and in fact may not even have the opportunity to join a risk plan since the
low payment rate discourages plan participation.

The Commission would be pleased to continue working with you as you modify
and improve Medicare's managed care policies. | would be happy to answer any
questions you have.


67

system with the private system in a way that minimizes distortions
and still provides quality care for our senior citizens?

r. ALTMAN. I support your comments in general, but I would
add the caveat that it is not only the government that gets caught
in this problem.

I have spent a few years on and off working with the large autos.
General Motors and Ford got really beat up when they went into
the managed care business because they wound up with problems
not unlike what happened to the government. They had their less
sick people fe into the HMOs. The HMOs were collecting average
premiums. They thought they were saving 10 percent. When they
finally added up the bottom line, they found that they were paying
a lot more because the people who weren’t in the HMOs were the
sicker ones and so they, too—you know, when you get—I think
what we are dealing with is bigness and big averaging creates
problems. So I agree with you.

My own view is, we need to move things down into the commu-
nity level. We need to develop mechanisms that are much smaller,
and I do believe Medicare needs to be incorporated into the broader
issues of reform. How that is done is, as you know, a very com-
plicated, not-agreed-on strategy, but basically I agree with you. I
think it is bigness and averaging that creates these problems, and
of course, the biggest of all is the government, so it creates the
most. problems.

Ms. WILENSKY. Let me try and expand a little on this issue.
While there are problems outside of Medicare and Medicaid that
need to be addressed, that I wish had been addressed in the last
2 years, but weren't, I think that the public programs are different
because they use public moneys. We need to address them with an
urgency that can’t be avoided because of the pressures that they
are putting on the Federal budget and attempts to reduce govern-
ment spending or government involvement.

In the case of Medicare, if you wanted to try to reduce govern-
ment involvement, you could try to set the amount that Medicare
will pay at whatever price is available to cover Medicare-covered
services as they exist now, hopefully, with some risk adjustment so
you take care of those that are predictably sicker—and allow people
to do as they will in buying various products—HMOs, managed in-
demnity plans, and regular, old, expensive fee-for-service, which
means they will have to put in some more money.

But to have the Medicare amount reflect the cost of a low-cost
provider of Medicare services and what other people want to buy
is something they can buy and add on to that.

As I think you know, I am also intrigued by the notion of having
a medical savings account catastrophic option as a one-time option
when you turn 65. I think the selection gets very difficult when you
get over 65, but to give people choices, Medicare should decide on
a competitively bid type of model that reduces the involvement of
government in those little areas.

Now, you still have to worry about risk adjustment and you will
still have to worry about making information available and making
sure that the plans aren’t fooling around in some way. But I think
that would make a huge difference in the Medicare market, wheth-
er or not you are willing to take on what is going on in the private


104

CIGNA conducts meetings at places where s seniors congregate (restaurants, senior
centers, etc.) as part of its marketing efforts.

Other efforts to increase membership include: the development of a $0 premium
benefit plan effective January 1, 1994; the expansion of the product in March, 1994
to include a limited number of CIGNA IPA providers; and the expansion of the
service area in April, 1994 to include greater Tucson.

Asa result of these efforts, our membership has steadily increased to over 24,000
Medicare beneficiaries today. The average age of our enrollees has decreased to

approximately 74 years.
MEMBER SATISFACTION

We have found our Medicare members to be very satisfied with the Health Plan. A
survey conducted by one of CIGNA’ hospital partners revealed that despite shorter
hospital stays, Medicare members enrolled in the risk program were likely to be
more satisfied with their hospital experience than were fee-for-service medicare
beneficiaries. Specifically, the survey found that CIGNA Medicare HMO patients felt
that CIGNA was more patient oriented (92 percent vs. 85 percent) and better
anticipated patient needs (96 percent vs. 85 percent) than traditional Medicare
providers. Voluntary termination rates have been low. During 1994, the voluntary
disenrollment rate was less than 3 percent. The majority of disenroliments are for
non-voluntary reasons such as members moving out of the service area and deaths,
Also in 1994, we forwarded only 39 Medicare appeals to HCFA for resolution. This
rate of 1.57 per 1,000 members is significantly below industry norms.

It is clear that acceptance of this product among seniors is on the rise. 1 would
observe, however, that further use by the elderly of managed care for their health
care needs would accelerate if structural and legislative barriers were removed. One
of the factors that has kept health benefits for Americans affordable has been the
efficiencies of group purchasing by employers through the workplace. At this point
in time, however, the purchase of Medicare is a one-person-at-a-time retail sale and
does not contain any of the current efficiencies of scale that much of the rest of our
system has. Ata minimum, it should be easier for employees to join risk contractors
through their employers when they retire.

SUGGESTIONS TO HCFA

I would like to suggest two other ways, in which HCFA could assist Medicare
contractors in improving services to beneficiaries and easing the administration of
the contracts:

© Create a climate that encourages innovation. A case in point is self-referral
options (SRO). The SRO benefit is being requested by beneficiaries, yet
implementation has been virtually impossible due to HCFA reporting
requirements, particularly for Federally qualified plans.

© Establish one HCFA office as the contact for plans with multiple sites. This
would be more efficient for both HCFAand the plans, For example, CIGNA
currently must request approval of marketing material from each different HCFA
regional office in which it has a health plan wanting to use the material. This
results in duplicated efforts and wasted HCFA resources, and places an
unnecessary burden on plans to comply with differing interpretations of the
regional offices.

SUMMARY

In summary, let me emphasize that Medicare risk contracting is a win-win situation
for everybody in Arizona. Compared with traditional fee-for-service Medicare plans,
seniors in Medicare-risk HMOs receive greater benefits with lower out-of-pocket
costs, while enjoying quality care and service. Retirees no longer have to worry
about claim forms or physician fees exceeding Medicare’s “reasonable and customary”
limit. Providers have leamed a new way of doing business which involves using the
most cost-effective level of care consistent with a member ‘s medical needs. The


167

STATEMENT OF CONGRESSMAN BILL LUTHER (MN-06)
WAYS AND MEANS SUBCOMMITTEE ON HEALTH.
5/24/95

Mr. Chairman:

I seek to testify today on an issue that affects many Americans, especially the citizens of states
like Minnesota -- the issue of regional disparity in reimbursement for Medicare risk contracts.

I come from Minnesota, a state which is working hard to implement health care reform. For
a number of reasons including efficiencies we have achieved along with bi-partisan efforts such
as our MinnesotaCare health reform initiative, the people of our state enjoy among the lowest,
health care costs in the country while receiving eacellent care. But ironically, we htave been
penalized by our efforts to become more efficient. Our health plans offering managed care to
Medicare enrolives get reimbursements well below the average and, as a consequence, our
Medicare beneficiaries are required to pay more out of pocket for less benefits than those in
many other states.

The problem stems from the capitation rates under the TEFRA (Tax Equity and Fiscal
Responsibility Act of 1982) risk contracting programs, which serve approximately three million
Medicare beneficiaries. Every year, HCFA calculates the capitation rate, called the Adjusted
‘Average Per Capita Cost (AAPCC), which is the amount a health plan receives to provide
Medicare coverage. This figure, however, varies widely from county fo county, and herein lies
the problem. This rate is calculated by first estimating a national average Medicare expenditure
per beneficiary. HCFA then adjusts the rate to take into account the local trends in expenditures
as well as the demographics of each particular area.

In Minnesota’s case, our capitation rates are 70-80% of the average in urban areas. The 1995
Medicare payment rate per person in Anoka County, Minnesota is approximately $338. Since
the rate is based on fee-for-service costs in each geographic region, and because our health care
is delivered cost-effectively, our rate is lower. In states which have less effective health care
systems, more money is spent per beneficiary. In calculating rates for these areas, HCFA
figures a higher projected Medicare spending rate per beneficiary and capitation rates are higher,
For example, the 1995 Medicare payment rate per person in Kings, New York is approximately
$646.

The unfairness in this disparity is obvious. States that are keeping costs down are punished with
low reimbursement rates, while those that have not controlled health care costs are rewarded
with high per-person allowances. This inequity becomes even more glaring for beneficiaries of
managed care plans. Because TEFRA requires that additional savings from managed care be
passed to beneficiaries only as benefits, plans in areas such as Kings are able to offer more
benefits yet cut out-of-pocket expenses such as premiums, deductibles and co-payments and still
maintain a profit, while plans in states like Minnesota cannot afford to offer such benefits.
Therefore, while people pay the same amount into Medicare during their working careers
regardless of their state, some Medicare beneficiaries pay less and get more of their expenses
covered than others depending simply on where they live.

Mr, Chairman, this is unfair and it is creating exactly the wrong incentive in the delivery of
health care. We must adopt a new formula for setting Medicare reimbursement rates. If we are
to achieve Medicare savings and yet serve the real needs of the senior population, the federal
government must send a clear message. Rather than penalize reform, we must reward the
efficiencies realized in a health care system like those in Minnesota. While the issue of
reimbursement disparity is but one piece in the larger puzzle of Medicare, it is one that affects
citizens all around the country and it has the potential to affect them dramatically in the future.
It is time that the Medicare debate include discussions of efforts to achieve an improved
Medicare system with a sound financial future. 1 look forward to working with you and other
‘Members of the Subcommittee to address this issue.

‘Thank you.


126

Mr. CHRISTENSEN. What about the theory that the gatekeeper
under a managed care system is not going to refer out to the spe-
cialists under the current, say, bonus system where a gatekeeper
is provided—a primary care physician is, provided a bonus if he is
able to contain the costs and not refer out, and some people have
said that people aren’t going to receive the type of attention that
they need from the specialists?

Have you experienced any of that kind of lack of specialized care
for your seniors?

Dr. BLock. I ean take that question. I know that is a concern.
We have checks and balances in terms of looking at underutiliza-
tion, as well as looking at overutilization, and when we evaluate
our physicians, we don’t look only at their cost of care, but we also
look at other dimensions, and I believe probably other plans do
similar things.

We review their charts, we make sure people are getting the ap-
propriate preventive services. We look at patient satisfaction. We
actually survey their members to determine if they are satisfied.
And with this type of competitive market, people do vote with their
feet. I mean, the risk of not providing quality care in addition to
incurring later costs by not providing preventive services is that
people will leave your plan and go to other plans where they per-
ceive the quality to be better.

Mr. ZUCARELLI. Just to add to that, HMOs typically do capitate,
however it gets back to the alignment of incentives issue, and we
are becoming much more sophisticated whereby sometimes the spe-
cialists even share in the risk pools associated with primary care
and hospital usage, and funds are commingled. So it takes the cus-
tomer out of the middle, because if you look at HMOs in the
eighties, we were basically a discount medicine approach with
strong policing mechanisms on the front end with authorizations,
and so forth.

But I think we have evolved—mature managed care plans have
evolved now to more customer focus and have incentives that are
aligned between primary care and referral specialists, as well as
sharing in the hospital usage of resources. I am sure we all do this;
we credential the providers. So that is such a value-added service.

Mr. CHRISTENSEN. Do all three of your organizations advertise
for that customer? How do you go about getting your customer into
the system? I asked a similar question earlier today to the panel-
ists and HCFA has no process in place to refer out to managed care
programs.

How do you all fo about it?

Dr. JAcoss. Well, we have general advertising, which is image-
type advertising. We also have tactical advertising in the local mar-
ketplace, and our sales is a one-on-one sales. It is very expensive
to do it that way. I might comment briefly on the comparisons with
the Gost of administering Medicare versus the SG&A costs for an

FHP is running about 8.4 percent of revenue for its SG&A costs
but it is not an apples to oranges comparison. We also have sales
costs which are considerable. Also, running the gauntlet of admin-
istrative regulatory costs is very high as well, but we try to—we
have general community just advertising, image advertising, and


45

these gains without committing itself to a single nationwide solu-
tion immediately.
Mr. Chairman, that concludes my testimony. I will be glad to an-
swer any questions you and the Committee Members may have.
[The prepared statement follows:]


87

Reduced Red Tape and Bureaucracy. In administering a consumer choice system in
Medicare, Congress could relieve the Health care Financing Administration(HCFA) of
the task of trying to dictate the minutiae of virtually every facet of health care financing
and delivery for the nation’s elderly. Instead of administering complex and cumbersome
system of economically inefficient price controls, or promulgating an seemingly endless
stteam of rules, regulations and guidelines, HCFA could simply transmit defined
contributions, either in the form: of vouchers or through electronic transmissions, to the
plans of the elderly’ citizens choice, certify private plans as meeting basic hospital and
physicians benefits, meet fiscal solvency requirements, and guarantee catastrophic
coverage (a benefit that Medicare does not now provide). Moreover, HCFA could
promulgate and enforce serious rules protecting elderly citizens from fraud by insurance
companies.

‘An AARP Health Plan? Much like the National Association of Retired Federal
Employees (NARFE), which rates and grades the quality and benefits of plans offered to
congressional and federal retirees, the American Association of Retired Persons (AARP),
and other senior citizens organizations, could play a similar role in a revamped Medicare
system, rating and approving competing plans on the basis of rice, service, quality, and
benefits for Medicare beneficiaries. In fact, there is every opportunity for the AARP, and
other senior citizens organizations to sponsor and market their own health care plans,
centering into competition with established insurance carriers, such as federal unions and
‘employee organizations do today within the FEHBP.

CONCLUSION

Unless Congress soon takes action, the costs of the current Medicare program will
continue to rise at unsustainable rates and will become insolvent. The Medicare program
i structurally unsound, It provides a false sense of security for the nation’s elderly
population. Attempts at holding down annual cost increases of 11% per year through
arbitrary prive controls have failed. The Health Care Financing Administration (HCFA)
has become an entrenched, intrusive and overly bureaucratic organization. It has issued
volumes of rules, regulations and guidelines that are confusing not only to the public and
lawmakers, but also to doctors, hospital administrators, and patients.

‘The new debate over Medicare reform is one of the most important domestic
policy discussion since Congress debated comprehensive health care reform last year.
Congress must make decisions affecting the lives of every American, working or retired,
rich or poor, healthy or ill, It is imperative that participants in this debate, particularly
Members of Congress, focus their attention on not only the financial health, but also the
administrative structure, including the regulatory details ,of the Medicare system. While
pursuing necessary spending restraints in Medicare and many other government programs
in order to secure an end to these ruinous deficits, they must also remain open to the
fundamental restructuring of the Medicare program with a view towards improving the
quality, availability, and the security of health services to the elderly well into the next
‘century. If Congress fails, then the elderly will be faced with a dramatic reduction in the
‘quantity and the quality of their health care coverage, or already overburdened working
families, now paying over one third of their total income in taxes, will be forced to pay
record high levels of payroll taxes just to maintain the current level of benefits. Either
consequence is tantamount to fiscal and political disaster. If Congress succeeds, and takes
advantage of this historic opportunity to create a new Medicare system based on
consumer choice and competition, it will not only be a great comfort to our nation’s
elderly , it will also serve future generations of taxpayers as well.


8

and policy responses will be needed to reinforce the positive effects
of these market changes.

Although managed care remains a small part of Medicare, its
rapid growth does suggest that the time may be ripe for policy
changes that will help guide this program into the next century.
Much can be done to make changes in Medicare that are consistent
with the innovations that are going on in the private sector and to
ensure that the program acts as a prudent purchaser in responding
to the changing health care environment. The challenge that lies
ahead will be to expand the number of choices available to bene-
ficiaries and encourage the use of cost effective providers, and to
do so in ways that protect the fiscal integrity of the program and
also, of course, preserve the beneficiary’s access to high-quality

oy “would like to provide some background information on what
has been going on, But more importantly, to talk about some of the
changes that are needed in payment policy. And I will also outline
very briefly some of the work that is going on now to try to help
this Committee as it develops a Medicare reform package.

As you well know, beneficiaries can choose HMO enrollment
when they become Medicare eligible or at other times when HMOs
offer open enrollment. As the health care system has moved toward
managed care and integrated delivery systems, the willingness of
HMOs to participate in Medicare and the beneficiary enrollment
has grown rapidly, although it still remains a very small part of
the program. We should note, however, that about three-quarters
of the elderly live in an area where there is a Medicare managed
care plan available to them.

Enrollment rates vary considerably across the country as you
have mentioned, but there are high rates that tend to occur in
some areas where there is very high commercial HMO penetration.
We may be able to learn something about the growth in those
areas.

Further expansion will depend on a number of factors: The ca-
pacity of HMOs to accommodate elderly and disabled patients, the
willingness of the plans to do business with the program, and of
course, the willingness of the elderly to receive care under these ar-
rangements.

The ability of a plan to attract and retain the elderly will grow
over time as yple who are now in managed care plans age into
the Medicare Program. At the same time, Medicare can encourage
greater plan participation and also ensure that cost savings
achieved occur as a result of efficiencies rather than by risk selec-
tion.

Changes in the payment methodology are urgently needed and
these need to be considered as a first step in encouraging a more
substantial role for managed care. The Commission, in its 1995 re-
port, has made a number of recommendations which we believe
would enhance the program performance. There are a number of
problems now about the way that Medicare payment occurs to
HMOs, and it has contributed to the limited participation.

These problems include linking the managed care payment to the
Medicare fee-for-service expenditures in the area and the very wide
geographic variation in terms of the amount that is paid. They in-


MEDICARE HMO ENROLLMENT GROWTH AND
PAYMENT POLICIES

WEDNESDAY, MAY 24, 1995

HOusE OF REPRESENTATIVES,
COMMITTEE ON WAYS AND MEANS,
SUBCOMMITTEE ON HEALTH,
Washington, DC.
The Subcommittee met, pursuant to call, at 10:08 a.m., in room
1100, Longworth House Office Building, Hon. Bill Thomas (Chair-
man of the Subcommittee) presiding.
{The advisory announcing the hearing follows:]

qd)


150

facing Medicare. Experience of the Medicare risk contract program confirms that the
healthiest segment of Medicare beneficiaries tend to enroll in managed care, while the older
and sicker beneficiaries do not appear willing to change doctors or give up theit freedom to
choose a particular specialist or hospital.

In testimony to the Senate in February, the CBO testified that HMOs attract healthier
members of the Medicare population and "there may also be a tendency for HMO enrollees
to switch to the fee-for-service alternative when severe health problems arise." When sicker
beneficiaries return to the fee-for-service pool, the HMOs are relieved of the costs associated
with providing the patient with advanced services and necessary equipment. This favorable
selection holds down the managed care plans’ expenses, but can result in major losses to the
Medicare program overall.

A 1994 General Accounting Office report explains that “as more healthy beneficiaries join
HMOs, the Medicare fee-for-service population on average becomes sicker, driving up
Medicare's average costs of treating fee-for-service patients. When this average cost rises,
so does the capitation rate HCFA pays to risk contract HMOs.”

Favorable selection results in Medicare over-paying managed care to treat the healthy and
then being forced to swallow the costs of the older and sicker who return to fee-for-service in
the later stages of life.

There is no reason to believe that expanded enrollment in Medicare managed care programs
will prevent favorable selection. The GAO concluded last year that “favorable selection is
not likely to disappear once larger numbers of Medicare beneficiaries are enrolled in
HMOs."

Ill. Managed Care Lacks Capacity to Serve Entire Nation

‘There are also limits to the ability of managed care programs to serve rural areas that do not
contain sufficient population to sustain effective HMO competition. After all, nearly one in
three Americans live in such rural areas. According to a study published in the New
England Journal of Medicine, communities with less than 180,000 people may be too small
to support effective competition among managed care providers.

HCFA Administrator Bruce Vladeck cautioned that "the movement toward managed care
cannot outpace the capacity of managed care plans to serve large numbers of new enrollees,
particularly those with expensive and special health needs of the Medicare population."

IV. | Managed Care is Not Suited to Handle Unique Health Needs of Elderly

Cost is not the primary concern of the elderly. This reduces their sensitivity to pricing and
their tolerance for slower, less tailored care. The special health needs of Medicare enrollees
place them at higher risk for failure of managed care to provide timely access to needed
care. The drive to hold down costs may threaten the health of senior citizens enrolled in the
program. Numerous studies have cautioned about the adverse effects of HMO participation
by the elderly. In responding to financial pressures to provide care at a Sow cost, HMOs
may restrict care too much, leading to lower quality care. In recent years, seniors have
expressed their dissatisfaction with Medicare managed care by disenrolling from the
Medicare risk program in large numbers.

A study published in the May 1994 issue of the New England Journal of Medicine questions
the ability of managed care to treat chronic conditions prevalent within the Medicare
population. The study suggests that HMOs may be ill-suited to handle the needs of
individuals with conditions that demand extended and repeated medical attention.

It is not realistic to assume that managed care delivery systems will effectively serve our
Seniors. As retirees grow older and sicker, they become increasingly dependent on ready
access to specialists and treatment of their choice. ‘Their expanded reliance on prescription


42

Chart 11. Hospital Per Capita Cost Growth and Private
Sector HMO Enrollment for Selected States
(In Percent)

Hospital Per
Capita Cost 1993 Private
Growth Sector HMO
Rank State 1980-1993" Enrollment”
1 Nevada 6.0% 16.7%
2 California 6.8 51.4
3 Kansas 7.4 85
4 Minois. 74 212
5 Arizona 74 29.6
6 Minnesota 75 31.8
7 Colorado 75 30.6
8 Maryland 77 37.2
9 Wisconsin 77 28.3
10 Rhode Island 7.8 36.6
National
average Alt 8.8 23.8
41 Georgia 97 10.8
42 South Dakota 9.9 5.1
43 New Jersey 39 21.0
44 North Carolina 10.0 10.5
45 Louisiana 10.0 13.9
46 Tennessee 10.1 72
47 Kentucky 10.3 17.8
48 Arkansas 10.3 7.0
49 South Carolina 10.5 5.6
50 New Hampshire. 10.9 17.8

Note: HMO = health maintenance organization.
“ Hospital per capita cost growth is measured as annual change in
hospital costs per capita from 1980 to 1993.
° Private sector HMO enrollment is based on 1993 plan-level data as a
proportion of each state's nonelderly privately insured population.
SOURCE: ProPAC analysis of data provided by InterStudy; Employee
Benefit Research Institute; American Hospital Association;
and Department of Commerce, Bureau of the Census.


161

P. 0. Box 438, Commack, NY 11725

MANAGED COOPERATION
‘A Modical/Mental Health Care Plan
An idea for the future

(revised 2/14/95)

1. The success of a health care plan will depend on the value system upon which it is based.
Cooperation seeks solutions that enhance and are fair to all parties involved.

2. Managed Cooperation optimally balances patient choice and freedom with responsibility,
instills provider responsibility to the patient, and engenders cost- and utiization-consciousness in
patients and providers.

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

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

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

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

7. Annually or every other year, Regional Boards would recommend fee ranges and insurance
reimbursement levels for each procedure and send this information to consumers, clinicians, and
insurers (the government it single payer systems ere used or to insurance companies if a multiple
payer system is used). Insurers would set dollar amounts for each procedure's reimbursement.
Providers would set fees, preferably on & starting with a fee minimally above the
reimbursement, up to 8 reascnable “full fe ent would be the difference between
the reimbursement and the fee for the patient's income level, and could be legally waived if
necessary. Clinicians would provide current and prospective patients with their fee schedule



73
money in an open-ended entitlement. That is a very nice place to
be.

Mr. RaTNER. There is an additional aspect of that also, which is
that particularly the elderly feel what many people feel, that they
are attached to their primary care physician. That becomes a more
acute problem as people age, particularly if there are chronic dis-
eases that are present.

So while the financial element, the financial choices that they
face, is an important thing to consider and is going to affect some
people, we do have to remember that this is a somewhat different
population than the younger employee population. It is a tougher
market, really, to draw people in voluntarily.

The second thing is that—what Dr. Altman said is very impor-
tant, there are many things that employers do as sponsors that are
much more structured than Medicare and the Federal Government
have done vis-a-vis Medicare beneficiaries and, perhaps, are con-
templating. That structure, while not necessarily compulsion, really
gives an extra push to people in the private sector in the employee
population. So there are some different things going on there.

Chairman THomas. I was looking at a chart in the ProPAC struc-
ture. The majority of people in California are in managed care pro-
grams. We are really negligent if we don’t create a system that car-
ries over the workplace experience, which in the sixties was fee-for-
service, and create a wall to a certain extent for those people who
were in the system and try to incentivize them into the newer sys-
tem.

But to the degree we don’t inform them, we don’t have a pay-
ment system which is rational. We are, in fact, penalizing ourselves
and the taxpayers by getting people into Medicare basically as a
fee-for-service program, when they were in a managed care pro-
gram in a place of work.

Mr. RATNER. Yes. There certainly are things that can be done—
or can be considered—so that people who have been in managed
care organizations as employees can age in and remain in Medi-
care. But part of the problem there, that again we have to recog-
nize, is that currently the Medicare managed care program is
largely an HMO program, whereas the thrust of managed care in
the private sector has been heavily toward looser forms of managed
care.

There are some things that we need to pay attention to in think-
ing about the choices that the beneficiaries have, so that if we are
looking for the kinds of gains you get in the private sector, that it
is reasonable then to expect them to show up in Medicare.

Chairman THomas. I have no interest in locking nineties Medi-
care into a structure which may be transitionary, as we did in the
sixties. It has got to be an open-ended model to allow for move-
ment. There is no question about that.

Let me ask you a very difficult political question. If, in fact, we
are basically providing them, for want of a better term, with a
chocolate sundae and the other option is plain ice cream, and we
keep the chocolate sundae available and continue to try to convince
them the plain ice cream is pretty good. Would you advise us to
look at the possibility of closing out the chocolate sundae market
on a prospective basis so that only ice cream is available?


82

citizens who cannot afford an acceptable level of physician services and other services
now available under Part B, not to everyone over 65.

A POSSIBLE MODEL FOR LONG-TERM REFORM — THE FEHBP

Members of Congress searching for an alternative model for reforming Medicare
do not have to look far. For well over three decades, Members of Congress and federal
employees ~- and federal retirees -- have been enrolled in a unique consumer-driven
health care system called the Federal Employee Health Benefits Program (FEHBP),
Unlike Medicare, itis not run on the principles of central planning and price controls.
Instead, it is based on the market principles of consumer choice and competition. Starting
enrollment in 1960 with 51 plans for the federal workforce, there are now over 400
private health insurance plans nationwide, ranging from traditional indernnity insurance
and fee-for -service plans to plans sponsored by federal unions and employee
‘organizations to various managed care plans, including Health Maintenance
Organizations (HMOs) and Preferred Provider Organizations ( PPOs). In the
Washington, D.C., metropolitan area, half of ail persons with health insurance are
covered by one of the 35 plans competing in the FEHBP.

‘The FEHBP works on entirely different principles from those in Medicare. For
one thing, Medicare is a defined benefit program, meaning that each enrollee has access
to a specific set of health services which are then paid for in total or in part by the federal
‘government. The FEHBP, on the other hand, is a defined contribution program, in that
the govemment agrees to provide the federal worker or retiree with a financial
contribution towards the purchase of the health plan of their choice.

Even more important, and unlike Medicare, the FEHBP does not attempt to
constrain costs by controlling prices and specifying services. Instead it sets only very
broad guidelines over how plans must be structured and marketed, and specifies only a
brief set of core benefits, permitting federal workers and retirees to choose the plan and
benefits that are right for them. Cost restraint is achieved not with an army of Medicare
style price controllers, but through the operation of consumer choice in a market of
competing plans.

Choices for Federal Retirees. The FEHBP system is open to all congressional
and federal retirees who retired after July 1, 1960. Under current rules, a congressional or
federal retiree is eligible to enroll in an FEHBP plan if they retired on an annuity with at
least five years of continuous service at the time of retirement, or if they retired on a
Civil Service disability. A federal or congressional retiree can assure coverage for
spouses if they elect such survivor benefits for their spouses. And any survivor annuitant
can even request FEHBP coverage for grandchildren, under certain conditions on or after
August 11, 1994.”

Significantly, while private sector firms in recent years have been cutting back, or
even eliminating private health insurance for their retirees altogether, the FEHBP has
improved its coverage. Moreover, while the number of active employees has remained
fairly constant over the past ten years, the number of retirees has grown, from 1.3 million
to 1.6 million.* Congressional and federal retirees and their dependents now make up 40
percent of the total enrollment in the program.” And for these fortunate congressional
and federal retirees, the FEHBP offers choices and services denied to Americans enrolled
in the Medicare program. Among the features of the FEHBP:

* Wide Choice of Health Plans. No group of Americans enjoys the same range of
personal choice over health plans as do active and retired congressional and federal
employees. Their private plans range from fee-for-service to managed care plans. They
can even obtain plans through organizations they trust. Plans sponsored by federal unions
and employce organizations are particularly popular among federal workers and retirees -
- almost one-third are enrolled in such plans, In recent years, managed care plans have

7 Whether or not a child will be added to a family plan of a survivor is dependent upon the family status:
“"The deciding factor now is whether oF not the grandchild would have qualified as a family member if the
retired employee were still alive.” See NARFE, p. 28.

* Carolyn Pemberton and Deborah Holmes, eds., EBRI Databook on Employee Benefits, (Washington
D.C: The Employee Benefit Research Instiute, 1995), p278.



MEDICARE HMO ENROLLMENT GROWTH AND
PAYMENT POLICIES

HEARING

BEFORE THE

SUBCOMMITTEE ON HEALTH

OF THE

COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES

ONE HUNDRED FOURTH CONGRESS
FIRST SESSION

MAY 24, 1995

Serial 104-58

Printed for the use of the Committee on Ways and Means

ee

U.S. GOVERNMENT PRINTING OFFICE
26-329 CC WASHINGTON : 1996

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

ISBN 0-16-053954-4



108

Chairman THomas. Thank you, Dr. Block.
Dr. Jacobs.

STATEMENT OF RICHARD JACOBS, M.D. VICE PRESIDENT,
HEALTH CARE DELIVERY, FHP HEALTH CARE, PHOENIX,
ARIZONA

Dr. JAcoss. Mr. Chairman, Members of the Committee, good
afternoon. My name is Richard Jacobs. I am a physician, board cer-
tified in internal medicine, and also the vice president of health
care delivery with FHP Health Care in Arizona, which is a division
of FHP International Corp.

I received my medical degree from St. Louis University in 1976,
did a medical residency program, and I have practiced medicine in
both the fee-for-service setting as well as in the managed care set-
ting and am now a physician administrator with an MBA, so I am
not an expert on national health care policy. But I would like to
share with you my experience and observations in managing health
care to a Medicare risk population for a successful plan in a highly
competitive environment, and I hope that that will be of some
value to you.

FHP has been around a long time, over 30 years. We started in
Fountain Valley, California with a Staff Model and we were in on
the ground floor with a Medicare risk contract. We were one of the
demonstration projects early on and so we have been doing this a
long time.

We have over 2.3 million Americans that we take care of in 20
States, the District of Columbia, and also in Guam. We came into
the Phoenix area in 1985 and then finally into Tucson in 1989. And
right now the Arizona—FHP Arizona has over 182,000 members in
three counties: Maricopa County, Pinal County and also Pima
County, and roughly half of our membership are in the Medicare
risk contract.

Arizona is a little different in that we have what we call a mixed
model. Our members can choose their care from a private physician
in the community, a contracted provider, if you will, and we have
over 1,500 of those. We also have 17 or 18 community hospitals
that we are contracting with so there is a lot of overlap between
our network and the care provided by physicians in the community
for Medicare, Medicare patients.

We also have a Staff Model which is an owned and operated type
of thing and we have primary care physicians employed to provide
services in our Staff Model, and we get very tight control of the
services and quality in the Staff Model environment. We are the
second largest Medicare risk contractor in the Nation and, as I
said, we were the first Medicare risk contractor in Arizona.

If I could digress from my written statement just briefly to give
you an observation about what that was like to start up a managed
care plan in a new area, it might be of some value to you.

In 1985, when we entered Arizona, there was really—there was
no Medicare risk contract at all. We lost millions of dollars in the
first year trying to get this thing going. Our bed days at that point
really approximated Medicare’s experience in bed days. Over 2,000.
Our physician costs were twice what we anticipated. And it took
us over a year to really get a handle on all of that, to train the


131

courses in managed care. If physicians understood managed care
when they came out of medical schools, we could really expedite
this whole process.

Chairman THOMAS. You think if we got more of the payment for
the medical education in the hands of the students, that we could
shape those trends a little faster?

Dr. Jacoss. I don’t know, sir.

Chairman THOMAS. One quick question.

Dr. Block, in terms of the benefits that you offer, beyond the
basic, and you went through a litany of a number of benefits, are
you offering those, and this is a tough question so I appreciate it
if you don’t feel comfortable in answering it. Are you presenting
those because you think you need to offer those to be competitive,
understanding the price mechanism that we now have available to
you, or are those things that you feel comfortably that you can add
to fill up the gap between what it really costs you and the 95 per-
cent that is being paid, and what would you do in terms of that
benefit profile if you didn’t have the fixed 95 percent? To what ex-
tent are the add-ons market driven or a function of adding to a
fixed cost structure?

Dr. BLock. I think some of the add-ons are market driven, and
I think that as we suggested, we all compete with each other and
so part of it is market driven. I think part of it is that it makes
good sense to provide those benefits because what you are provid-
ing could potentially avoid more expensive benefits down the line.

thairman THOMAS. And you could do that given the funding
mechanism? If we changed it to a more competitive funding mecha-
nism, you would then probably not offer some of those?

Dr. BLock. It is a little hard to say exactly how that would work,
but I would guess that we would have to balance the need to be
competitive with the need to provide benefits that are above those
that Medicare provides.

Chairman THOMAS. Would you look forward to that opportunity
to produce a truly competitive market price?

r. BLOCK. I think we could compete very effectively in the mar-

ketplace.

Chairman Tuomas. Thank you very much. We could go on for a
long time and I believe we will be revisiting Arizona as we did on
the Medicaid solution. We are going to be revisiting Arizona on the
Medicare solution. I want to thank you folks for your testimony
very much.

The Subcommittee is adjourned.

[Whereupon, at 1:45 p.m., the hearing was adjourned.]

[Submissions for the record follow:]


159

AL. 1 AND
P. 0. BOX 438, COMMACK, NY 11725
PHONEJFAX: 516-424-5232

‘Original Vignettes (#1)
“Managed Mental Health Care
(Revised 12/18/93)
‘The following vignetes are summaries of managed care (MC) cases. Decisions about who can be in treatment,
‘how long treatment can continue, what type of treatment patients can bave, and who can provide it, are being made by the
MC companies. While they state they are basing decisions on "medical necessity," the companies cannot be free of a need
to themselves be profitable. Unfortunately the cases below are not atypical,

‘Ten year-old *Susie” was involved in a tragic and frightening accident. She and one parent escaped, but the other parent
and ber sibling died. “SusieTM became mute, and began drawing pictures of alittle girl with a noose around her neck
‘The surviving parent brought "Susie" to their HMO. "Susie" began therapy, but her pictures became increasingly darker

degree)
atthe 10th session. This HMO therapist concluded treatment with the 10th session, stating that “Susie” “should be”
finished. "Susie* was still mute and suicidal. Fortunately, the parent had some money available to pay for therapy
-without insurance coverage. The pareat asked a friend fora referral outside the HMO and found a psychiatrist who
offered a reduced fee. "Susie” was seen three times/week for 18 months. It took 12 months before “Susie” began to

appeal. Within a month, she was hospitalized for severe gastric distress and required surgery. The therapist believes
this was caused by inadequately treated depression.

“Jane,” a depressed and suicidal woman, had finally left her physically abusive husband, She called her MC company
for permission to begin therapy and fora referral. The request was refused, The reason given was that “domestic
‘violence isa social problem, not a psychological problem."

4. "Sean," an adolescent boy, asked to be in therapy, His mother called the MC company for permission for him to begin
therapy and for a referal. “Sean” stated he would not be comfortable seeing a male therapis. No ist of
‘therapists is published, so the mother could not find an appropriate referal herself, The company agent refused to offer
‘the name of a female therapist, though there were many in the network in that area. Despite many protests by the
mother, the agent gave only names of male therapists, stating: “Listen, if you're sick, it doesn't matter who you sec.
‘And if you don't take the names I gave you, I can't help you anymore.”

“Rosa,* a young mother with 3 young children, cuts her wrists. Her HMO approved only & sessions. The therapist
believes her symptom is due to feetings of anger at the responsibilities of motherhood. As the oldest of 9 children
‘herself, "Rosa" had been over-burdened with responsibility as a child, for her own mother was unable to care for the
children. Without appropriate treatment, "Rosa" will not likely understand the reasons for her distress. She will likely
‘continue to cut her wrists, possibly escalating to serious cuts. ‘The potential for child abuse is also present should "Rosa
begin directing her anger outward instead of toward herself

6, "Henry," a middle-aged man with a childhood history of being severely humiliated, requested treatment due to
interpersonal problems, including difficulty trasting others, “Henry” refused to return to treatment when the therapist
‘was required to submit a detailed report about him and his therapy. The therapist finally convinced him to return and
‘they spent much time discussing what the therapist should write. The report was written and more sessions were
authorized, but "Hemy" never renurned for treatment. Whea the therapist called him, Henry” said that the experience
‘of having to divulge information to the company was too humiliating for him,

(over)




109

physician network on how to manage the care, to teach them how
to use the community resources in a coordinated way for the bene-
fit of our members, and to bring the bed days down to a level that
is really successful.

Right now, in an open network, not in a Staff Model, not in a
group model, but in an open contracted network, we are running
bed days of around 1,000 to 1,200, averaging around 1,100, which
is half of what Medicare is running nationwide and represents a
significant improvement in cost savings.

We get paid 95 percent of what HCFA pays fee-for-service Medi-
care area, and we really feel that our estimate is we save the Fed-
eral Government about $60 million nationwide because of that. We
think it makes a lot of sense to manage the care. Until managed
care came around, those services were provided in an ad hoc way.
There was no way to coordinate the services and to bring to bear
in a coordinated fashion all of the various complex services, such
as sociai services and so on to take care of patients with many dif-
ferent needs. That is what managed care brings to the table.

You are going to hear—you heard from Dr. Block and you will
hear from Mr. Zucarelli. Many of the different programs and meth-
odologies that we use, in my written statement, those are really
summarized as well, but what I would like to emphasize is man-
aged care intuitively makes a lot of sense. It makes sense to plan
the care. It makes sense to coordinate the services, to monitor how
well you are doing and to use a TQM approach to incrementally
improve the care.

Finally, we have found the 50-50 rule to be a real impediment
to marketing to more and more seniors and I just might give you
an anecdote.

In my church where I attend, even though we have been in this
marketplace since 1988 and FHP has been around since 1985, I
constantly have seniors who come up to me and say, gee, we just
never heard about your plan. We wish we would have known about
it a lot earlier. And it is really, I think, time to get rid of 50-50
and take the wraps off, and we can really reach a lot of bene-
ficiaries who want this but don’t know about it.

Thank you very much.

[The prepared statement follows:]


30

were characterized by higher than average enrollment rates during 1993 and average
or slightly higher disenroliment rates. Enrollment rates in the Seattle and Kansas City
regions were notably low. The Boston and Denver regions experienced lower than
average enrollment and disenroliment rates in 1993. Anecdotal information suggests
that Boston enrollment has accelerated in the last year. No clear pattems emerge to
explain the variations in these findings. The Seattle region had high private sector
HMO penetration and exhibited litle Medicare risk beneficiary turnover--either enrolling
or disenrolling. In contrast, however, the San Francisco area, again with high private
sector managed care enrollment, had higher than average enrollment rates, possibly
due to the large number of plans, particularly new plans, in the area.

CHARACTERISTICS OF PLANS

Plan-specific data for those with the highest and lowest disenrollment rates
highlights some characteristics that may be important in determining a plan's ability to
satisfy Medicare beneficiaries (Chart 10). The five plans with the highest
disenrollment rates in 1993 were for profit, independent practice association model
HMOs. In contrast, the five plans with the lowest disenroliment rates were all
nonprofit and group or staff model HMOs. Group and staff model HMO plans have
more controls over enrollee service use and tend to have stronger relationships with
their providers than IPAs. Further, they are the older HMO models, so they likely
have a longer history in the private sector market. Plans with the lowest disenrollment
tates also had participated in the Medicare risk program longer and, although they had
about the same number of enrollees as plans with higher disenrollment rates, they had
fewer new enrollees,

Analysis of data from the Group Health Association of America highlight some of
these characteristics as important in distinguishing plans that participate under
Medicare at all. IPA model HMOs and for-profit plans are the predominant types of
HMOs, yet have lower than expected Medicare participation. Younger plans and


89

competitive system from breaking the bank with extra benefits.
But all plans would have to offer a core set of benefits, including
prescription drugs. That is important, to make the private plans
more attractive to older Americans and the disabled.

I think we could build in flexibility as we move forward in the
system—as Dr. Butler indicated, by moving to high-deductible
plans or medical savings accounts; but, initially, they are going to
attract more healthy people. So if we have a problem today in risk
selection in the managed care program, it will be even worse with
the medical savings account approach.

The quality of care for each plan should be carefully assessed
with hard data about the performance instead of simply relying on
regulations to protect consumers. Medicare should follow the lead
of large employers that write report cards on health plans for their
employees.

I believe that consumers armed with good information are better
regulators than bureaucrats wielding rules. Every Medicare partici-
pant should have a pamphlet that compares the cost, quality and
services of each choice on the menu of plans, and including the cur-
rent Medicare system. I agree with the sentiment of the Committee
that we should be doing so much more in just providing better in-
formation to consumers.

The next step, verifying, means checking for savings as well as
for high quality. Are the health plans saving money by risk-
skimming the healthy? Are the plans more efficient because provid-
ers are doing more for less and not degrading quality? If Congress
cannot answer these questions with confidence, then the pace of
change should be slowed until it can. The final step is to adapt all
of Medicare to a competitive system. As participation in private
plans rises, more of Medicare spending will be set by competition
rather than regulations. Medicare’s fee-for-service plan should have
the authority and flexibility to manage its costs as any other health
care plan should. You can almost imagine a privatized HCFA. Con-
fidence in the private health plans would allow Medicare to limit
its spending increases to market conditions, and a fee-for-service
spending cap would discipline Medicare’s fee-for-service system
without sacrificing access and quality.

In short, the pace of change in Medicare reform should depend
on the ability of the government to win confidence in the new sys-

m.

The challenge of reform is summed up by what was said last
year by a Medicare participant who was alarmed by the idea of
having government-run health care. He said, keep the government
out of Medicare. That is the sum of the problem we have today.

Keep in mind that the beneficiaries and the taxpayers have a
common interest and that is fighting the high cost of health care.
We need to forge a new relationship between the government and
Medicare participants. The government must ask them to accept
more responsibility for key decisions about the costs and quality of
their health care and, in exchange, the government must make
sure that they have the resources and the information to make the
right decisions for themselves.

Thank you.

{The prepared statement follows:]


84

Many federal retirees, but not all, bave access to Medicare system, us well as their
FEHBP plans. For retirees who retired from the federal govemment during or after 1983,
and met Social Security earnings criteria, are eligible for Medicare’s hospitalization
program. All federal workers are eligible for Part B at age 65, whether or not they ever
worked under the Social Security system. Whether it makes sense to enroll in the
Medicare Pant B is dependent upon one’s personal needs and choice of FEHBP health
plan. Retirees are given advice on these issues by consumer organizations such as the
National Association of Retired Federal Employees (NARFE). Washington’s Consumer
Checkbook. a consumer organization, gives retirees advice on the best options, such as
enrolling in plans that coordinate with Medicare, Various other groups rate plans and
provide information on plan services, quality, and levels of benefits.

Deticiencies in the FEHBP The FEHBP is not without deficiencies. The most
significant is that plans must offer community-rated premiums, meaning they must offer a
plan to heaithy 19 year-old at exactly the same premium as they charge a very sick 89
year-old. This inevitably leads to the problem of adverse selection. Still, the FEHBP
functions so well that even this problem does not undermine the program. Nevertheless, it
does introduce distortions and perverse incentives that prevent the FEHBP from
functioning as effectively as it should. A wise reform would be to vary the degree of
assistance to FEHBP enrollees at least according o their age and to permit plans to vary
premiums also by age. That would allow plans to compete more effectively and to offer
services with less vulnerability to adverse selection.

A REFORM AGENDA FOR MEDICARE

Congress has committed itself to curbing the growth of Medicare spending in
order to restore the financial stability of the program and thus prevent out-of-control
Medicare spending from swallowing up money for other programs or forcing huge
increases in taxes, To carry out this wise commitment, Congress can proceed in,two
ways. It can, as it has done in the past, impose tighter regulation, stricter price controls
and cut medical services for the elderly. But experience shows that strategy yields only
short-term spending reductions at best. In the long run it does nothing to curb runaway
spending, and yet undermines the quality of care for the elderly.

The other option for Congress is to achieve spending restraint by giving the
elderly greater control over their Medicare dollars and greater opportunity to use their
dollars to select the health care plan and services that are right for them. Such a reform,
modeled after the health system serving federal retirees, would use consumer choice and
competition to curb waste and improve care.

Such a reform would include three principles:

Principle 1: | Medicare should be changed from a defined benefit program into a defined
contribution program.

Principle 2: The elderly should be allowed to use their Medicare dollars to enroll in a
plan with health services that they choose, not services that bureaucrats or
politicians have chosen for them.

Principle 3: Cost control should be achieved through consumer choice and
competition, not central planning and price controls. Indeed, HCFA’s complex
system of price control and other restrictions should be phased out.

A reform incorporating these principles would be to provide Americans eligible
for Medicare with a voucher to purchase the Medicare plan of their choice. The amount


12

TESTIMONY OF GAIL R. WILENSKY, PH.D., CHAIR
PHYSICIAN PAYMENT REVIEW COMMISSION

Mr. Chairman, 1 appreciate the opportunity to be here this morning to present the Physician
Payment Review Commission's views concerning Medicare managed care. The Commission
has devoted considerable thought to this important issue in its 1995 Annual Report, making
recommendations on needed improvements in Medicare's payment policies for managed-care
plans, In addition, we are now beginning work on several projects that will provide the
Congress with information it can use to extend the role of managed care within the Medicare
program

AS we speak, the U.S. health care system is undergoing a major change. Employers are
fundamentally altering the way they purchase health services. Managed-care plans are growing
rapidly and evolving toward more integrated systems of care. Physicians and hospitals are
joining together in new types of organizations, transforming the way care is delivered

These developments, along with the financial pressures facing the Medicare program, are
bringing Medicare to a turning point, Dynamic change in the marketplace is creating both
opportunities and challenges for the Congress to improve performance of the Medicare program
and to further such policy goals as containing costs, expanding access, and ensuring quality of
care. While the innovations in the private sector suggest new solutions to longstanding policy
problems, the pace of change varies widely around the country. Multiple approaches and policy
responses will be needed to reinforce the positive effects of market evolution and to mitigate any
adverse consequences.

Although managed care is now only a small part of Medicare, its recent rapid growth suggests
that the time may be ripe for policy changes that will guide the program into the next century.
Much can be done to make changes in Medicare consistent with innovations in the private sector,
and to ensure that the program acts as a prudent purchaser in responding to the changing health
care marketplace. The challenge that lies ahead will be to expand the number of choices
available to beneficiaries and encourage the use of cost-effective providers, and 10 do so in ways
that protect the fiscal integrity of the program and preserve beneficiaries’ access to high-quality
care.

In my testimony this morning, I will provide some background information on the current role
of managed care within the Medicare program and then present the Commission's recent
recommendations on changes needed in Medicare payment policies. I will also outline the work
that is getting underway which we hope will be of assistance to you as you develop a Medicare
reform package.

The Context for Change

Under the provisions of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA),
Medicare beneficiaries have the option to enroll in health maintenance organizations (HMOs),
all of which offer Medicare-covered benefits and most of which also offer coverage of cost
sharing and supplemental services that replaces Medigap policies. Beneficiaries may choose
HMO enrollment when they become Medicare eligible or at other times when Medicare HMOs
offer open enrollment

As the health system has moved toward managed care and integrated delivery systems, both the
willingness of HMOs to participate in the Medicare program and heneficiary enrollment in these
plans have grown rapidly. The number of managed-care plans with Medicare risk contracts
increased by over 80 percent from the end of calendar year 1990 to the end of calendar year
1994, and enrollment increased by about 85 percent during the past 5 years. Currently about
9 percent of Medicare beneficiaries are enrolled in HMOs, About 75 percent of enrollees are
in HMOs with risk contracts which are paid on a per capita basis; the rest are in plans with cost
contracts that are paid based on “reasonable costs.”

Fully three quarters (74 percent) of Medicare beneficiaries now live in an area with a Medicare
managed care plan available to them. But enrollment rates vary considerably across the country,
with higher rates tending to occur in areas where commercial HMO penetration is high. Almost
one-third (28 percent) of those Medicare beneficiaries living in California and Arizona are
enrolled in risk contract HMOs. By comparison, 15 percent of those in Florida receive care


54

officials complain that rate instability hurts their ability to
conduct long-term planning--for example, by complicating
decisions about investing in new clinics and expanding physician
networks--and can cause wide swings in enrollees’ premiums from
year to year.

STRATEGIES EXIST FOR
MEDICARE TO REALIZE SAVINGS

By modifying the present payment system, HCFA could help
generate savings for Medicare. Our review of the experience of
the private sector, reforms in other public health care programs,
and empirical research suggests that a number of strategies hold
promise. These strategies can be grouped into three broad
categories: increasing price competition among HMOs, developing
better risk adjustors, and revising the AAPCC-based capitation
rate.

In our view, potential Medicare savings will be greatest if
strategies in all three categories are concurrently pursued. An
attempt to address all obstacles in a uniform way across all
regions of the country is unlikely to be successful. This is
because the predominant challenges to saving costs in large
cities are not necessarily the same ones that exist in rural
counties and because the challenges vary from region to region,
even for otherwise similar communities. Consequently, a variety
of reforms is warranted; local conditions would determine the
particular mix of solutions for any specific area.

The details of how any reform is implemented matter.
Changing the Medicare policies for paying HMOs could affect their
decision to participate in risk contracts and the benefits they
provide. This, in turn, may affect Medicare beneficiaries’
decisions to enroll in managed care plans and the quality of care
they receive in those plans. Thus, estimating the potential
dollar savings and determining the best method of implementing
specific reforms may be possible only after quickly conducting
and evaluating demonstrations.

Increasing Price Competition Among HMOs

Price competition that would enlist market forces to help
contain Medicare costs could be encouraged by requiring qualified
HMOs to submit competitive bids. The accepted bid would set the
capitated rate at which HMOs would provide comprehensive care to
Medicare enrollees in an area. This approach completely
decouples capitation rates from average fee-for-service spending.
Under a competitive bidding system, HMOs would have an incentive
to submit bids that reflect their actual costs of providing



71

protection and safeguards in this changing marketplace by instituting a point-of-service

feature in all health plans.

A listing of the current membership of the Patient Access to Specialty Care

Coalition follows:

Allergy and Asthma NetworkeMothers of Asthmatic, Inc.

‘American Academy of Allergy and Immunology

‘American Academy of Child and Adotescent Psychiatry

‘American Academy of Dermatology

‘American Academy of Facial Plastic and
Reconstructive Surgery

‘American Academy of Neurology

‘American Academy of Ophthalmology

‘American Academy of Orthopaedic Surgeons

“American Academy of Otolaryngology - Head and
Neck Surgery

‘American Academy of Pain Medicine

‘American Acaclemy of Physical Medicine & Rehabilitation

‘American Association for Hand Surgery

‘American Association for the Study of Headache

American Association of Clinical Endocrinologists

‘American Association of Clinical Urologists

‘American Association of Hip and Knee Surgeons

‘American Association of Neurological Surgeons

‘American Association of Private Practice
Poychiatrists

‘American College of Cardiology

‘American College of Foot and Ankle Surgeons

‘American College of Gastroenterology

‘American College of Nuclear Physicians

‘American College of Obstetricians & Gynecologists

‘American College of Osteopathic Surgeons

‘American College of Radiation Oncology

‘American College of Radiology

‘American College of Rheumatology

‘American Diabetes Association

‘American EEG Society

‘American Gastroenterological Association

‘American Lung Association

‘American Orthopaedic Society for Sports Medicine

‘American Pain Society

‘American Podiatric Medical Association

‘American Psychiatric Association

‘American Psychological Association

‘American Rehabilitation Association

‘American Sleep Disorders Association

‘American Society for Oermatologic Surgery

‘American Society for Gastrointestinal Endoscopy

‘American Society for Surgery of the Hand

‘American Society of Anesthesiologists

‘American Society of Cataract and Refractive
Surgery

‘American Society of Clinical Pathologists

‘American Society of Dermatology

‘American Society of Echocardiography

‘American Society of General Surgeons

‘American Society of Hematology

‘American Society of Nephrology

‘American Society of Pediatric Nephrology

‘American Society of Plastic and Reconstructive
Surgeons, Inc.

‘American Society of Transplant Physicians

‘American Thoracic Society

‘American Liver Foundation

‘American Urological Association

tee Coalition of America

‘Adthritis Foundation

‘Arthroscopy Association of North America

Association of Subspecialty Professors

Asthma & Allergy Foundation of America

California Access to Specialty Cate Coalition

California Congress of Dermatological Societies

College of American Pathologists

Congress of Neurological Surgeons

Cooley's Anemia Foundation

‘Cystic Fibrosis Foundation

Eye Bank Association of America

Federated Ambulatory Surgery Association

Joint Council of Allergy and Immunology

Lupus Foundation of America, inc.

National Association for the Advancement of Orthotics
‘and Prosthetics

National Association of Epilepsy Centers

National Association of Medical Directors of
Respiratory Care

National Foundation for Ectodermal Dysplasias

National Hemophilia Foundation

National Kidney Foundation

National Multiple Sclerosis Society

National Osteoporosis Foundation

National Psoriasis Foundation

‘Oregon Dermatology Society

Orthopaedic Trauma Association

Patient Advocates for Skin Disease Research

Pediatric Onhopaedic Society of North America

Pediatrix Medical Group: Neonatology and Pediatric
Intensive Care Specialists

Renal Physicians Associal

Scoliosis Research Society

Society for Vascular Surgery

Society of Cardiovascular & Interventional Radiology

Society of Gynecologic Oncologists

Society of Nuclear Medicine

Society of Thoracic Surgeons

The Alexander Graham Bell Association for the Deaf, Inc.

The American Society of Dermatophathology

The Endocrine Society

The Paget Foundation For Paget's Disease of Bone
and Related Disorders

The TM) Association, Ltd,

‘The HMO Industry Study has been retained in the Committee Piles.


96

think setting a broad voucher amount is a much simpler task than
trying to set prices throughout the current system.

Mr. McCrery. It seems to me we have created kind of a dual
health care system—one private, one public—and we have dupli-
cated a lot of mechanisms that were already in the private sector
for monitoring everything that is going on and checking prices and
fees and peer review and all of this stuff that the government tries
to do, which costs a lot of money. The private sector already does—
maybe in a different way—but they do it out of their own self-inter-
est, and if we could somehow get rid of that government respon-
sibility and all the costs associated with it and let the private sec-
tor do that, it seems to me we might be better off.

Mr. BUTLER. Even within the government sector, it is very in-
structive to compare, say, the way the FEHBP serves Federal re-
tiree employees and the way Medicare serves other retirees in
terms of the way it operates—the things that Gail Wilensky was
mentioning regarding basic information that is available and rou-
tinely provided, if you happen to be an over-65-year-old Federal
worker.

There are all kinds of arrangements made for the various com-
peting plans to provide standardized information. You can go to
places and have all the plans there offering their wares in an orga-
nized situation. All these things are available.

So it is not even necessarily whether the government is involved
or not. It is the basic incentive and structure of the system itself.
One program depends—which is Medicare—on the government
making every decision about prices and services. The other involves
the government setting broad guidelines and giving a defined con-
tribution and allowing the normal methods of the market in the
nonprofit sector, in terms of providing information, to then begin
to operate.

r. KENDALL. If I could just add one point to that. I think it is
easy to bash the current system because it is inefficient—and I am
no fan of it. But it has provided one value, I think, among many,
that needs to be stated; as a conservative businessman told me, the
one thing Medicare has accomplished is defining a product in
health care.

Before Medicare, there was no standardization of a product
which is necessary to make a marketplace work; and albeit with a
clumsy and awkward way of doing it, it has given that.

Now, we need to replace that product definition with a new prod-
uct definition, but I think it is important to keep in mind that that
product is still defined in many people’s minds the old way as a
very real thing, and we can’t just get rid of it.

Mr. McCrery. Thank you, Mr. Chairman.

Chairman THomas. Thank you.

The only concern I have in that discussion is, it is always easier
to talk about it than to do it. When you talk about a defined con-
tribution or a voucher—in essence, the AAPCC was an attempt to
try to do that, and what we heard from the previous panel is, it
has been a disaster, even within relatively close regions on a coun-
y basis.

So even if we went to the concept so that you would have a list
of plans—we will test, we will verify, then we adapt, then we have


170

that encourage or discourage utilization of out-of-network coverage and the nature of
the discounts negotiated with network providers. (For the Subcommittee’s use, the
Coalition has shared with it a copy of the complete Milman and Robertson study)

Again, the Patient Access to Specialty Care Coalition maintains that a built-in
point-of-service feature provides a good safety valve for the unhappy or dissatisfied
members of the closed pane! HMO. Under the point-of-service feature, patients are
able to go to a non-network provider of their choice. In doing so, however, the patient
would incur a higher copayment for the opportunity to go “out-of-network.”

This point-of-service feature provides the patient with an out when they question
the quality of care they are receiving by the network's limited providers. It also provides
an opportunity for the patient to seek an additional opinion from a non-partisan provider
when the patient or family disagrees with the decision made by the closed pane! HMO
or the primary care gatekeeper to withhold treatment or deny an appropriate referral to
a specialist.

N! OF MANAGED. THE MEDICARE PROG!

The Coalition is not opposed to managed care. It is concerned, however, that
Congress may be embracing a concept of cost savings of managed care in the
Medicare population without sufficient data.

Should Congress choose to go forward with expanding managed care in the
Medicare program, the Coalition maintains that its recommended point-of-service
feature will:

a) End the uncertainty and unpredictability of seniors moving in and out
of health plans through open enroliment and disenrollment-the feature will
always be there, and actuaries could easily calculate utilization of out-of-
network services.

b) Give the Medicare patient effective protection against the potential for
restricting access to medically necessary health care services.

) Provide a quality assurance check on all health care plans to make sure
that they are providing the full range of health care services to their
enrollees.

THE POINT-OF-SERVICE FEATURE IS NOT AN “ANY WILLING PROVIDER”
PROVISION.

The point-of-service feature endorsed by the Patient Access to Specialty Care
Coalition, differs substantially from “any willing provider" proposals. “Any willing
provider" provisions deal with the contractual relationships between health plans and
providers of medical services. The focus of the Patient Access to Specialty Care
Coalition is on patient choice and the health care access rights of consumers and

Mr. Chairman, the Patient Access to Specialty Care Coalition's point-of-service
feature allowing patients to access out-of-network medically necessary care ensures
real choice and real consumer protection, and is a sound quality assurance check to
make certain that all plans offer the full range of quality health care.

tn your continuing deliberations on managed care and the expansion of managed
care in the Medicare program, we urge your Subcommittee to ensure adequate patient


75

Ms. WILENSKY. It is not a surprise why you have got a problem
here.

Chairman THOMAS. Yes, Mr. Ratner.

Mr. RATNER. Just a couple of points. First, the idea of putting
fee-for-service out of reach of the beneficiaries I don’t think makes
sense in terms of good economic logic. What you really want to do
is make sure that people have appropriate incentives to choose effi-
cient plans. Whether that happens to be fee-for-service, HMO, PPO
or some new alphabet soup that comes up in 10 years, you want
to have an appropriate, level playingfield there so the incentives
are right, not that somebody prejudges which delivery form is best.

Point two. If you look at Boston, Massachusetts, and compare
that with New Haven, Connecticut, you will find that the level of
resources devoted to medical care per person in Boston is much
greater than in New Haven. You can have a managed care plan in
Boston that may be having a richer, more intense practice style
than New Haven.

If you set up a scheme that just says, exclude one form of deliv-
ery, a fee-for-service plan, you would be saying in effect that maybe
parts of the country where they do things leaner shouldn’t be doing
it. I think it becomes sticky there. So I just give that as a caution.

Chairman THomas. Well, finally, my concern is that if we do de-
termine what is a reasonable payment structure and different
styles of delivery of care have a different cost pattern, would it be
appropriate to indicate that this is what is available, and if you
want a different program, you pay for the extra cost, but that you
could get this under a particular style—that is, provide a wide
choice, but clearly certain styles would have 100-percent coverage,
and if you want a different style of delivery, it would then be out
of pocket on your case.

That is an option that we would be looking at, isn’t it?

Ms. WILENSKY. That is I think what you need. That is what you
need to move to.

Chairman THoMaAS. The gentleman from Louisiana.

For the record, I think Dr. Altman nodded his head.

Mr. ALTMAN, I did.

Mr. McCreErY. Just a quick followup to perhaps conclude this. Is
any one of you familiar with the CBO study on the amount of
money that the average Medicare recipient paid into the system
versus the amount that the average Medicare recipient takes out
of the system?

Ms. WILENSKy. I was just looking at some figures that were
HCFA, and I think ProPAC has done them. I don’t know that I
have seen CBO’s.

But basically, what I recall is that in part A, the trust fund part,
the average payment in is about $8,000. The average payment out
is about $40,000. So it is roughly a 5-to-1 differential. If you in-
clude the employer’s share, it is then about 2¥ to 1.

You get out two-and-a-half times more than what you put in, and
of course, that doesn’t account for part B where somewhere be-
tween 25 and 30 percent is paid by the senior and, therefore, 70
to 75 percent is paid for by the taxpayer. So it is a heavily sub-
sidized transfer as it exists now.


36

Chart 1. Managed Care Enrollment, by State
and Payer (In Percent)

Private
State Sector Medicare’ —_Madicaid®
National average 24.1% 5.1% 172%
California 51.4 20.9 15.3
Massachusetts 478 32 61.0
Oregon 40.4 19.9 70.2
Maryland 372 0.1 23.9
Rhode Island 36.6 78 12
Hawaii 33.8 8.9 48
Minnesota 318 o4 277
Utah 318 0.0 42.7
New York 314 29 125
Colorado 30.6 95 8.4
Arizona 29.6 23.4 100.0
Connecticut 28.4 0.0 0.0
Wisconsin 28.3 0.0 242
New Mexico 25.8 114.6 0.0
Delaware 25.3 0.0 44
Michigan 23.6 05 20.0
Pennsylvania 229 17 24.9
Washington 22.8 92 55.8
Missouri 215 1.8 52
Mlinois 212 38 69
New Jersey 21.0 ot 5.0
Florida 20.0 13.1 19.9
Ohio 18.9 1.1 127
New Hampshire 17.8 0.0 123
Kentucky 178 0.5 0.0
Nevada 16.7 15.9 29.7
Vermont 15.6 0.0 0.0
Texas 15.0 26 15
Louisiana 13.9 0.0 0.0
‘Oklahoma 13.0 24 0.0
Virginia 11.0 ot 0.0
Georgia 10.8 0.0 03
North Carolina, 10.5 0.0 14.0
Indiana 97 03 0.0
Alabama 97 0.0 0.0
Kansas as 0.6 0.0
Nebraska 85 13 0.0
West Virginia 74 0.0 0.0
Tennessee 72 0.0 100.9
Arkansas 7.0 0.0 0.0
Maino 62 0.0 0.0
‘South Carolina 5.6 0.0 0.0
towa 5.2 0.0 a8
‘South Dakola 54 0.0 0.0
Montana 24 0.0 0.0
Idaho 2.0 0.0 0.0
North Dakota 06 0.0 0.0
Mississippi 0.4 0.0 0.0
Alaska 0.0 0.0 0.0
Wyoming 0.0 0.0 0.0

Neneldeay privately incuted population in health maintonance ganizations,

Juy 1003,

® Medicare population in ek contracting plans, January 1994.

* Medicaid population in lly or patiay capiated plans, July 1904

SOURCE: InterSiudy; Employes Benett Research Ineitute: Hoalth Care
Financing Administration, tice of Managed Care and Medicaid
Buroau; and Lewin-VH) ne, Stalas as Payers: Managed Care
fer Maicaid Popuiations (Washingion, OC. National Insite or
Hoatth Care Management, 1995).



48

BENEFICIARY ENROLLMENT GROWING IN
MEDICARE'S RISK CONTRACT PROGRAM

The Medicare risk contract program may be poised for
substantial growth in enrollment during the next few years. HCFA
reports that three-fourths of all Medicare beneficiaries now live
in areas where they could enroll in a risk contract HMO.

Although beneficiary enrollment in these HMOs is relatively low,
in recent years the program has grown dramatically in both
beneficiary enrollment and HMO participation.

Fiqure 1: Percent of Beneficiaries Enrolled in HMOs With Risk
Contracts State

—

Source: HCFA, Bureau of Data Management and Strategy. Enrollment
information based on computer runs using the Denominator File.

As of May 1995, about 2.6 million beneficiaries were
enrolled in the risk contract program--about 7 percent of the
total Medicare population.* Although this share is small,

‘another 2 percent of Medicare beneficiaries belong to HMOs that
either have cost contracts or are Health Prepayment Pla:
programs reimburse HMOs on a cost basis and lack the
financial incentives of risk contracts to reduce costs.
Consequently, these cost contract HMOs are not relevant to
Proposals that would expand Medicare’s use of capitated health
plans.



117

dietitians, and administrative coordinators that perform intensive
evaluations on Medicare beneficiaries and include histories and
physicals, nutritional assessments, pharmacological assessment,
functional fitness interviews, psychosocial interviews, evaluations
of mental health and depression screening, and safety and health
risk assessments of their actual home environment.

Let me tell you a brief story about what this has meant to two
of our Medicare risk members who happen to be a couple. I will
refer to them as Mr. and Mrs. A. Mr. and Mrs. A became progres-
sively more worried about being able to stay together in their
home. Mrs. A was 81, was becoming more dependent on help, and
her 79-year-old husband feared they would be separated by a nurs-
ing home wall. Mrs. A has diabetes, hypertension, cancer, glau-
coma, and a history of falls.

The GEM team was able to approach the patient in a multidisci-
plinary fashion and detect early stages of Parkinson’s disease as
well. This may not have been picked up in an ordinary routine of-
fice visit by the physician. The treatment plan was able to effec-
tively coordinate the already complex mix of medications she was
on so that her Parkinson’s would be effectively managed, without
detrimental effect on the management of her other health prob-
lems. In-home support was arranged for Mr. A through a group of
care givers. Three months after this evaluation, Mr. A’s progressive
arthritis and vision changes resulted in a GEM evaluation for him-
self as well. Early stage Parkinson’s was diagnosed and an in-
creased fall danger was noted in a gait evaluation. Podiatric care
was prescribed as a care for Mr. A.

In-home support is still being used by Mr. and Mrs. A. However,
in the face of complex medical problems, they are still at home
maximizing their quality of life together. In conclusion, innovative
programs like these are the result of taking the HMO concept and
moving it forward.

In Tucson, Arizona, managed care plans serve the needs of Medi-
care members with excellent results. With four Medicare HMOs op-
erating in the Tucson marketplace, nearly 50 percent of Medicare
beneficiaries have voluntarily opted out of traditional fee-for-serv-
ice medicine and into one of the managed care plans.

I would suggest you might want to survey these people directly
to assess their perceptions of the increases in service, convenience,
quality, and economy which they are currently experiencing.

I also believe the integrated approach, which our HMO is a part
of, is a giant step in the right direction to serve, and more directly
connect the customer with providers of service of care, so true pro-
ductivity and accountability is the result.

We believe we are uniquely positioned in our marketplace to sig-
nificantly reduce costs and provide better quality care because of
our shared vision of our elements, namely, managing our commu-
nities toward a better health and improved health status within a
finite set of resources. We think we are proving it is a worthwhile
effort.


53

persists despite HMO enrollment expansion. HCFA officials agree
that the risk contract program displays favorable selection,
though they believe that excess payments are at the lower end of
this range.

Formula Produces Capitation Rates That
Vary Considerably Within Market Areas
And Over Time

Capitation rates are set separately for each U.S. county and
vary considerably nationwide among regions and states, among
urban and rural counties, and even among neighboring counties.
This variation may discourage some HMOs from participating in
risk contracts. For example, under the present system, an HMO is
paid 27 percent less for serving a beneficiary living in Prince
George's County, Maryland, than for serving an otherwise
identical beneficiary living in neighboring Montgomery County,
Maryland--even if the two individuals are treated in the same
facility by the same doctor.’ The inconsistency of payment
rates across county lines leads some HMOs to enroll beneficiaries
from a limited portion of the HMO's service area.

The geographic problems in the capitation rates are caused
by the formula's tie to local fee-for-service spending, which
reflects local variations both in the prices and volume of
medical services used by Medicare beneficiaries. Much of this
variation may, however, be attributable to underutilization of
health care in some areas and overutilization in others instead
of differences in the cost of providing appropriate health care.
If fee-for-service beneficiaries use a large number of services
(either because beneficiaries demand these services or because
their doctors order additional services), then HMO payment rates
will be relatively high in that county. In contrast, if Medicare
fee-for-service beneficiaries use few services--perhaps because
of inadequate transportation or a lack of providers in rural
areas--then HMO payment rates will be relatively low. As a
result, rates in some areas are too low to induce HMO
participation in the risk contract program, while in other areas
rates are too high for Medicare to realize the potential cost
savings generated by capitated payments.

HMOs also can be discouraged from participating in risk
contracts because payment rates can increase or decrease
dramatically from year to year. This problem is most prevalent
in rural counties. Because of the small number of Medicare
beneficiaries in such counties, a few very expensive illnesses
can drive up the following year's capitation rate, while an
especially “healthy” year will have the opposite effect. HMO

"Capitation payments are based upon where the beneficiary lives,
not where he or she receives medical care.


138

_ In the very recent past, there has been a tremendous increase in the rate of growth for
HMOs under Medicare. Moreover, Medicare HMO enrollment is likely to continue to
increase substantially over the next 20 or 30 years, as many of the employees covered by
HMOs during their working years retire. Very few current HMO Medicare members are
individuals who “aged into" Medicare HMO coverage. The one probable exception is
Kaiser Foundation Health Plans, which started with HCPPs in the early 1970s. These
plans have been in business long enough to develop a relatively large aged-in Medicare
population. Many of the newer HMO plans just do not have many age-ins, so they must
rely on open enrollment for enrollment growth. Nevertheless, over 50 million active
employees and their dependents are now covered under HMOs, and, as some of these
reach retirement, it is likely that many of them will choose to stay in their HMO, or even
shift to a new HMO if they retire to a different geographic location.

Another source of potential growth is smaller HMOs and PHOs. It is becoming more
common for insurance-carrier owned HMOs entering into Medicare risk contracting. In
addition, though, there are many smaller HMOs establishing additional sites (25 - 50 of
these per year), and there is also a potential major expansion of HMO networks, through
the nearly 1,000 physician-hospital organizations (PHOs) that have been formed. For
example, new hospital ventures, such as in Phoenix and Tucson, have yielded rapid
enrollment of great numbers of Medicare enrollees. In this competitive environment, many
hospitals are striving to retain their share of Medicare enrollees by entering into Medicare
risk contracts—either directly as an HMO, or by subcontracting with a federally qualified
HMO or competitive medical plan.

Competitive forces favor an expansion of HMOs and may encourage more Medicare
enrollees. In the HMO industry, commercial prernium rates have been falling for nearly two
years, and many expect that rates will fail even more sharply by the beginning of 1996.
Insurance carriers and HMOs are lowering rate quotes sharply on large-employer groups
to increase their market share. Some analysts think that we are in the beginning of a
dramatic downtum in profits for the prepaid health care industry, although the results would
certainly be worse for straight indemnity plans than for HMOs, which have capitation
contracts and negotiated low prices.

During the past several years, particularly in 1994-96, there have been sharp reductions
in Medicare risk contract supplemental premiums. These premiums are the amount above
HCFA's capitated rate that enrollees are required to pay for themselves. Figure 2 shows
that approximately 50% of the contracting HMOs have a zero premium (except for
supplemental benefits); 56% of Medicare enrollees are in zero premium plans. With
indemnity, Medigap, or employer premiums exceeding $100 per month, it is not surprising
that employers. are building in incentives for their retirees to join HMOs, which have far
more modest premiums.


49

recent HMO enrollment of Medicare beneficiaries has grown
rapidly. From 1990 through 1992, enrollment grew by about 13
percent annually but then, during 1993 and 1994, grew by an
annual average of 23 percent. Preliminary data for 1995 suggest
@ growth rate approaching 30 percent. Similarly, the number of
risk contract HMOs, which declined substantially during the early
years of the program, since 1991 has nearly doubled from 83 to
the current 164,

Figure 2: Number of Beneficiaries Enrolled in HMOs With Risk
Contracts (in millions), 1987-1995

199 tek 1908

Source: HCFA, Office of Managed Care

In 1994, HMO enrollment in California and 14 other states--
which account for 55 percent of all Medicare beneficiari
experienced double-digit growth. The other state showed no
enrollment growth. For the most pa: are states where HMO
market penetration has been extremely’ Low.



78

similar to the way elderly Federal retirees do today; and I think
organizations like AARP could fulfill the same kind of role that say
NARFE does for Federal retirees, which is to help grade the plans,
recommend plans and so on.

So I think a lot of the concerns associated with marketing tricks
could be very simply dealt with under this kind of system.

I think if you move in that direction, Mr. Chairman, a lot of the
issues that were raised in the first panel would be substantially
dealt with because you would have a situation where the elderly
would have a much more normal set of incentives to make deci-
sions. They would have to take total costs into account, and there
would be strong incentives for the plans to innovate in terms of the
services that they provide.

Thank you, Mr. Chairman.

[The prepared statement follows:]


88

Chairman THomas. Mr. Kendall

STATEMENT OF DAVID B. KENDALL, SENIOR ANALYST FOR
HEALTH POLICY, PROGRESSIVE POLICY INSTITUTE

Mr. KENDALL. Thank you. My name is Dave Kendall with the
Progressive Policy Institute, which is the policy arm of the Demo-
cratic Leadership Council. I thank you for the opportunity to be
here today.

Let me begin by recalling one of the lessons from last year’s de-
bate. The public cannot have confidence in a program that they
don’t know. That was the problem with President Clinton’s health
care alliances. They inspired little confidence in his plan because
they would have been a brandnew institution in this country. And
that is the danger of bold proposals like the ones we are consider-
ing today.

‘he Federal Employees Benefit Program, for instance, is a good
model to be using to think about the reforms that we need to do,
but most Medicare participants are not familiar with it. Instead,
we need to build up from what we already have.

Medicare already offers vouchers. It is in the managed care pro-
gram. And the growing popularity of managed care plans offers an
opportunity to create fiscal discipline for Medicare that it has never
had before.

HMOs are offering participants an alternative to rapidly rising
costs, better benefits at lower prices. As a result, they are growing
at an annual rate of 27 percent. The dark cloud raining on this pa-
rade is that taxpayers are not gaining much of the savings from
the managed care movement.

The reason is simple. Medicare pays managed care plans 5 per-
cent less than its fee-for-service costs. Even if we solved the risk
adjustment problems, we would still be saving only 5 percent. So
the public will never reap the full benefits of competition as long
as Medicare benefits are tied to the fee-for-service costs.

The alternative is to base payments to managed care plans and,
ultimately, to the government’s fee-for-service plan on the best
price in the marketplace. A competitive approach like this must be
enacted step-by-step in order to win public confidence during the
transition.

We recommend a three-part strategy: Test, verify and adapt.
Test the competitive basis for paying managed care plans and any
other kind of health plan; verify access to high-quality care at
lower costs; and finally, adapt all of Medicare spending to limits set
by competition. Let me explain in detail.

Testing competition means opening up Medicare’s program to
more than just HMOs. Other kinds of health care plans like PPOs
and even fee-for-service private plans should be allowed to compete.
A greater range of choices would make the option of joining a pri-
vate plan more attractive to Medicare beneficiaries.

The government’s contribution would be set initially near the av-
erage of all plans competing that way. Medicare participants would
be assured that the government's contribution to their health plan
would always be worth something.

The benefits offered by health plans should not exceed the cost
of the current value of Medicare benefits. That would prevent the


43

Chairman THOMAS. Thank you very much, Dr. Altman.
Mr. Ratner.

STATEMENT OF JONATHAN RATNER, ASSOCIATE DIRECTOR,

HEALTH FINANCING AND POLICY ISSUES, HEALTH,
EDUCATION, AND HUMAN SERVICES DIVISION, US.
GENERAL ACCOUNTING OFFICE

Mr. RaTNER. Thank you, Mr. Chairman.

Mr. Chairman, Members of the Committee, good morning. We
are pleased to be here to discuss opportunities to improve Medi-
care’s method of paying HMOs that enroll Medicare beneficiaries.

As we stated this past February in testimony to this Committee,
Medicare’s dominant HMO option, known as the risk contract pro-
gram, has not been able to harness the cost-saving potential of
managed care. This finding takes on greater importance as health
care payers, seeking to slow rapid growth in health spending, look
increasingly to managed care, as we have heard.

About 7 percent of Medicare’s population are HMO enrollees in
the risk contract program. But recent proposals aimed at slowing
Medicare spending growth call for moving a greater proportion of
beneficiaries into HMOs. In view of congressional interest—and it
is growing and expanding—in Medicare’s HMO Program, you asked
ust to discuss the program’s payment problems and its potential for
change.

I am honored to follow Dr. Altman, Dr. Wilensky, but I confess
it is a bit of a burden. I am going to be covering some of the same
ground, but I will try to highlight a few things that are a little dif-
erent.

In brief, HCFA needs to act promptly to correct flaws in the way
Medicare sets HMO payment rates. We have heard already that
enrollment growth has been very rapid. This increases the urgency
of correcting rate-setting flaws that result in unnecessary Medicare
spending.

As you stated at the outset, Mr. Chairman, enrollment, in fact,
has been growing dramatically since 1992. In fact, in addition, en-
rollment growth is concentrated geographically. A rather remark-
able statistic is that in 1994, 15 States, accounting for over half of
Medicare beneficiaries, experienced double digit growth in HMO
enrollment. Against this backdrop, let me just talk a bit about the
payment problem.

How Medicare pays HMOs can be looked at from a couple of per-
spectives. From the perspective of Medicare and the taxpayer,
there are a pair of problems. First, Medicare caps its potential sav-
ings from HMOs by setting its payment rate at 5 percent below fee-
for-service costs. Now, the cost advantage of HMOs appears consid-
erably greater than 5 percent, whether one looks at reports of spe-
cific HMOs generating great efficiencies, or HMO premiums for em-
ployees declining, or research studies.

‘here is HCFA-sponsored research, good research, that finds
that Medicare HMOs, in caring for their enrollees, have costs at
least 10 percent below fee-for-service. But as we have heard, Medi-
care’s formula for setting these payment rates largely precludes the
taxpayer and the Medicare Program from sharing in any of the
HMO savings beyond 5 percent.


129

your system? Because, clearly, a reduction like that would normally
be seen as a reduction in quality by sheer reduction of hours.

How do you counter that?

Dr. Bock. I think one of the things we do, and I suspect the
other plans do as well, is to have a large number of nurse case
managers. We call them patient care coordinators. They work with
physician advisors in any of our hospitals to immediately begin
case management of inpatients so the patient is not surprised, and
the expectation is set for approximately how long they are going to
be in the hospital.

And we also work with the physician groups to try to set the ex-
pectations early. I agree with the other two panelists that this real-
ly does lead to real savings. ! had the pleasure of attending a con-
ference where Senator Rudman addressed the American College of
Physician Executives and he was trying to explain why the Medi-
care Program was so expensive. He talked about a case where a
person was in there for an infection of the inside of the heart and
they were hospitalized for a total of 6 weeks for antibiotics. Then
someone from the audience, this being a managed care meeting,
raised their hand and said, “If they would have been with an TiMO,
they would have been in for 2 or 3 days and then home for 6
weeks.” It turns out the Medicare Program doesn’t cover the IV
antibodies at home. We would do nothing but cover those anti-
biotics at home. So once again we have real savings.

Chairman THOMAS. Once again, it is an attempt to try to create
a system and then force a fundamentally different approach into
that system and we have failed to respond to it. Dr. Block, you
mentioned something which intrigued me because this is one of the
normal arguments against a managed care program in general and
clearly for seniors.

Arizona probably has a relatively high percentage of mobile sen-
iors. They tend to get around a lot and travel. And you mentioned
that you have an emergency coverage portion of your program on
a worldwide basis that if I left Arizona as part of your HMO cov-
erage, is that true, that I can get emergency coverage?

Dr. BLOCK. We have emergency coverage and I think this is man-
dated by HCFA worldwide. The coverage outside of the service area
for emergency or urgent situations is regulated.

Dr. JAcoss. It is a requirement for us to do that, yes.

Chairman THomas. Just curious.

Mr. CHRISTENSEN. Mr. Chairman, could I ask——

Chairman THOMaS. Go ahead.

Mr. CHRISTENSEN. Have you had any of your participants who
were in a fee-for-service plan who had their doctor move into the
managed care system and how did that transformation process go?
Did the participant follow that doctor into one of your plans? Were
services reduced? Were they increased?

Dr. Jacoss. Mr. Christensen, we have about 1,500 contracted
providers and we have observed that a number of those patients do
move to the Medicare risk contract to the plan and stay with their

loctor.

Mr. CHRISTENSEN. Has anything changed for that Medicare re-
cipient from the fee-for-service to managed care when they have
been in a long relationship with that doctor? Have you seen any-


118

In our most recent patient satisfaction survey conducted earlier this year, medical services,
indicators on appointment availability, accessibility and convenience, front office personnel,
and pharmacy all were found to be "better than expected.”

As a iederally-qualified HMO, we must abide by the rules and regulations established by
the HMO Act of 1973 and amendments. We are required to meet all statutory, regulatory,
and policy requirements laid out for Medicare risk contractors. Every two years, the Health
Care Financing Administration visits every Medicare risk contractor and formally audits
almost every aspect of our business. HCFA carefully looks at how we are organized, our
fiscal soundness, cost reporting, utilization management, incentive arrangements, the way we
deliver care, quality assurance efforts, marketing activities, procedures for enrollment and
disenrollment, processing claims, grievance procedures — both internal and with Medicare,
and our compliante with the Equal Employment Opportunity and Americans with
Disabilities Acts.

Other regulatory bodies “looking over the shoulders" of HMOs in Arizona include the Joint
Commission on Accreditation of Healthcare Organizations, the Occupational Safety and
Health Administration, the Arizona physician oversight organization, the Arizona peer
review organization, the Arizona Departments of Insurance and Health, and others.

Does Competition Work?

Each of the HMOs represented on this panel — and the six other commercial HMOs in
Arizona ~ compete in the marketplace. But that does not mean competition is based solely
on price. We are all striving to keep our current members and bring in new members by
Providing more value for their health care dollar. We all hope to increase value by adding
new benefits, developing new or improved products and services, improving our customer
service, streamlining administrative functions, or developing larger provider networks. This
is all for the good of our membership and the public at large.

Through the Arizona Association of Managed Care Plans, we also come together to inform
and educate the public, business community, state legislators, and our Congressional
delegation on significant health care issues. Our goal is to foster a better understanding of
HMOs and how they impact health care quality, accessibility, and cost.

Through The Arizona Partnership for Infant Immunization (TAPII), Arizona HMOs are
leaders in the statewide effort to meet the President’s goal of 90 percent immunization of
Arizona two-year-olds by the year 2000. Three of the four subcommittees are chaired by
HMO representatives. Many other HMO employees volunteer to serve on each of TAPII's
committees. They do it because it not only makes good business and medical sense to
immunize, but because they care.


122

‘They are interrelated and complementary.

(Our primary-care-based case management, just several months into its pilot process has
‘already been expanded into seven physician offices from its original five. Available for our
health plan patients of all ages, it tends to see predominantly a senior population. With
this program we have a nurse case manager assigned to the office practice of participating
physicians so that extended resources are available at the primary care level to identify and
intervene in patients who are at risk for health difficulties

(Case managers work with patients identified by their primary care providers on the basis
of diagnoses or risk factors. Patients with multiple diagnoses, frequent hospitalizations or
multiple emergency room treatments are among those paid special attention.

‘The nurse case manager administers a health risk appraisal including a home environment
assessment and works with the primary care physician in creating and implementing a plan
of care. They identify and deal with gaps in support systems available to patients. It is an
‘on-going process to give long-term additional support and reach to the primary care
provider in bringing maximum results for each patient

One simple example of the efficiency of this extra resource is the case of a woman who is
now using night-time oxygen as a result of an extended, in-home evaluation by her nurse
case manager. Because of the greater period of time available for evaluation within the
case management system (compared to an office visit with only the physician) and because
it can be in the member's home, a more complete picture of the patient's total health risks
and needs can be gathered. In this case, an in-home visit determined that overnight
‘oxygen monitoring was warranted, that in tur pointed to a risk from lower oxygen intake
during sleep. A simple addition of night time oxygen is now working to prevent a more
serious incident.

(Our nurse case managers report a wide spectrum of experiences, some as simple as finding
asthma patients at home with poor dust control, ali of which leads to intervention and
prevention at its most effective and efficient level,

‘The pilot study includes both independent physician practice and group physician practice
settings. We are currently investigating extension of our case management system into
‘ther areas including pediatric care and working to make it more widely avaiable.

‘The geriatric evaluation and management (GEM) program has been in operation for
‘almost a full year, during which we have found substantial success in providing an
‘unprecedented level of support for senior patients and for their primary care providers by
carefully coordinating resources available within the various segments of our THO's
‘operating entities.

Primary care providers are offered the opportunity to refer Medicare risk patients whom
they believe to need special attention into this program for evaluation, The GEM program
consists of health professionals in numerous disciplines from each of our major [HO
‘component areas: hospital, health plan and physician practice. This team (a
pharmacologist, a physician, a geriatric nurse practitioner, a social worker, a registered



127

one-on-one sales effort, and word of mouth has been the most im-
portant way of attracting members.

I can’t emphasize enough the importance of competition, and
competition based on something more than just on price. We com-
pete in benefits, we compete on service and network. We compete
across a broad range of program attributes and competition based
just on price is a real mistake.

Mr. CHRISTENSEN. Thank you, Mr. Chairman.

Chairman Tuomas. Thank you.

Following that line of argument a little bit, the point was made
that—I think Dr. Block, without a point-of-service option because
of the prohibition on the part of Medicare, you obviously are not
able to market a product that would be as complete as your cus-
tomers would like. That is primarily affecting you on the basis of
a less attractive product, doing less than you could do, or do you
lose people over that? How fundamental is that failure to be able
to provide a point-of-service?

Dr. BLocK. We have done-——

Chairman Tuomas. Is it evolutionary? That is, more people now
are more concerned about it than they were 3 years ago?

Dr. BLock. We have done focus groups and surveys, and what we
have found is there are people that are fearful of joining an HMO
and have a supplementary product or an indemnity product plus
Medicare because they still want to be able to access that one doc-
tor that they have had for 10 years, their eye doctor or their heart
doctor. And when they know that they cannot access that doctor
through the lock-in HMO, they are not willing to consider that as
an option.

I think the commercial experience will say that one way that
commercial HMOs and carriers have introduced the HMO concept
has been to go with a point-of-service option as kind of an interim
step so that people do have the ability to see that one or two doc-
tors in their life who are very important to them and still have all
the benefits of an HMO.

Chairman Tuomas. Dr. Jacobs, you are talking about the dif-
ficulty with the 50-50 rule, which is somewhat similar. You can’t
market the product the way you want to market it because of the
prohibitions which like a lot of things we do in government, had
a real good reason at one time to establish what folks I guess
thought was a quality check but which clearly is a limitation to a
certain extent, if you want to specialize in an area.

And then in response to Mr. Christensen, you talked about the
kind of advertising that you do. Do you use focus group or question
new enrollees as to how they found out about you? I know you
mentioned several times it was by word of mouth. Is that what you
find to be probably the primary reason folks looked you up?

Dr. Jacoss. Mr. Chairman, I don’t have those statistics at my
fingertips. I do know that word of mouth is very important to us,
but I can’t give you a percentage, what percentage of our leads
come from word of mouth. It is a high percentage, though, and we
are inhibited by 50-50 to a significant degree.

One other impact the 50-50 rule has on us is that we are unable
to take on Medicaid patients because they count toward the 50-50,
and J know that access in Arizona would like for us to participate.


151

drugs and advanced treatments will put them at odds with organizations that are under
pressure to look squarely at the bottom Tine. An 1994 study of HMO performance warns
that little evidence exists that the performance of prepaid care in relatively healthy
populations can be replicated among sicker patients.

V. Medicare Changes Should Encourage Personal Responsibility in Health Care
Spending

Further short-term reductions of expenditures and the expansion of managed care will not
solve Medicare's budgetary problems. The Medicare program requires serious, long-term
transformation if its promise is to be preserved for future and current generations.

‘Any formulation of a long-term solution should include the principles of enhancing inter-
generational equity in financing, reducing regulatory and administrative complexity for
patients and physicians, and facilitating price competition among physicians.

Moreover, we believe that a crucial component in reducing the rate of growth in the cost of
Medicare and health care in general is encouraging personal responsibility and cost-
consciousness at the point of service.

In restructuring Medicare, a possible sofution for Congress is to provide the same tax
incentives for Medical Savings Accounts (MSAs) as given traditional employer-paid health
benefits.

The enactment of MSAs, as proposed in various bills pending in Congress, would be an
important step in moving away from the current system of first-dollar coverage provided by
third parties, and toward returning control over health care spending to individuals and
decreasing costs by lowering utilization. ASPRS welcomes chairman Bill Archer's initiative
in this area and encourages the committee to develop this approach concurrent to its changes
in the Medicare program.

VI. Medicare Patients Enrolled in Managed Care Should be Provided With Certain
Protections

To the extent that managed care expands within the Medicare program, ASPRS strongly
believes that beneficiaries should be provided with formal safeguards to ensure that the profit
motive does not endanger patient care. Also, seniors should be fully informed about the
coverage, restrictions and procedures of various plans.

To protect Medicare patients enrolled in managed care from potential abuses of managed
care, ASPRS recommends that Congress adopt the following safeguards:

° Financial incentives should not be allowed to interfere with medical judgment. For
instance, plans should be prohibited from establishing arrangements in which the
gatekeeper has a financial incentive to not refer patients, The patient's first point of
contact should be encouraged to make all needed medical referrals and should not fee!
constrained financially from doing the best job for the patient;

© Point of service options should be mandatory for all plans with limitations on out-of-
pocket expenses to patients. Patients should be able to opt out of any closed system
to seek the specialist of their choice. The financial penalties that accrue to such an
opt out, or “point of service" should be capped. ‘This option is the ultimate consumer
protection against poorly managed health care plans, or those that unduly restrict
access to necessary specialty treatment;

© Plans should be required to provide the full range of specialized care for enrollees
with rare, unusual or highly complex conditions, and should provide all appropriate
specialty services in accord with clinical practice guidelines established by recognized
specialty societies. Direct access to specialty care is essential for patients in


155

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

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

Also, this can mean that if a panel provider believes that the MCO's.
recommendations would be harmful to the patient, the provider may not tel this to the
beneficiary. The consumer should have the right to know his/her provider's opinions of
treatment decisions made by the MCO, especially if the provider believes that the MCO's
decision is not in the patient's best interests. Also, these clauses prevent managed care
abuses from reaching the press and legislators,

6. Pati yen their ener

Patients never know whether or not their treatment will be covered until they become il.
Since providers may be at risk if they acvocate for the consumer, this leaves consumers
often having to spend their energy on advocating for themselves when needed treatment is.

providers being at risk for unemployment if they advocate for their patients, there may be
fo one let io advocate for he ekery patent, especialy i family is urinvolved or Ives fr

Since the MCO's now decide which providers will be able to continue working, many
have been frightened into silence. Many fee! too powerless to protest poor treatment of
consumers to the MCO, the press, or to their legislators. When New York State's
Assembly held hearings on managed care in January, 1994, several providers told me they

future sessions. These vary real threats put the consumer at risk, especially in mental
heatth, where patients usually do not advocate for themselves, and especially with the
elderly patient, who may not be able to advocate for hinvnerself,

a) a tect cine inte not spent on vaamont. Corporate profs ar soaring
while beneficiaries are TeceWving

are prohibited from ‘care for chronic and ongoing problems
and are being discharged from hospitals prematurely.
) Even capitated contracts that are made between employers and providers directly,
MCO's, are problematic. One Califomia therapist told me that she was called by

wri ho porto Sly to ‘Obviously, if the patient requires 10 sessions, she is
receiving poor wages (with no benefits) for someone with a doctorate or even a master’s
degree. i the patent requires 40, 50, or more sessions, Kbecomes hdicrous, Thus,
there is a strong incentive to under-treat, and clinicians may simply not be able to afford to


CONTENTS

Advisory of May 9, 1995, announcing the hearing ....

WITNESSES

Physician Payment Review Commission, Gail R. Wilensky, Ph.D., Chair ...

Prospective Payment Assessment Commission, Stuart H. Altman, Ph.D.
Chairman .... ese

U.S. General Accounting Office, Heaith, Education, and Human Services Di
sion, Jonathan Ratner, Associate Director, Health Financing and Policy
issues ...

Butler, Stuart M., Heritage Foundation
CIGNA HealthCare of Arizona, Inc., Martin Block, M.D
FHP Health Care, Richard Jacobs, MD ..
HealthPartners of Southern Arizona, Paul A. Zucarelli
Kendall, David B., Progressive Policy Institute .
PARTNERS Health Plan of Arizona, Paul A. Zu

SUBMISSIONS FOR THE RECORD

Air Force Sergeants Association, James D. Staton, statement ..
‘American Academy of Actuaries’ Medicare Work Group, statement .
American Rehabilitation Association, statement
‘American Society of Plastic and Reconstructive
Coalition of Mental Health Professionals and Consumers, Inc., Kai
statement and attachments ...
Consortium for Citizens with Di
Luther, Hon. Bill, a Representative in Congress from.
statement .

43


145

In fact, there is a third factor, denial of services. Enrollees may find that certain services are not
provided, either because they are deemed to be unnecessary or because of contract limitations,
the effects of which are not appreciated until itis too late. This observation is not to suggest that
HMOs and other managed care plans seek to deceive enrollees, but rather that certain specialty
services which are utilized by a small number of enrollees do not receive adequate attention by
either the plan or the enrollee until the service is needed.

This is often the case for rehabilitation services. Rehabilitation is designed to restore or improve
physical and cognitive function after a disabling event or illness. Typically disability is produced
by traumatic injury, stroke or neurologic disease or congenital problems. ‘The ability to walk,
talk and perform activities of daily living can be restored or enhanced through a coordinated
program of therapies and other services. Depending on the medical condition of the patient, such
services may be provided in a rehabilitation hospital or unit, a skilled nursing facility, on an
outpatient basis or in the home.

‘This testimony provides a brief overview of the treatment of rehabilitation by managed care plans
and suggests ways in which present or potential enrollees may make informed decisions about
a managed care plan's coverage of same.

BACKGROUND

Managed care plans do not always fully delineate the scope and duration of covered services,
explicitly state what is or is not covered, disclose incentives for or against use of various services
or provide mechanisms for resolution of disputes with enrollees about the need for services.
Relatively few people utilize rehabilitation services in a given year; about four million people
receive some type of therapy service annually. Of this total about 400,000 are admitted to a
rehabilitation hospital or a rehabilitation unit in a general hospital. Thus, the chance that a given
individual will need rehabilitation services is slight.

While HMO Medicare plans are to cover all Medicare benefits, when the need for rehabilitation
services does arise, enrollees find that managed care policies frequently limit or restrict access
to services. To avoid such circumstances managed care plans should provide adequate
information to consumers to enable them to understand what they have purchased and their rights
in case of disputes about the need for services. These issues will arise in the 104th Congress as
consideration is given to restructuring the Medicare program.

This means that coverage of such services is not a major consideration when a choice is made
to enroll in a managed care plan. When the need for rehabilitation services does arise, enrollees
find that contract limitations or managed care policies bar or limit access to services. To avoid
such circumstances managed care plans should provide adequate information to consumers to
enable them to understand what they have purchased and their rights in case of disputes about
the need for services. These issues will arise in the 104th Congress as consideration is given to
restructuring the Medicare program health insurance reform, and Medicaid and ERISA waivers.

The Association has heard repeatedly about instances where Medicare beneficiaries are not
referred for rehabilitation services or where services have been limited in duration, not allowing
for maximurn or (even adequate) functional recovery, or, the site of services is inappropriate.
Most recently the Association heard of a group of physicians who in preparing their profile in
order to contract with local HMOs, refused to refer a patient with a hip fracture and prothesis
toa local rehab hospital. ‘The hospital had a critical path for such patients whereby the patient
would be sent home, walking within in one week, or less. The physicians, wanting to
theoretically save money, sent the patient to an alternative site where the patient never got out
of bed; received only bed side physical therapy; developed serious pressure sores and the cement
on the prothesis cracked. He was readmitted to the acute care hospital and receive another hip
prothesis, after the complications of the pressures sores were corrected. Then he was referred
to the rehab hospital. While the physician's profile may not show the readmission and
subsequent rehab referral, the Medicare program had to bear the cost of this decision, the
readmission and the complications that could have been avoided.

Also, an American Rehab study of HMO coverage of rehab services found that one-half of the


106

Attachment A

The primary differences between our two benefit plans are summarized below:

CIGNA SENIOR COVERAGE
BENEFIT
BASIC PLAN _| PREMIUM PLAN
Premium ” so
Outpatient Copays $10 per visit $5 per visit
Prescription Drug annual | $750 $2500
Maximum benefit
‘Hospital Inpatient Copay | $300 for nom-plan | no copay for noa-plan
hospital admission | hospital admission
Lensiframe benefit Not Covered ‘$100 allowance
Wearing Sev
-Euams Not Covered $5 per visit
~ Hearing sid appliances Not Covered $100 credit for each
hearing aid unit per year
Routine Podiatry Services | Not Covered $5 per visit

‘An optional dental plan is also available for those members who desire dental coverage.


66

are the disabled, are the renal patients and everybody else who can
buy an average Medigap plan; where in the managed care plan,
they are not there.

So there are distortions that are currently building into the Med-
icare Program, and it varies of course by area.

I think the Medicare Program is fast moving away from its basic
premise, which is to provide a national benefit package of roughly
comparable rates around the country; and it is distorted twice, at
the Medigap policy and at the way the government pays through
the AAPCC.

Mr. Stark. Thank you, Mr. Chairman. Thank you.

Chairman THOMas. Interesting.

Let me say that everybody has subtle ways of selecting, and the
gentleman from California indicated drivability to the hotel. I
would say if I was an association looking for would-be seniors I
would begin mailings to individuals age 50 and up—obviously they
are people who plan for the future, which, by definition, are some-
what atypical, and they have 15 years of planning for the future
before they become available for the plan.

Mr. ALTMAN. Absolutely.

Chairman THOMAS. The gentleman from Louisiana.

Mr. McCrery. Thank you, Mr. Chairman.

Just a quick question to you, Dr. Altman. I think you said that
when you look at seniors that are served by the VA system and by
DOD, you find that their costs or their expenditures are 3 to 7 per-
cent higher?

Mr. ALTMAN. I may not have made myself clear.

Many seniors avail themselves of services that are provided free
to them by the VA and the Defense Department, so they therefore
use less services from the regular Medicare fee-for-service or man-
aged care world. But when it comes time to calculate the AAPCC
in the area, they include in the denominator all of the people, in-
cluding those that use the DOD and the fee-for-service. As a result,
in some areas, you get a distortedly low——

Mr. McCrerv. I see. I misunderstood.

Mr. ALTMAN. No. I didn’t say it correctly. I can see why you mis-
understand it.

Mr. McCrerv. That explains it. Thank you.

Dr. Altman, you talked about distortions that are in the current
system. It seems like every time we talk about Medicare, the sub-
ject of distortions comes up; and it seems to me that many of those
distortions are caused by the government trying to direct one thing
or another, or the government trying to create incentives, or the
way the government designs a benefit package or a payment sys-
tem or whatever. It is almost a catch-22. You try to fix something
here and you create something over there, and you get these distor-
tions because of government policy.

I would like to find a way to minimize the government's influ-
ence in the Medicare system; and it seems to me that in order to
do that, we are going to have to follow the President's advice,
which is to address the health care system at the same time you
address Medicare in terms of reform.

Do any of you have any ideas on that? Do you agree with that,
and if so, is there a way that we can work to blend the Medicare


52

The recent surge in HMO participation indicates that many
organizations now view Medicare risk contracts as potentially
lucrative. In addition, in caring for Medicare beneficiaries,
HMOs are estimated to achieve cost savings in excess of 5
percent. Research suggests that HMO costs in caring for their
enrollees are at least 10 percent less than HCFA would have spent
on fee-for-service care for them.‘ Finally, some experience of
private-sector employers with HMOs suggests that the 5-percent
discount may be too low, especially in certain urban areas with
mature managed care markets. In those markets, even a larger
discount (lower capitation rate) might not significantly
discourage HMOs' participation in Medicare risk contracts.

Risk Adjustment Methodology Inadequate
to Prevent Overcompensation

Currently, HCFA's capitation payment to HMOs is "risk
adjusted" only for four demographic factors: beneficiary age,
sex, Medicaid status, and institutional status. These
adjustments are designed to modify HMO payments for expected
variations in medical costs. For example, the capitation payment
is higher for older beneficiaries, since they are expected to
require more medical care than younger beneficiaries. However,
this risk adjustment is inadequate because it does not
specifically adjust for the health status of enrollees. By
enrolling the healthier individuals, HMOs need deliver less
health care but are compensated as if they enrolled a costlier
clientele--both the healthier and the sicker individuals.*

Our review of studies on risk selection shows that, because
most HMOs benefit from favorable selection (the healthier
individuals typically enroll in HMOs), Medicare has paid HMOs
more than it would have paid for the same patients' care by fee-
for-service providers.‘ Estimates of the excess payments range
from almost 6 percent to 28 percent. Although these estimates are
based on 1991 data, our review suggests that favorable selection

‘Randall S. Brown and others, "Do Health Maintenance

Organizations Work for Medicare?" Health Care Financing Review,
Fall 1993, Volume 15, Number 1, p. 14.

SHCFA uses administrative means, such as prohibiting HMOs from

refusing to enroll beneficiaries with pre-existing conditions and
monitoring HMO marketing materials, to lessen the ability of HMOs
to purposely attract healthier-than-average beneficiari .

“Medicare: Changes to HMO Rate Setting Method Are Needed to
Reduce Program Costs. GAO/HEHS-94-119, pp. 21-23.



101

eight year period, our monthly member premiums increased from $45 to $69.50 in
‘an attempt to cover costs. However, competitor risk contract products with no
premium were available. It became clear to us that seniors were attracted to the
benefits of a managed care health plan, but found the expense of cost contracts
prohibitive. Thus, the competitive market helped drive our decision to convert to a
risk contract for Medicare in 1993 — much as the market place has led the managed
care transformation of privately funded health care.

THE MOVE TO RISK CONTRACTING

Our offering of a benefit plan under a risk contract in Arizona met with
‘overwhelming acceptance. More than 97 percent of our cost contract members

enrolled in the risk product. The average age of our Medicare membership at that
time was nearly 78 years old, compared to approximately 74 years for the general

Originally, we offered one benefit plan option -- with a $20 monthly premium --
in our staff mode! to individual members only. This was done, in part, for
ease of administration and also to limit membership until we could determine
whether we could successfully implement utilization management measures for our
Medicare membership while maintaining quality. Our immediate and dramatic
eduction in inpatient hospital days with the risk contract proved that our utilization
management measures were successful. During our last year under the cost contract,
inpatient hospital days per thousand members were approximately 2,200. After our
first year in risk, days per thousand dropped to about 1,100, or nearly one-half the
amount realized under the cost contract, These impressive utilization results, it
should be noted, were achieved with an older population than on average, while
maintaining quality of health care.

HOW WE SERVE SENIORS

The key to CIGNA’ success in containing health care costs is close management of
the patient ‘s care. This is achieved through "partnerships" we have developed with
our two major hospital networks to effectively manage the Medicare risk population.
‘The risk, as well as the potential rewards, are shared between the Health Plan and its
hospital ‘partners. The hospital systems are capitated for inpatient services including
skilled nursing facilities (SNF), outpatient surgery, home health services and durable
medical equipment. Risk bands have been established, based on the utilization of
these components.

Additionally, through the wise use of medical resources, CIGNA is able 10 provide
beneficiaries

referring them, when needed, for specialty care or diagnostic procedures. And nurse
practitioners play an important role in assuring that SNF patients get appropriate,
‘quality medical care.

The Health Plan works hard to meet seniors‘ needs in the most efficient way possible.
We focus on our patients ’ entire needs, not just their medical care. By offering a full
continuum of care, we can begin making appropriate plans for patients ‘ discharge

early in their clinical course. SNFsare located on the main campuses of the
hospitals and are designed to accept more seriously ill patients than most other SNFs.
Once patients are admitted, they are reviewed on a daily basis by utilization nursing

the most appropriate level of care. The nurses work directly with the patients and
their families to coordinate services.

‘The Health Plan also as an extensive Ambulatory Case Management program to
support the ongoing needs of members. Early identification of potential cases is an
important aspect of the program. Once members are in the program, the RN Case
Managers, under the supervision of Health Plan physicians, are responsible for
evaluating patients ‘ needs, coordinating care and community resources and
monitoring patients ‘ health status. For example, a patient discharged with the
diagnosis of congestive heart failure may have ahome health nursing visit to ensure
that they understand their medications and how to take them, to teach them how to


26

provide Medicare covered services to Medicare enrollees. If these costs are less than
the expected payment, plans are required to provide additional benefits to the enrollee
or to return the difference to the Medicare program. Of course they alll elect to provide
the benefits, and the Medicare program fails to gain from their efficiencies. Plans
argue that if they do not offer these extra benefits, given the structure of the Medicare
Program, few beneficiaries will join a managed care plan. While there may be truth in
such contentions, it is hard to understand why all of the higher payments should go to
these extra benefits.

Our analysis of the ACR data indicate that managed care plans in areas with
high fee-for-service (FFS) costs have higher costs than plans in areas with lower
costs. However, the costs incurred by managed care plans rise more slowly than FFS
costs and Medicare payments. In fact, our analysis showed that in 1994 a $100
increase in Medicare's payment to the plan was associated with only a $72 increase in
its cost of providing Medicare covered services. Consequently, in high cost areas
plans retumed $28 in additional services or reduced liability to the beneficiary for every
$100 increase in the AAPCC, and Medicare did not share in the savings.

There is substantial variation in the monthly value of the added benefits that are
provided at no cost to Medicare risk plan enrollees (Chart 6). Ten percent of enrollees
received additional monthly benefits worth between $111 and $139. At the other end
of the spectrum, 10 percent of enrollees received additional benefits of less than $10
with some receiving no extra benefits.

There is one other aspect of Medicare's treatment of expected plan cost and
payments that | would like to mention, Mr. Chairman. As part of their calculations,
plans include the combined percentage of their costs due to administrative overhead
and profits in their private business. Medicare allows them to keep this same
percentage of their expected costs for overhead and profit. Since Medicare's
capitated payment is much higher than the capitated rate in their private business, the


22

IMPROVING MEDICARE’S MANAGED CARE PROGRAMS

| would like to tum now, Mr. Chairman, to what we at ProPAC have learned
about the operation of the current Medicare managed care options, their policies, and
the problems with how they work.

Medicare offers several different types of managed care programs (Chart 2). In
1990, 1.9 million individuals were enrolled in one of these programs. By 1994,
enrollment had increased to almost 3 million individuals (Chart 3), and by early 1995
more than 3.2 million beneficiaries were in Medicare managed care programs. More
than 400,000 additional individuals were in the SELECT program. The most popular
option is the fully capitated risk contracting program, which now enrolis over 76
percent of all Medicare managed care beneficiaries. Under a risk contract, Medicare
Pays a health plan a capitated rate per enrollee, and the plan is responsible for
providing all necessary Part A and Part B covered services. Beneficiaries may be
charged a copayment and, under certain circumstances, receive additional benefits.
The plan can also offer Medicare enrollees additional benefits for which it can charge
a premium, like other supplemental coverage policies. Plans must have annual
enrollment periods and meet other requirements. Each month, however, beneficiaries
may elect to disenroll from the plan.

In addition to the risk contracting program, Medicare also contracts with
managed care plans to provide benefits on a cost-reimbursement basis. These
contracts allow managed care plans to participate in Medicare without assuming
financial risk for treating these patients. There are two types of cost contracts. The
first, referred to as Section 1876 reasonable cost plans, provide all Part A and Part B
Medicare benefits and must meet requirements that are similar to those for risk plans.
In 1994, about 5 percent of Medicare's managed care beneficiaries were enrolled in
‘one of the 27 cost plans (Chart 2). The second type of contract, known as health care


105

resulting elimination of unnecessary services and inpatient days of care allows
CIGNA to provide enhanced benefits at a lower overall cost. The competitive
‘Arizona marketplace has encouraged innovative approaches and resulted in better
benefits for Medicare beneficiaries.

Looking to the future, we are committed to being a part of the improvement and
transformation in the Medicare market and believe that seniors‘ choices should be
expanded in the managed care environment. Medicare managed care, we're
convinced, is quality care.


162

upon request. The intention is to provide true discounts for those with limited incomes. The
Board's recommended fee ranges would protect westthier patients from being over-charged.
High-priced clinicians would have to be able to justify their fees to patients. Caps on fees and
‘the mandatory use of sliding scale fees could be instituted if-a voluntary sliding scale did not
adequately contro! fees. Sliding scales might be able to be used for hospital expenses if the
ercentage share for costs was graduated according to incom ens earning $30,000
might only pay 5% of hospital bills up to a catastrophic limit appropriate for their income, while
those earning $300,000 might pay 60% of all bills up to an affordable catastrophic limit.

8) the Insurer's liability is limited by the fixed reimbursement, b)
patients and providers, due to a co-payment scaled to the patient's income, become cost- and
utilization-conscious, c} patients could “comparison shop” and have freedom of choice, and d)
practitioners would be guaranteed at least a minimum payment for each procedure (the fixed
reimbursement), yet would retain some independence to compete in a truly free market based
upon training, talent, reputation in the community, and fees.

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

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

10. Outpatient psychotherapy would cover individual, group, and marital/couple/family
treatment, as allowing children, adults, or families to remain in distress is harmful and costly to
our country. Coverage for 40-50 sessions/year is recommended, as: a) 85% of patients use
less than 26 sessions, even with liberal benefits and no UR {utilization review), b) liberal
outpatient benefits reduce inpatient costs and, thus, overall mental health costs, and c}
preventing the 15% of patients who need long-term psychotherapy from receiving it may
increase society's costs and harm patients and their families. UR can be used to provide
additional sessions beyond the annual limit for those who demonstrate strong psychological
and/or medical need AND financial need, UR would not intrude on session content of personal
information. Inpatient treatment would require UR, but at reasonable intervals. Medication
management would be given the same status as any medical visit. Partial hospitalization,
half-way houses, and group homes would be supported to reduce inpatient costs and the costs
to society of inadequately treated mental health needs. There would be no limit to inpatient
cere for the seriously mentally ill (schizophrenia, bipolar disorder, major depression, severe
borderline personality disorder, etc.), but appropriate UR would be utilized. Patient education
‘would be developed to explain mental health problems, different forms of treatment and
psychotherapy, and the educational requirements of different types of clinicians.

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

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

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


165

© provide bonuses or penalties to providers based on their adherence to utilization limits
determined by the managed care plan,

© place individual physicians at financial risk for caring for patients by requiring physicians
to assume the cost of out-of-plan specialty care.

RECOMMENDATIONS
Managed Care Safeguards for Consumers and Providers

To address these significant problems with health care delivery through managed care, Medicare,
Medicaid, and private health insurance reforms should include safeguards for consumers and
providers from certain managed care practices. Managed care plans continue to gain market
power with few federal or state guidelines for the provision of quality care, particularly for people
with disabilities and those with specialized or complex health needs Managed care plans should
at least be required to meet certain standards to maintain access, quality, and accountability to
enrollees, Without these protections, managed care plans can be devastating to the health status
and ability to function of people with disabilities and chronic health conditions.

CCD strongly encourages the 104th Congress to include the following provisions in any proposals
to reform both the public and private health insurance systems. These provisions have wide
support in the consumer and provider communities.

° Provider Due Process Protecti

CCD strongly supports the inclusion of due process protections in Medicare,
Medicaid, and private insurance reform legislation so that consumers and providers
are on a level playing field when interacting with powerful managed care
companies, These protections will ensure appropriate decision-making and
selection procedures for providers, and in so doing, will protect consumers in their
choices and access to health and mental health professionals and other providers

© Quali Provisions in § Care PI

The need for appropriate quality assurance measures is particularly important for people
with disabilities and chronic conditions in managed care settings, As enrollment in
managed care health plans continues to increase, consumers must be informed about the
nature of managed care health delivery and their rights within these plans, Consumer
needs must be routinely and systematically considered and consumers must play a central
role in decision-making within the managed care entity. In fact, consumer involvement is
Critical at all levels of health care system governance CCD strongly supports an emphasis
within public and private health plans on consumer choice, consumer involvement in the
governance of the plan, consumer rights, and consumer satisfaction. We believe that this
‘emphasis on the role of the consumer is directly related to assuring the actual quality of
health and health-related services provided under managed care plans

© Point-of-Service Option

Managed care plans should provide a point-of-service option to their enrollees in
order to allow persons with specialized health care needs to obtain care from
‘out-of-network providers, assuming they opt to pay the extra premium and
copayments necessary. This provision retains the ability of closed-panel HMOs to
contain costs but also allows enrollees the flexibility to opt out of the network if
they pay a little more for this option.


169

consumers secure in knowing that the health care provider of their own choice will
always be there.

Making available out-of-network treatment and services for enrollees in all health
care plans provides a very good quality assurance check. It ensures that all health
care plans provide the health care that their enrollees need and deserve. The ability
of all Americans to seek out-of-network coverage, provides consumer protection as.
well. If a patient is not satisfied with care, he or she could pursue other treatment for
a reasonable, but not cost-prohibitive price.

Today, one of the more popular health insurance products among consumers is
a closed panel managed care plan with the availability of out-of-network coverage.
Patients have been demanding this freedom to choose, and the marketplace has
fesponded. This point-of-service feature for all health plans, therefore, is not intrusive,
but rather advances a developing trend, and builds in consistency and predictability for
consumers.

THIS POINT-OF-SERVICE FEATURE IS NOT COSTLY

Building a point-of-service feature into all health plans will not affect any health
plans’ ability to be aggressive in their cost containment activities, nor will it limit their
efforts to encourage providers and consumers to use health care resources wisely. It
will simply put pressure on health plans to keep patients’ welfare uppermost on their
agenda, ahead of dividends and the bottom line.

‘Consumers expect to bear some additional cost for this point-of-service feature.
However, this cost is not great, and it is a simple actuarial calculation to determine a
reasonable copayment. There is also no financial burden placed on the HMO.

The Patient Access to Specialty Care Coalition retained the firm of Milliman &
Robertson, Inc. to study the cost impact on HMOs, if all closed-panel HMOs had to
offer a point-of-service to their enrollees. A closed-panei HMO only allows patients to
receive care from its own contracted providers. When a closed panel HMO has a
point-of-service feature, patients have an opportunity to “opt-out” of the managed care’s
network of providers, and seek “out-of-network” care.

The managed care industry has consistently claimed that a point-of-service
feature in all health plans would greatly increase the cost of doing business. This
assertion is contradicted by the Milliman and Robertson findings.

According to this study, a built-in point-of-service feature for all managed care
plans would not greatly change the cost of managed care or HMO benefits. In fact the
study demonstrates that this point-of-service feature, in some instances, can actually
lower the costs to an HMO.

The Milliman and Robertson study estimated the “net claim cost" for two typical
health care ntans in today's marketplace. These plans were developed from existing
data in tne HMO Industry Study, 1994 of the Group Health Association of America.
Milliman and Robertson concluded that when it compared a point-of-service feature to
a pure HMO (a closed panel), the expected cost ranged from a decrease of about 5
percent for a typical HMO plan to an increase of about 10 percent for a more generous
HMO plan.

Analysis of this data demonstrates that the inclusion of out-of-network coverage
within an HMO design does not, in itself, either increase or decrease claims costs
incurred by the HMO. Instead, claims costs are increased or decreased depending
upon the HMO’s selection of factors (deductibles, copayments, and out-of-pocket limits)


34

PROTECTING BENEFICIARY ACCESS TO QUALITY CARE

While expansion of Medicare's risk contracting program has the potential to slow
the rise in Medicare spending, it also could have negative effects on beneficiary
access to services and the quality of care they receive. Because plans use network
Providers, beneficiaries may be limited in their choice of physicians and hospitals. If
their current provider is not in the plan's network, they will have to change
Practitioners, thereby disrupting their relationship with their physician and their
continuity of care. In addition, managed care plans rely on utilization management
Practices that may limit the services they receive. Although there is no consensus
about whether these restrictions impede or improve quality, they are sometimes
perceived as limiting the beneficiary's access to services.

Collecting and making data available on plan and provider outcomes can help
enrollees measure the strengths and weaknesses of different plans, and help them
choose the plan that best meets their needs. The availability of such data in the
Medicare managed care program varies widely. In California, Arizona, and Nevada,
HCFA’s regional office is disseminating information. In other areas, elderly advocacy
and insurance advisory groups are compiling it. However, in most of the nation no
‘such information exists.

Current program rules require participating HMOs to enroll at least 50 percent of
their membership from sources other than Medicare or Medicaid. When this
requirement was established, it was intended to be a quality assurance measure. The
rule was predicated on the assumption that quality care for Medicare beneficiaries
could be enhanced since plans would have to provide an appropriate level of care to
attract private sector enrollees. Since then, quality measures have been developed in
the private sector that allow enrollees to compare plan prices, outcomes, beneficiary
satisfaction ratings, and other related information. These measures are now being
fefined to reflect the elderly population. Medicare should make these alternatives for


115

Closing
HMOs ~ like FHP ~ provide high quality care with more comprehensive benefits, more
preventive services, and lower out-of-pocket expenses. Because of our focus on quality,
administrative efficiencies, coordination of care, and purchasing power we are able to
provide these services at a lower cost than the fee-for-service system. We encourage people
to see their personal physician to catch small problems before they become major ones.
‘Our members can choose from a wide variety of board certified personal physicians who
meet high standards of professional training and medical practice. Based on our experience
and numerous independent studies, our members like their care every bit as much and
often more than people in old-style fee-for-service plans.

HMOs — organizations comprised of people just like you and me -- have grown rapidly in
Arizona and across the country because a need existed, The healthy competition that has
evolved in Arizona can serve as an indicator of what states with low HMO penetration can
look forward to. HMOs in Arizona have been working successfully ~- in the marketplace
and as an industry — to solve many of the problems in our health care system that you and
your counterparts at the state level are trying to address.

Thank you. I welcome any questions you may have.


136

ofthe DRG system. During the entire operating period of HCPPs (early 1970s to present),
HCFA has allowed HMOs with poor financial success under Medicare risk contracts to
switch to HCPP contracts, without federal qualification, or to switch to TEFRA cost
contracts. This means that the HMOs that are doing well financially with Medicare
contracts can retain their current risk contract status. However, those that do poorly are
likely to choose to switch to a contract where their risk is eliminated. This option tends to
minimize any chance of cost reduction for HCFA. HCPPs will be mostly phased out at the
end of 1995. TEFRA cost contracts will still be an option, however. In April 1995, the
number of Medicare eligibles covered under various types of cost programs exceeded
500,000, or 2% of the Medicare population.

Overall, growth in the number of Medicare risk enrollees has been moderate. But as
shown in Figure 1 (prepared by the Federal Office of Managed Care) growth in the risk
contract market has been accelerating over the past five years.

One reason for the slow growth noted prior to 1991 was the HMO industry's relatively poor
economic performance during the mid-1980s. These financial difficulties left many HMOs
short of capital, prompting them to become rather non-aggressive in enrolling risky
populations and to raise commercial rates substantially in order to strengthen their capital
position. Some early growth occurred, however, through the conversion to risk contracts
of enrollees in several of the large prepaid group practice plans which had previously been
contracting on an HCPP basis.

Growth has also resulted from the many for-profit HMOs that have emerged, largely a
result of conversions of not-for-profit HMOs, start-ups, and mergers. These for-profit
HMOs have targeted the Medicare population as a major source of new growth and
revenue, focusing their marketing efforts in areas that had high concentrations of traditional
Medicare fee-for-service system participants, with very high medical costs.

Commensurate with enrollment growth, federal disbursements to Medicare managed care
plans of all types exceeded $10 billion in fiscal year 1994. They are expected to exceed
$12 billion in fiscal year 1995.

POTENTIAL FOR FUTURE MEDICARE HMO ENROLLMENT GROWTH

HMOs, in general, have been expanding rapidly. The HMO industry estimates that total
HMO enrollment is now approximately 56 million, up from the approximately 50 million
enrollees at year-end 1994. This growth is expected to continue at least in the near future.
In addition, the Medicaid population may become a potential large source of growth.
Some states envision prepaid Medicaid contracts as a potential strategy for controlling
state expenditures on heaith care for this population.


58

service utilization patterns in the fee-for-service sector.
Modifications could also be made so that the AAPCC reflected HMO
market areas, rather than artificial political boundaries. For
example, defining a single capitation rate for a metropolitan
area would eliminate the possibility that an HMO would receive
more for serving a senior in one county than it would for serving
an otherwise identical senior living in an adjacent county.

These changes would also tend to reduce the volatility of the
AAPCC over time and consequently increase HMO participation in
the risk contract program. **

HCFA PLANS TESTS OF
HMO PAYMENT REFORMS

HCFA is planning to conduct demonstration projects that will
examine several proposals for modifying or replacing the current
method of determining payment rates to HMOs. Some results of
these demonstrations could emerge during fiscal year 1996, but we
believe that a thorough assessment of the demonstrations is, at
best, several years away. The proposals are at various stages,
from solicitation of proposals from private contractors to
implementation of the demonstration itself.

Specific projects that HCFA is pursuing include: (1) a study
of "outlier pools” as a way of adjusting for health risk
retrospectively; (2) a demonstration of competitive bidding as a
means of setting the capitation rate; (3) a demonstration of a
sophisticated health status risk adjustor; and (4) an open-ended
demonstration project that would study one or more proposals for
improving Medicare managed care.

In our view, these demonstration projects are steps in the
right direction, though somewhat overdue. In light of Medicare's
current losses due to the risk contract program--estimated at
between 0.5 billion and 2.5 billion per year--there may be other
steps that HCFA could take immediately to stem losses. For
example, HCFA could increase the HMO “discount” from its current
5 percent in selected areas. These might be areas where Medicare
HMO enrollment is growing rapidly or where most HMOs do not
currently charge beneficiaries a premium.

CONCLUDING OBSERVATIONS

Several factors are at work that change the context of
Medicare managed care:

-- the recent and anticipated growth in risk contract
enrollments,

“annual Report to Congress 1995, Physician Payment Review
Commission (Washington, DC: 1995).


112

+ We use computerized practice guidelines and national standards to determine
whether surgery or certain tests are really necessary. Very few individual
physicians have this information at their dispasal.

+ Physicians and nurses make daily hospital rounds to monitor the in-patient
care our members receive.

+ We encourage patients to become more involved in deciding their course of
treatment. FHP is pioneering a unique computerized interactive video
program which allows patients dealing with breast cancer or prostate cancer,
for example, to learn about all the-options available to them. ‘The more
informed patients are, the more cooperative and supportive they are in their
treatment plan.

+ We have found that six percent of our member population uses 60 percent of
‘our health care resources. By identifying these high risk individuals, we can
intervene earlier in their course of treatment, proactively manage their care,
and reduce costs.

+ We care enough about our members with limited or fixed incomes to help
steer them to available community resources, like food stamps, social security,
and long term care options.

+ We sponsor annual flu immunization clinics that are open to FHP members
and non-members alike. Last year, over 25,000 Arizonans received their flu
shot from FHP. The goal is to reduce the incidence of flu-related illnesses
and hospitalizations the next spring — and it works.

+ Finally, we have adopted a continuous quality improvement approach to the
way we deliver care and service. We carefully examine areas for
improvement and put together Quality Action Teams to reduce or eliminate
nonconformity. For example, we significantly reduced the time that members
subject to blood clots received the results of their anti-coagulant medication.
Our team of pharmacists help these members learn more about possible
interactions of Coumadin, with their diet, exercise plan, other drugs, and
other diseases,

Customer Satisfaction
Are we doing a good job? Our members think so. We regularly survey our members about
the health care they receive and encourage them to tell us about the good things we are
doing and the things we could do better. Using the results of these surveys, we work with
our physicians, health care providers, service representatives, and staff to develop new or
improved plans and programs that respond directly to what our members tell us.


76

Mr. McCrery. So the average Medicare recipient, at least under
today’s system, takes out about three times as much as he ever
puts in in taxes when he was in the work force.

Ms. WILENSKY. Slightly more. Slightly more. It is 2¥2 to 1 on the
hospital side and—well, I guess 3 to 1. So it is about 3 to 1.

Mr. McCrery. Well, I think that explains where part of our
problem is.

Chairman THomas. Any additional questions?

I want to thank all of you very much. As usual, you have been
very, very helpful in focusing our attention.

I would ask the next panel to come forward and this panel will
consist of Stuart Butler from The Heritage Foundation and David
Kendall from the Progressive Policy Institute.

I want to announce prior to the beginning of this panel that, due
to a previously arranged Ways and Means Committee function, the
Subcommittee will break at noon for 1 hour and we will reconvene
for the third panel at 1 o’clock. So that if the folks from Arizona
want to try to get a bite of lunch, we are not going to be back in
until 1. I apologize, but the Full Ways and Means Committee has
a preplanned meeting and function, and we are required to partici-
pate in that. .

I would tell this panel, as I have the others, that if you have any
written statement, it will be part of the record, without objection,
and that you may proceed to inform us any way that you see fit.

r. Butler.

STATEMENT OF STUART M. BUTLER, PH.D. VICE PRESIDENT
AND DIRECTOR, DOMESTIC AND ECONOMIC POLICY
STUDIES, THE HERITAGE FOUNDATION

Mr. BUTLER. Thank you, Mr. Chairman, for the opportunity to
testify. The discussion toward the end of the last panel with regard
to incentives, I think, very nicely sets up for what I wish to ad-
dress, which is the basic incentive system. We see a slow pace of
HMO enrollment and other innovations of delivery in the Medicare
system because of the very nature of the program, which is essen-
tially a planned, defined benefit program.

As such, it tends to be rather insensitive to the normal process
of innovation and quick decisionmaking that occurs, say, in the cor-
porate area. Similarly, it is insensitive to the introduction of serv-
lees that the elderly may want and, may be more effective to treat
them.

I think as a general strategy with regard to Medicare, it is im-
portant for Congress to restructure the program, moving much
more to giving control of the dollars and choice of services to the
elderly, and using competitive forces among competing plans to
provide both quality and price for the elderly to buy.

As a model to look at for how this might be done, I think the
Federal Employee Health Benefits Program, which, of course, cov-
ers you, Mr. Chairman, and other Members of the Committee, and
also Federal employees and retirees from the Federal sector, is a
very good basic model to examine.

It provides good information to the elderly who are in that pro-
gram. It provides a range of plans. It provides different benefits
within those plans. And a method of enabling elderly Federal retir-


28

maintaining access to care for Medicare beneficiaries. Removing these extra
payments from the calculation of the AAPCC and distributing them to the appropriate
providers, based on the care they furnish to Medicare risk enrollees, would allow these
facilities to compete for patients on a more equal footing with other providers in their
area.

LACK OF ADJUSTMENT FOR HEALTH STATUS

Another concern with Medicare's capitation rate is the lack of an effective means
to adjust payments to reflect differences in beneficiary health status. Medicare uses
five factors to adjust the capitated rate--age, sex, institutional status, Medicaid status,
and employer-based coverage. However, these measures do not adequately account
for variations in potential costliness, and plans have strong incentives to avoid sicker
enrollees. The recent evaluation of the risk contracting program found that this lack of
adequate risk adjustment was responsible for the failure of the risk contracting
program to achieve the Medicare program savings that were expected. Program costs
were almost 6 percent higher than they would have been under the fee-for-service
option. A recent national household survey, however, did not find substantial
differences in self-reported health status between those elderly enrolled in HMOs and
those in the fee-for-service program.

Adjusting capitated payment rates to refiect health status will be much more
difficult for the Medicare program than for the private sector because Medicare
enrollees generally are sicker than the general population. it is even more important
to do so, however, since it may be easier for plans to identify and avoid more costly
Medicare beneficiaries.

ENROLLMENT AND DISENROLLMENT POLICIES

Medicare's enrollment and disenroliment policies differ substantially from those in
the private sector. In the private sector, employees may not have the choice of a fee-


94

reveal high marks even as costs come down. If not, additional safeguards will be
necessary. But rather than relying on anecdotal information to evaluate private health
plans, seniors deserve hard data to determine if lower costs come from true efficiency
gains and not from degrading quality.

Phase Three: Adapt Medicare's Overall Growth Rate to the Limits Set by Competition.
As participation in the competitive system rises, more of Medicare's spending will be set
by competition rather than regulations. Confidence in private health plans will allow
Medicare to limit its spending increases to market conditions. This market-based
spending cap would discipline Medicare's fee-for-service system without sacrificing
quality and access to care.

Since Medicare will need several years to develop this market-based cap, Congress
will have to resort to the same stopgap actions used in the past to delay bankruptcy in
Medicare’s hospital insurance trust fund: moderate provider cuts and more patient cost-
sharing.

In general, this approach ensures that the government's contribution to the health
insurance will be restrained to the level of essential services without shifting costs on to
the private sector. The marketplace, not arbitrary government limits, will establish the
price at which providers are willing to care for Medicare patients.

Conclusion

The pace of change in Medicare reform should depend on the government's
ability to win public confidence in the new system. An example of the challenge before
Congress is the words of one retiree during last year’s debate. The campaign against
"government-run" health care led him to demand that his congressman keep the
government out of Medicare.

The Progressive Policy Institute urges Congress and the President to recognize
that taxpayers and those who rely on Medicare have a common interest: fighting the
high cost of health care. Republicans must forgo arbitrary budget caps that anticipate the
savings from competition before it has even begun. Democrats must acknowledge that
preserving Medicare will require fundamental Medicare reform.

The real political challenge is to reshape the relationship between the government
and Medicare participants. The government must ask them to accept more responsibility
for the key decisions about the cost and quality of their health care. In exchange, the
government must commit to make sure they have the resources and information to make
the right decisions for themselves.


9

clude the highly volatile county-level payment rates, particularly
those with small Medicare populations. They include an inadequate
risk adjustment mechanism, and also the unrestricted movement
between risk and cost contracts which results in HMOs with risk
contracts attracting patients with less expensive patterns of care.

In the Commission’s view, the first step toward expanding man-
aged care should be improving the payment policy for risk con-
tracts by correcting the flaws in the current program, and that
means correcting the flaws in the AAPCC. There are at least two
approaches to improving the capitation payments: A competitive
bidding mechanism and, also, refining the current AAPCC, because
we won't be able to have competitive bidding early on in all areas.
That is, because there are just not enough HMOs in some areas,
both approaches will be needed.

We also need to make payment adjustments that mitigate the fi-
nancial impact of adverse risk selection. Because my written testi-
mony provides some information about how we see competitive bid-
ding occur, I would just like to indicate that we believe that it will
have to generally occur by having the plan submit offers of mini-
mum payment rates that they would be willing to take and give
HCFA the ability to establish a payment rate that is based on the
bids submitted and to make sure that there are some penalties for
those plans that try to have high bids in there to protect them-
selves.

HCFA needs to be given sufficient authority and flexibility to in-
troduce a competitive bidding process in those markets where they
have the best chances for success and then to expand the competi-
tive bid process as they learn from those activities. But as I have
indicated, we have to recognize that the AAPCC will continue to be
used in some areas because there won’t, at least early on, be
enough HMOs to permit competitive bidding; and that means we
need to make some adjustments to some of the flaws that are

ere.

Right now what happens is that the ratio of the county-level per
capita costs are taken relative to the national average. It is flawed
because it provides very unstable rates over time that are suscep-
tible to extreme geographic variations and service use patterns. It
also encourages HMOs to go into the areas that have very high ex-
penditure per capita.

We need to recognize that input prices can vary and those are
factors HMOs can’t control, but we need to protect ourselves from
incorporating the effects of the very high service rates which now
occur.

All of these changes are currently affecting the AAPCC. A blend-
ed AAPCC, one which uses a weighted average of the AAPCC and
the national average per capita, the so-called USPCC, adjusted for
local differences in prices, would be a way to make that kind of ad-
justment, still taking account of some local variations, but not auto-
matically incorporating all the high use that may occur.

To reduce payment volatility, there are at least two approaches
that could be used. One is to define a larger geographic area and
the other is to use a statistical technique that establishes county-
level payment rates that are based partly on the county’s average
payment and partly on the payment rate for a larger area. There


17

ees to pick plans sensibly, by the use of fairs and other kinds of
marketing arrangements to deal with some of the problems of mar-
keting that Mr. Stark and others mentioned.

If you were going to move to a system like this for Medicare gen-
erally, there are two broad changes that would be necessary. One
is to move toward a defined contribution system, or a voucher ad-
justed by age, sex and geography at the least.

Incidentally, the former and current Directors of the CBO, Mr.
Reischauer and June O’Neill, both support a move in this direction.

An alternative to a simple voucher would be some kind of credit
system against the cost of premiums and other expenditures, and
there are various variations that can be considered there. But the
important thing is to move to a defined contribution, which is es-
sentially in the hands of the elderly themselves to make the deci-
sion over exactly what kind of plan will serve them.

The second element which is crucial is to allow Medicare-
approved plans, willing to enter this market, to compete for the
voucher, much as under the FEHBP. The same kind of arrange-
ment should occur. It must be a very open-ended arrangement to
allow variation of types of services, not just HMOs or fee-for-
service, but a wide choice of a continually expanding range of types
of delivery to be incorporated into plans that could be offered to
Medicare beneficiaries.

To be Medicare-approved, I would argue that such plans would
have to meet certain basic conditions very similar to those in the
FEHBP. They must show basic financial security. They must have
a standardized description of their costs and services and a stand-
ardized marketing method very similar to what OPM requires for
the FEHBP plans. It would be possible under this arrangement for
Members of Congress, say, or HCFA, to arrange all kinds of ways
of standardizing information for the elderly to pick the particular
plan they wanted.

Third, there should be a core set of benefits in the plans that are
being offered to the Medicare-eligible population. This should be a
rather leaner core than today—principally catastrophic, hos-
pitalization and so forth—but with a wide range of additional serv-
ices that could be incorporated into any plan, and a Medisave vari-
ant could be offered as well.

And, fourth, premiums in such a Medicare-approved plan, would
be subject to limited underwriting, using essentially the same prin-
ciple to devise the voucher—age, sex and geography. Under this ar-
rangement, you would see two principal effects. One is that the
elderly’s choice of plans would be affected by the total cost of plans
and out-of-pockets, not the way in which their out-of-pocket is af-
fected, which is the case today.

So to take your ice cream sundae analogy, it would be rather like
offering either ice cream or a sundae, but saying, we are going to
contribute 50 cents to whichever one you want. My kids certainly
react very well to those kinds of incentives. In so doing, they are
looking at the total cost of the product, rather than the specific
payment that you make.

And second, of course, it would mean that the elderly would be
able to pick plans that are right for them in terms of the services
within them, and the relative costs and benefits. Again, this is very


83

become quite popular in the FEHBP. But among the managed care plans, there are @
variety of different types of options. There are Health Maintenance Organizations (or
HMOs), including staff model HMOs, where physicians are paid on the basis of a salary
rather than a fee. But there are also "group model” HMO’s, where the HMO “rents” the
services of physicians; “network mode!” HMOs, where the insurance company contracts
with physician group practices; and “Independent Practice Associations"(IPAs), where
the HMO contracts with individual doctors in private practice and groups of physicians
ata negotiated rate. There are also “point of service” plans, where retired federal and
congressional workers can choose to use a personal physician outside the HMO network
for a higher copayment.

‘The FEHBP is very popular among federal retirees. Indeed, it is so popular that
many federal retirees who qualify for Medicare decide instead to remain in the FEHBP.
And as the National Association of Retired Federal Employees states, in its 1995 guide to
federal health plans for retirees, “All FEHBP plans are good.... You can't make a serious
mistake in choosing a FEHBP plan unless you choose a high cost plan or option when
you don't need one." "°

* Choice of Health Benefits. Federal retirees do not merely have a choice of plan.
Unlike virtually all other Americans, active or retired, congressional and federal retirees
also have the freedom to choose the services they want. Unlike Americans enrolled in the
Medicare program, congressional and federal retirees are not locked into a single,
government standardized benefits package. Beyond the normal range of typical
hospitalization and physicians services, congressional and federal retirees can pick from a
variety of plans that cover such items as skilled nursing care and home health care by a
nurse, dental care, outpatient mental benefits, routine physical examinations, durable
medica! equipment and prostheses, hospice care, chemotherapy, radiation , physical and
rehabilitative therapy, prescription drugs, mail order drugs, diabetic supplies, treatments
for alcoholism or drug abuse, acupuncture and chiropractic services. And FEHBP plans
include catastrophic coverage — in sharp contrast to Medicare.

* Choice of Price. Unlike the limited or non-existent choices of workers and retirees in
the private sector, and unlike the rigidly controlled pricing in the Medicare system,
congressional and federal employees have a wide range of options in terms of what they
will pay in premiums, coinsurance or copayments. Under the FEHBP’s financing
formula, the federal government will contribute up to 75 percent of the cost of a plan up
to a maximum dollar amount (currently $1,600 for individuals and $3,490 for families).

If congressional and federal retirees wish to choose a very expensive “cadillac”
plan, with a rich set of benefits, they may do so, but they make the decision to pay extra .
If, on the other hand, a retiree picks a less expensive plan, he or she saves money on their
portion of the premium. Private health plans compete directly for these consumers"
dollars.

Needless to say, the dynamics of a competitive market in the FEHBP have had a
positive impact on premium prices for federal employees and retirees. According to the
Congressional Budget Office (CBO):

‘Over the past five years, FEHBP plan premiums have increased an average of
6.8 percent a year, whereas the premiums paid by medium and large firms
surveyed by Hay/Huggins Company, a benefits consulting firm, increased by
10.8 percent a year. Furthermore, FEHBP premiums are expected to decline by
3.3 percent in 1995; the Congressional Budget Office projects, however, that
aggregate private health premiums are likely to rise by about 5 percent.

According to the CBO, Medicare hospitalization (HI) costs will rise at a nominal
rate of 8.4 percent per annum between 1995 and 2000, and the Medicare supplemental
medical insurance (SMI) plan costs will rise at a “nominal rate” of 12.9 percent between
1995 and 2000."

'° See Federal Health Benefits Information and Open Season Guide, 1995, The National Association
Retired Federal Employees (Washington D.C., 1994), p. 1

" Congressional Budget Office, Reducing the Deficit:Spending and Revenue Options, A Report to the
Sate and House Comminess on The Budget February 1999). 184,

° tid. p 225


5

Chairman THomas. The Subcommittee will come to order.

I want to welcome you to our hearing on Medicare’s HMO Pro-
gram. This morning, we are going to hear from a number of panels
to allow us to begin to focus on an effort to make Medicare better
by improving the solvency of the trust funds and by examining
ways to provide more options to the beneficiaries for their health
care coverage outside of the traditional program.

Clearly, one of the options among many beneficiaries will be the
enrollment in cost effective HMOs. Today we will examine the cur-
rent Medicare HMO Program, the recent enrollment growth, cur-
rent policies for paying HMOs under risk contracts and, obviously,
options for modifying the payment system.

In April, 1993, 1.6 million Medicare beneficiaries were enrolled
in HMOs with risk contracts. In April of this year, there were 2.5
million beneficiaries in such plans, a 56-percent increase in just 2
years. All signs indicate that enrollment will increase another 20
to 25 percent this year.

Clearly, coordinated care is making some inroads into the Medi-
care Program. Beneficiaries are finding that in many parts of the
country, well-run private health plans can provide more coverage
at less cost than the traditional Medicare Program. By enrolling in
risk-contracting HMOs, they can reduce their Medigap premiums
and, to a certain extent, their paperwork hassles.

Nonetheless, managed care remains a relatively small part of
Medicare, with only 9 percent of beneficiaries enrolled in coordi-
nated care plans; and the payment methodology for risk contracts,
which is essentially a fee-for-service shadow price, has been criti-
cized by many as arbitrary and really ineffective in reducing costs
for the program.

I am anxious to hear from the list of experts we have testifying
today about how we might move away from the current payment
methodology, the so-called AAPCC, or the average area per capita
cost payment structure, to a payment system that promotes cost ef-
fectiveness, is more stable geographically, and encourages more
plans to offer coverage to more Medicare beneficiaries.

I am also pleased that we have a sufficient number of witnesses
from Arizona to take more of an indepth look at that particular
HMO market. Arizona is a highly competitive market. Well-
coordinated care organizations have been very successful in enroll-
ing large numbers of Medicare beneficiaries, even though the pay-
ment rates are not as high as other areas with managed care en-
rollment rates that are high as well. I am grateful that the three
HMO representatives from Arizona are here today and are going
to share their insights with us.

These HMOs differ in terms of their evolution, size, and ap-
proaches to managed care. So their particular perspective is some-
thing that we want to get on the record in the hopes of finding
some common patterns that will assist us in this evolutionary proc-

8.

I look forward to hearing from all our witnesses, but prior to
that, I would recognize the Ranking Minority Member, Mr. Stark,
for his opening statement.

Mr. Stark. Thank you, Mr. Chairman.


lll

receive high quality, comprehensive health care, plus other benefits such as prescription
drugs which regular Medicare beneficiaries must pay for. It has been estimated that FHP’s
extra benefits save each of our senior members about $1,200 a year in out-of-pocket costs.
‘That comes to approximately $335 million a year for our senior members, When the
individual savings are combined with the five percent government savings, we believe FHP -
~ company-wide ~ helps eliminate almost $400 million a year in unnecessary health care
costs. The Medicare risk contract program is a “win-win" proposition for all parties
concerned. .

‘The Arizona Marketplace

Between December 1992 and December 1993, commercial and senior enrollment in
Arizona HMOs grew almost 11 percent ~ from about 1,175,000 members in 1992 to
1,301,000 members in 1993. ‘These numbers do not reflect the number of Medicaid
beneficiaries who receive their care through Arizona's unique Medicaid managed care
system, the Arizona Health Care Cost Containment System (AHCCCS). That could be the
subject of another hearing like this one.

Tucson ranks 6th among the 54 largest metropolitan areas in the country for HMO market
penetration ~ Phoenix ranks 12th, Just over 39 percent of the Tucson population are
members of HMOs. Approximately 29 percent of the Phoenix population are enrolled in
an HMO.

Quality of Care in HMOs

‘There have been considerably more studies of HMO performance than of any other health
benefit option. A comprehensive review of the literature published from 1980 to 1994
appeared in the May 18, 1994 Jouraal of American Medical Assoclation. ‘The study
analyzed the findings of 16 studies comparing the quality of health care provided in HMOs
with care provided to other populations in other settings.

It was determined that HMO quality of care results were better than or equal to results in
fee-for-service plans on 14 of 17 quality of care measures. ‘The study found that people
cared for in HMOs consistently received more preventive care (such as breast, pelvic,
rectal, and general physical exams) than people in fee-for-service plans. HMO members
also received more health promotion counseling than members of fee-for-service plans.

How Does FHP Provide Quality Care?

In the 34 years that FHP has been providing managed health’ care services, one fact is
continually reinforced: providing quality health care is the best way to keep costs down. Our
health care professionals utilize a number of techniques, pioneered by health maintenance
organizations, to coordinate the care of each member. Let me cite a few examples:


81

system and the purpose of reform. So Members of Congress must educate the American
people about the true dimensions of the problem, including the potential tax burden
facing working Americans if action is not taken. This last task can be accomplished in
two ways

First, Congress should order the Health Care Financing Administration(HCFA) to
notify America’s 37 million senior and disabled citizens that their Medicare
hospitalization program is facing bankruptcy as early as 2001, according to the Medicare
Trustees Report. To keep the program going without reforms, HCFA should explain that
billions of dollars will need to be taken from the paychecks of working Americans or
diverted from other programs.

Second, Congress should order HCFA to inform the elderly that the premiums
they pay for their Medicare supplementary insurance program (Part B Services)
represents only 25 percent of the premium income for those services, and that their
children and grandchildren, young working families. are paying the bulk of these
Medicare benefits out of general tax revenues. Most elderly are under the erroneous
impression that they are paying the full cost of their Medicare benefits. The truth about
the financial condition and circumstances of the Medicare system will only improve the
quality of the necessary public debate.

Short-term Reform of Part B

‘Congress should act immediately to reduce the heavy taxpayer subsidy of
Medicare's Part B premiums.

Option #1: The simplest, though not necessarily the best, option would be to
restore the premium to the original 50 percent level. This could be done in a gradual,
phase-down of the current level of taxpayer subsidies at five percent per year over a five-
year period. This change would save taxpayers approximately $74.7 billion over the next
five years.° By financing one-half of the Part B program costs, Members of Congress
would thus return to the spirit of the original 1965 “contract” with America’s taxpayers.

A reduction of the taxpayers’ subsidy in Part B would encourage many enrollees
to compare the costs and benefits of more efficient private alternatives with the cost and
benefit of the Part B program. The more the subsidy is reduced, the more level would be
the playing field between the private sector plans and the government plan. The elderly
would have incentives to choose more efficient plans in the private sector. The likely
result: not just a reduction in the subsidy but also a significant reduction in the gross
budget outlays for Medicare Part B.

‘One problem with simply reducing the subsidy across-the-board is that it would
impose some hardship for many lower-income Americans yet it would still continue a
taxpayer subsidy to the affluent (though it would reduce that subsidy). It would also raise
the cost to states of enrolling in Medicare some individuals also on Medicaid.

Option #2: An alternative would be reduce the current subsidy as income rises,
and perhaps raise the level of subsidy for the elderly with very low incomes. The savings
achievable from such @ change would vary widely, depending on what method of means-
‘esting was introduced. At, say, $65,000 adjusted gross income for individuals and
$85,000 for couples, the subsidy might be phased out in increments of three percentage
points per $1,000 of income above the threshold. The full premium would be paid by
individuals above $98,000 AGI and couples above $118,000 in AGI.

Not a Tax. Contrary to what liberals in Congress may say, an increase in the Part
B premium is nor a tax inerease, but a reduction in a direct subsidy. It is not a tax
increase because the Medicare Part B program is a voluntarily chosen service from the
federal government that can just as easily be provided by the private sector. Part B is a
subsidized commercial service provided by the federal government in competition with
the private sector. If Members of Congress believe it necessary to give high levels of
subsidies to enrollees in the program, those subsidies should be targeted to those elderly

* This, and other short term budgetary proposals for dealing with the Medicare system are discussed in
Scott A. Hodge( ed.) Rolling Back Government: A Budget Plan To Rebuild America” (Washington, D.C.
The Heritage Foundation, 1995).


Attachment B

107

Following is a summary of benefits we offer that exceed those provided by Medicare.

Medicare vs. CIGNA HealthCare for Seniors

CIGNA SENIOR COVERAGE
‘BENEFIT MEDICARE
COVERAGE | BASIC PLAN _| PREMIUM PLAN
a Part B Medicare 2
‘premio regired | Part B Medicare Pact B Madicare
premium rguind | premium required
Yreventive Care
= Ranaing pyc Not covered ‘Yon pay $10 pr vist | You pay 35 per viet
‘cumioaions
= Routine Immnications — | Not covered fou pay mothing | You pay nothing
= Wellcss Comes Not covered You pay wetsiog | You pay mothing
Precriptien Drugs Not covered ‘You pay $7 tov cach | You pay $7 foreach
‘prescription or rfl wp | presenpton or refill op
© 30 ay mel (0 30 day mapply.
Maxigum eurual | Matimam anooal
‘benefit of 3750 in| benaft of $2500 in
tased upon the average | based upon the average
‘wholela rice ofthe | whole price ofthe
ve vg
‘Bospita Inpatient Services | You most eye | You pay mething wien | You pay nothing wince
= Semipeivata oom and | deduct of $716 | sented to our plan | admitd to any
toard; mis. charges | for your fit 60. | Bowpitain. (You pey | hoop (Al ooo-
= Genel pasing caro | days for the it | copayment of $300 for | exmerpeocy Boop
+ Operating room (rong the 00h dey | ndeniion, ‘Mossi will be
Lab wd enya of a benefit prod, | emergency admission, | schadaled through your
Drugs aod modal mpples | you pay © to soy tears or ot | primary car physician
+ Spotl care wait ‘oimmnace of $179 | of-eren boop tht ia | at «plan howpial.)
1 Blood trmafaons ‘cay. you tm | sot pln boop)
+ Rebebibtation mevices sch eye | Maxim etl foo
‘= pial honey, (wn, towards hoplatization
cocopatona therpy, mad | coismurance ia 358 0 | ia $716.
ay ay
igen Services For | You pey $100 aneal | Physician services aro vice a
‘Beagle or Skid Nersing pla 20% | covered under your | covered under our
Canter Care of Madicare howpitl best You | bowpitl benefit. You
Capsion) spproved charges sad | guy mating foe ay washing for
: sevice poten
1 Specie sevices charges wptotie | charge, charge.
= Majochmiooe mrpeey __| Hing
Viton Services|
= Rasaine ee exams (once | Not covered You may $18 ‘You par 85 por visit
scaled yor)
~Lene/feme beset Not covered Nor COVERED — | $100 allowance towards
((oatine) purchase of oe pair of
tf glawes or contsct
‘souly.
Not covered Nor covERED —_| You pay $5 per vst
Not covered NOT COVERED (ret for cach
bearog ai unt per
yer
Not covered ‘NOT COVERED | You pay 85 por vit
‘You pay $100 sonmal | You pay mothing wien | You pay mothing whe
deduce, poe 20% | you uses CIGNA | you use « CIGNA
of HeatiCere
spprwved charges wp | provider tad wen | provider und when
{© te limiting rece by 8 prescribed by 2 CIGNA
pony GONA Hoaldicare | HealthCare
‘Physic | physician for sevicos
for meviow covered by | covered by Medicare
Not ower ‘You pay 250 pox visit | You pay $59 por vist

‘You pey $300 ‘You py sahing per
‘copayment pet noo
lan bospital (Cour $50 copayment in



92

history indicates they are healthier on average than the general population. This
recommendation has not yet been adopted, but should be.

Restricted Choice. Medicare rules prevent managed care plans from offering
patients the option to see doctors outside their network. As a result, older Americans
and the disabled must agree to see only the HMO’s doctors when they enroll.

Ineffective Quality Assurance. Medicare has two quality assurance programs that
are weak and outdated. First, federal inspectors review each managed care plan’s
operations periodically without ever measuring its results. Second, a managed care
plan’s business must be at least 50 percent non-Medicare, which is based on a crude
assumption: if it’s good enough for the private sector, it must be good enough for
Medicare. In contrast, employers and state Medicaid agencies are demanding
sophisticated measures of managed care’s performance.

Inadequate Consumer Information. Medicare does not ensure that participants have
access to reliable information comparing the costs, benefits, and services of HMOs.

Step-by-Step Reform

Many of the flaws in the risk-contracting program can be fixed immediately
through the following actions: 1) Expand the choice of private health plans for Medicare
participants to point-of-service plans and preferred provider organizations, which allow
patients to go to doctors outside of a provider network; 2) Provide comparative
information to all Medicare participants about their private sector options; 3) Pay
managed care on a market-wide basis rather than a county basis; 4) Permit health plans
to offer cash rebates in lieu of extra benefits; 5) Assure quality through health pian
report cards and satisfaction surveys instead of outdated methods; and, 6) Give the
Secretary of Health and Human Services the authority and responsibility to prevent risk-
skimming.

But the more fundamental problem—the lack of competition—requires broader
reform. As long as payments to managed care plans’ are tied to the fee-for-service
system, savings will be meager and payments unstable.

To create competition, Congress should follow the path blazed by large
employers. They have been successfully fighting runaway costs while keeping workers
satisfied. The key has been letting workers choose their own coverage from a menu of
plans that compares costs, quality, and service. Workers choose more cost-effective plans
are because they see value in it. When workers become comfortable
ity for their own decisions, employers limit their health care
contributions to the cost of a managed care plan. But they have kept options for workers
who want more expensive benefits to pay more.



60

Mr. Chairman, this concludes my testimony. I would be glad
to answer any questions you and the committee members may have.

APPENDIX I APPENDIX I
RELATED GAO PRODUCTS

Medicare: Opportunities Are Available To Apply Managed Care
Strategies (GAO/T-HEHS-95-81, Feb. 10, 1995).

Health Care Reform: Considerations for Risk Adjustment Under
Community Rating (GAO/HEHS-94-173, Sept. 22, 1994).

care: Changes to HMO Rate Setting Method Are Needed to
Reduce Program Costs (GAO/HEHS-94-119, Sept. 2, 1994).

Managed Health Care: Effect on Employers’ Costs Difficult to
Measure (GAO/HRD-94-3, Oct. 19, 1993).

Medicare: HCFA Needs to Take Stronger Actions Against HMOS
Violating Federal Standards (GAO/HRD-92-11, Nov. 12, 1991).
Medicare: PRO Review Does Not Assure Quality of Care Provided by
Risk HMOs (GAO/HRD-91-48, March 13, 1991).

Medicare: Increase in HMO Reimbursement Would Eliminate
Potential Savings (GAO/HRD-90-38, Nov. 1, 1989).

Medicare: Reasonableness of Health Maintenance Organization
Payments Not Assured (GAO/HRD-89~41, Mar. 7, 1989).

Medicare: Health Maintenance Organization Rate Setting Issues
(GAO/HRD-89-46, Jan. 31, 1989).

Medicare: Physician Incentive Payments Prepaid Health Plans
Could Lower Quality of Care (GAO/HRD-89-29, Dec. 12, 1988).

Medica: Experience Shows Ways to Improve Oversight of Health
Maintenance Organizations (GAO/HRD-88-73, Aug. 17, 1988).

Medicare: Uncertainties Surround Proposal to Expand Prepaid
Health Contracting (GAO/HRD-88-14, Nov. 2, 1987).

Medica: Issues Raised by Florida Health Maintenance
Organization Demonstrations (GAO/HRD-86-97, July 16, 1986).

Problems in Administering Medicare's Health Maintenance
Organization Demonstration Projects in Florida (GAO/HRD-85-48,
March 8, 1985).



56

Arizona's experience illustrates these points. Arizona
spends on Medicaid administration an amount equal to over 11
percent of its program's acute care medical costs. This is about
twice as much as comparable states spend administering their
traditional fee-for-service Medicaid programs. This suggests
that the effective use of managed care may require strong
administrative structures that can provide adequate oversight and
manage program resources efficiently. Even so, Arizona's
experiment with competitive bidding seems to have paid off,
providing health care to beneficiaries while saving the state
money.

Market forces could be introduced in other ways besides
requiring competitive bidding. These include approaches that
would encourage Medicare enrollees to be more price sensitive--
they range from requiring newly eligible Medicare beneficiaries
who choose fee-for-service to pay slightly more than those
beneficiaries who choose a managed care plan, to approaches that
would allow beneficiaries to “price shop" among a list of
approved HMOs and share a portion of any cost savings with the
government. Because they are so far untried, the extent to which
these schemes would increase beneficiaries’ price sensitivity and
help control Medicare costs is unknown. As with competitive
bidding, there is a wide variety of ways in which these Medicare
reforms could be implemented. However, a fuller discussion is
outside of the scope of this statement."

Improving Risk Ad.

01

In earlier reports,,we noted that researchers have proposed
several alternative risk adjustment methods to reduce HMOs’
incentives to enroll only relatively healthy Medicare
beneficiaries. Each of these alternative methods attempts to
measure the health status of enrollees more fully than HCFA's
method. ‘These proposals can be judged according to a number of

our work on the Medicare risk contract program emphasizes the
importance of effective mechanisms, whether administrative or
market based, to ensure quality, resolve beneficiaries’
complaints, and deter and pursue fraud and abuse.

“For example, under several proposals, beneficiaries could be
given a voucher that would allow them to choose between
traditional Medicare or among several qualified HMOs. HMOs would
compete for enrollees on both price and benefits offered (subject
to a minimum benefits requirement). Beneficiaries who choose a
less expensive health plan would be allowed to keep a part of the
difference between the premium cost and voucher amount; the rest
would return to the federal treasury. However, neither vouchers,
nor other proposals with similar consumer incentives, have been
tried in Medicare.



18

Medicare is very quickly turning into a geographically experi-
ence-rated program, and it is being driven by what seemed like a
fair way of paying, which is, you pay at the fee-for-service level, but
it doesn’t work like that.

The other thing we found is that the current way that Medicare
pays the managed care plan for profits and administrative costs
deals directly with the percent that they get for such services from
the private sector. Then Medicare takes that rate and multiplies it
times a much higher payment and gives the same percent, but a
much higher amount to a plan.

Take two plans. One plan, say, provides most of its benefits to
large beneficiary groups and therefore has low administrative cost;
and let’s say there is a fair amount of competition in that area, so
their profit rates are down to a reasonable level.

Another area sells primarily in the fee-for-service market with a
lot of extra advertising. So it has high administrative costs, plus
maybe it doesn’t have as much competition and so it has high prof-
its. Medicare comes in and pays those rates. So you could have
wide differences in the Medicare profits and administrative costs
that are going to plans, when in fact the cost of providing those
services to Medicare is exactly the same for both groups. So we are
very concerned about restructuring the system to deal with that in
a fair and equitable way.

Gail has indicated a number of changes that could be made in
the way Medicare sets the rates, and they seem reasonable and
consistent with the way we are thinking, as well; and the idea of
phasing in and recognizing that you can’t go to competitive bidding
or some other form overnight also makes a lot of sense, but one
needs to move.

We also recognize, when managed care started, the Medicare
Program was very fearful of it, and there have been some abuses.
We must recognize them, but also we recognize that most—the
overwhelming proportion of Medicare beneficiaries in managed care

lans enjoy it. They find the services more than adequate. They
‘ind the benefits fine. And this idea of counting on the 50-50 rule
as the sole way to protect quality, that you have to have 50 percent
of your population from the private sector, seems to be outdated.
There are new and better methods of ensuring quality.

We need to guard the Medicare beneficiary against poor quality
and bogus access, but the 50-50 rule is an arbitrary system that
probably should go, if not immediately, over time, as we begin to
develop better mechanisms for dealing with the system.

Now, one or two other points which we have talked about in con-
text. The AAPCC includes a portion of the $10 billion of extra pay-
ments that Medicare makes to teaching hospitals, disproportionate-
share hospitals and rural hospitals. We at ProPAC believe that the
Congress was correct in trying to recognize certain special prob-
lems of the hospitals. We don’t see the justification for continuing
to include those payments in the AAPCC unless and until those
moneys get redirected back to those institutions.

We don’t want to force the managed care plans to use teaching
hospitals if they don’t want to. We want to encourage efficiencies.
We believe other mechanisms should be set up to recognize the le-
gitimate needs of this country for teaching hospitals, the special


AT

-- Second, with respect to achieving the promise of such
initiatives, details matter. How these strategies would be
designed and implemented could mean the difference between
success and failure.

Although HCFA is planning demonstration projects to study
ways to correct its HMO rate-setting method, results are likely
to be years away. We believe that, in the short term, HCFA can
mitigate its capitation rate problem by introducing a better
health status risk adjuster. HCFA also should proceed promptly
to test competitive bidding and other promising approaches to
setting HMO rates that reduce Medicare costs. Given the recent
acceleration in Medicare's HMO enrollment growth, we believe that
correcting Medicare's HMO payment rate problems should become a
HCFA priority.

BACKGROUND

In 1982, the Congress created the Medicare risk contract
program to capitalize on the potential cost savings associated
with HMOs. Under this program, HMOs are paid a flat fee for each
Medicare beneficiary enrolled. The law sets HMO payments for
comprehensive care at 95 percent of the estimated average cost to
Medicare of treating the patient in the fee-for-service sector.
HCFA, which oversees the Medicare program, calculates these
payment rates using a three-step process. HCFA determines:

-- The base rate. HCFA calculates the projected Medicare
expenses nationwide for the average beneficiary in the next
year. .

-- The adjusted average per capita cost (AAPCC). HCFA adjusts
the base rate for differences in medical costs among the
counties and multiplies the result by 0.95.

-- The capitation rate after adjusting for health status risk.
HCFA adjusts the AKPCC for enrollees” demographic
characteristics--age, sex, Medicaid eligibility, residence in
an institution such as a nursing home. This "risk adjustment”
attempts to prevent HMOs from benefiting from favorable
selection of health risks, which occurs when HMOs enroll
beneficiaries that are healthier--and therefore less costly to
care for--than those in the fee-for-service sector.

Although in existence for over a decade, the risk contract
option remains a relatively small part of the Medicare program.
As of May 1995, about 7 percent of Medicare beneficiaries were
enrolled in plans offered by the 164 HMOs currently participating
in the program.


51

HMO _RATE-SETTING METHODOLOGY THWARTS
MEDICARE'S EFFORTS TO REALIZE SAVINGS

Our work suggests that Medicare's HMO rate-setting
methodology does not maximize the potential of managed care to
yield cost savings and, in some cases, can even discourage HMO
participation in the program. By tying HMO payments to Medicare
costs in the fee-for-service sector, the current methodology
causes three problems. First, the rate-setting formula restricts
potential savings and ignores the ability of competitive market
forces to help produce additional savings. Second, the lack of
adequate risk adjustors in the formula allows some HMOs to be
overcompensated, given the health status of their enrollees.
Third, the formula may discourage plan participation by setting
payments that are too low in some areas and by causing rates to
vary greatly both across geographic areas and over time.

Formula Encourages Competition Between HMOs
That Primarily Benefits Enrollees

Under the present system, all HMOs in an area are paid the
same capitation rate. With the payment rate fixed and
independent of both HMO costs and the competitiveness of the
local managed care environment, HMOs compete only for the
enrollment of Medicare beneficiaries. Efficient, low-cost HMOs
may be able to offer more generous benefit packages to enrollees
and still prosper under the fixed capitation rate. However,
because the payment rate is fixed, the government derives little
benefit from either increased competition between HMOs or
increased efficiency of HMOs. Moreover, Medicare beneficiaries
have only limited incentives to seek care from low-cost health
plans.

Medicare may be underestimating the efficiency of HMOs, and
requiring an HMO "discount" from fee-for-service costs that is
too modest. ‘The HMO capitation rate is set by statute at 95
percent of the AAPCC, in other words, 5 percent below the
estimated cost of serving beneficiaries in the fee-for-service
sector. HMOs that can attract Medicare enrollees and provide
health care for less than the capitation rate--for example, for
85 percent of fee-for-service costs--keep the difference (within
limits) between their costs and the capitation payment.’

°HMOs are permitted to earn profits up to the level earned on
their non-Medicare business--the adjusted community rate (ACR).
Profits earned in excess of the ACR must either be returned to
HCFA or used to provide beneficiaries with additional benefits or
reduced copayments and deductibles.



80

shifted costs over to the private sector, driving up premiums for working individuals and
families.

Instead of trying to tighten the controls and regulations in the current system, the
proper reform is to create a very different dynamic and set of incentives to drive the
Medicare program. Specifically, the bureaucratic, standardized command-and-control
structure of today's Medicare must be replaced with consumer choice of competing health
plans offering different benefits. This is the same dynamic that has allowed health costs
to be brought under contro! while improving quality in the private sector — and in the
government-sponsored health plan enjoyed by Members of Congress and other federal
employees.

‘The way to achieve the same results in Medicare is to reform the Medicare
program by patterning it after the existing Federal Employee Health Benefits Plan
(FEHBP), which covers roughly ten million federal employees, families, retirees,
including present and former Members of Congress. Under this new Medicare program,
pethaps renamed the “Medi-Choice” program, Medicare would become a defined
contribution program instead of today's defined benefit program. Making this change
would give America’s seniors unprecedented opportunity to choose their own health plan
and range of benefits, just as retired Members of Congress and other federal retirees do.
Under such a system, and unlike today's Medicare program, the nation’s elderly and
disabled could choose sound health insurance plans from a variety of different managed
care and fee-for-service arrangements. And retirees could choose coverage for services
not covered by today’s standardized Medicare program — such as a prescription drug
benefit -- by accepting, say, higher copayments for other covered services. One of the
‘reat ironies of the Medicare debate is that those who oppose reforms are in practice
denying the elderly the chance to receive many basic medical services that are available
to working Americans and even the indigent.

‘The key financial difference is that the government would make a defined
financial contribution to the plan of the retiree's choice, rather than reimbursing each
Washington-approved service according to a fee schedule that defies comprehension and
ignores market realities. Doing so would mean the same incentive in the reformed
Medicare as it does for federal retirees in the FEHBP: encourage beneficiaries to pick
plans with the best value for money, pocketing part of the savings for choosing more
efficient coverage. That incentive has enabled spending in the FEHBP to increase at half
the rate of Medicare. And this year, federal workers and retirees were treated to a
reduction in premiums averaging 3.3 percent. Introducing that incentive system into a
reformed Medicare program would save hundreds of billions of dollars over the next
decade, putting the program on a sound financial footing so that it can serve both today's
elderly and the next generation of Americans.

Congress in reality only has two choices when considering the future of Medicare.
‘One choice is for Congress to make no significant change in the way in which Medicare
is run by the government, and to try to pay for future trust fund shortfalls by raising new
revenues through higher payroli and other taxes, or by diverting money from other

s. This means Medicare survives only by draining money away from the rest of
the budget or by raising taxes.

- The second choice is to change the way Medicare is run, so that benefits are
delivered more efficiently, avoiding future tax increases or a diversion of money from
other programs, Making the program more efficient would not reduce the financial
burden Medicare will place on the next generation, but it will also improve the quality of
benefits and the choices available to America’s senior citizens.

HOW TO REFORM MEDICARE
In grappling with Medicare’s emerging fiscal crisis, Congress should pursue both short
term budgetary measures and a long-term strategy of structural change. Short-term
‘measures are needed to deal with the injustices and glaring shortcomings of the program.
But long-term structural reform is needed to deal with the structural financial problems of
the program and to improve the quality of care for America's seniors. Moreover,
Congress must help to deal with the public confusion about the status of the Medicare


142

If competitive bidding is used, it may be necessary to require that all HMOs in the market
use risk contracts, and not be allowed to use cost contracts (This will not be an issue after
year-end 1995 because most cost contracts will be phased out.). With a competitive
bidding environment in high-cost areas, HCFA should consider allocating a portion of true
savings to increase the payments to the HMOs in low-cost areas.

Compensation Rate

To the extent that restricting reimbursement rates in the fee-for-service sector reduces the
federal government's cost, it tends to lower the amount of reimbursement that would go
to HMOs under the current system. This may be problematic because HMOs may not be
able to reduce their costs by a large enough margin to reduce federal government outlays
for Medicare contracts. HMOs may find it difficult to renegotiate physician and employee
fees and continue to reduce the current hospital reimbursement rates below the federal
reimbursement rate. To the extent that the increases in AAPCCs are controlled, HMOs
must be able to operate within that rate in order to enter into contracts successfully.

Adjusting for Annual Fluctuations

Attempts to smooth the income flow, and methods for retroactive adjustments, have been
discussed, but never negotiated. Concern for budget neutrality and the difficulty of
recapturing overpayments to HMOs appear to have stalled discussions.

Health Status Adjusters

While many HMOs have tried to implement a health status adjuster (HSA) system, the
administrative requirements have proved formidable, and the HCFA capitation rates have
changed frequently as medical histories are updated.

Many researchers have investigated the possible effect of factors such as prior disability,
variations within geographic regions, and changes in use patterns in rural areas under
HMO coverage, and adjustments for the working aged. But most studies have focused on
the result of significant differences in prior hospital utilization or ambulatory care diagnoses.
Because of these efforts to develop HSAs for Medicare, many states, such as Minnesota,
require HSAs for populations subsidized under universal health care legislation.

Although Congress may propose other methods of controlling Medicare costs, as well as.
other options for enrolling Medicare eligibles, we need to bear in mind that the issue of
adverse selection (or favorable selection) for one of the options will lead to more problems
if more options are offered, since smaller populations will be selecting in order to maximize


135

The testimony begins by briefly summarizing recent trends in Medicare HMO enrollment
and commenting on the expected future direction of such trends. It then describes how
HMOs are currently reimbursed under Medicare risk contracts and discusses issues
surrounding the key element in the reimbursement calculation—adjusted average per
capita costs (AAPCC). It concludes by describing a number of different approaches for
addressing issues raised by the current risk reimbursement methodology. Among the
suggestions made are the following:

© Competitive bidding could be used for setting reimbursement rates. HCFA could
determine an average cost that it would be willing to pay, and any balance could be
chargeable as a premium to individual Medicare enrollees.

® Provisions for alternative contracting mechanisms could, and probably should, be
made for HMOs that are operating in areas where growth in AAPCCs are controlled.

© Adverse selection against some types of health plans and favorable selection
toward others will arise when Medicare enrollees are allowed to choose among fee-
for-service and managed care options. Therefore, some method needs to be
devised for discriminating between risks in calculating reimbursements.

Incorporating these and other suggestions into the current reimbursement system for
HMOs could result in a more competitive system with greater government and societal
savings. In creating a more competitive system, however the Academy work group is also
concemed that care is taken to protect Medicare enrollees’ access to quality care. The
group suggests that some mechanism be put in place to assure that risk-bearing providers
do indeed have the required capital, either directly or through a contracting HMO, to
support the risks they undertake.

PAST MEDICARE HMO ENROLLMENT TRENDS.

As of April 1995, Medicare's managed care program, called Medicare risk contracts,
enrolled more than 2.5 million individuals, or about 7% of the Medicare population
Medicare enrollment in HMO risk and cost contracts were authorized by the Tax Equity and
Fiscal Responsibility Act of 1982 (TEFRA). HCFA approval of risk contracts and
enrollment did not get under way officially until 1985. Between 1982 and 1985, several risk
demonstration projects were set up to establish the process of contracting and rating
arrangements.

Prior to the passage of TEFRA, the federal government did hold some HMO contracts
called health care prepayment plans (HCPPs), which were set up on a reimbursable cost
basis similar to the Medicare hospital reimbursement system used prior to implementation


13

from HMOs and just 5 percent of those in Massachusetts and Texas. There are virtually no
Medicare HMO enrollees in 28 states.

Policy Responses

Further expansion of managed care within the Medicare program will depend upon several
factors: the capacity of HMOs to accommodate elderly and disabled patients, plans’ willingness
to do business with the program, and beneficiaries’ willingness to receive care under these
arrangements. Plans’ ability to attract and retain Medicare beneficiaries and beneficiaries’
comfort level with managed care will likely grow over time, At the same time, Medicare could
encourage greater plan participation and ensure that the cost savings achieved as a result of
managed care efficiencies accrue to the Medicare program by reforming its methods for paying
HMOs.

Changes in this methodology are urgently needed and should be considered a first step in
encouraging a more substantial role for managed care within Medicare. ‘The Commission has
made a number of recommendations in this area which would enhance program performance and
help Medicare capitalize on innovative changes in the health care market

The Problem. Current Medicare payment policies for HMOs are fundamentally flawed, and
have contributed to problems of limited HMO participation (and thus low beneficiary enrollment
rates), and higher costs per enrollee than their fee-for-service costs would have been. These
problems include:

© the linking of managed care payment rates to Medicare fee-for-service
expenditures, so that the cost efficiencies achieved by HMOs do not result in
savings for Medicare;

© wide geographic variation
service patterns of use;

payment rates due to local variations in fee-for-

© highly volatile coumy-level payment rates, particularly for those with small
Medicare populations;

© inadequate risk adjustment methods; and

© unrestricted movement between risk and cost contracts, resulting in HMOs with
risk contracts attracting patients with less expensive patterns of use.

The Sotutions. in the Commission's view, the first step in expanding managed care should be
improving payment policy for risk contracts by correcting flaws in current capitation rates
(referred to as adjusted average per capita costs or AAPCCs). If Congress fails to address these
problems, a greater role for managed care will not necessarily lead to cost savings. Building
upon this foundation, additional managed care choices (such as Medicare SELECT and other
preferred provider or point-of-service options) also can be expanded. In addition, other
approaches that would create competition among fee-for-service and managed care options within
Medicare should be explored.

Capitation payment rates should be improved so that they (1) cover costs of an efficient HMO,
(2) are better adjusted for risk selection, and (3) are more predictable from year to year. The
Commission suggests two approaches for improving capitation payments: competitive pricing
methods and refinements to the current AAPCC geographic adjustment method. Because
competitive pricing would be effective only in markets with multiple HMOs, both approaches
are needed in the short-term.

Also needed are payment adjustments that mitigate the financial impact of adverse risk selection
(having a patient population with higher than average health care use) and reduce the incentives
for HMOs to select good risks. Since current risk adjustment methods are inadequate, partial


187

FIGURE |
‘rowth in Medicare Risk Enroliment.

The largest increase in managed care enrollment by Medicare beneficiaries occurs in risk
HMOs. Since the inception of the program there has been a steady increase in the number ot
beneficiaries enrolling in risk HMOs. From 1992-1993 there was a 19% increase; 1993-1994
showed a 19% increase; and enrollment in 1994-1995 grew from 1,848,373 to 2,339,592 - a
27% increase.

Thousands
2,500 + —
2,000 5
1,500 ~~
1,000 = ,
.
500 5 AN
~
\ \\
° A D> : 2
& & ca

Rate of Enrollment Increase

1987 _| 1988 1969 | i980 igor | 192 | 1993

t7% | 6% | 5% | iam | ii | 19%



55

health care to Medicare enrollees. Low bidders would be rewarded
with risk contracts. High bidders could be excluded, included if
they accepted the winning bid amount, or included but subject to
a financial penalty.

A competitive bidding strategy may be most effective in
urban areas with well-developed managed care markets. The
details for implementing such a strategy would determine the
strength of incentives driving HMOs to submit low bids and the
amount of choice available to beneficiaries. For example,
excluding high bidders from participating in risk contracts would
maximize HMOs' incentives to submit low bids, but reduce the
choice of plans available to beneficiaries. Allowing high
bidders to participate but with a penalty--perhaps having to
charge the difference between their bid and the accepted bid as a
premium to seniors--would create a weaker incentive for low bids
but would allow beneficiaries a wider choice of plans.

Competitive bidding, rate negotiation, and beneficiary
incentive approaches have been used successfully in other public
health insurance programs. Arizona, for example, since 1982 has
delivered health care to its indigent population mostly through
capitated managed care organizations where the capitation rates
are set through a competitive bidding process. A recent study
concluded that, compared to traditional Medicaid programs
(predominately fee-for-service), Arizona achieved significant
cost savings and a lower rate of expenditure growth. The
California Public Employees Retirement System (CalPERS), serving
about 1 million members, also relies upon price competition among
health plans and consumer incentives to control costs.
Negotiating rates with HMOs has helped CalPERS to achieve
reductions in premiums in each of the past 3 years, ranging from
0.4 percent in 1993-4 to 5.2 percent in 1995-96.°

Designing a good competitive bidding system requires
attention to many issues, such as whether beneficiaries in plans
that lose the bidding must shift to the winning plan. In
addition, savings may not be realized immediately because of high
initial start-up costs--for example, developing the bidding
process and establishing the necessary management information
systems. Administrative expenses may be high as well.

"Managed Medicaid Cost Savings: The Arizona Experience, Laguna
Research Associates (San Francisco: 1994).

‘Health Insurance: California Public loyee's Alliance Has
Reduced Recent Premium Growth (GAO/HRD-94-40, November 1993).

Jackson Hole Group, Responsible Choices for Achieving Reform of
the American Health System eds 7 Paul Ellwood and Alain Enthoven,
{March 1995) -


ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON HEALTH

FOR IMMEDIATE RELEASE CONTACT: (202) 225-3943
May 9, 1995
No. HL-I1

Thomas Announces Hearings on

increasing and Improvin: ions fe

Medicare Beneficiaries

— Private-Sector Lessons to be Sought —

Congressman Bill Thomas (R-CA), Chairman, Subcommittee on Health of the
‘Committee on Ways and Means, today announced that the Subcommittee will hold a series of
hearings to explore increasing and improving options for Medicare beneficiaries, with a focus
on private-sector successes.

The bearing dates and subjects are as follows:

Tuesday, May 16, 1995: Experience in Controlling Costs and Improving
Quality in Employer-Based Plans

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

Thursday, May 25, 1995: The Potential Role for Employers, Associations,
and Medical Savings Accounts in the Medicare
Program

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

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

CKGROI

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

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

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

(MORE)


163

‘TESTIMONY SUBMITTED FOR THE RECORD
CONSORTIUM FOR CITIZENS WITH DISABILITIES

MANAGED CARE AND PEOPLE WITH DISABILITIES

The 49 million people with disabilities in this country include individuals with physical and mental
impairments, conditions or disorders, and people with acute or chronic illnesses which impair their
ability to function People with disabilities are disproportionately represented among the
underinsured and uninsured in America's private health insurance system

A sound managed care plan can offer several advantages to people with disabilities
‘well-coordinated care or case management, comprehensive services, the convenience of “one-stop
shopping" which minimizes physical and other obstacles to obtaining care, and an emphasis on
primary and preventive care, Unfortunately, these potential positive aspects of managed care are
usually undermined by the economic incentives inherent in managed care and capitated health
plans. Many of these incentives run counter to the interests of all beneficiaries, particularly people
with disabilities and chronic health conditions. People with disabilities often have extensive,
special, and complex health care needs and are often underserved in these types of plans.

Managed care plans would significantly decrease their costs over time if appropriate services were
delivered to people with disabilities and chronic conditions in a timely manner. The provision of
appropriate rehabilitation therapies, services, and devices today can substantially reduce
secondary, expensive conditions tomorrow. The provision of home and community-based
services, including personal assistance services, can greatly save expenditures on institutionally-
based inpatient and long-term care. Al! health plans, particularly managed care plans, should
consider their enrollees’ long-term health status and seek to maximize their function and
independence through primary and preventive care, appropriate rehabilitation therapies and
services, and assistive devices and technologies. More often than not, managed care plans simply
do not do this.

‘As managed care is increasingly utilized by both the private and public health care systems,
erative that consumer and provider safeguards are established and enforced under
Medicare, Medicaid, and private managed care plans,

PROBLEMS WITH MANAGED CARE
Gatekeeper Inadequacies/Choice of Providers

‘Most managed care plans use "gatekeepers" to manage individuals’ care While in theory a
gatekeeper provides coordination of care, in reality a gatekeeper can create many problems for
people requiring frequent or specialized health care services. Due to financial disincentives,
gatekeepers may delay access to critical services which people may need immediately
Gatekeepers may also be reluctant to refer patients to specialists because of utilization limits
imposed by managed care plans, despite gatekeepers’ unfamiliarity with the health care needs of
people with specific conditions or disabilities or the medical needs of the chronically ill

People with disabilities often require specialists with whom the managed care plan may not have a
contractual relationship. Another common problem is that of insufficient numbers of specialists in
the panels of some managed care plans, leading to long waits for appointments

Many managed care plans assign enrollees to physicians and do not allow subscribers to choose
their own physician who may be familiar with their medical history and health care needs. In
addition, most plans do not allow specialists to serve as a gatekeeper. However, many people
with disabilities, because of their complex requirements, often need a specialist to meet their
primary care needs and to determine if additional specialized services are needed. Children with
disabilities often need the option of pediatric specialists as the primary physician or as part of a
multi-disciplinary team. In some managed care plans, children with disabilities may be limited to
adult specialists who may not be familiar with the special needs of children



72

here—is that the Federal Government isn’t actively pursuing an in-
formational directory to have people call up an 800 number and
find what is available in their area.

Ms. WILENSky. Mr. Thomas, now that you mention it, it strikes
me that there was some money set aside, and perhaps you could
ask whether that is available now in the Social Security offices or
not. It strikes me that that was supposed to be in place all in one
stop. Of course, having the Social Security Administration no
longer part of HHS is not going to make any of that coordination
easier.

Chairman THOMAS. It is not easier, but we are going to run it
down because as this discussion went on, in my head, I said, wait
1 minute, I thought we had done this once. We are going to follow
up on that.

The last question I guess I will ask you is one that you can’t an-
swer, but I want you to begin thinking about it, and again, it is
partly the chicken-and-the-egg because you spent so much time.
And Mr. Ratner, if you can get in on this from the angle of your
research as well.

Both of you, Drs. Wilensky and Altman, spent so much time on
the failure of the AAPCC to be a reasonable tool in measuring
value—and we talked about small percentage shifts into managed
care—to what extent is the failure to move more rapidly—even in
areas where managed care is clearly the dominant choice, to what
extent is it the failure of the funding mechanism? The primary rea-
son?

Ms. WILENSKY. No. I would put it the secondary reason. The sec-
ondary reason is that the elderly have very little reason to leave
the a la carte, open-ended entitlement fee-for-service system.

I don’t think the AAPCC is a trivial problem. I think that is why
Medicare doesn’t get much in the way of savings. But, for me, the
most serious problem is the lack of incentives for the elderly, the
reward to choose wisely. I don’t know what——

Mr. ALTMAN. I would agree with that. We did not see a rapid
buildup in managed care in the private sector until employers
changed the incentive structure substantially, not marginally, so
that it became more and more expensive to individuals to stay in
the program that they traditionally had. It didn’t force them, al-
though now you get to some employers that your only options are
between managed care A, B or C. But in the transition, it moved—
it flipped in the late eighties from making fee-for-service the domi-
nant choice for many employers to making managed care the domi-
nant plan.

You have got to be more careful with the seniors, but I support
Gail. That is the primary reason.

Chairman THOMAS. So the system that is driving us bankrupt
that we are going to try to get people to move out of voluntarily
is actually the wisest dollar choice that they could make?

Mr. ALTMAN. Yes.

Ms. WILENSKY. They are acting very rationally.

Chairman THoMas. And the failure to change that system fun-
damentally?

Ms. WILENSKY. Make some of those changes, either because they
are—in the best of all worlds, they are using a lot of other people’s


27

actual payment per enrollee for administrative costs and profit is also much higher.
This policy encourages plans with high administrative costs and profits to participate in
the Medicare program, and it discourages plans that have kept these costs low.

TEACHING, DISPROPORTIONATE SHARE, AND RURAL HOSPITALS

There also are substantial problems with the way the Medicare risk contracting
program deals with payments to teaching, disproportionate share, and vulnerable rural
hospitals. Capitation and managed care in the public and private sectors is designed
to increase the pressure on all providers to contain costs in order to compete. Certain
providers, such as those located in remote rural areas or urban underserved areas
may be disadvantaged in responding to such pressure. Other providers that furnish
services such as training of the future health care work force and research and those
that serve a disproportionate share of low income patients are also at risk. During
1994, 41 million people had no health insurance at some time during the year.
Hospitals, physicians, and other providers traditionally have furnished needed services
to many of the uninsured, by subsidizing these costs.

in 1994, the Medicare program provided about $10 billion in extra payments to
certain rural, teaching, and disproportionate share hospitals to recognize the costs
they incur that other hospitals do not bear. The extra costs to produce socially
valuable services, however, may not be recognized in a price competitive health care
financing and delivery system. The Medicare risk contracting program, in fact, does
not appropriately account for these payments or costs. Because the AAPCC is based
‘on Medicare's total fee-for-service payments in a particular geographic area, it
includes the special payments to these facilities. The plan, however, is not obliged to
use these providers or pass along the extra payments to them.

The Medicare program provides these extra payments in recognition of the
unique contributions of these facilities by assisting them financially and, therefore,


70

As a worker, I want a company that, first, has done some screen-
ing, and second, I can go to at some point to protect myself. I don’t
think you would be able to withstand hundreds of thousands of
seniors coming in here and bombarding you if they get really hood-
winked all over the place.

So you need—I agree with Gail. You need somebody out there to
do what is now being done for enrollees in the private sector, these
HEDIS reports and stuff like that. With that information, then you
can have a much freer system of selection. Even the Federal em-
ployees are doing the same thing. So that is more along a model
of what HCFA could do.

Mr. ENSIGN. Thank you.

Thank you, Mr. Chairman.

Chairman THOMAS. The gentleman from Nebraska.

Mr. CHRISTENSEN. I would tend to agree with my colleagues from
Nevada and Louisiana that if there is one major problem in this
whole dilemma, it is HCFA.

To what degree does Medicare inform beneficiaries of the man-
aged care options available?

Ms. WILENSKY. Not at all.

Mr. CHRISTENSEN. At all?

Ms. WILENSKY. Not at all. If you will forgive me, HCFA is admin-
istering the program that is basically in place by legislation. I
agree with a lot of the complaints of your seniors and your physi-
cians, but it is the program that was legislated in place. Excuse
me.

Mr. CHRISTENSEN. We will change that.

No information at all?

Ms. WILENSKY. None. None.

Mr. CHRISTENSEN. Pretend that I am a Medicare recipient. I call
HCFA. I can’t find out any managed care plans in the area? I can’t
find out any premium information, additional benefits? I can’t find
out any information?

Ms. WILENSKY. Well, there is a group that has worked with
HCFA, and I can’t remember what it is called. There is a group
that is a public group that has been working with HCFA to make
information available, and of course, as a result of the changes in
1991 law, the kinds of options that are available under Medigap
are severely restricted.

So HCFA doesn’t have as part of its mission, or any funding, to
make information in general available about the managed care
plans; but there is some structure now because of the changes that
were put in law about what is available. But nothing like what I
think should exist.

Mr. CHRISTENSEN. What do you think should exist?

Ms. WILENSKY. What we were talking about, which is really the
sort of report card notion of what is out there, what it costs, what
kind of benefits you get, consumer satisfaction, enrollment,
disenrollment and anything we know about outcomes.

Mr. CHRISTENSEN. How many HMOs in an area do you think it
needs to put together a competitive-type structure, competitive bid-

ing?

For example, I am from Nebraska. Two-thirds of my State is
more rural than urban. How would it work in the western United


146

or units. Several studies raise concerns about HMO treatment of Medicare beneficiaries as well.
The Medicare Advocacy Project, Los Angeles, California, in its January 1993 report, "Medicare
Risk Contract HMOs in California: A Study of Marketing, Quality and Due Process Rights”
noted the failure to refer for needed specialty care; not having enough contracting specialty
physicians available or having financial incentives to delay or prohibit referrals to specialty
physicians, and failure to refer for rehabilitation. Additional studies by MATHEMATICA, Inc. have
raised similar concerns.

These issues reflect several points.

1. Managed care plans enrolling Medicare patients are required to provide at least the same
coverage as the Medicare fee for service. There is no 60-day limit on inpatient
rehabilitation service under Medicare, as there may be for non-Medicare enrollees.

2, Most stated coverage assumes advance approval by the managed care plan and/or
“continual functional improvement". The standards to be applied in making such
judgments are not stated, leaving grounds for dispute between enrollees and the plan in
question.

3. There is no disclosure of incentives for gatekeeper physicians and other representatives
of a plan to provide or withhold care.

Additionally, several studies have found that rehabilitation services are restricted or limited.
For instances, at the request of HCFA, MATHEMATICA Policy Research, Inc. conducted a study
10 assess whether this risk program proved to be cost-effective and whether the delivered care
of HMOS was of comparable quality to that provided by FFS providers. A report of the study,
Does Managed Care Work for Medicare? An Evaluation of the Medicare Risk program for
HMOs, was released by MATHEMATICA Policy Research, Inc. in December 1993.

The results indicated that the risk program does not save money for HCFA and, in fact, costs are
aigher than they would have been had the enrollees not joined the HMOs. Costs under the risk
srogram were 5.7% higher than they would have been under the FFS because beneficiaries with
shronic health problems were less likely than healthy beneficiaries to enroll in HMOs, and the
vayment (capitation) rates failed to reflect this favorable selection fully. Although payment rates
0 HMOs were set at 95% of HCFA’s projected FFS cost for enrollees, these projections were
00 high, by about 11% on average. HCFA's simple method of basing the payment rate for
ndividuals on their age, gender, and a few other readily available characteristics fails to account
‘ully for the healthier-than-average mix of beneficiaries who choose to enroll in HMOs, Thus,
nstead of saving 5% as intended, HCFA spent nearly 6% more than it would have for enrollees
1ad they not joined the HMOS.

Another study, The Quality of Care in TEFRA HMOs/CMPs, was released in December of
992. This study found that overall medical care for strokes and colon cancer was comparable
© that in the fee-for-service sector. Any reduction appeared to be influenced by patient severity.
Therefore, the researchers found that HMOs were cutting costs for these patients who needed the
ervices least. In terms of speech and physical therapy visits for stroke patients, HMO enrollees
ended to receive fewer services and were discharged with greater deficits than non-enrollecs.

“hese excerpts from various managed care plans reflect three points of likely confusion.

First, overall limitations are framed in terms of time or number of days of services per
condition, leaving considerable ambiguity about what constitutes a condition.

Second, managed care plans enrolling Medicare patients are required to provide at least
the same coverage as the Medicare fee for service. There is no 60-day limit on inpatient
rehabilitation service under Medicare.

Third, most of the coverage stated assumes advance approval by the managed care plan
and/or “continual functional improvement”. The standards to be applied in making such


63

Now, this is not saying these are bad people. This is not saying
these are un-American. This is what incentives do. So I caution you
as strongly as I can, do not be misled by the plans that talk to you.
They honestly went into this market, many of them have been in
the market for years. They had a social mission and an economic
mission. They didn’t experience rate. Some of them are getting
badly beat up in the HMO world because they are finding them-
selves with adverse selection relative to the newcomers.

You can’t ignore incentives. That is why we want to change, be-
cause the old set of incentives in fee-for-service killed us. You could
create another set of incentives that would kill you, and then the
groups are going to be here talking about profits being made and
other firms going broke, and I think most managed care plans
would want to have a fair risk adjuster so they don’t get hurt.

Mrs. JOHNSON. Thank you. We will pursue this at other times.

Chairman THOMAS. Just two points before I recognize the gen-
tleman from California.

Stu, you and Gail talked about the problem in the way in which
teaching hospitals are funded.

Mr. ALTMAN. Yes.

Chairman THOMAS. Perhaps the HMOs are not passing through
the money given to them to those institutions, like the more tradi-
tional structure. You just talked about a problem in terms of risk
adjusting and rating within Medicare. It just seems to me that both
of those problems are probably better addressed in the larger arena
of health care reform, like fundamentally changing the way in
which teaching hospitals are reimbursed. Then you don’t worry
about it passing through cleanly on a Medicare structure; and we
deal with the way in which insurance is sold and the way in which
ratings are determined. If we deal with that on the health care
question, we then will have solved it. And I just am a little con-
cerned about how much weight we have put on the back of Medi-
care to carry changes in the Trealth care arena that probably would
be fairer and better met on a broader based change, more fun-
damental change.

Mr. ALTMAN. I agree with that, but I think back to a discussion
I had with Mr. Cardin several hearings ago. And he chastised me,
and I think appropriately so, for a catch-22 environment, which is,
OK, I buy that. But suppose you take the extra funds out of Medi-
care, what happens to those institutions? And so, in general, I sup-
ported where you were.

I think in the bigger picture, it is a small issue. It is not a small
issue in Los ‘Angeles and in Boston and New York; and it is not
going to be a small issue when Medicare goes to 50-percent man-
aged care.

So, yes, in a theoretical sense, I would much rather see it in
broader reform, but I don’t think you can ignore it in Medicare be-
cause now Medicare is becoming the dominant form of extra pay-
ment for these teaching hospitals.

Chairman THOMAS. F think your response is well taken. So what
I need to do then is, in crafting a solution for Medicare, make sure
that it fits into the larger health care plan that will either precede
or follow it. So one or the other, the two have to be compatible. I
prefer doing the larger, which gives us a broader——


20

‘TESTIMONY OF STUART H. ALTMAN, PH.D., CHAIRMAN
PROSPECTIVE PAYMENT ASSESSMENT COMMISSION

Good Moring, Mr. Chairman. | am Stuart Altman, the Chairman of the
Prospective Payment Assessment Commission (ProPAC). | am accompanied by
Donald Young, M.D., Executive Director of ProPAC. | am pleased to be here today to
discuss Medicare's managed care options and the improvements that are needed to
improve their effectiveness. During my testimony, | will refer to several charts. These
charts are appended to the end of my testimony.

You have recently held a series of hearings at which we and others have
described the rapid rise in Medicare spending and the factors accounting for this
growth. You also have examined the contributions of the Medicare program to the
tising Federal deficit and the impending insolvency of the Medicare Part A Trust Fund.
These are not new problems. in the early 1980s, Congress addressed these
problems by enacting the Medicare prospective payment system for inpatient hospital
services, physician payment reform, and other initiatives that collectively slowed the
rise in Medicare spending and delayed the insolvency of the Trust Funds. As a result
of these initiatives, the growth in Medicare expenditures per enrollee slowed
considerably, falling substantially below the rise in private health insurance spending
per member. These initiatives effectively controlled the increase in payment per unit
of service, such as a hospital admission or visit to a doctor. They were less effective,
however, in controlling the total number of services provided to each Medicare
enrollee. More recently, Medicare spending has again accelerated, while the rise in
private health insurance expenditures has moderated.

THE CONSEQUENCES OF FEE-FOR-SERVICE PAYMENT

Without additional reforms, Medicare spending is projected to continue growing
about 10 percent a year. About half of this rise, or 5 percentage points, is due to
increases in the number of Medicare enrollees and their average age and to inflation
in the general economy. The remaining 5 percentage points is due to increases in the
price of medical goods and services above general inflation and especially increases
in the number and intensity of services furnished to Medicare enrollees. This rise in
service volume and intensity is a result of several factors, including the aging of the


37

Chart 2. Summary of Medicare Managed Care Contracts,

June 1994

Number Number of

of Plan Beneficiaries
Type of Contract Contracts Enrolled
Total 268 3,280,438
Risk 133 1,996,169
Cost 27 169,495,
Health Care Prepayment Plan 62 655,559
‘Social HMO 4 22,052
SELECT 32 435,300
PACE 10 1,863

Chart 3. Medicare Managed Care Enrollment and Payments, 1990-1994

‘Combined Contracts” isk Contracts
En
Number Pereant Amount Parent «Number Percent «= Amount—-Percent
Year (In Milions} Change (in Bilione) Change (In Milions) Change (in Billions) Chango
$42 -
49 107%
87 163

72 263
94 254



157

¢) Some MSA plans are combined with MCO's. Again, this penalizes consumers for
using out-of-network clinicians, which limits their choice of providers, especially for those
with a limited income.

2 Re ver citize

a) Phase out employer involvement in health care. It no longer works. For employer
premium money actually belongs to the employee, for it is taken from his/her wages.
Retum this money to the employee so that employed citizens can purchase, own, and
control their own health care plans. Under Medicare, and for citizens with limited incomes,
beneficiaries should be expected to pay a portion of their premiums, based on their
incomes, with government paying the balance.

b) isumers, t under managed care
tivacy_and decision-making) Employees lost these rights because we now expect
‘employers to pay for insurance, and because employers needed to cut costs once the
patient became separated from the consequences of their decisions under the
fee-for-service system. Citizens have been separated from the fact that itis their money to
begin with, and the greater the separation, thet less care they ‘ake with that money.

ia ct their le for their

Tobe £0.

i) Medicare beneficiaries with adequate incomes would buy their own plans, or at
least pay for a portion of their premiums. Goverment would pay that portion of the
Premium which is unaffordable for the Medicare beneficiary or other citizens.

ii) Benefit design must create incentives for patients to be cost- and
utiization-conscious, without restricting access to care and other freedoms.

d) Individual mandates might be considered. Car insurance is required of all who
drive, not just of all who have accidents, Why can't health insurance be required of all who
live, not just those who get sick? While we might wish to protect the freedom of the citizen
NOT to be insured, all citizens must then pay for emergency care and follow-up treatment
when an uninsured individual requires treatment he/she cannot afford out-of-pocket.

3. Protect qual consumer freedoms by encouraging citizens to buy and own their
100%. ion for all ci jing their own health care
plans.

All citizens deserve the tax break now given to employers, especially those who are
self-employed or unemployed, which may include a large number of Medicare
beneficiaries. Also, it is important for a goverment to encourage people to take care of
themselves, so they will be less dependent upon the government for services. The more
health insurance coverage one owns, the less dependent one will be on the government
for care.

4, Guarantee portability of health care plans.
5. Prohibit “pre-existing condition” ent

6. Guarantee all citizens in M "Point-of-Service” options:
Unfettered access to specialists is crucial for those who are ill

7. Guarantee the right of includin«
with providers of their choice.

In the case that a health pian denies reimbursement for a particular service, the citizen
must still be allowed to purchase health care he/she believes is necessary. The MCO
might be making incorrect decisions. Medicare beneficiaries cannot currently purchase
psychotherapy except from Medicare providers. If Medicare comes under managed care,
beneficiaries will also frequently be denied more than a handful of psychotherapy sessions,
as is already happening to the general population. Most MCO's are only allowing “crisis”
care, and are prohibiting true forms of psychotherapy. We cannot make it illegal for
Medicare beneficiaries, or anyone else, to obtain genuine psychotherapy.

jicare beneficiaries, to “contract privately"

8. Allow the States ate the m: indust
‘@) With a true “free market” system, in which the citizen has the ability to make his/her
own health care decisions while being given incentives to be cost-conscious, there will be
Jess need for regulation than there is under managed care.
b) Managed care plans frequently short-change the patient, and often prevent
providers from advocating for patients and from delivering the best care they know how to


57

generally accepted operational criteria. For example, a good
risk adjustor would be inexpensive to administer, reduce
favorable selection, create incentives for HMOs to provide
appropriate care, and would not be subject to manipulation by
participating HMOs. However, no risk adjustor is likely to
exhibit all these positive traits because these criteria have
tradeoffs. For example, a more complex risk adjustor may be more
successful in reducing favorable selection but may do so only at
a high administrative cost.

Recently, we evaluated 10 possible risk adjustors.? None
emerged as the definitive solution to the problem of the current
system. However, 4 of the 10 adjustors we examined were
potentially superior to the current system and seemed to entail
less administrative burden than the most sophisticated risk
adjustors. One of these adjustors--clinical indicators--would
adjust capitation rates for the presence or absence of a
particular chronic health condition (such as heart disease,
stroke, or cancer). Two other promising clinically-based risk
adjustors include information not only on whether a beneficiary
has a specific condition but also on the severity of the
illness.” In the fourth approach, HMO capitation payments
would be linked to beneficiaries’ own views of their physical and
emotional health.

Improving the AAPCC Capitation Rate

HCFA could require steeper discounts from HMOs than the
present 5-percent discount off the estimated local fee-for~
service cost. Although this would lower payments to HMOs, it may
not necessarily have a large impact on their participation in
Medicare risk contracts. Previous research indicates that
enrollment of healthier-than-average beneficiaries, combined with
an imperfect system of risk adjustment, results in excessive
payments to HMOs--even after factoring in the 5-percent discount.
‘The number of HMOs seeking risk contracts has increased from 109
to 164 in less than a year and a half. Thus, HMOs may continue
to find Medicare risk contracts attractive--even at a somewhat
larger discount. However, if health plans react by offering less
generous benefit packages, fewer seniors may be attracted to
managed care.

The method used for calculating the AAPCC could also be
improved by assigning a greater weight to the influence of local
medical prices and a lesser weight to the influence of local

“Medica: Changes to HMO Rate Setting Method Are. Needed to
Reduce Program Costs (GAO/HENS-94-119, Se (GAO, 19, Sept 1994

?The two risk adjustment measures are Ambulatory Care Groups
(ACGs) and Diagnostic Cost Groups (DCGs).


23

prepayment plans (HCCP), provides only Part B services. There were 62 of these
plans in 1994, accounting for about 20 percent of Medicare's managed care enrollees.

Medicare also has several managed care demonstrations. These include the
Medicare Select program, which uses a preferred provider network to furnish Medigap
supplemental coverage. The Medicare program is also sponsoring the Social Health
Maintenance Organization (SHMO) demonstration, which uses HMOs to link nursing
home and community-based services with acute care. The PACE program provides
managed care for the frail, generally poor, elderly population.

THE RISK CONTRACTING PROGRAM

The Medicare risk program has the potential to slow the rise in Medicare
spending. The evidence to date, however, indicates that it has not achieved this goal.
There are a number of reasons for this. They include the methodology used to
calculate the payment for each plan, requirements regarding differences between each
plan's payments and expected costs, and Medicare's policies regarding enrollment and
disenrollment, including the lack of an adequate adjustor for health status. In addition,
each year plans are allowed to convert from a risk contract to a cost contract or vice
versa. There also are problems regarding Medicare's extra payments to teaching,
disproportionate share, and rural hospitals that | will describe.

The development of Medicare's payment rate is based on a simple idea that has
not worked as intended. The notion was to calculate a capitated amount that gives
HMOs incentives to provide care at less cost than fee-for-service providers. In
concept, Medicare was to generate savings because its payment to risk plans is set at
a level less than the average spending that would otherwise be expected to occur in
an area. Medicare pays a risk plan a capitated rate equal to 95 percent of the
average Medicare fee-for-service program spending in the county in which the enrollee
lives. This amount is adjusted to reflect age, sex, Medicaid status, institutional status,


144

STATEMENT OF THE AMERICAN REHABILITATION ASSOCIATION

SUBMITTED TO THE SUBCOMMITTEE ON HEALTH
COMMITTEE ON WAYS AND MEANS

FOR THE RECORD OF THE HEARING ON MEDICARE ISSUES
- INCREASING AND IMPROVING OPTIONS FOR MEDICARE BENEFICIARIES -

MEDICARE HMO ENROLLMENT GROWTH AND PAYMENT POLICIES

MAY 24, 1995
MEDICARE MANAGED CARE: CONSUMER PROTECTION STANDARDS

Mr. Chairman:

This testimony is being submitted on behalf of the American Rehabilitation Association for
inclusion in the record of your subcommittee’s hearing on managed care and the Medicare
system.

The American Rehabilitation Association (formerly NARF) is the largest not-for-profit
organization serving vocational, residential, and medical rehabilitation providers in the United
States. ‘The established leader in the field of rehabilitation for more than a quarter of a century,
‘American Rehab services its more than 800 member facilities by effecting changes in public
policy, developing educational and training programs and promoting research. In addi it
provides networking and communications opportunities, all of which

and access to services to more than four million persons with disabilities each year.

All of us will probably need at least one reh.bilitation service sometime in our life. As we go
about our daily lives none of us contemplate if we will have a stroke, break a hip, hit our head,
have a spinal cord injury, be shot or stabbed or have a child born with a congenital problem. We
do not think about this as our future. But for many Americans, unexpectedly and unfortunately
these things happen. These types of illnesses or injuries require rehabilitation services to help
return people to home, to work, to school and ideally to an active life. For a child bom with
a congenital or genetic disorder, rehabilitation services can help them walk, move, write, feed
themselves, and therefor attend school, participate in social events and enjoy the kind of life that
most of us think is what life is all about.

PURPOSE

The number of people who obtain health care coverage through various types of managed care
plans is gcowing. It is an article of faith among many policy makers that "managed care" is the
appropriate, if not the only, way to slow the rate of growth in health care expenditures. Managed
care plans, primarily health maintenance organizations, are replacing indemnity carriers as the
insurer of choice for many corporations. State Medicaid programs increasingly are using
‘managed care in one form or another. Various members of Congress are advocating the provision
of incentives for enrollment in managed care plans by Medicare beneficiaries as a means of
reducing costs (or at least reducing the rate of increase of costs) of the Medicare program.

In concept there are two reasons why managed care plans can provide care at lower cost than
traditional forms of insurance and health care delivery. First, it is assumed that by hiring or
contracting with providers of services to significant patient populations, HMOs and other
managed care plans can achieve economies of scale (or drive hard bargains). Second, through
"management" of care through gatekeeper physicians and other controlling mechanisms they can
avoid delivery of ineffective or superfluous services and, thereby, avoid the associated costs.


90

TESTIMONY OF DAVID B. KENDALL
PROGRESSIVE POLICY INSTITUTE

The growing popularity of managed care plans in Medicare has created the
opportunity to achieve fiscal discipline. For too long, older Americans, the disabled, and
taxpayers have had little choice but to pay Medicare’s rapidly rising premiums and out-
of-pocket expenses. Today, private health plans—namely, health maintenance
organizations (HMOs)—offer Medicare participants another choice: better benefits at a
lower price. But taxpayers are saving little because Medicare's government insurance
plan, which is based on fee-for-service medicine, is shielded from competition.

Under current law, payments to managed care plans are tied to Medicare's less
efficient fee-for-service plan. Instead, payments to all health plans—both private and
government—should be based on the best price in the marketplace. To compete,
Medicare's fee-for-service insurance plan should have new authority and flexibility to
manage its costs. Such competition would unleash Medicare's buying power by
transforming "beneficiaries" into responsible consumers. They would have more control
and responsibility for Medicare spending, thereby lowering costs for taxpayers.

Competition offers an alternative to the price controls and spending limits
preferred by many Democrats and the arbitrary budget caps proposed by Republicans.
On the one hand, the regulatory approach has been largely exhausted. The controls that
have been developed and refined over the last thirty years do not have the potential to
restrain Medicare’s rising costs to available revenue. On the other hand, the proposed
budget caps would reduce spending without regard to the consequences. No one knows
how much and how fast to reduce Medicare spending without sacrificing quality and
access to health care.

A competitive approach must be enacted step-by-step in order to assure public
confidence during the transition. First, a competitive basis for paying private health
plans would be widely tested. Next, access to high quality caze at lower costs would be
verified. Finally, all of Medicare would be adapted to limits set by competition.

Medicare's "risk-contract” program, which pays managed care plans a fixed-sum
for every person they enroll, is the logical place to start this new approach. It is the only
existing opportunity for private health plans to assume the financial risk of managing
the costs of Medicare patients. But it has many flaws that must be fixed before
competition can be effective.

Flaws in the Current System

Risk contracts already permit a limited form of competition between private
insurance plans and Medicare's fee-for-service insurance. HMOs compete by offering


IsBI 6-053954

tN


44

Now, second, by not adjusting its rates appropriately for whether
HMO enrollees are healthier or sicker than average, Medicare pays
more than necessary—by some estimates, about 6 percent too
much; by others, about as much as 28 percent. This is the famous
favorable selection or risk selection problem.

Now, these payment problems for Medicare coexist with real
operational problems for HMOs in the Medicare business, and Dr.
Wilensky has talked about some of those already. From the per-
spective of the HMOs, they see at least two problems. First, that
the payment rates that Medicare has vary considerably between
counties without necessarily reflecting the actual costs of providing
care,

Here is an example: Medicare pays an HMO 27 percent less for
serving a beneficiary living in Prince George’s County, Maryland
than for serving an otherwise identical person living in neighboring
Montgomery County, Maryland, even if the two people are treated
in the same facility by the same doctor.

Second, in some counties, the HMO rates can increase or de-
crease dramatically from year to year. This can deter HMOs from
participating in counties with volatile Medicare rates.

Now, our work drives home two points that would make success
more likely if the Congress pursues expanding Medicare managed
care and better pricing of capitated health plans. One, with respect
to pricing these plans in Medicare, one size does not—does not—
fit all. Market conditions vary too much and in important ways,
even among metropolitan areas. Two, details matter. How pro-
grams are designed and implemented often makes the difference
between failure and success.

As for solutions, we believe a sensible approach would vigorously
and concurrently pursue three strategies: Increase price competi-
tion among HMOs, make risk adjusters more accurate, and correct
the pricing of HMO plans based on modifying the existing formula-
based approach. Our written statement contains the details of
these strategies.

By pursuing multiple strategies, by carefully monitoring experi-
ence, Medicare could benefit from early action, while gaining more
information on how well these strategies work and how they might
be better implemented.

In particular, we believe that HCFA should move quickly to im-
plement a better risk adjuster. Last year, we recommended that
they look at four risk adjusters and move quickly on demonstration
projects. This year, we think they should select one of the four that
is more administratively feasible and implement it as an interim
fix. Meanwhile, HCFA could devote its resources to refining a more
sophisticated risk adjuster.

Finally, we believe that HCFA should move forward without
delay in launching demonstration projects on competitive bidding,
and you have heard about that already. By trying competitive bid-
ding in different regions, HCFA can obtain valuable information
about what works and what doesn’t work.

For example, demonstration projects could test different ways of
penalizing HMOs that lose on the bidding. However, demonstration
need not equate with delay. If a demonstration testing the competi-
tive pricing of health plans results in savings, Medicare will reap


85

of the voucher would be the combination of two amounts, reflecting the financing of
today's Part A and a reformed Part B. The two elements of the voucher would be:

Portion (A) Part of the voucher would be an amount, adjusted by age, sex and
‘geography. intended to cover the actuarial equivalent of the hospital and other
services in today's Part A of Medicare. This portion would not be means-tested.

Portion (B) The other part of the voucher would be based on an amount, adjusted by
age, sex and geography, intended to cover the actuarial equivalent of the services
currently in Part B. This base amount would be means-tested to determine the
dollar amount of this element, And since today’s Part B is voluntary, the elderly
‘would be able to decline this portion of the voucher.

An alternative form of defined contribution, rather than a voucher, would be for
‘the Medicare program to cover a certain percentage of the premium for the plan of the
elderly's choice, with a maximum dollar amount of contribution. This structure of
contribution would be more like the FEHBP, but would mean somewhat less financial
assistance for lower-income elderly.

‘The elderly would be able to use the voucher (or the percentage contribution) to
purchase a Medicare approved health plan of their choice. Medicare would distribute
information on the plans to the elderly, as well as a checklist to permit the elderly to pick
their desired plan. Medicare would then inform the appropriate plan of the retiree’s
choice.

‘These plans, somewhat like plans offered through the FEHBP to retired federal
workers, would have to meet certain basic requirements to be marketed as Medicare-
approved plans:

Plan Requirement #1 The plan would have to meet certain basic financial requirements
to assure their financial strength.

Plan Requirement #2 The plan would have to specify its services and costs in a
standardized manner, to enable the elderly to choose without confusion.

Plan Requirement #3 Each plan would have to offer coverage designed to be actuarially
‘equivalent to Part A (for those declining the “Part B” portion of the voucher) and
a plan with additional services equivalent to the services in Part B (for those who
wanted the full voucher).

Plan Requirement #4 Each plan would have to contain a core set of benefits, including
catastrophic overage. This core would be leaner than Medicare today, thereby
permitting the elderly to purchase a less expensive basic plan and supplement it
with other optional services, or — with the help of the voucher — buy those
services directly from providers. As an option, plans could offer a Medisave
option, allowing the enrollee to pay directly for services out of an account, with
insurance only for catastrophic expenditures. The core benefits for those declining
the “Part B” portion of the voucher would be less extensive, and focused on
hospital services. If a senior declined the “Part BTM portion of the voucher they
could buy additional insurance or pay for benefits without any requirement that
these additional services comply with any federal guidelines. Thus, just as today,
the equivalent of part B coverage would not be compulsory.


62

order to provide a Medicare coverage service package to the people
in that area.

In some areas of the country where you have established Medi-
care Programs—for example, Portland, Oregon has over half of its
seniors already in HMOs and managed care, there is no question
in my mind, you could do competitive bidding as fast as you could
put the office in place.

Mrs. JOHNSON. They do that in Oregon without our doing the
Federal risk adjuster. A lot of things that are happening are hap-
pening without our fixing the problems in the system, and when
74 percent of seniors live in markets where there are managed care
choices, why do we have to fix all the problems you point to? Why
can’t we go around them and gradually wipe them out?

Ms. WILENSKY. Competitive bidding in the areas where there are
a number of HMOs is something that you ought to start quickly.
There are parts of the country, of course, where you won't have
enough entities to start, and there is a problem in risk selection.
Let me try to explain why.

Even if HMOs are not actively selecting healthy risk—I believe
Stuart, that there are a couple of bad apples out there—in general,
I don’t think HMOs are going out and actively shunning certain
groups and attracting others. But the problem is, if it turns out
that you get the healthy folk in your HMO and the HMO down the
street gets the sick people, there will be financial reward or penalty
if you don’t make an adjustment. That is, if you get part of the 10
percent of the population that spends 70 percent of the money, or
the 1 percent that spends 43 percent of the money, you will either
make a bundle, if you are paid on average, or lose a bundle if there
isn’t some adjustment to the premium. If you have any linkage to
what is going on in the fee-for-service system—which I hope you
get rid of, then you get caught there in case the people who are
left are either sicker or healthier than average.

So as long as you have choices around, this is not just a Medicare
problem. This is a problem any time you have choices in the sys-

em.

FEHB, for example, the public program for Federal employees,
faces a risk problem if disproportionate numbers go to a particular
plan.

I think we can make some inroads there. I am not going to rec-
ommend you stop until we fix the problem. I think we can do better
than we have if we give it a little more serious attention. But I am
all with you; competitive bidding, which means going to the mar-
ket, is great.

Mr. ALTMAN. Let me add a couple of things to that. I am con-
vinced that if you don’t seriously look at risk adjustment, 3 to 5
years down the pike, a new group of people are going to be sitting
at this table telling you some horrendous stories; and the reason
why I say that is, if you look at the insurance world, the fee-for—
the private insurance world, they are very sophisticated, experi-
enced raters. I mean, we can’t be naive. There is so much money
at stake here, the ability to make money in—and these are smart
people. The ability to make money by carefully crafting techniques
to have less sick people is such an incentive out there, it is almost
too tempting.


86

An alternative would be for Congress to require that, at a minimum, each plan
must contain at least the specific services available today under Medicare, yet

allow plans to offer additional services — with perhaps higher copayments for
services currently in the Medicare package.

Plan Requirement #5 Each plan would have to set its premiums according to limited
underwriting principles. These would be age, sex, and geography, but not health
status. One exception to this general limitation would be to permit
“lifestyle” premium discounts for seniors willing to enroll in sickness prevention
and health promotion programs.

A reform based on this consumer-choice approach would have numerous
advantages for the elderly and the taxpayer.

Personal Freedom. Under a consumer choice system in Medicare, elderly Americans
could choose the type of private health insurance that best meets their individual needs.
With the advice and counsel of their doctors, they would be able to pick not only the level
of benefits above a basic set of hospital and physicians services, but also a broad range of
medical services and treatments that are available on the free market. Consulting with
their doctors, rather than waiting for approval from the bureaucrats al HCFA, this means
that the elderly would be able to take immediate advantage of changes in treatments,
medical procedures, and service delivery innovations. The only large group of the elderly
with access to similar breakthroughs today are retired Members of Congress and federal
employees.

Value for Money. Like retired federal and congressional retirees, Medicare beneficiaries
would be able to pocket any savings from their personal decisions. While the cost of
health care for the elderly is considerably higher than the cost of health care for active
workers and ther families, the level ofthe government contribution to their heath plans
would also be higher, depending on differences in age, sex, and geography.'?

Controlling Costs. While by no means a perfect market, the FEHBP, serving retired
Members of Congress and federal workers, has been able to control costs better than
either private, employer based insurance or the current the Medicare program. According
to the Congressional Budget Office and such private econometric firms as Lewin-VHI,
this success is in large part due to the ability of Members of Congress and other federal
workers, families, and retirees to comparison shop among the various health plans in their
geographic region for the best value for their money. In ora yar, ven though the
FEHBP enrolls approximately 1.6 million higher-cost retirees and

includes pogresivelyhigha beef, be FEMDP’seays have invest ch
slower rate than the Medicare program." With the establishment of a Medi-Choice
system, similar in structure to the current FEHBP, the powerful market forces of
consumer choice and competition should produce similar dynamics and thus similar
results in the Medicare program.

As noted earlier, one central weakness of the FEHEP is that is insurance underwriting practices are
‘outdated. It is currently a crude form of community rating, where there is po distinction in premium
‘payments for active and retired federal workers and their families. This carrent FEHBP arrangement also
directly contributes to the persistent problem of “adverse selection” in the FEHBP. The problems could be
‘emt liad ty an sijesmment nthe FEHB? premio sac. reaing te snuloneosly higher
‘premiums for retirees than active workers, along with mn increase in the governanest contribution
Tetsees chosen plans oa tx credit for federal pers of te hereaed cre Fore dscesson of ow
10 improve the FEHBP, see Robert E. Moffit, “Consumer Choice in Health :Learning From The Federal
Employees Health Benefits Program,” op. cit pp.17-19; see also Stuart M. Batler, “Reforming Health
Insurance: Analyzing Objections To The Nickles-Stearns Bill," Heritage Foundation Issue Bulletin,
1No.193, fume 14, 194,

* Source: Office of Personne! Management, Office of Actuaries, Table entitled "Federal Employees
Health Benefit Program, 1992 Contracts.”


121

‘Our measurement categories included such things as overall evaluation of care, access to
specialty care, and time available with physician and their staff members. The survey was
based on an instrument developed by the Group Health Association of America.

The strength of this expressed satisfaction in our services is perhaps best exemplified by
‘our members telling us that they are very unlikely to switch to a different health plan,
given the opportunity. When surveyed on this question (and while our overall membership
response was very favorable) our members aged 65 and older were the /east likely to
‘express any inclination to change plans.

Extra Services for Seniors
Perhaps a part of the satisfaction our members express can be traced to some of the
‘synergy of services which is available because of our integrated system.

‘TMC's hospital-based program of special services for seniors (which is available at no
charge to our Medicare risk members) provides a free transportation service to members
in need of inpatient or outpatient services at the hospital or to appointments at physician
offices within a 10-mile radius for members unable to drive. The service provides an
average of approximately 1,000 rides each month and 70 per cent of our riders report thet,
without this service, they would be missing or postponing medical services which would
‘greatly increase the potential of adverse health results and increased health care costs.

‘This program also provides for significant discounts on classes at our FitCenter Plus, a
center for exercise and wellness with a membership of more than 2,000 seniors, Staff
members at FitCenter specialize in senior fitness programs and work in cooperation with
members’ physicians or restorative services providers. A recent 12-week study of warm
‘water therapy demonstrated dramatic improvements in range of motion, shoulder strength
‘and walking speed for participants. This takes place in a relatively low-cost setting which
‘members find pleasant and productive. More than 50 classes per week are offered
throughout the city at six different sites.

Our Medicare risk patients also receive free membership in another community-based
program known as OASIS which offers a wide variety of classes and programs. Among
them is an inter-generational tutoring program which matches trained senior volunteers
with elementary school-age children with needs for assistance in reading and language
skills who are not eligible for other literacy programs. Last year, 268 member volunteers
provided mote than 42,000 tutoring hours to 383 students from 37 schools throughout the
area

‘These are a few of the extra services and opportunities which come to Medicare members
who chose our HMO, some are clearly and directly related to improving and maintaining
their health and others work more indirectly. All are benefits which have been
‘enthusiastically endorsed.

Innovations for Better Care

T'd like to tell you about two programs currently being piloted within the HealthPartners
Network, they are of particular significance to Medicare members of PARTNERS Health
Plan, These two programs literally bring together all the major components of the HO,
placing the patient's best interest at the center of the process, where it belongs. The
programs are

* a primary-care-based nurse case management system and

* an intensive geriatric evaluation and management system,


124

After medical progress from a treatment plan developed by the GEM team, and with
‘connections to community-based resources in her home town which were arranged by the
‘GEM team, Mrs, C chose to leave Tucson and to use the community support evailable
allowing her to live independently in her northeastem home for the best of all possible
reasons — because she could.

Conslusion

Innovative programs like these, which don't aim at merely reducing costs but rather
rearrange systems and resources into a more efficient and more patient-centered
configuration, are the result of taking the HMO concept and moving forward with it

At the core of the HMO philosophy is the belief that a policy of using resources to keep
the patient well and to intervene appropriately in the earliest detectable stages of iliness,
disease or disability provides (considering not just finances, but lives as well) the most
‘economical approach to better health, I am convinced that is a valid and valuable starting
point. In southern Arizona managed care plans are serving the health needs of the full
spectrum of Medicare members with excellent results at low cost. With four Medicare
HMO's operating in the Tucson market nearly 50 percent of Medicare beneficiaries have
voluntarily opted out of traditional fee-for-service medicine and into one of the managed
care plans. 1 would suggest you might want to survey these people directly to access their
perceptions of the increases in service, convenience, quality and economy which they are
‘experiencing,

We believe that the marketplace response to our managed care plans for Medicare
enrollees is strong evidence that we have taken the fee-for-service setting and improved
‘upon what it has to offer.

‘While there might be individual primary care providers in a fee-for-service setting who
have comprehensive resources available to them comparable to our case management and
GEM systems, | am unaware of them in our marketplace. It is the combined strength, skill
and commitment of the components of our IHO which can create this kind of resource on
a system-wide basis and make it available to a greater portion of the population

HMO’s, I think you can agree, have not been stagnant, 1 submit that HealthPartners of
Southern Arizona is an example of how rapidly and effectively community-based health
organizations can innovate and focus on its residents in a community fashion. We can do
the right thing for our customers if we continue to streamline the process. I believe the
THO configuration into which our HMO has joined is a giant step in the right direction and
serves to much more directly connect the customer with the providers of service and care
so that (rue and productive accountability is the result

ask you to keep in mind, as you consider legislative alternatives, that this type of
progress is possible only when we are able to operate without counterproductive
restrictions and cumbersome barriers.

We believe the case is strong to show that we are, infact, paving a new path to better
patient care while building a more economical system of delivery. HMO"s, as integral
parts of IHO’s, are uniquely positioned to reduce costs significantly and provide better
quality care because of the shared THO vision of our core business as managing our
communities toward better health within a finite set of resources.

Task that you recognize that not all HMO's are the same. Some of us are community-
‘owned and community-focused, without the need to serve the financial demands of
investors seeking a purely financial return. We are at HealthPartners of Southern

community-based and driven by a shared commitment with and to our
‘communities. Our ultimate return isa truly healthier community.

It is an exciting and challenging prospect to extend managed care principles through a
system aimed first at improved health status of patients and improved community health.
‘We think we're proving it’s a worthwhile effort and I would encourage you to look for
incentives to make more of this development possible rather than allowing creation of
restrictions, intended or accidental, which will slow down our ability to build healthier
‘communities and contribute to a stronger nation,

Thank you.


31

those with smaller total enrollments are also less likely to participate. These factors
may reflect the added risk of the Medicare population, the administrative costs of
enrolling Medicare beneficiaries, or the geographic distribution of plans.

In a survey conducted by the Office of the Inspector General, most Medicare risk
plan enrollees indicated that they were satisfied with their care. In fact, most who
disenrolled from a pian, enrolled in another risk plan. About one-third of those who
Jeft a pian did so for administrative reasons—they moved or their supplemental
insurance changed. The rest disenrolled for reasons that may relate to the quality of
the heaith plan or beneficiary preferences in health care delivery. These reasons for
disenrollment included believing that premiums or copayments were too high, wanting
to use providers not participating in the plan, or having to wait too long for
appointments. It should be recognized, however, that most Medicare enrollees remain
in the capitated plan they selected initially.

IMPROVING MEDICARE’S MANAGED CARE PROGRAMS

Major changes in Medicare's policies are necessary to achieve the savings that
are possible through managed care. Information presented to the Commission
suggests that managed care is capable of generating significant reductions in
beneficiary utilization without impairing access to quality care. In addition, ProPAC
‘analyses have shown that those states with the lowest hospital per capita cost
increases between 1980 and 1993 generally had the highest percentage of private
sector HMO enroliment in 1993. In contrast, all the states with the highest per capita
cost growth had lower than average HMO enrollment (Chart 11).

Medicare, however, is not taking advantage of the potential for savings. To do
‘$0 requires altering the method for determining the monthly capitated rate and the
services included within this rate, changing the incentives for beneficiaries to choose
this option, and encouraging HMO growth and participation in the program.


156

treat patients properly due to under-capitation. It is the bias of the corporations that people
should only require 1-3 sessions. This is not reality.

¢) itis true that under the fee-for-service system, there was some incentive to
over-treat the patient. However, not all providers over-treated, as wise clinicians knew that
they would receive future referrals from patients whom they treated appropriately. Also,
under a fee-for-service system, if a consumer feels that he/she is not being treated
property, he/she can easily leave that clinician and find another. Further, a system of
appropriate co-payments, when used by the insurers, encouraged consumers to be cost-
and utilzation-conscious.

naged tition comprise a“
there is no free market for the patient, the actual consumer of 7

a) Managed competition is really about the elimination of competition, As
consolidation continues, only a few large insurers will remain.

b) in several areas, the industry already controls 90% of the market. Where managed
care squeezes out fee-for-service plans, there is no competition for managed care itself, A
lack of competition always bodes poorly for quality.

©) A free market for the patient would mean that the patient is the one who would
determine what care is needed, determine the value of that care, and choose freely from all
who are qualified to provide that care. Managed care does not allow the patient these
liberties. As managed care becomes an arrangement between employers or governments
and the insurer, and the “consumer” becomes the employer or goverment, for they pay
the premiums, the "free market" exists between the MCO and the payor. Under managed
care, the MCO determines who will receive what kind of treatment, for how long, and who
can deliver it. The true consumers of care, the patients, as well as the body of
professionals who could administer care, are kept out of the "marketplace."

d) The managed care industry controls both suppiy and demand in regard to health
care services. MCO's have declared that there is an over-supply of mental health
professionals. This is predicated, however, on the industry's assumption that only brief
forms of crisis-oriented therapy are needed, and that few people need treatment. This is
not based upon true demand, which would be based upon the citizens’ requests for care.
Although fee-for-service is a "subsidized" market, itis still based on a more true supply and
demand than under managed care. Under a fee-for-service system which hag, in recent
years, seen extremely high co-payments for psychotherapy, the demand for services was
far greater than what is allowed under managed care. There will soon be a drastic
shortage of mental health professionals and other providers, for the number will be based
‘on what the managed care industry "needs," not upon what our citizens need. This will
affect our entire society.

C) Recommendations:

1. Allow Medicare beneficiaries to choose among a variety of health plans, including
fee-for-service plans, Medical Savings Accounts, MCO's, and any other type of health plan that
currently exists or is yet to be devised.

‘a) Medical Savings Accounts (MSA) are attempts to retum the rights of the "free
market” to the actual consumers of health care. incentives are provided that make the
‘consumer cost- and utiization-conscious. Up to the catastrophic limit of the MSA, the
consumer retains the right to choice of provider, the right to privacy, and the right to make
his/her own treatment decisions.

b) There are some problems with MSA's, however:

3) Beyond the catastrophic limit, the consumer retains freedom of choice, but loses
privacy and the right to make his/her own treatment decisions, as treatment may be
Subject to utilization review. However, because there are no panels, and MCO's can't
threaten the providers with unemployment, providers are free to advocate for patients.

li) The standard MSA contract written by the Golden Rule Insurance Company, has
a limit on mental health services of $10,000 per year per individual. This is generally
‘adequate for a patient requiring only psychotherapy, but not for one requiring a day
treatment program or hospitalization.

‘Thare is some concem that MSA's will not be appropriate for those who are
unable to be responsible for their funds. This may affect some of the elderly. It may be
necessary to arrange for a relative to make MSA decisions or, when there is no such
relative close by, for a consumer case manager (not a case manager contracted by the
insurer) to do so.



7

I don’t think there is a quick fix out there. We looked for it on
a bipartisan basis for 10 years and didn’t find one. I am sure we
will have some suggestions. I don’t know if we have got anybody
from Jackson Hole, but I am sure that oxygen starvation still pre-
vails in that group, and they will have some kind of a quick fix,
but we will see. I think we could just keep doing what the Chair-
man has done so well and move slowly and cautiously.

I look forward to the witnesses that you have assembled today.
Thank you.

Chairman THoMa~S. I thank the gentleman for his opening state-
ment, notwithstanding all of those cautionary and sometimes wise
observations. We have got the Medicare Hospital Insurance Trust
Fund going bankrupt, and I am looking for any and all options.

Our first panel is Gail Wilensky, who is the new Chairperson of
the Physician Payment Review Commission. J believe this is the
first time she will be appearing before us in that particular capac-
ity. We also have Stuart Altman, Chairman of the Prospective Pay-
ment Assessment Commission; and Jonathan Ratner, who is Asso-
ciate Director in the U.S. General Accounting Office in the area of
Health Financing Issues.

I would tell each of the panel members that any written testi-
mony that they may have will be made a part of the record, with-
out objection, and that you may proceed to inform us in any way
you believe will be useful in educating us.

And we will start with Dr. Wilensky and then move to Dr. Alt-
man and Mr. Ratner. Dr. Wilensky, again, congratulations, and
welcome to the Subcommittee.

STATEMENT OF GAIL R. WILENSKY, PH.D., CHAIR, PHYSICIAN
PAYMENT REVIEW COMMISSION

Ms. WILENSKY. Thank you, Mr. Chairman. I appreciate this op-
portunity to be here to present the Physician Payment Review
Commission’s views concerning Medicare managed care.

The Commission, as you know, has devoted considerable thought
to this important issue in its 1995 annual report, and it has made
recommendations on some needed improvements in the payment
policies. We are also beginning to work on several projects that will
provide the Congress with information we hope will be helpful in
extending the role of Medicare managed care.

As we speak, U.S. health care is undergoing major changes. Em-
ployers are fundamentally changing the way that they purchase
health care services, and managed care plans are growing rapidly
and evolving toward integrated systems of care. Hospitals and phy-
sicians are joining together in new types of organizations, which
are transforming the way that care is being delivered.

These developments, along with the financial pressures that face
the Medicare Program, as you know only too well, are bringing
Medicare to an important juncture. Dynamic change in the market-
place is creating both opportunities and challenges to the Congress
to improve the performance of the Medicare Program and to fur-
ther such policy goals as containing costs, expanding access, and
ensuring quality of care. While the innovations in the private sec-
tor suggest new solutions to longstanding policy problems, the pace
of change varies widely around the country. Multiple approaches


189

FIGURE 2

KR

Covered by Risk Contracts

inge of Premiums for Medicare Population

Premiums in Medicare risk contracts range from $0 to $110 per member per month. Sixty-
six plans offer beneficiaries health care coverage for no monthly premium; 12 charge up to
‘$19.99 a month; 26 charge $20 - $39.99; 15 charge $40 - $59.99; 11 charge $60 - $79.99
and only € charge in excess of $80. The majority’of Medicare enrollees in HMOs incur
litle or no out-of-pocket expenses for HMO coverage. This coverage generally includes
non-Medicare-covered services, such as preventive care, immunizations, outpatient drugs
and eye exams.

$20-39.99 $40-58.99

s60-7¢ 9

$01-19.99

T
$0

D
20.09.98 soto «= Plans

$01-19.99
$60.79 9

>$a0

% Members


47

judgments are not stated, leaving grounds for dispute between enrollees and the plan in
question.

Fourth, there is no disclosure of incentives for gatekeeper physicians and other
representatives of a plan to provide or withhold care.

DISCLOSURE OF REHABILITATION COVERAGE

For these reasons, the Association recommends that managed care plans enrolling Medicare
beneficiaries fully describe coverage of rehabilitation services and that any limitations on such
coverage be clearly delineated. ‘The following principles are recommended for inclusion in any

legis

A

4

5

ion designed to foster the use of managed care plans by Medicare beneficiaries and others.

Plans should provide uniform written descriptions of their benefits, services and
procedures that clearly and fully disclose limitations of coverage, exclusions and out-of-
pocket costs, including copayments, deductibles, coinsurance, and established aggregate
maximums on out-of-pocket costs.

Assessment

Primary care providers should perform a rehabilitation evaluation within 72 hours of
seeing patients who fall into the diagnoses most commonly treated by rehabilitation, and
who have a specific functional level as measured by a common rehabilitation assessment
tool.

‘Then if an enrollee is a candidate for rehabilitation and meets the existing Medicare
inpatient rehabilitation hospital or outpatient guidelines he or she should have access to
and be referred for those services.

Quality

Managed care plans should be accountable for the quality of care provided. They should
ensure adequate access to services for all their enrollees. Outcomes, both medical and
functional, should be reported by plans to the government and to enrollees.

To do so, plans should have mechanisms in place which measure quality, access and
outcomes, This would include: (a) functional improvement; (b) maximum waiting periods
for appointments, both initial and followup, and for referrals to specialists; (c) maximum
travel distances; (d) readmission to the hospital; and (¢) submission of data to the public
fon outcomes to assess the cost and quality of health care.

Specialists as Gatekeepers

Enrollees who require ongoing, specialized health services should be able to choose a
specialist as a gatekeeper in order to effectively manage the services appropriate to their
conditions. Relevant specialists should also be directly available to enrollees without
gatekeeper approval where continued specialized care is medically indicated.

Physician referrals to physician and non-physician specialists should be based solely on
the needs and desired outcomes of the patient.

Point-of-Service Option
This provision is critical to allowing persons with specialized health care needs to obtain
care from out-of-network providers, assuming they opt to pay the extra premium and co-
payments as necessary. It retains the ability of closed-panel HMOs to contain costs, but


153

ith i
P.O, Box 438, Commack, NY 11725 516-424-5232

Testimony
Karen Shore, Ph.D., Executive Director
1988 Ashley Place, Westbury, NY 11590
516-997-3390

A) Introduction:

Tam submitting testimony on behalf of the Coalition's approximately 1250 members.
‘The Coalition is a national, grass-roots organization, made up of clinicians from all mental
health disciptines and consumers of mental health care, their family members, and their
advocates. The Coalition is working with approximately 24 regional “affiliated groups” that
have no legal tie to the Coalition, though some have taken out memberships. Thus, ! am not
officially testifying for these groups, but do want tha Subcommittee to know that several of
these groups are state or regional Coalitions (MA, NY, NJ, PA, DE, MD, NC, GA, TN, IL, OH,
CO, CA, WA, MO) that have been inspired by our Coalition or that formed prior to our forming
(November, 1992), have similar goals, and are attempting to work together. Each of these
groups may have dozens, hundreds, or thousands of members.

am testifying because of plans to increase the number of Medicare beneficiaries to be
enrolled in HMO’s and other forms of managed care. The Coalition formed specifically
because of the deciine in quality of mental health treatment brought by managed care
organizations (MCO's). MCO?s also have a strong impact on the ability of professionals to
deliver proper care. The problems of managed care have the most impact on beneficiaries
‘who need treatment, as opposed to those who are generally healthy. Thus, a larger
percentage of the Medicare population covered by MCO's than of the general MCO population.
will experience these problems, as our elderty generally require more treatment than does the
general population.

In this testimony, | will outtine the problems we have seen in delivery of services under
MCO's in the private sector and will offer recommendations. We cannot assume that Medicare
beneficiaries will receive better cara under MCO's than those in the private sector.

B) ith Managed Mental He fc ry widers:

ns and treatment facilities.

their provider list to providers who demonstrate a
willingness to perform short-term treatment, whether or not itis truly appropriate, and on
‘their willingness to do so without complaint. Thus, the pool of providers available to the
‘consumer may exclude those who would perform or advocate for quality care.

bj Primary care providers often must act as gatekeepers and may limit access to
psychiatrists and to psychotherapists. Often, there are financial penalties if primary care
providers make "too many" referrals. Corporate profits are often more important than the
‘consumer and treatment. Primary care physicians are asked to do “counseling,” but do not
have the training to do real.

‘¢) MCO panel limitations often cause the consumer to travel a great distance for their
care, which could be especially burdensome for the elderly, and may prevent needed care

d) Consumers may have to change cinicians often as plans drop providers and merge
with other MCO's, or as the consumer changes health plan. Continuity of care and the
building of trust in the clinician are impeded. Continuity of care and trust may be
particularly important for the elderly, who often are more in need of ongoing treatment than
the general population.

€) Clinicians are impeded in their ability to make the best referral possible due to panet
restrictions preventing them from referring “out-of-netwo!

f) Generally, psychiabists and other doctoral-level clinicians, and even master's level
clinicians, may be prevented from performing psychotherapy by MCO’s, as MCO’s often
search for the "cheapest ciinicians. One MCO reportedly has begun using bachelor's leve!
counselors rather than professionally trained master’s and doctoral level professionals.
‘When beneficiarles cannot receive reimbursement for treatment by clinicians with
advanced training, quality of care is

19) Patients hospitalized in a non-network hospital in an emergency may be forcibly
transferred to a network hospital before they are well, impeding recovery and possibly

increasing symptoms.

tn) Even if the MCO offers out-of-network benefits (Point-of-Service Option), consumers
«with limited incomes may be unable to access out-of-network providers, as they are
financially penalized for doing so. This may affect the elderly in large proportions due to
the large percentage on limited incomes.



46

STATEMENT OF JONATHAN RATNER, ASSOCIATE DIRECTOR
HEALTH FINANCING AND POLICY ISSUES
HEALTH, EDUCATION, AND HUMAN SERVICES DIVISION,
U.S. GENERAL ACCOUNTING OFFICE

Mr. Chairman and Members of the Committee:

We are pleased to be here today to discuss opportunities to
improve Medicare's method of paying health maintenance
organizations (HMO) that enroll Medicare beneficiaries. As we
stated this past February in testimony to this Committee,
Medicare's current HMO option, known to providers as the risk
contract program, has not harnessed the cost-saving potential of
managed care.’ In fact, Medicare has paid HMOs more for
beneficiaries' treatment than it would have spent, on average,
had those same beneficiaries received care in the fee-for-service
sector.

A small portion--about 7 percent--of the Medicare population
is enrolled in HMOs under the risk contract program. However,
recent deficit reduction proposals aimed at slowing Medicare
spending growth call for moving a greater portion of
beneficiari into HMOs. In view of increasing congressional
interest in the Medicare HMO program, you asked us to discuss (1)
recent trends in Medicare beneficiary enrollment in HMO} (2) the
obstacles preventing Medicare from realizing potential savings
from HMOs, (3) the strategies that could enable Medicare to
realize HMO savings, and (4) the Health Care Financing
Administration's (HCFA) efforts to test HMO payment reforms. Our
findings derive from examinations of Medicare program data,
reviews of the literature, interviews with industry expert:
discussions with HCFA officials, and our reports on this subject.
(See the app. for a list of related GAO products.)

In brief, we found that recent enrollment growth in Medicare
HMOs has been sing the urgency of correcting rate-
setting flaws that result in unnecessary Medicare spending. By
not tailoring its HMO capitation payment to how healthy or sick
HMO enrollees are, HCFA cannot realize the savings that private-
sector payers are able to capture from HMOs. In addition, we
derive two lessons from our review of ways to fix Medicare's HMO
capitation payment:

-- First, with respect to rate-setting, one size does not fit
all, so a multipronged approach makes sense. The large
disparities in market conditions between states--from
California to Maine--call for solutions keyed to market
Conditions. Several broad strategies--increasing price
Competition among HMOs, using better risk adjustors, and
revising Medicare's capitation rate--show promise for enabling
Medicare to realize these savings.

‘Medicare Opportunities Are Available to Apply Managed Care
Strateq (GAO/HEHS-95-81, F 10, 1995).


6

We are going to talk about managed care today and how to im-
prove managed care for Medicare’s beneficiaries. I think we have
got to deal with three things. Does managed care actually save us
any money? If one assumes that managed care restricts the use of
health care services, does that serve the patients well? And, in gen-
eral, how have managed care plans been working for the Medicare
population?

‘BO has consistently reported that the savings from managed
care are pretty elusive. It only works generally with staff model
and group model HMOs. You only get savings from those. There is
little evidence that managed care reduces any growth in health
spending over a period of time, and virtually all of the recent
growth and enrollment in managed care plans has been in looser
arrangements, such as preferred provider, point-of-service plans,
those which have no evidence of saving any money.

The issue of consumer satisfaction, I find that studies which tend
to show people who like fee-for-service don’t really reflect whether
or not we save money or not, and I tend to dismiss those; but my
own district experience is that half of my constituents belong to the
Kaiser Permanente Health Plan and they seem to be satisfied. A
large number of them choose to stay in Kaiser when they mature
into Medicare. And yet, I receive a lot of mail from people who are
unhappy. The stories are anecdotal, but they largely have to do
with restricted or withheld care.

Managed care options have worked reasonably well, but we know
that the AAPCC payment system needs fixing. This Subcommittee
made that clear in legislation we approved in 1989. Wide variations
in payments to HMOs make little or no sense, and they leave the
impression that access to low-premium, high-benefit HMOs may be
an act of where the beneficiary lives, rather than a function of the
particular health plan.

To devise a fair payment system is going to be a real problem.
The potential for risk selection within the Medicare population is
high. The citizens are uniquely vulnerable in that population, and
it provides an opportunity for health plans, usually through un-
scrupulous insurance salesmen, to skim off the low-risk bene-
ficiaries; and proposals to increase managed care enrollment of that
nature could cost Medicare more, not less.

So last, I think that we have to preserve managed care’s vol-
untary nature. My feeling is that efforts to coerce beneficiaries to
enroll in HMOs or other managed care organizations will cause
problems and eventually end in failure.

Taking away the freedom of choice of doctors and hospitals from
the Nation’s seniors, to me, is a sure way to start a revolution. No
amount of planning can take away the fact that the choice of a
plan is not the same thing as the choice of a doctor, and [ think
if we keep that in mind, we may avoid a lot of problems that we
have had in the past when we have legislated too quickly for sen-
lors.

We could provide new profit centers for insurance companies, but
that is not what this Committee ought to be doing. We can find
ways to cut Medicare benefits, but I am sure that the public will
call that to our attention, and I think we have to continue to pro-
tect the benefits that seniors receive and do that incrementally.


40

Chart 6. Monthly Value of Medicare Non-Covered
Benefits Provided at No Cost to Medicare Risk
Pian Enrollees, By Decile of Risk Plan
Enrollees, 1994

Enrollee Decile Monthly Value of Benefits

$ 0-10
10-27
27-39
40 - 45
47-52
55-63
64-75
76 - 89
91-110
111-139

* Each decile includes 226,800 risk plan enrollees.

SOURCE: ProPAC analysis of Adjusted Community Rate Proposal data
from the Health Care Financing Administration.

Seor amaenH

Chart 7. Firms Offering Various Insurance Options, by
Size, 1994 (In Percent)

Preferred Health
Provider Point of Maintenance
Firm Size Indemnity Organization Service _Organization
All firms 46% 30% 15% 22%
Employees
10-499 46 30 15 22
500+ 60 40 25 53

Note: More than 90 percent of the sampled firms had fewer than 500
employees. This proportion reflects national employment
distributions.

SOURCE: A. Foster Higgins & Co., Inc., National Survey of Employer-

Sponsored Health Plans, 1994.

Chart 8. National Enrollment and
Disenrollment Rates for Medicare
Risk HMOs, 1993

Enrollment Disenroliment
Rate Rate Enrollment
Year (in Percent) (in Percent) Ratio
1989 36% 16% 24
1990 35 19 18
1991 30 18 17
1992 32 19 17
1993 37 18 24
Note: Plans in operation less than two years are
excluded.

SOURCE: ProPAC analysis of data from the Health Care
Financing Administration, Office of Prepaid
Health.


120

PARTNERS Health Plan with its 120,000 managed care members, and,

‘Arizona Physicians, IPA, the largest participating plan in Arizona’s managed
care Medicaid program known as the Arizona Health Care Cost Containment
‘System serving approximately 111,600 members (APIPA is a partnership with
‘Samaritan Health Services of Phoenix).

‘The process of bringing together all these interests is complex and difficult. We are,
nonetheless convinced that this is the best way to both continue to provide quality health
services as is demanded by the marketplace and to contain costs as is also demanded. The
‘community-based IHO brings providers of care (inpatient as well as outpatient, tertiary as
‘well as primary) into the same organization and simultaneously finances the managed care
products directly to the marketplace. All constituencies are thus linked daily to the
member. We believe we are, indeed, achieving a real alignment of interests and incentives
which includes payors, members and providers in a partnership which can truly minimize
conflict and maximize health improvement results for our members.

We view ourselves as being in the business of managing the health status of the defined
population we serve in our communities. Most HMO’s are arrangers or coordinators of
‘care through contracted networks; we, on the other hand, serve as an integral part of our
‘communities (we are among the largest private employers in southern Arizona) and both
provide care and finance it for the community.

‘We seek to create the best value for our customers and we understand “value” to be the
‘optimal intersection of quality service with cost containment, By being fogether in our
understanding of that mission, and in our rewards for success, we seek to remove the
‘counterproductive wrangling that is often seen between provider and insurer or between
hospital and physician. Inevitably, where such diversion is present, it is the patient who
suffers. We are convinced that this new configuration of health services in a community-
based IHO is capable of genuinely incorporating the customer at every level asa full
partnes to the benefit ofthe health status of the entire community.

‘The various organizations involved in HealthPartners have been working toward
integration for two years and began to put integrated programs into place under the
‘HealthPartners name this past November.

HMO Ouality for Medicare Enrollees

‘The overall reputation of PARTNERS Health Plan has been built on providing high
quality care while simultaneously being effective at limiting cost increases. A recent
independent survey of decision-makers in Tucson’s commercial managed care market
ranked PARTNERS as the only major health plan to combine high ratings from employers
for clinical outcomes and service as well as for limiting cost increases.

‘Our own internal monitoring of customer satisfaction provides an interesting extension of
that data specifically as it applies to our Medicare membership. In January of this year we
surveyed a representative sample of all our health plan members measuring responses in a
dozen areas which are pivotal in establishing member satisfaction.

We found that our senior members were the most satisfied of all our members, In all
twelve categories of measurement our senior members responded with scores statistically
higher than the mean score for overall membership (which includes commercial HMO and
Point Of Service plan members as well). In eleven of the twelve measures, our seniors
‘were the group which gave us the highest scores and in the twelfth category, their high
ranking was matched by those in one other category of membership.


19

problems of disproportionate-share hospitals and special problems
of rural hospitals. So some mechanism needs to be developed to
take that money out and then reallocate it in a different way.

Now, much has been made about the lack of adjustment for
health status. There are 35 different adjusters and rate bases that
Medicare now uses, but every study that has been done says, no
matter how many different categories you come up with, we still
do a poor job in adjusting for health status. And it is not because
Medicare doesn’t try; it turns out the methodology is just not there.
And so the system gives many encouragements for plans, either di-
rectly or indirectly, to adjust who they select.

Now, to be fair to the managed care plans, most of them don’t
need to do anything. It is just how they market, who comes to
them. My sense is that while there are a few bad apples out there
that really do figure out ways, most of them don’t have to do it.
The problem you run into from the Medicare Program, though, is
you are paying an average, and even if they didn’t do anything, if ~
they wind up with a less sick population, the Medicare Program
loses substantial amounts of money.

So in total, Medicare should be moving much more to managed
care. It is becoming the basic way health care is delivered in this
country. Yes, senior citizens do need safeguards. One needs to be
very concerned about the frail elderly, about people who have been
in the fee-for-service for a lor.g time. This should not be a shotgun,
but we do need to move and move fairly aggressively to change the
structure of the payment method and restructure the managed care
program so that Medicare, as Gail has pointed out, moves into
what is now becoming the dominant form of health care delivery
in this country.

Thank you, Mr. Chairman.

[The prepared statement and attachments follow:]


14

capitation methods that base HMO payment partly on a capitation rate and partly on actual
experience could also be tested. Reconsideration of the 30-day enrollment policy should also
‘occur. These are discussed below.

Competitive Pricing. Competitive pricing would uncouple HMO payment rates from
expenditures in the fee-for-service sector, using market mechanisms to establish payments that
reflect the costs for an efficient HMO. The process could work as follows. First, HMOs
meeting the qualifying conditions for risk contracts would submit offers of the minimum payment
rate they would be willing to take. Then the Health Care Financing Administration (HCFA)
would establish a payment rate based on the bids submitted. To create incentives for plans to
bid tow, plans that bid higher than the final rate should be penalized, perhaps by requiring these
plans to charge the balance of their bid to beneficiaries in the form of premiums.

Whether Medicare would save money from using competitive bidding would depend upon how
the final payment rates established from the bidding process compare with the level of the
AAPCCs in those markets. Because it is not clear how competitive bidding might affect
Medicare costs, some have proposed using payment limits -- for example, using the national
average per capita cost, adjusted for local input prices, as an upper limit. This approach is not
ideal, however, because it would reintroduce the very problems that competitive pricing was
intended to correct and distort competition by preventing the established price from reflecting
local market conditions.

‘To enhance prospects for successful implementation, the Commission recommends that HCFA
be given sufficient authority and flexit roduce competitive bidding in markets with the
best chances for success (e.
number of markets as competit

Refinements to the AAPCC Geographic Adjustment Method, Because competitive pricing
would be effective only in markets where multiple plans can compete for Medicare business,
AAPCCs or some other form of administered payment rates will be needed for the foresceable
future. AAPCCs also might be used during an interim period in locations designated for
competitive pricing, until the new method was ready to implement.

Adjustments are currently made for differences in costs across geographic areas by taking the
ratio of county-leve! per capita costs to the national average. This method is flawed because it
establishes payment rates that are unstable over time and are susceptible to extreme geographic
variation in service use patterns. It also creates an incentive for HMOs to choose to serve those
counties within their service area with the highest payment rates.

‘Theoretically, geographic variation could be addressed by making payment adjustments that
recognize input price factors that HMOs cannot control, such as local wage rates, and the
portion of service use variation that is attributable to differences in health status. ‘The current
AAPCC reflects all service use variation, a portion of which reflects service underuse or
overuse, and we are not able 10 measure the individual components accurately. Until more
direct measures are developed, the Commission has recommended that a blended AAPCC be
used, which is a weighted average of the AAPCC and the national average per capita cost
(USPCC) adjusted for local differences in input prices.

To reduce payment volatility, two possible approaches are suggested. The first is to define
geographic areas with larger Medicare populations, to obtain a more stable base of health care
expenditures for calculating AAPCCs. The second is to use a statistical technique (called a
shrinkage estimator) 1o establish county-level payment rates that are based partly on the county's
AAPCC and partly on the payment rate for a larger area that contains the county.

Partial Capitation. When an HMO assumes full risk for its enrollees’ health care costs under
capitation, its financial results could range widely from large gains to large losses. Partial
capitation would minimize these potential swings by having Medicare share risk with HMOs that
had losses or gains outside specified thresholds. Two different partial capitation methods could



WAYS AND MEANS SUBCOMMITTEE ON HEALTH
PAGE TWO

The Board of Trustees also expressed "great concem” about spending growth from the
Supplementary Medical Insurance trust fund. As noted by the Board of Trustees in the 1995
report:

"In spite of evidence of somewhat slower growth rates in the recent past,
overall, the past growth rates have been rapid, and the future growth rates are
projected to increase above those of the recent past. Growth rates have been so
rapid that outlays of the program have increased 53 percent in the aggregate
and 40 percent per enrollee in the last 5 years.”

Medicare insurance coverage remains largely as it was originally enacted in 1965:
traditional fee-for-service indemnity insurance with beneficiary cost-sharing requirements to
control utilization.

However, private health insurance has evolved substantially since that time. More and

HMOs in 1994, up from 36 million in 1990, and 65 percent of people with employer-based
health insurance plans were enrolled in some form of managed-care arrangement, according to
the KPMG Peat Marwick Health Benefits in 1994 (October 1994).

Moreover, |-care organizations have recently been successful in slowing the
rate of growth of premiums. In 1995, on average, HMOs are expected to reduce their per
person premiums by 1.2 percent, according to GHAA.

‘Some private employers have also begun to offer their employees Medical Savings
Accounts. Such accounts allow employees and their dependents to control their health care
dollars, providing strong incentives for cost conscious spending.

Medicare beneficiaries can enroll in HMOs under the risk contracting program and
other managed-care arrangements, but, due to certain features of the program, managed-care
remains relatively small part of Medicare, with only 8 percent of the beneficiaries enrolled
in managed-care plans as of December 1994. Medicare beneficiaries are also not currently
able to enroll in any kind of Medical Savings Account.

FOCUS OF THE HEARINGS:

‘The hearings will focus on successful private-sector approaches at controlling costs and
improving quality and an exploration of how such approaches can be made more available to
increase choices for Medicare beneficiaries.

‘The hearing on Tuesday, May 16, 195, on "Experience in Controlling Costs and
Improving Quality in Employet-Based Plans” will review the approaches employers have
‘taken to improve the cost-effectiveness and quality of their coverage for their employees, the
issues and problems encountered as these approaches were implemented, the effectiveness of
these approaches, and lessons the Federal Government can learn from these private-sector
experiences.

The hearing on Wednesday, May 24, 1995, on “Medicare HMO Enrollment Growth
and Payment Policies” will investigate the reasons for increasing beneficiary enrollment in
Medicare risk contracting HMOs, and current and alternative HMO payment methods.

‘The hearing on Thursday, May 25, 1995, on “The Potential Role for Employers,
Associations, and Medical Savings Accounts in the Medicare Program” will explore issues
involved in enabling employers and associations to offer Medicare coverage to former
employecs and members repectvly, andthe potential role Metical Svings Accounts could
play in the Medicare program.

(MORE)


132

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

Mr. Chairman and inguished committee members, millions of senior citizens who are
retired from the military, the majority of them enlisted (noncommissioned), are concerned
about how Medicare reform will affect them. I am testifying on behalf of the Air Force
Sergeants Association's 160,000-plus members. AFSA represents the millions of enlisted
active duty and retired Air Force, Air National Guard and Air Force Reserve members,
and their familis Many of our members have served their nation, have entered their
retired years, and are now among those currently receiving care through the Medicare
system. We appreciate this opportunity to again include AFSA's views in your delibera-
tions.

As AFSA has testified to this committee before, we are well aware of the challenge faced
by this committee in finding ways to control costs within the Medicare program. ‘The
overall costs and fees for service become especially Sigiticant for our members because
enlist he | As such, significant
medical bills can be devastating for this group of retirees, On behalf of our members
Task you to seriously consider a cost-saving option that would benefit enlisted retirees.

‘We urge the committee to support Medicare subvention: The transfer of funds from the
Department of Health and Human Services (HHS) to reimburse the Department of
Defense (DOD) for care received by Medicare-eligibles either in TRICARE or at Military
Treatment Facilities (MTF) (on-base medical care facilities). The question is not spending
HHS dollars versus DOD dollars; the real possibility is to save ¢axpayer dollars by the
non-parochial transfer of funds. Two bills have been introduced in the House that provide
for some form of subvention: H.R. 580, sponsored by Representative Joe! Hefley, and
ELR. 861, sponsored by Representative Randy Cunningham.

To put the need for subvention in proper context, consider that for years, military
members were told at every re-enlistment that when they retired, they and their families
would have free health care for life. Enlisted retirees, especially, considered this a part
of their deferred compensation package. Over the years, that promise has been broken.
At age 65, they are abruptly prohibited from formally partic in military health care
programs altogether. This practice must end, not just because it is discriminatory. but also
because it shatters already-broken promises,

‘The specific method for incorporating Medicare-eligible military retirees into a managed
care system is by allowing them to enroll or remain in the TRICARE program after age
65. This three-part system, DOD's health care plan of the future, is currently available
only to under-65 military retirees and their dependents, and active duty family members.
TRICARE includes an HMO option, TRICARE Prime. Prime's enrollment fee and cost-
shares also provide lower-cost care than traditional "fee-for-service" care associated with
Medicare Part B insurance.

The lower pension income of enlisted military retirees and their survivors magnifies the
issue of health care costs. The TRICARE program promises to offer enrollees much
lower costs than current fee-for-service insurance programs. Additionally, military retirees
would be allowed to stay in the MHSS for life, as they were promised when they served
their nation. At the same time, costs for their care would be reduced.

Another advantage in cost-savings would be that HHS would spend fewer dollars for the
care it buys at MTFs than it does from civilian providers. Savings on-base are derived
through the military's “utilization management,” which is preventive in nature. This
system ensures that medical resources are used in the most efficient way possible, and care
is coordinated so that more serious treatment problems are headed off, thereby holding
down costs. Put another way, the right treatment is given in the right place at the right
time, Also, the cost of physicians is significantly tempered by the military rank structure.


110

TESTIMONY OF RICHARD JACOBS, M.D.
FHP HEALTH CARE OF ARIZONA

Mr. Chairman and members of the committee, good morning. My name is Richard Jacobs.
1 am a physician and Vice President of Health Care Delivery for FHP Health Care in
Arizona, a division of FHP International Corporation.

After receiving my medical degree from St. Louis University in Missouri nearly 20 years
ago, I have practiced medicine in the United States Navy, in private practice, and in an
HMO setting. My specialty is Internal Medicine and I have seen the practice of medicine
evolve over the years both as a physician and as a physician-administrator. 1 am proud to
be associated with FHP, an organization that for the past 34 years has had the best interests
of its patients in mind.

‘Who We Are
FHP Health Care today provides a wide range of health care services to over 2.3 million
Americans in twenty states, the District of Cotumbia and Guam. Since our entrance into
the Phoenix area in 1985 and into Tucson in 1989, we have grown to serve over 182,000
residents in Maricopa, Pima, and Pinal counties. Roughly half of our membership in
Arizona 1s comprised of Medicare beneficiaries who have chosen to receive their care
through an HMO.

FHP in Arizona is a “mixed model" HMO. Our members can choose between receiving care
from an independent physician in the community or from a health care professional
‘employed by FHP. We contract with nearly 1,500 independent physicians in the state. In
addition, we employ our own physicians, dentists, optometrists, nurses, and ancillary staff
who are located in our fourteen medical centers in Maricopa and Pima counties. I am
proud to note that FHP in Arizona received one year accreditation from the National
Committee for Quality Assurance (NCQA) for both types of care delivery ~ through our
contracted physicians and through our employed staff of health care professionals. We
hope to receive full three year NCQA accreditation this year.

FHP Senfor Plan
FHP is the second largest Medicare risk contractor in the nation with 370,000 Medicare
beneficiaries among our members. FHP’s health plan for Medicare beneficiaries is called
Senior Plan. It’s an important part of our diverse portfolio of products and services. As
the first Medicare risk contractor in Arizona, we have a record of initiating and maintaining
health plans for seniors.

Because the Health Care Financing Administration (HCFA) pays us 95 percent of what it
would pay fee-for-service physicians and hospitals in a given geographic area, we estimate
that the federal government saved approximately $60 million in 1992 on our Medicare

patients, system-wide, alone. Our Medicare members also come out ahead because they


69

a yearly basis you choose managed care. Whatever it is out there
that you are choosing, the government is assigning the risk, and,
therefore, an amount so that the insurance companies don’t get
burned by the risk when they get all the bad patients into their
pool.

Do you see some kind of answers along those lines?

Ms. WILENSKY. I think it does some of it, but I would see struc-
turing it a little different: Believe me, in the 2¥%2 years I was at
HCFA, I heard about every evil thing ascribed to it you could imag-
ine.

I believe in having Medicare become an equivalent kind of payer.
That is what I was talking about—having a bid that reflects a
judgment about what it would take to have the services provided
in a low-cost plan or in an efficient way. That is what the govern-
ment should do. I don’t know that you necessarily have to give a
voucher to the individual.

What you need to do is have a way that individuals receive infor-
mation about the health care plans in that area, and that is some-
thing I think HCFA could do. If it is doing less about paying line
item services, it can provide information about the plans that are
in the area and make sure a payment adjustment is made so that
the plans that get the chronic diabetics or the serious cancer pa-
tients get an additional premium and everybody else gets a little
less.

You don’t have to make adjustments for all 37 million people on
Medicare. What you have got to do is make some adjustments for
the major classes of different users, and so it is like having an indi-
vidual voucher. I don’t know that you literally have to have that
kind of structure.

Mr. ENSIGN. It is more of a concept.

Ms. WILENSKY. What I would see HCFA doing is providing infor-
mation to seniors about satisfaction, about outcomes measures,
about making sure that the plans are behaving appropriately; get-
ting information; moving to annual or some other more structured
enrollment; and getting more and more away from being the payer
on a line item basis.

Even for people who want to go into fee-for-service plans, that is
fine. They just get a payment from the government that probably
isn’t going to be enough in most areas to cover an open-ended fee-
for-service. They add to it and go to their plan.

So I see a different function over time that HCFA would take on.
I guess the bad news is I don’t see HCFA going away for those that
had that as one of their main goals.

Mr. ENSIGN. I was just dreaming out loud.

Ms. WILENSKY. Reduce the level of involvement, though, for sure.

Mr. ALTMAN. Let me add something that the private sector is
doing that I think HCFA or some other agency needs to do, and
that is, yesterday it was announced that many of our largest cor-
porations, Sears and Merrill Lynch and American Express, are
forming into a consortium and opening up competitive bidding na-
tionwide for managed care plans to provide a whole battery of in-
formation—not only prices, quality of the care, availability of the
care. And that seems like it makes so much sense.


24

and employer-based coverage. This average county-level spending is called the
adjusted average per capita cost or AAPCC. In practice, this payment approach has
numerous flaws that discourage many plans from participating and limit savings to the
Medicare program.

CALCULATING THE AMOUNT OF THE AAPCC

A major problem with the AAPCC is the geographic area used to calculate the
capitated payment rate. This area currently is the county. Many counties, however,
may not have a sufficiently large population to adequately average fluctuations in fee-
for-service payments. This may result in wide variations in the AAPCC from one year
to another. Between 1994 and 1995, the increase in the AAPCC ranged from 2.1
percent to 9.5 percent for the 50 counties with the largest risk enroliment (Chart 4).

There also are large variations in payment rates among areas. In the top 50
counties, the monthly payment rates in 1995 varied from $292 in Marion County
Oregon to $647 in Kings County New York. These regional variations are
significantly larger than the variations in payment by the Federal Employees Health
Benefit program for HMO coverage for federal workers. In addition, a plan offering
services across several neighboring counties may receive very different capitated
amounts even though their costs per beneficiary may be similar. For example, in
1995 in the Washington D.C. area the monthly capitated rate varied from $361 in
Fairfax County to $543 in Prince Georges County. In the Minnesota Twin Cities Metro
Area, the rate varied from $277 to $380 (Chart 5).

Part of the variation may be due to flaws in the calculation of the AAPCC, which
excludes average expenditures for VA, military, or other programs used by Medicare
enrollees. A recent ProPAC analysis found that the value of the services provided by
these non-Medicare programs averaged about 3.1 percent of total Medicare per
enrollee costs across all states. The variation across individual states ranged from 1.2


148

their own advantage. Some studies have shown instances where there appears to be a
level of favorable selection for HMOs, whether intended or otherwise. These studies also
reveal that Medicare eligibles willing to join an HMO have had lower historic costs
compared with similar non-HMO Medicare eligibles, or that the health status in the average
Medicare population is worse than the average health status of the HMO enrollees. Other
studies comparing the health status of the Medicare HMO population with the general
Medicare population have not indicated that the health status of HMO enrollees is superior.

When allowing Medicare enrollees to choose from among multiple options, therefore, it
may be even more crucial to devise some method, such as HSAs, of discriminating
between risks. These should be set up as pilot programs until the actual pattern of
selection can be determined. In addition, if a competitive bidding process is implemented,
bidders may want to include some type of catastrophic reinsurance or HSA system to
protect them from enrolling a high-risk population on a random basis.

HMO CREDENTIALING

One of the major elements in continuing federal regulation of HMOs is credentialing.
Credentialing is intended to monitor the quality of care, grievance systems, and outcome
measurements. To the extent that we are putting in place a more competitive system, we
should also be concemed about protecting Medicare eligibles’ access to quality care during
a period of premium restraint and competitive bidding. It should also be determined that
risk-bearing providers do indeed have the required capital to support this risk, either
directly or through a contracting HMO. The National Association of Insurance
Commissioners is developing formulas for all types of health organizations to develop risk-
based capital requirements on a consistent basis.

CONCLUSION

With industry and government cooperation along the areas outlined above, the Academy
work group believes that the HMO industry could greatly expand its enrollment of Medicare
eligibles in a cost-effective way. This approach could produce savings to the federal
government, while at the same time preserving access to quality health care at competitive
cost for Medicare beneficiaries. Members of the Academy's Medicare Work Group are
available to discuss these and related issues.


10

are also such things as partial capitation that would use a blended
rate of the average of the capitation payment and fee-for-service
payments; and also we could consider having something like a risk
corridor that would adjust capitation to an HMO’s net financial
gains or losses exceeding some established threshold.

Because these are new ideas, we would suggest you think about
some demonstrations for using these partial capitation rates before
extending them to the whole Medicare Program.

There is also an issue with regard to the enrollment policy. Now,
as you know, people can opt in and opt out on a 30-day basis and
that may contribute to risk selection. The Commission suggests
that a more structured enrollment process be considered that pro-
vides for a more coordinated open enrollment period and also, im-
portantly, furnishes the elderly with information so that they can
make comparisons about the choices that they would have avail-
able. Choices are good, but information to make wise choices are
crucial.

I think you should also reconsider the use of the cost contract,
particularly in areas where you consider using competitive bidding.
That invites increased spending in Medicare and also risk selec-
tion.

There are a number of areas where the Commission is now work-
ing to try to provide information that we hope will be helpful to
you. Let me just summarize those quickly.

One is further work to set the capitation payment rates for the
risk contracting programs, to identify potential markets where
competitive bidding would be feasible, to design a bidding process,
to structure the premiums for high bidders, and to consider how to
establish payment rates in areas where we know competitive bid-
ding just won’t be able to work.

The Commission is also updating its assessment of current risk
adjustment methods. We all know that this has been one of the
major problems confronting the increased use of managed care in
Medicare, and of course, in the private sector it is also a problem.

We would like to explore more structured choices for Medicare
beneficiaries. The questions of interest here include whether or not
financial incentives for the elderly to choose more cost effective
plans could be made available and how exactly you would structure
these incentives. Options and information are important, but with-
out the use of incentives, we shouldn’t fool ourselves that there will
be enormous amounts of change in the Medicare Program.

We need to look at statutory barriers that also may be inhibiting
managed care growth and figure out how to manage better the fee-
for-service sector of Medicare, which we understand will always
exist in the future.

Access to care for the elderly will be a continuing issue of inter-
est. We need to be sure that we are monitoring access, for both
those that are enrolled in managed care programs and those that
are enrolled in fee-for-service. And also, finally, with respect to
graduate medical education, we need to consider whether or not
the payments that are now going to HMOs for expenses related to
graduate medical education make sense and if there needs to be a
modification, what that should be.


141

Each HMO is required to submit an annual adjusted community rate calculation to HCFA,
which sets an upper limit on the premium that the HMO may charge. in some cases, this
limit distorts the rates because HMOs are required to use HCFA's estimates for the cost
of covering deductibles and coinsurance, rather than cost factors based on the HMO's own:
‘experience. In competitive areas, HCFA should consider allowing HMOs to increase their
supplemental premiums without constraint.

Geographic Fluctuation Issues.

The AAPCC varies considerably by geographic area. One reason for this is the large
variation in fee-for-service Medicare costs. For example, there is an approximately
threefold variation, with some Medicare metropolitan areas now approaching $700 per
month per Medicare eligible and costs in some rural areas of between $200-$300 per
month per Medicare eligible.

In areas with a high concentration of HMOs, in some cases exceeding 50% in a given
county, it is not clear that the AAPCC formula will produce a fair capitation rate. Research
has shown that some areas with high HMO penetration of the Medicare market experience
a lower rate of Medicare spending increases, in aggregate. Major mathematical
adjustments are required to calculate the AAPCCs in the normal form, when the large
majority of the Medicare population in certain age/sex cells will be enrolled in HMOs. This
situation seems to be particularly problematic when there is no good method of counting
residents of nursing homes or Medicare eligibles also on Medicaid, who may go in and out
of eligibility frequently.

METHODS OF ADDRESSING CURRENT HMO REIMBURSEMENT ISSUES

Competitive Bidding

Most HMO enrollees tend to live in high-cost areas, where effective management controls
may more easily produce profits for the HMO, but little savings to the federal government.
Itwould appear that some other basis for reimbursing HMOs is necessary, to circumvent
the multiple problems that stand in the way of the two goals of equity and achieving
savings for the federal government.

Many experts suggest trying competitive bidding in some area where there are three or
four HMOs and a high HMO penetration of the overall marketplace. The HMOs would not
be restricted to an AAPCC, but may instead bid any price they choose. HCFA could
determine an average cost that it would be willing to pay, and any balance could be
chargeable as a premium to the individual Medicare eligibie.


29

for-service indemnity plan. They also may be required to select from among a small
number of the HMOs participating in their geographic area (Chart 7). Some
employees pay higher premiums or face greater cost sharing requirements if they
choose a more costly plan. Further, once they enroll in a plan, they must wait up to
‘one year for the next open enrollment period before they can disenroll or change
plans.

Unlike private sector enrollees, Medicare beneficiaries can choose any fee-for-
service provider or participating managed care plan operating in their area. They may
not bear the added costs related to choosing the most costly providers or plans. In
fact, as | described, beneficiaries living in areas with the highest capitated payments
receive substantial additional services at little or no added cost while beneficiaries
living in lower cost areas must pay for their additional services. Further, Medicare
beneficiaries enrolled in a capitated health plan may disenroll from that plan on a
monthly basis and automatically be covered under Medicare's fee-for-service policies.

While Medicare's enrollment policies are more favorable to beneficiaries than
private sector policies, it is important to note that the benefits they receive may not be
as extensive as those provided to private sector HMO members. The lack of a
prescription drug benefit is especially noteworthy.

There is much more movement of Medicare beneficiaries in and out of plans
than there is in the private sector. Medicare enrollees in many areas seem to be
confused about how the plans operate and, therefore, drop out. In other situations,
Medicare beneficiaries seem to find it advantageous to disenroll from one HMO and
enroll in another. In 1993, risk plan enrollment increased 37 percent; disenroliment
during that year was 18 percent of enrolled beneficiaries (Chart 8).

The relationship between the rates of enrollment and disenrollment varied across
geographic areas (Chart 9). The Dallas, San Francisco, and Philadelphia regions


166

© Specialists as Gatekeepers

Enrollees in network plans who require ongoing, specialized health services should
be able to choose a specialist to act as their gatekeeper and to manage their
condition. Relevant physician and non-physician specialists should also be directly
available to enrollees without gatekeeper approval where continued specialized
care is medically indicated. For instance, a person with spinal cord injury should
be able to access a qualified physiatrist as a gatekeeper who would provide
primary care at the primary care reimbursement rate and specialty care at the
specialist rate. Similarly, a person with multiple sclerosis should be able to choose
a neurologist as a gatekeeper who has authority to refer to non-physician providers
of specialty care in order to manage a chronic condition over time.

© Healthy ith Provi

All health plans should enter into agreements and other arrangements to ensure an
appropriate mix, number, and distribution of qualified health professionals in order
to adequately provide the plan's benefit package.

. Specialized T Pe

Managed care plans should ensure access to academic and other specialized health
centers. CCD recognizes that much specialized health expertise is provided in
centers that are not academically affiliated. Provision should be made in any
legislation addressing health care issues to provide people with disabilities and
chronic illnesses requiring specialized care access to a variety of centers of
specialized treatment expertise.

© Utilization Management Protocols and Physician Incentive Plans

Utilization review should be performed by qualified personnel with knowledge in
the specific medical area in which the coverage decision is being made. Physician
incentive plans can be extremely harmful to enrollees who require significant
and/or ongoing health services due to the incentives to underserve inherent in these
arrangements. In fact, all incentives to underserve managed care enrollees,
financial or otherwise, should be prohibited.

Any legislation addressing the public or private health care system should include all of these
important provisions.

For additional information, please contact one of the CCD Health Task Force Co-Chairs on the
cover page of this testimony.


98

to the Medicare problem, which, frankly, I think transcends par-
tisan lines.

Mr. BUTLER. Which it should do, certainly.

Chairman THOMAS. Thank you very much. The Subcommittee
stands in recess until, I think, 1 o’clock.

{Whereupon, at 12:05 p.m., the Subcommittee was recessed, to
reconvene at 1 p.m. the same day.]

Chairman THOMAS. The Subcommittee will reconvene.

I want to thank the gentlemen from Arizona. Your testimony is
important to us and your real world experience, which is the basis
of your testimony, is important to us. This panel is Dr. Block from
Phoenix, Arizona; Dr. Jacobs from Phoenix, Arizona; and Mr.
Zucarelli from Tucson, Arizona.

I would tell you that any testimony that you have that is written
will be made a part of the record, without objection, and you may
begin to inform us in any way you see fit about your experience on
HMOs and Medicare.

I guess we will start with Dr. Block and then move to Dr. Jacobs.
Then to Mr. Zucarelli. Thank you very much.

STATEMENT OF MARTIN BLOCK, M.D., MEDICAL DIRECTOR,
UTILIZATION MANAGEMENT AND GOVERNMENTAL
PROGRAMS, CIGNA HEALTHCARE OF ARIZONA, _INC.,
PHOENIX, ARIZONA

Dr. BLock. Thank you, Mr. Chairman.

My name is Martin Block and I am a physician employed by
CIGNA HealthCare of Arizona in Phoenix. At CIGNA, I am the
medical director of Utilization Management for the Staff Model and
for the Independent Practitioner Association, as well as the medical
director for Governmental Programs.

CIGNA is deeply committed to the Medicare managed care con-
cept and believes that Medicare risk HMOs are the model for the
future. In our experience, covering the Medicare population
through managed care networks achieves three goals: Seniors re-
ceive richer benefits with fewer out-of-pocket costs than under tra-
ditional fee-for-service Medicare, Medicare beneficiaries express
satisfaction with the quality of care they receive, and employers
providing retiree coverage save time and money.

CIGNA ranks among the largest investor-owned managed care
companies in the United States with 48,000 employees around the
world, $86 billion in assets, and 1994 revenues exceeding $18 bil-
lion. CIGNA is a leading provider of managed medical and dental
insurance with 3.3 million members in our HMOs nationwide.

In Arizona, CIGNA is one of the State’s largest HMOs and pro-
vides medical services to more than 400,000 participants in Medi-
care, Medicaid, individual, and commercial programs. We have
been providing health care services to Arizona seniors through pre-
paid health plans beginning in the seventies with our predecessor
company, which became the State’s first HMO. Today we are in
two counties for our Medicare risk program and have approxi-
mately 24,000 Medicare beneficiaries.

In 1993, CIGNA HealthCare of Arizona converted from a Medi-
care cost contract, which we conceived in 1985, to a risk contract,
in short, because our competitors were increasing market share by


140

A note of caution is appropriate here. The increased competition and increased pressure
for Medicare recipients to enroll in HMOs may also generate increased risk. Outcomes for
the HMO industry have been favorable, and competitive pricing appears to be at its peak.
However, new players who are entering the market are potentially at risk for not having
sufficient knowledge about running an HMO or the capital to withstand 2 negative result
under Medicare risk contracting.

REIMBURSEMENT METHODS FOR MEDICARE HMO CONTRACTS

Medicare risk contracts reimburse HMOs based on a capitation rate that varies for each
county and is adjusted for simple risk factors, including age, sex, total disability (under age
65), Medicaid eligibles, and institutionalized members (residents of nursing homes). These
capitation factors are called the AAPCC (adjusted average per capita costs) and are
derived from total Medicare Part A and Part B costs for the Medicare population (excluding
enrollees with end-stage renal disease)

The cost for each county is adjusted by taking the five-year average cost per capita for that
county and dividing by five-year average national per capita costs, to arrive at a stable
relationship. Average costs are then expressed by adjusting for the differences in the
population cells, by risk factor, in each county, to produce a comparable standardized
factor for the aged and disabled. There are large fluctuations in the rate of change each
year in county-level costs. This makes it more difficult for HMOs to predict short-term and
long-term costs accurately. Projecting AAPCCs is subject to projection error, with
projections sometimes being above or below what the actual experience will be. In
general, however, these projections are higher than actual experience. As a result, HMOs
are, on average, reimbursed at a higher rate than their actual costs.

There are two major sets of issues with the current AAPCC method that need to be
addressed. One has to do with the compensation rate and the other with geographic
fluctuations.

Compensation Rate Issues

Since the amount paid to HMO risk contractors is 95% of the projected fee-for-service cost,
even if the HMO were to save a great deal of money by operating at a much lower cost,
it would not save the federal government any additional money. HMOs with costs below
the federal reimbursement are allowed to add benefits, to an unlimited point, and to use
up whatever savings it may have accrued from having lower costs than the average
fee-for-service Medicare cost, thus reducing out-of-pocket costs for Medicare beneficiaries.


91

participants better benefits at lower prices. They combine into one package the benefits
offered through Medicare’s fee-for-service plan and supplemental benefits such as
prescription drugs and low out-of-pocket costs. Medicare participants would otherwise
have to pay more for a separate “medigap” insurance policy to get the same benefits.
HMO enrollment includes 9 percent of all Medicare participants and is growing at an
annual rate of 27 percent.

But the current program is poorly designed to capture the efficiencies of the
marketplace. Its problems stem from an outmoded, regulatory approach to health care
delivery, which is at odds with the consumer-driven marketplace taking shape in the
private sector.

‘Meager Savings. Rather than paying managed care plans based on competition, the
risk-contract program uses a rigid financial formula tied to fee-for-service costs.
Specifically, a managed care plan receives 95 percent of Medicare's current fee-for-service
spending ievel for every person it signs up, even though the plan’s real costs are usually
much less. The government could keep more of these savings, but instead, it requires
managed care plans to spend them on richer benefits for participants. This rule means
that many older Americans receive free dental care, eye and ear exams, and foot care,
which they ordinarily would pay for out of their own pocket

Long-Term Limits on Competition. Medicare's fee-for-service system limits the
capacity of managed care plans to drive efficiency gains in local markets. Consider the
example of the Minneapolis-St. Paul market, where the dominance of managed care
plans has fundamentally altered the behavior of all doctors. Specifically, doctors have
learned to get the same results with fewer tests and procedures, and these lessons have
been taken by fee-for-service doctors as well as those in managed care. Yet further
competition has been constrained by the fee-for-service nature of Medicare, which
guarantees a minimal income to both the managed care plans and the doctors. As a
result, participation in Medicare’s risk-contract program has declined, and managed care
plans for Medicare participants are switching to a different reimbursement system that
is based on fee-for-service charges. The drive toward efficiency has come to a halt.

A related problem is that managed care payments in adjacent counties can vary
by as much as three-to-one. Moreover, counties seldom correspond to natural market
areas. As a result, managed care plans are reluctant to do business in an area where they
could lose money by having the misfortune to sign up more people from counties with
the lower payment rates.

Risk-Skimming. Many critics have accused HMOs of saving money by attracting
enrollees who are healthier than average. To the extent this is true, the fault lies not with
HMOs but with those managing the program. Congress and the Administration have not
taken full advantage of measures to prevent risk-skimming. For example, Mathematica
Policy Research, Inc., which was hired by the government to examine risk-skimming, has
recommended lowering payments to manage care plans with patients whose health


ll

The Commission is focused on improving the methods of paying
HMOs, and changing these methods is long overdue. We just have
to remember, it is only one element in making reforms to the Medi-
care Program. Medicare can remain the last open-ended program.
dominated by fee-for-service medicine and unrestricted choice of
providers; or it can follow the kinds of changes that are going on
in the market in terms of the choices that it offers the seniors. We
need to remember that when Medicare was first set up in 1965, it
was modeled after the program primarily in existence in 1965, Blue
Cross-Blue Shield. I think it is appropriate to now look at the
changes that are going on in the medical marketplace and make
changes in Medicare that reflect this continuing evolution.

I would be glad to answer any questions that you may have.
Thank you.

{The prepared statement follows:]


97

a list of plans that get the Medicare Good Housekeeping Seal of
Approval in terms of the profile and the rest, and that the Medi-
care beneficiary has a debit card that is worth so much and we give
them plenty of information as to which ones are 100 percent cov-
ered by the debit card and which ones are 90 percent or 80 percent,
and they go ahead and do it, we still have the problem of the
regionality aspect of the way in which health care is delivered and
how much you get for your dollar to build in.

But I think what I am hearing you folks saying is that if we
would move to that level of the problem, we will have gone a long,
long way.

Mr. BUTLER. I believe so, and I totally agree with what you said.
But I think, say——Mrs. Johnson’s idea of saying, let’s start looking
at, say, a market test in the area rather than trying to
microanalyze all the different things is certainly one element of the
movement.

As I also said earlier, it seems to me it is much easier there—
not that there is no difficulty—but it is much easier to set a broad
amount in terms of a voucher in an area than to try and make de-
cisions and try to make calculations when the recipient themselves,
the beneficiary, is not motivated to make decisions on the basis of
total cost. That is a crucial difference. If you see the total cost, then
you have a strong incentive to look for the one that is the best
value. Now, that is lacking under the current system, which is one
reason why the AAPCC doesn’t work too well.

Mr. KENDALL. I think the question you are asking is about re-
gional variation. I think that is real important because fundamen-
tally healthy markets are regional in nature. Kaiser in California
is a very different animal from Kaiser in this area. We ought to
rate it separately as far as its cost quality, and it should be judged
that way too. So that is why you need a competitively bid system
that does allow for regional competition in setting that voucher.

Chairman Tuomas. Let me thank the panel, and I will tell you,
Mr. Kendall, although there may be some assumption that you are
tied somewhat politically to one party, the ideas you have offered
are very refreshing and, frankly, some distance from the Presi-
dent’s health care plan. Had he listened to you folks in terms of
putting together a plan, we would have had a lot more common
ground to work from.

I want to thank you, and I frankly believe we will be back to
both of you, not only for the specific plan structure as we move for-
ward, but frankly for a larger problem, and that is of marketing
whatever the product is that we get, given the climate and the po-
litical incentive to make political hay with this product.

If we are in agreement that we need to make change and that
the change we agree on is a professionally accepted one, I am very
concerned about the way in which the change is transmitted. I look
forward to working with both of you in that area.

Mr. Kendall.

Mr. KENDALL. Don’t sign me up for the Republican Party yet. I
want to see the bottom line of the budget first.

Chairman THomas. I am not interested in signing you up to the
Republican Party. I am interested in signing you up to a solution


102

recognize signs and symptoms of recurrent heart failure, and to assess nutritional
status and safety issues in the home environment. The case manager also stays in
contact with the patient by telephone or by home visit to ensure continued
compliance, offer family support, and make the patient aware of community
resources. The Health Plan also uses nationally accepted guidelines in managing
inpatient admissions and lengths of stay.

We are very pleased with the results to date, Inpatient hospital days are down, while
skilled nursing and home health services utilization is up. When compared to a
traditional fee-for-service Medicare population, readmissions within 30 days are
lower and mortality rates are, similarly, lower. In summary, CIGNA has reduced
inpatient utilization by partnering with its contracted hospitals, establishing financial
incentives, emphasizing preventive services, providing case management for complex
patients, and carefully managing all inpatient admissions. CIGNA’s effective
management system has resulted in high patient satisfaction and satisfactory
financial performance.

From the patient ‘s perspective, there are a number of advantages to participating in a
managed care environment, These include generous benefits and the ability of an
integrated health system to continuously improve the quality of health care delivery.
Let me comment briefly on these two advantages of Medicare managed care: benefits
and quality.

BENEFITS

Medicare enrollees are very attracted to our benefit package. We offer richer benefits
than are available under traditional Medicare coverage, particularly benefits that
seniors care about. For instance, our plans provide important prescription drug
benefits, and routine eye and hearing exams, with a nominal copayment charge.
Partial coverage for glasses and hearing appliances also is included. None of these
benefits are available under fee-for-service Medicare plans today.

By effectively managing utilization and expenses, we have been able to retum a
significant amount of the savings to our Medicare beneficiaries in the way of
enhanced benefits. We provide several preventive services which helps avoid
expenses related to costly illnesses. Preventive services include routine physical
exams and immunizations. We also provide “Wellness” classes with exercises
specifically designed for seniors.

Unlike fee-for-service Medicare, our benefit plans provide unlimited days of acute
hospital care. We also admit patients directly to SNFswhen appropriate -- foregoing
the prior three-day hospital stay required for coverage in traditional Medicare.
World-wide emergency coverage also is provided.

One of the enhanced benefits, which members would greatly appreciate, is a
point-of-service plan. In these plans — also known as open-ended HMOs ~- patients
can choose out-of-network providers at any time and still receive reimbursement,
although with a higher copayment, Point-of-service plans, it should be noted, are
one of the most popular benefit plans currently purchased by the under-65
population. Unfortunately, current Medicare regulations make it difficult, if not
impossible, for managed care plans to offer a true point-of-service product,

(Attachment "A"provides a more detailed discussion of CIGNA Senior Coverage. And
Attachment “B"provides a comparison of Medicare and coverage provided by CIGNA
HealthCare for Seniors.)

QUALITY MANAGEMENT

In addition to the generous benefit package, enrollees in CIGNA HealthCare for
Seniors receive another important advantage. They are the beneficiaries of rigorous
accreditation and quality control programs, which ensure that they receive high
quality care. In contrast, the federal goverment has no such quality management
programs for its fee-for-service Medicare population.


118

I would encourage you to look for incentives to make more of this
development possible rather than allowing creation of restrictions,
intended or accidental, which may hinder our ability to build a
healthier community. We urge you to expand managed care prin-
ciples to the Medicare line.

Thank you.

[The prepared statement follows:]


65

that would be a better system than allowing age bands and to kick
up the premium, and also a way to prevent what I think are rather
unscrupulous sales practices of starting low and then, when you
get to be 70 or 75, having rather severe increases.

Does that disadvantage or does it offend any of you to say per-
haps we ought to require that as a social benefit?

Ms. WILENSKY. Well, it would hurt a plan that was an estab-
lished plan in an area that would get older and older people who,
other things being equal, will be predictably more expensive; and
that, of course, doesn’t allow them any kind of package——

Mr. Sark. It seems to me—you are saying after they open up?

Ms. WILENSKY. Yes.

Mr. Stark. I am saying, when people move into Medicare, this
is your largest enrollment population, the people that become 65
each year; they mature into these plans, and rather than allow—
that is where the competition occurs among plans.

If you allow one plan to lowball—and in California, for instance,
AARP is the only one with a nonage-related premium, and they are
a couple hundred bucks higher for the same Medigap policy at 65.
But pretty soon, if you sign on to some of the other plans, by the
time you are 75, you are paying a whole hell of a lot more; and it
really, I don’t think, is—I don’t think that is good for the consum-

ers.

I don’t think it hurts Medicare, and I think it prevents possible
chicanery to just say, wait a minute, you set a rate. Now, if you
come in later, that is OK, but it becomes the rate for the rest of
your life. I mean, you don’t let them kick up the rate every 5 years.

Mr. ALTMAN. I want to make a distinction between the rate the
individual pays and the amount paid by the program. I think you
need to risk-adjust the amount paid by the program because the
plans need to be protected. I mean, I would have to—

Mr. StTarK. Why do we have to protect the plans? Why do we
have to protect the plans? I am not so sure.

Mr. ALTMAN. Because | think they are going to wind up having
to provide more services, and you don’t want to—you don’t want to
underpay them for legitimate needs of older seniors.

Mr. STarK. You are not into this market business story. That is
not our job. They are supposed to go broke. That is what takes the
inefficient ones out and the efficient ones make a big profit.

Mr. ALTMAN. This has nothing to do with efficiency. This has to
do with legitimate service that an 85-year-old frail person might
need that a 65-year-old doesn’t.

So I think it is——

Chairman THOMAS. Go easy on him. He is new to this market
concept.

Mr. Stark. I am learning.

Mr. ALTMAN. Let me jump.

Mr. Chairman, there was one piece that I don’t have in my testi-
mony that also blew my mind, and I apologize for this; but what
you said, Mr. Stark, is absolutely correct.

The Medigap business is also leading to substantial distortion. If
you buy fee-for-service Medigap versus buying a Medigap policy
from a managed care group, you wind up paying substantially more
for the same risk in the fee-for-service because in the fee-for-service


71

States, in the less urban areas, what you are proposing, in terms
of ideas?

Ms. WILENSKY. I think what you will see happening are two
things. The first is you will find some of the groups coming in that
you might not expect to be in your backyard. For example, the
Mayo Clinic has been running around northern Iowa setting up re-
lationships with primary care physicians, relationships to have peo-
ple go back to the Mayo Clinic and, if needed, to Methodist Hos-

ital.
P The Loveless Clinic in Albuquerque has been doing similar ar-
rangements with regard to physicians in rural New Mexico. So for
one thing, I think you may find over time you may have more com-
pany in your areas than—even in the western parts of your State
than you thought.

The second thing is that a number of States have used primary
case management as trying to bring together a coordinator so that
you don’t have completely a la carte fee-for-service medicine; and
again, you can get a package of services that would then get put
together and bid for.

So I think we need to recognize that for the frontier parts of the
country—the Dakotas, Montana, and Wyoming—that there are dif-
ferent ways of structuring this than if you are in Los Angeles or
the bay area. But I think that in both the entry of groups that are
nearby will be greater—I mean, there are a lot of those activities,

Jus spins on primary case management, to allow for some level.

ut in areas that are sparsely populated, you know, two or three
groups will be all you will have.

Mr. CHRISTENSEN. I guess one thing I will probably remember
the most from this panel today, Dr. Altman, is your response to Mr.
McCrery’s question and saying that we are not talking about effi-
ciency here. And I guess someday maybe we could—someday
maybe we will get to a government-run program that is somewhat
efficient.

Thank you.

Ms. WILENSKY. You have got to change the incentives first.

Mr. ALTMAN. You have got to change all those incentives.

Chairman THOMAS. Let me underscore a couple of points. Chair-
man of the Budget Committee Kasich and I sent, in February 1995,
a letter to Bruce Vladeck at HCFA asking him once again to pro-
vide us with any kind of a listing of the information sent out about
managed care options. HCFA has not gotten back to us on that. We
are also looking at some language right now from OBRA 1990
where I think we even set aside some money.

And it just seems to me a little bit unfair to constantly point out
that HMOs are out there sophisticatedly avoiding risks in the re-
cruitment of seniors when a simple foil to that would be to provide
a one-stop-shop access for information about them; when, in fact,
I believe it is more simply going out there looking for customers
and the manner in which you look for customers.

Whether it is a third floor hotel that you have to drive to or a
sophisticated mail program to professionals at age 50, those are
marketing choices that J think are, after the fact, damned as selec-
tive procedures, when I think one of the fundamental faults—and
another—we have talked about the number of catch-22s we have


16

© Graduate medical education, Medicare's current payment methodology for risk-
contracting HMOs has a flaw that results in overpaying many HMOs for expenses
related to graduate medical education. The Commission will assess the impact
of this policy and the implications of moving towards alternative financing
approaches.

Conclusions

This past year, the Commission focused on improving the methods of paying HMOs. Changing
the payment method is long overdue, but is also only one element in a strategy to improve the
performance of the Medicare program. Medicare is at a crossroads. It can remain the last
‘open-ended program dominated by fee-for-service payment and unrestricted choice of providers
or it can follow the rapid evolution of the market in the choices it offers and the incentives it
creates for beneficiaries to choose more cost-effective options. in addition to the policy changes
the Commission has recommended, the Medicare program needs to continue monitoring the
development of the market over time, Markets will continue to change and Medicare needs to
be able to adapt to both current and future trends.


17 “Steven” experienced increasing depression, panic attacks, and phobic anxiety that prevented him from working. His

influding spendis
‘interpersonal and emotional effects before the manic symptoms remitted with outpatient treatment.

8, "Barbara" was in individual and group therapy before a MC company took over her insurance, She had been sexually
* abused by her grandfather in many borrfying ways between the ages of 5 and 12. She was also abused by a neighbor at
ge 12, Maral sx was accompanied by tying flashbacks ofthe abuse, Te therpist was ld bya reviewer 1
“hurry it along." Unfortunately, the symptoms had worsened because "Barbara" was given a new assignment at work
‘hich required her to work with men about the same age as bez grandfather. Also, she had recently undergone her first

further
‘she was just "following company policy." Group treatment, in addition to individual trestment, is often extremely
‘important for sexual abuse survivors. .

9. "Linda* was in treatment for about 1 1/2 years before a MC company took over. "Linda" was unable to tolerate
antianxiety medication, but did respond to psychotherapy. Toward the end of the second year, "Linda" witnessed her
2 yearld dauphe being iby a, leving er a quadilep. “Lindt” ymploms increased drama. She

Was likely manifesting signs of Post Traumatic Stress Disorder. The therapist called the reviewer for permission to
‘continue treatment. “habeas wat le "Well, doctor, lt me tel you something, We are going to cut you off - be
‘prepared ~ its coming down the pike soon!”

10, “Allison” had been sexually abused by two of her brothers for several years during childhood. She was raped as an
adolescent,

recognized expert
reviewer that the literature speaks to the importance of individual and group therapy for optimal treatment, the reviewer
said: “Listen, we are not interested in providing optimal treatment, We are interested only in providing that which is
absolutely medically necessary."

a SD, mal incon of hia ‘but when he loses his temper, he threatens his pregnant wife with a loaded gun.

‘was encouraged to complete the work in $-12 sessions. Although the reviewer agreed this was a
Monger" ‘case, he stated that itis not the company’s policy to provide long-term treatment.

12. "Jennifer," ine ate 30, potcd pain in ue bras tough she found no fump on self examination Her HMO
"Sennifer," for mammography, The

the services she deemed necessary, "Jennifer" requested peychotherapy to deal with the stress. The HMO refused to
authorize psychotherapy for her,


99

offering risk contracts with benefits similar to ours but with lower
premiums. More than 97 percent of our cost contract members
transferred their enrollment to the risk product.

Our careful management of patient care maintains the quality of
services for our Medicare. population while reducing by half inpa-
tient hospital days per thousand. We work closely with our hospital
networks, which are capitated for inpatient services, including
skilled nursing facilities, outpatient surgery, and home health serv-
ices. We emphasize preventive care services, provide case manage-
ment for complex patients, and carefully manage all inpatient ad-
missions beginning early in a patient's clinical course.

By effectively managing utilization and expenses, we have been
able to return a significant amount of the savings to our Medicare
beneficiaries in the way of enhanced benefits that seniors really
care about. For example, we offer richer benefits such as prescrip-
tion drug benefits, routine e: cye and hearing examinations, and par-
tial coverage for glasses and hearing appliances. One benefit that
our members would like to have is a popular point-of-service plan
but, under current Medicare regulations, it is virtually impossible
for managed care plans to offer this option.

Our enrollees are assured of receiving high-quality care because
CIGNA HealthCare of Arizona is subject to rigorous accreditation
and quality control programs. The Federal Government, in con-
trast, has no similar quality control programs for its fee-for-service
Medicare population.

Our Phoenix Staff Model Plan was granted a 3-year accreditation
by the National Committee for Quality Assurance, a national
standards board. We also are involved in cooperative efforts with
other managed care plans to develop quality improvement proc-
esses and closely track patient complaints, Medicare appeals, and
disenrollments with the goal of improving service.

A recent survey found that CIGNA Medicare HMO members felt
that we were more patient-oriented and better anticipated their
needs than traditional fee-for-service Medicare providers. During
1994, the voluntary disenrollment rate was less than 3 percent,
and only 39 Medicare appeals were made to HCFA, a rate of 1.57
per thousand which is below industry norms.

In summary, Mr. Chairman, Medicare risk contracting is a win-
win situation for everybody in Arizona. Acceptance by seniors of
the HMO risk product is on the rise and would | accelerate if certain
structural and legislative barriers were removed. CIGNA is com-
mitted to a growing presence in the Medicare market and believes
that seniors’ choices should be expanded in the managed care envi-
ronment.

Thank you very much.

[The prepared statement and attachments follow:]


21

population and continuing medical advances. These factors are exacerbated,
however, by Medicare's reliance on fee-for-service payment methods. These methods
provide strong incentives for physicians and other providers to furnish more and more
services and for beneficiaries to request more care, including the newest technologies.
Frequently, however, the added services are of limited medical value.

THE TURN TO MANAGED CARE

The private insurance market has responded to rising health care costs by
developing alternative payment systems based on capitation and managed care.
These methods contain strong financial incentives for providers to control the number
of services furnished, as well as the cost of each unit of service. There also are
incentives for purchasers and their enrollees to choose the most efficient plans and to
seek out plans that can demonstrate that they provide high quality care.

In 1993, 24 percent of insured individuals in the private sector were enrolled in
health maintenance organizations (HMOs) (Chart 1). An additional 40 percent of
individuals were enrolled in preferred provider organizations (PPOs), which use fee-
for-service payment metheds but limit enrollees choice of providers and frequently
manage some of the care they receive. In contrast, in 1994 only 5.1 percent of
Medicare beneficiaries were enrolled in the risk contracting program, which most
closely resembles private sector options. This figure recently has increased to 6.6
percent. There are also substantial differences in Medicare risk plan enrollment
across the states, ranging from more than 20 percent to none. While the number of
Medicare beneficiaries choosing managed care plans is continuing to grow, we do not
believe these rates will equal those for the privately insured under age 65 population
until substantial changes are made in the Medicare program.


Figure 3: Fifteen states Had Double-Digit Growth in HMO

Enrollment in 1994

To) rtm eee
oe nn osecen me

Source: HCFA, Bureau of Data Management and Strategy.
Enrollment information based on computer runs using the
Denominator File.

Note: States that had 1 percent or fewer Medicare beneficiaries
enrolled in risk contract HMOs were classified as "insignificant
or no growth” states. Hawaii, with a growth rate of 6 percent in
1994 was also classified in that group. Ohio, with a growth rate
of 9.1 percent, was classified as a double-digit growth state.


95

Chairman THOMAS. Thank you very much.

I have been sitting here trying to refine the analogy, and I came
to the conclusion the difference between ice cream and a sundae is
the topping. They both have the ice cream. The sundae gets the
topping, and what you are saying, Mr. Kendall, is that after you
test various programs, running an average price on the innovative
structures, you verify they are getting quality for price, you can ac-
tually come back to the folks who are getting the sundae and say,
we will provide the ice cream with your fee-for-service cap, but
since you can get what we consider to be a reasonable and quality
product for that same amount, if you want the topping, you are
going to have to pay for it.

Mr. KENDALL. That is exactly right. That is what large employers
have done. They have spent a fot of time educating and dem.
onstrating to their employees that these new systems can work,
and that is what the government is going to have to do.

Chairman THomas. Well, thank you both for your testimony.

The gentleman from Louisiana.

Mr. McCrery. Thank you, Mr. Chairman, and thank both of you
for your testimony.

Dr. Butler, your testimony seemed to be pretty much in keeping
with Dr. Wilensky’s suggestion of—I think it was a suggestion—to
move toward a voucher system, basically figuring out what the gov-
ernment can afford, based on the financing mechanism we have in
place now, to provide for a base structure and then allow the elder-
ly to decide among a number of choices in the private sector.
Whether we set it up as we do in the Federal Employee Health
Benefit Plan or we just let the marketplace work and provide some
information, it is still basically the same approach. And that seems
to be the plan that we keep coming back to, and I happen to like
that plan.

Mr. Kendall, you didn’t really comment directly on that ap-
proach. You kind of talked around it, and it sounded like you were
talking about something very similar, but I couldn’t quite tell.

Would you comment directly on the voucher and capitation?

Mr. KENDALL. It is a difference more in style than in substance.

We believe that going to a defined contribution is ultimately the
right goal, but the danger is that you would set the voucher at an
amount that wouldn’t be worth anything, or be worth something
less than what would be politically acceptable and what would be
good for health care policy reasons and good for older Americans
and the disabled. That is the real trick, how to make sure that, as
we move into this new system, we continue our commitment to
making sure that everyone has good health care without reducing
our financial contribution to the point where individuals can’t fulfill
that.
Mr. BUTLER. May I just make a point that obviously there are
going to be complex issues to setting a voucher amount and also
there are variations. We are not necessarily talking about a simple,
voucher idea. It could be a system like the FEHBP is.

But the problems with setting a voucher are certainly no greater
and probably much less than the system where we are trying to set
fees and prices for every single service, to work right throughout
the country, to get us the right kinds of selections and so on. I


33

minimum population level or to reflect reasonable managed care market areas also
‘should be explored.

The capitated rate that is set should cover Medicare's standard benefit package,
although plans should be allowed to offer supplemental benefits to their enrollees for
an additional premium. The current practice of comparing a plan's expected costs
with its expected payments and allowing it to use the difference to provide additional
benefits severely limits the opportunity for the Medicare program to share in the
savings from more efficient service delivery. It also alters the uniform benefit structure
of the Medicare program and raises questions of fairness for those beneficiaries who
reside in relatively low cost areas,

Medicare's beneficiaries also should share in the savings when they choose a
cost efficient plan. This can be done by linking their cost sharing requirements to the
plans’ premiums. Beneficiaries that wish to choose a more costly plan should share in
the additional cost of their choice. Such an approach maintains Medicare's tradition of
freedom of choice but provides financial incentives for beneficiaries to evaluate the
value of a higher cost plan in terms of their added payment responsibilities. Plans,
however, must make appropriate information concerning price, access, and quality of
care available to Medicare enrollees during a coordinated annual open enrollment
period.

Newly enrolled beneficiaries also should be given a limited period of time
following each enrollment period during which they can switch plans or retum to the
fee-for-service sector. Thereafter, however, they should be required to wait for an
annual enrollment season.


168

TESTIMONY OF THE PATIENT ACCESS TO SPECIALTY CARE COALITION

Mr. Chairman: This statement is made on behalf of the Patient Access to
Specialty Care Coalition ("Coalition"), consisting of nearly 100 patient, physician and
non-physician health care professional organizations dedicated to ensuring the right of
patients to consult and be treated at a reasonable cost by the specialist of their own
choice, regardless of the health plan in which they are enrolled.

ATI RE HEALTH
CARE DELIVERY

As the presence of managed care increases in the marketplace, and as
Congress seeks to further expand the role of managed care in the Medicare program,
it is the Coalition’s belief that Congress must preserve the patient's right to select the
provider of his or her choice.

Many major changes are now taking place in the way people purchase health
insurance and receive medical care. The pressures to reduce health spending continue
to be intense, and health plans and providers have become more aggressive in their
cost containment activities. While many health plans have developed a number of
effective techniques to achieve economy and maintain quality of care, others have not
always achieved that balance.

{In this rapidly changing health care delivery environment, the Patient Access to
Specialty Care Coalition believes that consumers of medical services must have
effective protection against the potential that their access to medically necessary health
care services will be inappropriately structured.

The most effective check against this potential restraint is the patient's power to
seek and obtain medical services outside the provider network established by the
health plan. Health plans that provide good service to their enrollees should not be
troubled by this point-of-service feature. Only health plans that fail to meet the needs
of their subscribers should be concered.

THI IN’ RVICE FEATURE

The Coalition's message is a simple one. There are a number of current
practices, especially in managed care settings, which impede patient access to
treatment, particularly specialty care.

True freedom of choice for patients can only be achieved by making available
out-of-network medically necessary treatment and services ‘or all health care plans
All patients should have the option, at an additional but not prohibitive copayment, to
seek the out-of-network treatment they desire. This feature should be built into every
health care plan, and not just offered at the time of enrolimer

While offering a point-of-service feature at the time of enrollment is a good first
step in preserving consumer choice, patients sometimes act with less than perfect
information when choosing a health care plan. Many times healthy patients are unable
to assess their heaith care needs, until they actually get sick or need specialty care.
Consequently, the broa ssible patient ion is to build choice of health care
provider into every health care plas.

Real health security is the freedom for patients to choose their own physicians
or specialty care provider, and then to continue to access these same caregivers
regardless of a change of jobs or tiealth care plans.

As Congress explores the role of managed care in controlling health care costs,
it also has the opportunity to guarantee the patients’ right to choose, and to make


133

Finally, MTFs already have an infrastructure in place, so the basic care components are
there. The results, when comparing MTFs to civilian providers, are savings in costs,
overhead and mark-up fees.

However, on-base care opportunities are very limited for Medicare-eligibles. Whereas all
military retirees are eligible to seek space-available care at MTFs, most are viewed
differently after they are forced to transition from CHAMPUS (soon to be TRICARE) to
Medicare. In practice, MTF commanders are facing smaller and smaller budgets, and our
older members, particularly our Medicare-eligibles, are denied space-available care
because of a lack of DOD treatment funds. AFSA feels that Medicare subvention would
make on-base care more likely for our older retirees when there is space available and,
at the same time, save program costs by reducing the tevel of Medicare expenditures for
military retirees. In any event, the option of TRICARE enrollment should be open to
these retirees.

DOD leaders have repeatedly supported subvention for Medicare-eligible retirees.
Now is the time to make it happen.

Mr. Chairman, thank you again for the opportunity to express our ideas on ways {o lower
the costs associated with the Medicare system. As you are deliberating this issue, we urge
you to give serious consideration to AFSA’s ideas on the matter. Approving ways to keep
all retirees in the military health system is not only cost-effective, it also keeps a promise
made to retirees. i.c., that they would have lifetime, affordable care as part of the military
fami

The men and women of the Air Force Sergeants Association wish you well as you work
to accomplish your important mission, As always, we are available to assist you in
matters of mutual concer.



17

Chairman THomas. Thank you very much, Dr. Wilensky.
Dr. Altman.

STATEMENT OF STUART H. ALTMAN, PH.D., CHAIRMAN,
PROSPECTIVE PAYMENT ASSESSMENT COMMISSION

Mr. ALTMAN. Thank you, Mr. Chairman. To keep things on a
level playingfield and minimize time, I won’t go through the rec-
ommendations that Gail Wilensky indicated, but I do want to make
it clear that ProPAC shares the general thrust of those as well.

Another thing I want to make known to you is that the two Com-
missions are working together on managed care. We have had sev-
eral meetings together. We are working collectively on our staffs to
minimize duplication of effort, and in the future, we may be pre-
senting you with joint recommendations and reports so as to be a
more efficient help to you.

It is clear to us that Medicare needs to change. Managed care is
growing quite rapidly in the Medicare Program, but it will never
be able to get close to what is occurring in the private sector, and
more importantly, you will never see the kinds of savings that you
need in order to bring some balance in the trust fund and other
areas unless and until substantial changes are made in Medicare,
and particularly the way the current managed care system works.
Gail has articulated well the problems with the AAPCC and some
possible solutions which we mostly agree with.

What I would like to do this morning, though, is to give you the
benefit of some recent research that ProPAC’s staff have been en-
gaged in to further your thinking about the issues; and quite frank-

, Mr. Chairman, this information came as quite a shock to me,
and I think I have a pretty good sense most the time of what is
going on, and I suspect very few people realize what is going on.

One, we have been looking at total expenditures by the aged, not
only the amount of money that is spent by Medicare and Medicaid,
but also what is spent by the VA, the Defense Department, and
other agencies of the government on behalf of the aged. And we
have found that while, on average, it adds about 3.1 percent in
total expenditures to the aged; in some areas of the country it ex-
ceeds 7 percent.

So to be fair in terms of an appropriate payment, it is appro-
priate to include these payments when one is calculating what the
average aged person in an area receives, or you will discriminate
against certain areas that currently use a lot of VA and DOD.

On the other side, the current AAPCC system was set up for the
government to save a little, for the beneficiaries to get the benefit
of joining these plans by getting extra benefits. What came asa
rude shock to me is how large the difference is. Medicare has al-
ways prided itself on being the same program in all parts of the
country and to all beneficiaries; that was its stock in trade. It turns
out today that if you are a Medicare beneficiary in a high AAPCC
area, a high-cost area, you can receive from the Medicare Program
over $110 a month in extra benefits.

On the other hand, if you happen to be in a low AAPCC area,
for a variety of reasons, you could receive zero extra benefits, even
if you join a managed care plan. That is $110 versus zero per
month. The average difference is $50.


61

Chairman THOMAS. Thank you, Mr. Ratner.

A portion of your testimony stimulated a question back here.

The gentlewoman from Connecticut.

Mrs. JOHNSON. I thank the panel for their excellent testimony,
and as one who is particularly interested in the reimbursement of
medical education, I look forward to more specific conversations
with you about how we can assure that not only do we carry for-
ward into the future the tradition of outstanding medical education
that has marked American medicine, but that we do it in a way
that hopefully all beneficiaries—that is, all of us—participate in,
rather than just Medicare participants.

But I don’t want to go to that issue right now. I want to ask a
general question of the panel. I hear what you are saying about the
AAPCC. I hear what you are saying about how we reimburse risk
contracts, 50-50 rules for HMOs. What you are talking about is
changing the current system to fix it for the future.

If we set the payment rates relative to the current Medicare pay-
ments, we are going to carry into the future the problems of that
structure, which are numerous as you have just elucidated. Why
can’t we go around that system and base the new Medicare pre-
mium on the average premium of plans in that market that provide
the Medicare basket of services? In other words, why don’t we go
to the market and see what they are charging for those services?

Now, I understand the problem of risk, but my impression from
talking with plan operators is that if they are able to market ag-
gressively, they are able to reach a certain critical mass of senior
involvement with an established managed care plan, they don’t
care about risk. And I have had companies who have done this, sit
across the table from me and say, here are the three ways we can
medically underwrite X, Y and Z; this is how they work, and we
don’t use them once we get a critical mass of size.

When you look at how some seniors are being overmedicated,
when you look at the costs of hospice care versus nonhospice care,
when you look at the ability of managed care plans to deal with
frailty, to deal with prevention, there are just extraordinary oppor-
tunities to save money around senior health care while at the same
time improving the quality of health care; but they are not things
we will ever be able to do from Washington.

So why not circumvent these problems? Why not end-run them
and go to the market and say, what are you charging for this bas-
ket of services, and try it in a few markets and do it in a timeframe
that will give us the information to move at the pace we must, or
this system will go bankrupt and we will not have the choices that
we need?

Ms. WILENSKY. Well, I think—if I may make the first response,
Mrs. Johnson, I think it is consistent with what Stuart Altman and
I have said, that the difficulty is that there hasn’t been an obvious
market to look to, particularly as it relates to seniors. The idea be-
hind competitive bidding as a strategy to set the amount that you
pay is not to tie it to what was spent on average under fee-for-
service in an area for Medicare beneficiaries. We could protect our-
selves as a program by putting an upper limit there, but otherwise
basically let markets establish what they are willing to pay in


130

thing change? Have you seen any evidence that those recipients are
not happy when they move from their fee-for-service to managed
care with the same doctor?

Dr. Jacoss. No, we have not seen that trend, and in fact, we
have seen a real—I think we have seen a real improvement in care
quality. It does take a while for that physician to learn managed
care. It is a different way of practicing medicine. But in terms of
the patients, I think patient satisfaction goes up. That has been
our experience in the surveys we have done.

Mr. ZuCARELLI. And the elderly certainly appreciate no filing of
forms and the no confusing paperwork.

Chairman THomas. On that point, Dr. Jacobs, I think you men-
tioned that FHP was founded in Fountain Valley, which is in Or-
ange County. Fountain Valley is one of those new towns created in
a beanfield, in the sixties. You were on a sharp learning curve to
understand what you needed to do. Then you mentioned dealing
with doctors to understand in part the structure.

But do you believe that there is something you have learned
which is transferable to other areas? Are there management skills?
Is there a model that could be recreated, or does it tend to have
to be shaped in terms of the area you are in? To what extent are
the ideas that you have learned exportable to the other States that
you now practice?

Dr. Jacoss. I think the methodologies that we use are highly
transportable. The reason for that is, we are all using the same
technologies that are available in medical science, meeting the
same anatomical, physiological and medical needs. Those aren’t dif-
fering from State to State and patient to patient, in the same regu-
latory environment with the same financial structure, and that is
really what is driving the methodologies that we use.

What is very labor and time intensive, however, is training the
physician and provider network in how to use these methodologies,
managed care methodologies, because what Mr. Zucarelli talked
about, what Dr. Block talked about, what is in my written testi-
mony, is that managed care attempts to coordinate a number of
complex technologies and individualize it and use it in a proactive
way to meet the patient’s needs up front, and you need to get the
physician to cooperate with that because he or she writes the pur-
chase orders, and that means that you—that as a medical director,
we need to get out of the community and interact with them on a
one-on-one basis, develop a relationship and build trust, and then
use that trust as a platform to teach them managed care, and some
come along, you know, gleefully and others don’t and it just takes
time.

Chairman Tuomas. Dr. Jacobs, you have been in the business for
10 years, 5 years in Arizona. Have you seen a different product
coming out of our medical schools and residencies in the last 3 to
5 years?

Dr. JAcoBs. No.

Chairman THOMAS, Do you think you could go a long way toward
reshaping those programs to create a product that is a little more
focused in terms of what you need?

Dr. Jacoss. Yes, I really think that the medical schools are way
behind the times. It is time—I believe it is time they start offering


114

‘Suggestions for Reform
FHP, of course, supports federal and state efforts to encourage citizens into managed care
settings. There are several recommendations that we believe Congress should enact to help
these efforts along:

Require HCFA to implement a proactive program to educate Medicare
beneficiaries about the Medicare coverage choices available in their area.
Eliminate the 50/50 rue. This rule has outlived its usefulness. Other means
now exist to measure and assure quality. In Arizona, there is substantial
HMO competition for the relatively small commereial population. However,
there are fewer HMO competitors for the Medicare population. The result is
that the 50/50 rule has in many instances limited the ability of seniors to
enroll with a risk contractor of their choice. Nationally, the 50/50 rule is an
impediment to expansion of the risk contracting program. FHP is committed
to the Medicare risk program. We would like to expand into new markets.
Currently, to develop a sufficiently large commercial base to be a risk
contractor takes significant time, or enormous resources must be spent to
acquire an existing commercial HMO which is not a risk contractor. From
‘our view, the quickest way to expand the number of beneficiaries choosing
Medicare managed care options would be to eliminate the 50/30 ruie.
Expand health plan choices available to beneficiaries to include a point of
service/self referral option, a preferred provider organization, and other
managed care delivery methodologies. Plans offering a Medicare SRO should
adhere to the same marketing and selection practices presently in place for
the Medicare risk program. All plans should be held to the same quality and
fiscal standards.

‘Streamline the new application and plan expansion process by amending
current Medicare contracting guidelines to allow entities to seek first time
qualification for a Medicare risk contract under the terms of a Competitive
Medical Plan (CMP). Federally qualified HMOs should be deemed to have
met these standards. Plans with at least three years of Medicare contract
experience would not be required to file full applications. For multi-state
plans, there should be “national use and file” standards so that marketing
materials can be approved for use nationally without subsequent review by
HCFA regional offices. Private accreditation would be deemed approval of a
plan’s quality assurance and delivery system.

‘Subject each Medicare risk contractor to an annual external independent
review consistent with HCFA guidelines pertaining to the quality, timeliness,
and accessibility of services Medicare beneficiaries are entitled to receive.


116

Chairman THoMas. Thank you.
Mr. Zucarelli.

STATEMENT OF PAUL A. ZUCARELLI, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, PARTNERS HEALTH PLAN OF
ARIZONA, TUCSON, ARIZONA; AND SENIOR VICE PRESIDENT,
MANAGED CARE, HEALTHPARTNERS OF SOUTHERN
ARIZONA

Mr. ZUCARELLI. Thank you, Mr. Chairman, Members of the Com-
mittee. My name is Paul Zucarelli. I am the president and chief ex-
ecutive officer of PARTNERS Health Plan of Arizona and senior
vice president of HealthPartners of Southern Arizona, an inte-
grated health organization. The PARTNERS Health Plan is the
largest health plan in the Tucson area with approximately 120,000
enrollees.

We introduced our Medicare risk product 2¥%2 years ago and cur-
rently enjoy 13,000 customers in that product line, representing
slightly over 10 percent of Tucson’s Medicare population.

PARTNERS, as I said, is part of an integrated health organiza-
tion which joins together both the health care delivery infrastruc-
ture and the financing mechanisms of health care. We have shared
governance and ownership based upon the following members: The
area’s largest community hospital, a tertiary care facility; a medical
group practice model with six health centers, an independent phy-
sician organization that comprises one-third of the area’s physi-
cians, and the health plans.

We are convinced that an integrated approach is the best way to
continue to provide quality health care services as is demanded by
the marketplace. And to contain costs, it is also simultaneously de-
manded.

Let me comment on our reputation for quality. A recent inde-

ndent survey of decisionmakers in Tucson’s managed care mar-
Ket ranked PARTNERS as the only major health plan to combine
high rankings from employers for clinical outcomes, service out-
comes, and limited cost increases. Our internal monitoring of cus-
tomer satisfaction found that our senior members in the risk prod-
uct were even more satisfied than our other members in general,
scoring statistically higher than the mean for overall membership.

I would like to share with you some specifics relative to our cus-
tomers in the Medicare risk product. We currently provide free
transportation services to members who are unable to get to a hos-
pital for outpatient visits or inpatient stays or to physicians’ offices
for appointments within a 10-mile radius of their home. This serv-
ice provides an average of approximately 1,000 trips per month to
the elderly, and 70 percent of our riders have reported that without
this service, they would be missing or postponing health care,
which would greatly increase the potential for adverse health out-
comes and results and, therefore, increased health care costs.

Another innovative program that we have rolled out for the Med-
icare population is what we have called a Geriatric Evaluation and
Management Program, affectionately known as GEM. I would like
to share this briefly with you.

We have a team—the GEM team consists of a physician, phar-
macologist, geriatric nurse practitioners, social workers, registered


WAYS AND MEANS SUBCOMMITTEE ON HEALTH
PAGE THREE

"AILS FOR SUBMISSIC cor 7

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, Thursday, June 8, 1995, 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 10 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:

aes or printing oh aya woes, any writen or et the pred recent
(x any wrtcan commen in repens tsa request fo writen comments srt confor tothe guidaliaes listed below. Aay element or
peer a wot Be prota, Bet wl Be te ‘Blas fo review and se bythe
Comte.

2 Capen of waste docanents rubbing exhibit mata) wl not bo accepd fr peating. stad, exit mate sheald be
‘lerenced and quoted or paraphrased. Aleit material at meeting these epetfeadons wl be malnianed inthe Commie Des fo
‘are and au0 by the Comicon,

2 aun niin ea as ub being. bmg» an he dos ue bun. meg tn
an reapose w a request for art inca his Ma
(Srensprven wuss on whs ball ewes taper

A rupplemenia sheet mst accompany each satamentUtag he nate fall adres, 4 tslephene number where the wine
‘x the Gexignatodropreseuacive may be reached ané& pica ootine or summary of he comments an recammendatons ithe fll
‘statment ‘Tis supplemental chest wil uot be incindd in De printed racer

Tae abere pptyexty to materia bag and cl
suri bite eae eho ep st le Stage ose abe Day mabe mt
aber forms.

Note: All Commitee advisories and news releases are now available over the Internet at
GOPHER.HOUSE.GOV, under ‘HOUSE COMMITTEE INFORMATION’.



93

The experience of large employers suggests the following strategy for Medicare
reform:

Phase One: Test the Use of a Competitive System. Medicare would create a menu of
private health plans from which participants could voluntarily choose annually. Private
health plans would offer a core set of benefits including some not already covered by
Medicare such as prescription drugs and a limit on out-of-pocket costs. But the overall
value of the benefits should not exceed the equivalent value under Medicare's fee-for-
service plan. This approach would ensure that the competitive system would have
appeal to potential participants without breaking the bank.

Private plans could not discriminate against the sick by charging them higher
premiums, but they would be free to compete using managed care or any other
innovative system. Over time, more flexible benefit design should be permitted as
Medicare becomes more successful in preventing risk-skimming. In the short run,
however, high deductible policies, for instance, might attract only the healthy.

The government's contribution would be set on a local basis near the average of
health plan premiums. Those who chose a plan that cost more than ihe average would
either pay the higher cost themselves, and those in lower-than-average plan would
receive the difference in cash. Without such a rebate, plans would have no incentive to
bid below the average.

Every Medicare participant would have information that compares the cost,
quality, and services for each choice on a menu of plans including the current Medicare
system. The advantages of the new system would become clear: lower out-of-pocket
costs, better services, and high quality.

Converting the whole country to a competitive system all at once would be
precipitous and impractical. Instead, legislation should allow a competitive system to be
phased in starting with the markets that could benefit the most: mature managed care
markets where competition has already hit the limits under the risk-contracting system
in such areas as Minneapolis-St. Paul.

Another interim measure would be to limit the HMO payment rates for those
plans in the non-competitive system to increases of 6 percent, which is more in line with
private sector experience.

Finally, Medicare should encourage private purchasing groups to negotiate on
behalf of large groups of Medicare participants. Competition is more likely to be
effective if Medicare creates purchasing systems similar to large employers, which are
the most effective purchasers in the private sector.

Phase Two: Verify Access to High Quality Care at Lower Costs. If private plans
perform as expected, then satisfaction surveys and report cards on patient outcomes will


38

Chart 4. Comparison of 1994 Versus 1995 Aged Monthly Adjusted Average Per Capita
Costs, by County Risk Contracting Enrollment

1995 Total Rate Total Percentage
Rank” County Stato Total Rate Change from 1994 Change from 1994

1 Les Angeles California $558.76 $26.73 5.02%
2 San Diego California 458.81 23.84 5.48
3 Broward Florida 544.02 26.81 5.18
4 Dade Florida 615.57 40.05 6.96
5 Orange California 523.12 24.14 483
6 Riverside California 464.00 18.58 4a7
7 San Bernardino California. 21.75
8 Maricopa Arizona 22.53
8 Cook Wings 24.03

10 Palm Beach Florida 21,38

11 Multnomah ‘Oregon 15.78

12 King Washington 13.23

13 Hennepin Minnesota 10.75

14 Pinelias Florida 26.17

15 Volusia Florida 20.90

16 Bexar Texas 2251

17 Monroe New York 23.97

18 Pima Arizona 14.14

19 Hillsborough Florida 20.73

20 Ramsey Minnesota 21.34

21 Worcester Massachusetts 15.27

22 Pasco Florida 2727

23° Kings New York 36.33

24 Clark 33.01

25 Orange 21.69

28 Washington 21.16

27 Clackamas 23.26

28 Bernalillo 9.77

23 San Mateo 18.03

30 Ventura 23.93

31 Denver 23.63

32 San Francisco 20.90

33° Queens 32.74

34 Cuyahoga 9.66

35 Middlesex 16.84

96 Snohomish 14.08

37 Honolulu 14.30

38 Kern 29.58

39° Nassau 30.12

40 Jackson 47.33

41 Jetterson 19.51

42 Clark 2214

43 Philadelphia 17.48

44 Montgomery 1757

45 Suffolk 21.56

46 Marion 18.02

47 Nueces 21.42

4s Etie 9.58

49 Marion 20.08

So Anoka 342.40 29.69

* The county with the largest number of Medicare beneficiaries enrolled in risk contracting plans is given the
number 1 ranking.
SOURCE: Heath Care Financing Administration, Oltice of Managed Care.


158

provide. It is imperative that the federal goverment allow the States to regulate this
industry. ERISA laws were not intended for health care. They were intended for pension
plans. If employer involvement were phased out, employers would not object to state
regulation of health insurance plans.

Encourage the States
with responsibility." MSA's attempt to do this.
b) There are many ideas yet to be devised and written down (e.g., see "Managed
Cooperation,” item F, below). Please do not lock Americans into any particular form of
system, as this will prevent better ideas from being formulated and implemented.

©) Summary:

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

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

means of the consumer.

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

M ti 9810,

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



125

Chairman Tuomas. Thank you very much.

Mr. Christensen.

Mr. CHRISTENSEN. It sounds like, Mr. Zucarelli, you are almost
taking on more of a hospice care in a way. You have got a lot of
the same elements of what the hospice care providers give a person
who is in their last 2 to 6 months of life and—except you have
taken it down to the situation where a person just enters the re-
tirement phase of their life, meaning you have got the care givers,
you have pot all kinds of—you have got a social worker here. How
can you afford to do that as a private sector company?

Mr. ZUCARELLI. Basically, it is a complete shift in thinking,
philosophically, how you manage a patient’s care. HMOs realize
that there is only a finite set of resources in the system and that
we will go broke quite quickly if we keep fixing people.

The early assessment portion of a person’s condition regardless
of their age is critically important, and to the extent we can pre-
vent a continuation of disease progression or management of re-
sources and enhance a person’s quality of life at the same time, if
they are chronically ill, but the key is to prevent chronic illness.
To the extent the aging process takes its normal course, certainly
we have to provide the care, but I agree with my other colleagues.

We have seen, simply in the acute care setting, days per thou-
sand, and I would agree with the figures that my colleagues shared
of roughly 2,000 days per thousand of hospital use being cut signifi-
cantly. We are approximately running 1,100 days as well in our
Medicare Risk Program. There is a tremendous amount of dollar
savings there that you can reapply to nutritionists, some in-home
care givers, and so forth.

Just a general comment. All the time we pick up safety factors
in the elderly’s home, like lamps, cord lamps, dust if they are asth-
matic, if their house isn’t clean, really, really simple things can be
done that don’t cost a lot of money but can save some dollars in
the health care equation.

Mr. CHRISTENSEN. What is the cost that you have seen in terms
of transportation? What does that average out to be? Is that some-
thing tbat is being widely done by your HMO managed care system
as weil!

Dr. Jacoss. You know, many of the benefits that you are going
to see here for the three plans are very, very similar and the rea-
son for that is we are competing in a marketplace for the same con-
stituency.

Mr. CHRISTENSEN. Competition.

Dr. Jacoss. Yes, it is competition, it really is. I think a better
question is: How can you afford not to do a proactive case manage-
ment approach? Because we have discovered at FHP that 6 percent
of our members incur 60 percent of the costs. It makes a lot of—
there is a lot of leverage there. It makes good business sense to

nd your resources on that 6 percent and proactively manage
their care in order to keep them out of trouble. I mean, better, high
quality health care in the long run is the least expensive health
care that you can provide.

It is true that there are anecdotes of needed care being withheld
in HMOs from time to time. You will hear that. But the bottom
line is that an HMO that does that is going to cost you more.


100

TESTIMONY OF MARTIN BLOCK, M.D.
CIGNA HEALTHCARE OF ARIZONA

Thank you, Mr. Chairman. My name is Martin Block. Jam a physician and am
employed by CIGNA HealthCare of Arizona, Inc. in Phoenix. At CIGNA, I am the
Medical Director of Utilization Management for the Staff Model and Independent
Practice Association delivery systems, as well as the Medical Director of
Governmental Programs. Iam Board Certified in Internal Medicine, am a member
of the American College of Physician Executives, and the Board of Directors of the
Arizona Association of Managed Care Plans.

It is a pleasure to appear before you and your committee today to discuss the

important issue of how we can deliver quality health care to our over-65 population

while controlling costs. CIGNA is deeply committed to Medicare managed care and

believes that Medicare-risk HMOs are the model for the future. In our experience,

covering the Medicare population through managed care networks achieves three

goals:

© ‘Seniors receive richer benefits with fewer out-of-pocket costs than under
traditional fee-for-service Medicare.

‘© Medicare beneficiaries express satisfaction with the quality of care.

© Employers providing retiree coverage save time and money with Medicare
managed. care.

T would first like to provide some background on our company, and then explain
‘our success in serving the Medicare population of Arizona through our managed care
programs.

BACKGROUND

CIGNA ranks among the largest investor-owned managed care companies in the
United States, with 48,000 employees around the world, assets of more than $86
billion, and revenue exceeding $18 billion, CIGNA HealthCare has an extensive
network of HMOs with 3.3 million members, as well as PPOs, and a nationwide
managed dental care network. Additionally, we are a leading provider of managed
medical and dental insurance.

CIGNA HealthCare of Arizona, Inc. is one of the state’s largest HMOs, providing
medical services to more than 419,000 participants. We provide coverage to
Medicare and Medicaid beneficiaries, as well as individuals and commercial enrollees
through a statewide network. Services are provided to Medicare enrollees through
the CIGNA staff models and independently contracted providers.

In Arizona, CIGNA has a long and successful track record of providing health care
services to seniors through capitated, prepaid health plans that goes back to the early
1970s. CIGNA HealthCare ‘s predecessor companies began providing prepaid medical
care in 1972, and became the first HMO in the state of Arizona ~- receiving its
Federal qualification in August 1978. Today, CIGNA‘s efforts have evolved into a
two-county Medicare-risk program with approximately 24,000 Medicare beneficiaries.
By focusing on quality of care, customer service and cost effectiveness, CIGNA has
been able to steadily increase its Medicare membership.

PARTICIPATION IN THE MEDICARE PROGRAM.

Beginning in the mid-80s, CIGNA offered benefits to Medicare enrollees through a
cost contract with the Health Care Financing Administration (HCFA). Membership
peaked at approximately 22,000 in 1989. After eight years of the cost contract,
however, membership began to erode due to our competitors ‘ offerings of risk
contract products, which had competitive benefits and lower premiums. During that


4)

Chart 9. Enrollment and Disenrollment Rates
tor Medicare Risk HMOs, by Region,

1993
Enrolment —_Disenroliment
Rate Rate Enrollment
Region (in Percent) _(In Percent) Ratio
Nation 37% 18% 21
Dallas 52 24 22
Atlanta 31 23 1.3
San Francisco 47 18 27
Philadelphia 65 7 3.8
Seattle 18 16 14
New York 33 15 23
Chicago 20 14 15
Kansas City 7 13 1.3
Boston 22 10 24
Denver 26 9 3.0

Note: Plans in operation less than two years are
excluded.

SOURCE: ProPAC analysis of data from the Health Care
Financing Administration, Office of Prepaid
Health.

Chart 10. Characteristics of 10 Pians with Highest and Lowest Medicare Risk
Disenroliment Rates, 1993

Average.

Disenroliment Disenroliment Enrollment Years in Medicare Model

Rate Rate Ratio __ Medicare Enroliment Status Type
Highest 15.8% 18 53 14,999 For Proft’ «= IPA
Lowest 63 22 72 18242 Non Profit Staff or

Group

Note: Plans in operation less than two years are excluded.

SOURCE: —ProPAC analysis of data from the Heath Care Financing Administration, Ofice of
Prepaid Health.