U.S. GOVERNMENT PRINTING OFFICE

52–969 CC WASHINGTON : 1999

MEDICARE PROVISIONS IN THE PRESIDENT’S

BUDGET

HEARING

BEFORE THE

SUBCOMMITTEE ON HEALTH

OF THE

COMMITTEE ON WAYS AND MEANS

HOUSE OF REPRESENTATIVES

ONE HUNDRED FIFTH CONGRESS

FIRST SESSION

FEBRUARY 13, 1997

Serial 105–57

Printed for the use of the Committee on Ways and Means

(
ii

COMMITTEE ON WAYS AND MEANS

BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois

BILL THOMAS, California

E. CLAY SHAW, JR., Florida

NANCY L. JOHNSON, Connecticut

JIM BUNNING, Kentucky

AMO HOUGHTON, New York

WALLY HERGER, California

JIM MCCRERY, Louisiana

DAVE CAMP, Michigan

JIM RAMSTAD, Minnesota

JIM NUSSLE, Iowa

SAM JOHNSON, Texas

JENNIFER DUNN, Washington

MAC COLLINS, Georgia

ROB PORTMAN, Ohio

PHILIP S. ENGLISH, Pennsylvania

JOHN ENSIGN, Nevada

JON CHRISTENSEN, Nebraska

WES WATKINS, Oklahoma

J.D. HAYWORTH, Arizona

JERRY WELLER, Illinois

KENNY HULSHOF, Missouri

CHARLES B. RANGEL, New York

FORTNEY PETE STARK, California

ROBERT T. MATSUI, California

BARBARA B. KENNELLY, Connecticut

WILLIAM J. COYNE, Pennsylvania

SANDER M. LEVIN, Michigan

BENJAMIN L. CARDIN, Maryland

JIM MCDERMOTT, Washington

GERALD D. KLECZKA, Wisconsin

JOHN LEWIS, Georgia

RICHARD E. NEAL, Massachusetts

MICHAEL R. MCNULTY, New York

WILLIAM J. JEFFERSON, Louisiana

JOHN S. TANNER, Tennessee

XAVIER BECERRA, California

KAREN L. THURMAN, Florida

A.L. SINGLETON, Chief of Staff

JANICE MAYS, Minority Chief Counsel

SUBCOMMITTEE ON HEALTH

BILL THOMAS, California, Chairman

NANCY L. JOHNSON, Connecticut

JIM MCCRERY, Louisiana

JOHN ENSIGN, Nevada

JON CHRISTENSEN, Nebraska

PHILIP M. CRANE, Illinois

AMO HOUGHTON, New York

SAM JOHNSON, Texas

FORTNEY PETE STARK, California

BENJAMIN L. CARDIN, Maryland

GERALD D. KLECZKA, Wisconsin

JOHN LEWIS, Georgia

XAVIER BECERRA, California

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records

of the Committee on Ways and Means are also published in electronic form. The printed

hearing record remains the official version. Because electronic submissions are used to

prepare both printed and electronic versions of the hearing record, the process of converting

between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process

is further refined.
iii

C O N T E N T S

Page

Advisory of January 31, 1997, announcing the hearing ....................................... 2

WITNESSES

Health Care Financing Administration, Hon. Bruce C. Vladeck, Ph.D.,

Administrator ....................................................................................................... 5

American Enterprise Institute, Robert B. Helms ................................................. 61

Commonwealth Fund, Karen Davis ....................................................................... 66

Reischauer, Robert D., Brookings Institution ....................................................... 51
(1)

MEDICARE PROVISIONS IN THE PRESIDENT’S

BUDGET

THURSDAY, FEBRUARY 13, 1997

HOUSE OF REPRESENTATIVES,

COMMITTEE ON WAYS AND MEANS,

SUBCOMMITTEE ON HEALTH,

Washington, DC.

The Subcommittee met, pursuant to notice, at 9:10 a.m., in room

1100, Longworth House Office Building, Hon. Bill Thomas (Chairman of the Subcommittee) presiding.

[The advisory announcing the hearing follows:]
2

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

SUBCOMMITTEE ON HEALTH

FOR IMMEDIATE RELEASE CONTACT: (202) 225–3943

January 31, 1997

No. HL–1

Thomas Announces Hearing on

Medicare Provisions in the President’s Budget

Congressman Bill Thomas (R–CA), Chairman, Subcommittee on Health of the

Committee on Ways and Means, today announced that the Subcommittee will hold

a hearing on Medicare provisions in the President’s budget. The hearing will take

place on Thursday, February 13, 1997, in the main Committee hearing room, 1100

Longworth House Office Building, beginning at 9:00 a.m.

In view of the limited time available to hear witnesses, oral testimony at this

hearing will be heard from invited witnesses only. Witnesses will include Dr. Bruce

Vladeck, Administrator of the Health Care Financing Administration, budget experts, and actuaries. However, any individual or organization not scheduled for an

oral appearance may submit a written statement for consideration by the Committee and for inclusion in the printed record of the hearing.

BACKGROUND:

Last year, the Medicare Trustees found that the Medicare Hospital Insurance (HI)

trust fund would become insolvent by the year 2001. More recently, the Congressional Budget Office stated that for the Medicare HI trust fund to achieve full solvency beyond 10 years, Medicare’s annual rate of growth must be slowed from 7.7

to 3.4 percent. Administration officials have publicly stated that the President’s fiscal year 1998 budget would reduce Medicare spending by $100 billion from 1998

through 2002. Included in the proposal is a shift of a portion of home health expenditures from the HI trust fund to the Supplemental Medical Insurance trust fund,

financed out of general revenues. This hearing will review the Medicare provisions

included in the President’s fiscal year 1998 budget, and begin to examine its impact

on seniors, health care providers, health plans, and taxpayers.

In announcing the hearing, Chairman Thomas stated: ‘‘We are anxious to review

the specific details of the President’s proposal to achieve future solvency of the

Medicare program. While the President’s proposal appears to succeed in cutting

costs, it may not make some of the structural changes to Medicare that would provide powerful market incentives to providers and health plans to improve quality

and reduce costs, in addition to extending the solvency of the HI trust fund.’’

FOCUS OF THE HEARING:

This hearing will focus on the Medicare proposals included in the President’s fiscal year 1998 budget and their impact on the Medicare Hospital Insurance trust

fund.

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

Any person or organization wishing to submit a written statement for the printed

record of the hearing should submit at least six (6) copies of their statement and
3

a 3.5-inch diskette in WordPerfect or ASCII format, with their address and date of

hearing noted, by the close of business, Thursday, February 27, 1997, to A.L. Singleton, Chief of Staff, Committee on Ways and Means, U.S. House of Representatives,

1102 Longworth House Office Building, Washington, D.C. 20515. If those filing written statements wish to have their statements distributed to the press and interested

public at the hearing, they may deliver 200 additional copies for this purpose to the

Subcommittee on Health office, room 1136 Longworth House Office Building, at

least one hour before the hearing begins.

FORMATTING REQUIREMENTS:

Each statement presented for printing to the Committee by a witness, any written statement

or exhibit submitted for the printed record or any written comments in response to a request

for written comments must conform to the guidelines listed below. Any statement or exhibit not

in compliance with these guidelines will not be printed, but will be maintained in the Committee

files for review and use by the Committee.

1. All statements and any accompanying exhibits for printing must be typed in single space

on legal-size paper and may not exceed a total of 10 pages including attachments. At the same

time written statements are submitted to the Committee, witnesses are now requested to submit

their statements on a 3.5-inch diskette in WordPerfect or ASCII format.

2. Copies of whole documents submitted as exhibit material will not be accepted for printing.

Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material

not meeting these specifications will be maintained in the Committee files for review and use

by the Committee.

3. A witness appearing at a public hearing, or submitting a statement for the record of a public hearing, or submitting written comments in response to a published request for comments

by the Committee, must include on his statement or submission a list of all clients, persons,

or organizations on whose behalf the witness appears.

4. A supplemental sheet must accompany each statement listing the name, full address, a

telephone number where the witness or the designated representative may be reached and a

topical outline or summary of the comments and recommendations in the full statement. This

supplemental sheet will not be included in the printed record.

The above restrictions and limitations apply only to material being submitted for printing.

Statements and exhibits or supplementary material submitted solely for distribution to the

Members, the press and the public during the course of a public hearing may be submitted in

other forms.

Note: All Committee advisories and news releases are available on the World

Wide Web at ‘HTTP://WWW.HOUSE.GOV/WAYSlMEANS/’.

The Committee seeks to make its facilities accessible to persons with disabilities.

If you are in need of special accommodations, please call 202–225–1904 TTD/TTY

in advance of the event (four business days notice is requested). Questions with regard to special accommodation needs in general (including availability of Committee

committee will come to order.

materials in alternative formats) may be directed to the Committee as noted above.

Chairman THOMAS. The hour of 9 having arrived, the Subf

Today’s hearing will focus on President Clinton’s fiscal year 1998

budget proposal for Medicare. In light of the fact that the President

and Congress could not come to an agreement on reforms to save

Medicare in 1995 and the subsequent attention that was given to

Medicare in the 1996 elections, it is now, in our opinion, largely up

to the President to provide leadership on Medicare. And I believe

that in this budget, he has recognized the challenges facing the

program and has accepted his role in submitting a budget proposal

which includes significant changes from his original proposal for

Medicare.
4

The Chair takes the President’s Medicare mandate seriously and

views the President’s budget proposal as at least ‘‘alive on arrival’’

for this Subcommittee to examine.

As the Members of the Subcommittee are keenly aware, in health

policy, the devil truly is in the details, so it is the intention of the

Chair, both today and during a series of hearings in February,

March, and April, to dissect the President’s proposal and assess its

implications with great care.

From a preliminary review of the President’s proposal, there is

much for us to consider. The proposal is not as comprehensive as

the 1995 congressional Medicare reform package and does not, in

our opinion, save Medicare. However, it does include many of the

ingredients of the 1995 Medicare bill which remain, obviously, worthy of adoption.

The President has chosen not as bold a route as we would propose in saving Medicare, but he has placed on the table a proposal

that deserves the time and energy of this Subcommittee.

Our first witness today will be Bruce Vladeck, Administrator of

the Health Care Financing Administration, at least for 1997; we

know that he has announced his intention not to be around for

1998.

The Subcommittee welcomes Dr. Vladeck and looks forward to

working with him as we consider the proposal that the administration has prepared. Before hearing from Dr. Vladeck, I would recognize the Ranking Member, the gentleman from California, Mr.

Stark.

Mr. STARK. Well, thank you, Mr. Chairman.

I, too, think the President has a good plan. Insofar as we know

now, it extends the life of the trust fund for 10 years, gives some

peace of mind therefore to the seniors; it improves some benefits,

increases fighting fraud, and modernizes the payments in a number of ways. Most of all, it avoids shifting more health care costs

onto seniors, many of whom are desperately poor.

I would like to propose that this is a standard against which

amendments could be measured. Anyone who wants to change it,

increase rural or change something else, should be held to account

as to whether they could keep the program solvent to 2007, whether they protect the poor in the safety net hospitals as the President’s plan does.

I think yesterday Chairman Archer indicated that he felt our

plan was not 100, it was 115 gross, and I think that that is about

correct. That is $7.5 billion in extra benefits, which I am sure we

all want to put in.

Mr. Chairman, I just propose that we take that range of 100 to

115—I will split it with you if you want—and let us mark it up.

And why wait for the Budget Committee? We can figure it out. If

that is what we have got to come up with, we have that laundry

list up there; let us just roll up our sleeves and figure out how we

are going to cut a little here and a little there and come up with

100—as I said, we are both saying it is 100 net or 115 if we want

those extra benefits; if we do not want them, it is 100. So, let us

go. Dr. Vladeck will tell us how to do it, and perhaps we can argue,

and we will have some regional differences and provider differences, but I think we can get to work and get this done in short
5

order. I look forward to hearing the administration’s suggestions,

some of which I might want to change, some of which you might

want to change, and we will get to work and deliver them a product.

Thank you very much.

Chairman THOMAS. I thank the gentleman.

I have said that the President’s program appears to be long on

reductions and somewhat murky on reform, and notwithstanding

his enormous abilities, this Chair probably will not be willing to

turn over to Dr. Vladeck the structure under which the changes

would be made.

Dr. Vladeck.

STATEMENT OF HON. BRUCE C. VLADECK, PH.D., ADMINISTRATOR, HEALTH CARE FINANCING ADMINISTRATION

Mr. VLADECK. Thank you very much, Mr. Chairman, Mr. Stark,

Members of the Subcommittee. I am very pleased to be here today

to present the Administration’s plan for modernizing Medicare and

incorporating some of our initiatives to ensure that the program

enters the next century in robust condition.

I am also very pleased in the context of some of my earlier experiences before this Subcommittee that we do in fact seem to have

entered a somewhat different set of circumstances this year. All of

the conversations, which I have had with Members from both sides

of the aisle, have suggested to me a kind of willingness to talk

about specifics and a willingness to work on issues. These conversations give us considerable optimism that we will, sooner rather than later, be able to work our way through the issues and to

provide the kind of legislation that is needed for the program and

needed for the American people. I very much look forward to that

process and to negotiating with the Chairman on just how much

discretion we will have over defining this structure.

Let me begin by saying that we always think it is important,

particularly for those of us who spend most of our time inside the

beltway, to start by putting a human face on some of these issues

and to think about the context of the impact that our proposals

would have on American citizens and on the beneficiaries, for

whom the program exists and with whom we need to be primarily

concerned.

If I could call your attention to the two charts which are to my

right, copies of which should be with your copies of my testimony.

Let me remind you that while only 10 to 12 percent of Medicare

beneficiaries fall below the Federal poverty line, more than threequarters have incomes of $25,000 a year or less. Medicare is often

described as a middle-class benefit, but its beneficiaries are middle

class precisely because they have Medicare benefits.

The second chart shows that with the availability of Medicare

benefits, because of the limitations in the Medicare benefit package

and because of their constrained incomes, the elderly already spend

21⁄2 times as high a proportion of their total income on health expenses as do the nonelderly.

Our goal with this package is really threefold. We propose to extend the solvency of the Hospital Insurance Trust Fund for a decade; we hope to contribute in a very significant way to reduction
6

of the Federal deficit and to the President’s plan to balance the

budget by Federal fiscal year 2002. But most importantly, we need

to lay the framework for a major modernization of the Medicare

Program that will move us forward into the next century in some

of the directions which we need to go.

First, let me very quickly highlight some of the more direct budgetary aspects of the proposal and then speak very briefly about

some of the more structural reforms, for want of a better term.

In order to contribute to deficit reduction and to extend the life

of the trust fund, we have a number of significant proposals. In the

aggregate, these initiatives would reduce the per capita growth

rate of Medicare outlays from the current projected baseline of approximately 7.4 percent per year to 5.3 percent per year. That

number is very close, we believe, to the best available estimates of

what the growth in the costs borne by other health insurers is likely to be over the same period of time.

About $33 billion in total savings over 5 years will come from reduction in payments to hospitals, including a reform of outpatient

payment, which I will say more about in a moment, a reduction of

the update factors to 1 percent per year below market basket, and

some relatively modest changes in the way in which we reimburse

hospitals for the direct and indirect costs of medical education. At

the same time, some of these reductions are offset by our proposal

to remove from payments to HMOs the costs attributable to medical education and to disproportionate share hospital payments and

to pay these directly to the institutions.

We are proposing to save $14 billion over the budget period

through the implementation of a case mix-adjusted prospective

payment system for home health agencies and some other reforms

in the way we pay home health agencies. Over the same period, we

save about $7 billion through the implementation of prospective

payment for skilled nursing facilities.

We have a series of interlocking changes in the way in which we

pay managed care plans under the program. Most of the attention

so far has focused on the proposal to reduce average payment levels

in the year 2000 and thereafter from 95 percent to 90 percent of

the AAPCC. At the same time, as I mentioned, we are going to pull

out the teaching and disproportionate share components of the

rates and pay these directly to the institutions.

We are also directly borrowing two concepts that were included

in the 1995 legislation and that I have often said we think are the

soundest pieces of that legislation—the proposal to reduce geographic disparities in payment rates by a slightly different method

than that contained in the 1995 legislation, which produces essentially the same result of essentially averaging in a component of

the national rates with the local rates on a phased-in basis. At the

same time we are proposing, beginning in 1998, a floor of $350 a

month in the capitation payment in any given county in the United

States.

The interaction of all of these changes gets sort of complicated,

and we also have some specific mechanisms to minimize the yearto-year impact of these changes in any given county which I would

be happy to address further.
7

We are also proposing to save $7 billion over 5 years by slowing

the rate of growth in payments to physicians and other providers,

primarily by improving and modernizing the index by which we update physician fees from year to year in the context of moving to

a single conversion factor for all physician payments.

We have a number of proposals aimed at reducing fraud and

abuse in the program, including extension of certain secondary

payer proposals and some proposals aimed at significant tightening

of the administration and enforcement of the home health benefit.

Very quickly, let me walk through some of the components of our

modernization proposals. We group these into seven areas, and the

rubrics we use are: Prudent purchasing, modernizing managed care

choices, preventive care, beneficiary protections, program improvements, integrated quality management, and improving access in

rural areas. In my oral statement I will not go into any great detail

about any of these, but let me very quickly mention that under

prudent purchasing, we are seeking to adopt some of the more effective techniques for purchasing of health services that have been

used in the private sector and applying these to the Medicare Program. We need to be able to contract with Centers of Excellence

which can provide expensive services at very high volume with

very high quality at some reduction in cost to us.

We need to have more flexibility in the way we pay for various

common supplies so that we are not paying retail list or something

above list, but something closer to an appropriate negotiated price.

We need to use the tools of competitive bidding in circumstances

in which it is appropriate to create greater competition among suppliers to the Medicare Program.

We are also proposing, as you know, to restore the characterization of Medicare home health care benefits to something substantially closer to what was in the law prior to 1980. Under our proposal, the first 100 visits following a hospital stay of 3 days or more

would continue to be a benefit under part A of the program. All

other covered home health services would be paid under part B, as

was the case before 1980.

We also have a set of proposals in the legislation that would permit us to modernize the administration of the Medicare Program,

building on the work that was done by the Congress in a bipartisan

way last year in HIPAA by giving us greater authority to pick and

choose among the contractors who perform various administrative

services for the program, to introduce greater competition in the

world of contractors, and to let us employ more specialized services

for issues like coordination of benefit or beneficiary services.

On the modernization of managed care, we propose in this legislation to open up Medicare contracting both to provider-sponsored

organizations and preferred provider organizations. We do provide

a mechanism for much expanded efforts at structured beneficiary

choice by providing for third parties to provide beneficiaries with

substantially better information about the plans available in their

communities; toll-free consultation, consumer education services,

and so forth.

We would emphasize that our plan extends information and open

enrollment processes not only to capitated plans but to Medigap

plans as well, and therefore our legislation also includes some pro-
8

posed reforms in the Federal law affecting Medigap policies similar

in a number of important ways to the legislation that Mrs. Johnson, among other Members, introduced late last year to create a

level playingfield between capitated and Medicare supplemental

options.

We are also building on some work that is already underway on

a bipartisan basis in this Congress to expand the preventive benefits in the Medicare Program. The legislation, which you, Mr.

Chairman, Mr. Cardin, and Mr. Bilirakis have introduced, is not

identical to our proposals for expanded preventive benefits, but I

think we are thinking along somewhat the same lines, and we

would be happy to talk about some of the differences in proposals

and to work toward an agreement.

We are particularly pleased to be able to define a set of preventive benefits relative to the management of diabetes, which we

think will have a particularly important effect not only on expenditures in the program over time, but on the health and well-being

of our beneficiaries.

We are proposing, as I suggested earlier, to totally reform the

way Medicare pays for hospital outpatient services. This will

produce no net savings over the budget window, but what it will

do is put an end to this growing trend in which beneficiaries, solely

for hospital outpatient services, pay more than 20 percent coinsurance. We estimate that next year, in the absence of legislative

change, the effect of coinsurance involving beneficiaries for hospital

outpatient services would be 46 percent. Under our proposal, by the

year 2007, we would be back to the 20 percent where that coinsurance belongs, while at the same time putting hospital outpatient

services on a rational prospective payment system.

We are proposing a new respite benefit in the program beginning

in 1998 that will provide caretakers of beneficiaries with Alzheimer’s disease or other irreversible dementias up to 32 hours a

year of direct care for the beneficiary to provide respite for care

givers.

We are making major steps on the quality improvement front in

both the capitated and fee-for-service side of the program. In order

to pull together existing authorities and to clarify our responsibilities relative to data and quality improvement, we have some proposals in the bill under what we define as our integrated quality

management strategy to bring the underlying statutory framework

up to date in terms of contemporary notions of continuous quality

improvement of information-based decisionmaking about quality

and appropriateness of services.

Last, we continue to be very concerned about assuring access to

Medicare beneficiaries in rural areas. In addition to the changes

that we are making in the payment mechanisms for managed care

plans, which we believe will have a very significant effect on rural

communities, we are proposing to expand the rural primary care

hospital program to all 50 States, something I know will be of great

interest to Members of this Subcommittee. We also propose to

strengthen and update other special payment provisions on the

part A side which we have for a variety of rural institutions.

In conclusion, we have tried to look beyond the immediate concerns of budget reduction and to keep our sights on the long-term
9

goal of safeguarding the vitality of the Medicare Program. As our

Nation evolves into a society with greater numbers of the elderly

and infirm, it is critical that we preserve Medicare as a strong and

vital program, and we believe the President’s budget contributes to

modernizing Medicare while extending the solvency of the trust

fund for 10 years, reducing the rate of growth in spending, and contributing importantly to balancing the Federal budget, including

eliminating the current Federal deficit.

Our payment reforms and strategies will ensure that Medicare

continues to be a sound investment in the Nation’s health security

for years to come.

Mr. Chairman, we are mindful of the overlap between many of

our proposals and proposals that you have supported in the past.

We are mindful of other proposals which other Members of the

Subcommittee have championed in the past, and we very much

look forward to working with all the Members of the Subcommittee

to achieve legislation this year that will strengthen and improve

the Medicare Program for years to come.

Again, I am pleased to be here today, and I look forward to your

questions and comments.

[The prepared statement and attachments follow:]

Statement of Hon. Bruce C. Vladeck, Ph.D., Administrator, Health Care

Financing Administration

INTRODUCTION

Mr. Chairman, I am pleased to have the opportunity to present the Administrations plan for modernizing Medicare. I am enthusiastic about the initiatives we have

undertaken to ensure that Medicare is strengthened for the 38 million Americans

who depend upon it, offers the best possible medical care, and enters the next century in robust condition.

We think it is important to put a human face on the equation and to be fully

aware of the serious impact such proposals would have on Americans least able to

bear these additional cost burdens. Although only 10–12% of Medicare beneficiaries

fall below the Federal poverty line, nearly 75% have incomes below $25,000.

[CHART #1] Medicare is often described as a middle-class benefit, but beneficiaries

are middle class precisely because they have Medicare. Recent data indicates that

the elderly already spend a formidable 21% of their income on health care, compared to 8% spent by the non-elderly. [CHART #2]

The Medicare provisions in the President’s FY 1998 Budget have two primary

goals: (1) to extend the life of the Medicare Trust Fund into the next decade, which

will contribute to reduction of the deficit; and (2) to modernize Medicare. Through

sound judgment and careful planning, we can guarantee that the Medicare program

of the future will continue to provide the same protections to the elderly and disabled as it does today.
10
11

EXTENSION OF MEDICARE SOLVENCY INTO 2007

Under present law, the Hospital Insurance (HI) Trust Fund would be depleted

early in 2001, based on the Board of Trustees’ intermediate estimates. The President’s budget proposals would extend the life of the Trust Fund by another 6 years.

It would provide adequate financing through the next 10 years, leaving us time to

tackle imminent fiscal problems precipitated by retiring baby boomers. Savings

would be achieved through a combination of scored savings from reductions in payments to hospitals, home health agencies, skilled nursing facilities, managed care

plans, and other providers. As was proposed in the previous two balanced budget

initiatives, it would permanently extend the 25 percent Part B premium. Finally,

the liability associated with some home health services would be reallocated to the

Part B side of the program.

Moderating Medicare’s Rate of Growth

The President’s budget includes explicit proposals to achieve $100 billion in savings over the next 5 years. Medicare per capita spending growth over the next five

years (1997–2002) will slow from the current projected gross rate of 7.4% to 5.3%.

In 2002, this will lower our average per capita spending from $7,800 to $7,100.

These savings come from substantial reductions in payments to providers.

Hospitals—We propose a series of hospital savings proposals, including a reduction in the hospital PPS update of 1.0 percentage point each year to account for increases in productivity, reinstatement of the reduction in capital payments from

OBRA 90, reforms to the direct payment for medical education to reduce the growth

of hospital-based residents and encourage more training in primary care, and reductions in the indirect medical payment to more closely reflect the cost of teaching activities. In addition, we propose to use a more up-to-date base year in calculating

payments to PPS-exempt hospitals, to set ceilings and floors for these hospitals’s

target rates, and to reduce the annual update to payments and cut capital payments

for PPS-exempt hospitals. We also propose a moratorium on new long-term care hospitals and to move to a PPS for hospital outpatient department services. Overall,

these proposals result in $33 billion in savings from hospitals over 5 years.

SNF and Home Health—As I will describe in detail later, we will be moving to

case-mix adjusted prospective payment systems for these providers. These payment

systems will incorporate payment reductions equal to $7 billion for SNFs and $14

billion for home health agencies (HHAs) over five years.

Managed care—Through a series of policy changes, the plan would address the

flaws in Medicare’s current payment methodology for managed care. Specifically, the

reforms would create a national floor to better assure that managed care products

can be offered in low payment areas, which are predominantly rural communities.

In addition, the proposal includes a blended payment methodology, which combined

with the national minimum floor, would dramatically reduce geographical variations

in current payment rates. The plan would reduce reimbursement to managed care

plans by approximately $34 billion over 5 years. Savings will come from three

sources: (1) Because HMO payments are updated based on projections of national

Medicare per capita growth, when the traditional fee-for-service side of the program

is reduced, HMO payments are reduced; (2) The carve-out of the medical education

and DSH payments from the HMO reimbursement formula (these funds will be paid

directly to academic health centers); and (3) A phased-in reduction in HMO payment

rates from the current 95% of fee-for-service payments to 90%. A number of recent

studies have validated earlier evidence that Medicare significantly overcompensated

HMOs. A recent HCFA study has validated earlier findings by Mathematica Policy

Research that Medicare overpays HMOs. The reduction does not start until 2000

and it accounts for a relatively modest $6 billion in savings over 5 years.

Physicians—We propose to establish a single conversion factor for payments

under the physician fee schedule and to reform the method for updating physician

fees. By creating incentives to control physician services in high-volume inpatient

settings and to make a single payment for surgery where an assistant-at-surgery

is used, costs will be reduced. We also propose to expand the settings in which direct

payment is made to physician assistants, nurse practitioners and clinical nurse specialists to include home and ambulatory settings. Medicare currently does not have

an expansive outpatient drug benefit, though there is coverage of certain kinds of

outpatient drugs. Our proposed plan will eliminate the mark-up charged by physicians and suppliers, limiting payments to acquisition costs subject to a limit. In addition to eliminating the current statutory x-ray requirement to determine the need

for a service, we also propose to improve access to chiropractic services. These proposals will result in savings of $7 billion over 5 years.
12

Fraud and Abuse

The President’s budget contains a number of proposals to reduce waste, fraud and

abuse in the Medicare program. Among these proposals are provisions to require

that insurance companies report the insurance status of beneficiaries, to guarantee

that Medicare pays appropriately. In addition, we have several proposals to prevent

excessive and inappropriate billing for home health services. We are proposing to

close a loophole in the current payment calculation by linking payments to the location where care is actually provided, rather than the billing location. When we implement the PPS, we will eliminate HHA periodic interim payments (PIPs), which

were originally established to encourage HHAs to join Medicare by providing a

smooth cash flow. Since over 100 new agencies join Medicare each month, inducements are no longer needed. We will develop more objective criteria for determining

the appropriate number of visits per specific condition, so that we can prevent excessive utilization.

Finally, the President’s budget calls for the repeal of several provisions in the

HIPAA that could hamper our ability to fight fraud and abuse. First, the President

is proposing to eliminate the broad new exception to the anti-kickback statute when

providers are at a substantial financial risk. These terms are undefined and somewhat broad. Additionally, the Congressional Budget Office assigned a cost to this

provision because it could be easily abused by those wishing to profit from referrals.

Second, the President is proposing to eliminate the requirement that advisory opinions be issued in response to specific requests as to how certain business arrangements may or may not be considered to violate the anti-kickback laws. This provision will hamper the government’s ability to prosecute fraud and is impractical because it is difficult, if not impossible, to determine intent based on the submission

of the requestor. Third, the President is proposing to reinstate the ‘‘reasonable diligence’’ standard. HIPAA eliminated the current standard for use of reasonable diligence and made providers subject to civil monetary penalties only if they act with

deliberate ignorance or reckless disregard.

MODERNIZING MANAGED CARE CHOICES

The President’s Budget modernizes Medicare and brings it into the twenty-first

century through major structural changes in seven areas: Prudent Purchasing; Modernizing Managed Care Choices; Preventive Care; Beneficiary Protections; Program

Improvements; Integrated Quality Management; and Improving Access in Rural

Areas.

1—Prudent Purchasing

As more beneficiaries are choosing to enroll in managed care, there has been a

lot of talk about fee-for-service being the ‘‘residual’’ as though it were somehow not

important. We must recognize that even if we double the rate at which beneficiaries

are moving into managed care in the short-term, the majority of beneficiaries will

still be in fee-for-service. Therefore, we need to look for ways to improve our purchasing power. Over the past several years, private sector purchasers of health services have developed a variety of innovative ways they pay for health services. It is

ironic that HCFA, the largest purchaser of health services in the U.S., has often

been shackled by outdated statutory payment and administrative pricing provisions,

which prevent us from adapting to today’s marketplace.

Beneficiary-Centered Services—Given the pressures on the federal budget, it is

critical that Medicare look beyond traditional purchasing strategies and scan the

private industry horizon for new ideas. HCFA’s ‘‘Beneficiary-Centered Purchasing

Initiative’’ proposals do just that, applying lessons learned from the private sector

and our demonstrations. With these proposals, we will have innovative purchasing

arrangements which will be powerful tools to control Medicare spending now and

in the future.

For example, under our ‘‘Centers of Excellence’’ demonstration, Medicare achieved

an average of 12% savings for coronary artery bypass graft procedures performed,

with no reduction in quality. Despite this success, we do not have the authority to

make the Centers of Excellence program a permanent part of Medicare. Similarly,

while other purchasers of health care services are successfully using disease and

case management services to selectively provide services for enrollees with specific

conditions (e.g. diabetes, congestive heart failure), we do not have this kind of authority under Medicare fee-for-service. The Office of Inspector General reports indicate that Medicare is paying far more for medical supplies and DME than other federal purchasers such as the Department of Veterans Affairs. Nevertheless, Medicare

lacks authority to use competitive bidding to establish payment rates. I urge Congress to re-examine these issues and give the Medicare program the flexibility to
13

pay on the basis of special arrangements, as opposed to statutorily-determined, administered prices.

Post-acute Services—Expenditures for skilled nursing facility (SNF), home health,

rehabilitation and long-term hospital services are among the fastest growing components of Part A, and, total Medicare spending. These services are often referred to

as ‘‘post-acute care services,’’ even though in some cases these services are delivered

without a prior hospital stay. The increase in expenditures for post-acute care is due

to demographic changes and improvements in the delivery of medicine that allow

more care to be delivered in non-hospital settings. In addition, our prospective payment system for hospitals provides the incentives for hospitals to discharge patients

more quickly, which also fuels the growth in post-acute care spending. Further, discharges to post-acute care providers may cause Medicare to pay twice for care—once

for the initial hospitalization, and again for care in the post-acute settings.

The President’s budget includes a proposal to end these double payments. We propose to limit the definition of a discharge, for payment purposes, to discharges from

the hospital to home. All other discharges, including those to SNFs and rehabilitation hospitals, will be considered ‘‘transfers.’’ We are looking to develop better integrated and more flexible financing and delivery systems. These systems will help

meet the needs of those Medicare beneficiaries with chronic conditions and disabilities who receive services from these post-acute care providers. The goal is to make

the system of services ‘‘beneficiary-centered,’’ where the needs of the patient, rather

than the classification of the provider, determine what services are provided and

how they are reimbursed. In the interim, we will move to prospective payment systems for home health care and SNFs to assert greater control over post-acute spending.

Beginning in July 1998 and phased in over 4 years, we propose to implement a

prospective payment system for SNFs, which will include payment for all costs related to SNF care (routine, ancillary and capital). SNFs will be paid a prospective

rate per day of care, which will be adjusted by a case-mix index to appropriately

reflect the resources used by Medicare patients. A prospective payment system that

incorporates all costs will reduce incentives for over-utilization of ancillary costs

which has been the primary reason for the rapid expenditure growth we have seen

in the past few years.

We are also proposing to implement a prospective payment system for home

health agencies (HHAs). Beginning in 1999, we will pay HHAs a prospective rate

based upon the characteristics of the patients it serves, not on how many services

it provides. Because we cannot continue to allow expenditure growth at current levels, we are proposing to implement additional cost limits until we can implement

this prospective payment system. Effective FY 1998, we will reduce the current cost

limits and introduce a new per beneficiary per year limit. The Administration is proposing a series of policy changes to prevent excessive and inappropriate billing for

home health care services, which are described earlier.

In addition, the Administration is also proposing to reallocate some of the home

health financing to Part B to restore the post-acute care nature of Part A. Data from

our Medicare Beneficiary Survey indicate that home health care plays a significant

role in the ability of many elderly to continue to live at home: 1 in 3 home health

users live alone, and 4 in 10 have incomes below $10,000. Under the Administration’s proposal, the first 100 visits following a three-day hospital stay would be reimbursed under Part A, just as this program covers 100 days of skilled nursing care

following a hospitalization. All other home health care (visits beyond 100 and those

not following a hospital stay) would be paid under Part B. Prior to OBRA 80, the

Part A portion of the home health benefit was limited in this way. OBRA 80 legislation eliminated the three-day hospitalization requirement and the Part A and Part

B visit limits, and in so doing made Part A responsible for almost all of the financing of home health. The restoration of non-post acute visits to Part B makes the

home health benefit consistent with the Medicare statute’s original intent and its

division of services between Part A and Part B.

Contractor Reform—While modernizing our payment methods for purchasing

health care services for beneficiaries is an essential step toward modernization, we

must modernize the way we purchase administrative services. The President’s budget contains a proposal that would end the requirement that all Medicare contractors

(that is, carriers and intermediaries) perform all Medicare administrative activities.

It gives HCFA the tools to take advantage of innovations and efficiencies in the private sector when it comes to utilization review, beneficiary and provider services,

and claims processing. It builds upon the authority granted in the Health Insurance

Portability and Accountability Act (HIPAA), where payment integrity activities

(such as audits) could be separately contracted. This provision also would allow us

to use the same competitive requirements that apply throughout the government
14

when awarding new contracts, and expand our pool of potential contractors beyond

insurance companies to other entities that may be well-qualified to do the work.

2—Modernizing Managed Care Choices

Under our Medicare Choices initiative, we would expand managed care options,

provide beneficiaries with comparative information on all of their health care

choices, ease comparison among options by increasing standardization of benefits,

provide a coordinated open enrollment period and other open enrollment opportunities and institute Medigap reforms. Let me address each of these components separately.

Expanded Managed Care Options—Currently, HCFA can contract with Health

Maintenance Organizations (HMOs) and Competitive Medical Plans (CMPs) to serve

as Medicare managed care plans. The Administration believes that Medicare beneficiaries should have more managed care choices, comparable to those available in

the private sector. Thus, the President’s budget would expand managed care options

to include Preferred Provider Organizations (PPOs) and Provider Sponsored Organizations (PSOs). We believe that direct contracts with alternative managed care models such as PSOs are the key to expanding managed care to rural areas.

Comparative Information—Under current law, beneficiaries may obtain comparative information on Medigap options through State Insurance Counseling Grant Programs. Some of these programs also address managed care options. There are no

mechanisms, however, to ensure that beneficiaries are aware of all their options, in

both managed care and Medigap. Under the President’s budget, the Secretary will

develop and provide comparative information to beneficiaries on all managed care

plans and Medigap plans in the area. This information will be used by State Insurance Counseling Grant Programs to assist beneficiaries in understanding their coverage options. The costs of preparing and disseminating this information and supporting the State Counseling Grant Program will be financed by the Medigap and

managed care plans.

Standardized Benefits—While comparative information will be helpful to beneficiaries, making an informed decision among the array of available coverage options

would be hampered unless differences in benefit packages are addressed. Under the

President’s budget, the Secretary will establish standardized packages for certain

additional benefits offered by managed care plans. For example, if the Secretary established a standardized package for outpatient prescription drugs, plans could offer

enrollees this benefit only according to the structure established by the Secretary.

The development of standardized additional benefit packages will make it possible

for beneficiaries to compare these benefits on the basis of cost and quality. The National Association of Insurance Commissioners (NAIC) will also review the current

standard Medigap packages to see if changes could be made to ease comparison with

the standard managed care benefits.

Open Enrollment Opportunities—Under Federal law, aged individuals have a once

in a life-time opportunity to select the Medigap plan of their choice when they first

join Medicare at age 65; individuals who become eligible for Medicare because of a

disability or end-stage renal disease beneficiaries have no such choice. If a beneficiary enrolls in a managed care plan and is later dissatisfied, he or she may not

have the opportunity to select the Medigap plan of his or her choice; for example,

drug coverage may be unavailable due to the individual’s poor health status. As a

result, some beneficiaries are reluctant to try managed care or are fearful of being

locked into managed care options with no opportunity to return to fee-for-service

and Medigap.

The President’s budget gives all new beneficiaries, not just aged beneficiaries, the

opportunity to choose the managed care or Medigap plan of their choice when they

first enroll in Medicare. In addition, each year all Medigap and managed care plans

will have to be open for a one month coordinated open enrollment period. Additional

open enrollment opportunities will be available under certain circumstances—such

as, when a beneficiary’s primary care physician leaves a plan or when a beneficiary

moves into a new area. While the concept of coordinated open enrollment is not new

and was included in the 1995 Conference Agreement, the key difference in our proposal is the inclusion of Medigap plans.

Other Medigap Reforms—In addition to addressing open enrollment, there are

other Medigap reforms included in the President’s budget. We would like to eliminate the ability of Medigap insurers to impose pre-existing condition exclusion periods. Under the policy in the President’s budget, a Medigap plan cannot impose an

exclusion period for a beneficiary who has recently enrolled in another Medigap

plan, Medicare managed care, or employer-based plan. This is similar to the policy

included in a bi-partisan bill introduced by Mrs. Johnson and others during the last

session and we look forward to working together toward enactment this year.
15

Our final Medigap reform addresses rating. There are currently no federal requirements regarding the rating methodology used by Medigap plans. As a result,

plans can use low premiums to entice beneficiaries to enroll in their fledgling stages,

but as the company matures it raises the premiums to unaffordable levels. Under

the President’s budget, Medigap plans would be required to use community rating

to establish premiums. The movement to community rating would be subject to a

timetable and transition rules developed by the NAIC. Given that managed care

plans are required to charge all enrollees the same premium, Medigap plans should

not be allowed to charge differential premiums based on age. Also, if choice is an

important goal, then premium structures such as attained age rating, which in effect make Medigap unaffordable as beneficiaries age, should not be allowed.

3—Preventive care

One of the core elements of our restructuring agenda is modernization of Medicare’s coverage of preventive care. The cost-effectiveness of illness prevention is

well-known; in the long run, preventive medicine pays for itself. The President’s

budget would make some significant improvements in the area of preventive benefits. I would note that there is a bipartisan consensus on many of these proposals

as indicated by the similarities between our initiatives and legislation sponsored by

Chairman Thomas, Mr. Cardin and Mr. Bilirakis. We look forward to working with

you to enact these new benefits:

Colorectal Screening Coverage—Colorectal cancer is the second most common form

of cancer in the U.S. and has the second highest mortality rate. Yet, despite the

demonstrated importance of early detection, Medicare does not pay for procedures

used to detect colorectal cancer when used as a screening tool. The President’s budget would provide such coverage, thereby increasing the possibility of early detection

and treatment of colorectal cancer.

Mammography Coverage—Forty-eight percent of new breast cancer cases and 56

percent of breast cancer deaths occur in women age 65 and over. For this reason,

the early detection and treatment of breast cancer is a high priority for HCFA. Although Medicare covers both screening and diagnostic mammography, only 40 percent of all eligible beneficiaries over age 64 (excluding those in managed care) received a mammogram in the two-year period from 1994 through 1995. In addition,

only 14 percent of eligible beneficiaries without supplemental insurance received

mammograms during the first two years of the screening mammography benefit,

which began in 1991.

The President’s budget expands coverage for screening mammograms to provide

for an annual mammogram for women age 65 and over. This is consistent with the

recommendations of most major breast cancer authorities. The budget also proposes

to waive cost-sharing for mammogram services in order to encourage their use.

Expanded Benefits for Diabetes Outpatient Self-Management Training and Blood

Glucose Monitoring—The third area where we propose to make investments is in

services for beneficiaries with diabetes. Under current law, Medicare covers diabetes

outpatient self-management training only in hospital-based programs, and covers

blood glucose monitoring (including testing strips) only for insulin-dependent diabetics. The President’s budget would expand coverage of diabetes outpatient selfmanagement training to non-hospital-based programs, and expand coverage of blood

glucose monitoring (including testing strips) to all diabetics.

Preventive Immunizations—Current law provides payment for the administration

of pneumonia, influenza, and hepatitis B vaccines, and already waives payment of

coinsurance and the Part B deductible for pneumonia and influenza. The President’s

budget increases payment amounts for the administration of all three types of vaccines, and waives payment of coinsurance and applicability of the Part B deductible

for the hepatitis B vaccine. These measures will improve access to adult vaccinations and make the cost-sharing waiver consistent for all covered vaccines.

4—Beneficiary Protections: Coinsurance Reform and Enrollment Improvements

Reform Beneficiary Coinsurance for Hospital Outpatient Department Services—Coinsurance for Part B services is generally based on Medicare’s payment amount.

However, for certain outpatient department services (OPDs), coinsurance is a function of hospital charges, which are significantly higher. In addition, as a result of

a flaw (‘‘formula-driven overpayment’’) in the statutory formula determining Medicare’s payment for certain OPD services, hospitals have had an incentive to increase

their charges. The net effect of charge-based coinsurance and hospitals’ increases in

their charges is that in 1998, without a change in law, beneficiaries will pay an effective coinsurance rate of 46 percent for OPD services rather than the 20 percent

for other Part B services. This effective coinsurance rate is expected to increase to

52 percent by 2007.
16

The President’s budget proposes the establishment of a prospective payment system (PPS) for OPD services in 1999. Total payments to hospitals for OPD services

will be established so as to equal total payments that would otherwise apply, minus

the effect of the formula driven overpayment. This also assumes the extension of

certain OPD policies included in OBRA 93 that are slated to expire in 1999. Coinsurance will be reduced starting in 1999 using the savings from the formula-driven

overpayment. It would also be gradually reduced in subsequent years until it equals

20 percent in 2007.

Part B Enrollment and Premium Surcharge—Under current law, with certain exceptions, beneficiaries who do not enroll in Part B when they are first eligible can

enroll subsequently only during an annual open enrollment period from January to

March of each year, with coverage effective in July. In addition, for each year that

they could have enrolled in Part B but did not, they face a 10 percent premium surcharge. While for most beneficiaries the surcharge is in the 20–30 percent range,

some beneficiaries face a surcharge of 150 percent or more—an amount which is punitive rather than bearing any relationship to the cost to Medicare of late enrollment.

In recent years, flaws in this enrollment process and inequities in the premium

surcharge have become obvious. Beneficiaries who never enrolled in Part B due to

availability of other coverage have attempted to enroll after their circumstances

changed. For example, beneficiaries may have not have enrolled in Part B because

they had generous retiree coverage through their former employers. Years later,

however, they were informed that the former employer was now requiring Part B

enrollment or was dropping coverage entirely. There are also situations where military retirees did not enroll in Part B because they could obtain physicians’ services

through a clinic at the military base near their home. Then, years later, the closing

of their base necessitated Part B coverage.

The President’s budget replaces the annual general enrollment period for Part B

with a continuous open enrollment period. Beneficiaries will be able to enroll in the

program at any time, with coverage beginning six months after enrollment. Also, the

Part B premium surcharge for late enrollment will be revised based on the actuarially determined cost to Medicare of late enrollment. This provision will provide substantial relief to thousands of beneficiaries.

5—Program Improvements

Respite Benefit—The President’s budget creates a respite benefit, beginning in FY

1998. This much-needed benefit will provide up to 32 hours of care each year for

beneficiaries suffering from Alzheimer’s and other irreversible dementia. Respite

care may be provided at home or at a day-care facility, and will serve to ease the

emotional ‘‘burnout’’ that is commonly experienced by primary caretakers, especially

when they are family members. In the spirit of the Administration’s efforts to improve the quality of family life, this benefit is an important step toward a

community-and family-centered approach to health care.

Social Security Disability Demonstration—Lack of health coverage is often a barrier to the disabled in their efforts to go back to work, since after a transition period

they are ineligible to receive premium-free Medicare Part A coverage. The Social Security Disability Insurance demonstration (SSDI) will allow certain SSDI beneficiaries to receive premium-free Part A coverage for up to four additional years.

6—Integrated Quality Management

The President’s budget will provide authority for HCFA to develop an integrated

quality management system that will unify HCFA’s quality assurance activities.

Our current quality assurance activities are focused on minimum standards rather

than the goal of achieving the best practicable health outcomes for beneficiaries.

This new authority will allow us to assess the overall quality of care beneficiaries

are receiving, and to require that care be effectively coordinated among different

settings, rather than site by site as in our current system. As we move to require

managed care plans to assess the overall quality of care they are providing to beneficiaries, we should be able to make the same determinations for beneficiaries who

remain in fee-for-service Medicare.

7—Improving Access in Rural Areas

The character of the American experience was formed in great part by frontier

and rural communities, yet over the past century we have become a largely urban

society. Almost 200 million (75%) Americans live in urban and suburban areas, compared with only 60 million (25%) Americans living in rural areas. This has a profound impact on the type and availability of health care services as advancing technology requires ever more costly medical equipment. Additionally, there is the long-
17

standing problem of enticing physicians and other health care providers to practice

in rural areas.

This Administration continues to promote Medicare reforms that strengthen

health care in rural America. For example, our plan will expand the extremely successful Rural Primary Care Hospital program to all 50 states. To ensure that the

10 million Medicare beneficiaries living in rural areas do not become second-class

citizens in terms of access to health care, our plan updates the payment for Sole

Community Hospitals, improves the Rural Referral Center program, and reinstates

the Medicare Dependent Hospital program to provide resources to those rural hospitals that need it most.

CONCLUSION

We have looked beyond the immediate concerns of budget reductions and sought

to keep our sights on the long-term goal, which is safeguarding the vitality of the

Medicare program. As our Nation evolves into a society with greater numbers of the

elderly and infirm, we must preserve Medicare as a strong and vital program. The

President’s budget modernizes Medicare, extends the solvency of the Hospital Insurance Trust Fund for ten years, reduces the rate of growth in Medicare spending,

and contributes to a balanced budget in 2002. It is essential that we protect Medicare, and our payment reforms and strategies will ensure that Medicare continues

to be a sound investment in our Nation’s health security for years to come.

Mr. Chairman, many of these reforms are initiatives that you, too, have championed. We look forward to working with you, Mr. Rangel, Mr. Thomas, Mr. Stark,

and all the Members of the House Ways and Means Committee to further strengthen and improve the Medicare program.

Modernizing Medicare

P

fRUDENT PURCHASING

• Centers of Excellence

• Competitive bidding

• Global payment for selected services

• Inherent reasonableness authority

• Post-acute services payment reform

IMPROVING CHOICES

• Expanded managed care options

• Annual open enrollment for Medigap and managed care plans

• Comparative information on all choices

• Medigap community rating

• Medigap pre-existing condition reform

• Standardized additional benefit packages

• Revised managed care payment

BENEFICIARY PROTECTIONS

• Hospital outpatient coinsurance reform

• Part B late enrollment surcharge reform

• Improved financial protections for managed care enrollees

NEW BENEFITS

• Diabetes education

• Improved mammography benefits with no cost-sharing

• Colorectal cancer screening

• Increased payment for vaccines with no cost-sharing

•

Just to clarify the record at the beginning, my colleague from

Chairman T

Respite benefit for Alzheimer’s patients

HOMAS. Thank you very much, Dr. Vladeck.

f

California talked about our concern in terms of any increases on
18

beneficiaries and that the desperately poor are what we need to

focus on. I just need to get it straight in my head. I do not know

exactly how you define ‘‘desperately poor,’’ but obviously, they

would be below the poverty level, I would assume, if they are desperately poor.

If someone is a senior and eligible for Medicaid, for example,

what out-of-pocket costs are attributed to them in the program?

Mr. VLADECK. For duly eligible, the——

Chairman THOMAS. No—straight Medicaid.

Mr. VLADECK. Are you talking about QMBs? For Medicare beneficiaries who have Medicaid coverage as well, dual-eligibles comprise about 12 to 14 percent of our beneficiaries, and their out-ofpocket health expenditures should be essentially zero.

Chairman THOMAS. So, if they are desperately poor, whatever we

do in this programmatic change will not affect them.

Mr. VLADECK. That is correct.

Chairman THOMAS. And there is a group called the SLMBs,

which are slightly higher than the QMBs, and it goes up to about

120 percent of poverty. And if we deal with any adjustments on

part B, don’t they get their part B paid for?

Mr. VLADECK. SLMBs get their premiums paid for, but they do

not get the supplemental benefits that folks who are fully eligible

for Medicaid benefits would receive.

Chairman THOMAS. Depending upon how you define ‘‘desperately

poor,’’ if it clearly is below the poverty level, anything we do in any

of these programmatic changes will not cost them out of pocket

since they do not have any out-of-pocket costs.

Mr. VLADECK. I think that is right, and I think that that is why

we seek to emphasize, Mr. Chairman, that——

Chairman THOMAS. I just want to make sure, as we have these

great liners about whom we are protecting in terms of changes,

that in fact the people whom anyone would define as ‘‘desperately

poor’’ are not going to be negatively impacted by anything we do.

Mr. VLADECK. No, sir, and that is why our concern focuses on

those who do not meet the Federal definition of poverty, but I believe by anyone’s view, they are certainly far from very affluent

and are primarily living on fixed incomes.

Chairman THOMAS. That is a fruitful area for working together

to make sure these folks are covered. But the ‘‘desperately poor’’

that I just heard about, whom someone is worried about, are already taken care of.

There is a large group of folks we need to be focused on, but I

do not think it is the desperately poor, since there is not $1 out

of pocket that they are going to be affected by.

Now, let me spend just a couple of minutes on home health

transfer, and you may not be able to give me the answer right

away, but we do need to understand the impact on both the part

A and part B in terms of the transfer.

I was under the impression that if you set aside—since, for budgetary purposes, the transfer does not affect the total reduction that

the President’s package has of $100 billion over 5, or whatever

CBO says OMB’s $100 billion over 5 is—if you did not do the transfer, the $100 billion of OMB recognized reductions would extend

the trust fund to about 2004.
19

Now, yesterday, the Secretary said that according to you folks,

it is only about 2002; is that correct?

Mr. VLADECK. That is correct.

Chairman THOMAS. And you agree with that?

Mr. VLADECK. That is correct.

Chairman THOMAS. I guess what we need to do, then, is see the

particulars of what the assumptions are regarding the baseline on

both A and B in terms of rate of growth, because we are going to

be asking CBO that question as well. I think there is reasonable

room for disagreement on how far we go, and the difference between 2002 and 2004, I think, is quite significant in a timeframe.

The administration has staked out a 10-year years-for-years’ sake

strategy in part, and my concern is, as you well know, primarily

on the programmatic change. Since 2004 is the last term of the

President who succeeds the current President, that seems to me at

least some kind of timeframe that would allow us to continue to

look at some changes. If it is only 2002 by your numbers, then we

need to partially rethink the way in which we are looking at

whether or not years-for-years’ sake is, in fact, a strategy that we

have to adopt, rather than wanting to adopt, to reach a particular

year.

Any of those kinds of assumptions and payouts would be helpful

to us.

Also, I do not know if you have calculated it this way, but you

have all the numbers, and we do not, and I would very much like

to have the answer to this question. You have decided that the part

B premium, contrary to current law, will be frozen at 25 percent

instead of going down to about 20.8, I think it is, in 2002. If you

freeze the premium at 25 percent and carry out your shift of 78 to

82, 2 billion over into the general fund, that will be borne 100 percent by general fund, so it is a new general fund obligation in essence. But you argue that the premium will be at 25 percent. Well,

if it is at 25 percent now, and you shift all of that money over to

the 100-percent side or the 75-percent side in the distribution,

what in essence would be the real burden between the beneficiary

and the general fund—because it certainly would not be 25–75. My

guess is it is pretty close to the 20.8, or 21 percent that would have

been the case if you had left current law in place.

Mr. VLADECK. I do not have that exact number for you, Mr.

Chairman, but we have the numbers you would need in order to

calculate that, and certainly by the end of the day today, we can

get you that number.

Chairman THOMAS. That would be helpful because rather than

say that in fact we are putting an extra burden on the beneficiaries

as opposed to current law, we are in fact by this switch not obligating them any more on a split than would otherwise be the case if

we did not transfer home health care.

Now, one other point in terms of this home health care transfer.

You folks have said it from day one when the Secretary held a

press conference more than 1 year ago; it was said yesterday, and

you have just repeated it again today—that what you are doing is

going back to a pre-1980 structure. And I guess what I will say is

that the only thing I can recognize as a pre-1980 structure is that

there is home health care on the part B side, because as you know,
20

the part B home health care pre-1980 was part of the premium and

the deductible, and you are not proposing that; you are going 100

percent to the general fund. But beyond that, I think I heard you

say that in terms of the part A, with the 100 visits, all that is being

transferred over to part B will be the current postacute home

health care.

Currently, that is being consumed at significantly higher rates by

many people than 100 visits a year—in fact, more than 20 percent

according to a 1994 statistical layout that you folks were kind

enough to provide us. Of those 20 percent who consumed more

than 100 visits, the average among those folks was 227.

This is a Social Security Act-related law December 1978, ‘‘Part

B Supplementary Medical Insurance benefits, section 1831. Section

1832. Scope of Benefits. Home health services for up to 100 visits

during a calendar year.’’

Do you propose to cape the home health care visits that you propose to transfer under part A to part B to make it, as you have

repeatedly said, like the structure pre-1980?

Mr. VLADECK. No, sir.

Chairman THOMAS. OK. If this transfer is not part of the premium, is not part of the deductible, and does not limit it to 100 visits how can—well, I know why you say it—how can you continue

to say this is like it was pre-1980?

Mr. VLADECK. Because, Mr. Chairman, we think there is a significant difference in the characteristic of the beneficiaries and the

characteristic of the benefit between those who are associated with

an immediately passed hospitalization, including post-acute services associated with hospitalization and beneficiaries who are admitted from the community into home health services. We think

these individuals have different needs, receive different services,

and therefore, they should receive different benefits.

With regard to the extent to which similarities outweigh or do

not outweigh the differences between what we are proposing and

the status of the law prior to 1980, there is a semantic distinction

which I would be happy to defer to you on, but I think the basic

distinction——

Chairman THOMAS. Dr. Vladeck, I will tell you it is not a semantic difference. The gentleman from California proposed a compromise here that was dollars and cents. The difference between

your proposal and the pre-1980 proposal is dollars and cents, number of visits and who pays what reasonable fair share of the program. It is not semantics; it is dollars and cents. It is programmatic.

And if in fact you are going to propose a transfer which will truly

be a pre-1980 transfer, then I think a number of people would be

more than willing to look at it. But as a pure grab for pure general

fund support for the fastest growing area in Medicare today, it is

very difficult for us to try to maintain a working relationship when

you absolutely refuse to recognize the fundamental dollars and

cents and programmatic differences between what was home health

care in part B pre-1980 and what you are proposing. Either you

recognize those, and we will deal with them, or it is going to be

very difficult to try to deal with this part A to part B transfer.
21

Mr. VLADECK. We would be happy to discuss that with you, Mr.

Chairman, and we need to do so, if I can put just one qualifier on

that, in the context of moving to a prospective payment system for

home health services in which the number of visits becomes less of

a driver of payment. But your point is well taken, and we

would——

Chairman THOMAS. Absolutely. We had a prospective payment

system for home health care as well as SNFs last time, as you did.

Neither one is perfect, but we have got to put some kind of an imperfect structure there and then continue to deal with it. And it

makes no sense whatsoever that visits are the driver.

Mr. VLADECK. Well, I think we need to have these two conversations together, and we look forward to having them.

Chairman THOMAS. Thank you.

The gentleman from California.

Mr. STARK. Thank you, Mr. Chairman.

Concerning your charts and your discussion on who is old and

who is poor and the percentages—I do not want to go into that

again—but I want to, if I can, Bruce, summarize some testimony

that we will hear in a little bit and see whether you care to comment on it.

Dr. Reischauer is going to tell us the President is prudent to expand the range of choice very cautiously; that under certain circumstances, HMOs, he is referring to here, could result in less and

not more choice. He goes on to say that ‘‘policymakers should not

wait until 2002 to begin ratcheting down the capitated payments

made to HMOs. A gradual phase down of possibly 2 percentage

points a year should begin in 1998.’’

Karen Davis is going to tell us that even if enrollment in managed care plans were to expand more rapidly, it would not yield

savings to the program. She says, ‘‘It makes little sense to overpay

HMOs and encourage Medicare beneficiaries to enroll, yet have the

program lose money on each beneficiary who enrolls.’’ Further, she

says, ‘‘Nor has the long-term success of managed care in controlling

costs while providing quality care to seriously ill patients yet been

demonstrated. Proceeding cautiously and slowly is in order.’’

Now, the worst probable thing is, she says, ‘‘It is important that

managed care plans be held to high quality standards.’’ A recent

study—this happens to be a JAMA study—finding that health outcomes of elderly patients worsened under managed care compared

to fee-for-service care are particularly troubling. There may also be

a significant down side to managed care enrollment that requires

beneficiaries to change positions. One of the Commonwealth Fund

studies suggested that retaining the same physician for a long period of time has had benefits.

Now, this is an area which I think will be discussed a great

deal—are we paying HMOs too much? Do you agree with the tenor

of what those witnesses will tell us later and what, if any, are the

dangers of not cutting HMO payments as the President suggests?

Mr. VLADECK. Well, let me say two things. The first is that,

again, on average, we believe we are clearly paying HMOs too

much. On the other hand, because of the enormous variation in

what we are paying from one county to the next and the variation

within one county from one year to the next, the average level of
22

the payment is not our only problem in this regard, and we need

to fix the various pieces of the system simultaneously.

The related issue there, and I think implicit in your question—

and it is really very important to us—I personally feel very strongly, and I think this is a fair characterization of the Administration’s view, that we believe there needs to be a level playingfield

in which the choice by a beneficiary of whether to elect a managed

care plan or a fee-for-service arrangement is a matter that is financially neutral from the point of view of the Medicare Program.

And then, over time, beneficiaries will choose the kinds of arrangements that give them the greatest satisfaction and the highest quality. If capitated plans are going to succeed, plans will need

to succeed by outperforming the fee-for-service community within

the communities.

At the moment, we do not believe the playingfield is entirely

level for several reasons, such as the way in which we pay HMOs

which is the most significant. On the other hand, we have been

very concerned with proposals in the past like many in the 1995

legislation that we thought would tilt the playingfield in specific directions.

The trick in doing this is to really try to achieve a way to save

money regardless of the choice the beneficiary makes and to make

that choice as open, uncoerced, and beneficiary-driven as we can,

and then to let the various kinds of service providers compete on

quality and customer satisfaction for enrollment.

Mr. STARK. Just two questions, quickly. Does current enrollment

in HMOs cost us more on average than the fee-for-service program,

and have you had any indication that the quality of HMO programs of care on average is as good, better, or worse than fee-forservice?

Mr. VLADECK. In answer to your first question, on average, Medicare loses money when people enroll in HMOs as opposed to staying in the fee-for-service sector.

Second, we do have a fair amount of data that on average, the

quality of care received by Medicare beneficiaries and HMOs is as

good as or better than the quality of care received in the fee-forservice sector.

We have two studies, however—one, the study that you cited

from JAMA, and the other, a study done for us by researchers at

the University of Colorado—that suggest that particular subcategories of Medicare beneficiaries with significant chronic care or

long-term care problems may fare less well qualitatively in managed care plans than they do in fee-for-service.

Mr. STARK. Thank you.

Thank you, Mr. Chairman.

Chairman THOMAS. Mr. Ensign.

Mr. ENSIGN. Thank you, Mr. Chairman.

Before I go on to my other questions, I want to address what you

said last because first of all, you were saying qualitatively—is that

a scientific study? Are you saying as a matter of fact that HMOs

provide worse care?

Mr. VLADECK. I am saying that insofar as anyone——

Mr. ENSIGN. You said ‘‘suggest’’——
23

Mr. VLADECK [continuing]. Is able to measure quality of care at

the moment, there are two studies—one that looked at specific

chronic illnesses, one that looked specifically at postacute care—

which are the best studies of those specific subjects currently available, which show that the quality of care provided to Medicare

beneficiaries and HMOs in those instances was inferior to the quality in fee-for-service.

Mr. ENSIGN. Do you think the number of senior citizens switching to HMOs—do you think seniors talk amongst themselves, in

other words, saying, Hey, do you like your HMO? Do you think

that that means anything to senior citizens?

Mr. VLADECK. Oh, absolutely.

Mr. ENSIGN. If they thought they were getting worse care, do you

think more and more seniors would continue to switch to HMOs?

Mr. VLADECK. Well, let me answer that in two parts. First, I do

not believe this is the case, and second, unless they regularly read

the Journal of the American Medical Association——

Mr. ENSIGN. I said talk amongst themselves.

Mr. VLADECK [continuing]. The availability at the moment of

good data about that is very limited.

Mr. ENSIGN. No. I was just talking about talking amongst themselves.

Mr. VLADECK. Our data show that most of our beneficiaries enrolled in HMOs are extremely satisfied.

Mr. ENSIGN. The only reason I asked that was because it actually

leads to another one of my questions. What percentage have you

assumed in your budget will be people who are going to be switching over the next 5 years to HMOs?

Mr. VLADECK. Yes. Our actuaries actually have a very complicated model that models enrollment growth in managed care

plans, and they have run the numbers both under current law assumptions and on assumptions of all the proposals in the President’s budget.

Mr. ENSIGN. Over the next 5 years under current law.

Mr. VLADECK. Over the next 5 years, and if I can find the page

in the book, I will cite those numbers.

Thank you. Good staff work. Our projections are—we are now at

about 13 percent. Our actuaries project that under current law,

total enrollment in managed care by Medicare beneficiaries in 2002

would be between 19 and 20 percent.

Mr. ENSIGN. OK.

Mr. VLADECK. But that under the President’s budget proposal,

total enrollment in 2002 would be about 22 percent.

Mr. ENSIGN. OK. The only thing I would suggest that you may

be just a little conservative on is seeing what has happened in

southern Nevada over the last 2 years. We have gone from pretty

high numbers, in the thirties, to now over 50 percent. I would suggest that seniors talk to each other, and they seem to be liking

some of the extra services they are getting from managed care. I

would suggest that you look at the numbers and, as managed care

becomes more available, those numbers might be just a little bit

low.

The second question has to do with your chart over here and the

8 to 21 percent. Secretary Shalala yesterday brought the same
24

chart, emphasized the same chart, and this seems to be like a revelation. That is kind of obvious, isn’t it, to anybody with any common sense?

In other words, when you have small children, you have higher

health care costs; when you get older, you have higher health care

costs; when you have kids going to college, you are going to have

higher education costs. Seniors have lower housing costs, is that

not correct—as a percentage of their income?

Mr. VLADECK. OK, but again, we are talking about—and here is

the distinction which I think is important—we are talking about

what Medicare insurance—this is only the out-of-pocket cost——

Mr. ENSIGN. Yes, I know. I know that. I know that. What I am

saying is that at different stages of your life, your market basket

is made up of different things. When you have small children, you

go to the doctor more.

Mr. VLADECK. That is correct.

Mr. ENSIGN. OK. When you are older, you go to the doctor more.

When you are going into college, you have higher educational expenses. At certain times, you have higher housing costs, you have

higher car costs, you have whatever. Seniors have a tendency to

have lower automobile and lower housing costs.

The point I am making is that that chart is meaningless.

Mr. VLADECK. Well, I would disagree for the following reasons,

sir——

Mr. ENSIGN. Well, let me put it this way. It is obvious; without

doing any research, that is an obvious chart.

Mr. VLADECK. But let me make one suggestion that 8 percent for

people under the age of 65 is relatively constant, regardless of family age or family structure for insured people.

Mr. ENSIGN. Sure.

Mr. VLADECK. That is to say, for Americans with health insurance, the out-of-pocket proportions tend to be the same throughout

the life cycle until they get to Medicare, at which point the limitations on the benefit compared to private health insurance cause

that number to shift.

Mr. ENSIGN. Well, it also might be that they get older, and they

do happen to get sicker as they get older.

Mr. VLADECK. That is absolutely correct.

Mr. ENSIGN. The last question, since Mr. Stark went over, if I

may indulge the Chairman——

Chairman THOMAS. The gentleman will yield.

Mr. ENSIGN. Yes.

Chairman THOMAS. That is not why you are getting the extra

time.

Mr. ENSIGN. Oh. Thank you.

Chairman THOMAS. It is because the Chair is indulging you.

Mr. ENSIGN. Thank you, Mr. Chairman.

The other question I would ask quickly is that I have noticed—

and this question was brought up yesterday—that your plan does

not address any kind of medical malpractice reform. Does the Administration feel there is not a problem?

Mr. VLADECK. I do not know that we have an official position. I

do think we do feel that——

Mr. ENSIGN. Do you as an individual?
25

Mr. VLADECK [continuing]. Our Social Security Act is not the vehicle through which to address problems of the tort system.

Mr. ENSIGN. As somebody who is an expert in the health care

field, do you feel there is a problem in the whole idea of malpractice insurance and malpractice lawsuits?

Mr. VLADECK. Let me narrow my answer if I may, because I have

a lot of lawyers in my family. Having looked at this issue for many

years, I do not believe that either the direct expenses associated

with the malpractice system nor the phenomenon of defensive medicine is a significant contributor to the cost of health care compared

to the cost of liability risks in most other enterprises in this society.

Mr. ENSIGN. So——

Mr. VLADECK. I do not believe that the absence——

Mr. ENSIGN. I guess you have not talked to the same doctors I

have talked to, because the doctors I talk to—and it has even trickled down to poor, old veterinary medicine—that we experience the

same kinds of things. I would just spend some more time talking

to doctors.

Thank you, Mr. Chairman.

Chairman THOMAS. I thank the gentleman from Nevada. I guess

what the gentleman from Nevada was saying is that we believe the

chart would be much more useful if you had 100 percent of income

on the under 65, 100 percent of income and what their out-ofpocket costs are for various activities, and I think it would be selfevident that the gentleman from Nevada’s point would be made

that there are different costs in different stages of life.

It still does not change the fact that that is the portion for the

seniors, but that in fact there are differences in terms of what occurs to people in different phases of life. That does not give you as

much information as you would like, and I understand I gave you

the information that you would like.

Mr. VLADECK. We would be happy to try to determine that for

you. I do not know that HHS maintains that——

Chairman THOMAS. No. It would be from somebody——

Mr. VLADECK [continuing]. But BLS does, I believe, or Commerce, and we will try to track it down.

[The information was subsequently received:]
26
27
28
29

for an indulgent 5 minutes.

Chairman THOMAS. The gentleman from Nebraska is recognized

f

Mr. CHRISTENSEN. Mr. Vladeck, the President has proposed in

his budget the diabetes prevention benefits similar to our bill last

year, H.R. 15. I was surprised to see in OMB’s scoring on the President’s budget that it was actually going to cost $1.4 billion.
30

We were under the impression last year, when we passed the

Medicare Prevention Benefit Improvement Act, that it actually

would result in a savings, and I was wondering if the savings in

your analysis of the budget that the President has proposed is

going to come in the outyears, or was it actually going to occur

sooner than that, so we can have a better understanding of where

the President is coming from on diabetes prevention.

Mr. VLADECK. I believe, Mr. Christensen, that this is the case.

I believe our actuaries estimate that—actually, I am sorry—I am

corrected by my staff. We do have a disagreement between OMB

scoring and CBO scoring on this benefit.

Mr. CHRISTENSEN. What is that?

Mr. VLADECK. Again, CBO has not scored this year’s proposals.

I do recall—you are absolutely right—that last year, if I remember

correctly, CBO suggested that the first couple of years of the benefit would cost money, but then it would begin to generate savings.

Our actuary has scored it as a very modest increase in cost, something on the order of $600 million, if I am reading my chart

correctly, over the 5 years of the budget.

Mr. CHRISTENSEN. CBO, or——

Mr. VLADECK. No. That is the OMB scoring. We do not yet have

CBO scoring of this year’s proposal.

Mr. CHRISTENSEN. So, $1.4 billion over the 5 years in terms of

cost?

Mr. VLADECK. No. We estimate about $600 million in cost over

the 5 years.

Mr. CHRISTENSEN. OK. It was my understanding that OMB had scored these as costing $1.4 billion over the next 5 years. Do your

projections show a savings anywhere, and why not a savings? It

was my understanding when we proposed it last year, and this is

the reason why I think the President is proposing it this year, that

there would actually be a savings through this diabetes prevention;

isn’t that right?

Mr. VLADECK. Mr. Christensen, I cannot speak to CBO scoring

either this year or last year; I can only tell you what our actuaries

have done, although I cannot tell you why. But I will tell you that

I am personally convinced that over a long enough period of time,

this benefit will save lives and save enormous human misery. And

whether it is a slight coster or a slight spender, quite frankly, is

the least of the issue to me.

Mr. CHRISTENSEN. Well, I guess my point is—and I would agree

with you, I think it is going to save lives, and I think it is going

to save money—but I do not understand how these actuaries sometimes work, and I thought maybe you could enlighten me.

Mr. VLADECK. I am afraid only within limits. I think part of the

issue as I understand it—and I do not want to overspeak for them,

and we would be happy to get you further information—as I understand it, many of the benefits from this program are anticipated to

arise from early interventions for which the benefits in terms of reduced expenditures for eye disease or for coronary complications

and so forth are way out into the future. But again, that is a layman talking about this, and we will try to get you some more information on the issues of scoring.

[The information was subsequently received:]
31

Over time, the diabetes prevention benefits will save lives and save enormous

human misery. According to HCFA’s estimation of the President’s 1998 budget proposals, the diabetes prevention benefits program’s projections are: Fiscal 1998 a cost

of 0.2 billion; fiscal 1999 a cost of 0.3 billion; fiscal 2000 a cost of 0.3 billion; fiscal

2001 a cost of 0.3 billion; fiscal 2002 a cost of 0.3 billion; fiscal 2003 a cost of 0.4

billion; fiscal 2004 a cost of 0.4 billion; fiscal 2005 a cost of 0.4 billion; fiscal 2006

a cost of 0.4 billion; and fiscal 2007 a cost of 0.4 billion. Totals: 5-year total is a

cost of 1.4 billion, and the 10-year total is a cost of 3.1 billion.

Mr. CHRISTENSEN. I have one other quick question. Last year, we

had an opportunity to use outside accrediting boards to survey, certify, and propose some of the guidelines for nursing homes. Frankly, some of those outside certifying boards use tougher standards

than HCFA has used. What is your position on this, and do you see

HCFA moving more toward using outside accrediting boards, or are

we going to keep it in-house?

Mr. VLADECK. Let me phrase that question into two, if I may.

Our 1996 appropriations accelerated the process for recognizing

such—the term we use is ‘‘deeming’’—such outside agencies for everything but nursing homes. Since that law was changed, we have

had new private agencies deemed for ambulatory surgical centers,

but we have not seen any great rush of volunteers.

On nursing homes specifically, we owe the Congress a report by

July 1 of this year as a result of that appropriations bill, which will

review the whole issue of private accreditation of nursing homes.

We will meet that deadline. I cannot yet tell you everything that

is going to be in the report, but we will have a report to Congress

by the end of June on that subject.

Mr. CHRISTENSEN. I am out of time. Thank you, Mr. Vladeck.

Chairman THOMAS. The gentleman from Maryland.

Mr. CARDIN. Thank you, Mr. Chairman.

Dr. Vladeck, welcome. Following up just very quickly on Mr.

Christensen’s point, it is difficult for us to understand the dramatic

changes in some of the scoring between last year and this year, the

diabetes test being one. We understand we do not always agree

with the actuaries, but it is disheartening to see such a radical

shift in a 1-year period, and I would also appreciate seeing some

of those projections of how they were arrived at.

I also want to compliment you on the emergency care within

Medicare, using the ‘‘prudent layperson’’ standard, your recommendation to do that. That is certainly encouraging.

I want to talk a little bit about the home health care switch. Secretary Shalala was here yesterday, and I certainly agree with her

point that we do not want to increase the burden on our seniors

as far as their already high out-of-pocket costs, and I also understand the shift of the home health care services into part B and believe that makes sense.

But I am wondering whether there would not be a more efficient

way to deal with the out-of-pocket costs of our seniors, and rather

than take the home health care cost out of the part B premium,

couldn’t there be a more efficient way to deal with those seniors

who have high out-of-pocket health care costs or lower income and

use that money in a more directed way than to just change the policy and reduce the premiums for all our seniors?

Mr. VLADECK. Let me attempt to respond to your question, Mr.

Cardin, and if this is not totally responsive, I am sure you will let
32

me know. The general issue of the relationship of total out-ofpocket expenditures, premiums, deductibles, copayments, to income

and use of services is very close to the other question that has been

raised by Members on the other side of the Hill with us yesterday

about whether the general structure of deductibles and copayments

in the Medicare Program in the aggregate makes any sense.

Deductibles and copayments were grouped together in 1965. These

structures originated in two very different sets of proposals.

I do believe that—and I know that Dr. Davis, among others, has

advocated for a long time that we rationalize the whole structure

of copayments, deductibles, and coinsurance within the Medicare

Program. This approach would also permit us to consider the relationship between income and beneficiaries’ ability to pay.

We would support careful consideration. Let me just conclude my

response very quickly by putting in a plug on my favorite subject.

At the moment, we could not—the Health Care Financing Administration, Department of Health and Human Services—could not administer such a revised program because we do not have the data

processing capability to merge A and B data. When MTS, Medicare

Transaction System, is up and running very early in the next decade, it will be technically possible to do this much more easily. It

would probably be good public policy to move in this direction.

Mr. CARDIN. Yes. I understand that, and I understand the problems there. I would just urge you to consider, as well intended as

the policy is to keep it out of the premium base, that that could

become a difficult or dangerous precedent for the future as we look

at modifications in the Medicare system, if we start going down

that road of saying it is not part of the premium base.

I would urge us to try to look at other ways to deal with our seniors and out-of-pocket costs.

I would make one point. If we do not make this transfer, the

amount of cuts that would be necessary to achieve the type of solvency in the Part B Trust Fund would be significantly greater.

Have you analyzed what you would have to do if you did not make

this transfer?

Mr. VLADECK. We have not analyzed it in detail because, as you

know, part of the problem with trust fund solvency is not only the

5-year aggregate, but it is the year-by-year effect.

I would say that the simple rule of thumb here is that our proposed reductions in part A spending in the President’s budget over

the 5-year period are about $78 billion. The proposed reduction in

part A outlays due to the reallocation of home health over the same

period is about $82 billion.

In order to get the same trust fund effect of transfering the home

health expenditures, you would need to roughly double the level of

part A provider cuts that are called for.

Mr. CARDIN. And what impact do you think that would have?

Mr. VLADECK. I think that would then be very significant. We are

talking about $60 billion for hospitals over a 5-year period of time.

Again, these are rough numbers which are not precise. We are

talking about almost $30 billion in cuts in payment to home health

agencies over a period of time. We are up into the 25- to 30-percent

range in reductions at the end of the budget window, which gets

us to a level of reduction that would cause me very great concern.
33

Mr. CARDIN. Thank you.

Thank you, Mr. Chairman.

Chairman THOMAS. If the gentlelady from Connecticut would

yield for just one moment, Dr. Vladeck, I appreciate the questions

and answers that just went on, but this is a direction that now appears to be a strategy rather than a series of questions from various individuals.

If we are going to go forward on a bipartisan basis, you cannot

take credit for the policy changes that have been put in place and

brag about how you do not have to find as much money because

of what has already been done, then propose policy changes and

look forward and not take those into account by doing more of the

policy changes which will produce a shorter path that we need to

travel. But rather build these strawmen about how much has to be

done. If that is what you are doing, that is a clear condemnation

of the President’s plan because it is just years-for-years’ sake and

dollars for dollars’ sake to buy those years and not heavy enough

on programmatic changes.

One of the reasons I am concerned about how many years we get

without the transfer is that if we do have 6 or 8 years, and we get

serious about policy changes—if you have seen that new commercial on television about surfing the web, where the highway turns

into a wave, and it rolls—we will have a policy wave in front of us

that will buy us those years that you folks just, in a very partisan

way, cutely talked about the massive cuts that would have to be

made.

If we quit talking about cuts and start talking about policy

changes, then you are going to have that programmatic wave in

front of you, and it will buy years on a year-by-year, policy-change

basis.

If you continue, every time we are sitting in on these hearings,

to build these strawmen about how much we are going to have to

cut, then I am going to start talking about how much you are condemning the President’s program, because there is not enough policy change to build the ability to move forward on change.

We are trying to force a policy change so that we can do just

that—make sure we do not have to find as many cuts in the future.

If you are just cutting for cutting’s sake to buy years, which is

what I believe the transfer is, then there is no question the dialog

you just had is a reality. But, it is a reality because of the President’s program and the failure to find policy change rather than

the kinds of cuts you are talking about.

Let us rededicate ourselves to finding those policy changes that

will negate the necessity for this kind of partisan strawman building in terms of phoney arguments about what cuts are going to

occur in the future. OK? [Laughter.]

Mr. VLADECK. I was just trying to be responsive to a question

from the gentleman.

Chairman THOMAS. I understand you were trying to be responsive, and I want to put it in the context in which we are going to

deal with those kinds of questions and those kinds of responses.

The gentlewoman from Connecticut.

Ms. JOHNSON. Mr. Vladeck, thank you for being here this morning. Your testimony combined with the Secretary’s testimony yes-
34

terday raises many, many questions. This is an extremely important year for Medicare, and our work together has to be very fruitful. We have lost 2 years on the project of making Medicare sound,

so we have made our problem more complicated; and indeed if we

fail this year, it will be a catastrophe for the seniors of America.

I would simply point out in followon to my Chairman’s comments

that in the Republican bill—and I think this is really important,

the context—in the Republican bill, we tried to provide very generous premiums so that we would encourage the competition of the

private sector, offering better benefits than Medicare offers, and

then we slowed the rate of spending growth by slowing the rise in

those premiums and in other reimbursement rates, and we did it

gradually.

Now, I think that that is very, very important because in your

proposal, you are proposing very significant changes in the reimbursement rates for HMO risk contracts. In fact, of your $100 billion in savings, $34 billion comes from the changes in reimbursement rates for Medicare risk contracts, and yet only 12 percent of

Medicare beneficiaries are in those contracts. You are hitting that

sector of the Medicare delivery system disproportionately. In fact,

as I would describe it, you would dramatically alter the Medicare

payment method for HMOs.

Have you done the county-by-county analysis? When will we

know the county-by-county figures?

Mr. VLADECK. I would hope, Ms. Johnson, that we would have

the county-by-county figures for you next week. We have a preliminary run, and we are doing the proofreading and validity checks

on those now.

Let me commit that if we do not get them by 1 week from today,

by the very beginning of the following week, you will have them.

Ms. JOHNSON. Yesterday, the Secretary said that the aggregate

reduction would be about 5.3 percent. I just want to point out the

depth of my concern. In 1995 the rate in King’s County, New York,

would have decreased by $124, or 19.2 percent, per member per

month if teaching and DSH payments were removed. Now, it is one

thing to take away direct teaching payments for the purpose of reformulating how we fund medical education, but DSH payments

are another issue. That would have been a $1,488 reduction per

year for each DSH beneficiary enrolled in an HMO risk contract.

Mr. VLADECK. Ms. Johnson, our proposal would prevent that.

Under our proposal, no county in the year 2000 will receive a reduction in its rate of more than 3 percent, and in the other years

of the budget window, no county may receive a reduction from one

year to the next at all. So——

Ms. JOHNSON. Wait 1 minute. The Secretary said yesterday that

the reimbursement rates to HMO risk contracts would be cut 5 percent. I consider that a reduction.

Mr. VLADECK. Yes, ma’am, but we also have on all the other

things—this is complicated because of all the things going on at

once—but we cut the national rate on average by 5 percent, we are

phasing in this geographical shift, so there is an offset associated

with that, and the way the bill is constructed, in 4 of the 5 years,

none of the rates in any county will go down. In the year 2000, the
35

rates in a number of counties will go down as much as 3 percent,

but not any more than that.

Ms. JOHNSON. But you are saying that until the year 2000, the

rates will not go down?

Mr. VLADECK. That is correct.

Ms. JOHNSON. I do not understand how the rates cannot go

down, and the Secretary can say the rates on average will go down

5 percent.

Mr. VLADECK. The rates in the year 2000 will go down——

Ms. JOHNSON. No, no. She said the HMO risk contracts starting

this year will be reimbursed at 90 percent instead of 95 percent.

That is a 5-percent cut. Then, in the year 2000, additionally and

on top of that, there will be a 5-percent reduction, and if the budget

does not balance, 2.2 percent on top of that.

Mr. VLADECK. No——

Ms. JOHNSON. Under nothing the Secretary said yesterday was

there any indication at all that there would either be a hold harmless or any freezing of current rates, and in fact if you apply her

formula to Cook County, Illinois, the 1995 rate would have decreased by $51 or 10.4 percent per month per member.

I do not know how you can tell me it is not going to go down,

and you are going to hold everybody harmless and make the savings that the Secretary said you are going to make because you are

going to reimburse at 90 percent instead of 95 percent.

Mr. VLADECK. Well, let me just suggest that, again, on a yearto-year basis, all other things being equal, the rates go up by the

average rate of increase in fee-for-service costs.

Ms. JOHNSON. I hear what you are saying, I hear what you are

saying. You are saying rates are not going down because the rate

is going to stay the same; you are just going to take medical education and DSH out of it.

Mr. VLADECK. No, it is more complicated than that, Ms. Johnson.

There are four things going on simultaneously. We have a phased

renewal of the medical education and DSH components. We have

the geographic equalization and the application of the floor, and we

have the reduction in the year 2000 from 95 percent to 90 percent

of AAPCC.

Ms. JOHNSON. OK, let me just stop you right there.

Chairman THOMAS. Let us hear the fourth one; what is the

fourth one?

Mr. VLADECK. And the fourth one is we have the hold harmless

built into the formula as well.

Ms. JOHNSON. Now, wait 1 minute, wait 1 minute. This is unbelievable. You cannot hold harmless if every factor in your formula

hits the—Connecticut has some of the poorest cities in the Nation,

with big DSH payments. You take away the teaching hospital component from the nonteaching hospital, but one that still serves poor

people; you phase out the DSH payment; you do the equalization,

which is going to hurt New England because New England is high

cost—we get, by your standards, overreimbursed, so we are going

to get a cut under that—and I have forgotten the fourth one, but

that will hurt us, too. What is the fourth one, again?

Mr. VLADECK. The overall reduction in the AAPCC.
36

Ms. JOHNSON. Oh, yes, the AAPCC; that will hurt New England.

Do not sit there and tell me you are going to make these four

changes and save the money from them, but you are going to hold

us all harmless. We will get into this in more detail, I am sure, as

we go forward, but I can tell you——

Mr. VLADECK. We would be happy to walk through the illustration in any particular county with you.

Ms. JOHNSON. OK. Your answers raise far more questions than

they answer, and I will just remind you that we did do the calculation for two of the Nation’s biggest innercity hospitals, and the result was a 10.4-percent cut in rate in one and a 19-percent cut in

rate in the other, and that is just for starters; that does not reach

2000.

Mr. VLADECK. But we have looked at these for the Bronx, Ms.

Johnson, which is very close to my heart, and the fact is that if you

apply all of the provisions in the bill over the 5 years of the budget,

the Bronx receives about one-half the rate of increase that it would

under current law, and still the payment rate in the year 2002 for

HMOs in the Bronx is higher than it is in 1998 under our proposal,

and we would be happy to walk through all the specifics of that

with you.

Ms. JOHNSON. We will certainly have to walk through those details, because the way the material is presented in your testimony

and what was referred to by the Secretary does not indicate any

of those facts to be true.

I also want to go back to the contrast between the way we dealt

with the need to slow the rate of growth. Remember, the First

Lady sat here in this very room and testified in 1993—we are now

into 1997, 4 years later—to the effect—and she was absolutely

right, and to her credit and to the President’s credit, they both got

out there and talked about this when they were, frankly, young,

naive, and I guess more honest—but she sat there and said we

have got to slow the rate of growth in Medicare.

Now, the best way to do that for the system is gradually but

firmly. In your budget, a third of your savings comes in the very

last year, 2002. Now, you know us well enough to know that we

cannot save one-third of the savings in the last year. It is not possible. So you are bankrupting Medicare. Don’t you get it? You can’t

put out a program that is not going to save Medicare for America’s

seniors. And when—we have to win this time. We lost 2 years. It

was 4 years ago that the First Lady sat here. We have got to be

honest this time, and one-third of the savings in the year 2002 is

not honest.

Let me go to some more particulars——

Mr. VLADECK. Ms. Johnson, may I say something to that point?

Ms. JOHNSON. Yes.

Mr. VLADECK. If you take a program that is growing at a rate

of 8 to 10 percent a year, and you take level cuts across the 5

years, you will get more than 35 percent of your savings in the fifth

year. That is the simple arithmetic of the way we do budget scoring

and the way that savings work when you are saving off a growing

baseline.

Ms. JOHNSON. I hope you are right, and I certainly would be open

to the figures because this is real, we have got to get it right this
37

time, and we are going to have to spend a lot of hours in the seminar form so that we really do understand it.

Off the top of my head, I am disappointed in my mind and heart.

I intend to work with you to get a good plan that I can be proud

of and you can be proud of, and we can tell our seniors we put this

program back on track.

I have some specific questions, but there will be another round.

Thank you very much.

Chairman THOMAS. Thank you.

Dr. Vladeck, I think this underscores the fact that we need the

legislative language as soon as possible. You were able to cite the

Bronx in terms of the adjustment of the four categories that you

named; we are not. And I am not going to hold these hearings so

you guys can go back and change your program to try to make sure

the errors that may be in it, at least the ones we have touched on,

will be corrected by the time we get it.

I will tell the gentlewoman from Connecticut that what she does

not understand is, and what I believe we will find in the legislative

language is, that all the subtractions occur and then, after those

subtractions occur, there is a hold-harmless provision that is put

in for the rest of the time. In other words, after the furniture is

removed, after the house has burned down, then the policy kicks

in in terms of a hold harmless. If that is not the case, then we certainly need to see the legislative language, because if you have four

separate components interacting from day one, we have got to look

at the legislative language to understand it. It will save both of us

a lot of wear and tear as we try to maintain the bipartisan cooperation as we go forward, because listening to you, we do not understand what you are proposing. Give us the legislative language,

and then we can have a more fruitful discussion.

Mr. VLADECK. As soon as we can.

Chairman THOMAS. I understand.

The gentleman from Louisiana.

Mr. MCCRERY. Thank you, Mr. Chairman.

Dr. Vladeck, before I get into some of these areas that I want to

talk about, I want to compliment the administration for coming up

with a plan that does have some tough decisions in it—it was not

easy for you to create this proposal—so in some respects, I think

we should say thank you for at least coming forward with some

specific proposals to create savings in the Medicare Program.

Having said that, let me address the malpractice question for

just a second. I do not want to let your characterization of malpractice costs in the system be the final word here because I think

you are seriously in error.

I am a lawyer, and I certainly am in favor of a strong liability

system in this country. However, I think the way the liability system in this country is currently structured, particularly with respect to the health care field, it lends itself to some mischiefmaking, and mischiefmaking in the health care field leads to higher costs.

Now, you say that you do not personally believe it is a significant

factor in rising health care costs. You may or may not be correct.

There are those who disagree with you. Two studies have recently

been included, in fact, say just the opposite. The American Acad-
38

emy of Actuaries studied specific reforms in States and found that

in those States that have undergone serious medical malpractice

reform, the malpractice liability premiums are significantly less

than those States that have not undertaken those reforms.

Also, David Kessler and Mark McClellan of Stanford University

recently concluded a study in which they also looked at States that

have undertaken medical malpractice reforms and found that indirect costs in those States have been significantly less than in

States that have not undertaken medical malpractice reform. In

fact they conclude that the Medicare system in this country could

save up to $600 million a year on heart disease alone if we put reforms in place.

I think there is significant evidence out there that your conclusion is in error, and even if it is not a big cost driver, it certainly

is a cost driver. And if we are going to solve the problem of escalating health care costs in this country—and I think we ought to try

to do that as best we can, and it is so complex that none of us really want to try to get our arms around it—but we are going to have

to try, and if we are going to do it, we are going to have to attack

not only the big cost drivers that we all agree on, but maybe some

of the less significant cost drivers. We are going to have to do the

whole thing.

I would encourage you to take another look at your family members’ opinions on medical malpractice reform.

Next, I just want to say a word—and it has been beaten to death,

I guess—on the premiums and the shift from part A to part B. I

really encourage—and I asked the Secretary yesterday—I really encourage you to take a second look at your decision not to include

those costs in the calculation of part B premiums. The financing

structure of Medicare is not perfect, but at least it does instill some

sense of discipline in the system. You do have some recognition of

the costs on the part of seniors because of their out-of-pocket costs

and because of their premium costs, and to the extent that you

lessen that, you are going to lessen this panel’s ability and future

Congress’ to control costs.

And just out of curiosity, have you figured out what the premium

increase would be if you included those costs in part B, in the calculation?

Mr. VLADECK. Yes, sir, we have.

Mr. MCCRERY. What would that be? What would it increase the

premiums?

Mr. VLADECK. I have to find the right piece of paper here. In

1998 it would be an increase in the premium of about 18 percent,

or about $8.50 a month, $100 per year, roughly. In 2002 the percentage would come down, and there would be an increase in the

premium of about $11 a month, or about $120 per year per beneficiary.

Mr. MCCRERY. OK. Thank you.

I agree with Mr. Cardin that rather than just take a blanket approach, maybe we ought to look at some specific way to help those

seniors who are on the edge of poverty. I think that that would be

a much better approach to solving their problem.

Mr. VLADECK. I think I have heard that message from both sides.
39

Mr. MCCRERY. Good. One last question on the matter of graduate

medical education. As you know, we proposed last year to essentially go to a broad-based financing structure for graduate medical

education. Does your administration proposal include anything on

that?

Mr. VLADECK. We do not, sir, very frankly, because we have not

been able to identify in the context of this year’s budgetary process

a source of contributions which is a more broadly based mechanism

than Medicare’s payments.

We continue to believe that in principle, the kind of trust fund

which emerged from this Subcommittee and was included in the

1995 legislation, has a lot to be said for it as part of the long-term

approach to financing graduate medical education. There are a

number of issues associated with the trust fund that will still need

to be worked out and I think are very troublesome, but the real

issue in the accounting sense is not the uses part of the trust fund

design, rather it is the sources part. We have not in the current

environment, other than what Medicare is now spending, been able

to identify other sources of revenue for this trust fund, and therefore, have not proceeded with a proposal along these lines.

Mr. MCCRERY. Generally, though, do you agree that a broadbased approach to financing it would be superior to the approach

we have now?

Mr. VLADECK. Absolutely, yes, sir.

Mr. MCCRERY. Thank you.

Thank you, Mr. Chairman.

Chairman THOMAS. Dr. Vladeck, it just astounds me that you

would move a specific benefit for a particular person to the general

fund, the home health care transfer, and you would not take something that has a broad-based societal benefit like graduate medical

education and look for it from that broader general fund. It is the

kind of concern the gentleman from Louisiana and I share in terms

of the real logic of working our way out of a 1965 A–B box. What

you are doing only gets us deeper. We are looking for ways to try

to figure out a rational use of general fund money for a broader societal benefit.

Mr. VLADECK. Mr. Chairman, if I could make an observation, I

think that that is a commentary on some of the ways in which all

of us act as a result of the Budget Enforcement Act and the way

we define some of these things. I think that in some aggregate

sense, you are absolutely right that in fact what we are doing on

home health in accordance with the budgetary rules under which

we all operate, has no net effect on the Federal deficit, whereas the

creation of a trust fund, however, as wise a policy as it might be

under current budgetary rules, would have a very different kind of

consequence. I share your frustration about some of the constraints

that these rules impose on us.

Chairman THOMAS. All of us should struggle to deal with reality

rather than the virtual reality of the budget rules.

It is my pleasure to yield now to the newest Member of the Subcommittee, the gentleman from California, Mr. Becerra.

Mr. BECERRA. Thank you, Mr. Chairman. I am looking forward

to working with you on these issues.
40

I thank Mr. Vladeck for being here as well and look forward to

continuing to work with you. I appreciate the work you have done

in helping Los Angeles County cope with its health care problems.

Let me ask you about a couple of issues that relate mostly to

public hospitals. Obviously, Los Angeles County, with its recent experience, is trying to come up with a different way of providing

health care to its indigents and has been searching for ways to try

to cut costs. And I know you are doing things on DSH—can you

give me a better sense of how you are going to provide a formula

that will better target DSH dollars toward those hospitals that are

absolutely providing that care versus hospitals that at some point

do provide some of that care, but the bulk of it is going to those

public hospitals and those charitable hospitals that are in low-income areas?

Mr. VLADECK. This is one of the areas of the President’s bill, sir,

where I think some of the concerns about not yet having all the details available are relevant because—although I cannot answer

your question very well—on this issue in the Medicare Program,

frankly, we have proposed something of a punt. We are very much

concerned that merely by the effect of the changes in welfare reform, our ability to measure disproportionate share services or uncompensated care services in the way it has been defined in Medicare over the last decade or so is substantially weakened. We need

a much better way of measuring disproportionate share and targeting it for both Medicare and Medicaid, and frankly, we do not have

the answer to that at the moment.

What we do propose in the legislation, therefore, is that essentially, we freeze the level of DSH funding for the Medicare share

for all hospitals for 2 years and require the Secretary to make an

additional recommendation back to the Congress on how to fix and

improve the formula.

I have proposed to my colleagues that we write the legislation so

that the onus for a new formula was not on us, but that we assign

that responsibility to the Prospective Payment Commission or

someone else, because it is very difficult to do. However, we were

not able to totally get ourselves off the hook.

I guess that is a long answer to the question to say we know that

we have a problem—we have had a problem for a long time in the

best way to measure and target DSH dollars. This problem is significantly exacerbated by changes in the income maintenance systems for low-income people which were the heart of the measurement process for DSH in the past.

We need to come up with a new way to measure and target. We

need to mandate on ourselves in the statute the need to come up

with a new way, but we do not have it yet.

Mr. BECERRA. That AAPCC carve-out that you are making for

DSH and graduate medical education and so forth, those hospitals,

do you think you are headed in the right direction trying to pull

out the dollars you need for that? With this welfare bill that recently was signed with the growing tendency toward managed care,

how do public hospitals that are also teaching hospitals survive?

Mr. VLADECK. I think that is a very real issue. What we have

proposed—I know I am getting near jurisdictional turf here—but

what we have proposed on the Medicaid side, for example, is actu-
41

ally a reallocation of some of what have been Medicaid DSH dollars

to safety net institutions. Because of concern with the growth of

capitation in both Medicare and Medicaid, some of the subsidies

which we have built in in the past for these institutions are endangered, as HMOs steer their patients to other kinds of providers.

With regard to Medicare, we believe that if we pull the money

out of the capitation payments, and if we can obtain a better measure to target these dollars, we can do what we can to address this

problem. The Medicaid issue also requires more targeting.

The other problem is that many hospitals like hospitals located

in Los Angeles County, which are major academic centers and

major providers of services to low-income people, have a relatively

small share of their business on the Medicare side, so that the ability to help these hospitals directly through the Medicare Program

is somehwat constrained.

When I was a trustee of the public hospital system in New York

City, we kept talking about Medicare rate enhancements, because

we did not have many Medicare patients. I think that that is why

a trust fund sort of direction, in which we pool sources from all

payers and reallocate funds based on the nature of the program or

the nature of the services being provided is where we need to go

as soon as we can figure out how to do it.

Mr. BECERRA. But doesn’t the trust fund still leave, in effect, the

possibility of having an inequitable formula that ultimately drives

dollars in the wrong direction and constantly causes you to have

to turn to a trust fund, which will probably have to grow and grow

and grow?

Mr. VLADECK. Well, the fundamental problem is a twofold problem in that we have a large and growing number of people in the

United States without health coverage at all, and as we try to reduce the expenditures on both public and private health insurers

for people who do have coverage, the ability to subsidize the services for the uninsured is getting increasingly strained. I think that

that is why, again, over time, in the longer term, we have got to

get to the root cause of this problem, which is the growing number

of people without health insurance, and address that issue.

Mr. BECERRA. If I could add just one last question, there are all

sorts of ideas floating around these days on how you can try to

get—I guess the estimate is 10 million children who do not have

health insurance—some folks are talking about some form of tax

credit for kids that goes to a family so they can afford to get their

kids into some kind of program.

I know the Secretary mentioned that her program would bring

in an additional 5 million children under some form of health protection. I was wondering if you could tell me how you plan to do

some of that outreach that apparently is going to bring in 1.3 million children just through outreach. I am interested to know what

is so new and novel that we have not done or known about that

is going to get us 1.3 million more kids into the system.

Mr. VLADECK. We are just starting to meet with the Governors

and some of the public health agencies and so forth to work on

that, but my own sense of it is that the opportunities we are missing—we have a pretty hard number that there are about 3 million

children in the United States at the moment who are legally eligi-
42

ble or entitled to Medicaid, but not enrolled, and that is the target

population for trying to enroll 1 million to 1.3 million children.

I think that if you want to enroll children, then you go to the

schools, and for children below the age of 5, then you go to the preschool arrangements. We are expanding Head Start, and we are expanding subsidies for child care, so that increasingly we will know

where they are in that sense.

In the past, individuals operating these services may or may not

in a pro forma way have worried about the coverage of the children

they were serving. However, I think that this is going to be where

a lot of this action occurs in the short term. Just as we have used

the schools as a vehicle for seeing that at least by age 5 or 6, children are immunized, it is the vehicle through which we have got

to see that children who are potentially eligible for health insurance get it, and I think that that will be the primary focus, at least

at the outset.

Mr. BECERRA. And if I could just encourage you, as you try to get

the local governments to focus on how they can try to help you capture these kids, to think about where you are going, these areas

that you are going, and look at the demographics, and if you ask

folks to be a little bit more linguistically and culturally sensitive

to the areas where they are traveling, they will probably have

much more success in capturing some of these kids.

Mr. VLADECK. No. We cannot do this from Washington or Baltimore. This has to be done on the street. We understand that.

Mr. BECERRA. Thank you.

Thank you, Mr. Chairman.

Chairman THOMAS. Certainly.

Bruce, yesterday, I asked the Secretary when she was in front

of the Full Committee about the operational policy letter that is

going to be issued or which has been issued, clarifying for Medicare

managed care plans the requirement that outpatient mastectomies

or lymph node dissections not have a fixed maximum length of stay

in the hospital for inpatients. I believe the letter says that these

kinds of decisions ‘‘are better made by the patient and her physician after assessment of the patient’s individual circumstances.’’

And I know the American Cancer Society has said that under certain conditions, an outpatient procedure is entirely appropriate for

mastectomies, but always referring back to the patient and the

physician decisionmaking structure.

I tried to get the Secretary to explain to me—and it is very tight

in the 5 minutes we have in that kind of Full Committee structure—what the purpose of the issuance of that operational policy

letter was in contrast to the President’s stated position in his State

of the Union Address of supporting the DeLauro legislation and

other legislation of that type, which would require a specified hospital stay. And she did not really have enough time to explain it.

She was talking about the fact that under Medicare, we have the

ability to do certain things versus other areas.

What is it that you did—for example, my understanding is that

this letter was addressed just to the managed care HMOs. Does the

letter go to fee-for-service as well, or not?

Mr. VLADECK. No, Mr. Chairman. There needs to be another series of letters addressing this issue on the fee-for-service side, and
43

the process of generating these letters is underway. We are probably 1 week or so behind because that is a more cumbersome process.

Chairman THOMAS. Here is my problem, and I am trying to be

as objective as possible in looking at your responses, because frankly, I think HCFA and Medicare have served a useful purpose in the

last year or so about issuing directives that were reasonable and

appropriate—and notwithstanding the gentleman from Maryland

applauding you for your emergency care definition of a ‘‘prudent

layperson,’’ while your definition of a ‘‘prudent layperson’’ is significantly different than his definition—I do not know whether it is the

‘‘prudent’’ or the ‘‘layperson’’ that is the significant difference—I do

think your proposal helps bridge the gap between us.

When organizations align themselves with your declarations, we

do have to see if in fact it filters down to actual behavior change,

performance change and standards. But you have offered, I think,

a way out of this business or the penchant or the recent desire to

lock into legislation practices that really should be left to, in my

opinion, and I think a lot of peoples’, physicians and patients.

As I looked at the directive that just went out to managed care

plans on mastectomies, we looked around for some statistics in

New York State because they do a good job—I am sure you had

some part in making sure that that data was collected. For example, in 1995, there was a total of 7,016 mastectomies. Of that 7,016,

6,892 were inpatient, or 98 percent. Of the 2 percent that were not,

the 124 that were outpatient, the mastectomies performed under a

Medicare HMO as an outpatient were 2.

I am just wondering why you were—and if this is replicated

across the country, I am sure the numbers might adjust here or

there—but 2 out of 7,000 in the State of New York versus the feefor-service number would seem to me that when you deal with

issuing these kinds of directives, you might focus on where ‘‘the

problem is,’’ notwithstanding the bureaucratic difficulty of generating it because, quite frankly, when you put this out, there was

enormous press generated, and to be as objective as I can be, it

sure made it look like the HMOs were in the rip-off business, and

that they did not have quality medical standards and that you

folks had to go after them. And here I am looking at 2 out of 7,000

mastectomies that you are going to clean up with the directive that

you sent out in the State of New York, and we are trying to compile data countrywide.

I liked your earlier level of performance and objectivity. I do not

know why and how this was driven to be sent out when it was. But

if you were going to have a fee-for-service directive going out, it

might have been wise to hold both of them and release them at the

same time.

Mr. VLADECK. I think that point is well taken, Mr. Chairman,

and I would acknowledge that we should have had both letters

ready to go simultaneously; you are absolutely correct.

Chairman THOMAS. Now, just let me say also—I know you are

going to do it as soon as you can—but we have a hearing scheduled

for February 25 with ProPAC and a number of actuaries, looking

at the whole question of the AAPCC and how we might revise it.
44

If we could get those county-by-county numbers before then, it

would be a lot more fruitful.

Mr. VLADECK. You will have them, you will have them. Again,

you will have them no later than the Friday before, but I hope you

will have them earlier than that. We would not want Dr. Kahn and

others to work over the weekend on that, so we will try to get it

midweek.

Chairman THOMAS. Thank you. At the very least, the 48 hours

we talked about.

Mr. VLADECK. At the very least.

Chairman THOMAS. Thank you.

The gentlewoman from Connecticut.

Ms. JOHNSON. Thank you, Mr. Chairman.

As the hospitals have been under more pressure, Mr. Vladeck,

most of them have included their staffs to a far greater degree in

meeting the challenge of reducing costs, and as the staff has focused more on how the hospital operates, they have become far

more critical of how Medicare operates. I want to throw out a couple of little things that I would ask you to get back to me on.

For example, the requirements under Medicare for Neupogen in

the treatment of cancer. According to the physicians in one of my

hospitals, instead of it costing $900 a course, it could be down to

$100, if we would allow them to just write a prescription and deal

with it in a simpler fashion. I will be getting back to you on that.

Those little things are very distressing, when people can see that

we have pushed the costs up 90 percent.

In mammograms, if a senior wants to have an annual mammogram, although Medicare only provides it every other year, and is

paying for it herself, Medicare requires she sign a waiver of liability under part A and a waiver of liability under part B. Now, first

of all, this is more paperwork for the hospital. It takes time to explain this all to the senior, and it scares the senior, when in fact,

Medicare has absolutely nothing to do with this situation, we do

not cover annual mammograms, and the mammogram the person

is buying, they are paying for.

I would like HCFA to review that policy and I would hope repeal

it, but certainly I would like to hear from you on that requirement

because for small hospitals, that is significant.

[The following was subsequently received:]

The President’s fiscal 1998 Medicare budget proposals include provisions to expand Medicare’s coverage of mammography screening for beneficiaries age 65 and

over. This expanded coverage would be effective for services provided on or after

January 1, 1998. Current law already provides coverage of annual screening mammograms for women ages 50–64, and those at high risk, ages 40–49. Screening

mammograms for women age 65 and over are now covered only biennially, even

though breast cancer mortality increases with age. This President’s proposal would

remove this anomaly in current law and make coverage consistent with the frequency recommendations of most major breast cancer authorities.

Ms. JOHNSON. On bone density testing, very important to preventing osteoporosis, the HCFA policy goes back to 1984. It is so

outdated that it lists technology that is no longer available. As a

result of the outdatedness of our policy in regard to bone density

testing, coverage policy across the Nation is very inconsistent. I

would like to have HCFA get back to me on when you intend to

update that policy; it should not be hard. The knowledge in this
45

area now is very advanced. There are whole groups of seniors who

do not need bone density testing and so on and so forth, but we

need a modernized policy so there will be more consistent access

across the Nation for seniors who need bone density testing, which

is very important to their well being.

[The following was subsequently received:]

HCFA is committed to reevaluating coverage policy for bone mineral density

(BMD) studies. Currently, Medicare’s national coverage policy pertaining to coverage of BMD studies does not include any discussion of dual-energy x-ray

absorptiometry (DEXA) BMD scans for use in monitoring the treatment of

osteoporosis. Since there is not a national coverage policy on DEXA scans, the local

Medicare contractors make coverage decisions on claims for these tests, which may

result in some variation in coverage in different parts of the country.

As part of its effort to evaluate coverage policy of BMD studies, HCFA requested

five technology assessments from the Center for Health Care Technology (CHCT) in

the Agency for Health Care Policy and Research (AHCPR). Four of these assessments address bone mineral densitometry for patients with secondary osteoporosis,

specifically patients with asymptomatic hyperparathyroidism, patients with chronic

end-stage renal disease, patients on long-term steroid treatment, and patients with

vertebral abnormalities. (Patients with secondary osteoporosis comprise less than

5% of the population with osteoporosis.) HCFA also requested a technology assessment for patients with primary osteoporosis (osteoporosis brought on by age and

postmenopausal changes).

Three of the four assessments of BMD studies for secondary osteoporosis have

been completed by CHCT. The assessment of BMD studies for primary osteoporosis,

which is the assessment of greatest concern because it pertains to 95 percent of the

Medicare population with osteoporosis, has not been completed.

When the medical assessments have all been completed by AHCPR, we will reevaluate Medicare’s coverage policy for BMD studies, including DEXA, and take appropriate action based on that evidence.

Ms. JOHNSON. Those are three little examples of things that I

would like to get to, and then I do want you to comment on the

policy you have just announced, or perhaps are about to announce,

in regard to mastectomies. Again, as my Chairman said, you have

announced a number of very thoughtful policies that are relevant

to the problems we face, but you do point out in this policy that

conclusive medical research and evidence does not exist sufficient

to conclude that women derive any benefit, pro or con, from a definitive number of hours in the hospital following a mastectomy or

a lumpectomy. In the research that does exist, very little is applicable to Medicare beneficiaries, who are generally 65 years or older,

and therefore decisions of length of stay following a mastectomy or

a lumpectomy should be left to the discretion of a doctor and patient on a case-by-case basis.

It is a curious contrast between the actions of the Department

and the endorsement by the First Lady of a bill that sets specific

hours. I think it is a problem from the national level to set specific

hours. I think your policy directs itself at guaranteeing Medicare

beneficiaries appropriate care, and I commend you for it, but I

would appreciate your comment on that.

Mr. VLADECK. Well, thank you. I believe as a general matter that

enrollees in Medicare managed care plans currently have much

better consumer protections than do privately insured individuals

as a general rule. I believe this example illustrates the extent to

which we can ensure that Medicare managed care plans both have

grievance and appeals procedures and have other sets of rules

about how decisions are made which are not uniformly required on

managed care plans in the private sector elsewhere in the country.
46

Ms. JOHNSON. Thank you. I see the red light is on, and there is

just one little thing I want to mention.

I appreciate that because we are looking at the issue of appeals

procedures and managed care plans, and I think those kinds of protections are probably the right answer. I would also like to say that

I look forward to working with you on the issue of respite care policy. I know many seniors who are carrying the burden of full-time

care of a spouse who has Parkinson’s or a stroke or cancer, and I

think we do not want to create an inequitable benefit, and we also

want to be sure that as we develop postacute care bundling, we do

it in such a way that the small agencies at the local level will have

just as good an opportunity to serve, and we do not preference regional providers.

And as we move forward, I do hope to have the opportunity to

explore much more in depth your approach to establishing

preferred-provider service organizations. We worked on that at

great length in our bill because it will provide a nonprofit, noninsurance company competitor to insurance company-provided

managed care plans—not that they are not good, but you want

competition from plans where the power of medical decision is

clearly with the provider, and unless you do antitrust relief, unless

you adopt new asset standards for PSOs, you will not get them developing in the market, and they are very much afraid that by the

time they get in, the big plans will have already taken all the patients.

It is imperative, again, that we not let another year pass without

making those changes, but I would hope that your proposal when

it comes to us in detail will show some sensitivity to the antitrust

problems that impede the development of provider services organizations where doctors and hospitals do have the power both economically and medically.

Thank you.

Chairman THOMAS. The gentleman from Nevada.

Mr. ENSIGN. Thank you, Mr. Chairman.

I want to get into a little bit about the whole idea of skilled nursing facilities and the 3-day hospital stay. Dick Durbin and I last

year introduced some legislation dealing with that. I would like you

to discuss what the administration feels about certain DRGs being

classified and waiving that 3-day hospital stay for savings for

Medicare.

Mr. VLADECK. Thank you. I guess there are three pieces to the

answer. As I am sure you know, OBRA 1990 says the Secretary

has the authority to waive the 3-day hospital stay, if she can certify that doing so would be budget-neutral for the program.

The last time we looked at that systematically was in 1994 and

1995, and our actuaries would not provide an opinion to that effect.

We had not, prior to the suggestion that emerged last year, looked

at whether that legal provision would permit us to waive it on a

DRG or a diagnosis-specific basis. But with the development of a

prospective payment system for Medicare SNF services, I think

that changes the ball game. We would be happy to consider this

issue with you as we go through the process this year because to

the extent that the prospective payment system is going to work

appropriately for some of those diagnoses, we may well be able now
47

to talk about the 3-day stay no longer being necessary. However,

I think we would have to tailor it a little to reflect the characteristics of the new payment system, and I will confess we have not figured that out yet, but it is something we ought to address.

Mr. ENSIGN. Thank you.

We have gotten a little contentious occasionally today, but I also

want to compliment the administration on some of its proposals on

the preventive side. I think one of the things about Medicare is

that it does provide a model for a lot of the other private health

insurance companies to follow, and the more we can turn what has

been termed our ‘‘sick care system’’ into a health care system, I

think the better quality of life people will have, and I think that

overall in the long run, it is going to save a lot of money. When

we start getting farther into this and worrying about trying to reimburse people for keeping people healthy instead of only reimbursing them when people get sick, if we just change our paradigm

and our mindset to think in those terms—and the mammography

portion, although it is still somewhat of a ‘‘sick care,’’ it is trying

to catch something earlier, so at least you are trying to keep people

as healthy as possible—but the diabetes and the colorectal and the

rest, I applaud your efforts and what the administration has

brought forward on those areas.

Thank you, Mr. Chairman.

Mr. VLADECK. Thank you very much.

Chairman THOMAS. Thank you.

Let me ask a couple of questions and probably ask you for some

materials, and this will be back on the legislative language, Dr.

Vladeck.

We are going to be with ProPAC next month looking at the DSH

adjustment payment structure. I know you folks really did not do

anything on that—you are simply pulling it out. If we can sit down

and work around the ProPAC suggestions, it just seems to me that

as we move through reconciliation, this is something that if we are

all able to close on, we ought to close on, because we are going to

continue to redefine what ‘‘low income’’ is, and there are going to

be some outreach efforts.

I think it would be fruitful if we did that.

Mr. VLADECK. Mr. Chairman, I would love it. Let me just say—

and I do not mean to be off-putting at all, but as you know, I am

a ProPAC alumnus myself; it has been at least a decade that I

have been involved on and off in looking at this issue—it is really

hard. If we can do something over the next 6 months, if you can

do something that makes sense, or if ProPAC can, we would be delighted. I just do not want to give any false impressions of feasibility. Anything anybody can do to contribute, we would eagerly support.

Chairman THOMAS. But we can certainly make a good faith effort

in this area because of the changes that we are making in terms

of shifting pots of money; we should at least make the effort.

Mr. VLADECK. Absolutely.

Chairman THOMAS. The other thing I am concerned about, and

I do not know exactly what you are doing, although it is fairly easy

to understand in a general sense, is that you are talking about as

you make these other changes in HMOs, examining the benefits
48

that they use as inducements or additions, and you are going to try

to standardize them. One of the concerns I have in that process is

that as you are cutting down whatever margin of ability the HMO

has to put a package together that makes it more attractive, which

you are doing by reducing and squeezing out those areas. At the

same time, if you are going to move forward with the standardization—my hunch is that you may wind up, because you are standardizing and prioritizing them to a certain extent as well, that is,

if you are going to do them, you have got to do this one first, this

1 second, and so forth, or at least this one first—I am concerned

that while you are talking about creating an increased choice for

the consumer, and you are concerned about the ability to compare,

you may wind up killing the goose that laid the golden egg because

you do not have anything to compare it, because they are not offering it, or they cannot meet your standard which is now an additional criterion, since they have to actually meet what it is you

offer on the fee-for-service side.

My concern has always been that if you really want to increase

changes, let us talk about good oversight of a structure which

moves toward an actuarial equivalent to a 1965 concept of what

you need to make sure you get benefit for your money, but you do

not standardize everything, which really loses that whole concept

of change in choice that you are beginning to focus on.

Mr. VLADECK. Your points are very much on target, Mr. Chairman. We recently reviewed a little informal work which we did and

would be happy to share with you regarding the dynamics of

change in some of the Medicare markets that have occurred over

the last 5 years. You will find a couple of things that have occurred—and I will not identify particular markets here; we would

be happy to talk to you about them—that have influenced our

thinking quite a bit.

The first is that we have had several markets in which the existing plans were offering some limited supplemental benefits at some

modest premiums, and aggressive new entrants have come in, and

after 2 or 3 years, lo and behold, everybody in town is offering

more generous benefit packages at a zero premium, which is the

basic. If your barriers to entry are not too high, you will get new

competitors who will drive the market, and that is why you need

more competition.

The other thing we find, which is worthy of some more explanation, is that plans in the markets which we are watching do not

tend to seek to differentiate themselves in terms of a benefit package. It does not seem to be, as part of a marketing or long-term

strategy, one of the things they do; in fact, there does tend to be

enormous convergence around the supplemental benefit package,

and they seek to differentiate themselves in other ways.

Now, that does not mean that over time, we should not allow for

opportunities for plans to make their marks or to build their market share or whatever by being more creative on the benefits side.

It is just that, again, our observations of what is happening in

these actual markets in recent years suggests that that is not one

of the three or four top number of things by which a plan seeks

to distinguish itself.
49

Chairman THOMAS. I would only say that obviously, all of them

will try to reduce or eliminate an out of pocket. That is a very attractive immediate. We have seen them then move to paid prescription, which obviously is not on the regular program, and then it begins to diminish in what you do. And obviously what you do is try

to line up with your competitors so that you are not significantly

different.

I guess to me, the value of that, although you may not see it as

a value, is that it is the marketplace that is determining what it

is that people want, and to the degree you move toward standardization, it becomes more a bureaucratic structuring that determines

what is available to the beneficiary than it does the market forces.

I am just concerned that we almost always go to the direction of

standardization for comparison purposes which we view as a good

which may not necessarily reflect itself in the market.

Mr. VLADECK. No. I understand the balancing act there, and we

need to work with you because there are two conflicting valid goals

there, and I agree with you.

Chairman THOMAS. Yes.

The gentleman from California wanted to get back in.

Mr. BECERRA. Yes. Thank you, Mr. Chairman.

Mr. Vladeck, let me ask you to comment on some discussion that

has taken place over the course of all this health reform discussion

about moving the Medicare Program into a defined contribution

plan scenario where you are really giving that beneficiary a lump

sum or a certain bag of goodies, and once they use up the goodies,

they have to turn to their own resources to try to come up with

their payment of health care costs.

You do not go in that direction, from what I can tell, with the

President’s proposal, and if you could tell me what your thoughts

are and what the administration’s position is on that, and then if

I could ask a couple of questions after that.

Mr. VLADECK. Thank you. Yes, I think we can be very direct and

try to be very specific. We believe the basic social contract embodied in the Medicare statute implies a defined set of benefits. It

is for the availability of a defined set of benefits for their parents

and eventually for themselves that we have asked people to contribute part of their wages over the last 30 years.

It is true that from the point of view of budgetary neatness or

predictability, the problem with the defined benefit program, particularly in health care, is that it introduces something of a wild

card into your budgetary calculations because you can never control

the government’s outlays as precisely as you could if you said, We

are going to spend x dollars and no more per beneficiary.

On the other hand, we believe that a defined contribution plan

would in effect transfer the risk of excess rise in health care costs

or excess epidemiological phenomena are driving up the health care

costs from anything else would transfer that risk from the government and the public at large to beneficiaries, which is exactly the

wrong thing to do. It is a way of picking on the weak.

We are very strongly opposed not only to anything that would explicitly turn Medicare into a defined contribution plan, but anything that would implicitly or indirectly move it in that direction.
50

Mr. BECERRA. What if we placed on top of that scenario a balanced budget amendment in the Constitution that required us

every year to balance the budget without regard to the costs of

medical care?

Mr. VLADECK. Well, my concern would be more indirect. I think

if we did that under current law, we would be putting many of the

providers of service to Medicare at risk in a way that would be very

destructive not only to the program but to the health care system

over time. But again, even there, I would rather live under a scenario in which we said if we bump up against some kind of external ceiling, we are going to take across-the-board hits from providers—that would be a real problem, but it would be in my view not

as bad a problem as saying if we bump up against a ceiling, we

are going to increase the out-of-pocket liabilities of beneficiaries,

which a defined contribution plan would do.

Mr. BECERRA. Thank you.

Thank you, Mr. Chairman.

Chairman THOMAS. Certainly.

The gentleman from Louisiana is fond of saying that people will

consume all the health care other people are willing to pay for, and

whether we like it or not, that will be an ongoing societal debate—

what is the appropriate amount that other people are willing to

pay for other people’s health care.

If we have a structure which defines it as those people who receive the care rather exclusively rather than those people who pay

for it, you will not only be exacerbating the problem of controlling

the largest and the fastest growing area of the Federal budget, but

you will be exaggerating the problem we now have between generations in the most significant and largest transfer of wealth in the

history of the world between generations.

My question: The Federal Employees Health Benefit Program,

which is held up as a model constantly—in fact, a Senator whose

name I will not mention used it as an example of where he would

like to go with his reforms in Medicare—is the Federal Employees

Health Benefit Program a defined benefit or a defined contribution

program?

Mr. VLADECK. It is really neither, sir, but it is closer to a defined

benefit program than to a defined contribution program.

Chairman THOMAS. And so I get a number of benefits regardless

of the price, or do I get a dollar amount that is paid by the government?

Mr. VLADECK. Neither. Every year, the amount of the dollar contribution paid by the government is determined by a very complicated formula that is essentially benefit and price driven, not by

any external budgetary formula. It is an effort to assess—it is very

analogous to what we do in Medicare, although more complicated,

in the sense that it basically prices a benefit package in any given

year and then establishes an equivalent contribution level for

capitated or other plans tied to the price of the fee-for-service benefit package.

Chairman THOMAS. Notwithstanding its complexity, is it better

than what you do in Medicare?

Mr. VLADECK. No. I think it is inferior in a couple of ways, but

it has one enormous advantage over Medicare——
51

Chairman THOMAS. Because it is more dollar driven than benefit

driven, and Medicare is more benefit driven?

Mr. VLADECK. No. It is inferior to what we do in Medicare because it pays a lower proportion of the cost of the basic benefit

plan.

Chairman THOMAS. Well, notwithstanding what portion it pays,

the way in which it determines what is the appropriate contribution by others to support an individual’s health care needs.

Mr. VLADECK. I think if you really tried to take apart the formula by which that is done, and if it were applied to something as

visible to the Medicare budget, I think it would be hard to defend

over a period of time, just as a mechanical way of setting the contribution level.

Chairman THOMAS. Any additional questions?

[No response.]

Chairman THOMAS. Thank you very much.

Mr. VLADECK. I appreciate it, Mr. Chairman.

Chairman THOMAS. We look forward to all that data so we can

move forward.

Mr. VLADECK. You will have it.

Chairman THOMAS. Thank you.

It is my pleasure now to announce the second panel, which consists of folks we know well and are pleased to have back.

Dr. Reischauer, who is now a senior fellow with the Brookings

Institution, was Director of the Congressional Budget Office for

half a decade, recently leaving to assume the senior fellow position.

Dr. Bob Helms is director of health policy studies at the American Enterprise Institute and involved himself in the structure of

HHS for a number of years.

And Dr. Karen Davis, who has been with us both formally and

informally over the years to assist us in understanding different

ways of looking at the program, is currently president of the Commonwealth Fund.

Let us just start with the way you are lined up. Dr. Reischauer,

we will begin with you and move across the panel.

Welcome, and you can inform us in any way you see fit. Thank

you for your written testimony, and it will be made a part of the

record.

STATEMENT OF ROBERT D. REISCHAUER, SENIOR FELLOW,

BROOKINGS INSTITUTION

Mr. REISCHAUER. Thank you, Mr. Chairman. It is a pleasure to

be here before you again.

My prepared statement addresses three issues—structural reform in Medicare, the role that Medicare should play in the effort

to balance the budget, and the President’s Medicare proposals. Let

me say a few words about each of these.

First, with respect to structural reform, I would like to make four

points. First, structural reform is clearly unavoidable. Second, the

extent or ultimate shape of that structural reform for Medicare is

at this point unknowable; it will depend very much on how the

employer-sponsored marketplace evolves over the course of the next

10 or 15 years, and we really do not know where that will lead.
52

Third, just because we do not know the ultimate shape of the

structural reforms that are needed in Medicare, we should not

delay initiating change. The longer we wait to begin structural

change, the more rapid those changes will have to be, the more

wrenching the adjustments will be, and the more constrained the

policy options available to the Congress and the President will be.

It is in my judgment that this year is an appropriate time to

begin restructuring for several reasons. First, the 65 and over population is going to grow very slowly over the next decade—about

nine-tenths of a percentage point a year, slower than it has grown

in the previous 10 years, slower than it will grow starting 10 years

from now. What that means is that any new structures that are

put in place will not have to cope with a demographic tsunami as

they are trying to root themselves.

Second, there is clearly an excess of providers available now.

What this means is that if structural reform slips or makes a few

mistakes, there is a very low risk that that will affect the quality

of care or the access to care that beneficiaries face.

Moving to the role that Medicare should play in the effort to balance the budget by 2002, I will make three points. The first of

these is that it is far more important that the 105th Congress start

the process of structural reform than that it achieves 150 billion

dollars’ worth of savings for Medicare over the next 5 years rather

than $50 billion.

Second, it is clear that Medicare should be expected to make a

significant contribution to the deficit reduction effort because it is

a big and very rapidly growing program.

And third, the way to achieve most of the savings that are needed over the next 5 years is through the mechanisms that have been

used quite effectively in the past to reduce the growth of Medicare

spending—not savings through structural reforms, but rather, savings through reduction in provider payments.

Let me move now to the President’s budget proposals. The President has provided you with a good base upon which to build. Overall, I feel positive about his proposals, but I want to focus on three

areas where I think there could be improvement.

The first of these has to do with the benefit expansions and policy changes that would reduce the costs on beneficiaries. In the

former category is colorectal screening, in the latter category is the

reduction in effective coinsurance on outpatient hospital services.

I think the policies the President has proposed in these areas

make a lot of sense, but I think the President is sending the wrong

message to the beneficiary population. He is sending a message

that says beneficiaries can expect more for less in an era of fiscal

austerity at a time when the HI Trust Fund is running a deficit

and when we know Medicare faces big problems in the future.

I think a more responsible way of offering these benefits would

be to ask beneficiaries to chip in and pay for them. This could be

done by raising the part B premium by about $10 a month in the

year 2002. At that point, premiums would be about 29 percent of

costs. That would still be below where they were in 1995. I also

would urge you to consider raising premiums back up to where

they were in 1995, as well as imposing an income-related surcharge.
53

The second area that I would like to say a few words about is

the President’s proposal for changing the way HMO capitated payments are made. First, he would mix a national and a local

AAPCC, which is a good first step, but the local component really

should be based on a multicounty average rather than on a county

average for costs. Second, he would put a $350 floor under the capitated payments

in rural areas, which is intended to increase choice in these areas.

There is a possibility that this well-intentioned move might not

produce the desired result. We could find that Medicare costs go up

and choice is unchanged in these areas. This would happen if rural

providers banded together, set up a PSO, and decided to see Medicare patients only through their new PSO. Then we would have a

system that was largely unchanged except that the income received

by providers would be higher.

The third change the President would make in this area is that

he would reduce, after the year 2000, the capitated payments for

HMOs from 95 to 90 percent of the AAPCC. My testimony suggests

that it would be appropriate to begin this adjustment sooner, in

fact to begin in 1998 by reducing the AAPCC payment by 2 percentage points a year. Two reasons are given for this. The first is

that because the overpayment to HMOs will grow as HMO market

share increases, it is important to get this started early because

HMOs are growing very rapidly at this point. My testimony provides a rather extreme illustration of this, not intended to be realistic at all, but shows you the dynamic that occurs.

The second reason for acting sooner rather than later is a political one. HMOs devote part of the overpayment they receive to supplementary services to Medicare beneficiaries such as prescription

drug coverage. When the Congress begins to ratchet down the

capitated payments, plans are going to have a harder time providing members with these services without imposing additional costs.

What will happen then is HMOs will tell their beneficiaries that

policies being considered by Congress are going to lead to higher

payments or reduced services, and you will face a political backlash

and pressure, which will be hard to fend off.

Let me close by saying a few words about the President’s proposed shift of some home health costs from part A to part B. From

a conceptual standpoint, I think this is appropriate, but in my

judgment, it is not a wise policy for two reasons.

The first of these is because it would put even more of Medicare

in direct competition with discretionary spending and other mandatory spending in the effort to balance the budget. The political

power of Medicare will almost ensure that these other areas of government service will be cut back more than otherwise would be the

case if this shift did not take place.

The second reason is that the shift could put off the date at

which the issue of structural reform would have to be addressed by

Congress and the President. I know some of my colleagues here

think that that is a good idea; I think it is a bad idea. Congress

and the President are going to avoid this set of decisions as long

as they can, and as I suggested before, we have a window of opportunity now which is actually quite good for beginning these structural reforms. Waiting until 2000 or 2002, when we have a new
54

* Senior Fellow, The Brookings Institution. The views expressed in this statement are those

of the author and should not be attributed to the staff, officers or trustees of the Brookings Institution. 1 Net of part B premiums.

2The 1996 Annual report of the Board of Trustees of the Federal Hospital Insurance Fund

(pages 8 and 71) states that HI program costs are based on an assumption that the growth rate

of costs per unit of service will decline over the next 25 years until it reaches the rate of growth

of average hourly earnings. The growth of per enrollee SMI costs is assumed to decline gradually after 2008, reaching the rate of growth of GDP per capita by 2020 where it is assumed to

remain. Both of these assumptions represent a sharp slowdown from recent experience.

President concerned about reelection and when many of the baby

boomers are staring retirement in the face, is not going to be an

easy time to begin to make these structural changes.

That ends my summary, and after my colleagues have spoken, I

will be glad to answer questions.

[The prepared statement and attachments follow:]

Statement of Robert D. Reischauer,* Senior Fellow, Brookings Institution

Mr. Chairman and members of the Subcommittee, I appreciate this opportunity

to discuss the future of the Medicare program with you. My statement addresses

three issues:

• The need for structural reform of Medicare and the challenge such reform will

represent.

• The contribution Medicare might make to the effort to balance the budget by

2002, and

• The Medicare proposals contained in the President’s fiscal 1998 budget.

THE NEED FOR STRUCTURAL REFORM

From a fiscal, an institutional, or a political perspective, the Medicare program

is not sustainable as it is currently structured. There is no immediate crisis; rather

there are problems that will grow in severity over time. While there may be no need

for precipitous action, the sooner the nation begins the inevitable process of restructuring Medicare, the less disruptive or wrenching the changes will be and the more

options policymakers will be able to consider.

The fiscal problem is straightforward. Spending by Medicare, as it is currently

structured, is projected to grow at a faster pace than the economy is expected to

expand. The Administration expects that, over the next 5 years, spending on an unchanged Medicare program will grow at an annual rate of 8.9 percent while the

economy will expand by 4.9 percent a year.1 The Congressional Budget Office’s

(CBO) projections show Medicare growing by 8.8 percent annually and the economy

expanding by 4.7 percent annually over the next 10 years. The Board of Trustees

of the Medicare Trust Funds estimates that Medicare’s disbursements will grow

about 2.8 percentage points a year faster than the economy over the course of the

next four decades. This somewhat more sanguine but still unsustainable projection

rests on an optimistic assumption that there will be a sharp slowdown in the growth

of spending per capita.2 A program of Medicare’s size can not grow significantly faster than the economy expands for a sustained period of time without requiring either

drastic reductions in other government activities or significant tax increases.

The institutional problem arises because rapid changes are taking place in the

non-Medicare insurance marketplace. Medicaid, employer-sponsored plans, and individual insurance are becoming, for the most part, capitated systems involving panels of providers and some management of care. Medicare, on the other hand, remains largely an unmanaged indemnity insurance program open to virtually any licensed provider of services. The institutional infrastructures needed to support

these two very distinct types of insurance are different. The information requirements, regulatory needs, and management procedures of the two approaches will increasingly diverge, creating a certain amount of complexity, confusion, and inefficiency. The existence of two very different approaches may create incentives that

affect, in a positive or negative way, the access to or quality of care available to

Medicare participants. Incentives that increase cost pressures on Medicare could

also develop.

If the Medicare and non-Medicare portions of the health insurance market continue to evolve along different paths, the strong political support Medicare has enjoyed since its inception could begin to erode. As originally conceived, Medicare was

to provide the elderly, and later the disabled, with insurance coverage similar in
55

structure and scope to that enjoyed by members of the working population and their

dependents. In recent years, increasing numbers of those covered by Medicaid,

employer-sponsored plans, and individual insurance policies have found their choice

of providers limited, their access to specialists controlled, their selection of prescription drugs confined to those available through a formulary, and their ability to obtain certain expensive procedures constrained. These restraints have not been greeted with enthusiasm. If Medicare costs continue to escalate necessitating tax increases or reductions in other programs, some may begin to wonder why the elderly

and disabled enjoy more in the way of unrestrained access to providers and services

than that which is available to the balance of the population. If this happens, Medicare’s support among taxpayers could begin to wane.

While these developments imply that Medicare will not be able to avoid restructuring, it would probably be unwise for policymakers to attempt at this point to

specify all of the details of a restructured Medicare program. As a general principle,

the health insurance system that government provides for the elderly and disabled

should be similar to, or at least compatible with, that available to the balance of

the population. In recent years, the structures of Medicaid, individual insurance,

and employer-sponsored plans have been changing at warp speed. This change could

continue at a breakneck pace along the same path, come to an abrupt halt, or veer

off in an entirely new direction. It would be unwise for policymakers to assume that

they can forecast now where the private marketplace will settle when the convulsions cease. This suggests that restructuring Medicare should be viewed as an evolutionary process rather than a ‘‘big bang’’ event.

The fact that the ultimate destination is uncertain should not be taken as an excuse for delaying the journey. The general direction in which Medicare must move

is fairly clear. Market incentives must be incorporated into Medicare. Participants

will have to be given greater choice of plan types and incentives that encourage

them to obtain their care from those providers who are both efficient and high quality. Institutions will have to be developed that can measure and monitor the quality

of competing plans, disseminate information on the services offered by and performance of the different plans, enroll and disenroll participants, adjudicate disputes,

and regulate the financial soundness of plans. It takes time to build such institutions, to get the kinks out of their systems, and to get participants, providers, and

plans comfortable with the new structure. It would be best if this were done gradually and not when the new institutional infrastructure is required to bear the burden of fiscal restraint, which will be the situation a decade from now. In short, the

time to begin the structural reforms that Medicare will have to undergo is now.

Current demographic and market conditions, which suggest that the risks and

dislocation associated with restructuring are much lower now than they will be

later, reinforce this point. For the next decade the nation will experience something

of a lull before the demographic storm. The population that is 65 and over is projected to grow by 0.9 percent a year between 1997 and 2007 (or from 12.7 percent

of the total population to 12.8 percent). This is less than the growth experienced

during the previous decade. This suggests that any nascent institutional structures

that are created will have a period to take root before being faced with the rapid

expansion in number of participants that will take place after 2010. In addition, providers—particularly hospitals, physicians and other health professionals—are currently in excess supply. Furthermore, in contrast to previous periods, Medicare payment levels are not far below those of most private payers. Taken together, these

conditions suggest that there is little likelihood that the introduction of structural

reforms, even with a few slips and stumbles, will adversely affect access or compromise the quality of care received by Medicare participants. This was not the case

a decade ago and may not be the case a decade hence.

MEDICARE’S CONTRIBUTION TO THE BALANCED BUDGET EFFORT

With respect to Medicare, the 105th Congress should focus its efforts on initiating

the structural reforms that will be needed to ensure that the program remains viable over the long-run. Unfortunately, most of the recent debate has centered on the

contribution that Medicare might make to balancing the federal budget by 2002

rather than on structural reforms. Of course, restraining Medicare spending must

be an important component of the deficit reduction effort because Medicare is such

a large and rapidly growing program. The extent of these savings is limited only

by the nation’s commitment to providing the elderly and disabled with access to

high quality, affordable health care and its concern about excessive disruption of the

health care infrastructure.

Some notion of the amounts that Medicare might be expected to contribute to deficit reduction can be obtained by examining the various budget balancing plans that
56

have been proposed during the past two years. These plans called for Medicare savings that ranged from $100 billion to $270 billion. (Chart 1) These amounts constituted between one-fifth and one-third of the non-interest outlay reductions proposed by the various plans. (Chart 2A) Medicare spending would have been between

11 and 22 percent below baseline levels by 2002 under these proposals. (Chart 2B)

One can not make simple comparisons of the numbers in the charts because some

involve seven year’s worth of savings, some six years, and one five years. In addition, the baselines against which the savings are measured are different. In fact,

between March 1995 and January 1997, CBO lowered its estimate of baseline Medicare spending during the 1996 to 2002 period by $104 billion. (Chart 1)

The current Medicare budget debate is likely to revolve around savings that range

from $90 billion to $140 billion over the 1998 to 2002 period. Spending restraint in

this range is achievable and should not be too disruptive of the provider community.

Ultimately, the magnitude of the savings that Medicare might realize from restraining the growth of payments to providers and instituting certain efficiencies depends

crucially on what happens in the private insurance marketplace. If employersponsored health plans continue to hold down the annual rate of growth of their

per-capita costs to under 4 percent, larger Medicare savings might be possible. On

the other hand, if the growth of private health care costs rebounds to the rates experienced during the last half of the 1980s, even $90 billion in savings would prove

difficult to realize.
57
58

3 Congressional Budget Office, Medicare Spending on Post-Acute Care Services: A Preliminary

Analysis, January 1997.

THE MEDICARE PROPOSALS IN THE PRESIDENT’S FISCAL 1998 BUDGET

The Medicare proposals in the President’s 1998 budget constitute a good foundation upon which to build. The President calls for restraining the growth of payments

to providers through many of the mechanisms that have been used effectively in the

past. Most of the short-run savings are realized from these devices. While the savings proposed by the President are quite large relative to those that have been

adopted in previous reconciliation acts, conditions are quite different now. It is likely that the restraints proposed in the President’s budget could even be increased

somewhat without risking any serious adverse consequences for participants.

The President’s budget also proposes a number of new benefits and cost reducing

measures for participants. The former include coverage of colorectal screening, a diabetes self-management benefit, annual mammograms, respite relief for families of

Alzheimer’s patients, and improved availability of preventive injections. The latter

include eliminating cost-sharing for mammography services, reducing the costsharing for hospital outpatient services, lowering the premium surcharge for late enrollment in Part B, and changing the rules governing Medigap to make the premiums charged those leaving HMOs for the traditional fee-for-service system more

affordable.

There are sound reasons for each of these benefit expansions and cost reduction

measures. Nevertheless, the President’s proposal sends an inappropriate message to

Medicare participants. It tells them that they can expect to get more for less even

in an era of fiscal austerity, even when the Hospital Insurance Trust Fund is spending more than it is taking in, and even when Medicare faces severe fiscal problems

in the not-too-distant future. Under these circumstances, it would be appropriate to

ask participants to bear the cost of the proposed Medicare expansions. These costs

could be added to the Part B premium. This would raise premiums by about $10

a month in 2002. At that time, premiums would represent roughly 28.8 percent of

costs, which is still below the 1995 level. Increasing premiums to their 1995 level

and adopting an income-related surcharge on participants whose incomes are over

twice the median would represent a responsible way of requiring Medicare participants to contribute to the efforts to balance and preserve the program for future

retirees. For some this could represent a hardship, but many of the most needy

would be shielded by Medicaid, which must pay the premiums of beneficiaries whose

incomes are below 120 percent of the poverty threshold.

The President’s budget proposal also contains a number of nascent structural reforms, some of which would affect the traditional fee-for-service component of Medicare and some of which would affect the capitated component. While the President’s

structural reforms are a positive step, they are too timid and tentative. On the feefor-service side, the President proposes to replace the cost-based reimbursement of

home health care, nursing home care, and outpatient hospital services with new

prospective payment systems. The effort to move to prospective payment for postacute care is commendable but fraught with technical difficulties which were discussed in a recent CBO study.3 Unless movement to a PPS system is done with

great care, costs could increase, individuals with heavy service needs could have difficulty obtaining care, and quality could deteriorate. Nevertheless, it is important

to accept the fact that any measures which successfully curb the explosive growth

in post-acute care spending will lead to some reduction and redistribution of services.

The President’s budget also proposes that the Health Care Financing Administration (HCFA) be given greater authority to use negotiated prices and competitive bidding to set payments for non-physician Part B services. Such a procedure, which the

President has proposed before, is long overdue. However, giving this authority to

HCFA does not mean that it will be used. HCFA will be under intense political pressure to delay or make only very limited use of this authority. A bolder initiative

would could promise more significant savings. One option would be to include minimum thresholds in the legislation. For example, Congress could require that at least

30 percent of the laboratory services paid for by Medicare in 2002 be purchased

through competitive bids or negotiated prices unless HCFA provides evidence that

such procedures would not be cost effective.

The structural changes the President proposes for the capitated portion of Medicare are more modest than those suggested for the fee-for-service program. The

President would expand the choices available to participants to include Preferred

Provider Organizations (PPOs) and Provider-Sponsored Organizations (PSOs) that

meet certain standards as well as HMOs. While other plan types might be included,
59

the President is prudent to expand the range of choice very cautiously. Until we are

confident that HCFA can risk-adjust the capitated payments paid to plans sufficiently to avoid serious adverse selection problems, the expansion of options must

be done very deliberately.

The budget also calls for the dissemination of comparative information on the

plans available to Medicare participants. From the information available, it is not

clear whether a new entity would be established to collect, evaluate, and disseminate this information or whether the enrollment and disenrollment functions would

be handled centrally by Medicare or would be decentralized to the plans. There are

good reasons to establish a new entity to preform these responsibilities.

The budget also calls for significant changes in the way HMOs and the new types

of capitated plans would be paid in the future. Rather than having payments strictly

related to the local costs of fee-for-service Medicare, payments would be a blend of

national and local fee-for-service costs. Local costs would still be calculated on a

county basis, which does not make a great deal of sense when health market areas

are much larger. The local cost component of the President’s proposal should be

based on multi-county averages. This would reduce some of the random year to year

variability in payments and make payments more equitable. Why, for example,

should a Medicare HMO operating within the Washington metropolitan area receive

about $2,200 less a year for an enrollee living in Fairfax County, Virginia than for

an enrollee residing in Prince Georges County, Maryland?

The President’s plan would also place a floor beneath capitated payments in rural

counties to encourage expansion of managed care into these areas. On the surface,

this proposal seems both equitable and efficient. Under certain circumstances, however, it could result in less not more choice. If the capitated payment for the area

were considerably above the average fee-for-service Medicare expenditure in the

area, providers would have an incentive to band together and see Medicare patients

only through their PSN, PPO, or HMO. In this way providers could maximize their

Medicare incomes.

The President’s proposal also calls for gradually reducing the average payment

made to capitated plans from 95 percent of the AAPCC to 90 percent starting in

2000. This initiative responds to research evidence that suggests that if those selecting Medicare HMOs had remained in fee-for-service Medicare, they would have incurred costs somewhat below 95 percent of the average fee-for-service costs. If this

is true and there is any positive correlation between the proclivity to enroll in an

HMO and health status, the gap between the capitated payments received by HMOs

and the costs of providing services to HMO enrollees is likely to grow as HMOs increase their market share.

Charts 3 and 4 provide an admittedly extreme and unrealistic illustration of this

point. Chart 3 provides a picture of the distribution of per beneficiary Medicare

costs in 1996. As is well known, costs are highly skewed with the most expensive

one percent of the enrollees accounting for roughly 14 percent of the program’s costs

and over half of costs being incurred by the most expensive five percent of beneficiaries. Chart 4 depicts what would happen if Medicare participants enrolled in

HMOs strictly according to their health status. The HMOs’ costs to care for these

individuals would rise as an increasing share of the population joined HMOs but

the AAPCC would rise even faster because of the skewed nature of Medicare costs.

When only the healthiest individual in the Medicare population, one who would

incur no Medicare costs, participated in an HMO, the HMO would receive 95 percent of the AAPCC—or about $4,500 a year—and the individual might not use any

of the HMO’s services. If all but the most expensive one percent of the Medicare

population joined HMOs, the capitated payment made to HMOs would be over

$50,000 per participant, but the costs incurred per member by the HMOs might be

only around $4,000.
60

Medicare HMO enrollment has been growing by leaps and bounds. In 1996 enrollment expanded by 36 percent and CBO projects Medicare HMO enrollment to grow

by 30 percent in 1997 and 25 percent in 1998. Evidence suggests that Medicare

HMO enrollees are younger and healthier than other Medicare participants. It is

reasonable to expect that the dynamic illustrated in its most extreme form in Chart

4 is occurring and will grow in significance until the Medicare HMO population stabilizes and ages. If this is the case, policymakers should not wait until 2002 to begin

ratcheting down the capitated payments made to HMOs. A gradual phasedown of

possibly two percentage points a year should begin in 1998. As this reduction in

capitated payments takes place, a substantial and continuous research effort should

be mounted to measure the extent to which HMO participants are (or are not) less

costly than their fee-for-service comparison groups. Congress should also instruct

HCFA to devote more resources to developing risk adjustment mechanisms that

could be used to modify capitated payments in an environment in which the payments made to capitated plans are decoupled from fee-for-service costs.

In addition to the analytical, there is a political reason for moving expeditiously

to reform the capitated payment mechanism. In part because of the generous level
61

of capitated payments, many HMOs have been able to provide their Medicare members with additional services at little or no additional costs. Low cost sharing, vision

services, prescription drug benefits, and routine check-ups are among the most common of these benefits. As HMO enrollment grows and more and more Medicare

beneficiaries come to regard these benefits as an entitlement, it will be increasingly

difficult to reduce HMO payments. Plans will tell their members that actions being

considered by Congress threaten their prescription drug benefit or their vision care.

The pressure will be intense. This suggests that moving soon and in small steps is

preferable to waiting and taking larger leaps.

A final element of the President’s proposal that merits some attention is his proposal to shift a significant portion of the costs of home health services from Part

A, which is funded by the payroll tax, to Part B, three-quarters of which is supported by general revenues. Conceptually, the services the Administration would

shift do not fit in the Part A hospital insurance program. However, the Administration’s motive for this shift does not appear to be a quest for conceptual purity. Rather, it reflects political expediency—the need to make good on the promise to keep

the wolves of insolvency from the trust fund’s door for a decade without raising payroll taxes or imposing too much of a burden on Part A providers. The President’s

refusal to either increase Part B premiums to reflect the transferred costs or to subject transferred home health services to the deductible or coinsurance that most

other Part B services face underscores the impetus behind the proposal. So too does

the apparent failure to limit the home health services available to those beneficiaries who have only Part A coverage to the services that would be paid for from

the Hospital Insurance Trust Fund.

But the real issue is not the motive behind this proposal but rather its consequences. The shift of home health expenditures to Part B will place an even larger

portion of Medicare spending in direct competition with other programs for scarce

budgetary resources. In a constrained environment, this inevitably will mean that

discretionary and other mandatory programs will be cut more deeply in the effort

to balance the budget. Equally important, the shift will serve to delay consideration

of the types of fundamental structural reforms needed to preserve Medicare for the

babyboom generation. Anachronistic as the Part A trust fund mechanism is, it

serves the important function of forcing reluctant policymakers to restrain this popular program when Part A spending outpaces payroll tax receipts and the trust

fund’s solvency is threatened. Shifting a portion of the fastest growing component

of Medicare into Part B, which can dip into the Treasury’s bottomless well for funds,

will only delay the unavoidable and make the needed adjustments all the more

wrenching when they occur. The longer we wait to make these changes, the more

constrained our options will be and the more prominent a role tax increases will

have to play in the solution. If the political pressures are great now, they will be

even more intense in a decade when the babyboom generation is facing the realities

of retirement.

Dr. Helms.

Chairman THOMAS. Thank you very much, Bob.

f

STATEMENT OF ROBERT B. HELMS, DIRECTOR, HEALTH

POLICY STUDIES, AMERICAN ENTERPRISE INSTITUTE

Mr. HELMS. Thank you, Mr. Chairman.

This little sign says: ‘‘Robert Helms, Assistant Secretary for Bureaucratic Fast Food.’’ This was on my door at HHS some years

ago. The origin of this little sign was an op-ed piece in the Washington Post that referred to one of the Reagan budget plans as

‘‘warmed-over policies and bureaucratic fast food.’’

I was reminded of this when I looked at the President’s Medicare

proposals. They consist of warmed-over proposals from last year

and a bureaucratic shuffling of funds designed to extend the life of

the so-called Part A Trust Fund. What the administration would

describe as a prudent proposal to save Medicare and to give us

time to debate fundamental reform, I would describe as another

head-in-the-sand proposal that would distract us from the real
62

problems we already know are coming and should be addressed

now.

We are now at a crossroads regarding the future of Medicare.

The road that takes us across the President’s bridge is a well-worn

route to direct government controls of the type used in Canada and

most European countries. In the long run, I do not think this is in

the best interest of Medicare recipients, taxpayers, or, I might add,

Members of Congress.

We have the opportunity to take a different road, a road to fundamental reform that uses the best of what we know about the delivery of quality health care, the economic behavior of consumers

and providers, and the performance of competitive markets, to help

save the Medicare Program in the next century. Such policies can

do a lot to improve the efficiency of health care markets, but they

may not be enough given the enormity of the problem.

As numerous other people have pointed out, the longer we delay

facing the real problems in Medicare, the more difficult it will be

to achieve what we all want, and that is a Medicare Program that

is affordable and provides realistic choices to beneficiaries.

I see two fundamental problems with this proposal. The first is

its emphasis on direct controls. I do not object so much to the

amount of the reductions as I do the perverse incentives that I

think these controls create. In particular, I think they threaten to

create situations of excess demand where providers will have

strong incentive to get around the controls. I think they will also

have incentives to discriminate among potential recipients, in particular, picking those that have fewer medical problems.

Consumers will also have strong incentives to get around these

controls, and, I might add, the controls create particular difficult

enforcement problems for the agency.

There is little doubt that a government can reduce outlays if it

is willing to devote increasing amounts of resources to enforcement.

You can see examples of that in the current budget.

The alternative to controls is the kind of system I think we could

get through competitive reforms. A competitive approach would create strong incentives for patients to choose health plans on the

basis of quality and value, and strong incentives for providers to

compete for patients on the basis of quality, service, convenience,

and value.

The second major problem I have is the failure to deal with

Medicare’s long-term demographic problem. I have some quotes in

my testimony from the trust fund trustees that I think are pretty

alarming. One way to illustrate this is to convert their percent of

payroll figures to actual dollar amounts. For example, the differences between Medicare expenditures and receipts under current

law are $48 billion in 2000; $91 billion in 2005; and $154 billion

in 2010. At this point we are not to the point yet where the baby

boomers start to turn 65. These annual deficits then jump to $268

billion in 2015 and $456 billion in 2020.

By whatever standard you use, these are large numbers. They

make the point that Robert Reischauer has already made, that it

is time to get started on Medicare reform.

Let me also say a word about the transfer of home health care

benefits. I think focusing on the home health care benefit in terms
63

1For a more complete treatment of this topic with numerous references to the economic and

health policy literature, see my testimony to this committee on February 10, 1994.

of which fund it ought to be in misses the main point. The most

important effect of this proposal is on the source of funding for

Medicare. Since the payroll tax now funding part A is not reduced

after this shift and the part B premium is not increased, the net

effect of the transfer of home health is to transfer general funds

from the overall budget to part A. This has the effect, as Robert

Reischauer has already said, of further reducing the discretionary

portion of the Federal budget. I think this shift creates longer run

problems for the Congress and for the future of the program.

In conclusion, let me point out there are lots of market-based solutions we could follow that have been proposed. My own preference is a defined contribution plan. I think that that would be

much more efficient than direct controls. I have seen Karen Davis’

testimony and her emphasis on protecting the poor. I do not think

such a defined contribution plan has to penalize the poor, but it

will force us to be more explicit about what we are willing to pay

for the poor.

Thank you.

[The prepared statement follows:]

Statement of Robert B. Helms, Director, Health Policy Studies, American

Enterprise Institute

Mr. Chairman, this little sign reads, ‘‘Robert Helms, Assistant Secretary for Bureaucratic Fast Foods.’’ This was on my door at HHS when I was an assistant secretary in the Reagan Administration. The origin of this sign was an op-ed in the

Washington Post which described HHS’s part of one of the Reagan budgets as,

‘‘warmed-over policies and bureaucratic fast food.’’

I was reminded of this description when I looked at this Administration’s Medicare proposals. They consist of warmed-over proposals from last year and a bureaucratic shuffling of funds designed to extend the life of the so-called Part A Trust

Fund. What the Administration would describe as a prudent proposal to save Medicare and give us time to debate fundamental reform, I would describe as another

head-in-the-sand proposal that will distract us from the real problems we already

know are coming and should be addressing now.

We are now at a crossroad regarding the future of Medicare. The road that takes

us across the president’s bridge is the well-worn route to direct government controls

of the type used in Canada and most European countries. In the long run, this is

not in the best interests of Medicare recipients, taxpayers, or, I might add, Members

of Congress.

We have the opportunity to take a different road, a road to fundamental reform

that uses the best of what we know about the delivery of quality health care, the

economic behavior of consumers and providers, and the performance of competitive

markets, to help save the Medicare program in the next century. Such policies can

do a lot to improve the efficiency of health care markets, but we should not promise

too much. Given the enormity of Medicare’s unfunded liability, even competitive reforms may not be enough. We will have to do even more to change people’s expectations about what is realistic.

As numerous others have pointed out, the longer we delay facing up to the real

issues in Medicare, the more difficult it will be to achieve what we all want—a

Medicare program that is affordable and provides realistic choices to beneficiaries.

The critical choice for Medicare is between a system that relies on direct controls

and one that relies on the incentives of providers and consumers. To illustrate why

I think it is important that we start on the road to reforms based on market incentives, I would like to briefly describe two fundamental problems I see with the President’s Medicare proposals.1
64

2President’s FY 1998 Budget: Medicare Savings and Investment Proposals, Background Materials, February 1997. Decimals do not equal due to rounding. 3Medical markets can be defined for numerous medical providers, types of procedures, and

for different geographical locations, so it is likely that specific Medicare controls have had different effects in different markets, and even no effect in some markets. 4 Any economist can be expected to point out that the effects of direct controls are not the

same if a market is less than perfectly competitive. That is theoretically correct, and I will not argue that: medical markets are perfectly competitive; that monopoly power may not exist in

some contemporary medical markets; or that the extent of monopoly power did not exist in medical markets in the past. For today’s policy discussions, I think it is reasonable to look on most

medical markets as highly competitive. Two AEI studies present evidence relating to the competitiveness of medical markets: H.E. Frech, III, Competition & Monopoly in Medical Care,

Washington, D.C.: The AEI Press, 1996; and Michael A. Morrisey, Cost Shifting in Health Care,

Washington, D.C.: The AEI Press, 1994.

TWO FUNDAMENTAL PROBLEMS

While the President’s Medicare proposals present numerous detailed policy issues,

I want to concentrate on what I think are two fundamental shortcomings in the

basic policy approach being followed by the Administration.

1. The emphasis on direct controls: The President’s budget proposes reductions from current law Medicare outlays by $132.4 billion over five years (FY 1998–2002)

and additions of $32.3 billion, for a net saving of $100.2 billion.2 The bulk of this

reduction is from reducing payment rates for hospitals ($33 billion), physicians ($7

billion), home health agencies ($14 billion), and skilled nursing facilities ($7 billion),

and reducing payment rates to Medicare managed care ($34 billion).

The objection to this approach is not the amount of the estimated reductions, but

the perverse incentives they will create over the next several years. It is the nature

of what budgeteers call ‘‘the wedge effect’’—policies that force a lower rate of growth

have continually larger effects as the years go by. The problem here is in knowing

what wedge to measure when we are making comparisons between proposed policies

and current market conditions. Both CBO and OMB measure savings against a

baseline of what they estimate will happen under current law. But the actual effect

on providers may be larger or smaller depending on what providers would have

charged had they had more freedom to do so. If existing controls have had any effect

on what providers actually receive, as seems logical for most medical markets,3 then

the effect of direct controls can be expected to increase over time.

There is a large literature about the effects of controls that push prices lower than

would exist in a competitive market.4 Controls affect providers on the supply side,

consumers on the demand side, and the agency that is charged with enforcing the

controls. Providers usually receive the most attention because the controls have a

larger per capita effect in the income of providers and because they are usually better organized to complain about the controls. Effective controls give providers incentives to reduce the supply of the products or services being controlled. Even if it is

against the law to reduce supply, there are many subtle ways to reduce the quality

or convenience associated with the product or service.

One aspect of producer behavior in medical markets that should be of particular

interest to policy makers is the incentive to discriminate among potential consumers

(patients) on the basis of their medical condition. If both the provider and the patient are prevented from using higher prices to ration the available supply, then

there will be strong incentives for the provider to pick only those patients that satisfy his or her own preferences, whatever they happen to be. The result is likely

to be increasing problems for Medicare beneficiaries to gain access to the providers

they would prefer to see. This lack of access could be expected to be greater for patients with more serious medical problems which expose the provider to increased

risks.

In addition to these effects on providers and patients, controls also can be expected to cause increasing problems for the agency charged with enforcement. All

markets have some degree of what can be called fraud and abuse. Direct controls

which increase in their effect over time create a new definition of what may be considered illegal as both providers and patients have growing incentives to charge and

pay illegal payments to circumvent the effects of the controls.

There is little doubt that a government can reduce outlays if it is willing to devote

increasing amounts of resources to enforcement, and is willing to try to block the

efforts of both providers and Medicare recipients who want to avert the controls.

But the ‘‘opportunity cost’’ of such an approach is the efficiency that could be obtained if both providers and Medicare recipients had positive incentives to improve

both the quality and the cost-effectiveness of medical services. The objection to controls is not the amount of the savings, but the method of getting there. A competitive approach could create strong incentives for patients to choose health care or
65

5 All three quotes taken from the 1996 Annual Report of the Board of Trustees of the Federal

Hospital Insurance Trust Fund, p. 15.

health plans on the basis of quality and value. And, at the same time, providers

would have the incentive to compete for patients on the basis of quality, service convenience, and value. Meanwhile, the agency administering the program has a much

easier time with enforcement.

2. The failure to deal with Medicare’s long-term demographic problem: Much has

been written and said about what will happen to Medicare once the baby boom generation begins to become eligible for Medicare after 2010. But in my view, nothing

is more alarming than the last report of the HI trustees, a document typically

known for its dry and technical language. Some examples follow:

The HI program remains severely out of financial balance. As we have said since

1992, we must report that the HI trust fund does not meet even our short-range

test of financial adequacy.

The long-range outlook also remains extremely unfavorable. The trust fund fails

by a wide margin to meet our long-range test of close actuarial balance, . . . To bring

the HI program into actuarial balance, over just the next 25 years under the intermediate assumptions, would require either that outlays be reduced by 39 percent

or that income be increased by 63 percent (or some combination of the two) throughout this 25-year period.

. . ., substantially stronger steps will be needed to prevent trust fund depletion

after 2010 as the baby boom generation reaches age 65 and starts receiving benefits.

At that time, the ratio of workers to HI beneficiaries, currently about 4 to 1, is projected to begin declining rapidly to a ratio of about 2 to 1.5

My own way of illustrating the magnitude of Medicare’s problem is to convert

trust fund reports’ income and cost figures as a percent of payroll into actual dollar

amounts and look at the annual difference between Medicare projected revenues

and expenses. Based on the latest Trustees Report, these annual differences are:

2000 ........................... $48 billion

2005 ........................... $91 billion

2010 ........................... $154 billion

2015 ........................... $268 billion

2020 ........................... $456 billion6

6 Intermediate projections of the 1996 HI Trustees’ Report, Table II.E2; Payroll figures from the Office of the

Actuary, HCFA.

By whatever standard you want to use, these are large numbers. They illustrate

the size of the problem that we have, a problem so large that we need to get started

on finding a solution now rather than wait until 2007. We now have about 13 years

to start our transition into a different kind of Medicare program. Waiting even five

years to start the transition to a new program will make it even more difficult to

achieve efficient reform. Whether we choose direct controls or competitive reforms,

all providers and consumers will experience large changes in the way Medicare operates. The sooner we get started, the easier it will be.

Another aspect of this failure to face up to the long-term problem with Medicare

is the one item proposed in the President’s budget to extend the solvency of the Part

A trust fund, the transfer of home health care from Part A to Part B. The Administration has defended this on the basis that the home health benefit is more like Part

B benefits so should be part of that program.

I think focusing on where the home health benefit should be misses the main

point. The most important effect of this proposal is on the source of funding for

Medicare. Since the payroll tax now funding Part A is not reduced, and the Part

B premium is not increased, the net effect of the transfer of the program is to transfer general funds from the overall budget to Part A. This has the effect of further

reducing the discretionary portion of the federal budget. Regardless of where home

health care is located, is this shift of the sources of funding in the best interest of

taxpayers?

CONCLUSION

There are numerous policies that have been proposed to start us down the road

to efficient market reform of the Medicare program. My own preference is that we

should adopt a defined contribution plan for Medicare and let Congress decide how

much they want to spend on it. I do not think such a system has to penalize the

poor, but it would require us to be explicit about the cost.
66

Unlike direct controls, all such proposals seek to create a more competitive health

care market and give consumers stronger incentives to choose among competing

plans. If the profession of economics has anything to contribute to this debate, it

should be that no one can predict exactly what should be the most efficient method

of delivering, organizing, and financing health care in the future. The best we can

do is try to create the right incentives so all players in these markets will attempt

to adjust their behavior to meet the needs of consumers. We know from economic

history that competitive markets are much more efficient than the political process

in finding out the most efficient way to satisfy consumers. It is time we started

down that road.

Ms. Davis.

Chairman THOMAS. Thank you, Mr. Helms.

f

STATEMENT OF KAREN DAVIS, PRESIDENT, COMMONWEALTH

FUND, NEW YORK, NEW YORK

Ms. DAVIS. Thank you, Mr. Chairman.

I am delighted to be here to testify on the President’s Medicare

proposal and to look at it in the context of the long-term changes

in Medicare that are required.

I would like to highlight some points that are in a set of charts

at the back of my statement. In chart 1, the Subcommittee has discussed the fact that the elderly pay 21 percent of their income now

on health expenses. I would point out that for low-income beneficiaries, even with Medicaid supplementation, the average they

spent out of income is 30 percent.

Chart 2 points out that the Medicare benefit package has deteriorated over time and not kept pace with certainly what employer

plans have been doing. For example, in 1966 when Medicare was

introduced, the part A deductible was $40; in current dollars, that

would be $190. But because we have indexed it to the cost of hospital care, the elderly pay $736 for a hospital stay. The part B premium when it started was $3 a month; in today’s terms, that would

be $171, but in fact, we charge beneficiaries $510 a person. The elderly are paying more now than they paid when the program started, and benefits for the most part have not been improved. Ninetyfive percent of employer plans, for example, cover prescription

drugs, which Medicare does not.

Chart 3 notes that the amount that beneficiaries now pay for

their own health care expenses is $2,600 per person.

Chart 4 shows the distribution of the cost to Medicare of beneficiaries, depending upon how sick they are. The sickest 10 percent

of beneficiaries cost the Medicare Program $37,000 per person. The

healthiest 20 percent incur no Medicare expenses. The mean is

$4,700 per person.

This has tremendous implications for managed care. If we set a

capitation payment based on the mean, HMOs will make money if

they enroll beneficiaries who are in the healthiest 80 percent, and

they will lose money if they enroll the sicker beneficiaries. It is

those that they tend not to enroll and that cost the Medicare Program.

But the point I make in chart 5 is that those 10 percent of beneficiaries who are the sickest are also the ones who are paying the
67

most themselves. They spend $8,800 per person on average for

their own health expenses.

In chart 6 we have mentioned that Medicaid is there to pick up

the premiums and the cost sharing for the Medicare beneficiaries

with incomes below poverty. I would say two things about that.

First, only about two-thirds of those eligible are participating. It is

a little like Medicaid children who are eligible but not enrolled, so

we are not getting to all the elderly who are eligible for this.

But the other thing I would just remind the Subcommittee is that the poverty level for a single elderly person is $7,500, so you

are talking about beneficiaries above that amount having to pay

these out-of-pocket costs. And the premium subsidies under the

SLMB Program only go to 120 percent of poverty, so we are really

only protecting beneficiaries up to about $9,000 income, and these

out-of-pocket costs are very high for a beneficiary with a $10,000

or $15,000 income.

Chart 7 just looks at the history on how Medicare expenses per

person have grown compared with private. Medicare did better in

the late eighties. Private insurance expenditure growth has been

the same or a little better in the early nineties.

Chart 8 is the CBO projections on managed care enrollment. We

are expecting a lot of growth in Medicare managed care enrollment,

and therefore, some of the changes in the President’s budget to

change the way HMOs are paid, to tighten up on that because

there is overpayment, are worthy of consideration by the Subcommittee.

I raise some of my concerns about vouchers or moving toward a

defined contribution approach to Medicare, which would put beneficiaries at risk. Instead, in the long run, we certainly need to think

about improving Medicare benefits, improving protection for lowincome Medicare beneficiaries, moving forward with the structural

reforms, such as prospective payment for all Medicare services and

reforming the Medicare managed care options, particularly providing better information to beneficiaries and setting better quality

standards, which the Health Care Financing Administration is beginning to do but which I think are really currently in a very rudimentary stage.

Thank you.

[The prepared statement follows:]

Statement of Karen Davis, President, Commonwealth Fund, New York, New

York

Thank you, Mr. Chairman, for this opportunity to testify on budgetary savings to

the Medicare program and considerations that should shape long-term changes in

the Medicare program. Medicare has brought health and economic security to elderly Americans for over 30 years. Before it was enacted half of older Americans were

uninsured, leaving them and their families at risk of financial catastrophe in the

face of major illness. Medicare has improved access to health care, contributed to

better health for millions of elderly Americans, and protected against the financial

hardship of medical expenses. These fundamental goals should be preserved.

Consideration of Medicare budgetary savings should be in the context of desired

long-run changes to assure Medicare better meets the needs of an aging population

in the 21st century, encourages preventive care, promotes efficiency, and adapts to

the changing American health care delivery system. Principal issues include:

• Medicare premiums, cost sharing, and benefits

• Prospective payment methods for all health care providers

• Medicare’s managed care options

• Financial solvency.
68

1Marilyn Moon, Crystal Kuntz, and Laurie Pounder, Protecting Low-Income Medicare Beneficiaries, The Commonwealth Fund, December 1996. 2 Janice Blustein, ‘‘Medicare Coverage, Supplemental Insurance, and the Use of Mammography by Older Women,’’ New England Journal of Medicine 332:1138–1143, April 27, 1995. 3 Harriet L. Komisar, Jeanne M. Lambrew, and Judith Feder, Long-Term Care for the Elderly,

The Commonwealth Fund, December 1996. 4Marilyn Moon, Restructuring Medicare’s Cost-Sharing, The Commonwealth Fund, December

1996.

MEDICARE PREMIUMS, COST SHARING, AND BENEFITS

The President’s budget protects beneficiaries from additional out-of-pocket costs

for health care. The President’s five-year budget proposal includes:

• $10 billion savings from holding the Part B premium at 25 percent of outlays

• A cost of $7 billion for gradually reducing the coinsurance on hospital outpatient care to 20 percent from 46 percent currently

• A cost of $6 billion for improved preventive services coverage and an Alzheimer’s respite benefit.

The net impact on beneficiaries is about a wash—although some beneficiaries will

pay slightly more than under current law, and some will have out-of-pocket costs

reduced.

Concern for beneficiary financial burdens is appropriate. About three-fourths of all

Medicare beneficiaries have incomes below $25,000. On average Medicare beneficiaries already spend 21 percent of their income on health care. For those with incomes below the poverty level, elderly beneficiaries spend 30 percent of income on

health care.1

These high costs come in large part because the Medicare benefit package has deteriorated rather than improved over the last 30 years. The structure of benefits is

fundamentally the same today as it was when it was implemented, but cost-sharing

is considerably higher. In 1966 the hospital deductible was $40 ($190 in 1996 dollars); in 1996 it was $736. The deductible for Part B (Supplementary Medical Insurance) services is $100, also up from $50 in 1966, but lower in current dollars than

it was in 1966 ($238 in 1996 dollars). The Part B premium was originally set at

$36 ($171 in 1996 dollars), representing 50% of SMI outlays; in 1996 it was $510

a year representing 25% of program outlays. These premiums and cost-sharing are

also higher than faced by most workers. In addition most employer plans include

a ceiling on out-of-pocket expenses; Medicare does not.

The Medicare benefit package is essentially unchanged over the last 30 years. The

only major new services include hospice care, rural health clinics, drug coverage for

immunosuppressive drugs, erythropoietin for persons with chronic kidney failure,

outpatient chemotherapy, and some limited preventive services (subject to the Part

B deductible and 20% coinsurance).

The application of cost-sharing to preventive services such as mammograms has

restricted access to this service, especially for those without supplemental coverage

to Medicare. A recent study supported by The Commonwealth Fund found that elderly women without Medicaid or supplemental private health insurance were much

less likely to get mammograms.2 The financial barriers posed by deductibles and coinsurance for cancer screening contribute to failure to detect cancer in an early

stage when recovery chances are higher.

Medicare does not cover prescription drugs (covered by 95 percent of employer

plans). Not covered, for example, are insulin, cholesterol-lowering drugs, hormone

replacement therapy medication, and pain medication for cancer patients. Medicare

also has limited long-term care benefits (only 16 percent of nursing home and home

health care is paid by Medicare; another 38 percent is paid by Medicaid.3

The high cost-sharing and limited benefits expose seriously ill Medicare beneficiaries to high out-of-pocket costs. In 1996 Medicare beneficiaries paid $2,605 per

person for their own health care costs. Medicare expenditures and out-of-pocket

costs, however, are highly skewed. The sickest 10 percent account for 75 percent of

Medicare outlays. In 1996 the sickest 10 percent of Medicare beneficiaries averaged

$37,000 in Medicare outlays; the healthiest 20 percent incur no Medicare expenses.4

But the sickest beneficiaries also spent the most themselves. Their out-of-pocket

costs for Medicare covered services was $5,600, and their out-of-pocket costs for all

health services was $8,800. Any increase in cost-sharing would fall disproportionately on these beneficiaries and add to this considerable financial burden.

Since a major purpose of Medicare is to provide financial protection for beneficiaries, a good case could be made for improving benefits, lowering cost-sharing,

and raising premiums in the long-term. This would improve financial protection, especially for the 10 percent of Medicare beneficiaries who have no supplemental re-
69

5General Accounting Office, MediGap Insurance: Insurers’ Compliance with Federal Minimum

Loss Ratio Standards, 1988–1993, August 1995. 6Marilyn Moon, Crystal Kuntz, and Laurie Pounder, Protecting Low-Income Medicare Beneficiaries, The Commonwealth Fund, December 1996. 7The Commonwealth Fund Commission on Elderly People Living Alone, Old, Alone, and Poor,

April 1987.

tiree or Medigap coverage and for those chronically ill Medicare beneficiaries with

major health care expenses.

One possibility would be giving Medicare beneficiaries the choice of a comprehensive benefit package with little or no cost-sharing and a commensurately higher premium so that beneficiaries would not be forced to purchase costly private MediGap

coverage. With some important exceptions, MediGap plans often deny coverage to

elderly people with pre-existing conditions. MediGap plans are required by federal

law to limit administrative costs to 40 percent for individual plans and 25 percent

for groups plans; yet in 1993, 38 percent of plans did not comply with minimum loss

ratio standards.5 Combining supplemental coverage with Medicare into a single

comprehensive Medicare benefit package would lower administrative costs, reduce

paperwork burdens, and the necessity of coordinating Medicare and MediGap payment. At a minimum MediGap plans should be required to accept all Medicare beneficiaries without underwriting, excluding bad risks, or charging higher premiums to

sick or very old beneficiaries.

Low-income elderly and disabled beneficiaries have increasingly relied on the

Medicaid program to supplement their Medicare benefits. The Qualified Medicare

Beneficiary (QMB) program entitles all poor Medicare beneficiaries to supplemental

Medicaid coverage to pick up cost-sharing and premiums. Beneficiaries with incomes

up to 120 percent of the poverty level are eligible for Medicare Part B premium subsidies from Medicaid (Specified Low-Income Medicare Beneficiary [SLMB] program).

These provisions are quite modest. The poverty level for a single elderly person in

1996 was $7,525 and $9,484 for a couple.

Only about two-thirds of those eligible for QMB coverage, however, participate,

and only about 10 percent of those eligible for SLMB do so.6 A Commonwealth Fund

study found that the most common reasons why elderly poor are not covered by public benefit programs are that they are unfamiliar with the programs or do not think

they are eligible.7 Better outreach to those who are qualified for Medicaid supplementation to Medicare is important.

Poor and near-poor elderly are more likely to be experiencing health problems

that require medical services than elderly people who are economically better off.

Yet, they are less able to afford needed care because of their lower incomes. For

those who do get care, large out-of-pocket medical expenses can lead to impoverishment.

Medicaid could be improved to assure better benefits and financial protection for

low-income Medicare beneficiaries. Federalizing this portion of Medicaid, improving

supplemental coverage (including prescription drugs), and increasing eligibility to,

say, 150 percent of poverty are options worthy of exploration. Federalization of the

QMB and SLMB programs would permit better coordination with Medicare and

likely increase participation of those eligible.

In short the President’s budget represents modest steps toward improving benefits

and protecting beneficiaries financially. It provides for annual mammograms without cost-sharing. It provides respite benefits for families of Alzheimer’s patients. But

more significant steps over the long-term will be required to modernize the Medicare benefit package, including prescription drugs, lower cost-sharing, and assure

the adequacy of supplemental coverage for poor and near-poor beneficiaries.

PROVIDER PAYMENT

The President’s budget obtains the bulk of its projected five year savings by tightening provider payments: $33 billion from hospitals, $7 billion from physicians and

other practitioners, $14 billion from home health agencies, $7 billion from skilled

nursing facilities, $2 billion from other providers, and $9 billion from measures to

curb fraud and abuse.

The extent to which Medicare can tighten payments to providers without jeopardizing access to quality services for beneficiaries and introducing serious financial instability in the health sector is a judgment that is difficult to make with any precision. As a general principle Medicare can not depart too fundamentally from payment rates in the private sector without risking the deterioration of its fee-forservice coverage.
70

8Physician Payment Review Commission, Annual Report to Congress 1995, p. 83. 9Marilyn Moon and Stephen Zuckerman, Are Private Insurers Really Controlling Spending

Better than Medicare? The Urban Institute, July 1995.

Because Medicare is a major source of revenues to health care providers, nearly

all qualified health care providers and increasingly nearly all HMOs have opted to

participate—despite the fact that payment rates have historically been set by Medicare below private sector rates. In the last few years managed care plans have followed Medicare’s practice of using significant purchasing power to obtain ‘‘price discounts’’ from providers.

Medicare has been an innovator in provider payment. Its system of physician payment has been increasingly accepted by physicians as payment in full. Its innovations in physician payment in fact have contributed to the growth of managed care

plans who use it as a basis for establishing fee schedules for physicians participating in discounted fee-for-service managed care plans. A survey of managed care

plans finds that Medicare still obtains the best ‘‘discounts’’ from physicians—with

most managed care plans paying physicians in excess of Medicare rates.8

A good comparison of the performance of Medicare and private coverage for the

working population is difficult because of the age differences in those it covers. Instead analysts have focused on comparing the rates of increase in Medicare and private sector outlays. Prior to the mid-1980s both Medicare and private health expenditures grew rapidly, with Medicare growing slightly faster. Starting with the

introduction of prospective payment for hospitals, Medicare grew more slowly than

private health expenditures in the mid-1980s to early 1990s.9 Employers complained

regularly that Medicare was ‘‘cost-shifting’’ to the private sector because it achieved

price ‘‘discounts’’ from hospitals and physicians.

The development of private sector managed care plans that used their collective

purchasing power to obtain price discounts appears to have moderated the growth

in employer premiums in the 1990s. Recent reports suggest, however, that this period of moderation may now be ending, as both Medicare and private plans become

subject to the underlying forces that have driven health care costs historically—

labor-intensive services and improving health care technology.

Over the long run both Medicare and private health insurance are driven by underlying trends in health care costs. A sustainable rate of growth of Medicare outlays, therefore, is one that assures that Medicare expenditures per capita adjusted

for the aging of the population grows over the long-term at the same rate as the

rest of the health sector. Otherwise the quality and accessibility of services under

Medicare are likely to deteriorate relative to that of other patients. To define ‘‘sustainability’’ as a rate of growth of Medicare outlays that obviates the need to increase taxes or increase beneficiary financial contributions is to ignore the fundamental goal that Medicare is trying to achieve—access to quality health care services and financial security for beneficiaries.

Rather than continue the attack on Medicare’s fee-for-service option, it is important that the innovations of prospective payment for hospitals and physicians be extended to other Medicare services. Growth in Medicare hospital and physician expenditures have moderated considerably. The major areas where Medicare is now

growing rapidly are for those services not covered by prospective payment approaches—particularly home health, skilled nursing facilities services, subacute hospital care, and hospital outpatient care. Developing new methods of prospective payment for these services should be a top priority, and the President’s budget recommends steps in this direction. Other techniques such as profiling patterns of utilization of different physicians, appropriateness guidelines, and high cost case management may also generate further savings.

Nor should we lose sight of the fact that growth in health care spending nationally and in Medicare have brought improvements in life expectancy and quality of

life. Life expectancy at age 65 has increased by three years since Medicare was enacted, and the U.S. is a world-leader in life expectancy of older adults. Technological

innovations such as cataract surgery, joint replacements, and advanced methods of

treating coronary artery disease have prolonged life and improved functioning for

millions of Americans. Medicare, in particular, has contributed to technological advances not only by directly financing health care for older Americans but through

payments to academic health centers which are on the forefront of developing and

testing new advances in medicine.

MEDICARE’S MANAGED CARE CHOICES

The President’s budget also proposes to achieve $34 billion over five years in savings under its managed care options. This is to be achieved by: tightening fee-for-
71

10 Congressional Budget Office, January 1997 Baseline: Medicare/Medicaid, January 18, 1997. 11 John E. Ware, Jr., Martha S. Bayliss, William H. Rogers, Mark Kosinski, and Alvin R.

Tarlov, ‘‘Differences in 4-Year Health Outcomes for Elderly and Poor, Chronically Ill Patients

Treated in HMO and Fee-for-Service Systems: Results From the Medical Outcomes Study,’’

Journal of the American Medical Association 276:1039–1047, October 2, 1996. 12Linda J. Weiss and Jan Blustein, ‘‘Faithful Patients: The Effect of Long-Term PhysicianPatient Relationships on the Costs and Use of Health Care by Older Americans,’’ American

Journal of Public Health, December 1996. 13 R. Brown et al., The Medicare Risk Program for HMOs: Final Summary Report on Findings

from the Evaluation, Mathematica Policy Research, February 18, 1993.

service provider payments, which lowers the managed care capitation rate ($18 billion); a proposal to lower the capitation rate from 95 percent to 90 percent of the

fee-for-service cost ($6 billion); removing the allowance for teaching and disproportionate share from the managed care capitation rate ($10 billion); and reducing the

wide geographic disparities in the payment rates (budget neutral). In addition, the

proposal would expand the kinds of managed care plans eligible to participate in

Medicare.

Managed care plans are aggressively marketing to Medicare beneficiaries. Medicare permits qualified health maintenance organizations, including point of service

plans, to participate in the program. Seventy percent of HMOs offer coverage to

Medicare beneficiaries. Currently 10 percent of Medicare beneficiaries enroll in

HMOs, but this number is growing rapidly. The Congressional Budget Office estimates that by the year 2000, 20 percent of Medicare beneficiaries will belong to

HMOs.10

Genuine choices between quality managed care and fee-for-service care for Medicare beneficiaries are important to preserve over the long-term. Fee-for-service care

has the disadvantage of creating incentives for too much care at too high cost; managed care has the disadvantage of creating incentives for too little care at substandard quality. Providing a genuine informed choice for beneficiaries of both options may counter the harmful consequences of either extreme. If either part of the

program deteriorates in the quality and level of service available, neither beneficiaries nor the government will be well served. Careful attention, however, will

need to be paid to issues of risk selection since sicker beneficiaries are more likely

to opt for fee-for-service coverage while healthier beneficiaries are more likely to enroll in managed care plans.

While most Medicare beneficiaries have managed care options available to them,

familiarity with this option is not widespread. Medicare could systematically make

information available to beneficiaries about choices in their geographic area, and

conduct a formal annual enrollment process.

It is important, however, that managed care plans be held to high quality standards. A recent study finding that health outcomes of elderly patients worsen under

managed care compared to fee-for-service care is particularly troubling.11 There may

also be a significant downside to managed care enrollment that requires beneficiaries to change physicians. A study supported by The Commonwealth Fund

found that continuity of care from retaining the same physician for a long period

of time has benefits. Medicare beneficiaries who had seen the same physician for

ten or more years had fewer hospitalizations and lower Medicare costs.12

Starting slowly is important. Expanding coverage to loosely organized managed

care plans such as preferred provider organizations does not seem warranted, until

many of the problems with current capitation payment are resolved and adequate

quality standards established and an enforcement mechanism instituted. The

Health Care Financing Administration is taking important steps to require that participating managed care plans provide standardized information on quality indicators, but an effective quality information and assurance system is a long way from

realization. Nor does the program as yet require accreditation of HMOs. One protection for beneficiaries is the right to disenroll from a managed care plan on a monthly basis. This ability to ‘‘vote with their feet’’ is an important protection until better

quality standards are in place.

Even if enrollment in managed care plans were to expand more rapidly, it would

not yield savings to the program. The best study on the issue finds that the actual

cost of serving Medicare beneficiaries who opt for HMO enrollment is 5.7 percent

more than Medicare would have paid for these same beneficiaries had they been

covered under fee-for-service Medicare coverage.13 Instead of saving Medicare

money, the program loses almost 6 percent for every Medicare managed care enrollee.

Nor is there compelling evidence that managed care generates health system savings over the long term. Most savings such as price discounts or reduced hospitalization are one-time savings and do not offset the rate of increase over time. Managed
72

care administration costs, furthermore, average 15 to 20 percent, compared with

Medicare’s 2 percent administration costs.

Medicare loses money on managed care to the extent that plans enroll and retain

healthier than average beneficiaries. Given the extreme variability in health outlays

among beneficiaries, there is great leeway for plans to select relatively healthier

beneficiaries for whom capitated rates exceed true costs. If managed care plans succeed in attracting and retaining relatively healthier Medicare beneficiaries (which

they have very strong incentives to do), Medicare will be overpaying for those under

managed care, and yet paying the full cost of the sickest Medicare beneficiaries who

are unattractive to managed care plans. Managed care plans have the option of

switching out of the risk contract program if they experience adverse selection.

The current method of paying managed care plans for Medicare patients is seriously flawed. Its primary weakness is that it does not adequately adjust for differences in the health status of beneficiaries. Unfortunately, a good method of setting capitation rates to adjust for differences in beneficiary health status still seems

years away.

Tying Medicare HMO payment rates to local fee-for-service experience is neither

equitable nor tenable in the long-term. A national rate with appropriate geographic

adjustment for differences in the cost of practice would be preferable. However,

rates are currently so widely variable across geographic areas that a long transition

period will be required.

The current method of Medicare HMO payment includes allowances for the direct

and indirect costs of medical education, even though managed care plans do not

incur these costs; The payment rate also includes an allowance for disproportionate

share payments even though managed care plans do not cover the uninsured, and

in general are open only to those who can afford the premium or have employers

or public programs that pay the premium on their behalf.

It makes little sense to overpay HMOs and encourage Medicare beneficiaries to

enroll, yet have the program lose money on each beneficiary who enrolls. If adequate measures to adjust for health status can not be developed in the short run,

serious consideration should be given to lowering the Medicare HMO payment rate.

It is currently set at 95 percent of Medicare projected expenditures for beneficiaries

with average health status. Given the favorable selection that occurs, reducing this

to 85 to 90 percent could be considered.

The extent of managed care abuses could be curbed by lowering capitation payment rates and imposing penalties on plans for high disenrollment rates, but the

basic underlying incentives are unlikely to be substantially altered. Nor has the

long-term success of managed care in controlling costs while providing quality care

to seriously ill patients yet been demonstrated. Proceeding cautiously and slowly is

in order.

VOUCHERS, MEDICAL SAVINGS ACCOUNTS, CATASTROPHIC COVERAGE

Another approach is to convert Medicare from a defined benefit program to a defined contribution program. Currently, Medicare sets payments to hospitals and

HMOs; this payment is payment in full. Hospitals and HMOs may not charge beneficiaries on top of what Medicare pays. Physicians have strict limits on balance billing over the fee schedule (no more than 15 percent above the fee schedule); and

about 90 percent of all claims are now assigned. Most defined contribution approaches would eliminate this feature and permit managed care plans and health

care providers to set their own charges, with beneficiaries financially at risk for the

difference between a fixed voucher and what providers and health plans charge.

In a difficult federal budgetary climate, capping the federal budget obligation for

Medicare on first examination has appeal as a policy option. Vouchers or giving

beneficiaries the actuarial value of Medicare to purchase private coverage permits

the government to control its expenditures regardless of the trend in health care

costs. However, this approach shifts financial risks to beneficiaries, and undermines

the financial security that Medicare is intended to provide. By freeing managed care

plans, hospitals, and physicians to charge whatever they choose in the marketplace,

the benefit of the large purchasing power that Medicare has, as well as the governmental authority it represents, no longer would be available to help beneficiaries obtain care at lower cost.

Proposals to change Medicare into catastrophic coverage with, for example, a

$2,500 combined deductible could pose major barriers to care for low-and modestincome beneficiaries. A high deductible with no ceiling on out-of-pocket costs is especially of concern.

Vouchers to purchase catastrophic health coverage with the balance invested in

medical savings accounts raise particular concerns. Such provisions are likely to be
73

costly to the Medicare program. While a mandatory voucher system could be designed to guarantee savings, a voluntary voucher program is almost certain to be

attractive only to relatively healthier beneficiaries. Setting the voucher at an average level could result in very substantial overpayments. Medicare currently spends

very little on the healthiest 50 percent of Medicare beneficiaries. If they were to

take vouchers, the cost to the program could be extraordinary. Skimming off the

healthiest Medicare beneficiaries undermines the advantages of risk pooling that

Medicare as a universal program now achieves.

The most serious potential problem with vouchers is that the market would begin

to divide beneficiaries in ways that put the most vulnerable beneficiaries—those in

poor health and with modest incomes—at particular risk. If vouchers or other types

of specialized plans like medical savings accounts skim off the healthier, wealthier

beneficiaries, many Medicare enrollees who now have reasonable coverage for acute

care costs, but who are the less desirable risks, would face much higher costs due

to the market segmentation. A two-tier system of care could result in which modest

income families are forced to choose less desirable plans.

Catastrophic coverage is unlikely to be attractive to many beneficiaries. After all,

90 percent of Medicare beneficiaries now obtain supplemental coverage to avoid the

$736 Part A deductible and $100 Part B deductible. Few beneficiaries who truly understand that a plan has a $5,000 or $6,000 annual deductible are likely to find it

attractive. Many of the chronically ill would be required to pay this deductible not

just once, but year after year. Nor is it affordable for the three-fourths of Medicare

beneficiaries with incomes below $25,000. If beneficiaries were to experience a serious illness, they could face financial bankruptcy and bad debts to providers. Providing financial protection for beneficiaries was the major rationale for creating Medicare. It should not be abandoned now.

Further, the experience with sale of private MediGap coverage to beneficiaries is

that without stringent safeguards, marketing abuses are likely. Confused or scared,

some beneficiaries could take options which are not in their best interests—nor

genuinely preferred by them.

On balance, vouchers offer little in the way of guarantees for continued protection

under Medicare. Further, the federal government’s role in influencing the course of

our health care system would be substantially diminished. For some, this is a major

positive advantage of such reforms. But the history of Medicare is one in which the

public sector has often played a positive role as well, first insuring those largely rejected by the private sector and then leading the way in many cost containment efforts. But most troubling is the likelihood that the principle of offering a universal

benefit afforded by social insurance would be seriously undermined.

FINANCING MEDICARE IN THE 21ST CENTURY

The President’s budget would ensure the solvency of the Part A Trust Fund until

the year 2007 by shifting about half of home health services from Part A to Part

B. While this has been criticized as an accounting ‘‘gimmick,’’ there are sound analytic and pragmatic reasons for making this shift.

Pragmatically, the alternative short-term options for preventing the looming exhaustion of the Part A Trust Fund come down to: increasing beneficiary cost-sharing

for hospital and other Part A services, tightening provider payments substantially

further than those contained in the President’s budget, and increasing payroll taxes.

The deductible for Part A services is already exorbitant ($736 in 1996) and costsharing already falls heavily on those who are seriously ill enough to incur a hospitalization or need post-acute services such as home health or skilled nursing facility services. There is a limit to how rapidly the health sector can adjust to tighter

provider payment rates, and how sharply Medicare can curtail provider payment

rates relative to the private sector.

The fiscal problem of the Hospital Insurance Trust Fund is directly related to the

fact that hospital, home health, and skilled nursing facility care are financed by a

payroll tax, while general tax revenues and beneficiary premiums are used to finance ambulatory care. The payroll tax will always fall short of covering Medicare

hospital and post-acute care outlays—for the simple reason that the number of older

people is growing faster than the number of workers and health care costs historically go up faster than earnings. According to the Congressional Budget Office, the

Hospital Insurance Trust Fund could be solvent for an additional 25 years if the

payroll tax were increased by an additional 0.65 percent on both employers and
74

14 June E. O’Neil, ‘‘The Financial Status of the Medicare Program,’’ testimony before the Committee on Ways and Means, U.S. House of Representatives, May 2, 1995. 15General Accounting Office, Medicare: Home Health Expands While Program Controls Deteriorate, March 27, 1996. 16 Genevieve Kenney and Marilyn Moon, ‘‘Reining in the Growth in Home Health Services

under Medicare,’’ draft report to The Commonwealth Fund, February 1997. 17Pamela Loprest and Cori Uccello, Uninsured Older Adults: Implications for Changing Medicare Eligibility, The Commonwealth Fund, January 1997.

workers (from 1.45 percent now).14 More modest increases of, for example, 0.15 per- cent on both employers and workers, would generate about $10 billion annually.

Analytically, there is no reason why hospital and post-acute care benefits for the

elderly should be financed by a payroll tax and physician and other ambulatory

services should be financed by general revenues and premiums. Nor does it make

much sense that visits by a nurse to the home should be paid for by a payroll tax

while visits to the home by a physician should be paid for by general revenues and

premiums.

The real issue is the rapid growth of home health spending in recent years, and

what changes in the Medicare program would help assure that appropriate services

are being provided efficiently. Changing from cost reimbursement to prospective

payment is an important improvement. But the levels of service vary widely across

geographic areas and by type of home health agency. For-profit agencies provide

twice as many home health visits per beneficiary as nonprofit agencies.15 Home

health visits annually range from over 24,000 per enrollee in Louisiana to less than

3,000 in Wisconsin.16 Setting guidelines for numbers of services based on patient

health or functional status, and perhaps establishing an overall expenditure target

such as the Volume Performance Standard incorporated in the prospective payment

system for physicians are worthy of exploration.

Shifting some or all of home health services into Part B creates an opportunity

to apply methods appropriate to ambulatory services to home health care. By making a one-time reduction in the fiscal burden on Part A it also provides much-needed

time to address the more fundamental problems created by the division of Medicare

into Part A and Part B.

In the long-term it will be imperative to make changes in the way Medicare is

financed. Division into two parts is a historical artifact. In part the division arose

from the fact that it was modeled on Blue Cross (BC)/Blue Shield (BS) plans which

separately covered hospital and physician services; subsequently most BC and BS

plans have merged, but Medicare has not. Another reason that Medicare has two

parts is that Part B was tacked on late in the legislative process as a political compromise. Whatever its origins, it is fair to say that the dual structure serves little

useful purpose today and is even counterproductive.

How we choose to finance Medicare benefits is a policy choice, not a given dictated

by history. Merging Part A and Part B into a single Trust Fund would improve the

rational operation of the program, especially as managed care grows. With managed

care providing both hospital and physician services, a combined benefit makes more

sense. A single ceiling on out-of-pocket expenses is also facilitated by a single benefit.

In the long-run, payroll taxes may not be the best source of financing Medicare.

It would be useful to have a revenue source that grows automatically as the population ages—whether that is greater reliance on general revenues, new taxes such

as consumption taxes or value added taxes, a health sector tax, or greater taxes on

the elderly (e.g., taxing the actuarial value of Medicare or an income-related Medicare premium). Payroll taxes can continue to be a portion of financing, but will always generate periodic crises as Medicare expenditures outstrip payroll tax revenues. Nor can Medicare’s long term problems be solved by raising the age of eligibility

for Medicare. Employer retiree health benefits have been dropping precipitously in

the last decade. Today only about one-third of retirees have such coverage. Early

retirees between the ages of 55 and 64 are already at risk, and those with major

health problems find it difficult to obtain affordable coverage.17 Consideration

should be given to permitting those under age 65 to purchase Medicare coverage.

Subsidies may be required for low and modest income retirees to make such coverage affordable. Raising the age of Medicare eligibility would exacerbate this already serious problem.

BUILDING ON MEDICARE’S STRENGTHS

At present, too little attention is being focused on how to improve the functioning

of the Medicare program, rather than departing radically from its basic structure.
75

The goal should be preserving genuine choice for all Medicare beneficiaries to be

cared for by physicians or a health system of their choice while guaranteeing quality

care at a reasonable cost to beneficiaries and to taxpayers. Steps can be taken in

the short-term to: 1) improve benefits and financial protection for beneficiaries; 2)

institute prospective payment methods for all Medicare services; 3) improve Medicare’s payment system for managed care plans, set and enforce quality standards,

provide standardized information to beneficiaries, and manage an annual enrollment process with genuine choices for beneficiaries; and 4) extend the solvency of

the Part A Trust Fund while beginning an indepth examination of the merits of alternative sources of financing Medicare over the long term.

What should be preserved is the essential role that Medicare plays in guaranteeing access to health care services and protecting from the financial hardship that

inadequate insurance can generate for our nation’s most vulnerable elderly and disabled people. No American should become destitute because of uncovered medical

bills nor be denied access to essential health care services. Medicare is a model of

success. It should be strengthened and improved, and any fundamental restructuring should occur only after a full array of options is carefully analyzed, critiqued,

and debated.

Thank you.
f

76
77

On your chart 8—and we are going to have a hearing so that we

Chairman THOMAS. Thank you, Ms. Davis.

f

can get CBO estimates—I notice that you use the CBO baseline for

projection of percentage participation. Whether you view it as good

or bad, don’t you believe the changes that the President’s program

advocates, or any that we might adopt similar to those, would in

fact change the percentages of people going into HMOs? It certainly

would not make them more attractive to go into them; would you

agree with that?

Ms. DAVIS. I think if you tightened up the payment rate and

made it 90 percent instead of 95 percent, the HMOs would be able

to offer fewer supplemental benefits, and it would be somewhat less

attractive.

On the other hand, if Medicare is losing money for every person

who enrolls, it makes little sense, from the government taxpaying

point of view, to want more people to enroll.

I think the basic objective is to make it neutral, and one could

do that by trying to find a way of adjusting the current payment

rate for health status. In the absence of a good way of doing that,

I think that just lowering the rate has merit.
78

Chairman THOMAS. And you did use the phase, ‘‘if we are paying

more,’’ and you cited a study in your written testimony about the

fact that perhaps we are. I just lament—and in your written testimony, you also lament—the search for the ‘‘Holy Grail,’’ which is

a risk-adjusted mechanism that would allow us to make more objective comparisons within that structure. And it is just unfortunate that we do not have tools. I am ready for an imperfect tool

if I cannot get a better tool for doing those kinds of measurements.

Also in your chart—and you alluded to the number of children

who are eligible for Medicaid insurance who are not under it—similarly, seniors who are dual-eligible are not—why are we not doing

a better job of getting a higher participation rate? What is it? And

I ask anybody. You folks, especially Dr. Helms and you, have been

in the inside business on this. Why can’t we pick up a higher percentage in a program that already exists?

Ms. Davis. I think part of the problem is the Federal-State nature of Medicaid. The States do not want to pick up what they view

as the Federal Government’s responsibility of paying for the elderly, so they are the ones who have to go out and tell the elderly that

they are eligible for this benefit, which costs the State governments

money, so they view it as a mandate, as a higher cost on them.

When you look at the SLMB feature in New York City, the Medicaid officials did not have the form if somebody asked for it. It is

not in the State’s interest economically to make it known to these

beneficiaries that this is available.

Chairman THOMAS. If the Feds would in essence hold the States

harmless for any increase in the enrollment, if we are in fact going

to talk about legislating in this area, either for children or for seniors, don’t you think the most cost-effective way to spend Federal

dollars would be to pass through and encourage the States, who

are the primary contact points, to do a better job of enrolling, rather than starting Federal programs for these recipients?

Ms. DAVIS. Well, as I say, the States have an economic disincentive to do it.

Chairman THOMAS. But if we passed through and did not create

that disincentive, and we held them harmless—we have a Federal

dollar, we can pass it through to encourage the States to enroll

more, or we can use the Federal dollar to start a program at the

Federal level which in fact may cover those people who are in essence already covered. Which way would be a better way to spend

that Federal dollar?

Ms. DAVIS. Well, I think for the dual beneficiaries, those who are

eligible for both Medicare and Medicaid, you get problems of coordination across two programs, and there are some arguments administratively for making it a single program. But if you were to keep

it as a State level, certainly, to increase the Federal share on that

would be a way to give States more of an incentive to deal with

it.

Mr. REISCHAUER. Can I suggest that this really is a Federal responsibility? The motivations that Karen alludes to are perfectly

correct, but let us remember that the States have no idea who is

on Medicare and who is not among their populations. The Federal

Government does; the Federal Government sends notices saying

what changes in Social Security are going to be made in the next
79

year, what changes in part B premiums are going to be made. It

would not be hard to include in that notification a statement that

if your income is below 120 percent of the poverty level, and the

dollar value of that income could be given, that you could go to

your State enrollment agency for Medicaid and provide an address,

and you could, at a minimum, have your part B premiums paid for.

If you were below poverty, you could have your deductibles and coinsurance paid as well.

I see no reason to expect the States to be the parties responsible

for this kind of enrollment.

Chairman THOMAS. Karen, on your chart 1, where you break out

the out-of-pocket burden and you emphasize clearly that the poor

and the near poor are about 60 percent, I look at the chart and see

that somewhere around 30 percent are middle income and high income.

Currently, we have a general fund contribution of about 75 percent of part B costs. It is a subsidy to everybody in part B. And

your concern is with the lower end. If in fact we have this contribution, doesn’t it make more sense to take the total dollars and redistribute them to increase the protection for those who are least able

to pay and reduce the subsidy for those who are best able to pay?

Ms. DAVIS. I certainly agree with that. I certainly have no problem, if that is your question, with including the home health benefit in the part B premium and taking that added revenue and using

it to improve the premium protection at the low income or possibly,

as Mr. Reischauer suggests, an income-related premium surcharge

at the very high end.

I think you want to think about the income ranges you are talking about. Twenty-six hundred dollars, which is the average for everybody, is a lot of money today for an elderly person with a

$20,000 income or a $30,000 income. You have to look at how it

is borne, but certainly the basic notion of having better protection

at the low income, if you have got to raise more money through

beneficiaries, doing it through premiums rather than cost sharing

that falls on those who are very sick and if necessary, getting more

money out of the high-income level.

Chairman THOMAS. Now, that changes the program, and there

are a number of folks who are kind of adamant about not changing

this subsidy for everybody. But as we get into the scarce dollars

and looking for where and how we are spending it, I just do not

understand those who will look at this chart and be willing to

maintain problems at the lower end while providing a subsidy for

those who, with any—400 percent of poverty income getting 75

cents out of every dollar subsidy out of the general fund is just—

I do not understand why people are not willing. And the best statement we have been able to get out of the President is that he is

not unopposed to looking at something like that.

Somebody—and I do not want to say on your side—but somebody

has got to start talking about doing things that are prudent, like

taking the fixed amount of money we currently use and spending

it better. We have just got to start talking about that, or we are

never going to close on problem areas.

Ms. DAVIS. Mr. Chairman, at a Ways and Means conference I

think in 1984, I supported an income-related premium.
80

Chairman THOMAS. That is good enough; I just wanted to get

something on the record.

Ms. DAVIS. The point I would make is that only 5 percent of Medicare beneficiaries have incomes over $50,000, so you are not

going to generate a lot of revenue from it.

Chairman THOMAS. If it is one penny, how can you defend the

kind of program that continues to do that? It is done in large part

by some folks for philosophical reasons, and I think we have got

to get beyond some of these philosophical standards and look at

where and how scarce resources are being allocated.

Dr. Reischauer, you were talking about options that are available

to us, and when you boil it down, you either raise more revenue,

increase the age, or you look at the programmatic topography and

talk about change which will lead to changes in the future.

I was at an AARP meeting, and one of the women said, I do not

know why you did not just freeze the premium when it was at the

31.5 percent; it was just a couple of bucks for everybody, and they

would not have noticed it.

It is amazing now that the administration is moving at a 25-

percent freeze, and I think it is interesting that the difference between the 31.5-percent freeze and the 25-percent freeze equals at

least half of the $82 billion home health transfer. The simple timing of when we froze the premiums would have cut the problem in

half.

From your perspective and how you have watched the system

over the years, do you think there is any chance to go back to

something closer to the original 50–50, or is 25 percent in your

opinion about as high as we are ever going to get unless we rethink

the way in which we structure?

Mr. REISCHAUER. That is a political judgment. I guess I am optimistic——

Chairman THOMAS. Well, now that you are no longer director of

the CBO, you can proffer a political judgment if you want to.

Mr. REISCHAUER. I am hopeful that the part B premium can be

raised above 25 percent, particularly for those who have the capacity to pay. We have in the Medicare Program a program that subsidizes participants rather significantly. CBO’s estimates are that

the part B premiums and the payroll taxes paid by an averagewage individual retiring at age 65 in 1995 amounted to only 34

percent of their expected costs to this program. This is an issue of

a tradeoff. Somebody is paying that subsidy. Is the person paying

that subsidy, the average American taxpayer, or the average American beneficiary of some other program that is being cut back, more

in need of relief than the top half of the income distribution of the

Medicare recipients? I think the answer to that is yes.

Chairman THOMAS. Just let me say in terms of rethinking what

we are doing, that in our proposal last year, we worked closely with

Taft-Hartley unions who were quite concerned about people who,

through contract negotiations and others, are moving into a 55-

retirement period, and they have an enormous gap for 10 years, an

exposure, as they are no longer under an employer benefit program. And they were very excited about our structuring and union

participation retirement program that would blend in from the

workplace to Medicare.
81

We had a couple of other initiatives, and it is interesting to me

that the original argument was that we want to maintain fee-forservice because that is more like what people have in their place

of employment than managed care, and that slowed down the

movement toward managed care, and all of a sudden, when no one

was looking, 75 percent of those people who received their health

insurance from their employers are now in managed care. And if

we do not create a reach-back from the workplace to the rocking

chair and create a seamless blend in those kinds of programs, we

are going to lose a real opportunity to be innovative.

I noticed it was not in the President’s program, although he has

moved toward the provider-sponsored organizations, but I think if

we focus on who it is that is offering it, and for those who are willing and need a transition kind of structure, if we can work with

employers through the 100-percent writeoff incentive that is in the

Tax Code, we might be able to create a more receptive atmosphere

for folk to build these programs that move from the workplace to

retirement because when people talk about raising the retirement

age—and I know Dr. Davis was concerned about that—similar to

Social Security—I do not know why, mentally, we are locked into

a 65 starting point for Medicare or a 67 starting point for Medicare

and not looking more creatively. I am looking to you folk and your

institutions for a more creative blend of moving from the workplace

to the retirement program.

Are you looking at that in any way now?

Mr. REISCHAUER. I am not, but I think developments in that area

would be fruitful, and of course, the way to go would be to do something similar to what Social Security has done and will do in the

future, which is not to change the age at which initial eligibility

occurs, but rather, reduce the benefits at each age up until the normal retirement age. An analogous approach in Medicare, if one

thought it was appropriate to change the age for full benefits,

would be to have the age at which you receive full benefits rise to,

say, 67, but if you wanted to participate in Medicare between the

ages of 65 and 67, you would be asked to pay more substantial premiums.

Chairman THOMAS. These are the kinds of discussions that I

think need to take place in this Subcommittee and in Congress,

and I share your concern that to the degree we take easy outs like

moving money to buy time for time’s sake, we are going to leave

them to a commission, and in my historical analysis of the commissions, even the much praised 1983 Social Security Commission, did

not do a really good job. I hope you keep the pressure on us to try

to make as much policy change as we can in the short run.

The gentleman from California.

Mr. BECERRA. Thank you, Mr. Chairman.

Ms. Davis, if I could ask you to turn to chart 4, I have a question

regarding the costliest decile of beneficiaries. Do you know what

the characteristics of that group might be? Is it that they are the

oldest and therefore the sickest, and they are needing the most intense treatment? Are they the folks who are at that last stage of

life, or are they wealthy individuals who make use of services more

because they are informed about their access to these things, or are
82

they the poorest of individuals who do not get the care until the

last moment, when the illness is worst and therefore costs most?

Do you have any sense of what makes up that particular grouping of individuals who are very costly?

Ms. DAVIS. Well, we need to learn more about that. I am sure

it is a little bit of everything you name. The 10 percent who are

the sickest account for 75 percent of Medicare outlays. It is not just

care in the last months of life. About 6 percent of Medicare beneficiaries die in any given year and account for about 25 to 30 percent of Medicare outlays, so some of it is care of the dying, but that

is not the bulk of it. More of it is chronically ill people, people with

conditions like chronic obstructive pulmonary disease, advanced

heart disease, cancer, and it just requires a lot of care for those

people.

Mr. BECERRA. And I pose this question to any of the three panelists. Is there some way we can grasp or some method we can get

hold of to try to reduce the costs that we see associated with the

highest decile there? I know the President, for example, is proposing a lot more preventive care. He is talking about mammography

services and injections and so forth, and any time you go toward

preventive care, I suspect you do save quite a bit in terms of intensive care. But are there any proposals out there that you all are

aware of that would help us try to reduce the costs of the costliest

beneficiaries?

Ms. DAVIS. In the employer sector, the main technique is something called ‘‘high-cost case management,’’ which is when somebody

crosses a given threshold, you basically have a person whose job it

is to really work with the family as they encounter different situations—maybe something is not in the benefit package, but they will

cover it if it means it avoids a hospitalization or some other high

cost.

But basically, I think a lot of this cost is just given, that when

things go really wrong, people need a lot of care, and some of it can

be helped through preventive care—if diabetes is well controlled,

maybe it does not wind up in a hospitalization; certainly, a mammogram may find something at an early stage and avoid all of the

care and human suffering that goes with terminal cancer. But I

think some of this is inevitable. We see this even with children,

where expenditures are very skewed. We have had some recent

work that tried to break it down by condition, like diabetes, and

pulmonary disease is very skewed within those chronic conditions,

so there is just a subset of people who are just going to have enormous complications that require a lot of care.

Mr. BECERRA. Mr. Helms, do you want to respond?

Mr. HELMS. Yes. If you look at Karen’s chart 4, I think it is

worth remembering something about the economics of insurance.

For any one individual, it is difficult to say where you are going

to be in this chart next year or 10 years from now. What you are

doing when you are buying insurance is asking what is the probability that you are going to be in the last 10 percent as opposed

to the first 10 percent. You buy insurance to protect yourself, if you

end up in the expensive category.

As Karen was saying, the private sector has shown us that there

are probably lots of things that can be done to reduce costs. But,
83

the problem with Medicare is that it is still an open-ended system

where neither providers nor consumers have very strong incentives

to ask about the cost effectiveness of the care they choose. The reason why I think we should go to more market-type principles and

a more competitive system is that it would put this problem into

the hands of competing plans. They would have to attract people

to their plans, but they would also have to control cost.

Ms. DAVIS. But I think that that is the problem with managed

care. Managed care plans do not want people in that top 10 percent, and they have techniques for figuring out how to screen them

out. It is illegal just to refuse to take somebody because they have

a preexisting condition in a Medicare HMO, but if you have an ad

in the New York Times that says come for coffee on Tuesday morning at 10 a.m. at Broadway and 42d, only those people who read

the New York Times know it is Tuesday and can get there are

going to be exposed to that pitch. They have techniques, whether

it is the way they advertise, the kinds of specialists that are in

their plans, where their facilities are located, encouraging people to

disenroll. We know from the Physician Payment Review Commission that those who disenroll have 60 percent higher expenses than

the average beneficiary.

They have ways of discouraging people who are very sick from

enrolling. I am saying if they are ethical and want to take everybody, of course, there are HMOs out there what will not use these

techniques, but others see that very strong profitability that can be

made by skimming off the healthier and will respond to those incentives.

Mr. BECERRA. If I could continue, Dr. Helms, how would you try

to discourage in a market-oriented system, if you have Medicare

and go toward that market-oriented system, a provider seeking

only those—as we see in some cases now—individuals, those beneficiaries who are healthiest to avoid—if you are going to use the

market principles to try to drive your decisions, obviously, as Ms.

Davis has said, you are going to avoid the folks who are the costliest, and you may, in making choices about how to reduce costs, not

look so much at a preventive procedure as much as an approach

to seek out only those who are healthiest.

Mr. HELMS. I am certainly not going to defend every practice of

every HMO in today’s market. I do think they presently have some

incentives to avoid the expensive people. But we are talking about

the future. If we continue to grind down on reimbursement rates,

we are going to get more access problems.

It will not be easy, but I do think you can create the kind of competition where providers and health plans are going to go after the

sicker population, and they are going to be encouraged to keep

them. Inevitably, as people get older, they are going to have more

and more problems. Health plans are going to have to convince people that they are the plans that can take care of them.

What we are really talking about is developing competition more

on the basis of quality. I see quality competition happening in most

other nonhealth care markets, and I think that eventually, it can

happen here, too.

Mr. BECERRA. I would think that under that approach, though,

if you do go toward a market-based approach, you are still going
84

to have to find a way to have competition almost by segment of

that population of those beneficiaries, so that there is almost a

competition for the healthiest, and there has to be some form of

competition for those who are most ill.

Mr. HELMS. That is right, and it gets back to the question that

was raised earlier about trying to have some kind of health status

risk adjustment. If people have an incentive to adjust, then we will

get more research on this. I think we could begin to make some

progress in this area.

Chairman THOMAS. Xavier, I will tell you that it is illegal to do

that. There is no question it is done subtly, and our job is to make

sure we have a very strong and appropriate punishment mechanism for those who would in fact try to cherrypick or select.

One of the things we do not have, and it is very frustrating, and

you will get more frustrated as we go along with this line of questioning, is that we really do not have good computer patient

records. Managed care companies have as good as any, and we

need to acquire them. We are paying for the collection of that, and

they hang onto them, so they must have some proprietary value.

We want them, because our problem is we do not have the kind of

outcomes research models that we need that would lead us to

guidelines for heroic intervention or others. But fundamentally, the

problem is that this society refuses to have a meaningful dialog

about life and living, quality of life versus quantity of life, and that

there is to a degree, at this last period, a failure for the society to

face quality versus quantity and offer reasonable and appropriate

alternatives that are not just cost centers, but that focus on the

way you deal with people on the quality side versus the quantity

side. Our job is to create a structure with malpractice reform and

others that the providers feel comfortable about, and we push them

to engage folks in this discussion—but unless we can provide them

with clear outcomes research that if you continue this, this is the

outcome, it is going to be very difficult for us to begin to slow down

the process of continuing to put money in these particular areas.

Mr. BECERRA. Absolutely.

Chairman THOMAS. It is very tough for decisionmakers. We are

certainly not going to lead the society in determining who gets

what, but the society has got to have a dialog with us. It is a very,

very tough area, but we have got to engage in it, because if we do

not, current medical technology will be a black hole that will consume every dollar that this society can——

Mr. BECERRA. Everything has to be on that table. Mr. Chairman,

if I could ask one last question of Ms. Davis.

Chairman THOMAS. Surely.

Mr. BECERRA. You mentioned the problems we have trying to get

the elderly poor to participate in the QMB and the SLMB Programs, and the panel raised the concern that perhaps the State

should not be the entity that tries to promote utilization of those

two programs. Do you have any other thoughts on what we should

be doing to try to increase the number of elderly eligible individuals to get them to participate in those two programs to make sure

they get the health care they deserve?

Ms. DAVIS. Well, there are ways of doing outreach to low-income

seniors that are effective in increasing enrollment, and actually
85

just putting a notice in their Social Security check is not the most

effective way.

We supported at the Commonwealth Fund a demonstration that

was managed by the American Association of Retired Persons that

had campaigns in communities, including things like putting it in

their electric bill, television campaigns, and ads letting people

know. But if you make a real intensive effort to tell people this

benefit is available, people will sign up for it, if they hear about

it. The main reason they do not join is not that they do not want

it; they just do not know about it, or they do not think they are

eligible.

The second point, I think, from the participation is just the low

level of this. Even the SLMB only goes up to 120 percent of poverty, so you are really helping a very narrow segment, and there

are many just above that who are already finding the kinds of premiums and out-of-pocket costs burdensome.

Mr. BECERRA. What about—and I asked Mr. Vladeck this—trying

to ensure that anything you do to reach out to people is sensitive

to the communities’ profiles, so that if you are trying to reach out

in parts of Los Angeles, and you provide some information that is

solely in English, there is a good chance you are not going to get

to a large sector of the Asian-descended or Spanish languagedescended communities there, so you have to try to tailor your message a little bit to make sure you are getting to a lot of these elderly, low-income and in many cases somewhat removed communities

to get them that message.

Ms. DAVIS. Yes, I think that that is right, too. Certainly, among

minority communities, there are even lower rates of participation.

Language can be a problem. One way you can get the people is to

work with some of the providers in those communities, clinics that

are located and catering specifically to both low-income nonelderly

and elderly populations and try to get people signed up that way.

Mr. BECERRA. I know that in parts of Los Angeles, the Latino

community, Asian community, and the Jewish community have

been doing quite a bit of work to try to make sure that some of the

elderly—for example, the Russian Jews who have come over recently as refugees—who are not going to have an opportunity to

learn English as quickly and perhaps as proficiently as others

might, still have access to the information through some of the centers that they may go to, some of the community-based organizations that provide services. A lot of folks are trying to target information to these elderly populations through some of those service

providers that are already out there, providing them other services.

Ms. DAVIS. Yes.

Mr. BECERRA. Thank you.

Thank you, Mr. Chairman.

Ms. JOHNSON [presiding]. Thank you. I am going to go ahead

with my turn to question in the absence of the Chairman, as he

asked me to.

I would like all of you to comment on Ms. Davis’ chart, which I

think is sort of commonly accepted. At least you predict, Ms. Davis,

that by the year 2000, 20 percent of seniors will be in managed

care, 19.9. On what data do you base that, and particularly on
86

what year of data do you base that? And then I am interested in

knowing whether the others agree with that estimate.

Ms. DAVIS. On chart 8, in terms of the Medicare projected enrollment in managed care plans and HMOs, that is from the Congressional Budget Office and their baseline update in January 1997; so

just about 1 month ago.

I listened to Mr. Vladeck from the Health Care Financing Administration who had slightly different numbers. He had slightly

higher numbers in 1996 of 13 percent instead of 10 percent are currently in HMOs——

Ms. JOHNSON. I think that that was because he was looking at

HMOs and was also predicting inclusion of his PPOs and PSOs.

That is my understanding of why his numbers were higher.

Ms. DAVIS. Well, under current law, HMOs, including point of

service, can participate, and then there are some demonstrations of

other models. But PPOs are not currently an eligible plan.

Ms. JOHNSON. But presumably, at least according to Mr.

Vladeck’s testimony, he is trying to open up the system and put

more plans out there——

Ms. DAVIS. Yes, but I think he was talking about under the

President’s budget, he expected 22 percent of Medicare beneficiaries to be in HMOs by the year 2002. He estimated that 19 to

20 percent would be in there in current law. I think CBO by the

year 2002 has 25 percent in.

Ms. JOHNSON. What I am interested in——

Ms. DAVIS. Under any of these, we are talking about a doubling.

Ms. JOHNSON. What I am interested in is, Do you have any idea

what data and how recent the data is that they are basing those

estimates on? That is what I am interested in.

Dr. Reischauer.

Mr. REISCHAUER. I think that what we have here is simply what

the trends have been over the last couple of years. Medicare HMO

enrollment grew by 36 percent in 1996. CBO has laid out growth

rates of 30 percent for 1995, 25 percent for 1998, 20 percent for

1999, and so on.

Ms. JOHNSON. Why do they decline?

Mr. REISCHAUER. Now, the nature of those numbers—25, 20, and

so on—should make you realize that these are rather crude approximations, and of course, much will depend on changes that are

taking place in the marketplace.

This is a question of how attractive HMOs are relative to the feefor-service world. Much will depend on how rapidly Medigap insurance premiums rise. If they rise very, very rapidly, then one would

expect HMO enrollment to grow even faster.

Ms. JOHNSON. I think that that is exactly what I was trying to

get at. In my State of Connecticut, where we have been slow to develop managed care products and particularly in the senior category, the number of HMO risk plans has just exploded, and the

number of options seniors now have and the aggressiveness of the

marketing has totally changed the environment. And this is at a

time when Medigap premiums are now beginning to go up. And

there is just absolutely no way, in my mind, that we are not going

to be way ahead of 20 percent.
87

I think those kinds of figures underestimate our experience in

managed care where market maturity now takes place far more

rapidly than it did 5 years ago, 4 years ago, 3 years ago. In other

words, where these plans get in and get marketing, the pace of enrollment goes much more rapidly. We saw this in the private sector, and one section of Connecticut went from zero managed care

participation to a very high level in 6 months. The maturation of

that market now that we know more about it and the plans are

more sophisticated takes place much more rapidly than it did in

the early years of managed care or even the midyears.

My guess is that these figures are way low. We are not going to

solve that here, but I want it clearly in the record that, really, the

data they are using and the interaction of the facts make these estimates very, very unreliable.

Mr. REISCHAUER. I think you are right, they are very uncertain.

There are factors moving in the other direction. We know that

HMOs are more attractive to relatively healthy younger groups of

retirees. As those retirees age, the question is will they find feefor-service relatively more attractive and higher fractions of them

disenroll. Right now, disenrollment is very, very low. A lot of the

proclivity to disenroll will be affected by what happens to Medigap

premiums for those who disenroll. Right now, they effectively could

lock one into the HMO because they would be risk based. But if

you changed the policy as the President has proposed, you might

see more of this churning. So, I think——

Ms. JOHNSON. But as one who has actually introduced the first

bill to assure portability so that seniors can come back, I think that

is important, and I think we will do it. But it is also very interesting to watch what is happening on the other side. One of the disadvantages of HMOs was that you were sort of locked into their

doctors. Now, all of a sudden, at least in Connecticut, HMOs are

saying you can go to any doctor you want—not all of them, but

some of them. They are now in the competitive market beginning

to break down the very barriers that in a sense help them control

costs or gave them an advantage, but also gave the consumer disadvantage.

For instance, in my area of Connecticut, there are a couple of

very big physician groups; they are now in every plan. Your access

to, in a sense, the largest number of specialists in every area is the

same no matter what you are in.

I think we are underestimating the power of the fact that—and

this goes right to the heart of this business of protecting lowincome seniors—I see seniors much more interested in this because

Medigap covers some costs but they cannot afford the premium.

And I do not see a single new managed care risk program on the

market that does not cover Medicare copayments and deductibles

and that does not provide some prescription coverage, that does not

actually improve the benefit package quite significantly and reduce

out-of-pocket costs quite significantly.

If the managed care sector keeps this up, not only will it grow

more rapidly than anyone is projecting, but people with high medical costs will stay if all their doctors are part of the plan, as is

evolving now, at least certainly in my small part of the country.
88

I want to contrast that to—and I am curious, Ms. Davis, that you

really prefer the old model of concentrating on expanding benefits

and expanding protection and regulating rates, because I have here

a page from the administration’s worksheets, and this only has to

do with overhead costs. But one possible proposal—and nothing has

been settled on—but one possible proposal would cut reimbursement rates for cardiac surgery and cardiology, two of the big use

areas for seniors, anywhere from 32 to 44 percent.

Now, this is going to reduce access. If we keep regulating rates

this way—internal medicine, they allow a 1-percent increase, and

1 percent to 4 percent are the options there. Truly, we are squeezing down, and we saw this in Medicaid. In Medicaid, we reduced

access for poor people dramatically. In my hometown, they went

from having a full range of access to all obstetricians down to just

the one public clinic. Now that we are into Medicaid managed care

plans, they are back up to all the physicians who participate in

those plans.

We are really at a point now where we have to keep two systems

running, but we also have to look at how rate reimbursements are

going to reduce fee-for-service access versus how managed care

plans may have the opportunity to not only increase access to benefits through managing care, but provide rates that are comparable

to private sector rates, because the HMOs are going to be covering

not just seniors but everybody else eventually.

I do not know why you would want to keep going down this path

of micromanaging rates when we have the opportunity now to

begin moving gradually down the path of a uniform set of rates

covering all of society, with government assuring, through appeal

procedures and oversight, access to specialty care and those kinds

things that we know need to be watched in integrated care systems, and focusing on prevention, which has never been part of the

fee-for-service system in history.

Ms. DAVIS. Well, first of all, I do not favor fee-for-service over

managed care. What I think is healthy is a healthy competition between both, where you have quality in both a fee-for-service option

and a managed care option.

What I say in my testimony is I think what we all know—feefor-service does have an incentive for too many services at too high

a cost. Managed care has an incentive for too few services at too

low quality. And you do not want to have seniors forced into managed care and not have a viable fee-for-service alternative. You do

not want to undermine the quality of fee-for-service by setting

prices so low that no doctor wants to practice under those circumstances.

I think the point you make, that you do not want to drive fees

in the fee-for-service level too far below the private sector, currently—and I am sure you will get the latest update from the Physician Payment Review Commission, but their reports show that

Medicare pays 70 percent of what private insurers pay physicians.

You cannot keep squeezing that and driving it down to Medicaid

levels of 30 or 40 percent and not affect the willingness of physicians to take Medicare over the long term.

Ms. JOHNSON. Absolutely.
89

Ms. DAVIS. I noticed in the CBO baseline estimates out to 2002

that even under current law, the typical physician fee will basically

be the same 6 years from now as it is today. I am concerned about

squeezing too much, and that is why I think the President’s proposals are adequate savings, and I would not try to do more than what

he is proposing in the way of payment squeezing under this.

Ms. JOHNSON. But you think he is not proposing too much?

Ms. DAVIS. Excuse me?

Ms. JOHNSON. You think some of his proposals are adequate?

Ms. DAVIS. I am saying that if you tried to, say, double the provider payment savings he is proposing, you will really have to

worry that Medicare is getting too far out of line with what physicians and other providers are paid in the private sector, and it

would reduce willingness to participate.

Right now, physicians in fee-for-service are perfectly willing to

take Medicare patients. There is a point of squeezing provider payment that you do not get provider participation.

The point you made about managed care aggressively marketing

to Medicare patients, they are giving extra benefits, prescription

drugs out of pocket, I think it should also raise a question in your

mind as to whether we are overpaying HMOs, and that is one of

the reasons why they want this Medicare market. I think you have

to look at both. You have to both worry about paying physicians

too little on the fee-for-service side, and you have to worry about

overpaying HMOs and not being able to keep them from creamskimming this healthier population.

Ms. JOHNSON. My point is, Ms. Davis, that if you are trying to

control future cost, which is primarily our goal, and do it in a way

that improves the benefit package and improves protection for poor

people, we are better off with keeping the premium payment for

the managed care plans high enough so they can improve the benefit package and give our low-income seniors the option of just the

Medicare premium, not additional Medigap premium, getting a

much better, lower out-of-pocket cost plan.

I do not want to ratchet that down because that achieves both

of your goals of better benefits and better protection for low-income

folks, and I think that that is what we ought to be focusing on because we can do a better job there than we can micromanaging all

of these rates. It is simply appalling—dermatology goes up, the

general internist, the family practitioner. This has created endless

problems in the last 20 years, and they get worse every single year.

I think from the point of view of consideration of the poor and

consideration of a modernization of the benefit package, it looks to

me like we are having far greater and more success in that with

overseeing managed care plan development than we are with

micromanaging reimbursements. I guess that is really my point.

And my time has certainly expired; I guess they forgot to turn

the light on. Let me yield to Mr. McCrery.

Mr. MCCRERY. Thank you.

Dr. Reischauer, why do you say it is more important to do structural reforms now, or start some structural reforms now, than it

is to worry about the number of $50 billion or $100 billion or $150

billion in savings?
90

Dr. REISCHAUER. Because the real problems Medicare faces are

not the problems that will exist over the next 5 or 7 years; they

are the problems that will begin to mount after about 2010. And

I do not think we can wait until 2005 or 2008 to begin to address

those problems because by that time, it will be too late to, in a deliberative way, start changing the structure of the program.

Mr. MCCRERY. The cumulative effect is what is needed over the

years of those structural reforms.

Dr. REISCHAUER. Well, structural reform is not an easy thing to

bring about. It requires building an institutional infrastructure.

That takes time, and it is best to build that infrastructure at a

time when you do not have inordinate pressures put on the infrastructure, either the pressures of an expanding number of recipients, or the pressures of having to say to this new infant structure,

‘‘You are going to have to save a lot of money as well as sort of

transform incentives.’’

I think it would be wise to start the process now and get plans,

participants, providers used to this new structure over a period of

a decade before you had to really put heavy weight on that structure. But we are going to have to put heavy weight on that structure within 15 years.

Mr. MCCRERY. At the same time, though, you recognize our immediate problem with the trust fund balance in the HI Trust Fund,

and we have got to address that one way or the other. Our preference is to create savings and see that the trust fund does not go

bankrupt.

Mr. REISCHAUER. As Administrator Vladeck pointed out earlier,

if all you consider are the President’s actual savings in part A, you

have really extended the life of the trust fund 1 year or maybe 2

years. The way that they are getting breathing room or salvation

is really a bookkeeping device. You could do the bookkeeping at

any point. That is not a complicated issue. You could even look

back and credit the Part A Trust Fund for moneys that were spent

before. Anything in a sense can be changed by a law.

Mr. MCCRERY. Except that if you want to include those costs in

the calculation of the part B premiums, you have to do it prospectively; you cannot do it retroactively.

Mr. REISCHAUER. No, you could not do that, no.

Mr. MCCRERY. That would create an additional problem that you

do not want to deal with.

When we have more time, I would like you to expound on what

structural reforms you would recommend, but I do not want to get

into all that right now. I have some idea from your testimony and

from your verbal remarks.

I think the point you made, though, about shifting more of Medicare expenses into the general fund is an excellent one and one

that I have tried to make in the past. The example that I give is

like the Pac-Man machine. Do you remember the Pac-man game,

where the Pac-man would go across and eat all the other Pac-men?

If we shift Medicare into the general fund, Medicare and Medicaid

will to a much greater extent than they are doing now, act like

Pac-Men and eat up the rest of the budget. And you are right, the

political pressure is much greater to maintain these benefits than
91

any array of other benefits you can think of, and I do not think

that that is a very good way for policymakers to do business.

I appreciate your making that point, probably better than I have

with my Pac-man example, but for some of our constituents, the

Pac-man example is better.

Dr. Helms, you said your preference for a structural reform I

guess is the ultimate structural reform, and that is to go to a defined contribution plan. I assume that you have given this a good

deal of thought. How would you arrive at the defined contribution,

and do you see problems when you go to a defined contribution

plan in creating a two-tier health care system, one for the poor and

one for the wealthy, or one for those who can get extra health care?

Have you thought about that, and I would appreciate your remarks

on that.

Mr. HELMS. Yes, I have thought about it. A basic criticism of

Medicare is that it is an open-ended entitlement where everybody

has an incentive to keep spending more money.

One of the objectives, quite frankly, of going to a defined contribution is to put the issue back onto the Congress. The Congress

should decide, in the context of making other decisions about discretionary funding, how much you really want to pay for Medicare.

And in the process, I think that would make people be more realistic and focus on the issues that Karen is raising about helping the

poor.

In other words, we now have a system where the net subsidies

from the tax policy and from Medicare go to higher income people.

A defined contribution would force Congress to consider who we

really want to subsidize. Do we want to continue an open-ended

subsidy for higher income people, or do we want to take care of

poor people? It is a complicated matter, but it is not any more complicated than some of the things we are trying to do in the President’s budget proposal.

Ms. DAVIS. I think the point you raise about defined contribution

leading to a two-tier system is my number one concern with the defined contribution approach to Medicare. Medicare, historically,

was to guarantee beneficiaries, regardless of income, access to a defined set of benefits, and I think that once you go to a defined contribution, you are going to have the lower income beneficiary forced

into lower quality plans, managed care plans, they will have difficulty getting appointments—they are not going to have their diabetes, their hypertension, and their heart disease managed appropriately. They are going to be discharged from the hospital before

they can really take care of themselves. I think we are really getting into different medicine for different populations.

Mr. HELMS. I do not think you have to end up with a two-tiered

system. As a matter of fact, I think you will get those results if you

continue on this course of more and more controls.

Mr. MCCRERY. Dr. Reischauer.

Mr. REISCHAUER. Henry Aaron and I wrote a piece in ‘‘Health

Affairs’’ in the summer of 1995 which suggested an approach that

I do not think creates the problems that Karen has alluded to. The

approach would have a defined benefit, a package of required benefits. Within each market area, plans would make bids for covering

Medicare beneficiaries with that defined package. The contribution
92

the Federal Government made toward this package could be set at

the 50th percentile bid or the 70th percentile bid or some bid other

than the lowest bid, which would then give the low-income participants a choice of plans just like everyone else’s. I think some of the

problems would be mitigated by such an approach.

But it is a fact that right now, Medicare is a classless system.

A provider really does not care what side of the tracks you come

from because he or she receives the same payment. And any movement to plans, even an HMO type of arrangement that we have

now, could, over time, break down that classless nature of the system.

Ms. DAVIS. And I think that that is a hypothetical that Congress

would set the voucher at the 50 percent or the best plan level, but

I think there is always a temptation in a budgetary environment

to set it at the minimum level, and that is all, then, that the low

income could afford, and higher income would add to that. I think

you do inevitably introduce, in anything that just guarantees the

elderly a fixed amount of money to buy health care as opposed to

buying health care, this kind of introduction of income differentials

in the care available to seniors.

Mr. MCCRERY. Let me tell you my concern, Ms. Davis, if we do

not go to some different system than the one we have now—radically different. My concern is that ultimately, we will reach the

point where everybody will get lower quality health care in this

country, because I just do not see how we can afford as a society

to give everything the health care system has to offer to everybody

on the same basis. If you do that, you are going to reach the lowest

common denominator for everybody, and that means that health

care quality is going to go down for everybody in our society, and

that is not a desirable goal to me as a policymaker. Now, somebody

in the old Soviet Union may like that idea; I do not think it worked

too well there.

I am trying to figure out a way we can avoid that result and yet

not create a system in which we have a great many people in our

society not getting an adequate level of health care, and I am hopeful that smart folks like you will help us figure out a way to reach

that middle ground.

Ms. DAVIS. Well, I think we all share the same goal of wanting

quality care for all of our seniors, and I do not think anybody defends the current system. I just think we need to move slowly on

managed care, and we need to adopt the prospective payment approaches Medicare has used successfully with hospital and physician services to the other services, which is really where the Medicare costs are going up quickly—home health, hospital outpatient

department, and other services.

Mr. MCCRERY. Yes. I want quality health care, too, but I do not

necessarily want the same level of health care for everybody, and

I think that that is a key question that we have got to broach and

discuss as policymakers and as a society.

Ms. JOHNSON. I share a lot of Mr. McCrery’s concerns, and I am

not sure you are as realistic as perhaps you need to be about what

is happening in the system out there now. There are, for example,

five reimbursement rates for office visits, and what I have seen

happen, year after year, as we get closer to the end of the budget
93

year, is that HCFA simply just pays the lowest rate for office visit,

which is something like $32 in my part of the country, and it does

not matter whether you have a complete physical, it does not matter whether you can document a higher rate. The provider is

caught between do I write five letters now to document rate 3 or

rate 4 which I should have had, because HCFA keeps coming back

to me with, We are going to give you $25 or $32 or whatever the

lowest rate is?

That is what is happening out there. Recently, HCFA announced

to physicians in my area that they are no longer covering certain

preventive things that they used to cover routinely, and now they

are saying, Oh, they are preventive, and we do not cover preventive.

There is a lot of cost cutting going on behind the scenes that is

denying seniors the care they used to just take for granted, and it

is beginning to affect access particularly in internal medicine.

I think this issue of moving forward into plans that serve people

of all ages with the same premium for seniors as younger people

is absolutely a healthier answer, but I want to ask you one thing,

because this is the heart of and a very big part of the administration’s proposal. What is your opinion—and you may not know much

more than I know, so it is hard to make judgments—but if in 1

year, you remove GME, IME, DSH from the AAPCC, you will have

a very dramatic effect on the reimbursement rates of certain hospitals. Now, I do not know much about how they feed some of this

back in—maybe you know more about that than I do—but basically, IME and DSH are there because we do not really know how

to compensate the system well enough for uncompensated care, and

to just suddenly drop these out of the AAPCC and believe that you

are going to have a system providing the same level of care seems

to me very unwise and not in harmony with our discussions about

those factors in the payment system in the past. If you have any

comment on that, I would be interested to hear it.

Ms. DAVIS. Well, I do think we have to be concerned about how

these changes affect teaching hospitals and those that serve lowincome communities. As I understand the proposal, those savings

will be put into a special fund and then go directly to the teaching

hospitals to cover the indirect and direct graduate medical education costs. As I understood it, they were not being used for general budget savings but were being put into an earmarked fund

that would go directly to those institutions.

Ms. JOHNSON. But, as you well know, you are into a new distribution system and the administrative cost of that and the inaccuracy and accuracy of that.

Mr. REISCHAUER. What we are talking about here is taking

money out of the capitated payments going to HMOs and distributing that money directly to the provider hospital. It is likely now

that some of that money never reached the teaching hospital because the HMO was not using the teaching hospital, in which case

if the distribution mechanism is appropriate—and I do not think it

is very complicated to get one that is appropriate—teaching hospitals should be better off than they were.

Now, the HMOs, of course, will have to tighten their belts a little

because they will have a little less in the way of a capitated pay-
94

ment which they can use to provide services or increase their profits, but I do not think there is anything in the administration’s proposal which should cause great concern for the teaching hospitals

or DSH hospitals, as well, if this money is simply recycled.

If anything, those institutions should be better off under the administration’s plan rather than worse off.

Ms. JOHNSON. Well, I can certainly see that in regard to the IME

and DME. I really worry about the DSH payment as well, because

there are hospitals with a lot of DSH money that do not have a lot

of DME money; in other words, the line is not clear.

Mr.REISCHAUER. But I think there would be a separate mechanism for distributing the DSH money. This once again is payment

taken out of the capitated amount given to HMOs, and the question is, ‘‘Were the HMOs using facilities that were DSH facilities?’’

The answer is probably, ‘‘Not very much.’’ They were in a sense

pocketing this money.

Ms. JOHNSON. Yes, and philosophically, the larger issue of DSH

money is for people who cannot afford very good care. Don’t you

want some of that to go to the premium that you offer HMOs so

they will provide broader protection which lower income people

need? I need for them to be able to provide a package to all those

seniors who are eligible for Medicaid coverage that will take care

of their copayments because they cannot afford their copayments

and will offer them some prescription coverage.

When we worked on this for a couple of years recently, we just

took the money out of the general fund, saying education is something not just seniors should be concerned about, but medical education is everybody’s business, and that is a legitimate taxpayer

fund. And I think that philosophically, it is important at this time

that we try to make those distinctions between what serves us all,

and therefore, is general revenue as opposed to general revenue

now picking up home health care for seniors. I think we need to

keep the cost of home health care for seniors in Medicare so that

we are clear what it is costing us to deliver care to seniors, and

also encouraging HMOs to better integrate hospital and home care

and all those kinds of things, and then separate out the teaching

costs and bear some of those costs across the general taxpayer. To

me, that is philosophically cleaner, and I think that eventually, it

could be system cleaner.

Mr. REISCHAUER. I think you are right on about that. I agree

with you 100 percent, and I think the Balanced Budget Act measures to do that were in fact quite sensible. I also agree with your

feeling that it is good to have HMOs providing a comprehensive

benefit package, more than Medicare requires, with low cost sharing by participants. But we have got to remember that that is in

conflict with the desire to save money. HMOs are able to do this

because we are overpaying them relative to what these individuals

would have cost in the fee-for-service sector where these ancillary

services and the low cost sharing would not be available or would

be available only if the individual purchased a Medigap policy or

had an employer wraparound retiree policy.

There is this tension between what is good and the desire to get

Medicare spending under some kind of control.
95

Ms. JOHNSON. Yes, but your issue of overpaying depends on

whether or not the HMO is able to deliver more benefits because

they are more efficient and they do a better job—and some of that

is certainly true. It is also true that managed care is our only hope

of delivering better preventive care because the fee-for-service system does not look at a patient holistically; it looks at it physician

by physician, incident by incident. So that if prevention is every

going to mean anything—and of course, you see this in Medicaid

managed care, where for the first time, we really are looking at

prenatal care and able to demand and deliver prenatal care that

reduces the number of low-birth-weight babies, and you get extraordinary savings—so a more holistic approach to medicine is one

of the opportunities we have in managed care, and rather than

talking about we are going to overreimburse, let us talk about what

we need to get, because our real challenge is to slow the rate of

growth at the same time we improve the quality of the package

and turn to prevention.

And if you look at that chart about their high costs, maybe the

one thing we ought to be looking at it is, How does government

take care of the outlier. One of the things that concerns me in the

President’s package is that they are going to eliminate any reimbursement for outliers, which I think is a problem for very small

hospitals.

I think maybe we have got to keep pushing ourselves to broaden

our thinking so that we get the low-income concern, and we get the

better benefit package, and we in the future gradually control

costs.

Incidentally, would you all agree as economists with Mr.

Vladeck’s statement—which was new to me, and I do not know a

lot—that if you put the savings in place now, it is not surprising

to get one-third of your savings in the last year—because one of the

things that does concern me about this budget is that $34 billion

of the $100 billion is all in the last year. Does that mean there is

a precipitous cut, or is that the cumulative impact?

Mr. REISCHAUER. No. It is true that savings compound over time,

so well over half of the savings that result in sort of equal percentage reduction in spending occur in the last 2 years of a 5-year

package, so that is not——

Ms. JOHNSON. Fifty percent in the last 2 years——

Mr. REISCHAUER. Well, not—actually, I am not talking about

Medicare now. I am talking about if you wanted to balance the

budget solely by reducing the growth of spending, and you reduced

the growth of spending by an equal percentage in each of the 5

years, 62 percent of the total saving would occur in 2001 and 2002.

Ms. JOHNSON. Thank you. That is very helpful.

Mr. REISCHAUER. That is just arithmetic.

Ms. JOHNSON. Thank you.

Mr. Helms.

Mr. HELMS. Yes, my testimony refers to this as the ‘‘wedge effect.’’ If you have 2 trendlines going off at different rates, as they

diverge, you are going to have bigger effects in the outyears. But

that is different from the criticism of this budget of its backloading

policies, that is, putting in policies which only kick in the last year

or two after President’s Clinton’s term is over.
96

Ms. JOHNSON. Those are two different things. I am pleased to

have confirmation. I have been aware of the compounding, but I

did not quite realize that, generically and generally indicated, it

was that high. Thank you very much.

Thank you for your thoughtful testimony this morning. We look

forward to your input as we work through this challenge. As I said

earlier, I know I feel, and I know that particularly Jim and some

others feel, very strongly that this year, we absolutely have got to

try to do this job right because of the compounding effect of problems created or not addressed. We thank you for your input.

The Subcommittee is adjourned.

[Whereupon, at 12:37 p.m., the hearing was adjourned.]

Æ