U.S. GOVERNMENT PRINTING OFFICE

73–535 DTP WASHINGTON : 2001

MEDICARE REFORM

HEARING

BEFORE THE

SUBCOMMITTEE ON HEALTH

OF THE

COMMITTEE ON WAYS AND MEANS

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

FEBRUARY 28, 2001

Serial No. 107–4

Printed for the use of the Committee on Ways and Means

(

For sale by the U.S. Government Printing Office

Superintendent of Documents, Congressional Sales Office, Washington, DC 20402XXXXX

ii

COMMITTEE ON WAYS AND MEANS

BILL THOMAS, California, Chairman

PHILIP M. CRANE, Illinois

E. CLAY SHAW, JR., Florida

NANCY L. JOHNSON, Connecticut

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

WES WATKINS, Oklahoma

J.D. HAYWORTH, Arizona

JERRY WELLER, Illinois

KENNY HULSHOF, Missouri

SCOTT MCINNIS, Colorado

RON LEWIS, Kentucky

MARK FOLEY, Florida

KEVIN BRADY, Texas

PAUL RYAN, Wisconsin

CHARLES B. RANGEL, New York

FORTNEY PETE STARK, California

ROBERT T. MATSUI, California

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

LLOYD DOGGETT, Texas

EARL POMEROY, North Dakota

ALLISON GILES, Chief of Staff

JANICE MAYS, Minority Chief Counsel

SUBCOMMITTEE ON HEALTH

NANCY L. JOHNSON, Connecticut, Chairman

JIM MCCRERY, Louisiana

PHILIP M. CRANE, Illinois

SAM JOHNSON, Texas

DAVE CAMP, Michigan

JIM RAMSTAD, Minnesota

PHILIP S. ENGLISH, Pennsylvania

JENNIFER DUNN, Washington

FORTNEY PETE STARK, California

GERALD D. KLECZKA, Wisconsin

JOHN LEWIS, Georgia

JIM MCDERMOTT, Washington

KAREN L. THURMAN, Florida

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.XXXXX

iii

C O N T E N T S

Page

Advisories announcing the hearing ........................................................................ 00

WITNESSES

Altman, Stuart H., Brandeis University ................................................................ 00

Breaux, Hon. John B., a United States Senator from the State of Louisiana .... 00

Francis, Walton J., Fairfax, Virginia ..................................................................... 00

Georgetown University, Judith Feder .................................................................... 00

Progressive Policy Institute, Jeff Lemieux ............................................................ 00

SUBMISSIONS FOR THE RECORD

Advanced Medical Technology Association, statement ......................................... 00

Alliance to Improve Medicare, statement .............................................................. 00

Citizens Against Government Waste, statement .................................................. 00

Healthcare Leadership Council, statement ........................................................... 00

National Association of Chain Drug Stores, Alexandria, VA, statement ............ 00

TREA Senior Citizens League, Alexandria, VA, statement ................................. 00

(1)

MEDICARE REFORM

Wednesday, February 28, 2001

HOUSE OF REPRESENTATIVES,

COMMITTEE ON WAYS AND MEANS,

SUBCOMMITTEE ON HEALTH,

Washington, DC.

The Subcommittee met, pursuant to call, at 10:04 a.m., in room

B–318 Rayburn House Office Building, Hon. Nancy L. Johnson,

(Chairman of the Subcommittee) presiding.

[The advisory and revised advisory announcing the hearing follow:]

2

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

SUBCOMMITTEE ON HEALTH

FOR IMMEDIATE RELEASE CONTACT: (202) 225–3943

February 21, 2001

No. HL–1

Johnson Announces Hearing Series on

Medicare Reform

Congresswoman Nancy L. Johnson (R–CT), Chairman, Subcommittee on Health

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

hold a hearing on Medicare reform. The hearing will take place on Wednesday,

February 28, 2001, in the main Committee hearing room, 1100 Longworth

House Office Building, beginning at 10 a.m.

Oral testimony at this hearing will be from invited witnesses only. Witnesses will

include Senator John Breaux (D–LA) and other leading Medicare reform experts.

However, any individual or organization not scheduled for an oral appearance may

submit a written statement for consideration by the Committee and for inclusion in

the printed record of the hearing.

BACKGROUND:

This hearing will be the first in a series to be held this Spring. These hearings

will lay the groundwork for reforming and modernizing the Medicare program, including incorporating outpatient prescription drugs into the program.

In announcing the hearing, Chairman Johnson stated: ‘‘Strengthening and improving Medicare is one of the most important challenges facing Congress this

year—and one of my top priorities as Chairman of the Health Subcommittee. It is

time for us to get to work. The American people are waiting for us to act.’’

FOCUS OF THE HEARING:

This first hearing will provide a general overview of major Medicare reform proposals, including the recommendations of the National Bipartisan Commission on

the Future of Medicare and the ideas set forth by the Clinton Administration. In

addition, the hearing will feature testimony on new solutions that have emerged to

bridge differences between these competing plans and provide concrete guidance on

specific reform elements that can be enacted this year.

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 six (6) single-spaced copies of their statement,

along with an IBM compatible 3.5-inch diskette in WordPerfect or MS Word format,

with their name, address, and hearing date noted on a label, by the close of business, Wednesday, March 14, 2001, to Allison Giles, 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

3

office, room 1136 Longworth House Office Building, by close of business the day before the hearing.

FORMATTING REQUIREMENTS:

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

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

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

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

files for review and use by the Committee.

1. All statements and any accompanying exhibits for printing must be submitted on an IBM

compatible 3.5-inch diskette in WordPerfect or MS Word format, typed in single space and may

not exceed a total of 10 pages including attachments. Witnesses are advised that the Committee will rely on electronic submissions for printing the official hearing record.

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

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

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

by the Committee.

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

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

or organizations on whose behalf the witness appears.

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

telephone and fax numbers where the witness or the designated representative may be reached.

This supplemental sheet will not be included in the printed record.

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

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

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

other forms.

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

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

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

If you are in need of special accommodations, please call 202–225–1721 or 202–226–

3411 TTD/TTY in advance of the event (four business days notice is requested).

Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed to the Committee as noted above.

4

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

SUBCOMMITTEE ON HEALTH

FOR IMMEDIATE RELEASE CONTACT: (202) 225–1721

February 21, 2001

No. HL–1–Revised

Change in Location for

Subcommittee Hearing on

Medicare Reform

Congresswoman Nancy L. Johnson, Chairman of the Subcommittee on Health of

the Committee on Ways and Means, today announced that the Subcommittee hearing on Medicare reform, previously scheduled for Wednesday, February 28, 2001, B–

318 Rayburn House Office Building.

All other details for the hearing remain the same. (See Subcommittee press restart. I understand Mr. Stark is on his way, and when he comes,

lease No. 

Chairman J

HL–1, dated February 21, 2001.)

OHNSON. Since the Senator is here, we are going to

f we will let him contribute his opening thoughts as well. But let me

start welcoming you all to this first hearing of the Health Subcommittee of the Ways and Means Committee. We do have a formidable agenda this session, and this first hearing on Medicare reform follows a half-day retreat that we had yesterday to begin to

lay a stronger foundation among ourselves of facts and information

as we look at the issue of prescription drugs for seniors and the future of Medicare.

Medicare is as important a government program as there is in

America at any level of government. And as you all know, local

governments and State governments do some things that are pretty

important in people’s lives. The whole movement to shelter battered women didn’t start in Washington, it started in communities.

So I say that Medicare is as important a program as any program

any level of government has ever developed, with a very deep respect for the programs that other levels of government have developed to address terrible needs in our lives.

Medicare unfortunately is also an antiquated program. It is one

of the few health programs that doesn’t cover prescription drugs.

It is the only program I know of that legally prohibits preventative

care. It is really truly quite astounding and a good indicator and

reminder of the era in which this program was founded and the degree to which it is desperately behind in the quality of health care

it provides to its recipients.

5

It has become incredibly bureaucratic, incredibly bureaucratic,

and any of you who don’t believe that, get out of Washington. Go

home. Look and see what your nursing homes are hiring their

nurses to do. They can’t hire them for patient care because they

have to hire them for paperwork. Sit down with home health agencies in New England, who looked me straight in the face 10 days

ago and said, you let that demand billing memo go through, this

is not even a regulation or a guideline, this is even lower than that,

and we will have to stop serving dual-eligibles; from agencies who

have sacrificed, raised money, struggled to keep in there providing

home care services in our urban neighborhoods.

So if you don’t think this program is on the verge of denying care

in every category to the seniors of America, then you don’t—you

aren’t thinking, and you are too in Washington, and I don’t want

to know, because I am telling you I consider this program as troubled a program as any program I have ever had contact with, including the programs that we put in place with the States to manage children at risk.

So I face our challenges very seriously. I believe they are formidable. And when the 77 million baby boomers retire, and the number of workers per retiree declines from 4 : 1 today to 2 : 1 in 2030,

if we have not prepared for that, we will not be able to meet the

needs of our seniors. And I am bound and determined to meet

those needs, though I appreciate the enormity of the challenge and

the difficulty of the choices we will have to make.

Nearly 2 years ago, by a 10 to 8 majority of the bipartisan Medicare Commission, the premium support program to modernize

Medicare was supported. Now, that wasn’t the majority required by

the law, so the Commission did fall one short, one vote short, of

the supermajority statutory requirement to officially report recommendations to Congress. But the Commission’s recommendations, because they rested on a vast amount of information, research and discussion among a remarkable group of people, have

lived on, have been very useful, and are providing a useful framework for reforming Medicare. President Clinton responded with a

Medicare reform proposal of his own, which was then followed by

proposals put forth by Members of both parties in the House and

the Senate.

Today the Subcommittee begins to examine all of the major reform proposals in an attempt to develop consensus on how we can

best modernize this critical program so that it ably serves beneficiaries, taxpayers, and providers in the decades ahead.

We will continue our investigation throughout the spring and

build upon the work already performed with fresh and new ideas

of our own, but this is going to be real work, and we are going to

welcome ideas and those who want to contribute to the thinking

about how—where we go and how we get there.

[The opening statement of Chairman Johnson follows:]

Opening Statement of the Honorable Nancy L. Johnson, M.C., Connecticut,

Chairman, Subcommittee on Health

Medicare has improved the health and lives of millions of seniors and disabled

Americans for more than 35 years. However, Medicare has also become increasingly

antiquated, bureaucratic and unwieldy.

6

The fiscal challenges to the program are formidable. Soon, 77 million baby

boomers will begin to retire and the number of workers per retiree will decline from

4 : 1 today to about 2 : 1 in 2030. Our seniors will be living longer than ever before

and economists predict that health inflation, fueled largely by new technology, will

far outpace the growth of the overall economy.

But perhaps more important, Medicare has failed to keep pace with modern

health care. Just to cite one example, last year it took an act of Congress to add

important new preventive benefits—bi-annual pap smear screenings and pelvic

exams and colon cancer screenings for all Medicare beneficiaries—to the program,

when private sector plans had done this years ago.

Similarly, no one today would design a seniors’ health care program that did not

fully incorporate outpatient prescription drugs. Yet because Medicare must wait for

Congress to enact a law for it to modernize its benefits or delivery structure, it will,

by definition, be behind the curve. Many of our seniors therefore lack prescription

drug coverage and the bargaining power to reduce the price of drugs.

In addition, the health care providers that we rely on to serve Medicare beneficiaries are being crushed by more than 130,000 pages of overly burdensome regulations, which hamper their ability to provide quality care to our seniors.

Nearly two years ago, a 10–8 majority of the bipartisan Medicare Commission

supported a ‘‘premium support’’ proposal to modernize Medicare. While the Commission fell one vote short of the supermajority, statutory requirement to officially report the recommendation to Congress, the Commission’s recommendations are still

seen by many as a useful framework for reforming Medicare.

President Clinton responded with a Medicare reform proposal of his own, which

was then followed by proposals put forth by Members of both parties in the House

and Senate.

Today, the Health Subcommittee begins an examination of all of the major reform

proposals in an attempt to develop a consensus on how we can best modernize this

critical program so that it ably serves beneficiaries, taxpayers and providers. We

will continue our investigation throughout this Spring and build upon the work already performed with fresh new ideas of our own. Let

f’s get to work.

Chairman JOHNSON. Mr. Stark.

Mr. STARK. Thank you, Madam Chairman, and thank you for

calling this hearing.

I have submitted to you a written statement describing in detail

a bill that I have introduced to ‘‘save’’ Medicare for the long run.

It contains a number of reforms, including a generous drug benefit

with tough cost containment.

It uses a competitive bidding system, similar in some ways to the

Breaux–Frist II legislation, as I refer to it, to obtain some savings

in the program, but it does so without hurting beneficiaries who

need or choose to stay in traditional Medicare—I want to talk

about that in just a moment. It uses new purchasing tools to provide better coordinated care, most of which are designed to improve

quality and outcomes, and some of which will also generate savings.

It makes major changes to narrow the differences in medical

spending in this Nation, which seem to have no relationship to outcomes, quality or need. There is no reason to be paying two or

three times as much for a patient in Miami as we do in Minneapolis, without getting better quality in Miami.

Most of all this bill recognizes that we will need new revenue to

keep Medicare sound through the retirement of the baby-boom generation.

We had a wonderful seminar yesterday in which it was explained

to us that the number of people on Medicare are going to double.

They are going to live longer. They are going to want to access

7

more new technologies. We can try to preserve Medicare if we just

shift the cost to the beneficiaries, cut providers, and claim that

there are massive efficiencies that will save us from needing new

revenues. But I am afraid we are going to have to look for revenues. Nobody wants to do it. Nobody has done it.

Tobacco related disease for instance, costs Medicare $20 billion

a year in treatment costs. Once before this Subcommittee voted

narrowly to increase the tax on cigarettes to pay for some of the

health care costs.

Senator Breaux, I appreciate your being here and your work on

Medicare. But I urge you and my colleagues to start reform discussions based on Breaux–Frist 2000 and not the first bill. Many of

us believe the first bill would shift huge costs onto vulnerable seniors and push many of them into HMOs that basically do a poor

job.

I believe it would be possible to develop a bipartisan bill by using

Breaux–Frist II as a base and by improving it with a provisions

from the Moynihan–Clinton bill from last year, while ensuring the

plans compete on the basis of core package of Medicare benefits

and that payments are risk-adjusted as soon as possible. And if we

take this road, I also urge you to look at many of the ideas in our

bill that improve quality, save money and would make Medicare a

much better program.

However, if we are going to truly look and learn, and I appreciate

the Chair’s efforts to educate us and learn what is going on, I think

we have to recognize that managed care has not been overwhelmingly popular with the beneficiaries and their families. The public

wants the patient’s bill of rights because they don’t like what managed care is doing. Managed care is unpopular with the physician

community. Managed care is unpopular with the hospitals. Medicare managed care costs more than fee-for-service. It is supposed

to cost less. It is supposed to cost 95 percent of fee-for-service costs;

instead, it costs up to 10 percent more. Its quality is of dubious

character. And too many of the managed care companies are being

sued by various providers and others who have to deal with them.

Managed care has not helped Medicare. Quite the opposite. It

has wasted money. Too often, it has provided less than adequate

services. It has aggravated the beneficiaries and the providers.

Why we keep looking to managed care as a solution eludes me.

I hope in the hearing today we can see something that says there

is some evidence that managed care helps the system; otherwise I

think we ought to erase that one and start over, look for something

completely new, and I would like to join the Chair in that search.

Thank you.

[The opening statement of Mr. Stark follows:]

Opening Statement of the Honorable Pete Stark, M.C., California, Ranking

Minority Member, Subcommittee on Health

SAVING MEDICARE

Madame Chair, Colleagues, I’ve introduced a bill to modernize and extend the life

of Medicare that does not raise premiums for seniors who choose to stay in fee-forservice Medicare because their health conditions require a wide array of providers.

It is basically the Clinton Administration proposal of June 1999, greatly strengthened to achieve major savings and more program improvements. As we consider reVerDate 11-MAY-2000 11:54 Aug 06, 2001 Jkt 073535 PO 00000 Frm 00011 Fmt 6633 Sfmt 6621 E:\HR\NSET\73535.XXX pfrm07 PsN: 73535
8

forms this year, I hope this proposal, or portions of it, can be discussed and included.

Benefit Improvements

The current Medicare benefit is woefully inadequate. Medicare only covers about

half of the average beneficiary’s total medical expenses, and includes no outpatient

prescription drug coverage. The benefit structure needs to be improved. This bill

—provides a generous drug benefit coupled with strong cost containment that encourages research on breakthrough drugs;

—improves Medicare’s preventive care package, eliminates co-pays and

deductibles on preventive services, and does more to prevent blindness;

—coordinates Medicare with an optional, Medicare-run supplemental policy that

reduces beneficiary paperwork and, because there are no sales and overhead

costs, provides more affordable medigap coverage than the private sector;

—helps low income seniors use Social Security offices and data matches to enroll

in the QMBy and SLMBy programs which help pay premiums and (for QMBy)

co-pays for those under 135% of poverty (today only about half the eligible seniors are enrolled in these two programs);

—reduces hospital outpatient department co-pays from 40% in 2006 to 20% by

2010 (a process that will otherwise take several decades);

—permits uninsured individuals age 62–65 to buy into Medicare at full cost, but

with the help of a refundable tax credit equal to 50% of the cost of the Medicare

premium; provides similar help to those 55–62 who lose their health insurance;

—improves quality of care for beneficiaries by creating an extensive program of

case and disease chronic care management (with special emphasis on rural case

management), more information on treatment options, more bundled packages

of care, and use of a new VA advanced illness coordinated care program, and

—adds adult day care as a service under a home health plan of care.

Saving Medicare for Future Generations

With increasing use of high technology and expensive pharmaceuticals, health expenditures are becoming an increasing part of our economy. As a rich society, there

is nothing particularly wrong with that—it is a choice we make. But with so many

younger people uninsured and so many other unmet needs, it is imperative that

Medicare be run as efficiently as possible, so that Medicare taxes on future generations can be kept as low as possible and so that other societal needs can be met.

The number of people on Medicare will roughly double in the next 30 years. The

number of working taxpayers to support the program will decline from today’s 3.4

per beneficiary to about 2 per beneficiary in 2030.

There are only 3 ways to save Medicare: shift costs to beneficiaries, cut payments

to providers (and that includes so-called program ‘efficiencies’), or inject new tax

revenues.

I believe it will take all three: beneficiary cuts, provider cuts, and new taxes. Anyone who says differently is not being honest with the American public.

This bill does all three:

Beneficiaries:

—the Part B deductible is indexed for inflation;

—the value of the Part B subsidy (of which 3/4ths is paid by general taxpayers)

is added to the income of beneficiaries and if the beneficiary has enough income

to be taxed, that subsidy will be subject to tax at the taxpayer’s rate of progressive tax (15%, 28%, etc.); lower income seniors will not be hurt.

Providers:

—Medicare will finally start to obtain savings from Medicare+Choice, as plans bid

to provide the core Medicare benefit and compete by offering to lower the Part

B premium. Plans can offer supplemental packages of benefits separately priced.

Any amount a plan bids below 96% of Medicare fee-for-service costs in an area

will be shared 3/4ths with the beneficiary, 1/4th with Medicare and the taxpayers.

This proposal is somewhat similar to Breaux–Frist 2000, and it protects beneficiaries who choose or need to stay in fee-for-service Medicare;

—extends Medicare’s competitive purchasing of durable medical equipment and

other services nationwide and gives Medicare more ‘inherent reasonableness’

authority to cut overpayments;

—saves lives and money by using higher volume hospitals for complicated and expensive surgeries;

9

—modernizes Medicare’s ability to contract with and use intermediaries and carriers; —gives Medicare numerous ‘‘private sector-type’’ purchasing tools, such as the

ability

(1) to act more like a Preferred Provider Organization (and requires the development of PPOs in the highest cost treatment areas of the nation (after adjustment for severity of illness, etc.)),

(2) to impose sustainable growth rates on sectors where there is a questionable explosion of services (e.g., CORFs in doctors’ offices),

(3) to receive the most favored price in an area as is appropriate for a volume

buyer, and

(4) to pay for quality, safe care at the lowest rate (HOPD, ASC, or doctor’s office), regardless of setting; —allows Medicare to waive the 3-day hospitalization rule for skilled nursing facility care, if less expensive quality care can be provided by going directly into the

SNF rather than the hospital (it is increasingly likely that some DRGs can be

treated in quality SNFs); —develops key long range (ten-year or more) cost reforms, such as

(1) a single bundled payment system for an illness or injury; and

(2) a system of profiling patterns of care, educating providers when their pattern of care is abnormal (both for ‘excessive’ or ‘inadequate’ care), and eventually reducing payment updates to institutional and individual providers who

bill for abnormally expensive care without a quality or severity of illness justification. This proposal is a long-term effort to begin to reduce the huge regional disparities of treatment and health care costs in America which do not

appear to provide any particular quality of life difference. As the work of Dr.

Wennberg of Dartmouth has repeatedly shown, if we could adopt the style

and practice of medicine of certain States where people have high quality

health care, the Medicare trust funds would be solvent indefinitely!

—encourages a more rational hospital policy, by using Medicare capital payments

and other special payments to discourage over-capacity (the nation’s hospitals

are roughly half empty, and utilization is expected to continue to decline in the

coming decades) and to encourage a trade adjustment assistance-type program

to help essential community hospitals ‘‘right-size’’ and achieve long-term financial solvency.

New tax revenue:

With a doubling of the number of seniors and with people living longer, and with

new hi-tech devices and medications, we estimate that over the next 30 years we

will need about 2.5 times as much money for Medicare as we spend today (in current dollars).

That means new taxes—or at least keeping old taxes.

In addition to upper-income beneficiaries contributing more (as previously noted),

the bill proposes

—to forgo some of this year’s proposed tax cuts and save the money for Medicare,

by transferring 20% of the projected on-budget surplus to Medicare ($542 billion

over ten years);

—dedicating any revenues received from the Federal government’s legal actions

against the tobacco companies to Medicare (treating smoking related diseases

is estimated to cost Medicare over $20 billion a year); if that court case is not

successful or pursued by the new Administration we should increase the tax on

cigarettes an equivalent amount;

—Rather than repealing the estate tax, the bill dedicates the amount raised by

the estate and gift tax to Medicare. We are about to give this tax revenue away

to 2% of decedents. In the year of its proposed total repeal, the revenue loss

will be $50 billion per year—enough to provide a drug benefit to what will then

be 47 million beneficiaries: the choice should be made clear to the American

people—help improve and extend the life of Medicare, or (per the letter from

300 multi-millionaires opposed to estate and gift repeal) help create a plutocracy; and

—dedicate to Medicare a tax on excess profits of certain pharmaceutical sales, in

cases where the company’s administrative and sales budgets exceed twice their

Research and Development budgets; while this provision is not expected to raise

any money, it is designed to encourage the drug companies to spend more on

R&D and less on political campaigns to defeat adding a drug benefit to Medicare or ads telling us how much they spend on research!

Colleagues, this is a very ambitious bill that would make enormous long-term savings, while also making the Medicare benefit truly adequate. I certainly do not exVerDate 11-MAY-2000 11:54 Aug 06, 2001 Jkt 073535 PO 00000 Frm 00013 Fmt 6633 Sfmt 6621 E:\HR\NSET\73535.XXX pfrm07 PsN: 73535
10

pect it all to pass this Congress, but I hope portions could be included in whatever

we are able to accomplish.

It is an attempt to honestly point out the need for more revenues, and for increased efficiencies in our fee-for-service payment systems. It does not include everything we need to do, such as provide —an error reduction and quality improvement program to stop the 50,000 to

100,000 accidental hospital deaths per year; —true mental health parity in Medicare, and —a dependable source of funding for HCFA’s administrative costs, or —‘reform’ the agency, perhaps by making it a free-standing agency like Social Security.

Nevertheless, this bill is a major blueprint for a comprehensive, long-term way

to Save Medicare. As this Subcommittee prepares to investigate Medicare reform,

it is my hope that this new legislation will be a major part of our discussion.

[The opening statement of Mr. Ramstad follows:]

Opening Statement of the Honorable Jim Ramstad, M.C., Minnesota

f Madam Chairwoman, thank you for calling this important hearing today to begin

exploring Medicare reform.

I strongly believe that Medicare needs comprehensive reform. We cannot focus on

simply tinkering around the edges, and we must not take the easy road of simply

adding a prescription drug benefit to an already overburdened program.

As a representative of a state hurt by the unfair and unjust inequity in the Medicare managed care reimbursement formula, I know firsthand the difficulties faced

by seniors when irrational decisions at the federal level deny them the choices they

deserve.

And as a member who represents literally hundreds of medical technology companies, I know firsthand the damage to small businesses, their employees and seniors

when the federal system irrationally delays or denies coverage of their innovative

products. I understand the difficulty faced by seniors when they are denied life-saving and life-improving technology. I’ve even authored legislation to ensure that seniors have access, through Medicare, to new technologies.

That’s why I’m so glad that Senator Breaux is here today to discuss his work on

the bipartisan Medicare commission. I applaud his work, and I hope that today’s

hearing sheds more light on other proposals to address this important issue.

Since anything worth doing is worth doing well, we must carefully review all proposals for their strengths and weaknesses, as well as intended and unintended consequences. We must look for methods that will expand access to prescription drugs,

rationalize the reimbursement process and provide seniors access to new medical

technologies.

I believe that together, in a bipartisan way, we can design an effective and efficient way to comprehensively improve the system and preserve it for the 21st century.

Madam Chairwoman, thanks again for your leadership. I look forward to learning

more from today

there is a real opportunity for us to work together on this ComChairman J

’s witnesses on how we can best address this critical issue.

OHNSON. Thank you, Mr. Stark. And I do agree that

f mittee and develop a bipartisan solution. I couldn’t disagree more

strongly with your closing analysis of managed care, and I think

the evidence is the extraordinary outcry of unhappiness when the

managed care plans leave the market, and seniors were forced back

into regular Medicare. But that is a discussion for another day, and

certainly one will have to look more carefully in terms of the data.

But I do consider it a great advantage, Mr. Stark, to have you

as Ranking Member with your long experience with Medicare and

your very deep interest in health care and commitment to our seniors, and I look forward to working with you and my Democrat colVerDate 11-MAY-2000 11:54 Aug 06, 2001 Jkt 073535 PO 00000 Frm 00014 Fmt 6633 Sfmt 6602 E:\HR\NSET\73535.XXX pfrm07 PsN: 73535
11

leagues—and Mr. Cardin, who has always, from the Ways and

Means Committee, taken a special interest in health care issues.

And I would like to welcome our esteemed colleague from the

Senate, the Honorable Mr. Breaux of Louisiana, but for the great

privilege of introducing him in greater detail, I am going to yield

to my esteemed colleague Mr. McCrery, also from Louisiana.

Senator BREAUX. That is enough.

Mr. MCCRERY. Thank you, Madam Chair.

It is my pleasure to introduce my colleague from Louisiana, Senator John Breaux. Senator Breaux and I come from different sides

of the political aisle, but having worked with him closely over the

years, on behalf of the interests of our home State of Louisiana and

on other matters affecting the entire Nation, I can tell you there

is nobody on either side of the aisle that is more dedicated to doing

things that will make this country a better place in which to live.

And he is a recognized expert on Medicare and health care generally, and it is an honor to work with him on these issues, and

it is certainly an honor for our Subcommittee today to have him before us to hear his testimony.

Welcome, Senator Breaux.

STATEMENT OF HON. JOHN B. BREAUX, A UNITED STATES

SENATOR FROM THE STATE OF LOUISIANA

Senator BREAUX. Thank you, Madam Chair and Congressman

Stark and Members of the Committee on both sides of the aisle.

Jim, I am sorry I suggested that was enough. I thank you for the

fine introduction. I appreciate the comments and thank the Members of the Committee.

Number one, congratulations to the Chair and the Ranking Member and to all of you for beginning this process very early. Too

many times we spend too much time delaying and talking about

how we are going to go about the process, and we never get involved in the process. So with something as complicated as Medicare, Madam Chair, thank you for starting early. We have not yet

reached that point in the Senate, and it is incredibly important we

start as early as we possibly can. So congratulations for beginning

the process of finding a solution.

The first point I would like to make is one that I think is becoming more and more accepted as a policy matter by more and more

Members of Congress and by more and more people in the American public, and that is that while Medicare has been a wonderful

program for a very long time, since 1965, that it is no longer a 21st

century health care program for modern Americans because it is

inadequate in what it does and noted for what it does not do. No

one of you behind this desk has a health program that is insufficient as much as Medicare is for the 40 million seniors in this

country. Nobody sitting behind us has a health care plan that is

as inadequate as Medicare is for the 40 million American seniors.

Almost everybody in America that has health insurance has a

better plan than people who are on Medicare have today. Why do

I say that? Because of what it doesn’t cover. Time after time we

have heard evidence that it only covers about 53 percent of the average senior’s health costs. That means 47 percent of their costs

must come from somewhere else. We don’t cover it. They have to

12

buy an additional Medigap policy. They have to become so poor,

they have to get on Medicaid, or their family has to take care of

them when they become destitute for the things that Medicare does

not cover. It doesn’t cover long-term care, it doesn’t cover assisted

living, it doesn’t cover vision and eye care, and, most importantly,

it doesn’t cover probably the most important medical innovation

that we have in the market today, and that is prescription drugs.

None of us have a policy that is that inadequate. So I think that

there is a growing admission, if you will, that there is an absolute

necessity that we do something about this program. That is almost

now a given. We have crossed that hurdle. No longer can someone

say with any total degree of honesty that I like Medicare just like

it is; don’t do anything to change it. That argument doesn’t hold

water in the 21st century any longer.

So what is the solution? The solution is not to have a totally government-run program with 133,000 pages of regulations that we

micromanage to the nth degree in every detail. Nor is it to just

abandon what the government does and to say all of a sudden we

are going to have the private sector do everything for the health

of seniors in this country, and we are not going to have government

involvement at all. Neither one of those suggestions, which we have

all heard of far too many times, is the correct decision.

I would suggest that the correct decision is combining the best

of what government does with the best of what the private sector

does, and I would submit that Breaux–Frist I and Breaux–Frist II

takes that approach.

Now, what do I mean by that? Number one, the best of what government can do is help pay for it. There is no question that it is

going to cost more money, as Congressman Stark talked about. We

are not going to save money by reforming Medicare, but in the long

term we will make it a better program with more cost efficiency.

The best of what government can do is help finance it and help pay

for it. The best of what government can do is help make sure that

it is being run properly as opposed to micromanage it in detail.

And that is what Breaux–Frist I and II does. It combines the best

of what government can do with the best of what the private sector

can do.

And what do I mean by that? The best of what the private sector

can do is to bring about innovation and new technology so that the

Congress doesn’t have to sit in our back rooms and decide that for

the first time Pap smears will be covered under Medicare when private plans have done it for decades. We did that last year. When

the private sector can help say that when you have a drug that can

be orally administered for the same efficiency as it being intravenously administered, it will be done through the private sector

and not take an act of Congress, which we had to do in past years.

And the second thing that the private sector can do best is to help

bring about competition, which will help lower prices.

So the idea is to combine the best of what government can do

with the best of what the private sector can do and create a program that fits the 21st century, and that is why we have tried to

model what we have recommended after the same program that

every one of you up here, and myself included, and all of our emVerDate 11-MAY-2000 11:54 Aug 06, 2001 Jkt 073535 PO 00000 Frm 00016 Fmt 6633 Sfmt 6602 E:\HR\NSET\73535.XXX pfrm07 PsN: 73535
13

ployees behind us have, and that is a Federal employees health

benefit plan.

I mean, every year we get a choice of a large number of plans

that we pick from, and some have said, well, Breaux, you are proposing a voucher system, and that is not going to be realistic for

seniors. Of course it wouldn’t be, but our plan is no more a voucher

than what you have and what I have and what all of our employees

have. We don’t have a voucher. We have an absolute government

guarantee that they, in our case, are going to pay about 75 percent

of the premiums that are the cost of the plans that we are offered.

That is an absolute guarantee. There is an absolute guarantee of

what the policy has to cover, although they can cover much more,

and most of them do. And there is a Federal involvement through

the Office of Management and Budget to guarantee that there is

not going to be scamming of the system, there is not going to be

programs that have adverse risk selection that are going to be offered.

That is what government can do best. It pays for our premium.

It guarantees that the program is run properly, but it also brings

about competition because of the various plans that want to compete for the right to serve 10 million Americans.

We have vision. We have prescription drugs. We have competition. We have guaranteed government payment for a large portion

of the cost of our policies, and the prescription drug plan works in

a way that I think should be available to all seniors as well. So,

I mean, that is the concept.

Why did we introduce Breaux–Frist I and Breaux–Frist II? Put

the charts up if you can, Sarah. Breaux–Frist I was the result of

really what the Commission attempted to report. We got a majority. We got more than a majority, but we didn’t get the super,

supermajority that was required. The concept in Breaux–Frist I

was to really have competition among fee-for-service as well as

these private plans that will be offering these benefits. We wanted

to do it outside of the current micromanaged system, so we created

this Medicare Board. If you wanted to compare it to OPM, that

would be a good comparison.

The Medicare Board would ensure the quality standards. We said

they would have to have the same benefits that would be available

on the current fee-for-service. They could do more, but they couldn’t

do less. They would negotiate the premiums to make sure that people get the best premiums, that they would have the best possible

price. They would have to approve the benefits package, which

means they would not let plans be offered that attempt to scam the

system by only adversely risk-selecting healthier seniors, which

would be a terrible mistake. They would say, you can’t do that. You

can’t play. You can’t offer if you are going to do that. And that is

the safeguarding against adverse risk selection.

It would also, like we get every year, provide to every Medicare

beneficiary a book on what is available to them. And some people

say, well, you can’t give them choice because they are too old, they

are not going to be able to make the right choice. And yet on the

fee-for-service they make choices every day. They pick the doctor

they want to go to, the hospital they want to go to. If they are not

14

capable of doing that, their children help them or senior organizations help them and find the right place to go.

You would have the same system under the Breaux–Frist I. And

what you would have is have—HCFA would continue to offer their

standard plan. They could offer a high option plan which, would

provide prescription drugs, and it would be competing again in the

same market with other private plans who could come in and offer

the plans, and they would hope to get the business as well.

But if you want to stay in fee-for-service, I guarantee you some

of our older citizens will stay there. They are not ready to change.

But 77 million baby boomers getting ready to hit this market, who

are going to be more accustomed to coming into this new system,

will be looking for new choices and move into the new plans, but

if they don’t want to, they could still stay in the fee-for-service system.

Put up the second chart, if you would, which is Breaux–Frist II.

You might say, well, why don’t you just offer I. We offered II because we want to give you and all of our colleagues an array of options that are out there. Breaux–Frist II is competition, but it is

probably less competition than Breaux–Frist I. For those would feel

we have to take it more gradually, we offered a Breaux–Frist II option, which again maintains the Health and Human Services and

HCFA, which would continue to run the fee-for-service program

and the Medicaid program and the SCHIP program for children.

But we would have a competitive Medicare agency for the first time

outside of HCFA running Medicare+Choice and the prescription

drug plan.

The reason I would offer Medicare+Choice has not worked is not

because it is inherently not possible to work, but because of the

way it has been run. What we set up was that Medicare+Choice

was going to be competition for fee-for-service, but guess who was

going to run it? Fee-for-service.

HCFA sets the rates on an arcane formula. They put in risk adjusters and all kind of problems to make Medicare+Choice not

work. In some areas, as you know, they get paid too much, and

some areas they get paid far too little, and they move out and leave

the people without any Medicare+Choice managed care options at

all.

So you have to—if you are going to have them have a chance to

compete, you ought to have it with an agency that is based on competition and that is their purpose, not on trying to fix the prices

to make sure one side wins and one side loses. The Medicare Prescription Plus plan is the prescription drug plan that would be provided under the Medicare+Choice. And if you want to stay in the

fee-for-service, you would be over there to get in the Medicare Prescription Drug Plus plan.

I think Pete sort of indicated a lot of Democrats are saying, yeah,

we believe in prescription drugs if it can be delivered in a competitive mode as opposed to being micromanaged by HCFA. This would

do that.

I don’t think any of us want to add prescription drugs to a 1965

model and have to sit in our back offices and try and figure out

what the proper reimbursement rate is going to be for thousands

and thousands of drugs, and which one should be approved and

15

which one should not be offered. We can’t do that. We shouldn’t do

that. We only have got one doctor and a couple of veterinarians

over in the Senate side that you all sent us from over here. Glad

to have them, but we ain’t got a lot of people with a lot of medical

expertise over there trying to decide which prescription drug

should be available; should it be orally administered, or can it be

intravenously injected; which one do we pay for; which one we don’t

pay for. We can’t micromanage another prescription drug plan. So

that is what that would do, and that is the way it would work.

Anything else? OK. That is basically why we have both plans out

there. I thank you for your attention. I am more than happy to try

and answer any questions. Thank you.

[The prepared statement of Hon. John Breaux follows:]

Statement of the Honorable John B. Breaux, U.S.S., Louisiana

Madam Chairwoman, Representative Stark, and Members of the Committee,

thank you for inviting me to testify today on an issue very relevant to the current

discussions over the federal budget—how to reform an aging Medicare program

while adding a long-overdue prescription drug benefit. I applaud this Committee for

beginning the process of addressing what I consider to be one of the most important

issues facing this Congress.

As you know, earlier this month Senator Bill Frist and I reintroduced legislation

(S. 357 and S. 358) to strengthen and improve Medicare and add an outpatient prescription drug benefit for all seniors. We reintroduced both Breaux–Frist I and II

in order to lay out legislative markers for both the Senate Finance Committee and

the House Ways and Means Committee to consider as they begin to tackle this very

important issue. As I’ve said with respect to every issue, this cannot be a ‘‘my way

or no way’’ approach. We are open to suggestions about ways to improve our bills

but we need to start talking about how we’re going to get this done sooner rather

than later.

The short-term budget picture is indeed rosy but that will change quickly once

the baby boom generation starts to retire in 2010. The latest budget projections estimate a $3.1 trillion on-budget surplus over the next ten years. Even Medicare’s Part

A Trust Fund will post nearly a $400 billion surplus over the next decade. But when

making decisions about tax and fiscal policy this year, we should keep in mind the

budget picture beyond the 10-year budget window when entitlement spending could

turn surpluses into deficits overnight. As GAO Comptroller David Walker testified

before the Senate Budget Committee earlier this month: ‘‘Our long-term simulations, updated using CBO’s new budgetary estimates, show that spending for federal

health and retirement programs eventually overwhelms even today’s projected surpluses.’’

We all tout the merits of debt reduction but as much of the debt as we may pay

off in the next decade, we will almost certainly have to start borrowing again to pay

for the Medicare and Social Security benefits of 77 million baby boomers unless we

make much-needed changes to the programs.

We all know that the fear of change and a fear of the unknown make Medicare

reform a challenge. If this were easy, it would have been done long ago. But what

we do know should give us the incentive to consider some alternatives. As good as

the short-term economic outlook is today, the problems facing Medicare haven’t

changed and they bear repeating:

16

• 1965 health care delivery system—Medicare is a program frozen in time. It

takes an act of Congress to update the benefit package. For example, pap

smears and glaucoma screening were finally covered under Medicare in last

year’s Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act

of 2000—several years after the private sector started using these important

screening tools.

• Outdated Benefits—Medicare’s current benefit package is extremely outdated,

covering a limited number of outpatient prescription drugs, providing few preventive services, and limiting access to new medical technologies. Medicare is

too rigid and slow to change. Seniors deserve access to life-saving drugs and

technologies as they become available. The very fact that Congress must pass

laws to add new benefits best illustrates the problem with a heavily micromanaged program. The U.S. Congress simply should not be in the business of setting disease-specific or drug-specific health policy. No government program can

possibly keep up with the increasingly rapid rate at which new life-saving and

life-improving drugs and technologies are brought to the market.

• Inadequate coverage—On average, Medicare only covers 53% of beneficiaries

health care needs. No other comprehensive health plan—public or private—covers so little.

• Micromanagement by Congress and HCFA—The government-administered

pricing system Medicare currently operates under is governed by over 130,000

pages of rules and regulations—four times larger than the Internal Revenue

Code. I strongly believe that one of the reasons we don’t have a prescription

drug benefit in Medicare today is because of its rigid pricing system, which is

micromanaged by Congress and slow to adapt to changing health care needs

and technologies.

• 77 million baby boomers beginning in 2010—Again, budget projections may

change from one year to the next but nothing will change the demographic fact

that 77 million baby boomers will begin retiring in 2010 and demanding their

Medicare and Social Security benefits.

In addition, CBO estimates that Medicare will continue to grow by an average of

7.5% over the next ten years, doubling spending from $216 billion in 2000 to $456

billion in 2011—and this obviously does not include the cost of adding a new prescription drug benefit to the program.

17

Elements of Breaux–Frist I and II

The Breaux–Frist prescription for Medicare reform is to combine the best of what

the government can do with the best of what the private sector can do—this is not

an either/or decision. The government’s role is to provide financing and oversight

while using private markets to ensure that Medicare keeps pace with advances in

medical technology and injects much-needed competition into the program.

Many critics have mistakenly characterized Breaux–Frist as some sort of voucher

proposal where seniors will be given a check and sent into the market to buy insurance. Nothing could be further from the truth. Breaux–Frist is no more a voucher

proposal than the Federal Employees Health Benefits Plan (FEHBP). Under

Breaux–Frist, the government’s contribution is tied directly to the cost of health

care and the level of government support is explicitly outlined in statute. The new

entity overseeing Medicare (the Medicare Board in Breaux–Frist I; the Competitive

Medicare Agency in Breaux–Frist II) will serve a function similar to that of the Office of Personnel Management (OPM) which approves plan premiums and benefits

to minimize adverse selection.

The primary difference between Breaux–Frist I and II is that the premium support model in the original bill would give HCFA the tools to modernize itself and

become more efficient but for the first time make it compete with private plans

based on premiums, costs and quality of benefits. This represents competition in the

purest sense. Much of what we proposed in Breaux–Frist I (S. 358) reflects the policies supported by a bipartisan supermajority of the Medicare Commission which I

had the privilege of co-chairing with Ways and Means Committee Chairman Bill

Thomas. I have said many times and I continue to believe that we should use the

addition of prescription drugs to Medicare as an opportunity to make important

structural changes to the program.

Breaux–Frist II (S. 357) also adds a universal prescription drug benefit to Medicare but does so in the context of more incremental program reforms. In Breaux–

Frist II, plans are allowed to compete, but Part B premiums are used as a reference

point so that beneficiaries in fee-for-service won’t pay a higher Part B premium than

they otherwise would under current law.

When reintroducing our legislation 2 weeks ago, some people suggested that we

just reintroduce Breaux–Frist I—others suggested we focus on Breaux–Frist II. The

two bills actually share some common elements.

18

Both Breaux–Frist I and II guarantee that all seniors are entitled to the same

benefits they get today (even though the current guarantee only takes care of 53%

of their health care needs). We explicitly say in our legislation that seniors continue

to be entitled to the Medicare benefit package outlined in Title 18.

19

Both bills establish a new competitive system managed outside of HCFA. We

must move away from a framework that gives HCFA regulatory and pricing authority over Medicare+Choice and any new competitive systems we design.

Both Breaux–Frist I and II envision a fee-for-service drug benefit not micromanaged by the federal government but run through public-private partnerships overseen by a new Medicare agency. I have serious reservations about giving HCFA any

pricing, management or administrative role over a new prescription drug benefit.

Moreover, simply using private contractors like PBMs in a given region is no different than how HCFA currently contracts with fiscal intermediaries and carriers

today to deliver Part A and B benefits.

FEHBP is a good example of how a public-private partnership could work in

Medicare. Private plans participate in FEHBP, a program for nine million federal

employees and their families with a 40-year proven track record, without major

problems. Clearly the federal government will have to bear some risk in order to

encourage the private sector to offer the benefit but the private sector has to bear

enough risk so that there is an incentive to get deeper discounts and control utilization. Giving the federal government full risk for a drug benefit will lead to a system

where there is no competition, no choice and a heavy reliance on government price

controls.

Some have mistakenly characterized these public-private partnerships as not giving seniors a drug benefit ‘‘in Medicare.’’ But just as will be the case for all other

Medicare benefits, the new drug benefit envisioned in Breaux–Frist I and II is in

Medicare—it’s just not micromanaged and priced by HCFA.

In both Breaux–Frist I and II a new Medicare agency (which is part of the executive branch) would oversee a new competitive system and would ultimately be responsible for guaranteeing that all seniors—including those in rural areas—have access to a prescription drug benefit. This new agency, using public-private partnerships to administer the drug benefit, and a change in HCFA’s role and mission, are

the critical down payment Congress must make if it passes prescription drug legislation this year.

Both Breaux–Frist I and II also establish new ways of measuring Medicare’s financial health. With general revenues supporting a growing share of overall Medicare spending, we need to look at more accurate methods of gauging Medicare’s solvency. In Breaux–Frist II, we require the Medicare Trustees to evaluate general

revenue spending in Medicare, provide historical spending trends, provide 10-year

and 50-year projections, and provide information regarding the rate of spending

under the program compared to the rate of growth in the gross domestic product.

Conclusion

The overwhelming public support for an outpatient prescription drug benefit gives

us a real opportunity to make Medicare better with bipartisan legislation. Seniors

absolutely need prescription drug benefits, but adding them without addressing the

underlying problems facing the program will only exacerbate Medicare’s financial

deficiencies and administrative inefficiencies.

Medicare must be modernized and put on a sound financial footing to be able to

provide seniors with a drug benefit that is an integral part of their health care plan.

No system is perfect, and change is always unsettling, but we must move beyond

the demagoguery and disinformation campaigns and act responsibly to balance the

very real need for outpatient prescription drug coverage with the need for meaningful program reforms. It is time for us to take the necessary steps to reshape Medicare, include a prescription drug benefit, and guarantee health care security for seniors in the decades to come. By doing this, I believe we can truly provide choice and

security for our Medicare beneficiaries to ensure their individual health care needs

are met, today and well into the future.

The Medicare Prescription Drug and Modernization Act of 2001 (Breaux–

Frist II)

IMPROVED MEDICARE MANAGEMENT AND ADMINISTRATION

✔ Restructures the 1965 Model

Establishes a new executive branch agency, the Competitive Medicare Agency,

outside of the Department of Health and Human Services to oversee

Medicare+Choice plans and outpatient prescription drug coverage. Eliminates

the inherent conflict of interest of HCFA managing both fee-for-service Medicare and Medicare+Choice plans that compete for the same beneficiaries. Establishes a new mission for Medicare in the 21st century leaving behind the buVerDate 11-MAY-2000 11:54 Aug 06, 2001 Jkt 073535 PO 00000 Frm 00023 Fmt 6633 Sfmt 6621 E:\HR\NSET\73535.XXX pfrm07 PsN: 73535
20

reaucracy and outdated mindset that continues to plague the program and instead guaranteeing seniors choice, health care security, and improved benefits

and delivery of care.

MEDICARE PRESCRIPTION DRUG AND SUPPLEMENTAL BENEFITS

PROGRAM

✔ Establishes Voluntary, Universal Outpatient Prescription Drug Coverage

Allows all Medicare beneficiaries who are entitled to Part A benefits and enrolled under Part B to elect outpatient prescription drug coverage beginning in

2004. Beneficiaries can receive drug coverage through either a Medicare Prescription Plus Plan, designed for beneficiaries remaining in traditional Medicare, or through a Medicare+Choice Plan.

✔ Guarantees Medicare Benefits, Standard Coverage for Prescription

Drugs, and Protections Against High Out-of-Pocket Drug Costs

Maintains all current Medicare benefits and offers standard outpatient prescription drug coverage, which includes a $250 deductible, $2,100 in initial coverage

and 50% cost-sharing. Provides coverage and security against escalating out-ofpocket drug costs by requiring that all outpatient prescription drug coverage offered to beneficiaries include stop-loss protection of $6,000 so a beneficiary

never pays for drugs out of their own pocket beyond this amount. Provides

beneficiaries the choice of coverage that best suits their individual needs by allowing the offering of different drug benefit plans, while ensuring the benefit

value of standard coverage is maintained along with all stop-loss protections.

✔ Guarantees Price Discounts off Prescription Drugs

Requires price discounts negotiated between, pharmaceutical companies and insurers to be passed along to beneficiaries through a prescription drug discount

card program offered by the plan, to ensure beneficiaries never pay retail prices

for prescription drugs at any time.

✔ Guarantees Affordable Drug Coverage through Universal Premium Subsidies

Offers all beneficiaries a 25% subsidy toward the premium costs of prescription

drug coverage. In addition, all beneficiaries will enjoy the benefits of additional

premium reductions as a result of the federal government sharing in the risk

of covering high-cost beneficiaries.

✔ Protects Low-Income Beneficiaries

Provides subsidies for beneficiaries with incomes below 135% of poverty by offering 100% full coverage of premiums, deductibles and co-pays associated with

prescription drug coverage. Beneficiaries between 135% and 150% receive premium subsidies on a sliding scale from as much as 100% to no less than 25%.

Since 39% of beneficiaries with incomes below 150% of poverty have no drug

coverage under Medicare, this provision alone will provide comprehensive drug

coverage for over 5 million seniors and individuals with disabilities.

MEDICARE+CHOICE PROGRAM IMPROVEMENTS

✔ Improves Benefits and Health Care Delivery under Medicare

In 2004 establishes a new competitive system under Medicare+Choice where

plans bid for the costs of delivering care and compete based on benefits, price,

and quality so that beneficiaries receive the highest-quality, affordable health

care. Allows maximum flexibility for plans to reduce current beneficiary Part B

premiums and cost-sharing as well as offer new and additional benefits to beneficiaries, including outpatient prescription drug coverage.

BENEFICIARY PROTECTIONS, OUTREACH AND ENROLLMENT

✔ Encourages Informed Choice and Maintains Beneficiary Protections

Establishes Medicare Consumer Coalitions, beneficiary supported organizations,

designed to provide beneficiaries timely and accurate information at the federal,

state, and local levels with respect to Medicare benefits and options. Ensures

beneficiaries are protected through appropriate grievance and appeals processes

for all Medicare benefits, including outpatient prescription drug coverage.

21

MEDICARE SOLVENCY MEASURES

✔ Establishes Fiscally Responsible Measures of Solvency

Provides a true and accurate measure of solvency by establishing reporting requirements for the Medicare program as a whole, including both Parts A and

B, in determining the financial health of Medicare. Requires reports to Congress

by the Medicare Trustees to evaluate general revenue spending in the program,

provide historical spending trends, provide 10-year and 50-year projections, and

provide information regarding the rate of spending under the program compared to the rate of growth in the gross domestic product.

your presentation and for your many years of thoughtful evaluation

Chairman JOHNSON. Thank you very much, Senator Breaux, for

f of the options that we have in terms of managing the transition of

Medicare to a more modern and responsive and affordable plan.

Actually we have so many Members here that I think I am going

to forego my right to question so that we get through everybody,

because I have had chances to talk with you, and I will.

Mr. Stark.

Mr. STARK. Well, again, I question whether managed care or

Medicare+Choice is any good. I happen to disagree, John. I think

Medicare is the finest system we have in this country. We have

starved it by wasting money on managed care, and we may not be

paying as generous benefits as we, in fact, should. I think that last

month it was announced came out that the National Academy of

Social Insurance is going to issue a report warning that relying on

the marketplace to solve Medicare’s problems will make matters

worse, not better—largely because of the quality of care problems,

especially for those who are poor or minorities, that will be generated by a premium support system.

22

I would like, Madam Chair, to enter the Medicine and Health article in the record that outlines the National Academy of Social Insurance’s forthcoming action. I think our colleagues will find it of

some interest.

The private market has its problems. Aetna, for example, the

largest, most prestigious insurance company in America that runs

more managed care than anybody else is now being sued by the

Connecticut Medical Society for not paying claims promptly. Too

often, there are inappropriate personnel making coverage determinations; there are inappropriate incentives for the reviewers to

deny care.

Only approximately 15 percent of the seniors have chosen managed care, many because they have been inundated by advertisements from the managed care companies.

The Chair rightly indicates that many people were concerned

about the managed care companies closing up. I submit to you that

is only because many beneficiaries in those plans have drug coverage not available in Medicare. If we had a drug benefit in Medicare, we would, in fact, find that few would want to give up the

right to the absolute open choice that the fee-for-service system

now provides, and we would have happier doctors, hospitals.

Chairman JOHNSON. Mr. Stark, if you could direct your questions

more directly to Mr. Breaux, I would appreciate it, because we

have so many people who want to ask questions.

Mr. STARK. I understand that. I will get to the question.

Managed care does not help pay for graduate medical education

and it does not provide benefits to those in rural areas, which the

fee-for-service does now, to the tune of about $10–$12 billion a

year. What possible benefit is there to the Medicare beneficiaries

to be encouraged to go into managed care? That is my question.

What evidence do you have that managed care is any good?

Senator BREAUX. I think there is a good question in there, and

I hope I can find a good answer for you.

Mr. STARK. I don’t think there is any evidence.

Senator BREAUX. Let me try.

Mr. STARK. All right.

Senator BREAUX. If you only took half of what we are suggesting,

and that is to let the private sector take over all of the operations

of the Medicare, I think Congressman Stark would be right, because there would be no guarantees of benefits. There would be no

guarantees against adverse risk selection, and all of the problems

that he talks about would probably be potentially existing. But

what we have designed, as I have said, to combine the best of what

government can do and what the best of what the private markets

can do.

And when you have a Medicare Board or you have a competitive

Medicare agency, their role would be the same type of role that we

have with OMB that guarantees against adverse risk selection,

guarantees it is legitimate and fair competition, and also allows the

private sector to bring about innovation and technology advancements. So you have the protection for the beneficiaries that I would

argue is not there today, and you have real competition, which is

clearly not there today.

23

But the bottom line is that people who do not want to go into

the new system, they have the right to stay in fee-for-service if

they think that serves their needs better. They have a choice, and

I think that is the right way to go.

Mr. STARK. Well, I would just suggest, Senator, that managed

care has an abysmal record and their popularity is plummeting

among Medicare and non-Medicare beneficiaries alike—including

corporate America, which is getting sick and tired of it. Going to

the managed care industry for help with reform is sort of like going

to Saddam Hussein to find out how to teach democracy.

Senator BREAUX. The model we are going to is the model that

you have as a Member of Congress, I have as a Member of the Senate, is the Federal Employees Health Benefit Plan. I would suggest

the reason that Medicare+Choice has not been doing well is because of the way it has been micromanaged by HCFA.

Mr. STARK. Senator, I will bet you a nickel that there aren’t two

people in this room that belong to a managed care plan.

Chairman JOHNSON. Oh, everyone. There are no Federal employee benefit plans in my district that aren’t HMOs.

Mr. STARK. Those are PPOs. I am talking about managed care.

Chairman JOHNSON. They are all managed care.

Mr. STARK. Come on.

Senator BREAUX. He is talking about bad managed care.

Chairman JOHNSON. You are talking about bad managed care.

Mr. STARK. Thank you.

Chairman JOHNSON. Mr. McCrery.

Mr. MCCRERY. Thank you, Madam Chair.

Since my good friend and colleague from California brought up

the seminar that we had yesterday, let me refresh the memory of

those who were there, and for those who weren’t let you know that

we are also told yesterday that in the year 2040, based on current

projections, if the government is still spending around 18 percent

of GDP, Social Security, Medicare and Medicaid will consume 80

percent of the Federal budget. That leaves 20 percent of 18 percent

of GDP for national defense, for roads and bridges and highways,

for environmental protection, court system, you name it; 20 percent. We all know that is untenable. Can’t do that.

We must do something to at least try to curb the rate of growth

in Medicare and to curb the rate of expenditures for Social Security. So at least Senator Breaux and his Commission brought forward a plan that gives us some hope of doing that in the Medicare

system.

I think Senator Breaux would be the first to tell you, Mr. Stark,

that he is not sure this will work. Nobody is. But we are going to

do something. And I would certainly urge you and others who don’t

like the premium support model to come forward with something

else that will control costs. So far I haven’t heard much. But we

are anxious to hear other views, and certainly that is going to be

the job of this Subcommittee to look at any alternatives and try to

decide what is in the best interest of—the best long-term interest

of this program and the country.

Senator Breaux, you have discussed adding a prescription drug

benefit, and certainly I don’t think there is any argument that

Medicare is deficient in that regard. We do need to provide a preVerDate 11-MAY-2000 11:54 Aug 06, 2001 Jkt 073535 PO 00000 Frm 00027 Fmt 6633 Sfmt 6602 E:\HR\NSET\73535.XXX pfrm07 PsN: 73535
24

scription drug benefit to senior citizens in this country, but I have

seen in print you quoted as saying that you don’t think a prescription drug benefit should simply be added to the current Medicare

program, that it ought to be done in the context of overall Medicare

reform. If that is correct, would you expound on that just a minute?

Senator BREAUX. Congressman, that is correct, and I think it is

important. I mean, I have used the analogy, I thought it was kind

of good when I said it, I think it is still pretty good, that just adding prescription drugs to the existing program is like adding more

gas to a 1965 automobile. It is still going to run like a 1965 car.

Therefore, just adding more benefits to a 1965 Medicare system is

still going to have the same problems. It is going to cost a lot more.

It is still going to be micromanaged. There still will be no competition.

So I think that what we have to do in assuring that Medicare

does cover prescription drugs, which I feel very strongly it should,

that it is part of a reform system that allows the prescription drugs

to be delivered in a 21st century model that guarantees the protections, guarantees quality, but also brings about competition which

will help on the prices as far as having competition so we don’t

have to micromanage it or price regulate it, which I think would

be a serious mistake.

Mr. MCCRERY. In the work of the Commission, the projections

that were developed by the Commission showed that in the first 10

years of Medicare reform under the premium support model, the

system would save about $100 billion over current projections for

the current program, but then in the outyears, after the first 10

years, it showed considerably more savings for the program. Is that

correct? And how did the Commission explain——

Senator BREAUX. Congressman, the Commission, as I know—Jim

McDermott was there and others behind me that were on the Commission with me know one of the recommendations that did not get

the super, supermajority was an increase in the eligibility age,

which would have caused substantial savings. That is not part of

our plan. Neither Breaux–Frist I or Breaux–Frist II touches the

eligibility age. But I do think going to a more competitive system

you will still have the savings. I think we were scored in Breaux–

Frist II as $163 billion over 10 years. We have resubmitted that

request to be updated, and it is going to be more than that under

Breaux–Frist II. And that is going—will be made available as soon

as we have it.

You know, I thought in the beginning, quite frankly, you could

devise a new system to come up with a lot of savings in a program.

I think the best we are going to be able to do is to improve it and

to keep the increase in costs down. I don’t know—we are going to

have to spend more money in this program, and that is it.

Mr. MCCRERY. Sure. I am referring to a savings from the baseline, not a——

Senator BREAUX. OK. Yeah. It would be that. I mean, the projections we have, CBO is now estimating that Medicare will grow by

an average of 7.5 percent over the next 10 years, doubling spending

from $216 billion to $456 billion by the year 2011, and that does

not cover the cost of adding prescription drugs. So when you add

25

that, then you are looking at some huge amounts, which Jim just

pointed out.

Mr. MCCRERY. Thank you very much.

Chairman JOHNSON. I would just mention, to keep things in perspective, that that 7.5 percent growth leading up to very big spending is current law. And just since last year, the House-passed prescription drug bill, which was very modest, I think, by anyone’s

standards, has increased in its cost 23 percent in 1 year. So we do

have to really understand the implications of what we are doing.

Mr. Crane.

Mr. CRANE. Thank you. I don’t have a question. I just want to

commend you, Senator Breaux, and your colleague Senator Frist

for the work you have done, working toward fundamental reform

of the problems that we are experiencing with the Medicare program. And I think that approach is infinitely superior to what we

have been doing through the years, and that is piecemeal or patchwork. And so keep up the good work, and we are looking forward

to continuing to work with you both on the Senate side.

Senator BREAUX. Thanks, Phil.

Chairman JOHNSON. Mr. Kleczka.

Mr. KLECZKA. Thank you, Madam Chair. I might have a question

somewhere along the line, but I would like to make a couple of observations.

Senator, thank you for your presentation today. I think the debate that we are having and the discussion we are having is proper, and it is probably healthy, but in the bottom—or at the end of

the day, my conclusion will be that it just ain’t going to work.

And one can only look back to about 35 years ago at this old

Chevy that you are talking about that needs a lot of gas, and the

reason that the government bought that automobile was because

the private market wasn’t providing the seniors in this country

with health care. Over 50 percent of the seniors had nothing. So

the government stepped in, which is the government’s role.

Now, when it comes to making cars, private industry does that,

and it does it quite well. When it comes to building our homes, private industry does it, does it quite well. Governments should not

get involved in that enterprise. But where there is a gap, where the

public is not being served and is in need of a service, that is what

we are here for. That is why the Founding Fathers created a Congress to look after the welfare of the citizens of this country.

Well, now we are saying, well, things have changed dramatically

in 35 years, and the insurance industry is now clamoring; they are

clamoring to insure these seniors.

Well, a couple of responses to that. First of all, we have had a

pilot program. We have had a pilot Breaux–Frist program operating the last couple years called Medicare+Choice. What has been

the experience? Seniors have gotten more care cheaper, and insurance companies are beating each other to death to insure them.

Wrong. What is happening in the city of Milwaukee, which I represent and come from, we had three carriers at one point. Now we

are down to one, who is going bankrupt and will probably file with

HCFA that they are going to get out of the business, too.

And the problem is you are insuring the sickest of our population, those who are going to be exposed to great medical costs in

26

a short period of time. Well, you say, let’s give them the same plan

offerings like the Federal employees. Well, in that market the insurance system works because you are insuring the young, healthy

and the 58-year-old somewhat healthy members like myself. When

you put them all into a big bin and mix it up, you can make a buck

doing that.

OK. So you know it is like rolling averages, but with the senior

population, 65 to 100, you don’t have that good exposure, all right,

because as time goes on, it is going to be more health care, more

drugs, more hospitalization, et cetera, so the private insurance

market doesn’t want them, all right? They ain’t going to make any

money on them.

Another case in point, let’s talk about the great drug bill, Madam

Chairman, we passed last year. Well, here is a drug subsidy program to be run by our favorite friends again, the insurance industry. What we are going to do is have them go out and sell drug

policies to seniors, and the government, taxpayers, will subsidize

their costs or losses or whatever you want to call it. Well, we had

a hearing, Pete, didn’t we, before the Committee, and half of the

insurance industry came before us and said, nice program, girls

and boys, but we ain’t buying into that, because the people who are

going to sign up for that program need drugs.

So here is the Republican response to a decent drug benefit that

we produced, and the major actors came forward and said, nice program, but we are not buying into it because we are not going to

make any money on it. So there are things, Madam Chair, that the

government should rightfully do, and this is one of them, but now

if we pass the Breaux plan, and, John, we could be getting to a

question pretty soon—— Senator BREAUX. I am taking notes.

Chairman JOHNSON. Remember you only have 5 minutes for

question and answer. I would like our witness to have a chance to

answer.

Mr. KLECZKA. Now I lost my train of thought. That was probably

great. I have to start all over again. I am sorry.

Chairman JOHNSON. Since the yellow light is on, why don’t you

let the Senator comment on—— Mr. KLECZKA. What has changed now? What do you see in the

marketplace that is going to offer all the benefits that are not being

offered in Medicare today plus the current base benefits that are

going to be more affordable than they are today, and we are going

to have more players, more private insurers coming forward to say,

gosh, I like your grandma, I would really like to help her out. OK.

Senator BREAUX. Let me take a crack at it and make a couple

of points. Number one, we cannot defend the status quo.

Mr. KLECZKA. As I like to say in the South where I come from,

it is better than nothing. You know what? It is pretty good.

Senator BREAUX. I will give you an alternative, which I think is

better than the status quo, number one.

Number two, let me take the analogy on the cars. You said Detroit makes cars; government doesn’t. That is true. The private sector makes the cars, where the government is involved in ensuring

safety standards, fuel efficiencies, and so they don’t roll over, to

make sure that the cars run according to certain national standVerDate 11-MAY-2000 11:54 Aug 06, 2001 Jkt 073535 PO 00000 Frm 00030 Fmt 6633 Sfmt 6602 E:\HR\NSET\73535.XXX pfrm07 PsN: 73535
27

ards. Private sector makes them, and they bring about efficiency,

and there is competition, but the government has a major role in

ensuring that they are safe and they meet certain standards and

fuel efficiency.

The same type of concept is what we are talking about with

health care. Let the government do what the government can do

best: help pay for it, help guarantee that it is being run properly

and meets certain standards, but allow the private sector to bring

about innovation and competition and new technology.

The final point: It is true that agencies that came up and talked

about prescription drugs being available would not ensure it only

because it is not a good insurance risk. Obviously we all understand that if you are only going to cover prescription drugs, the

only people to buy those policies are those who will need prescription drugs. Like in the Medigap insurance, the premiums become

so expensive that it is not a good investment.

But this proposal is different, I would suggest, in a major, major

way. Number one, the plans would be able to offer more than just

drugs only, which is one of their complaints previously. They would

be able to offer vision. They would be able to offer dental. They

would be able to have coverage for cost-sharing. In addition to that,

there would be a one-time enrollment to make sure that more people become involved in the process to give them a larger insurance

pool than they had before.

And the final and probably the most important thing is the reason why it would work is there would be substantial risk-sharing

by the government agency as well as the insurance companies to

help with regard to the risk-sharing in selling this type of policy.

So I think that when you look at what we are suggesting, that

it——

Mr. KLECZKA. Are you talking subsidy just like the drug program

we had?

Senator BREAUX. Yeah. Absolutely.

Chairman JOHNSON. I thank the gentleman.

My friend Mr. Johnson from Texas.

Mr. JOHNSON of Texas. Thank you, Madam Chairman. Let me

correct the record, if I might.

Mr. Stark, I have been getting complaints on the Medicare system as it is envisioned. I have been getting complaints about

HCFA, and I haven’t been getting complaints about HMOs.

Now, I think that what we have to consider is that HCFA, as

Senator Breaux has said, is obsolete and inefficient and doesn’t

work. And can you imagine us adding prescription drugs to this

thing, Senator, and every year coming up here and saying, we got

to add this one and this one and this one because of new innovations in medicine.

Medicine is moving faster than we can do that. That is what is

wrong with HCFA. It hasn’t been able to keep up with it. Inadequate benefits, and insufficient choices, and Medicare’s administrative inefficiency and structural obsolescence have to be overcome. I like what you are doing.

Would you care to comment on any of that?

Senator BREAUX. You are right on.

Mr. JOHNSON of Texas. God bless you. Thank you.

28

Mr. MCCRERY. Would the gentleman yield?

Just to correct the record, another time there were, in fact, PBMs

that came forward last year and said they would participate in the

prescription drug program that we offered. And I think the main

industry sector that was saying loudest they wouldn’t participate

is that sector that already participates in the Medigap policies that

are so profitable. So I would urge you to question those sources.

Senator BREAUX. Medco said they would write a drug only plan.

Mr. JOHNSON of Texas. Thank you, Madam Chairman.

Chairman JOHNSON. Thank you.

Mr. Camp.

Mr. CAMP. Senator, thank you for all your good work. I would

agree with you that the addition of prescription drugs really is an

opportunity to modernize Medicare. And for example, this 1965

model when you get the drugs if you are in the hospital, but you

don’t if you are out of the hospital, it just cries out for some

change.

You said in your written statement and I think in some of your

comments that the premium support model in Breaux–Frist I

would give HCFA the tools to modernize itself. Could you elaborate

on that, please?

Senator BREAUX. OK. What do we have on that Sarah? Basically

we are giving them more of an ability to write the regs this away

that would encourage more competition within the system, giving

them the flexibility to offer some of their benefits through a more

competitive system than they do now, and basically giving them

greater flexibility in order to be more competitive, because under

this they are going to have to compete now with the private plans.

So we give them more flexibility on how they would be able to utilize what they do now in a more competitive fashion in order to be

able to compete.

Mr. CAMP. OK. Thank you very much.

Thank you, Madam Chair.

Chairman JOHNSON. Thank you.

Mr. McDermott.

Mr. MCDERMOTT. Thank you, Madam Chairman.

Sam, if you can sell the idea that Medicare has been a failure

to the people who are on Medicare, you are a real good salesman.

I think that anybody who looks at the program can see there is

problems, but to say it is a failure or we ought to throw it out and

bring in this new, has simply not looked at the problem.

I would comment everybody looking at the GAO report that says,

plans withdrawals indicate difficulty providing choice while achieving savings—this is September last year—and there has been a

roughly 50 percent decline of members in the Federal Employees

Health Benefit Program covered by managed care operations.

Now, if this is such a good option, why are all the Federal employees leaving it? And yet, what we are seeing here is a proposal

that is designed to push us—push seniors, I am not quite there— to push seniors into that program. And they are dangling this little

benefit of drugs out there, and come on, folks, follow the drug, and

we will get you in there.

And the fact is that what has happened to Jerry has happened

all over this country, that people have had—every one of us sits in

29

our office and tries to deal with it, as I did in the State of Washington, almost 500,000 who were dumped by HMOs because they

couldn’t make money. And we started out with the premise that

when we put the HMOs in, they should get 95 percent of what we

spent on the average beneficiary in the Medicare program, and

they say, we can’t make it on 95 percent.

Well, where is the savings? That is what I want to ask you. Because we say we can get competition, and with competition we will

get savings. And yet the technology of medicine has gotten more

and more complicated, and for us to say that, well, we can do it,

I guess we will just let the managed care operations do the rationing.

And the question I have for you, John, is would you rather have

the insurance companies do the rationing, or do you want to do it?

Senator BREAUX. Neither one. I think—— Mr. MCDERMOTT. Well, you are going to have to do it one way

or the other, or you are going to have to cut back on services. You

cannot provide the level of services to an increasingly aging population with the technology that is going on in this country and not

cut somewhere.

Senator BREAUX. Let us remember, every one of us, that 47 percent of the average senior who is on Medicare’s cost for health care

every day is not covered by Medicare today. Forty-seven percent of

their illnesses and their ills that need to be treated, they have to

go and buy another policy, they have to go on Medicaid, or they

have to go to their children. Those facts are factual. It only covers

about 53 percent. So you already have a system that is woefully inadequate.

Now, we have to understand—the final thing we have to understand, I think all of us, myself included, that—I remember when

Stuart Altman was on the Commission and who is here behind us,

I think in the beginning we argued about this as a means of saving

a great deal of money. It is not going to save a great deal of money,

but it is going to help reduce the increases that are projected. We

are still going to be spending more money.

The feature that we have here is that we try to combine the best

of what government can do with the best of what the private sector

can do. I am not arguing that it is only the private sector making

the decisions in terms of risk selection, in terms of making sure the

policies offer everything that is needed and necessary to be offered.

The government is involved both with that and with paying for it.

And the final note is that people have a choice. If they like the old

program, they stay there; if they prefer the new one, they have the

opportunity to choose it.

Mr. MCDERMOTT. I think that that is admirable, and I like that

part of what you are doing. What I don’t like is the slanting of the

incentives to say, if you stay over on this old fee-for-service 1965

Chevy, you are not going to get that nice, big Cadillac that we got

for you.

Senator BREAUX. You do if you pick this Breaux–Frist I.

Mr. MCDERMOTT. It has got a drug in the front seat.

Senator BREAUX. That is the argument for Breaux–Frist I. Because with Breaux–Frist I, HCFA would offer their high-option

plan and prescription drug plan as well, so you could stay in feeVerDate 11-MAY-2000 11:54 Aug 06, 2001 Jkt 073535 PO 00000 Frm 00033 Fmt 6633 Sfmt 6602 E:\HR\NSET\73535.XXX pfrm07 PsN: 73535
30

for-service and get drugs under Breaux–Frist I; and under Breaux– Frist II, you would go to the competitive Medicare.

Mr. MCDERMOTT. Why do you even bring Breaux–Frist I here

when it is so patently designed to drive seniors into HMOs?

Senator BREAUX. I don’t think it does that. You can still stay—— Mr. MCDERMOTT. You mean if I offer my mother, who is 91 years

old, a drug benefit if she goes into an HMO if she doesn’t have it

now?

Senator BREAUX. For Breaux–Frist I, under HCFA’s high-option

plan, they offer not only all of the current benefits but also prescription drugs; and the prescription drug plan would be available

under fee-for-service and HCFA. If my father wanted to stay in

HCFA and get prescription drugs under the high-option plan, they

would have prescription drugs under the high-option plan.

Mr. STARK. A $50 benefit for 1,200 bucks? That is a heck of a

benefit.

Senator BREAUX. We can design it. We can pick the number. That is an actuarial value. That is not $800 worth of drugs. It is

an actuarial value.

The average senior in this country spends approximately—— Mr. MCDERMOTT. Would you say, in closing—— Senator BREAUX. —between $600 and $700 a year on drugs. That is the average cost. An actuarial value policy of $800 is a pretty

good deal.

Mr. MCDERMOTT. Let me just say, in closing, that what you have

to keep in mind here is that you are designing a program that presently has something like 9 million widows in it living on $8,000 a

year. Now, if that is the program we are trying to design—we are

not worried about Bill Gates when he goes into Medicare. He is

going to be able to afford a few extras. But it is the people at the

bottom who you give this miserable benefit to at a time in their life

when $800 may turn out to be a pittance of what they spend. When

the average out-of-pocket cost is $3,500, according to our seminar

yesterday, an $800 benefit doesn’t cover it.

Senator BREAUX. Let me suggest that an $8,000 income is probably covered by Medicaid which covers 100 percent of their drugs

and 100 percent of their health costs.

Mr. MCDERMOTT. Do you make an automatic entry into Medicare—Medicaid? Because nobody on this Committee will automatically default people into Medicaid. They make them go down to the

welfare office and beg to get in. And that is why this is deceptive.

Chairman JOHNSON. I would like to exercise the prerogative of

the Chair to make two comments.

First of all, Medicare is currently a fee-for-service plan and a

plan that offers managed care choices. It has offered them for many

years. It has offered the HMO risk plans. Now it offers some other

variants. In 40 years, Medicare is going to be there, and it is going

to be offering fee-for-service coverage and other choices.

So no one here is for a moment suggesting that we do away with

Medicare, and it concerns me when we allow an opportunity to educate ourselves to become in a sense a political debate. You know,

neither party, the administration, nor anyone else—— Mr. STARK. No, no politics here.

Chairman JOHNSON. I find that disrespectful, Mr. Stark.

31

Mr. KLECZKA. Madam Chair, I—— Mr. STARK. I am just bringing some humor into the subject.

Chairman JOHNSON. I understand what you are saying, but hear

me out.

No political party and no administration has come up with a plan

that meets your criteria, nor that we have costed out, nor that we

have figured out how we are going to fund.

Now, this Committee is going to try to do that, going to try to

get into more depth on why is it that the choice plans haven’t met

the needs of either the recipients or the taxpayers or the plans. But

I think it is very important to remember that nobody is talking

about doing harm to Medicare.

What people are talking about is Medicare’s inability to offer

state-of-the-art benefits to the recipients, and how are we going to

do that in the context of extraordinary expenditure estimates, and

how are we going to do it in a way that we don’t force people into

choices to get benefits but do honestly give them a choice. And how

are we going to deal with some of the problems of the low-income

seniors who are just above the Medicaid level, and can we really

afford to continue a program that doesn’t take into account the

very minimal needs of someone—just minimal abilities of someone

just above the Medicare level or just above 150 percent of poverty

to pay even premiums whether they are in—whatever bill they are

in.

So I think we have very big challenges before us, and I don’t

think that we have understood clearly on the congressional side— and I think you would agree with me on this, Senator Breaux— that we really haven’t understood clearly why is it Medicare didn’t

work as well and what is the complexity of the system that it found

itself facing. What are some of the things that it did that were

good, and what are some of the things that it did that were bad?

Because, clearly, if we are going to do this, we are not going to try

to re-create the experiences of the last few years. We are going to

try to strengthen Medicare fee-for-service with prescription drugs;

and we are going to try to provide stable, predictable, funded alternatives; and it is going to cost money.

So if we can focus on our questions about Mr. Breaux’s answer

as precisely as we possibly can, I think we arm ourselves to go forward and work through some of the problems that have been

brought up that are real.

Mr. Ramstad.

Mr. RAMSTAD. Thank you, Madam Chair.

Senator Breaux, let me just first say that this is one Member

who appreciates the fact that you have approached Medicare reform in a bipartisan, pragmatic, common-sense way; and it is just

a crying shame that the final vote necessary to constitute a supermajority wasn’t there on the Commission. Because to the degree

possible—and I realize it is not fully possible to depoliticize this debate and the subject we are working here on, but to the degree possible that, more than anything, would have depoliticized and that

Commission report would have sailed through in a bipartisan way

certainly the Congress, both bodies, I believe.

But let me focus in on this. In his opening remarks, Mr. Stark

acknowledged the incredible inequities of the Medicare+Choice proVerDate 11-MAY-2000 11:54 Aug 06, 2001 Jkt 073535 PO 00000 Frm 00035 Fmt 6633 Sfmt 6602 E:\HR\NSET\73535.XXX pfrm07 PsN: 73535
32

gram and the reimbursement formula. In fact, I think he mentioned the difference between Minneapolis and Miami, and everyone knows that a Medicare beneficiary can receive 2–1/2 Medicare

surgeries at the Mayo Clinic in Minnesota for every one in Miami,

Florida. That is absolutely unconscionable and unfair. We did take

a baby step forward in increasing the minimum payments or the

floor last year to $525 in urban counties and $475 in rural counties, but we still have incredible disparities, and seniors and providers are being cheated in States like Minnesota who are penalized for their history of prudent health care spending. Minnesota,

for example, over the last decade has kept its costs 3 percent under

the national average. As a result, our reimbursement formula is

less.

How, in your judgment, should Congress address the unfair equities in the Medicare+Choice reimbursement system?

Senator BREAUX. Well, I mean, you have to I think get rid of the

arcane methodology in which Medicare+Choice plans are being

paid for. It is a political formula. It is a somewhat cost-oriented formula, but that is not the premise of it. They ought to be paid based

on competition. They ought to be asked to compete in the marketplace, and they would be paid accordingly, and we would be looking

at who can do it for the best price, providing the best services.

Right now, as you point out, some areas are getting paid more

than they need; other areas are getting paid far less than they

need. I mean, they get hit with risk adjusters and user fees and

payment recalculations. It is no wonder Medicare+Choice has not

been able to be working out there as it was intended to work, because it is managed by the organization that is in competition with

it. It was not in their interests to help make it work.

Therefore, we get out of the concept of having it paid based on

an arcane national formula, rather than being paid based on the

competition that they would have to compete with; and the ones

who would do it for the best price with the best services would get

the business and others would not.

Mr. RAMSTAD. Well, I thank you for that response; and on behalf

of all Minnesota seniors, Medicare seniors, I truly hope we can get

that done this year, because it is simply not fair. I have every—

every town meeting I attend, every senior center I visit I am barraged with complaints and questions about the inequities, so I appreciate your approach to that problem.

The second question I have, I represent 300 of the best medical

technology, medical device companies in the world, comprising Minnesota’s Medical Alley, and they are developing new technologies

all the time—Medtronic, for example, the first pacemaker—technologies that save lives and improve the quality of life for people

all over the world. These technologies, as we all know, are available in the private sector years before they are approved by HCFA

for Medicare beneficiaries.

I saw in your other chart the fourth item listed was—maybe it

was yet another chart. Anyway, it was medical——

Senator BREAUX. It is in one of our charts.

Mr. RAMSTAD. Exactly, one of the charts. But, anyway, we have

to get more access to seniors to medical technology, and how in

33

your judgment should we address this in a comprehensive Medicare reform bill?

Senator BREAUX. Well, first, Congressman, the Commission had

the privilege of going to your home area for one of our Commission

hearings.

Mr. RAMSTAD. I know. In fact, I was there; and I appreciate that.

Senator BREAUX. It was fascinating what we were able to learn.

The whole question of innovative technology is part of what the

private sector can do best, as opposed to what government can do.

We now make technological decisions that we have not the competence to make in the Senate Finance Committee, and I would say

also in your Ways and Means Committee as well, about what we

are going to pay for and what we are not going to pay for. Is this

the best procedure to pay for, or are we not going to pay for this,

but we will pay for this procedure over there.

We all have, probably, examples of industries that have come to

us and said, we want you to introduce a bill to get Medicare to

cover this, and the other side who is selling the other product will

say, no, we don’t want you to do that because they are paying for

our product.

That is not the best way to bring about innovative health care

technology. The best way is to allow the marketplace as it is developed to be able to offer it, and then through choice we pick the

thing that best fits our particular needs, as competition among the

technologies, both on price and on efficiency and quality. The government in this role guarantees that no one is scamming it, that

no one is offering quack type of proposals. That would be what government can do best, to see that it is not being run incorrectly but

not micromanaging it.

Mr. RAMSTAD. Thank you very much, Senator.

Thank you, Madam Chairman.

Chairman JOHNSON. Thank you.

Congresswoman Thurman.

Mrs. THURMAN. Senator, I am sorry I missed your opening remarks. We have been in hearings for the last couple of days and

my constituents were beginning to wonder if I was missing in action some place when they came by to see me, so I apologize for

that.

Senator, I guess the thing that I am most concerned about and

am trying to understand, try to explain to me what is really the

difference between what is going on today—I mean, we have a feefor-service, we have Medicare+Choice programs. For those, in those

regions that they can have them, I mean, most of them are pulling

out, some of them are losing their prescription drugs. And I am

kind of having a hard time understanding what exactly, if I were

to go home and try to explain this to a constituent, why they would

buy into this after what they have seen over the last couple of

years.

To just tell you what has happened in one of my counties, yes,

I am from Florida, but I am not from Miami, so we don’t get the

big numbers, I kind of have some rural areas. But what do I say

to them when they say, well, you know, our Medicare programs

pulled out last year, our choice programs. I mean, only by the fact

that we were able to put an incentive back in did they come back

34

in, and we are only hoping they stay there for as long as we can

keep them.

Are we still going to have, or do you still see the volatility within

these markets? I mean, are they still going to have to go back to

fee-for-service? I mean, what is going to guarantee in this plan different from what we are seeing happening already? Because you

are still depending on the private market to do this, and they are

only going to do it based on whether or not they can get a profit,

you know, what their profit might be at the end.

Then let me ask this: Show me the relationship on the price premium as compared to what happens today with how government

controls what we pay in and what potentially could happen, because I know in Breaux I, I think there was actually an idea that

we could have to come back if it got over 40 percent, what was

going to happen, and we would have to come back and have the

debate on the floor.

Senator BREAUX. Well, Congresswoman Thurman, there are a lot

of good questions in your comments.

Number one, to make a general comment, any change is very difficult, particularly for senior citizens, because change is scary to all

of us, and it is certainly probably even more scary to seniors, and

especially when you are talking about something that is as important as their health. I would say that that group of seniors, number

one, that the current plan you have does not cover about 47 percent

of your health costs. It is not adequate, it is not as good as it

should be, and it is not as good as it can be made to be.

The second thing I would say to them is that I would like to give

you the opportunity to have the same type of system that I have

as your Congresswoman, or that the two senators from Florida

have as Members of the Federal Employees Health Benefit Plan.

They have always said that if it is good enough for the Members

of Congress, it must be a pretty decent plan; and they are right on

that, because it is.

Now, how it would work is that——

Mrs. THURMAN. But they have choices.

Senator BREAUX. That is exactly right. And we would absolutely

guarantee the choices and give them, in fact, a lot more choices

than they have today, because it is very, very limited and it is inadequate in its coverage. The concept would be that they would

have all of these plans on Breaux–Frist I that would have to come

to the Medicare Board which is like our OPM.

Mrs. THURMAN. And you guarantee it how?

Senator BREAUX. That would be the government role. I said to

combine the best of what government can do with the best of what

the private sector can do. The best that government can do is help

pay for it, and we would guarantee to pay for it by exactly the

same percentage that they would be paying under fee-for-service.

It is 88 percent paid for today totally, and it is probably going up

higher than that, and it would go up higher than that in our plan,

too. So the government guarantees that they pay for it, and they

guarantee that they are going to supervise it. It is not going to be

adverse risk selected, it is not going to be a bunch of scam operators, because the Medicare Board, which is an agency of the Federal government, would guarantee that that would not be allowed.

35

Then, from a choice standpoint, when you have five or six or

more plans being offered, they would be able to look at them and

all of them would have to meet a certain standard, all of them

would be basically paid for by the Federal government, and they

would pick and choose. If they still do not like any of those new

choices, then they would be able to stay in a traditional fee-forservice.

I think that you can tell your constituents that what you are giving them is the opportunity to have something that is a lot better

than they have today.

Chairman JOHNSON. Mr. Cardin, would you like to question?

Mr. CARDIN. Just very briefly, Madam Chair. Thank you for the

courtesy.

First, Senator Breaux, I share the comments; and we thank you

very much for your service to our country. I think you will find that

on our side of the aisle the Breaux–Frist II is what we are going

to feel more comfortable with, that model.

I just have one question. As I understand it, you use as the

benchmark for the payment for private insurance 100 percent of

what it costs for Medicare fee-for-service, and you don’t put a risk

adjuster in until I think the year 2014.

I guess my question to you, and you need not fully answer it

today because I guess we will have the answer when we get the

fiscal costs of Breaux–Frist II, it seems to me that those changes

will add dramatically to the cost of the program, that there is a

good chance that the payments made for private insurance will actually exceed what it would otherwise do, and we might just be

adding to the cost of Medicare without providing an additional

choice or benefits to our constituents.

Senator BREAUX. Well, that is a real good question. It is a very

technical question, but it is also a very important question.

The risk adjuster is something that is going to be needed. If you

have a group of people who are sicker and older and cost more, you

are clearly going to have to have a risk adjuster in that program

which would allow them to be compensated for the extra costs that

they have. In fact, I think the risk adjuster that we suggested was

the one that the Clinton Administration was actually talking about

and proposing. That can be refined and it can be updated and it

can be modified, but that is where we got the concept of the risk

adjuster from, and you would have to have that.

But then you also remember, you also have the role of the Federal government insuring against adverse risk selection. If someone

submits a plan to be offered that is tailored to meet only healthier

seniors, thereby throwing sicker seniors into traditional fee-forservice, that plan would not be allowed to be offered, and that

would be the strong role of the Federal government. This Medicare

Board in that case is a very strong Federal agency and is part of

our government, but they would be also able to have a competition

which we can’t handle through HCFA, but they would guard

against adverse risk selection. But also recognize that if there is a

preponderance or a greater percentage of sicker seniors, then there

would have to be a risk adjuster, and we are very open on how we

craft a risk adjuster to take care of the extra cost.

Mr. CARDIN. Thank you, Madam Chair.

36

Chairman JOHNSON. Thank you.

In concluding, Senator Breaux, it is also true that when you talk

about setting premiums, the Board setting premiums, those would

take into account that these insurance policies are covering older

people with higher health care needs.

Senator BREAUX. Oh, yes. The point is that, yes, they are going

to be covering probably people that are obviously older and obviously sicker than we have in the Federal Employees Health Benefit

Plan, so that answer is yes; and that is going to have to be accounted for in the pool of people that they are going to be insuring.

They are going to be older and less healthy.

Chairman JOHNSON. That ties in with our opening comment

about the Federal government’s role is to help pay for the benefits

that we have guaranteed the seniors.

Senator BREAUX. The final point on that—I mean, all of this is

so incredibly complicated. I am not in the insurance business and

don’t pretend to understand it. But the average premium that we

pay under Medicare combined A and B is—about 88 percent of the

cost is Federal government and 12 percent is the beneficiary

through part B premiums.

If—our first bill, it was interesting, we had pegged the reimbursement rate under the new plan to 88 percent; and some said,

well, suppose it goes up, isn’t that going to make fee-for-service go

rocket high? We have changed that now. We are saying that whatever the government percentage is that they would pay under our

bill is what they would pay. Whatever the government contribution, if it goes up to 90 percent, under our bill, that would be the

premium contribution under the new plan.

So there is some flexibility there. It is not tied. We picked 88 percent because that is what it was at that time, but we know it is

going to be higher than that, and, therefore, the new legislation

says that whatever the government calculation is as a percentage

would be what they would pay under our proposal as well.

Chairman JOHNSON. So the cost would not be shifted from the

government to the consumers.

Senator BREAUX. Yes. They would not have an increase in their

participation.

Chairman JOHNSON. Thank you very much for your time and attention.

Senator BREAUX. It is always a pleasure to come to this side of

the Capitol.

Chairman JOHNSON. Thank you.

I would like to call forward the panel. Stuart Altman, it is a

pleasure to have you back, Stewart; Judith Feder, who has also

come before us on other occasions; Walter Francis, the independent

healthcare consultant from Virginia; and Jeff Lemieux, who is the

senior economist at the Progressive Policy Institute.

We thank you all for joining us, and we will move through each

of you making your opening statement and then we will open the

whole panel for questions.

Dr. Altman.

37

STATEMENT OF STUART H. ALTMAN, PH.D., PROFESSOR,

SCHNEIDER INSTITUTE FOR HEALTH POLICY, HELLER

GRADUATE SCHOOL FOR SOCIAL POLICY, BRANDEIS UNIVERSITY, WALTHAM, MASSACHUSETTS

Dr. ALTMAN. Thank you, Madam Chairman.

I am Stuart Altman, and I am a professor of National Health

Policy at Brandeis University. I really wanted to congratulate you

on taking over the Chair.

I also would like to say hello to Congressman Stark who just left,

but I did have the privilege of working under him for almost 12

years when I chaired the Prospective Payment Assessment Commission. So it is really good to be back before this Committee

again.

You have my complete testimony, so what I would like to do is

take my 5 minutes to focus on what I consider to be some of the

major components of the debate.

As Mr. McDermott knows, he and I were members of the bipartisan Commission along with Senator Breaux, I was one of those

members that ultimately voted no in terms of the plan. But I want

to focus on why I voted no and why I think things have changed.

I voted no because I thought our Medicare program was in serious financial shape, and while I can’t say that Medicare is not

going to have financial difficulties in the future, it is in much better shape today and, therefore, solvency is much less of an issue.

Second, I really do believe, and still believe, that we should have

a very important and very comprehensive prescription drug benefit;

and I think Breaux–Frist II goes part way toward there, although

there are a number of suggestions I would like to make to make

it better.

What I would really like to focus on is what this discussion has

been about: Why has Medicare+Choice not worked? I would like to

offer my opinion. I came into government in 1971, actually in what

was then HEW; and after being there a month I was asked by the

President to be responsible for controlling health care costs. I used

to be 6 foot 4, Mr. McDermott.

Mr. MCDERMOTT. Great job.

Dr. ALTMAN. My boss at that time was the current Vice President, and I became one of the most hated people in America. The

AMA had a special issue of their publication that made me, you

know, Big Brother, Public Enemy Number One.

What the essence of this is, is that whoever tries to constrain the

system is not going to be liked by the system. Managed care has

been beaten up because it was responsible for constraining the system. I will tell you, if we didn’t have managed care after BBA, I

don’t think you would find a doctor, a hospital, or a home health

agency that wasn’t ready to kill the Federal government. So, yes,

this is a game in which whoever is taking the food away from their

kids is going to be the one that is going to get yelled at.

Now, let’s look at Medicare+Choice. Mr. Stark, you and I have

had very good times together; and I hope you will listen a little to

what I have to say. I have been looking hard at Medicare+Choice,

why it doesn’t work, and I would like to offer to this Committee a

little different perspective. We must create a true level playing

38

field between the Federal government and the running of its feefor-service system and the Medicare+Choice program.

Now, I have heard the arguments about the administrative costs

of Medicare+Choice plans, and complaints that too much profits are

being made, and I am not here to defend them. However, I would

submit to you that we have created a very unlevel playing field

where it is impossible, over the long run for a private market to

work. I am in the category, of those who believe that it is good for

this country to have true competition between the private market

and the public sector, and I think Breaux–Frist II goes a long way

to do that.

But in answer to your question, Mrs. Thurman, the current situation is such a lopsided event that it is hard to see how it can

work. Why is it lopsided? It is lopsided in the following ways: First

of all, Medicare, through the government, can pick and choose the

prices it wants to pay. It doesn’t have to negotiate with a hospital

or a doctor. It tells the hospital or doctor, or home health agency

what it is going to pay. The Congress is the vehicle for that choice.

Ultimately, providers could say that they are not going to provide

Medicare services, but it is very difficult for a hospital that has 50

percent of its patients in Medicare to say, I am not playing because

you are not paying me enough. History suggests that when Medicare has been quite generous, as it has been in several periods like

in the middle nineties, it turns out that the private insurance market can come in under that generosity and get better discounts as

they have done, and they wind up saving money and a lot of people

joined their plan. That was the period of time when

Medicare+Choice prospered.

When you introduced BBA—and I am not arguing against BBA,

but why did you introduce BBA? Because you looked at the growth

rates in Medicare spending and you said Medicare is paying more

than the private sector and the country can’t sustain that. Well,

Congress thought it was going to cut $115 billion over 5 years. As

it turned out, some estimates suggest that the savings amount is

going to be closer to $230 billion. Of course, what happened? What

happened is that Medicare spending went way down. Then you

asked the managed care industry to compete with Medicare. But

the premiums they received were related to Medicare paid for services. But, they don’t have the same power to reduce payments

Medicare has. So they are now at a disadvantage.

If you want to make competition work, and I put it if—I happen

to believe it is good for our country to have competition work, you

have to level the playing field.

Several other things have happened as well. Medicare can decide

what a cost is and what a cost isn’t. Medicare goes into a hospital

or doctor’s office and says, this we will pay for and this cost we

won’t. Again, I am not arguing that you are not making the right

decisions, but the private sector can’t go in and say that. It can’t

say to a hospital administrator, we will only cover your salary up

to $150,000. If you receive $200, it doesn’t count. Can’t do that.

Can’t refuse to want all of your depreciation. You can go on and

on.

The point I want to make here is that if you want competition

to work—and the reason why Medicare+Choice did not work, yes,

39

maybe managed care oversold itself—estimates of savings of 25 or

30 percent proved to be too ambitious. Maybe the savings are closer

to 15 percent. But, then when you add higher administrative costs

and the fact that Medicare is paying in many parts of the country

90 or 85 cents on the dollar, it becomes impossible for a private

managed care plan to compete.

I provided a chart in the last part of my testimony that shows

the relationship between what Medicare pays and what the private

sector pays. When Medicare margins go down, private sector margins go up. In 1992, Medicare paid 90 cents on the dollar (payment

to cost ratio). Private insurance paid 131 percent. As Medicare

began to pay better during the nineties, private margins came

down. You watch what happens over the next couple of years. You

are going to see private payment rates go way up. Again, you can’t

compete if you don’t level the playing field.

One last piece of that puzzle. Recently, Congress passed legislation that will create a 50–50 national-regional blend so that every

area gets closer to the same amount of money. Now, I happen to

be very sympathetic to Seattle and Minneapolis and Portland, Oregon, which have very good health care delivery systems. I also am

very sympathetic to Boston and Miami and New York. What happens when you go to 50–50? How can a managed care company in

a high cost area survive?

Let’s say you are right, that, in fact, in certain parts of this country like Florida, there is just too much care being provided. The

providers are getting too much money. People in Seattle complain

all the time. So what are you going to do? You are not going to

touch the fee-for-service system. You are going to continue to pay

the higher amount. But the legislation will cut back what the managed care industry in high cost areas receive. How are these groups

going to be able to purchase the needed medical care? Can they

change the practice of medicine? That is not possible. If you want

to change the practice of medicine in this country, start with the

fee-for-service system. Don’t start with the managed care companies who are only 15 percent of the market. Again, I believe in

competition, level the playing field.

Now, with my remaining 2 minutes, I want to talk about prescription drugs. There is nothing more important. I think everyone

on this Committee has said this thing. We need to cover prescription drugs.

My sense is, my preference is that prescription drugs be covered

under both plans. I think it makes much more sense both economically and for health care that a health care delivery system provide

prescription drugs and that it be provided under managed care and

it be provided under fee-for-service. My preference is that it not be

provided by private insurance separate from coverage for other

medical care. However, I would make a couple of suggestions.

First of all, my preference is that the Federal government provide more than a 25 percent subsidy as suggested by Senator

Breaux. I think the subsidy rate needs to be closer to 50 percent.

Why? The actuaries tell us that such a subsidy rate will eliminate

adverse selection.

40

My other preference is that we go to more catastrophic. We should use a $500 deductible and a 50 percent coinsurance. Our

plans protect low income seniors, but not through Medicare.

I believe in a Social insurance model. I think if we are going to

cover low income seniors we need to do it through either a Medicaid program or some State-run program. So my preference is that

all of the subsidies for people under 135 percent of poverty—and,

yes, they should not pay anything—should be through a State program with mandates on the States to provide coverage according

to Federal rules supported by an enhanced Federal match as in

SCHIP.

Finally, this program is the most important thing we can do. I

would hate to see—and, unfortunately, we have done it all too

often, whether it is with the uninsured or with parts of Medicare— we go only for each of our view of the optimum type of plan. I have

given you my optimum, but if the only way we are going to pass

a prescription drug benefit, given the differences in the Congress,

is to have it covered by a fee-for-service run by private insurance,

I say go for it. But I would recommend two caveats:

First of all, give it a 5 year trial period and see if it works. And,

second, guarantee that in those areas where there is no private

market the Medicare program run it so that no American, regardless of what part of the country they live in, would be denied prescription drug benefits.

Chairman JOHNSON. Thank you very much, Dr. Altman.

[The prepared statement of Dr. Altman follows:]

Statement of Stuart H. Altman, Ph.D., Professor of National Health Policy,

Schneider Institute for Health Policy, Heller Graduate School for Social

Policy, Brandeis University, Waltham, Massachusetts

Good morning, Madame Chairman. My name is Stuart Altman. I am a Professor

of National Health Policy at the Heller Graduate School, Brandeis University. It is

indeed a great pleasure for me to again appear before this committee. I would like

to offer my congratulations to you on assuming its Chair. I would also like to say

hello to Representative Stark, who was a gracious Chairman for most of the 12

years I appeared before the committee as Chairman of the Prospective Payment Assessment Commission.

The subject of today’s hearing, Medicare Reform, is an issue of critical importance

to all citizens of this country and to most providers of health care services. It is also

a subject in which I have been deeply involved for more than 30 years. Perhaps because of this, President Clinton appointed me as a member of the Bipartisan Commission on the Future of Medicare.

Let me say at the outset of my testimony that I believe that Medicare has been

one of the most important and successful programs ever created and administered

by the federal government. It has allowed millions of Americans to receive much

needed medical care with dignity, free from fear of financial hardship. It has helped

finance the best health care delivery system in the world.

With that said, Medicare is not a program without problems. Its design is needlessly complicated for beneficiaries to understand, and its funding system does not

guarantee long-term financial viability. The health care benefits it provides have not

kept pace with the changing structure of our health care system, and at times, it

has been excessively expensive for both beneficiaries and the federal government.

Furthermore, it has not always used the most cost-effective techniques for purchasing health care services. I know this committee has worked hard over the years

to improve the program, but more needs to be done.

Senator Breaux and Congressman Thomas, the Co-chairs of the Bipartisan Commission, developed a plan to fundamentally restructure Medicare by greatly expanding the role of private health plans. Although there was substantial support for

their plan, it did not receive the necessary 11 votes to make it the official recommendation of the Bipartisan Commission. Despite my support for the basic component of this plan—creating a more market oriented system—I had a number of

41

problems that prevented me from supporting it. Any restructured system should include a comprehensive prescription drug benefit for all beneficiaries and a funding

system that guarantees the long-term financial viability of the Medicare program.

The plan discussed by Senator Breaux this morning (Breaux–Frist II) plus financial

events since the conclusion of the Commission go far to easing several of my concerns. Nevertheless, I offer this committee a number of recommendations that I believe will strengthen the Breaux–Frist bill or any other plan that tries to create a

more competitive Medicare program.

Since the ending of the Commission 2 years ago, other issues have surfaced that

must be confronted by those of us who wish to reform Medicare by expanding the

role of private insurance and introducing a more competitive system. That is, to develop a true level playing field between the traditional fee-for-service Medicare program and private health insurance plans.

Most Medicare reform plans, including the one introduced by Senators Breaux

and Frist, assume the continued availability of a government administered fee-forservice Medicare program similar to the one currently in operation. Such proposals

also encourage competition between that program and plans operated by private

companies. I also believe that it is highly desirable to maintain effective competition

between privately run health plans and the one operated by government. Such competition allows each system to learn from the other and offers beneficiaries the advantages of flexibility and choice. But, events of the last few years have convinced

me that unless changes are made in the way Medicare reimburses health providers,

expands and reduces benefits, and pays private health plans, it will not be possible

to have a viable competitive market.

Construction of a level playing field is no simple matter. This complexity has been

demonstrated in the experience of the Medicare+Choice program. Much has been

written about the number of managed care plans that have reduced or ended their

participation in Medicare+Choice. Critics of private managed care plans attribute

the decline in participation to high administrative costs, profits, and the inability

to effectively manage care. Evidence also suggests that many of the plans still in

operation have benefited from the enrollment of healthier then average beneficiaries. While there is certainly some validity in these concerns, the critics overlook

an important feature of the health care market that has helped generate the exodus

of private plans—the playing field is currently far from level.

When Medicare Managed Care was first introduced in the early 1980s, it was assumed that private managed care plans could out-perform the existing fee-for-service Medicare program by 25 percent or more. Such an advantage would have been

sufficient to cover the higher administrative costs necessary to enroll beneficiaries

on a one-by-one basis. It would also have covered the cost of operating either forprofit or not-for-profit managed care systems. In addition, the projected efficiencies

were expected to be large enough for the government to share in the savings by reimbursing at 95% of what it would have spent under the traditional program.

Much has changed since 1982. Medicare has introduced several major changes in

the way it pays health providers. Many of the advantages of managed care have disappeared as the general practice of Medicine changed to incorporate some of the

more obvious efficiencies (e.g., greater use of outpatient care and reduced inpatient

admissions). Managed care plans have also been prevented from using a number of

techniques, at least some of which have been shown to be medically appropriate, but

proved to be very unpopular with patients and physicians. As a result the cost advantage between a reasonably efficient managed care plan and the current Medicare

program has narrowed.

Each type of system has its own advantages and disadvantages in terms of controlling its costs. The annual increases in Medicare spending per beneficiary at

times have grown substantially faster and at times slower than the cost growth of

the privately insured. Medicare out-performed the private sector through much of

the 1980s and early 1990s, but beginning in 1993 the trend reversed with private

sector costs rising relatively more slowly. Medicare added greatly to its spending

levels as a result of double digit growth in the use of its home health and long-term

care services. Not surprisingly, it was during this period that we witnessed the

greatest growth in enrollment in private Medicare managed care plans. Following

passage of the Balanced Budget Act of 1997 (BBA), the trends reversed themselves

again and current Medicare spending growth is considerably slower than growth in

the private sector.

These changes in relative spending trends are not random. In part they reflect

the introduction of new services or the greater use of existing benefits paid by Medicare. For example, the Court ordered expansion of Medicare home health and longterm care benefits. But for the most part they reflect differences in what Medicare

and the private sectors pay for the same service. Only the government has the legal

42

right to unilaterally set the prices it pays to providers and to require them to accept

such payments as a condition to participate in the program. At times Medicare payments have been quite generous, leading to higher Medicare spending and the ability of private plans to secure services at lower rates. That is what happened in the

mid-1990s. But ultimately your committee and others in the federal government realized what had occurred and restructured provider payments and restricted the utilization of some benefits as part of the Balanced Budget Act of 1997 (BBA). Current

estimates suggest that BBA could reduce Medicare spending by as much as $230

billion over 5 years—about double of what was originally estimated. I do not believe

it is possible for a private market to function with such wide swings in relative

spending levels. Particularly when the payments private plans receive are in some

way tied to what health care providers receive from the Medicare program.

Hence, the government’s ability to restructure prices and change the types and

amounts of services it will pay for can enable Medicare to out-perform the private

sector whenever it wishes. Were such actions a net benefit to society I would say,

‘‘so be it.’’ But such savings are often illusory. What often happens is that health

care providers attempt to make up for what they believe are government underpayments by charging higher prices to private patients and their insurers. Such private

individuals or plans often lack the market power to stop such ‘‘cost shifting.’’ Figure

1 shows how this has played out for hospital care. In 1992, when Medicare was paying only about 90 percent of hospital costs for the services its beneficiaries used,

hospitals received 131 percent of their costs for the services they provided to private

patients. As Medicare payments increased after 1992, the payment to cost ratio fell

for the privately insured. In the last two years, following reductions in the rate of

growth of Medicare payments imposed by BBA, private sector payments, including

Medicare+Choice payments, have been under intense pressure to rise. While in

some areas, Medicare+Choice plans have been strong enough to resist this pressure,

most plans in most areas have not.

Hence, traditional Medicare has the power to drive the private market to pay

higher prices and unbalance competition between the two sectors. Yet, savings from

lower government payments are often not real because they are shifted to other payers. The manner in which government determines the prices it will pay also generates several other problems for a competitive market. First, the Medicare program

in setting its payments does not recognize all of the costs incurred by health care

providers. In many such situations health care providers engage in another form of

cost shifting by attempting to recoup such costs from other payers.

Recently, a new and subtler issue has arisen in connection with the way

Medicare+Choice plans are now reimbursed under the BBA. Since the establishment

of Medicare in 1965, the federal government has been reluctant to intervene in how

the medical community in a local area provides medical care. Even the Medicare utilization review systems put in place through the years relied for the most part on

local standards of care. Medicare reimbursement policy for most health care services

has also been based on regional factors. With the passage of BBA in 1997, a change

occurred with respect to how Medicare+Choice plans were paid. Previous to BBA,

plans were paid at a capitation rate equal to 95 percent of what was paid in that

area for providing care to similar types of patients in the traditional Medicare program. Such a payment system resulted in some areas receiving capitated payments

45 percent or more above the national average and some areas 60 percent below the

national average. Even such well-known medical areas as Seattle, Portland, Oregon,

and Minneapolis received payments equal to only 83 percent of the national average. Why such differences? There are no definitive studies, but it seems likely that

both cost-of-living differences and differences in physician practice patterns and patient utilization accounted for most of the variation in payments.

In the BBA, a system was developed to bring the capitated payment of all plans

closer to the national average regardless of differences in regional spending under

traditional Medicare. In the plan developed by the Bipartisan Commission, only

cost-of-living differences were recognized in regional payments to private plans. But

how are the plans in high cost regions going to pay for the more intense use of services in their area? It is unlikely that these plans will have sufficient enrollment or

the political strength to force changes in the style of care in the provider or patient

communities, particularly since the traditional Medicare plan will continue to pay

for these extra services. The BBA called for a gradual phase-in toward paying all

plans a 50–50 blend of local and national rates. If such a plan is included in any

Medicare reform system, there will be few private plans that can survive in highcost, medically intense areas. On the other hand, Medicare+Choice plans will be

overpaid in low intensity areas. If Medicare wants to change the practice of medical

care in either or both high cost and low cost areas it must first do so in the system

it administers.

43

Medicare pricing below costs is not the only element against which private plans

have difficulty competing. Medicare has significantly lower enrollment costs because

all beneficiaries are automatically enrolled while private plans must market their

services and enroll subscribers one person at a time.

To be sure, private plans also have many advantages. They can be more flexible

and innovative, and they can better manage provider costs and patient utilization.

They can be selective in which providers they use, and they have the potential to

coordinate care in a more uniform and efficient manner. And, they can attempt to

select healthier enrollees (an issue of some controversy) thereby retaining the same

capitated revenue but lowering their expected costs. Recent history shows us that

all of these advantages can help them compete with traditional Medicare. However,

when Medicare is reimbursing below cost, is administratively efficient, and is paying

private plans 95%, the playing field is too skewed and private plans, on average,

simply cannot compete successfully.

Research conducted at the Schneider Institute for Health Policy at Brandeis University bears this out. We use the term ‘‘average payment rate’’ (APR) to represent

an HMO’s predicted capitation or payment rate and the term ‘‘adjusted community

rate’’ (ACR) to represent the estimated cost of providing Medicare-covered services

to beneficiaries. This study revealed that the plans that exited the Medicare+Choice

market in 1998 had an APR-to-ACR ratio of 96%, indicating that, on average, costs

exceeded payments. In contrast, HMOs that remained in the Medicare+Choice market had an APR-to-ACR ratio of 110%. Many plans simply could not overcome the

totality of Medicare’s inherent advantages detailed above.

The Brandeis study also suggested that lower payment rates as a result of the

BBA were likely to have been a significant factor. A simulation showed that if payments to Medicare+Choice plans had remained on the 5-year trajectory that preceded the BBA, the probability of a plan exiting in 1999 would have been 22% less.

Furthermore, if those plans had also been reimbursed at 100% of average Medicare

costs rather than 95%, the predicted probability of exit in 1999 would have been

lower by 43%.

Prior to the BBA, enrollment in Medicare+Choice plans was growing quite rapidly. However well intentioned, the magnitude of the spending reductions generated

by BBA brought this growth to a halt and weakened the foundation of the competitive model that was being built. Many HMOs were forced to either sustain losses

or exit the market. The number of plans still in operation will fall even further if

the risk adjustment methodology specified by the BBA is implemented. While I

would certainly support the inclusion of an appropriate ‘‘risk adjusted’’ premium

were the playing field more balanced, in the current environment it could seriously

erode the private Medicare market. Hence, I concur with the recommendations in

Breaux–Frist II to limit the extent of the adjustment at least until the current system is restructured.

We now have an opportunity to re-build the weakened foundation of a private

Medicare program. Such a solid foundation is critical for any competitive system

that includes both private plans and a government operated program. With the

hindsight of our experience and the benefit of research data, I recommend the following changes be implemented in the Medicare+Choice program prior to or in coordination with the restructuring of the entire Medicare program.

• Stabilize the Medicare reimbursement process to limit the wide swings in

payment policy and set as a target that the traditional fee-for-service Medicare

program will pay rates necessary to generate a 100 percent payment-to-cost

ratio for all services covered under the program.

• Enact legislation to assure that if costs are deemed inappropriate for reimbursement from traditional Medicare or if utilization of covered benefits are

changed, than private Medicare+Choice plans are also exempt from paying such

costs or providing the reduced benefits.

• Increase the Medicare+Choice capitation payment to 100% of the average feefor-service cost in that area for both the regional and national payment rates.

• Limit the blend of regional and national rates to 80% regional and 20% national.

• Phase in a limited risk-adjuster consistent with the recommendations in

Breaux–Frist II, with the intention of implementing more strict risk-adjustment

when a level competitive playing field exists.

• Restructure the enrollment process to reduce the high administrative costs

imposed on private plans.

Such changes would go far to level the playing field and bring new, private

Medicare+Choice plans back into the marketplace. This would establish a more solid

foundation for a more extensive Medicare reform system. I fear that were we to legVerDate 11-MAY-2000 11:54 Aug 06, 2001 Jkt 073535 PO 00000 Frm 00047 Fmt 6633 Sfmt 6621 E:\HR\NSET\73535.XXX pfrm07 PsN: 73535
44

islate major reform of the Medicare program before we fix the current system, we

could seriously hamper the success of the new system.

Private plans have in the past and could again attract enrollees by offering lower

premiums, reduced cost sharing, and/or additional services. In particular, such plans

could offer more generous prescription drug benefits building on the plan outlined

in the next section of my testimony.

Given a more level playing field and greater long-term stability in payments to

both Medicare+Choice plans and providers under the traditional program, private

firms can be expected to compete vigorously for this large and growing part of the

population.

Assurance of Long-Term Financial Stability for the Program

One reason I could not support the plan put forth by the Bipartisan Commission

is that it lacked sufficient provisions to ensure the long-term financial viability of

the Medicare program. Fortunately, events of the last few years has made this less

of an issue as the solvency of the Part A Trust Fund improved. Nevertheless, I want

to put on the record that in my view any comprehensive Medicare Reform plan that

is enacted should include provisions to ensure the financial viability of the program

for at least the next 30 years. There are many ways of accomplishing this goal and

time constraints prevent me from discussing this issue further today. I would be

more than happy to again appear before this committee, Madam Chairman, should

you wish or respond to questions today or in writing.

Provide Access to a Prescription Drug Benefit for All Americans

When the Medicare program was formulated in 1965, the capabilities of today’s

pharmaceuticals could barely be imagined. In 1960, the country spent less than $3

billion on prescription drugs compared to nearly $91 billion in 1998. Since 1990, national spending for prescription drugs has tripled and their share of total health expenditures increased from 5.6% in 1993 to 7.9% in 1998. Clearly, the composition

of health care spending has changed significantly in this regard, but the Medicare

program has not. With science on the threshold of a renaissance in biotechnology,

the significance and the level of expenditure for prescription drugs is certain to increase even more.

Many beneficiaries have attempted to make up for the lack of outpatient prescription drug coverage in the basic Medicare benefit package by either relying on ‘‘wrap

around’’ coverage from their previous employer or by purchasing Medigap coverage.

Unfortunately, fewer and fewer employers now offer such coverage for retirees, and

the skyrocketing costs for those Medigap plans that do offer drug coverage is prohibitive for many senior citizens. There is also ample evidence that individuals without

prescription drug coverage use fewer drugs even when prescribed by their physicians. At the heart of the problem are the well-documented negative health consequences of not following prescribed drug treatment regimens. Thus, as we restructure Medicare for the 21st century, no issue is more important than expanding the

basic benefits to include coverage for prescription drugs.

The difficulty of formulating a prescription drug program is that of reconciling a

number of competing goals and principles that are important to various stakeholders. These basic goals and principles can be stated as follows:

• Retain the universal, non-means tested nature of the Medicare program while

instituting a prescription drug program.

• Avoid, wherever possible, the cost and poor incentive structure that would result from first dollar coverage.

• Provide free or low cost access to pharmaceuticals for those who would otherwise find them unaffordable.

Medicare has always been a universal program with universal benefits and eligibility levels. Critical to the success of Medicare has been the inclusion of more generous benefits and reduced cost sharing through state-based programs to assist

those seniors judged to be low income or medically needy. Maintaining this distinction protects the broad political support for Medicare. Hence, I recommend a structure in which Medicare will offer non first dollar insurance coverage on an optional

basis to all beneficiaries, while those earning below 135% of the federal poverty level

(FPL) will have access to free coverage through state programs supported by enhanced federal matching funds.

The Medicare portion of this prescription drug plan will include an optional subsidized drug benefit for all beneficiaries, regardless of income. The premium will be

paid in a manner similar to present part-B payments, as recommended in Breaux–

Frist II, but I recommend it be set at the actual cost minus a subsidy of 50%. I

have selected a higher subsidy than Breaux–Frist II to minimize the amount of adverse selection while providing a meaningful benefit to middle class beneficiaries.

45

To keep the cost of the program acceptable and to maintain a cost-conscious and

responsible role for patients in the types and amounts of drugs they purchase, I

would set the annual deductible at $500 with a co-payment of 50%. There should

also be complete stop-loss protection above $6,000.

Low-income people, below 135% of the federal poverty level (FPL), will have access to a state-based program that will cover the entire premium and all or most

of the cost sharing. States will additionally be able to offer partial premium assistance for beneficiaries between 135% and 200% of the FPL. States will have limited

discretion in their administration of these extra benefits in order to be eligible for

an enhanced federal match. The match could be similar to the SCHIP program in

which the current federal matching percentage is increased by 30% of the difference

between 100% and the current federal matching percentage in each state. The enhanced match could be capped at 85%. Matching funds should include a reasonable

amount for outreach and enrollment assistance, given the recent experience with

SCHIP.

It is my preference that the Medicare drug benefit be delivered by the same plans

that offer a comprehensive set of medical benefits, including the government operated plan, in order to best coordinate the medical needs of each patient. Separating

the provision of pharmaceutical treatments from other kinds of medical treatments

makes little sense from a cost effectiveness standpoint and can result in fragmented

patient care. Delivery of the drug benefit by a broad based medical benefit plan

could also result in lower prices by utilizing increased purchasing power and the

ability to shift patients to similar types of effective alternative drugs. Furthermore,

given the voluntary nature of the program, problems of adverse selection against

private entities that might offer a ‘‘drug-only benefit’’ would be avoided.

Nevertheless, I recognize that other proposals, such as Breaux–Frist II, recommend that private companies deliver the prescription drug benefit for the government plan through a competitive bidding process in each geographical area. Such

an option, although not my first preference, might be acceptable with the following

caveats. First, such a program should be instituted on a five-year trial basis and

be evaluated at the end of that period. Second, the Medicare program should deliver

the prescription drug benefit in any area in which competitive bidding does not provide a suitable alternative. Although I prefer the first of these options, I would not

hold hostage much needed reform in wont of one that might be arguably better.

On the federal side, a prescription drug benefit program of this nature would preserve the universality and popular support for Medicare. It would require sufficient

cost sharing to avoid significant moral hazard, but sufficient subsidy to provide a

strong incentive to enroll. Utilizing the part-B premium and payment structure already in place would not require a significantly greater administrative burden. Most

importantly, it would foster competition between traditional Medicare and private

plans and would enable all beneficiaries to benefit from competitive group purchasing arrangements.

On the state side, it could utilize the existing framework for pharmacy assistance

programs that are already in place in 26 states. States will have some flexibility

in designing programs best suited to their individual needs. Such programs may either be part of Medicaid or could be integrated with existing pharmacy programs.

Being similar to existing Medicare buy-in programs such as QMB, SLMB, QI–1, and

QI–2, it will not require a significantly greater administrative burden. Most importantly, it will provide totally free access to pharmaceuticals for those Americans

whose income is less than 135% of the Federal Poverty Level.

Conclusion

Reforming Medicare is a critically important and extremely complicated task. How

it is structured, who pays for it, what it pays for, and how it pays medical providers,

affects almost every American. I believe that a well designed competitive system

that includes both private plans and a government-administered system can enhance the existing program. But creating such a structure is not easy and current

history has taught us that design problems can seriously distort the end result. I

have tried to explain some of the complicating issues that exist in our current system that must be changed if an effective competitive market is to work.

Among the changes I have suggested, one such change cannot wait—Medicare

coverage of outpatient prescription drugs. No issue is more important! The design

of such coverage I outlined in this testimony is just one approach for addressing the

problem. Others have suggested alternative proposals. While I recognize that the

differences in plan design are not small, such differences should not stop you from

enacting a meaningful plan in this session of Congress.

46

Thank you, Madam Chairman, for letting me participate in this most important

hearing.

FIGURE 1

STATEMENT OF JUDITH FEDER, PROFESSOR AND DEAN OF

Chairman J

Source: ProPac and Medpac through 1998. Projections are my own.

OHNSON. Dr. Feder.

fPOLICY STUDIES, GEORGETOWN UNIVERSITY

Dr. FEDER. Thank you, Chairman Johnson, for your gracious welcome. Congressman Stark, Members of the Committee, it is a

pleasure to be with you this morning.

I want to begin by defining what I see as Medicare reform. That

is that the goal should be to meet the health care needs of elderly

and disabled Americans in a way that effectively manages taxpayer

resources. The pursuit of reform in Medicare does not mean that

Medicare is broken; it is not. Can we make it better? Absolutely.

I want to pursue some of the areas in which we can improve it.

First and most clearly from your comments this morning, we all

recognize that the primary challenge is to improve Medicare’s benefits. Today, the question is not whether but how to cover prescription drugs for Medicare beneficiaries. Some proposals simply won’t

work. We can’t just provide drug coverage for beneficiaries with low

or modest incomes. That would ignore the fact that beneficiaries

across the income scale experience chronic illness that requires

substantial prescription drugs beyond what they are able to afford.

47

We can’t just rely on HMOs and the private market. That would

ignore our painful experience with Medicare+Choice, which I will

come back to in a moment, a marketplace in which private plans

and their benefits come and go. That is what competition is and it

can leave beneficiaries in the lurch.

And we can’t rely on a private, stand-alone drug insurance plan

for beneficiaries in fee-for-service. That would not only be confusing

to beneficiaries, but it would ignore the insurance industry’s explicit warning about the inevitable risk selection. That will make

it unworkable and ultimately unofferable.

A Medicare prescription drug benefit that works must satisfy

three principles. First, the benefit must be a universal entitlement

that is integral to the Medicare program in fee-for-service and in

private plans. Essentially, beneficiaries ought to be able to get prescription drugs just the way they get hospital and physician care.

Second, the benefit must be affordable to all beneficiaries. And,

as Stuart argued, that means significant subsidies across the income scale to make sure that we have universal participation along

with universal entitlement, as well as full subsidies for those with

low and modest incomes.

Third, the benefit must be specified and meaningful; perhaps not

as extensive as some would like, but a defined minimum benefit

that makes clear what Medicare will pay for in private plans and

in fee-for-service, and that includes protection against catastrophic

costs.

The second area needing improvement is in managing resources.

Like all insurers, Medicare, the Nation’s largest is struggling with

the complexity of delivering today’s health care. Some have proposed that Medicare approach that struggle by pressuring beneficiaries to move from fee-for-service into private HMOs, either by

providing them extra benefits in those plans, as in Breaux–Frist II,

or by requiring them essentially to pay more for the fee-for-service

they now have, as in Breaux–Frist I. The strategy is pursued on

grounds that HMOs can manage resources more effectively than

Medicare fee-for-service. But it is by no means clear that they can,

as Stuart’s comments indicated. The fact is that fee-for-service is

pretty good at controlling its costs and at balancing the needs of

beneficiaries, providers and taxpayers.

HMOs do far more to manage costs than to manage care. That

is what we have heard from some of HMO’s strongest proponents.

They may limit access to needed providers and needed services,

and the structure of the market is to encourage them to enroll the

healthy and disenroll the sick. That kind of risk selection and competition around it are very hard for any agency to control and have

been a consistent problem in the Federal Employees Health Benefit

Plan.

Lower costs, then, don’t mean greater efficiency. They mean reduced access to quality care. HMOs’ continued demands for more

resources in Medicare+Choice reflect, I believe, and I believe the

evidence shows, the plans’ belief that they can only attract beneficiaries when they have resources to provide extra benefits. They

are finding it very difficult to compete with Medicare or to be more

efficient than the Medicare program. We also have evidence of

quality problems for Medicare beneficiaries in HMOs, challenging

48

claims regarding these plans’ ability to manage care efficiently and

effectively.

Rather than promote HMOs, reform must address fee-for-service

management, while managing HMO options for beneficiaries who

want them. As you indicated, Mrs. Johnson, we need to do both.

On benefits and provider payment, that means that Congress

must continue to balance the competing interests of beneficiaries,

providers and plans, and taxpayers. There is essentially no way out

of this responsibility. It means assuring the Medicare administrators greater investment in staff and systems and greater flexibility

to use new tools like competitive pricing for equipment and care

management for high-cost chronic illnesses. For HMO options, it

means empowering the Medicare administrator to pay plans fairly,

but not excessively, for Medicare benefits. Excess payments for

extra benefits are wasteful, unfair, and unstable. The goal is to

protect beneficiaries, not to protect plans.

Good management also means empowering the administrator to

manage the whole program, to serve beneficiaries and taxpayers.

Employers with self-funded plans and HMO options don’t believe

they have a conflict of interest in management. Their job is to manage the whole program, and Medicare would not be improved in its

administration by creating new arrangements that make plans or

pharmaceutical companies more comfortable with program administration. The responsibility is to beneficiaries and taxpayers.

The third and final area of improvement is to assure adequate

financing. As we have indicated this morning, Medicare’s financing

problem is pretty straightforward. As the population ages and as

health care costs rise, we will need more revenues to sustain and

improve insurance protection for the Nation’s elderly and disabled

citizens. No magic, competitive or otherwise, can change this reality. But our economy can generate these revenues. The challenge

is to secure them.

However, some proposals would weaken, not strengthen, revenues available to Medicare. For example, a proposal to claim the

current part A surplus that you have worked hard to achieve to finance part B expenses, or new prescription drug benefits, would

take resources away from future beneficiaries. And the proposal for

new accounting that would only serve to cap part B’s access to general revenues would create a crisis atmosphere promoting an overreaction, because a crisis simply does not exist.

What is needed instead is that we take advantage of our current

prosperity to pay down the debt, thereby reducing interest costs,

and begin to finance prescription drugs and other social needs.

That way, baby boomers contribute now to the Nation’s ability to

finance their needs in the future. It would be ironic indeed to take

the baby boom generation, my generation, off the hook with a tax

cut, rather than expecting us to pay our share to make it easier

to finance our needs in the future.

In sum, as we look to Medicare’s future, it is critical that any action we take in the name of reform actually secure rather than undermine Medicare’s strengths. The Medicare program has assured

affordable access to mainstream medical care for elderly and a substantial number of disabled people, regardless of the severity of

their health care needs, and with help for Medicaid, regardless of

49

their income. It is very easy to underestimate that accomplishment.

It is easy to propose so-called solutions that actually undermine

that accomplishment. Instead, the job of reform should be to sustain Medicare’s enormous achievement, both now and in the future.

Thank you, Madam Chairman.

Chairman JOHNSON. Thank you very much, Dr. Feder.

[The prepared statement of Dr. Feder follows:]

Statement of Judith Feder, Ph.D., Professor and Dean of Policy Studies,

Georgetown University

Chairman Johnson, Congressman Stark, distinguished subcommittee members,

thank you for inviting me to discuss my views on Medicare reform. As we all know,

the Medicare program faces a number of challenges, particularly as we approach the

aging of the baby boom generation. None of these challenges is new. But the good

news it that our recent prosperity, which has allowed us to balance the budget,

gives us the opportunity to address Medicare’s challenges effectively.

In addressing these challenges, our goal must be to meet the health care needs

of elderly and disabled Americans in a way that effectively manages taxpayer resources. Pursuit of this goal should not imply that Medicare is broken; on the contrary, it continues to be an enormously successful program that can and should be

improved. Efforts to reform Medicare must therefore secure, not undermine, the nation’s commitment to health care security for elderly and disabled people.

Since its enactment in 1965, Medicare (with some help from Medicaid for low-income beneficiaries) has succeeded in assuring affordable access to ‘‘mainstream’’ medical care for virtually all seniors and a substantial number of people with disabilities. Medicare has historically been more successful than the private sector in

controlling health care costs, while dealing with all segments of the population, all

providers and all parts of the country. Nevertheless, Medicare needs improvements—specifically in the adequacy of its benefits, the effectiveness of its resource

management, and the security of its financing for an aging population.

Assuring Adequate Benefits

In today’s environment, Medicare’s benefit package hardly can be considered generous. Four out of five employer plans have more generous benefits, and, on average, beneficiaries spend 20 percent of income out-of-pocket on premiums, cost-sharing and services Medicare does not cover. These substantial financial burdens reflect, in part, the absence in Medicare of a number of features common to employersponsored health insurance for the working-aged population: protection against excessive cost-sharing, adequate preventive benefits, and—particularly important to

elderly and disabled people—meaningful coverage for outpatient prescription drugs.

Increasingly, advances in medical treatment take the form of new prescription

drugs that improve health outcomes, replace surgical treatments and provide therapies for conditions that were once untreatable. Medicare beneficiaries use prescription drugs at a rate that far exceeds the non-Medicare population but are much less

likely to have drug coverage than are the younger, healthier population with employer-sponsored health insurance. More than one observer has noted the similarities between the current state of drug coverage for the Medicare population and the

inadequate health insurance available to the elderly before Medicare was enacted.

Thirty-five years ago, many elderly people were denied the benefits of medical advances—represented then, primarily, by technological breakthroughs in hospital care—because of lack of insurance. While about half the elderly population then had

some form of hospital insurance, the rest either could not afford insurance or did

not have access to it.

As was the case with hospital insurance in 1965, today’s Medicare beneficiaries

cannot count on affordable access to meaningful coverage for prescription drugs.

Medicaid prescription benefits are available only to the poorest beneficiaries; employer-sponsored retiree coverage is reaching fewer retirees; Medicare+Choice plans

provide very limited benefits; and Medigap policies are not comprehensive and may

not even be available, let alone affordable, to beneficiaries who need prescription

drugs.

It is generally recognized that the private marketplace cannot and will not address the problem of limited access to affordable coverage for prescription drugs.

Concerns about adverse selection and affordability render a purely private solution

unworkable. Members on both sides of the aisle have recognized the need for a public program that includes significant publicly-financed subsidies to address the problems raised by purely private approaches.

50

Some proposals that purport to address the prescription drug problem fall woefully short. For example, proposals to extend protection only to people with low and

modest incomes ignore the fact that access and affordability problems extend well

up the income scale. Over half the Medicare beneficiaries without drug coverage

have incomes above 150% of the federal poverty line. Chronic illness that entails

extensive use of prescription drugs affects beneficiaries at all income levels and can

absorb a substantial share of income. For people with incomes just above 150% of

the federal poverty level, for example, the highest drug users without coverage devote, on average, around 12 percent of income to out-of-pocket drug expenses.

Proposals that rely entirely on HMOs and other private plans to deliver prescription drug benefits ignore the maldistribution of private options and the instability

that has plagued the Medicare+Choice program in recent years. Reliance on private

plans will leave beneficiaries with tremendous uncertainty as to what plan or what

benefits will be available at any given time.

Proposals that extend prescription drug coverage to beneficiaries in traditional

fee-for-service only through a stand-alone private insurance arrangement rather

than integrating new benefits into the established fee-for-service structure are complicated and problematic. Under such arrangements, fee-for-service beneficiaries

with Medigap coverage would be forced to purchase two separate private plans—

an arrangement that is not only inconvenient to beneficiaries but could push them

into HMOs just to avoid the hassle. Even more important, the proposal ignores the

insurance industry’s explicit warning that such a benefit is unworkable and, ultimately, unofferable. Rather than assisting beneficiaries, this proposal seems aimed

at assuaging pharmaceutical manufacturers who would prefer to bargain with a

bevy of smaller private plans than with a public program.

Medicare reform to effectively assure prescription drug coverage must therefore

satisfy the following principles:

First, the benefit must be incorporated in Medicare as a universal entitlement for

all beneficiaries. Just as Medicare beneficiaries are entitled to benefits for hospital

and physician care—in the traditional fee-for-service plan as well as in any private

plans—they should be entitled to benefits for prescription drugs.

Second, the benefit must be affordable for all beneficiaries. That means significant

subsidies to individuals across the income scale (as now occurs in Part B)—alongside

full subsidies to the low and modest income population—to assure close to universal

participation alongside universal entitlement.

Third, the benefit must be specified and meaningful for all beneficiaries. All beneficiaries must be assured a minimum defined benefit. A Medicare prescription drug

benefit may not provide coverage as full as beneficiaries currently receive for physician and hospital care. And, as described below, the challenge of assuring beneficiaries access to extra benefits will continue to exist. But meaningful protection

must include coverage against catastrophic expenses. Meaningful protection also requires a benefit that makes clear what Medicare will pay for, whether in traditional

fee-for-service or in a private plan, with sufficient oversight to protect beneficiaries

against arbitrary and hidden benefit restrictions. Approaches that permit private

plans to offer ‘‘actuarially equivalent benefits’’ raise the specter of risk selection, especially when proposals delay the implementation of risk adjustment for an extended period of time.

Assuring Effective Resource Management

Medicare is the largest health insurance organization in the nation. All health insurance organizations are struggling with the complexity of delivering health care

in today’s marketplace—assuring value for the dollar, providing people with information about their health care options, promoting quality and keeping up with rapidly changing technology. Contrary to some assertions, Medicare has historically

been extremely effective, relative to the private sector, in managing the price it pays

for services (especially for hospital and physician care). Payment strategies pioneered by Medicare (e.g., DRGs; RBRVS) have been widely incorporated by private

payers. Similarly, Medicare has always administered its benefits at very low costs.

Nevertheless, Medicare’s challenges in effectively managing resources are formidable. Medicare faces responsibilities that other payers do not—most importantly,

for a growing elderly population with significant health care needs. In addition

Medicare, unlike private insurers, is charged with specific responsibilities for securing the health care system—for example, financing graduate medical education and

stabilizing services in rural and other underserved communities. Finally, the Medicare administrator’s resources, flexibility and authority to manage the program are

not on a par with private purchasers’ and have not kept pace with the program’s

growing obligations.

51

Specifically, the Medicare administrator has not been provided sufficient funds,

staff or management tools to effectively monitor the private contractors who pay

claims; to collect, manage and provide information to consumers and providers; to

respond effectively to beneficiaries’ concerns, questions, and problems; and to deal

effectively with HMOs and other private health plans.

Critics of Medicare’s resource management have proposed to address these problems in several ways. Some proposals would pressure beneficiaries to move from traditional fee-for-service into private HMOs, either by increasing premiums in the traditional fee-for-service program or by subsidizing benefits in private HMOs that are

not available to beneficiaries in fee-for-service. Proposals also have been offered that

would create a new administrative structure to oversee HMOs and private drug

plans, without adequately addressing the administrative needs of fee-for-service.

These so-called ‘‘solutions’’ rest on questionable assumptions and pose significant

risks.

Expectations that competition among HMO options will save Medicare money rest

on forcing beneficiaries to pay the difference between the costs of fee-for-service and

HMOs. Savings from these proposals are more likely to result from raising premiums for beneficiaries that remain in traditional fee-for-service Medicare than

from lower program costs from beneficiaries shifting into cheaper HMO options. At

the same time, this structure poses high risks for beneficiaries.

HMOs can keep their costs relatively low in a variety of ways: by constraining

access to providers and services, by slowing the diffusion of higher cost, new technologies and by selective enrollment or disenrollment of patients likely to need care.

In these circumstances, the costs to Medicare of having beneficiaries in HMOs may

be lower, but the value of Medicare to its beneficiaries may be similarly diminished.

In other words, pressuring beneficiaries into HMOs protects the federal government

against financial risk by shifting financial and other risks to beneficiaries and their

families. Further, because access to and quality of HMOs varies considerably around

the country, building a system on HMO options is fundamentally unfair to beneficiaries in rural and other underserved areas. These beneficiaries are likely to face

higher costs for the traditional fee-for-service benefit, with few alternative ways to

receive care.

Uncertainty about the ability and willingness of HMOs to truly manage care for

an elderly and disabled population calls into question proposals to rely on these

plans to provide beneficiaries adequate access to quality care. HMOs’ continuing demands for more resources from Medicare, when payments are at least adequate for

Medicare-covered service, challenge claims regarding these plans’ ability to efficiently and effectively manage resources. Research findings of limited service and

poor outcomes for beneficiaries with chronic conditions in HMOs, compared to beneficiaries in fee-for-service, reveal the risks beneficiaries face in such plans.

The wisdom of pressuring elderly and disabled beneficiaries into HMOs and other

private health plans seems particularly questionable, given recent experience among

the working-aged population. Proponents of managed care and managed competition

for the working-aged population have been very disappointed with private plans’

focus on managing costs rather than managing care. And the working-aged population has been not only dissatisfied but angry at the abrupt shift of employer-sponsored coverage away from fee-for-service toward managed care; hence the attention

to better patient protections. This experience should give serious pause to the assumption that coercing people into HMO or other private delivery systems is an appropriate strategy for Medicare.

Finally, some proponents of managed care and private delivery have accused the

Medicare program of a conflict of interest in overseeing private HMOs. This accusation ignores the fact that Medicare’s management of both HMO options and traditional fee-for-service resembles many employers’ management of self-funded plans

alongside HMO offerings. Centralized management rests on the appropriate premise

that an administrator’s primary job is to serve beneficiaries, not to accommodate

private plans.

To assure adequate health insurance protection with efficient management of taxpayer dollars, Medicare reform cannot, then, simply promote competition among

HMOs and other private plans or management changes that favor those plans.

Rather, reform must secure effective management of the traditional fee-for-service

program, while paying appropriately for HMO options for beneficiaries who want

them.

Efficient management of traditional fee-for-service Medicare requires the continued balancing of the competing interests of beneficiaries, health care providers and

plans, and taxpayers. Over the years, this balancing process has enabled Medicare

to effectively control growth in its payments to providers, without endangering access to or quality of care. Medicare policies on whether and how much to pay for

52

health care services have a profound effect not only on beneficiary access to care,

but also on the economic well-being of providers and their ability to fulfill broader

societal missions. For the foreseeable future, the vast majority of beneficiaries will

remain in the fee-for-service program, and it is crucial that the administrator have

sufficient resources to direct the program in a way that responds adequately to

these competing interests.

Further, the administrator must be provided greater resources for effective management and investment in systems for claims payment, information technology,

and responsiveness to consumers and providers. The administrator should have the

flexibility and authority to use new tools to promote efficient purchasing—like competitive pricing to pay for durable medical equipment and care management for high

cost chronic illnesses. Denying Medicare the resources and authority to manage feefor-service well means starving the system that has most effectively assured beneficiaries access to quality care.

Efficient management of HMO options requires empowering the administrator to

pay fairly but not excessively for Medicare-covered services. Experience indicates

that Medicare beneficiaries are reluctant to enroll in HMOs unless plans offer substantial benefits at little or no additional premium. Historically, Medicare has overpaid HMOs for Medicare-covered benefits, effectively subsidizing extra benefits. Payment constraints in the Balanced Budget Act of 1997—both in traditional fee-forservice and in managed care plans—reduced those subsidies, HMOs’ ability to offer

extra benefits at little or no charge and, accordingly, HMOs’ willingness to participate in Medicare. Subsequently, Congress increased the subsidies, but it is by no

means clear that greater subsidies will be used to support added benefits.

Excessive subsidies—which favor beneficiaries in some areas at the expense of

beneficiaries in other areas who go without adequate protection—are an unstable,

unfair, and wasteful approach to assuring HMO options. Indeed, this approach protects HMOs, not beneficiaries. Effective Medicare reform means paying plans appropriately for Medicare-covered services where market conditions allow them to operate efficiently; including explicit payment (not hidden subsidies) for benefits, like

prescription drugs, that all beneficiaries must have, and recognizing that HMO options, not HMO promotion, should be the goal of Medicare reform.

Finally, the goal of Medicare administration should be to better serve beneficiaries

and taxpayers, not to create new administrative arrangements to make private

HMOs and private pharmaceutical plans more comfortable with program administration. Proposals to create separate administrative structures, outside the administrator’s authority, reduce the administrator’s capacity to manage the overall program responsibly and elevate accountability to the industry over accountability to

beneficiaries and the public. Such measures would undermine, not improve, Medicare operations.

Assuring Adequate Financing

Medicare’s financing problem is relatively straightforward. At some point in the

foreseeable future, the revenues Medicare relies upon will become insufficient to

cover its expenses. Specifically, the payroll tax will fall short of fully covering Medicare’s liabilities for care under Part A. The shortfall reflects two factors. First,

health care costs (not just for Medicare but for the system as a whole) rise faster

than payroll. Second, as members of the baby boom generation turn age 65 and become eligible for Medicare, the number of people who depend upon the payroll tax

will grow much faster than the number of workers who pay it. In 1970, there were

3.7 workers for each beneficiary; in 2015, there will be fewer than 3 workers per

beneficiary and by 2030, about 2. Even for Part B of Medicare, for which spending

is not financed by revenue from a dedicated tax, growth in health care costs per capita and in the number of beneficiaries implies that Medicare’s current protections

will absorb a greater share of general revenues than they do today.

Recent policy actions have substantially slowed growth in Medicare spending and,

in combination with the revenues generated by economic growth, delayed the point

at which payroll tax revenues are insufficient to cover Part A expenses. Today, estimates are that the surplus in the Part A Hospital Insurance Trust Fund runs out

in 2025; as recently as 1997, the estimated date was 2001. On the expenditure side,

this experience shows that even a one-time reduction in spending—as occurred in

the Balanced Budget Act of 1997—dramatically reduces cost projections for the future.

The lesson from recent experience is not that Medicare has no long-term financing

problem; it does. Rather, the lesson is that balancing revenues and expenditures is

a problem, not a crisis, and that the problem is both less predictable and more manageable than is sometimes assumed.

53

Unfortunately, some proposals for changes in Medicare rest on the assumption

that future Medicare financing problems can be addressed simply by slowing expenditure growth. If the goal of Medicare reform is to meet the health care needs

of the elderly, it is essential to recognize that we cannot maintain benefits and cut

spending sufficiently to cover future costs. A recent report from a bipartisan panel

of experts convened by the National Academy of Social Insurance (on which I participated) concluded that even with continued growth in the economy and cost containment of various kinds (including promotion of HMOs), Medicare will still require

significant additional revenues to assure baby boomers the type of coverage current

beneficiaries receive.

Making those revenues available is not beyond the capacity of our economy or our

society. Economic growth at historical levels is sufficient to generate the resources

necessary to meet future needs, without sacrificing standard of living for the younger population. And just as society made the resources available to educate the baby

boom generation, it can make the resources available to assure that generation and

future generations affordable health care.

Rather than recognize these facts and begin to address future revenue needs,

some proposals have actually moved away from securing revenues. One proposal has

been to claim the current surplus in Part A to finance Part B services that Medicare

now covers or to finance a new prescription drug benefit. Such a proposal ignores

Medicare’s legitimate and continuing need for general revenues and creates a crisis

atmosphere that may lead to far more dramatic action than is really required.

Another proposed ‘‘solution’’ to the financing problem is to make Part B funding

look more like funding for Part A, by specifying some share of GDP as a ceiling on

overall program expenditures. Although some proponents of this approach characterize it simply as creating an ‘‘indicator’’ of revenue needs, policy change is not required to provide such an indicator. The Medicare trustees already include this

measure of revenue need in their annual reports.

The aim of this proposal therefore seems to be to move toward replacing Part B’s

historical access to general revenues as program needs require with a fixed amount

of revenue, regardless of program needs. Such a cap simply limits federal spending;

it takes no action to assure adequate support for health insurance for elderly and

disabled people.

With respect to both proposals, it is not at all clear why it would be justifiable

to limit Medicare’s access to general revenues when other commitments—to tax exemptions for employer-paid health insurance premiums or pensions benefits—remain open-ended entitlements. Indeed, it is hard to regard this approach or other

spending reductions as Medicare ‘‘reform’’; rather, they represent an abdication of

the nation’s promises to provide seniors and people with disabilities adequate health

insurance protection.

What’s needed instead is a wise use of current resources to facilitate future financing of health insurance for seniors and people with disabilities. Specifically, we

should take advantage of our current prosperity to buy down the debt and begin

to finance prescription drugs and other social needs. Using current revenues to buy

down debt reduces interest costs, thereby freeing up resources we will need to meet

future health care needs. It would be ironic if instead we cut taxes that baby

boomers are now paying—thereby reducing their obligation to contribute to the debt

reduction that can help the nation more easily support their future needs.

Conclusion

In sum, as we look to Medicare’s future, it is critical that any action we take in

the name of reform actually secure, rather than undermine, Medicare’s strengths.

The Medicare program has assured affordable access to mainstream medical care

for elderly and a substantial number of disabled people, regardless of the severity

of their health care needs and—with help from Medicaid—regardless of their income.

Unfortunately, it is easy to underestimate the importance of this accomplishment

and to put Medicare’s achievements—and its protections to beneficiaries—at considerable risk. No financial ‘‘crisis’’ requires such action; no evidence of a superior approach justifies a departure from the means we have relied upon to achieve such

success. We must therefore be wary of proposals that, in the guise of reform, risk

dismantling what is probably the most successful part of the nation’s health care

system.

Our current prosperity gives us the opportunity and the wherewithal to strengthen Medicare’s ability to provide elderly and disabled people health insurance protection, while effectively managing the taxpayers’ resources—specifically, by incorporating into Medicare a meaningful prescription drug benefit, by enhancing the administrator’s ability to effectively manage Medicare’s resources (including payments

54

to private plans), and by using current surpluses to reduce interest costs and facilitate the financing of future needs. These are the kinds of reforms that will best

serve the Medicare beneficiaries and the taxpayers to whom the program has been

and must remain fully accountable.

have let each of the first two witnesses go beyond their 5 minutes.

Chairman JOHNSON. The Committee may have noticed that I

f You each ended up taking 10 minutes, and I will allow the same

latitude to the following witnesses. I do think it is important that

when you put preparation in to come to talk to us about such a big

and important issue that you have time to speak, even if it reduces

our time for questioning. So I did it intentionally.

Mr. Francis.

STATEMENT OF WALTON J. FRANCIS, AUTHOR AND INDEPENDENT HEALTHCARE CONSULTANT, FAIRFAX, VIRGINIA

Mr. FRANCIS. I will try to do better.

Congratulations, Madam Chair, on your assumption of the leadership of this Committee. I think it is in very good hands.

I also want to mention that at a conservative think tank conference on Medicare reform a couple of months ago I mentioned

that, in the new Congress, it looked to me pretty clearly that nothing was going to happen on Medicare reform that Mr. Stark and

Mr. McDermott, for example—I named them—did not buy into.

That was met with groans and moans but, you know, you are going

to have to craft something that is going to work, that is going to

make the Members on both sides of the aisle not hold their nose.

Chairman JOHNSON. I may not be able to satisfy all Members on

both sides of the aisle.

Mr. FRANCIS. Perhaps not all.

Chairman JOHNSON. You may have noticed the range of opinion

on this Committee is 180 degrees.

Mr. FRANCIS. But I think you will find there is some middle

ground here that will work.

To summarize a few key points from my testimony, writing hurriedly last weekend I lost two very important points I think in the

details toward the end that I want to emphasize. First, what we

are embarked on here is improving a vital program, and I think

that is the way this needs to be perceived. Whether you do go to

something very close to Breaux–Frist I or II or you do something

a little different, I think that is what it is all about. We can improve Medicare and include making the program actuarially sound

in the long run to the extent possible. But we should not be kidding

ourselves about how much we can do in one set of reforms. In any

event, I think the whole debate and discussion ought to be starting

from that premise.

Second, I have said a fair number of harsh words about the

Health Care Financing Administration, and I am going to say some

more in just a second, but I do want to emphasize that I worked

with people in that agency for many years. Many of them are good

friends of mine. It is full of able and dedicated civil servants. I

think, unfortunately, the whole is much less than the sum of its

parts; and it is a big problem in what is going on. I would add to

55

that, I think the Congress is a big problem in a whole raft of ways,

several of which have been mentioned, I think quite eloquently, by

Senator Breaux.

I think that perhaps the single most important thing to

achieve—and I will assume we are going to be fiscally sound and

so on—is to establish the Federal government as a reliable business partner with private health insurance plans; and that is a tall

order. Harry Cain wrote a wonderful article in Health Affairs 2

years ago called ‘‘How to Make an Elephant Fly’’ in discussing and

adopting the FEHBP model for Medicare, and he didn’t think it

could be done. I am not at all sure it can be done, but this means

less micromanagement; less frequent changes in the annual OBRA,

COBRA, et cetera; less endless tinkering; fewer surprises that turn

out to make it impossible to do business; and fewer executive decisions, many of which are on their own terms reasonable but which

could have the cumulative effect of virtually wiping out

Medicare+Choice in half the country.

In this regard, when I wrote my testimony last weekend I noted

that Secretary Thompson had not acted on the midnight regulations. He now has, and I congratulate him for putting the midnight

regulation that imposed Medicare HMO rules on Medicaid HMOs

on the table for in-depth scrutiny. I am delighted. I just hope he

also adds to that the underlying Medicare+Choice rules which are

an abomination, in my view.

I think it is obvious that adding a prescription drug benefit available to every senior, which means adding it to traditional Medicare

as well as in the context of a reform program, is vital for any number of reasons, one of which, though, is to provide the lubricating

oil to make reform work. I hope you can construct—and you had

several suggestions and there will be others—a drug package that

will make some otherwise unpalatable changes go down a little

easier.

In this regard, I cannot overemphasize how important I think it

is to preserve, in a general way, the pricing and reimbursement of

drugs in this country and not move toward a system of administered prices similar to that used in Medicaid. I studied that in

some depth a dozen years ago and was appalled at the system they

used. It was clearly inefficient, unworkable and kind of silly; and

it hasn’t gotten any better in recent years.

Two final points. I testified before this Subcommittee almost exactly two years ago on the subject of consumer information on

health plans in Medicare. I castigated HCFA for its dismal performance, both in its printed materials and its electronic materials

on the Internet.

Speaking as someone who is a very successful purveyor of information comparing health plans, and in my perspective also as the

previous co-webmaster at HHS, I know a lot about what can be

done and how it can be done. And they were doing an awful job,

including making a website available that most people on most

computers couldn’t even read the information or download it.

HCFA was requiring equipment that most people didn’t have and

software that most people didn’t have.

Well, I revisited their website and their print materials before

coming here today and I want to tell you that, though they have

56

greatly improved the website in many respects, it still fundamentally fails in its most central purpose, which is to make it easy for

consumers to get important, comparative plan information.

This clock says I have lots of time left. That is going the other

way now.

Chairman JOHNSON. In comparison to the other speakers, you

have about 3, 4 minutes left.

Mr. FRANCIS. I will not belabor you with the details, but it may

take three dozen or more mouse clicks to get the information on

one health plan off that website, and that is just unacceptable. It

is absolutely unacceptable.

Like Senator Breaux, I brought the FEHBP Consumer ‘‘Guide.’’

It is 55 pages in 2001. It includes detailed but summary benefit information on 300 health plans across the country. I brought with

me ‘‘Medicare & You,’’ 2001 version. It is about 85 pages, 17 of

which appear to give details on health plans, but the format is so

verbose, if you will, that there is hardly any actual information included. It is unbelievable, but true, that you cannot in this 85-page

book find out what the prescription drug benefits are for any of the

dozen local HMOs in the four States that it covers. This particular

one covers Delaware, Maryland, D.C. and Virginia. The one set of

facts seniors most want to know, what is the drug maximum, what

are the drug copays, are left out of this book.

Let me stop there, and I will be glad to answer any questions.

Chairman JOHNSON. Thank you very much. We do have five consecutive votes, so we are going to give Mr. Lemieux equal time.

Frankly, I think our time was better spent listening to your

thoughts, since you have long had very good experience, than a

long question period. We will have maybe a couple of minutes for

questions.

[The prepared statement of Mr. Francis follows:]

Statement of Walton Francis, Independent Healthcare Consultant, Fairfax,

Virginia

Madam Chairman and Members of the Subcommittee, I am honored to be invited

to testify on Medicare reform. My experience in providing health insurance information to consumers, in regulatory reform, and in analyzing the Federal Employees

Health Benefits Program and Medicare as health insurance systems, all contribute

to my views on this vital issue.

Over twenty years ago I conceived the idea of providing Federal employees and

annuitants with information on the costs, benefits, and customer service of 50 or

so health insurance plans then participating in the Federal Employees Health Benefits Program (FEHBP). As a private author, I worked with the Washington Center

for the Study of Services (usually called CHECKBOOK); a non-profit organization

dedicated to providing objective consumer information, on developing the most useful possible publication for participants in the FEHBP. To date, we have sold well

over one half million copies of CHECKBOOK’s Guide to Health Insurance for Federal Employees and have saved both the Federal government and program participants billions of dollars by encouraging the choice of more cost-effective plans. We

cover some 300 plans across the entire nation, with comparative information on cost,

coverage, and quality.

For many years I served as the chief regulatory review official in the Department

of Health and Human Services (HHS). I led efforts to comply with laws and executive orders requiring that proposed regulations achieve their objectives while minimizing unnecessary burden on the public. I am just completing, in collaboration

with the CONSAD Research Corporation of Pittsburgh, a study for the Chief Counsel for Advocacy of the Small Business Administration entitled An Evaluation of

Compliance with the Regulatory Flexibility Act by Federal Agencies.

57

Because of my FEHBP expertise, I have been asked several times to analyze it

as a model for Medicare reform. My most recent publication on this topic was ‘‘The

FEHBP as a Model for Reform’’ (in Medicare in the Twenty-First Century, edited by

Robert B. Helms, 1999). My general conclusion has been best stated by Harry Cain

of Blue Cross: ‘‘The FEHBP has outperformed Medicare every which way—in containment of costs, both to consumers and to the government, in benefit . . . Innovation and modernization, and in consumer satisfaction’’ (from ‘‘Moving Medicare to

the FEHBP Model, or How to Make an Elephant Fly,’’ in Health Affairs, July–August 1999).

It is from these perspectives that I provide my views on reform options and reform implementation. I believe that if, as Senator Breaux and Chairman Thomas

have proposed, Medicare can be transformed to a system looking much more like

the FEHBP, then the financial viability of the program can be extended and its inadequate benefits can be improved. However, there are numerous issues and problems that need to be addressed to make this happen and to make it work well. Experience with Medicare reform to date is not encouraging.

I think that there are several essential issues—some interrelated—that need careful attention. These are: • consumer information dissemination, • using competition rather than price controls or administered prices to control

costs,

• creating structural reforms that remove most incentives for political micromanagement,

• actuarial rather than enumerative approach to guaranteeing benefit levels,

• regulatory reform,

• avoiding paralysis by analysis,

• organization and management reform, and

• semantic reform and reining in the rhetoric.

Consumer Information Dissemination

Two years ago I testified before this Subcommittee on the provision of consumer

information in Medicare. At that time HCFA had two main methods of providing

information to help consumers choose among Medicare+Choice Plans. First, it had

a summary pamphlet comparing plans entitled Medicare & You. Second, it had a

World Wide Web site called ‘‘Medicare Compare.’’ A third key ‘‘leg’’ of essential consumer information, detailed, current, and plain English brochures in a common format from each participating health plan, was not required by HCFA and did not

exist.

In my testimony in 1999, I castigated both of the existing legs, and noted the vital

necessity of the missing leg.

I criticized the pamphlet for containing only 5 pages of comparative plan information out of 42 pages, while containing 4 pages devoted simply to telephone numbers

of government agencies. In contrast, the comparable OPM Guide contained 42 pages

of comparative plan information out of 60 pages.

I characterized Medicare Compare as the ‘‘Web site from Hell.’’ It required a level

of computer and browser power that the great majority of Web-using seniors did not

have. Graphical information that was claimed to be on the Web site did not register

with Netscape browsers at all. Legally required disenrollment data was not available. Plan information was bloated in verbiage and extremely difficult to use to compare plans because it avoided ‘‘Yes/No’’ or other simple comparisons.

Worst of all, it was an act of extreme masochism to attempt to download summary

plan-specific information. It took 62 printed pages to download the information on

just one health plan, information that could have been presented in 2 typewritten

pages. It took 10 minutes and 72 mouse clicks just to find the pages to tell the computer to download and print the information on just that plan. (HCFA staff later

told me that they disagreed: it took ‘‘only 50’’ mouse clicks to get the information

on one plan.)

Unbelievably, the only copy of Medicare & You on the Web site in 1999 was one

that contained NO comparative plan information, not even the measly 5 pages of

summary information that had been mailed out to seniors.

That spring, HCFA staff briefed then Under Secretary Kevin Thurm on the status

of their consumer information efforts, and provided him a rebuttal of my testimony.

Among other things, they told him that:

• ‘‘feedback has been overwhelmingly positive’’ on their unusable Web site (obviously impossible unless the testing did not include actual efforts to obtain

comparative information on plans in an area),

• that their site was accessible to the blind (which it was not because it relied

heavily on PDF files—a problem that was illegal then and illegal today),

58

• that their consumer research showed that their population prefers the unnecessary verbiage that even I, an expert interpreter of health plans, can barely

decipher,

• that Medicare & You was available on the Web (versions including the comparative plan information which is the main purpose of the publication were not

in fact available),

• that it was acceptable that America On Line users could not use their site

because only 20 percent of the site visits come from AOL users, and that

• HCFA had minimized the number of clicks to the extent allowed by current

technology. (In contrast, the OPM Web site to which I compared the HCFA site

allowed all information on any health plan to be downloaded with 3 mouse

clicks).

In my testimony I had cited several excellent GAO reports that showed how

HCFA could improve consumer information. Subsequently, GAO produced one more,

focusing on plan-specific brochures (Medicare+Choice: New Standards Could Improve Accuracy and Usefulness of Plan Literature).

I dwell on these details because they are vital to understanding the problems facing Medicare+Choice and any even more far-reaching reform proposal. The fundamental engine driving the success of the FEHBP model or any close cousin is consumer choice. Choice depends on easily accessible and comprehensible information

comparing plans.

Since 1999, HCFA has improved its Web site. The graphics information now displays on a majority of browsers in use. Disenrollment information is available.

Printing works better. However, it still relies heavily on programming tricks, visual

displays, and PDF files that make it effectively and illegally unusable by the blind.

Plan benefit details are somewhat standardized, but still presented in far too many

words and in ways too complicated to facilitate comparisons. Few high school dropouts would be able to understand the HCFA Web site.

Most frustratingly, it still requires many dozens of mouse clicks to access and

print what amounts to 2 pages of information on one health plan. (Printing is essential because the human brain cannot remember the details when moving from one

comparison to another, repeatedly, for a half dozen or more comparisons).

Remarkably, in 2001 the state-specific versions of Medicare & You that include

plan comparisons are still not available on the Web. Providing these would be trivially easy as a technical matter. Every Federal agency provides HTML and PDF

versions of its regulations to the Government Printing Office. If HCFA would do the

same for Medicare & You consumers would simply have to click once to indicate

their state and click again to get the appropriate version in a format of their preference, either HTML or PDF. Of course, this is only beneficial if the plan specific

information is what beneficiaries want and need.

To use a simple gauge of progress, consider the print version of Medicare & You

2001. The version for DC/Delaware/Maryland/Virginia has about 85 numbered pages

of information. Of these, 17 pages provide plan specific information on

Medicare+Choice plans and the remaining pages other information about Medicare.

(Telephone numbers take up 7 pages, even more than in 1999). The 17 printed

pages of information, however, provide only 9 specific facts about each of 13 covered

plans: company name, plan name, telephone number, service area, premium, whether or not any prescription drug coverage, percent rating their care highly, percent

of women receiving mammograms, and percent disenrollment. All of this information for all of these plans could have fit on one typewritten page. In sum, HCFA

uses 85 pages to produce one page of plan comparison information.

In contrast, the OPM Guide for 2001 contains 55 numbered pages of information,

of which 44 present plan specific information. Those 44 pages present 18 specific

facts about every one of about 300 plans, covering all 50 states. Thus, HCFA could

have provided twice as much information on each plan, in a single edition covering

the entire nation, in one-third fewer pages and millions of dollars less in printing

and postal costs, had it simply used the OPM approach and format. (In fact, OPM

saves even more money because it sends only about 10 pages of information to every

retiree, and gives each several easy ways to get Guide information.)

HCFA provided summary information on prescription drugs in 1999, including

copay and maximum. Surprisingly, it does not do so in 2001. In contrast, the OPM

Guide tells enrollees the copayments for prescription drugs. Thus, the single subject

on which virtually every Medicare beneficiary most wants and needs summary comparative information is virtually omitted from its publications by HCFA. Not one

page in the 85 that are published is as important as this missing page.

HCFA does tell beneficiaries to ‘‘call the plan to get all the details of prescription

drug coverage,’’ but in a world of impenetrable automated answering services, and

without comparable plain language brochures available at the end of that travail,

59

HCFA has made getting this essential information a journey into frustration. The

near insurmountable practical problems facing beneficiaries in getting this essential

information are amply documented in GAO reports. Again, in sharp contrast, OPM

makes it simple for annuitants to get complete brochures laying out prescription

drug benefits in detail for every available plan, by mail, 800 number, or the Web.

In sum, a HCFA bureaucracy whose every employee is provided complete, simple,

clear, and timely information for choosing among Federal employee health plans, is

seemingly incapable of providing the same service to its beneficiaries. This problem

has persisted over decades of providing HMO plan choices. It has survived years of

repeated criticisms from the GAO and critics such as me and members and staff

of this Committee (see the 1996 GAO report entitled HCFA Should Release Data

to Aid Consumers, Prompt Better HMO Performance). And it has persisted despite

a generous earmarked budget that gives the agency carte blanche to produce consumer information at the expense of the plans themselves. Not only does HCFA fail

to provide the information; it even denies that it has a problem. And to the extent

that it admits a problem, it blames it on technology rather than its own bad judgment.

Thus, HCFA itself is a continuing major obstacle to consumer choice in Medicare.

Using Competition Rather Than Price Control or Administered Prices to

Control Costs

The essential mechanism by which free markets control costs is competition

among sellers. Competition not only controls costs, but also allows consumers to decide how much cost they are willing to trade for amenities such as benefits and service.

One way to think about this problem is to consider the automobile. There are literally hundreds of different models available and, with options, many thousands of

possible purchases. Few of us are automotive engineers or racecar drivers, yet who

else is qualified to evaluate those complex engines or evaluate brakes and emergency handling? The market creates lemons, such as the infamous Edsel and Jugo.

Seductive advertisements permeate the airways. Not one government agency provides objective and unbiased advice on which cars function best (with the minor exception of mileage statistics on purchase stickers). A wrong decision can cost $20

or $30 thousand, or even cost one’s life. Yet, somehow, things go well. Better cars

get more market share. Losing manufacturers reinvent themselves. Lemons go out

of business. Over time, valuable improvements are added to all makes of autos and

the hours of work needed to purchase an auto decrease. Government regulation provides a floor for safety, and sometimes stimulates valuable improvements (crash resistance, seat belts, and air bags), but is neither necessary nor sufficient to create

most safety enhancing improvements (better braking systems, better handling, better headlights, better tires), and impedes others (air bags too strong for children to

survive deployment).

I surmise that one of the most important safety innovations of the last decade is

improved cup holders. Surely many thousands of accidents have been avoided because drivers did not spill hot coffee on their laps, or become distracted while looking for a place to put their cups. Yet no government regulation has mandated the

size, location, and quantity of cup holders.

Health insurance is a simple product compared to an automobile. What can we

learn from the auto purchasing and FEHBP experiences when we consider

Medicare+Choice or more fundamental reform? First, only a small fraction of consumers have to be highly informed to ‘‘drive the market.’’ We all benefit from the

people who do their homework and advise the rest of us. Second, cost, service, and

product performance are inextricably linked in highly complicated ways that are difficult to describe and whose value is impossible to estimate in advance. No one could

have specified in a government regulation in (say) 1990 how to build the better cars

available in 2000. Third, progress is a complex process, not one of lock step ‘‘one

size fits all’’ or ‘‘once and for all’’ improvements. Fourth, government mandates can

stultify performance.

We have a famous example of a ‘‘once and for all’’ and ‘‘one size fits all’’ government designed automobile: the jeep. We have a successor: the humvee. Surely, no

one would want to pass a law requiring every elder in America to buy a humvee

or jeep. Yet traditional Medicare is just like these vehicles.

The FEHBP provides ample evidence, directly relevant to Medicare, that cost, performance, and service can all be simultaneously improved over time. The FEHBP

moved painlessly to catastrophic coverage, to HMOs, to prescription drug coverage,

to drug reimbursement reform, and to PPOs. Medicare remains locked in a mid1960s time warp.

60

As documented in my studies, over decades the FEHBP has grown in cost about

one percent a year less than Medicare, while improving benefits in major ways, and

despite a rapidly aging covered population. Even the last several years, where Medicare costs have been level and FEHBP costs have gone up about 10 percent a year,

reflect nothing more than the rapid rise in access to new, expensive, life saving and

life enhancing drugs in the FEHBP program, and the concomitant reduction in

Medicare’s actuarial value compared to real world health care expenses.

In fact, taking into account the recent huge increases in Medigap premiums for

plans covering prescription drugs, the FEHBP substantially outperforms Medicare

for any 10 year period, even including the last several years of level Medicare costs

induced by provider fear of criminal charges for previously legal behaviors. (For

Medigap costs, see the story in The New York Times of February 8, 2001, concerning

annual Medigap rate increases in the 20 and 30 percent range). Medigap premiums

for plans that cover only one-half of the cost of prescription drugs, up to a maximum

of only $1,250 a year reimbursed, are now on the order of $2,000 to $3,000 a year

(depending on age and plan). In this context, the recent premium increases in the

FEHBP of about 10 percent annually for plans that cover prescription drugs with

minimal coinsurance and without maximums, are positively anemic.

The FEHBP has achieved these results while making consumers pay only 25 percent (or less, for postal employees) of the excess cost of unduly expensive plans and

recouping only 25 percent (or less) of the savings from frugal choices. Unfortunately,

in the future the FEHBP’s already weak rewards to cost conscious consumers will

be further attenuated by the recent granting of tax deductibility to both employee

and employer share. Costs will rise considerably faster than would otherwise have

occurred, and the dynamic advantage over Medicare will erode over time.

In this context, the sterile and necessarily imperfect calculations of HHS auditors

and the GAO arguing that in the short run HMOs are somehow being paid a few

percent more than the calculated ‘‘just price’’ for the assumed (not proven) cost of

hypothetically identical enrollees become as irrelevant as theological disputes. No

one knows if HMOs are being overpaid (the debatable statistical evidence of the

GAO) or underpaid (the hard evidence of market withdrawals). But in a defined contribution approach, this all becomes irrelevant. Consumers pay the excess for plans

with above average costs; the government’s costs are fixed by formula regardless of

short term cost changes. In Open Season, consumers adjust their choices. Over the

long run frugal plans are rewarded and the rate of cost increase declines.

For a defined contribution and market competition approach to Medicare reform

to succeed, the entire mindset of government budgeting and auditing will need to

change. As opponents of reform fear, but perhaps should welcome, controlling the

government contribution to the premium rather than controlling the amounts paid

to providers will radically change the budgetary calculus. In the short run, costs

may be marginally higher or lower. (Higher, for example, if drug benefits are

added.) In the long run, budgetary performance will depend essentially on three

variables, only two of which are controlled by the government:

• the dynamic ability of health plans to control costs, using literally hundreds

of ingenious approaches, all evolving over time;

• the initial level of the government contribution; and

• the formula used to determine how the government contribution changes over

time, and changes in that formula to reflect experience.

This last variable can be either more or less generous than present law and the

unpredictable likelihood of changes in that law over time. And it can be more or

less generous depending on beneficiary income. Nothing about Medicare reform presumes adverse results to lower income seniors.

Structural Reforms to Reduce Incentives for Micromanagement

The most striking contrast between the FEHBP and Medicare is that in the

former law and regulation establish virtually no medical benefit details. In Medicare, almost all important benefit details are set in law. The essential difference is

that in the FEHBP these decisions are made plan by plan. Some plans offer chiropractic, acupuncture, and cardiac rehabilitation coverage; others do not. Some

deductibles are zero, others $200 or more; OPM and the Congress do not dictate this

vital benefit dimension. Some plans cover drugs the same whether by mail order

or local pharmacy; others do not. Some offer dental or vision coverage; others do not.

And so on.

This has a profound influence on governance. In Medicare, any given medical profession or provider type can achieve its ends only by lobbying the Congress to

change the law, or by persuading HCFA to change regulations. Every year, hundreds of changes are proposed and dozens are enacted. In the FEHBP, there is always a sweet smile answer to these pressures: ‘‘If you want benefit X that is not

61

covered well in Plan A, join another plan.’’ When the inevitable Congressional hearing arises, OPM can always say ‘‘the matter is decided by consumer and plan decisions. If consumers want benefit X, plans will offer it to get their business.’’ In most

years, there are no coverage or benefit decisions mandated either by law or regulation.

As ably documented by Bruce Vladek, the ‘‘medical industrial complex’’ and its

lobbyists hugely benefit from the current design of the Medicare program (‘‘The Political Economy of Medicare,’’ Health Affairs, January–February 1999). These same

pressure groups fare poorly at the FEHBP table.

This is not to say that such pressures do not exist in a competitive, market-based

system. And in recent years activist OPM directors have been uncharacteristically

active in fostering benefit mandates. But the differences between the two programs

are huge. And they result largely from the essential design distinction between a

program where consumers vote with their dollars to decide benefit and reimbursement details and a program where legislators vote on the floor to decide those details.

To return to the automobile analogy, Medicare is like the jeep: the government

decides every specification, including the unfortunate lack of either a hard top or

cup holders. FEHBP is like the regular consumer market for automobiles: consumers migrate to the plans that offer the combination of features that they like.

Nothing would improve governance in America more than taking health plan and

benefit decision decisions that properly belong to consumer-driven markets out of

the realm of politics. If the disciplines of Economics and Political Science prove anything about democracy’s strengths and weaknesses, it is that consumers maximize

their own preferences; politicians maximize their chances for reelection. For far too

long Medicare has been hostage to the latter rather than the former.

Actuarial Rather Than Enumerative Approach to Guaranteeing Benefit

Levels

Medicare is an ‘‘entitlement’’ program in two senses. First, every aged and disabled American, as defined in law, is entitled to a substantial package of benefits

and subsidies defined in law. Second, the details of those benefits and subsidies are

exhaustively enumerated in mind-numbing detail, also in law. To be sure, the Congress may change the law and not infrequently does, but any pedant can open a

law book, open the Code of Federal Regulations, read a court decision, and discover

that, indeed, Medicare does indeed cover so many pints of blood transfusions, so

many home health visits, and not so many prescriptions.

As a result of these benefit and subsidy entitlements, we have a grossly inferior

health insurance program, design vintage 1965. To be sure, seniors do not die for

lack of basic medical care in hospitals or by physicians, or go bankrupt through inability to pay catastrophically expensive medical bills (except for drugs, expenses incurred while traveling abroad, and, in very rare cases, particularly long hospital

stays). The overall package is substantial, and vital to the well being of elderly

Americans. But the entitlement is also deeply flawed, and inferior to any mainstream health insurance plan in America.

Nothing about Medicare reform implies that the underlying, core promise should

be broken. American seniors should continue to have most major medical bills paid.

Indeed, those bills should be better paid with existing gaps closed. Why should an

elderly person who happens to have a heart attack while traveling to Mexico or Europe be subject to tens of thousands of dollars in uninsured costs? (Or, alternatively,

why should an elderly person be offered a one size fits all Medical plan that does

not include travel coverage or prescription coverage?)

The implicit guarantee in the FEHBP, and one that should be explicit in a reformed Medicare program, is that every plan available will pay:

• on average no less than 80 percent (or slightly more or slightly less, based

on detailed design decisions) of the total amount spent by all beneficiaries for

reasonable, necessary, non-experimental medical bills of any kind, from any licensed provider, whether for hospitals, doctors, or prescription drugs; and

• 100 percent of all such bills in excess of $5,000 (or somewhat more or somewhat less) incurred in a year.

A guarantee of this kind is compatible with a deductive of zero, $100, or $500 dollars; with coinsurance of zero, 10, or 20 percent; with a low deductible for hospital

expenses and a high deductible for drug expenses, or vice versa; and with a host

of other differences in benefit design and coverage. A guarantee of this kind is compatible with a 100 percent paid HMO or a Medical Savings Account with a high deductible, if properly drafted to accommodate differences in plan design.

Properly drafted, a guarantee of this kind is also a far superior entitlement than

the current Medicare program.

62

Regulatory Reform

The brute fact is that the Congress dictates in excess of 90 percent of the content

of the thousands of pages (by some estimates over 100,000 pages) of Medicare regulations. The annual revisions in reimbursement regulations, driven by the latest

Omnibus Budget Reconciliation Act (by whatever name), aimed at fine-tuning budgetary targets based on fictitious spending projections, would be ludicrous if they did

not affect the livelihoods of hundreds of thousands of medical care providers.

Medicare reform will never work if Congress does not learn to change the rules

of the game far less frequently. This does not mean that oversight and midcourse

corrections will not remain necessary; it does mean that a stable insurance market

can never flourish if the stroke of the pen can, and is likely, to undo settled expectations. The Constitution guarantees the sanctity of settled contracts; the Congress

has learned to evade these provisions by assuring that no Medicare rules are ever

set by long-term contract.

The Congress limits the HCFA role in regulation, but the agency has nonetheless

found many ways to create regulatory excess. And the two institutions reinforce

each other’s bad habits. Senior HCFA staff several years ago came up with a slogan, ‘‘surety bonds,’’ as a feel-good approach in a new regulation to reduce fraud in the

provision of durable medical equipment. The same internal draft regulation also

contained provisions to ban the use of cellular telephones as primary business

phones. This plan rested on the observation that many crooks had no fixed address

and used cellular phones. An overworked Office of the Secretary reviewed the draft

regulation and concluded that the Secretary would be made a laughing stock if she

were perceived, half correctly, as seeking to ban cellular telephones in the health

care sector. Unfortunately, after exhausting large bureaucratic capital in fighting

this silly scheme, OS acquiesced in the plan to require a new kind of surety bond

that had never been available to businesses and never would be. Before implementation attempts proved this scheme unworkable, Congressional staffers, ever alert to

seemingly bright ideas, put the surety bond idea into law.

Average Adjusted Per Capita Costs (AAPCC) as a regulatory scheme for the reimbursement of HMOs has persisted for two decades. AAPCC rests on two demonstrably false premises: that costs paid by Medicare in particular counties differ in

roughly the same proportion as the underlying costs of health care delivery differ;

and that these underlying cost differences are large—ten, twenty, thirty, and forty

percent or more from one county to its neighbor. Under AAPCC, the government has

officially declared that HMOs should be paid roughly 50 percent more for enrolling

seniors in the Washington DC suburb of Prince Georges County than in the nearby

suburb of Fairfax County. The premises of AAPCC have long been discredited, particularly as they apply to HMOs (see Stuart Schmid, ‘‘Geographic Variation in Medical Costs: Evidence from HMOs, Health Affairs, Spring 1995). Unfortunately, this

misconceived regulatory scheme has prevented the effective integration of HMO

competitors into Medicare for the same two decades. In some parts of the country

HMOs were grossly overpaid; in other parts no HMOs participated because they

would have been grossly underpaid.

While the egregious flaw of the Balanced Budget Act of 1997 in tying HMO payment to fee-for-service cost levels that were about to decline in an unprecedented

reversal of historic trends was largely unforeseeable, the underlying premise was

much like that of AAPCC: assuming that the ‘‘right’’ level for payment could somehow be divined from the costs of traditional Medicare.

In the specific context of Medicare reform, the 1998 HCFA regulations on

Medicare+Choice, comprising hundreds of pages of highly prescriptive and costly

mandates devised by bureaucrats determined to protect against every imaginable

problem, may have been the single most excessive set of regulations ever devised

in HCFA. So draconian were these regulations that a year after issuance HCFA

issued a modest set of revisions; admitting that few if any health plans could possibly have complied with the original regulations. Some observers believe that these

regulations were deliberately designed to cripple the competition of traditional

Medicare. My own view is that they reflect ignorance of private insurance markets

and practices, and of the practicalities of health care and business administration,

rather than actual malice. And, of course, they reflect the ‘‘nanny state’’ mindset of

most government regulators.

The underlying problem is that the bureaucratic impulses of HCFA, whether conscious or unconscious, seem yet again to have had the seemingly unintended effect

of sabotaging rather than favoring Medicare choice.

Avoiding Paralysis by Analysis

There are any number of vital issues that need to be addressed in Medicare reform. To mention several, some alluded to earlier:

63

• What cost sharing mechanisms will create the best incentives for plans and

beneficiaries to reduce the rate of cost increase, improve services, and improved

benefits over time?

• What role, if any, should be given to presumed differences in underlying

health care delivery costs among and between geographic areas?

• What mechanisms should be used to avoid destabilizing risk selection, or to

prevent ‘‘cherry picking’’ to obtain the healthiest beneficiaries?

• Are there ways to prevent large scale shifting of costs to beneficiaries as Fortune 500 companies discover that an improved Medicare program makes

Medigap insurance subsidies superfluous?

• What consumer protections should be provided to prevent abuse of elderly

beneficiaries who are vulnerable to errors of omission or commission?

My take on these issues, and others, is that fine-tuning is a serious mistake. For

example, actuaries and economists and budgeters have been agonizing over the

problems of creating the perfect scheme for risk adjusters for decades. Year after

year, the glaringly obvious problems in AAPCC were not even partially corrected because ‘‘we haven’t finished the studies to determine the best possible system.’’ As

another example, all the procedural protections and appeal rights in the world will

not protect beneficiaries one tenth as much as the simple expedient of making sure

that no participating health plans are predominantly comprised of Medicare beneficiaries, and that consumer information and other attributes of a well managed

Open Season let consumers vote with their feet.

A recent study of the National Academy of Social Insurance (Structuring Medicare

Choices, 1998) recommended ‘‘a program of research, demonstrations, and evaluations to inform decisions about structuring choice in Medicare. Systematic research

to address specific technical issues is essential to the success of structured competition. . . .’’ The report recommends ‘‘an aggressive program to develop and implement risk adjusters’’ and research to ‘‘assess the benefits of standardized benefit options, in terms of beneficiary understanding.’’ In other words, the Academy recommended no Medicare reform until years of research. Yet, we have the experience

of current Medicare policy to demonstrate that risk adjusters can never be perfect

and can greatly interfere with orderly plan participation and competition. We also

have the experience of the FEHBP to demonstrate that a program with no risk adjusters of any kind (a huge defect) can proceed reasonably successfully for decades.

And we have the knowledge and experience of the professions of Political Science

and Economics, and the observed reality of both Medicare and state mandates, to

tell us that standardized benefits are an invitation to political mischief and micromanagement of the worst kind.

On another front, there is much hand wringing that the Congress blocked the

competitive bidding demonstration. In theory, there are competitive bidding models

that will save much more money than any consumer choice approach. We can give

health plan X a monopoly in area Y for a year, and squeeze the pips to save money.

But why would anyone think that the primary object of Medicare is to save money

in the short term, no matter what the cost in consumer choice or dynamic innovation? Who thinks that government procurement models of any kind have ever proven in practice to be an effective and efficient model to obtain services of any kind?

Would we apply such a model or practice to selection of automobiles for consumers,

or housing, or grocery stores? Just think of the announcement: ‘‘Today the Automobile Financing Administration announced that in the greater Denver area all consumers buying automobiles next year will get two-door Ford Escorts. The government obtained a five percent discount from the wholesale price. To prevent fraud,

civil money penalties to prevent Nevada dealers from selling Hondas or four-door

models to Colorado consumers have been increased, with Justice Department enforcement financed by an unlimited tap on the transportation payroll tax. . . .’’

There are many key issues in reform that require careful analysis of options, and

objective appraisal of the likely effects of alternatives. But Medicare reform should

not be a playing field for hypothetical concerns of little real world relevance.

Organization and Management Reform

Several Medicare reform proposals, including the Breaux/Thomas and Breaux/

Frist proposals, envision removing much or the entire locus of decision making from

HCFA. In this regard, it is worth recalling that HCFA as an organization violates

one of the most famous organizational principles of Public Administration, one most

famously used by Franklin Delano Roosevelt: making sure that no one Federal bureaucracy has a monopoly on an entire area of responsibility. With competing bureaucracies, the ability of the decision-maker to detect incompetence, error, and falsification grows exponentially.

64

To take an example one step removed from Medicare reform, implementation of

the Health Insurance Portability and Accountability Act (HIPAA) has been frustrating to participants both within and without the government because it has been

dominated by HCFA. The convenience of one health plan, albeit the largest single

health plan, has dictated the main options presented, and most of those selected,

in a sector of the economy with hundreds of billions dollars at stake quite apart

from the interests of the administrators of traditional Medicare. Under HIPAA,

HCFA has gradually assumed the role of regulator of American health insurance,

to the point where it routinely issues regulatory pronouncement on such subjects

as ‘‘Circumstances Under Which Health Insurance Regulated As ‘Individual’ Coverage Under State Law Is Subject to the Group Market Requirements Of . . .

HIPAA’’ (a copy of this impenetrable issuance can be found at www.hcfa.gov/medicaid/hipaa/content/bulletins.asp).

To take another subject removed from Medicare reform, what Federal government

agency is charged with thinking creatively about the use of tax credits or grants to

states or other options to improve health insurance coverage for 40 million uninsured Americans, and what expert resources is that agency devoting to creating

workable proposals to mesh with tax reform and the existing employer-based insurance system? The answers presumably are ‘‘HCFA, and close to zero resources.’’ My recommendation is that HCFA be dismantled or, at the very least, competing

agencies created. I have some difficulty with the proposition that competitors to traditional Medicare, paid from the same trust funds, should not come under the stewardship of the agency in charge of the trust funds. I think that a better reform

might be to separate all quality and protective regulation from operation of the

Medicare health plan itself (what used to be called the Health Standards and Quality Bureau of HCFA is in financial impact probably the third or fourth largest regulatory agency in the Federal government). Alternatively, all regulation of managed

care, of Medicaid, and of private sector initiatives such as tax credits might be

placed in a separate HHS agency.

But the difficulty lies in the details of the solution, not in the problem addressed.

Clearly, HCFA is not capable of reforming itself more or less out of business. Clearly, HCFA is not a student of ways to regulate private health insurance with a light

hand, and of ways to avoid regulation entirely. Clearly, HCFA is incapable of providing the most important consumer protections, such as readily accessible information, and all too capable of devising complex regulatory schemes so cleverly burdensome that they drive health plans out of the Medicare market. And above all, HCFA

has proven over and over again that the convenience of traditional Medicare as perceived by ease of HCFA administration and HCFA’s parochial interest is the dominant principal driving all decisions large and small.

In other words, HCFA behaves just as public administration theory suggests that

any agency or bureau should behave. It protects its turf, as it perceives that turf.

During the formative years of Medicare, when a new program needed nurturing and

then fiscal discipline, HCFA’s motives and the larger public interest coincided. But

that behavior, however congenial to the interests of HCFA as a bureaucracy, does

not now meet the larger public interest. The problem is compounded because HCFA

is far from incompetent. To the contrary, the senior staff are among the most able

and dedicated in the Federal government. They control access to information, the

regulatory agenda, the computer systems, and far more. They decide which studies

get done, and which do not, and who writes the studies. They share common interests and a common view of the world (one in which private health plans play at

most a marginal role). They succeed routinely in protecting their interests from outside interference, such as pesky oversight by the Secretary and his or her staff, or

the Congress, or OMB, or even the President.

Whatever organizational reform is selected, I believe it should result in at least

two agencies, and possibly three or more agencies within HHS, charged with somewhat overlapping responsibilities for health insurance matters, so that the Secretary

(and ultimately the President and the Congress) will have the benefit of differing

views, information, and perspectives presented on key issues.

The bottom line is that no matter what organizational and managerial model is

chosen, Medicare reform based on consumer choice among competing health plans

is highly unlikely to succeed if it is not placed in the hands of an agency whose basic

purpose and mission, incentives, and even staff promotions rest on making the reformed program a success. HCFA as it exists today is not such an agency.

Semantic Reform and Reining in the Rhetoric

The debate over Medicare reform is highly vulnerable to grandstanding and shrill

accusations. To many, the word ‘‘vouchers’’ has become a rallying cry for opposition.

A year ago, AARP issued a report, Medicare Benefits: a Comparison with the

65

FEHBP, that could not get past the point that Medicare benefits are individually

specified in law (i.e., ‘‘guaranteed’’ subject to the decisions of the next Congress)

whereas FEHBP benefits seem to be only those that consumers drive the plans to

offer. In this comparison of ‘‘legal guarantees’’ with ‘‘plan offerings’’ the superiority

of FEHBP benefits, and their far better improvement over time, got lost.

Another rhetorical swamp lurks in the opprobrium that has come to be attached

to managed care. Paul Elwood, often credited with inventing the term ‘‘health maintenance organization,’’ saw the essence of his idea as one of empowering consumers.

Elwood is bitter about the Clinton Administration’s decision to foment hostility

against HMOs, and uses terms such as ‘‘perversion and political destruction of our

ideas’’ to describe the terms of debate in recent years (as quoted in the Orange

County Register, February 16, 2001).

Next Steps

The next steps for the Congress must await Bush Administration decisions. Bills

can be introduced, hearings be held, proposals tested, and debates held—but these

will be in a vacuum until the Administration makes concrete proposals. In the

meantime, the Administration has important choices. Will Secretary Thompson engage in a meaningful review of Medicare+Choice regulations and clean them up,

both in reality and symbolically? Will Clinton ‘‘midnight regulations’’ expanding burdensome Medicare procedures to Medicaid HMOs be rescinded? Will the current

consumer information system for Medicare beneficiaries be put on a sensible track

that actually provides consumers easy access to information needed to choose health

plans? Will health care financing responsibilities be reorganized (former Secretary

Joe Califano created HCFA by a stroke of the pen shortly after taking office)? Will

political appointees in HCFA and the Office of the Secretary be consumer and market oriented?

For both the Congress and the Administration, it seems to me that prescription

drug coverage is the vital lubricant. It is popular, it is needed, and it is expensive.

What reforms can be obtained with drug coverage as the sweetener? Can a package

be devised that will not involve Kafkaesque price controls and discourage future research and innovation? Can some form of drug coverage be added to traditional

Medicare so that it will have at least a partially competitive position as other health

plans compete for business?

The answers to these questions, and the Congressional initiatives and responses,

will determine whether Medicare reform becomes a reality or an empty slogan.

Chairman JOHNSON. Mr. Lemieux.

f STATEMENT OF JEFF LEMIEUX, SENIOR ECONOMIST,

PROGRESSIVE POLICY INSTITUTE

Mr. LEMIEUX. Thank you very much, Madam Chairman, Mr.

Stark and Committee Members.

I may be a little naive, but I think that, working on the technical

details of some of these proposals and thinking them through,

there may be a lot more movement toward political compromise

and technical compromise and accommodation than you would have

known from the rest of this hearing. I think that both sides are

moving toward a stable, competitive approach that would fix the

deep flaws in Medicare+Choice that we have heard so much about;

and there seems to be a burgeoning political agreement to really

do a good job in improving Medicare’s benefits, mostly for prescription drugs but also for the other gaps in its benefits, especially the

financial gaps, the biggest concern to me.

Let me talk about my ideas for solutions in the context of Medicare’s problems.

We have heard the fee-for-service benefits are out of date and inflexible, and that is virtually a consensus opinion. Four out of five

beneficiaries are in that program, and they face large out-of-pocket

66

costs which they often try to insure by purchasing gap coverage,

sometimes at great expense.

We have also heard correctly that Medicare’s system of HMO is

a total mess, and I agree with that assessment 100 percent. Right

now, what we fundamentally ask HMOs to do is to compete on the

level of benefits they are going to offer and whether or not they are

just going to play ball, whether or not they are going to enter a

market or withdraw from a market. When they face competitive

pressures, their response under the rules of Medicare+Choice is to

adjust their benefits, which is very inconvenient to seniors or, even

more problematic, to just leave the market altogether or come back

if it looks like the profits will be there.

It would make so much more sense to have them competing

mostly on price instead of benefits, and staying in the market more

permanently. That is the great beauty of a Federal employee’s

plan: there has been a trust built up between many of the plans

and the agency running it. Sure, people have a choice. They can

disenroll from a plan they do not like, but they have an even better

choice, and that is they can stay with a plan that they like, because

the plans can adjust to market competition through changes in

their prices rather than just withdrawing from the market.

I think that both of these two problems, Medicare’s fee-for-service

benefit inadequacy and the problems with the HMO program, are

fundamentally caused by the superstructure of Medicare: the fact

that Congress dictates exactly how Medicare is to run and HCFA

perceives its role as administering the law, often with very detailed

regulations. HCFA does its best, but it is very difficult to keep up

with the health sector and all of the laws being passed in Congress.

As a result, fee-for-service benefits are really not very well integrated. I learned that firsthand when my grandmother was sick

last fall. It is a hodgepodge of benefits that have been crafted over

the years, and you would never have done it that way if you set

out to remake it from scratch today. The same thing is true of the

Medicare+Choice program. You would never have such a program

if you sat down this year and decided, here is how we are going

to try to encourage private plans to offer a choice to Medicare beneficiaries.

Of course, the fourth problem is the cost problem. I have worked

in the past at the bipartisan Medicare Commission at the Congressional Budget Office and at HCFA; and I have been involved, either

directly or indirectly, with a great many of the erroneous forecasts

that have been used over the years regarding the BBA, regarding

health care spending, regarding the Medicare Commission’s decision that the average government contribution was going to be 88

percent, and so on and so forth. All of those forecasts, I assure you,

were extremely reasonable, highly sophisticated and well thought

through; and they were vetted with the greatest minds in Washington and around the country; and most of them were wrong. So

I encourage you to be very careful about the potential costs of this.

It looks to me like the costs of all of these plans—Breaux–Frist II

are going to go up, the House Republican plan are going to go up,

so that will be an important consideration.

Let me just run down very quickly how I view the progress on

Medicare reform. First, there was the bipartisan Medicare CommisVerDate 11-MAY-2000 11:54 Aug 06, 2001 Jkt 073535 PO 00000 Frm 00070 Fmt 6633 Sfmt 6602 E:\HR\NSET\73535.XXX pfrm07 PsN: 73535
67

sion. The Commission set up a full ‘‘level playing field’’ competition

between the fee-for-service plan and managed care plans. It offered

subsidies for drugs only for the poor and near poor, and it would

have saved a fair amount of money, I think. I think that some of

the commentators who suggested that it was going to put fee-forservice out of business were exaggerating a little bit—I think the

probability of that was very slight, but it was a true level playing

field competition that would have probably saved a lot of money.

President Clinton came back with a proposal that was a partial

competition. In a sense, rather than having the taxpayers save

money from competition in Medicare, the beneficiaries were going

to essentially have the opportunity to save money by reducing their

premiums. So it didn’t save the taxpayers much.

Then the President’s plan had a pretty large subsidy for drugs.

It was 50 percent of the package, and the overall cost over 10

years, rather than saving $100 billion like the Medicare Commission’s plan, it probably would have cost about $300 billion.

The Breaux–Frist I plan was full competition like the Medicare

Commission proposed, but it took out some of the cost-saving features like raising the eligibility age, and it also added subsidies for

drug and other supplemental benefits to about 25 percent, even if

you weren’t poor or in that near poor range. I think that the cost

of Breaux–Frist I—I thought at that time it would probably be

about budget neutral. Now, it might be a little more than that.

As the Senator said, the cost of Breaux–Frist II is about $200 billion now with the updated estimates. It raised the subsidies from

25 percent to approximately 35, a little closer to what the President

had proposed last year; and it includes a partial competition or a

beneficiary competition like the Clinton plan as an interim step,

rather than the full level playing field envisioned by the Commission.

Now, my take on where you go from here is that I think that getting the formulas for competition, coming to agreement on that,

ought to be pretty easy. It seems to me like both sides have agreed

to protect the fee-for-service program for a considerable period of

time, and that means the taxpayers are not going to save much

money, but it seems like we have reached an agreement on that

sort of Breaux–Frist II approach to this. Regarding the amount of

subsidies, whether it is 25 or 35 or 50, it seems like there is a

range there that Members of Congress can probably get together on

reasonably quickly. The harder issues are issues of governance and

issues of how to structure the drug benefit in fee-for-service. So let

me just make a couple of quick comments about that.

On governance, I think that it is very important to create a new

agency of some sort to oversee the competition and to create a new

market for supplemental benefits for fee-for-service beneficiaries. I

think that we have had a political situation where many Democrats

have said that we really want a drug benefit in Medicare; and

many other people, Senator Breaux and many Republicans and

others, have said what we really want is to work with market

forces to the best of our ability and not have Congress dictate how

the drug benefit is going to work. I think there is a way to bridge

those two approaches.

68

I think the only way to guarantee that drug benefits and other

supplemental benefits are available to everybody is to empower the

government in a very strong way to make that happen, but I think

the way to get political agreement to do that is to create a new

agency that is fundamentally knowledgeable about and experienced

with competition, rather than the way that HCFA operates with

regulations and fee-setting.

So, just to sum up, I think the right mix of Medicare benefit expansions and competitive reforms requires both strong government

and flexible private markets. I think that conservatives have to

agree to protect fee-for-service for a while and allow the Medicare

agency or whatever this new administrator is going to be called a

great deal of latitude in creating supplemental benefits. I think

that the conservatives need to support pretty high subsidies and

make room in budgets for such things to make the system work.

Liberals, on the other hand, have to acknowledge, I believe, that

HCFA isn’t suited for competitive systems—it really never has

been—that market approaches really should be the goal for drug

benefits, that we ought to try to make that work, and that costs

cannot get out of hand.

One final comment. I think that, last year, the House-passed

plan was a little too narrow in the sense that it envisioned a drugonly benefit. I think it is really important and more convenient for

seniors and more practical for health plans if we link a supplemental drug benefit with other benefits that seniors need like these

financial protections against cost-sharing that they would otherwise have to face in fee-for-service. I think, by linking those two

markets and subsidizing that, you create a much more viable market and give seniors a one-stop shop for their supplemental coverage if they are in fee-for-service.

[The prepared statement of Mr. Lemieux follows:]

Statement of Jeff Lemieux, Senior Economist, Progressive Policy Institute

Thank you, Madam Chairman, Representative Stark, Committee members, for inviting me to offer ideas on how to take the final steps toward Medicare reform. My

name is Jeff Lemieux, and I am the senior economist for the Progressive Policy Institute (PPI). Prior to this position I worked for the Bipartisan Medicare Commission chaired by Senator John Breaux (D–La.) and Representative Bill Thomas (R–

Ca.), the Congressional Budget Office, the Health Care Financing Administration

(HCFA), and an economic forecasting firm then known as DRI/McGraw-Hill.

I believe most Democrats and Republicans in Washington could quickly come to

agreement on a compromise approach to Medicare reform that remakes Medicare’s

competitive system for private health plans and expands the program’s benefits, especially for prescription drugs and other items that form ‘‘gaps’’ in Medicare’s current benefits. This year, I hope Congress will rise above the usual partisanship and

close the deal for a durable, truly improved Medicare system.

My statement touches on several areas: problems in Medicare, a vision for a reformed Medicare system, my recommendations for solutions to Medicare’s problems,

the legislative steps that have been taken toward Medicare reform, some difficult

issues that must be dealt with, and a compromise idea or two. I have attached an

outline at the end of the statement that lists those components.

Problems

To launch the process of Medicare reform and improvement, I believe we must

expand benefits and create a new, market-based approach to how Medicare actually

delivers benefits. The solution should address the program’s four big problems:

1. Medicare’s fee-for-service benefits are inflexible and out-of-date. Most

seniors (about 5 of 6) face large out-of-pocket costs for prescription drugs and

other items not covered by the traditional fee-for-service program; many purVerDate 11-MAY-2000 11:54 Aug 06, 2001 Jkt 073535 PO 00000 Frm 00072 Fmt 6633 Sfmt 6621 E:\HR\NSET\73535.XXX pfrm07 PsN: 73535
69

chase additional insurance to fill in the gaps in Medicare’s fee-for-service benefits, sometimes at great expense.

2. Medicare’s system for HMOs is on the verge of collapse. About 1 in 6

Medicare beneficiaries has joined an HMO to get better benefits and avoid high

out-of-pocket costs. But Medicare’s system for HMOs is similar to its administration of the fee-for-service program: a bewildering array of government-set

prices and a dense thicket of regulations. Faced with lower reimbursements

and higher costs, many HMOs are slashing benefits or dropping Medicare participation altogether.

3. Medicare’s fee-setting and regulatory approaches are inefficient and

stifle innovation. Medicare’s inadequate fee-for-service program and its dysfunctional system for HMOs are not the result of bureaucratic ineptitude or

bad motives. They are the inevitable and direct result of how Medicare is structured. The way Medicare currently works, Congress is required to dictate virtually all of Medicare’s fees and rules. Then the Health Care Financing Administration (HCFA) adds layer upon layer of regulations in an increasingly futile

attempt to apply those fees and rules to a fluid, constantly-changing health

sector.

4. Medicare’s costs will mushroom when the baby boomers retire. The backdrop for any Medicare reforms, including adding needed (but expensive) new

benefits, is the fact that as 70 million baby boomers retire, high Medicare

spending is likely to crowd out other government initiatives, prompt a return

to deficits, or force tax increases. Without reform, Medicare spending could easily jump from over 10 percent of the federal budget today to 30 percent of the

budget by 2030. Combined with Social Security and Medicaid (a program for

the poor, including many elderly people in nursing homes), the total cost of entitlement programs for the baby boomers could suffocate progressive government.

The first two problems, inadequate benefits and insufficient choices, directly hurt

seniors. Seniors are largely unaware of the third problem—Medicare’s administrative inefficiency and structural obsolescence—but that problem is the root cause of

the first two. Furthermore, Medicare’s internal inefficiency contributes to its high

costs, which should never be far from policymakers’ minds.

The bottom line is that Medicare’s creaky internal workings are becoming politically unacceptable. Medicare was designed in the 1960s. Its benefits have not kept

up with medical advances and seniors’ needs precisely because of its top-down government controls and old-fashioned administration. Sen. Breaux likes to compare

Medicare to an old car: powerful, but inefficient and always in need of maintenance

or repair. Medicare was not designed for modern benefits or competitive approaches,

and recently Congress has had to enact legislation fixing parts of its payment systems virtually every year.

A Vision of a Reformed Medicare

In my opinion, a truly reformed, high value Medicare program will have two primary characteristics:

• Good choices of comprehensive private health plans such as HMOs or

PPOs for as many beneficiaries as possible. The system of competition should

encourage private plans to stay in the Medicare program, adjusting their premiums as necessary to be competitive. That is in direct contrast to

Medicare+Choice, which causes plans to compete by changing their benefits

(often at great inconvenience to seniors) or by moving into or dropping out of

Medicare altogether. Private plans’ benefits should include currently covered

items plus drug coverage and out-of-pocket protections. Health plans should be

able to innovate broadly on benefit design, but they should be given the incentive to compete as much as possible on price, not benefits. Plans should feel as

though they are long-term competitors for seniors’ business, not come-or-go government contractors.

• A fee-for-service plan that can improve itself, and requires considerably less

Congressional micromanagement. HCFA should operate the fee-for-service plan

in a more businesslike manner, under a much more transparent and planningoriented process. Over time, Congress’ role should shift from making laws concerning Medicare’s every detail to oversight and quality assurance. Current feefor-service benefits should be continually improved and truly integrated, and

beneficiaries in the fee-for-service program also need seamless drug and gap

coverage, without hassle or needless complexity.

70

Possible Solutions

Here is my list of the essential changes and reforms Congress could enact this

year to get started toward that vision: • Competition. I believe Medicare needs a new style of competition patterned

after the federal employees’ system both to expand and stabilize seniors’ choices

and to temper Medicare’s future costs. • Modern Benefits. We should add prescription drug benefits and new limits on

seniors’ out-of-pocket costs, and we should subsidize those new benefits sufficiently to encourage most seniors to enroll. • A New Attitude and Process. We should change the culture of Medicare first

by establishing a new executive agency outside of HCFA that is familiar with

competitive systems to oversee the new competitive approach. Second, we

should hammer out a new process under which HCFA has the flexibility to

make the traditional fee-for-service program more modern and accountable. • Innovation and Choice for Drug Benefits and Gap Coverage for Fee-ForService Enrollees. The new executive Medicare Agency should have the power

and financial flexibility to guarantee that seniors enrolled in Medicare’s traditional fee-for-service program will have access to choices of affordable private

coverage for prescription drugs and other out-of-pocket costs. I believe markets

for private coverage will work well, and that in general the government should

not dictate prices and detailed coverage rules for prescription drugs.

Almost There: The Path to Medicare Reform

Comprehensive Medicare modernization is a relatively new idea. In 1998 and

1999, the Medicare Commission formed a plan to remodel Medicare based on the

federal employees’ system of choices and competing health plans. In addition to the

new competitive system, the plan added benefits for prescription drugs and it limited beneficiaries’ out-of-pocket costs for hospital and physician services. To save

money, however, the Commission’s plan would have raised Medicare’s eligibility age

and added some new beneficiary co-payments. Furthermore, it subsidized prescription drug benefits only for beneficiaries under or just above the poverty line.

The Medicare Commission didn’t account for the rapidly improving budget outlook

in Washington, and its plan did not spark the hoped-for political consensus. As

budget deficits switched to surpluses in 1998 and 1999, President Clinton and many

in Congress refused to embrace such penny-pinching measures.

In June of 1999, the Clinton Administration countered with its own reform proposal. Clinton’s proposal also embraced the federal employees system as a model for

competition, but it added measures to protect the traditional fee-for-service from the

full force of market prices. In so doing, it allowed the new competitive system to

save beneficiaries money, but limited the amount the government would save. The

Clinton plan also dropped the plank raising the eligibility age. Finally, the Clinton

plan generously subsidized prescription drug benefits for all seniors and formed the

new drug benefit on the traditional fee-for-service model, with the government

poised to dictate payment policies and rates.

Senator Breaux’s first legislative proposal, cosponsored by Senator Bill Frist (R–

TN), included the Medicare Commission’s version of full competition, also dropped

the increased eligibility age, and added a modest ($200) annual premium subsidy

for beneficiaries above 150 percent of poverty (beneficiaries with incomes below that

level received larger or full subsidies).

The second Breaux–Frist proposal, which was released last Summer, accepts Clinton’s milder form of competition as an interim step, and raises the subsidies for

drugs to almost three-quarters of Clinton’s proposed level. Unlike Clinton’s approach, however, both of the Breaux–Frist proposals create a market for prescription drugs, so that Medicare beneficiaries in the fee-for-service program would have

a choice of drug plans and so the Congress would be more removed from the setting

of drug prices and fees.

Sticking Points

Since both sides basically agreed to protect fee-for-service beneficiaries from the

full force of competition and to subsidize the new benefits even for those above poverty, coming to final agreement on those issues should be straightforward. However,

sticking points remain on how the new competition and benefits will be administered. Should the new competition be administered by HCFA, or a new executive

agency? In my opinion, the only way to resolve the most crucial outstanding issue—

ensuring that fee-for-service enrollees will have access to drug benefits—is to create

a new executive Medicare Agency to oversee the new Medicare marketplace.

Here’s the problem: market solutions for drug benefits are a much better idea

than the sort of price controls that have distorted and politicized the hospital indusVerDate 11-MAY-2000 11:54 Aug 06, 2001 Jkt 073535 PO 00000 Frm 00074 Fmt 6633 Sfmt 6621 E:\HR\NSET\73535.XXX pfrm07 PsN: 73535
71

try and other sectors of the health economy. But how do we ensure that solid markets will spring into existence and that all seniors—including those in the fee-forservice program—will have good choices? By definition, free markets are impossible

to predict.

Many Democrats approve of market solutions for HMOs and other comprehensive

health plans, but assume that markets couldn’t be made to work for drug benefits

in the fee-for-service program. That’s why their proposals generally put HCFA in

charge of the benefit. Government control is the only way to be sure the benefit will

be there for all beneficiaries, under that assumption.

Senator Breaux’s plan relies on a new Medicare Agency to run the program’s market systems, both for comprehensive plans and for extra benefits for fee-for-service

beneficiaries. He would create a mini-market of plans specializing in drug and other

gap benefits, and seniors would be able to pick from those plans based on price and

benefit levels. Markets are the only way to ensure continued innovation, efficiency,

and dynamism in the health industry, Breaux argues.

In last year’s campaigns Democrats liked to say their drug benefit was ‘‘in Medicare,’’ meaning that it would operate just like the other parts of Medicare’s fee-forservice program. The Breaux–Frist plan would add a drug benefit to Medicare, but

only in the context of market competition and choice, not direct government management.

Fortunately, there is a bridge between the two approaches. Senator Breaux is

right to prefer competition to an HCFA-administered program, but other Democrats

are right that full government authority is the only way to be absolutely sure a benefit will be there for all seniors.

The essential compromise is clear: allow the government sweeping authority to

ensure drug benefits are available under any circumstance, but give that authority

to a new government agency that knows how to work with market systems and private companies, not to HCFA, which only knows price controls and regulations. Sen.

Breaux’s plan should be more explicit about exactly what tools the new Medicare

Agency could use to ensure that drug benefits would be available even if markets

were slow to form. The Medicare Agency should be given full authority to share risk

with private companies to ensure that markets develop and choices are available to

all beneficiaries, but it should be structured so that any significant government risk

sharing would be temporary—a true last resort, not a first option. That way any

government-private risk partnerships would be less likely to devolve into arrangements where the government became the regulator and micromanager and the private company was reduced to a contractor status, with no stake in benefit innovation or competitive outcomes.

Finally, the House Republican bill from last year concentrated on creating a market for drug-only supplemental coverage. That was a mistake, I think. It would be

much more convenient for seniors and more practical for health plans to offer a combination of drug and other gap coverage, such as protections against unlimited outof-pocket costs. In essence, Congress should create a new market for comprehensive

gap coverage for fee-for-service enrollees, and subsidize that market sufficiently to

make it appealing both to health plans and seniors. Creating a new market for allin-one drug and gap coverage would not interfere with current gap or retiree coverage that seniors have purchased or otherwise receive, but over time it would probably become an attractive option for many beneficiaries.

Conclusion

The right mix of Medicare benefit expansions and competitive reforms requires

the best of both strong government oversight and flexible private markets. Conservatives must agree to protect the fee-for-service plan for a time, allow the new Medicare Agency a great deal of latitude in creating a market for drug benefits and gap

coverage for fee-for-service enrollees, and support higher subsidies for those products. Liberals must acknowledge that HCFA is not suited to run competitive systems, that market approaches must be the goal for drug benefits, and that costs

cannot be allowed to get out of hand.

The political partnership for that sort of deal is shaky, but it does exist. By improving benefits, we can help America’s seniors now. By using market forces and

competition to shore up Medicare’s creaky inner workings, we can assure seniors

that we will be able to afford excellent health benefits in Medicare for their children

and grandchildren as well.

f72

Chairman JOHNSON. Thank you very much, panel. I welcome

your ideas; and I would urge you, as we move through this, to try

to be as tough with yourself as we are going to have to be. We all

know this is going to cost more money, I do not care what anybody

is saying. We all know fee-for-service is going to have to be there,

because there are just lots of parts of the country where that may

always be the only form.

But we do have to find a much better way of doing a lot of

things. If you read through Mr. Francis’ testimony, it is just simply

awesome what a bad job of just some very simple things that

HCFA has done. Now, we are loading them up with things to do.

If you had to do as many new things as they have had to do, you

might not do such a good job either.

So this is not about blame, but it is about reality, and it is about

where we spend our new money. I want you all to think about the

fact that neither the plan of the Republicans nor the plan of the

Democrats delivered prescription drugs as an integral part of Medicare. It was a Part D. It had another premium. It was just like

Part B. It was an entitlement, but it was an additional plan with

an additional premium. A lot of the people, that one-third of seniors who have no prescription drugs, folks, they are the people, a

lot of them, that are not going to be able to pay the premium in

the Democrats’ plan or to pay the premium in the Republicans’ plan.

So you have to be a little tougher now with us; you got to be a

little tougher with yourselves. Where do we put the premium? Is

it fair to pass a prescription drug bill with a $4,000 or a $6,000 catastrophic provision for people who will never spend $4,000 because

they can’t? Should we be putting our money into a more variable

catastrophic level and relying on our market power to create discounts in the market, rather than a government-paid benefit for all

those others? Remember how many of which are already getting

prescription drugs, at least 50 percent of whom have pretty good

plans. So we are going to have to be more realistic, because this

plan is going to carry extraordinary financial weight into the future, no matter what we do.

Senator Breaux said his plan just simply slows the rate of

growth in spending. That is all BBA did, remember? All BBA 97

did was control the rate of growth for the future 6 years, so it

would be the same as the rate of growth in the preceding 6

years——

And anyone who wants to go vote can. You got 3 minutes left.

I am going to quit in just a second.

I think we have to be serious about what BBA 97 did. What it

did in fact and what it was intended to do are two different things,

and that is what caused the havoc. But we do have a very important responsibility to fulfill, and it will not help if you are not

tough on yourselves.

Dr. Feder, I want to know exactly what you think ought to be

in that benefit plan. I want you to be part of costing it out, and

I want you to be a part of taking responsibility. I do not want to

hear we have a little problem of solvency. You know we have a big

73

problem of solvency. So I would really appreciate your continued

thoughts.

All of you had excellent comments in your testimony, and I thank

you for working with the Committee today.

The hearing is adjourned.

[Whereupon, at 12:05 p.m., the hearing was adjourned.]

[Submissions for the record follow:]

Statement of Advanced Medical Technology Association

AdvaMed represents over 800 of the world’s leading medical technology innovators

and manufacturers of medical devices, diagnostic products and medical information

systems. Our members are devoted to the development of new technologies that

allow patients to lead longer, healthier, and more productive lives. Together, our

members manufacture nearly 90 percent of the $68 billion in life-enhancing health

care technology products purchased annually in the United States, as well as 50

percent of the $159 billion products purchased internationally.

AdvaMed applauds the willingness of the Congress to review the current inadequacies of the Medicare program and to plan a future for Medicare that is more

responsive to beneficiary needs. We believe it is essential to restructure Medicare

to ensure that beneficiaries have access to high-quality health care, which includes

lifesaving and life-enhancing medical technologies.

We support the creation of a system that would provide Medicare beneficiaries

with a broader choice of competing health plans. HCFA’s role in such a system

should be to administer Medicare’s fee-for-service system, which should continue to

be available to beneficiaries. The dynamic and creative forces of the marketplace

and competition will lead to innovative alternatives and the individual options and

choices that Medicare consumers need. Given clear choices, Medicare beneficiaries

will choose the best quality and value offered in a competitive, patient-centered

health care system. In addition, we believe that a competitive market system for

Medicare will foster and reward innovations that improve outcomes, reduce costs,

and enhance the quality of life for patients.

Until such comprehensive reforms are fully implemented in Medicare, AdvaMed

believes changes must be made to the existing fee-for-service program to make coverage, coding and payment decisions more predictable and improve beneficiaries’ access to new medical technologies. Specifically, we support greater transparency in

national and local Medicare coverage processes, more efficient and timely coding

policies, and more frequent payment determination updates.

With or without major reforms, Medicare should be encouraged to capitalize on

advanced technologies, which have revolutionized the U.S. economy in many other

sectors. Significant advances in health care technologies—from health information

systems that monitor patient treatment data to innovative diagnostics tests that detect diseases early and lifesaving implantable devices—improve the productivity

level of the health care delivery system itself and vastly improve the quality of the

health care delivered. New technologies can reduce medical errors, make the system

more efficient and effective by catching diseases earlier—when they are easier and

less expensive to treat, allowing procedures to be done in less expensive settings,

and reducing hospital lengths of stays and rehabilitation times.

AdvaMed applauds Congress for the initial reforms it recently legislated to make

the coverage, coding and payment systems more effective and efficient. HCFA has

also recently taken some steps to modernize its coverage and payment systems.

However, there is still more work that needs to be done. AdvaMed encourages additional measures to make the coverage process more transparent and predictable, the

coding processes less complex, and the payment systems more timely and efficient.

While the Medicare program faces the challenge of a rapidly growing aged population, it is presented with the opportunity of unprecedented advances in innovation.

We look forward to participating in the Medicare reform debate and will review all

plans carefully to ensure that they will foster, rather than impede, the delivery of

innovative therapies for patients.

f74

Statement of Alliance to Improve Medicare

Introduction

The Alliance to Improve Medicare (AIM) is the only organization focused solely

on fundamental, non-partisan modernization of the Medicare program to ensure

more coverage choices, better benefits (including prescription drug benefits), and access to the latest in innovative medical practices, treatments and technologies

through the Medicare system. AIM coalition members include organizations representing seniors, hospitals, small and large employers, insurance plans and providers, doctors, medical researchers and innovators, and others.

The structure of the traditional Medicare program has changed little in more than

three decades and, consequently, has not kept pace with many of the dramatic improvements in health care delivery. AIM is dedicated to achieving comprehensive

modernization of the traditional Medicare program through policy research and educational programs for Members of Congress and their staff, the media, and the

American public.

Key Principles for Medicare Modernization

AIM has identified seven key principles to guide Medicare modernization efforts.

These principles seek to improve both the administration of the Medicare program

and the benefits provided to program beneficiaries.

First, AIM supports improvement of health care coverage through better coordination of care including health promotion and disease prevention efforts. The traditional Medicare program has not kept pace with private sector benefits and plans

offering preventive health care and screening measures such as annual physicals,

hearing and vision tests, and dental care. Medicare beneficiaries, more so than other

population age groups, can benefit from these preventive measures which can help

reduce long-term costs and ensure appropriate, early treatment of health problems.

Private sector Medicare providers should have the flexibility to incorporate these

measures as part of basic health care services. Unfortunately, an act of Congress

has previously been required to provide routine screening tests under the Medicare

fee-for-service program. For example, health management programs are offered by

a variety of health plans (including HMOs) and pharmaceutical benefit managers

(PBMs), companies who supply and manage prescription drug benefits for health

care companies. Health management programs reduce overall health costs and improve the quality of life by helping beneficiaries better understand and manage conditions such as asthma and diabetes.

Second, AIM supports improvement of health care coverage through increased

consumer choice. Medicare beneficiaries should have the option to choose from a

range of coverage options similar to those available to Members of Congress, federal

employees and retirees, and millions of working Americans under 65 years of age

who are covered by private plans. The Medicare managed care program,

Medicare+Choice, seeks to provide these types of coverage options to seniors nationwide. Unfortunately, inadequate payments and excessive regulation of private sector

providers participating in Medicare+Choice have seriously constrained the ability to

expand coverage areas and have caused numerous plans to withdraw from coverage

areas where reimbursement was inadequate to cover even the costs of basic care.

Between 1998 and January 2001, these withdraws affected over 1.5 million beneficiaries. One Medicare+Choice program participant, Oschner Health Plan (OHP) of

Louisiana, cited inadequate payments in July 2000 when announcing withdrawal

from nearly 6,000 OHP Medicare+Choice beneficiaries or 16% of OHP’s

Medicare+Choice beneficiaries in Louisiana. OHP projected 2001 losses of nearly

$6.8 million as a result of inadequate payment rates for basic coverage for these

beneficiaries.

Third, AIM supports improving coverage through increased competition among all

plans and providers in the Medicare program. Medicare’s managed care option, the

Medicare+Choice program, is an alternative to and competitor with traditional feefor-service Medicare. The federal government, through the Health Care Financing

Administration (HCFA), currently regulates Medicare+Choice plans while also acting as a participant itself through the traditional fee-for-service program. AIM believes this dual role is anti-competitive. Medicare reform and modernization efforts

must be evaluated based on success in increasing market competition and availability of basic, affordable coverage to Medicare beneficiaries, not on increasing

HCFA’s regulatory powers and oversight activities. The U.S. General Accounting Office (GAO) and former HCFA Administrators have identified several areas of conflict

75

between HCFA’s broad responsibilities and management structure including the dichotomy of the traditional fee-for-service program with the Medicare+Choice program. These conflicts include the lack of separate management offices and directors

for each program.

Fourth, AIM believes prescription drug coverage should be provided to all Medicare beneficiaries as part of comprehensive, market based Medicare modernization.

The opportunity for reform and modernization is presented by the recognized need

to cover prescription drug benefits for Medicare recipients. Congress should take

this opportunity and not simply layer a new, stand-alone drug program onto the traditional Medicare program without addressing the program’s outdated and inadequate financial and structural systems. The program in its current form cannot

meet the coming challenges presented by the retirement of the baby boom generation which will more than double the number of Medicare beneficiaries. Any Medicare reform proposal must address the real structural and financial problems of the

Medicare program. For example, Medicare currently does not cover simple screening

tests to detect high cholesterol among beneficiaries. Without modernization, Medicare will pay for only the drugs to treat high cholesterol but will continue to deny

payment for detection of high cholesterol problems in seniors. Under a drug benefit

as part of modernization, Medicare would ensure early detection and treatment, including drug therapy, as part of a comprehensive disease management approach.

Fifth, AIM urges Congress to continue to review and address the financial crisis

facing health plans and providers. Adequate financing is necessary to establish a

solid foundation upon which to build a better Medicare and ensure the long-term

financial integrity and solvency of the Medicare program. Payment cuts in the Balanced Budget Act of 1997 (BBA ’97) directly undermined patient care and progress

toward a modernized program. These cuts were originally estimated to be $103 billion over five years but recent Treasury Department and Congressional Budget Office (CBO) reports project cuts of almost $300 billion—nearly triple what was intended. Health plans, hospitals and doctors have been hit hard and patient care has

been and will continue to be affected. Congress recognized the damage caused by

BBA ’97 and has provided over $30 billion in restorations over the next five years.

These small repayments represent a good start at addressing the financial crisis

caused by the cuts. AIM encourages Members to ensure appropriate and timely payments for these providers and plans to ensure appropriate care for Medicare beneficiaries.

Sixth, AIM believes that the current rigid and outdated Medicare benefit structure and bureaucracy must be replaced. Program administrators must be provided

with the flexibility to make new health care innovations and technologies more

readily accessible to Medicare beneficiaries. Currently, Medicare beneficiaries wait

a minimum of 15 months after patients in private health plans, including

Medicare+Choice plans, to gain access to new medical devices and technologies, and

sometimes the wait is as long as five years. HCFA’s approval, coding and reimbursement procedures are largely responsible for this delay. Quality health care for Medicare beneficiaries requires these new technologies to be available for all patients.

For example, more than half the patients who could use cochlear implants, which

restore hearing to the profoundly deaf, are Medicare age. Unfortunately, few Medicare patients have received the device because HCFA hasn’t updated its inadequate

payment rate in 14 years. Current payment rates for cochlear implants cover less

than half of actual costs.

Finally, AIM believes Medicare administrators must reduce excessive program

complexity and bureaucracy caused by the more than 110,000 pages of federal rules,

regulations, guidelines and mandates. While AIM supports the elimination of real

fraud and abuse in Medicare, our members believe this can be achieved without relying on unnecessarily complex and heavy-handed regulation. Providers and plans

must not be forced to divert resources from patient care in order to respond to everchanging regulations. For example, Medicare+Choice plans announcing withdrawals

in July 2000 frequently cited the large volumes of Operational Policy Letters (OPLs)

as one reason for withdrawal. These plans reported increasing needs to devote additional employees to regulatory issues instead of health care delivery and management, increasing costs to plans at the same time as health care costs increased but

payment rates from HCFA remained stagnant.

Conclusion

AIM urges the 107th Congress to consider sensible, long-term solutions to the

problems confronted by the Medicare program and by Medicare beneficiaries and we

urge Members to work together on a bipartisan basis to achieve comprehensive

Medicare reform. AIM appreciates the opportunity to submit this statement for the

76

hearing record and we look forward to working with the Committee as they examine

options for Medicare.

Citizens Against Government Waste (CAGW) appreciates the opportunity to proStatement of Citizens Against Government Waste

f vide testimony to the House Ways and Means Subcommittee on Health on reforming

Medicare. CAGW is a non-profit, non-partisan 501(c)3 organization that accepts no

funds from the government. The organization has more than one million members

nationwide. CAGW was founded in 1984 by J. Peter Grace and nationally syndicated columnist Jack Anderson to build public support for implementing the Grace

Commission recommendations and other waste-cutting proposals, and has long been

interested in making Medicare more efficient and responsive to its beneficiaries.

For several years, one of the major policy issues in Washington and across the

country is how to provide Medicare beneficiaries with an outpatient prescription

drug benefit. Prescription drugs have become a major component of modern health

care and are routinely covered in private plans. Medicare, unfortunately for seniors,

is not a modern healthcare plan. It is still based on how private health insurance

was structured and delivered in the 1960’s. At that time, there were few innovative

drugs and health insurance focused mostly on hospital stays and expensive surgery.

Simply put, Medicare has not kept pace with the advances in modern healthcare

technology.

Medicare must be placed on sound financial footing and seniors should have access to a prescription drug benefit. CAGW is not in favor of simply throwing additional money to Medicare Part A and adding a prescription drug benefit, such as

creating a Part D as in Senator Daschle’s plan (S. 10), to the current Medicare

structure. Not only is Medicare in desperate need of modernization, it is financially

unstable. It would be unwise to allow the Health Care Financing Administration

(HCFA) to directly manage and control a drug benefit. CAGW agrees with the comments of Senator John Breaux (D–LA) at the last meeting of the Bipartisan Commission on the Future of Medicare:

‘‘As I’ve said before, I think putting surplus dollars into the Part A Trust

Fund doesn’t fix Medicare’s underlying program. I’ve likened it to putting

more gas in an old car—it still runs like an old car and doesn’t have any

of the features of a new car.’’

Medicare must be converted into a modern healthcare system that can provide innovative and up-to-date healthcare for our seniors. CAGW believes that the solution

to modernizing Medicare is what a majority of members on the Bipartisan Commission on the Future of Medicare recommended to fix the program. Medicare should

be restructured to resemble the Federal Employees Health Benefit Program

(FEHBP) that provides healthcare to members of Congress and nine million federal

employees, including the president. FEHBP offers about 245 privately run

healthcare plans nationwide. All the plans provide drug coverage and the program

uses customer choice to keep prices down and quality up.

Under this FEHBP-styled plan, seniors would be given the financial and institutional assistance necessary—better known as premium support—to buy governmentapproved private health insurance of their own choice. Seniors in economic need

would be given more assistance to purchase a plan. If this is not what they want,

they could choose to stay in the current government-run system.

An FEHBP model for Medicare would provide a wide range of choices for our nation’s seniors, from HMOs to PPOs to fee-for-service plans. Just as FEHBP allows

federal employees to pick a new health plan each year, seniors would be allowed

to pick a new one on an annual basis, as well.

Contrarily, Medicare uses price controls and rationing to control costs. Seniors

cannot shop for a new health plan each year and must accept HCFA’s choice on

what will be covered or not. As a result, Medicare effectively denies seniors access

to the most innovative technology. If supporters of a HCFA-run Medicare drug benefit have their way, it will not be too long before Congress and the agency begin

to ration and reduce payments to control pharmaceutical costs and usage, just as

has been done in prior years for other benefits and medical procedures.

If anyone doubts that Medicare would not deny coverage, ration or institute price

controls for a pharmaceutical benefit, one only needs to look how HCFA covers medical devices.

77

Medical devices can cover a wide range of technology used in healthcare. They

range from a simple test strip that is used to find how much glucose is in blood,

to a coronary angioplasty catheter, to a hip implant, to a Computerized Axial Tomography (CAT) scan that is used to view the inner workings of the human body.

Each has various degrees of complexity and vastly different functions.

Medical devices essentially go through two approval processes before they are

marketed to seniors. First, they must receive approval from the Food and Drug Administration (FDA) before they can be marketed to the general public. Then they

have to go through HCFA to win approval to be covered by Medicare.

One of the most important things for a medical device company to do is to obtain

a Medicare billing code for their product. When a medical device is used, the associated code will determine how much will be paid by HCFA and their contractors for

the procedure. If there is no appropriate code, reimbursement can be delayed and

doctors will be less likely to use the product.

Unfortunately for seniors, the process of getting an innovative device covered and

paid for is more complex and challenging in Medicare than in the private sector.

It often takes months or even years to get a code for a FDA-approved product. Without a code, proper payments are either delayed or uncertain. When this happens,

seniors often do not have access to the newest and best technologies.

It literally takes an act of Congress to get Medicare to cover some innovative technologies that are already used in the private sector insurance market. For example,

in 1997, there was a concerted bipartisan effort to pass a law to require Medicare

to cover:

• an annual screening mammography for women over age 39;

• triennial screening pap smear and screening pelvic exam for any woman (annually for a woman with cervical or vaginal cancer or other abnormality, or who

is at high risk of developing such a cancer), while providing for a waiver or deductible;

• annual prostate cancer screening tests;

• colorectal cancer screening tests, subject to prescribed frequency and payment

limits; and

• diabetes outpatient self-management training services, including blood-testing

strips glucose monitors for individuals with diabetes.

Fortunately, the bill was passed with bipartisan support, and signed into law by

President Clinton in December 2000. Now seniors are provided coverage for these

important diagnostic tools. But this should not be how Medicare is run or how seniors get access to important healthcare devices.

It is already a matter of life and death in that seniors must wait for HCFA’s approval so that Medicare provides access to a medical device. If this same protracted

process occurs regarding prescription drugs, this untenable scenario will be compounded.

According to the most recent report by the Medicare Trustees, the Medicare HI

trust fund (Part A) is estimated to go bankrupt in 2025. While this is much improved from prior estimates, the forecast is entirely dependent on future economic

trends and healthcare cost trends. Furthermore, by 2010, it is expected there will

be 3.6 workers for each HI beneficiary, and this will swiftly decline to 2.3 workers

for every HI beneficiary by 2030 when the last baby boomer reaches 65.

The Bipartisan Commission found that their FEHBP model proposal for Medicare

would be approximately budget neutral in its first five years (between 2000 and

2004 at the time the commission wrote the report.) Over the 10 years following, the

proposal would save approximately $100 billion. Over the longer term, the proposal

would reduce the growth of Medicare spending by approximately 1 percent a year.

The savings would accumulate slowly over time and by 2030 the annual budgetary

savings would range from $500 to $700 billion.

Prescription drug coverage for seniors must be made available, but simply adding

such coverage to the current Medicare system won’t work in the long run. First,

more needs to be done to make Medicare more efficient, agile, responsive and financially sound. CAGW believes the best way to save Medicare for the future and to

give control and choice back to our nation’s seniors is to modernize Medicare and

make it work like the plan that provides healthcare to our nation’s federal employees. After all, if FEHBP is good enough for Congress, it should be good enough for

our nation’s seniors.

f78

Statement of Healthcare Leadership Council

The Healthcare Leadership Council applauds Chairwoman Nancy Johnson for her

courageous efforts to maintain the goal of Medicare reform and bring the program

into the 21st Century.

The past couple of years have seen Medicare’s precarious bankruptcy date extended and the immediate pressure to reform the program lifted from Congress.

Chairwoman Johnson is to be applauded for continuing the dialogue on the issue

of Medicare reform and working toward a long-term solution, despite opportunities

for a short-term reprieve.

Even more dire than Medicare’s budgetary problems is Medicare’s inability to

keep up with private insurance coverage or with advances in health care technology.

An explosion in research has made the control and prevention of disease more

veritable than ever. Yet Medicare beneficiaries do not have access to prescription

drugs, limits on catastrophic out-of-pocket spending, many preventive benefits, and

a number of other health care products and services that are now enhancing and

saving the lives of those with employer health insurance including those enrolled

in the Federal Employees Health Benefits Program.

The HLC believes it is unrealistic to expect the federal government to finance a

comprehensive program with prescription drugs and other benefits under Medicare’s currently flawed structure. Recent estimates of spending on prescription drugs by

the Congressional Budget Office (CBO) have sharply increased, with spending on

drugs by Medicare beneficiaries in 2001 7 percent higher than estimated last year

and 23 percent higher by 2010.

Adding a costly drug benefit to today’s Medicare while it is facing insolvency, even

before peak enrollment by the baby boom generation, would further cripple the program. Instead, Medicare must embrace the innovations in health care delivery, benefit design, and cost management techniques that have occurred in the private sector in order to expand its benefit package and best serve its beneficiaries.

The Healthcare Leadership Council urges Chairwoman Johnson to continue her

efforts to work in a bipartisan manner and develop a plan for restructuring Medicare for the long term so that current and future beneficiaries can access the high

quality care and benefits they deserve. A reformed Medicare program that includes

a wide selection of private health plans competing for Medicare beneficiaries would

offer the highest quality of care and services, including prescription drugs and preventive benefits, at the most affordable price.

For the immediate future, HLC encourages Congress to begin incorporating elements of reform into the current Medicare program including a new streamlined

regulatory process that is neither burdensome nor complex, an accelerated coverage

process to ensure beneficiaries the latest medical technologies, a new independent

administering entity to encourage the success of the Medicare+Choice program and

any new benefits, a new method of measuring Medicare solvency for all Medicare

spending, and an improved Medicare+Choice payment methodology to increase the

availability of this program for Medicare beneficiaries.

The members of the Healthcare Leadership Council stand ready to assist the

Chairwoman and her subcommittee with their efforts to move Medicare toward assuring that, in the near future, its beneficiaries are able to take advantage of the

full potential our health care system has to offer.

Statement of National Association of Chain Drug Stores, Alexandria,

fVirginia

Introduction

Madame Chairman and Members of the Subcommitee. NACDS represents about

170 chain pharmacy companies that operate about 33,000 retail pharmacies all

across the United States. Chain pharmacy is the single largest segment of pharmacy

practice. We filled about 60 percent of the 3.1 billion prescriptions provided across

the nation last year.

NACDS appreciates this opportunity to provide comments today to the subcommittee on important Medicare reform issues. We are particularly interested in

sharing with the subcommittee our perspectives on providing prescription drug coverage to seniors. We believe that our experience in delivering and managing pharmacy benefits can be of value to the subcommittee as you begin your important

79

work this year in determining what works, and doesn’t work, for seniors in helping

them obtain their vital prescription medication and pharmacy services.

Develop a Pharmacy Benefit, Not Only a ‘‘Drug’’ Benefit

Today, when a patient arrives at their local community pharmacy, be it a chain

pharmacy or an independent, they come into contact with one of the most accessible

and trusted providers in the entire health care system. It is estimated that 95 percent of Americans live within five miles of a retail community pharmacy.

Thus, the vast majority of Americans are never far from a highly trained health

professional that can provide medications or advice on a wide range of health care

issues. Convenient access to community pharmacies makes us a critical part of society’s health care safety net.

Prescription medications are the most widely used and cost-effective health care

interventions used by patients today. Modern prescription drugs have extended and

improved the lives of millions of Americans and saved millions of dollars through

shortened length of illnesses, increased productivity, and reductions in hospitalization and medical procedures. Community pharmacy is proud of the role we have in

assuring the safe and effective use of these therapies.

That is why we believe that any new program to expand prescription drug coverage to seniors should be a pharmacy benefit, not just a prescription drug benefit.

Too often, we think of a prescription drug benefit as only providing a ‘‘drug product’’

to seniors. We believe that this is a serious mistake. Seniors take three times more

prescription medications than younger individuals. For that reason, seniors need

ready access to community-pharmacy-based education, counseling, and medication

therapy management, in addition to the drug product, so they can take their medications appropriately to achieve the intended medical outcomes.

We believe that insurers, payors, pharmaceutical manufacturers, and seniors

themselves can agree that these important community-based pharmacy services

help make better use of prescription products. To play off a popular catch-phrase,

‘‘pharmacy doesn’t make the drugs, but pharmacy does make the drugs work more

effectively.’’

We applaud forward thinking members of this subcommittee who supported inclusion of medication therapy management services in various prescription drug proposals introduced last year. It is absolutely critical that any Medicare prescription

drug benefit that Congress approves includes coverage for these services.

Don’t Over Promise Seniors and Understand the Market

Regardless of how seniors obtain their prescription drugs, whether through public

or private prescription programs or by paying out of pocket, community retail pharmacies are in a good position to help evaluate for the subcommittee the effectiveness

of various options for prescription drug coverage.

When considering approaches to prescription drug coverage, we believe that two

good principles for the subcommittee to keep in mind are: first, don’t over promise

seniors; and second, make sure that you understand how all the pieces fit together

in the pharmacy marketplace.

For example, many of you often receive mail from constituents asking the simple

question: ‘‘Why do my drugs costs so much?’’ Currently, reimbursement for almost

85 to 90 percent of all prescriptions is set by third party plans, such as insurance

companies, HMOs or PBMs. Third party plans keep squeezing down reimbursement

rates in order to control exploding costs, but these policies do little to control escalating expenditures. Under these plans, most patients simply pay a copay for these

prescriptions. Patient copays have been increasing over the last few years also because of the escalating costs of prescription benefit programs.

Having said this, we are concerned about policy approaches, both at the Federal

level and the state level, that would seek to target retail prescription prices as the

solution to the high cost of prescription drugs for seniors. The subcommittee should

be aware that almost 80 percent of the cost of the average retail prescription price

represents costs to the pharmacy over which we have absolutely no control. These

are predominantly the costs of acquiring the drug product from the manufacturer,

which is passed through to the consumer, and thus reflected in the retail price

charged.

The remaining 20 percent of the prescription price represents our operating costs,

such as heat, light, rent, salaries, computers, counseling, and other overhead expenses. Currently, our salary budgets are experiencing significant upward pressures

as a result of the critical pharmacist shortage. We look forward to working with you

this year, Madame Chairman, on alleviating this shortage and assuring an adequate

supply of pharmacists exists to serve all Americans, including Medicare beneficiaries.

80

1Massachusetts Institute of Technology, The HOPE Plan and the Section 271 Discount Drug

Purchase Program for Massachusetts: An Economic Analysis. December 21, 2000. 2Price Discounting Practices for Pharmaceuticals in the U.S. The Lewin Group, April 2000.

With this as background, we will now provide some of our perspectives and cautions on other approaches that you may consider this year.

Prescription Drug ‘‘Cash Discount Cards’’: Unfulfilled Promise

Retail pharmacies have no upward negotiating leverage with brand name drug

manufacturers, so any initiatives that seek to control or limit our retail charges do

nothing to affect our cost of buying the drug. For example, so-called prescription

‘‘cash discount’’ card programs essentially require pharmacies to provide a discount

on the retail prescription price, without lowering our cost of providing the product.

In other words, the pain doesn’t flow upstream.

We also believe that these prescription cash discount cards create unfulfilled

promises for seniors. If a senior cannot afford a drug at $100, it is very unlikely

that the senior can afford it at $90. In addition, as stated above, many of our pharmacies already give senior citizen discounts, which reduce the retail price essentially to the price that the senior would pay under the cash discount card. Finally,

many of these cash discount card programs also often use out-of-state mail order

as an incentive to steer patients to certain drugs that may be inappropriate for the

senior. Mail order also takes the senior out of the neighborhood pharmacy setting.

On this topic, we’d like to draw your attention to a recent report from the Massachusetts Institute of Technology that said, ‘‘the individuals who face the greatest

burden lack insurance coverage for prescription drugs are in relatively poor health

with severe chronic conditions, have relatively low income, and do not qualify for

existing state prescription drug coverage programs. These individuals need benefits

that far exceed the savings attainable from a pure discount card program.’’ 1

The Myth of Volume Pharmaceutical Purchasing

Some may say that you can obtain better prescription prices for the elderly by

‘‘pooling their purchasing power’’ so that they can get the same volume discounts

obtained by other pharmaceutical purchasers. Be wary of this line of argument, because the pharmaceutical marketplace doesn’t work that way. Volume purchasing

does not drive pharmaceutical manufacturers to give discounts—you have to move

a manufacturer’s ‘‘market share’’ to obtain these discounts.

If ‘‘volume purchasing’’ drove manufacturer discounts, then why do the largest

pharmaceutical purchasers, such as large chain pharmacies, as well as many of the

independent pharmacies that belong to large buying groups, pay higher prices for

brand name drugs than smaller pharmaceutical purchasers who buy less volume?

Here’s what the proponents of ‘‘volume purchasing’’ for seniors don’t and won’t tell

you. All this really amounts to is simply discounting the retail prescription price

that seniors pay at their pharmacy, without affecting retail pharmacy’s cost of buying the drug, or without requiring the insurance plan or PBM to ‘‘pass through’’ to

the senior any and all of the financial incentives that are given to them by the manufacturer. If these plans were required to pass through all the discounts that they

negotiate, both pharmacy discounts and manufacturer discounts, the senior would

truly benefit from lower prescription drug prices. Without requiring full ‘‘pass

throughs,’’ from the manufacturer, the entire burden of so-called ‘‘volume purchasing’’ falls squarely and unfairly on the shoulders of community pharmacies.

We also believe that some of the estimates being made of the size of the discounts

that volume pharmaceutical purchasing would attain for seniors are unrealistic and

will create serious unfulfilled promises. For example, there were several numbers

floating around last year that indicated that private sector entities, or PBMs, would

be able to lower retail prescription prices paid by consumers by 25 percent, with

some estimates as high as 30 to 39 percent.2

We do not know where these numbers come from or how they are calculated. The

only remotely conceivable way that this discount size could be attained is if the

PBM is required to pass along to the consumer any and all financial incentives (e.g.

rebates or discounts) that they negotiate with pharmaceutical manufacturers. This

does not happen today in the marketplace and is creating false and unrealistic expectations.

‘‘Drugs Only’’ Plans and Insurance-Based Models

We recognize that there is support among Members of Congress for creating

‘‘drugs only’’ insurance-based models to provide prescription drug coverage to seniors. Recent experience in the state of Nevada, however, should tell us that, just because you ‘‘build it,’’ doesn’t mean that ‘‘seniors will come.’’ In a genuine effort to

81

3 Insurers Push Rates Higher for Medicare Supplement. Milt Freudenheim, New York Times,

February 8, 2001. 4Pharmacy Benefit Managers, GAO/HEHS–97–47, U.S. General Accounting Office, February

1997.

help seniors obtain prescription drugs, Nevada embarked upon establishing an insurance-based model to provide prescription drug coverage. After several attempts

to finally find a company that wanted to administer the program, reports are that

only a handful of seniors have signed up because of the high premiums and significant cost sharing in the program.

We are concerned about a similar fate if such an approach is tried at the Federal

level. In general, these programs are subject to significant ‘‘risk selection,’’ and tend

only to attract those seniors that need protection against high prescription drug

bills. Many seniors will not see the benefit in obtaining this coverage because of the

significant deductibles and premiums that have to be paid before any benefit is derived from the coverage. Thus, because the cost will keep many seniors out of the

‘‘risk pool,’’ premiums will keep increasing for those remaining in the pool, making

it less and less affordable for those that need the coverage.

Moreover, the cost of these private-sector insurance plans can also be prohibitive,

as was recently reported in the New York Times. The premiums for Medigap plans

with prescription drug coverage, the model on which these insurance-based programs are based, will increase 31 percent in New York, 26 percent in Illinois, 24

percent in Wisconsin, 16 percent in Arizona, and 14 percent in Ohio.3

Finally, only one entity to date has indicated interest in creating an insurance

product in the market that would operate by assuming risk for senior drug coverage.

The insurance and PBM industry has demonstrated little enthusiasm for this concept. So, with only one competitor, it is difficult to see how competition would or

could actually work under this model. Moreover, we all should be concerned that

this one entity is a subsidiary of a drug manufacturer, which increases the likelihood that these manufacturers’ drug products, rather than the one that is best for

the patient, will be more frequently dispensed than others.

‘‘Premium Support’’ Models, Risk-Based Capitated Financing, and PBMs

We also believe that the subcommittee should consider the implications for quality

of care and cost of using a competition-based ‘‘premium support’’ model for Medicare

beneficiaries, financing the benefit through risk-based capitation, and delivering the

benefit through pharmaceutical benefit managers, also known as PBMs.

Almost all proposed models, to provide a prescription drug benefit to seniors, use

a PBM in some way, shape, or form. For example, some proposals would require

that an agency of the Federal government contract with one or more PBMs to provide a pharmacy benefit.

Other proposals would establish ‘‘prescription drugs only’’ insurance policies for

Medicare beneficiaries that could be voluntarily purchased in the private marketplace. Many of these proposed insurers would likely partner with PBMs to administer these plans. PBMs can serve several useful functions in the design and delivery of a new pharmacy benefit for seniors. However, NACDS believes that policymakers need to evaluate the implications for quality of care and cost of several management tools currently used by PBMs.

PBMs Achieve Savings by Focusing on Squeezing Pharmacy Reimbursement: How effective are PBMs at reducing the cost of drug products? How do PBMs

achieve most of their savings? Our experience is that they achieve the overwhelming

majority of their savings by squeezing down on pharmacy reimbursement, not by

aggressively negotiating rebates and discounts from drug manufacturers.

Evidence suggests that PBMs are relatively ineffective at managing drug costs,

and actually add expense to the system that could otherwise be passed along to the

consumer. For example, a 1997 GAO study said: ‘‘Much of the savings that PBMs

achieve appear to come from the lower prices paid to pharmacies rather than from

the rebates offered by drug manufacturers.’’ 4 The study found that 50 percent to 70

percent of the drop in the plans’ spending on prescription drugs resulted from lower

retail prescription prices. Only 2 to 21 percent of the savings resulted from manufacturer rebates that the PBMs shared with the health insurance plans.

This study reflected the experience of the three largest PBMs that manage the

9-million member Federal Employees Health Benefits Program (FEHBP). Members

of Congress should be aware that this program, which is being talked about as the

basis for a future Medicare ‘‘premium support’’ model, has been experiencing doubledigit increases in prescription drug expenditures over the last several years, 22 percent for 1998 alone.

82

5Drug manufacturer direct to consumer advertising spending increased to $1.9 billion for the

period January–September 2000.

We believe that the experience of FEHBP should be instructive to Members of

Congress as they consider the ‘‘premium support’’ model for Medicare. Please note

that these prescription drug cost increases are occurring in a population that is not

representative of the Medicare population. FEHBP generally serves a younger population that uses fewer prescription drugs than the Medicare population. More significant increases are likely to occur in an older, Medicare-based population.

Risk-Based Financing: Some proposals would finance a senior drug benefit by

shifting ‘‘full or partial financial risk’’ to the private sector entity managing the benefit. Under these approaches, a plan would receive a fixed or ‘‘capitated’’ amount to

provide all the beneficiaries’ prescription drug needs, regardless of the cost of those

drugs, or the number of drugs being taken. These ‘‘full or partial financial risk’’

capitation approaches have significant potential negative implications for quality of

care.

That is because providers are placed at risk for the cost of purchasing and dispensing drug products and providing pharmacy services, over which they have no

control. For example, to stay below the reimbursement ‘‘cap,’’ drugs that are less expensive but less effective may be provided to the patient. Ironically, under this

model, the drug manufacturers, who are driving the overwhelming majority of the

increases in drug spending due to DTC advertising and higher drug prices,5 bear

none of the risk.

Because of the unpredictability in prescription drug utilization, there are very few

private-sector prescription drug benefit programs that are fully or partially

capitated, and there are none for older Americans that uses this type of approach.

Past experiences in using capitation models for pharmacy benefits have been unsuccessful. There is no reason to believe that they would be any more successful today,

given the impact that manufacturer direct-to-consumer advertising has had on fostering increased prescription drug use.

Of further concern are recent reports that the Congressional Budget Office has

sharply increased its estimates of prescription drug spending by the elderly, escalating the cost of potential new Medicare drug benefit by one-third. This phenomenal growth in drug spending by the elderly should give us more pause to really

question the impact of a capitated drug benefit on seniors, and whether PBMs really

have the ability to manage these exploding costs.

Finally, providing ‘‘drugs only’’ capitated policies results in a serious ‘‘disconnect’’

in the integrated financing of health care. That is because under a capitated drug

benefit approach, insurers or PBMs only have incentives to hold down their drug

spending, without assessing how increasing (or decreasing) drug spending will impact overall health care spending for a patient. This leads to fragmented and disjointed health care for the patient, and thus could potentially compromise quality

of care.

Participation by Pharmacies as ‘‘Eligible Entities’’: It is important to note

that many of the bills would allow ‘‘networks of pharmacies’’ or ‘‘retail pharmacy

delivery systems’’ to contract directly with a Federal government agency or an insurance company to provide a capitated drug benefit to seniors. While we appreciate

the interest in enabling pharmacies participating as ‘‘eligible entities,’’ it is highly

unlikely that we will do so for two reasons.

First, many retail pharmacies (or retail pharmacy networks or delivery systems)

are not licensed in states as ‘‘insurers,’’ and would unlikely be willing to assume

capitated ‘‘risk’’ for the delivery of a drug benefit. This is especially the case since

pharmacies have little ability to control physician prescribing patterns or drug manufacturer advertising.

Second, even though retail pharmacies purchase, at significantly larger volume,

greater quantities of pharmaceuticals than most other pharmaceutical purchasers,

drug manufacturers charge them much higher prices for the same prescription

drugs than other smaller purchasers, such as Medicare+Choice plans. This will

place community retail pharmacies at a competitive disadvantage to these other entities that may want to bid to offer a drug benefit.

This market distortion is a fundamental inequity in the system, which belies the

whole premise that ‘‘competition’’ actually exists or even works in the pharmaceutical marketplace. If retail pharmacies were given the same access to the discounts that drug manufacturers make available to other, smaller purchasers, the

overall cost of the Medicare drug benefit would be reduced by billions of dollars. Prescription drugs would also be more affordable for other private prescription drug

plans, as well as millions of uninsured non-elderly Americans.

83

6Kaiser Family Foundation. ‘‘The Medicare Program’’ Issue Brief, October 2000.

Medication Therapy Management: Almost all Medicare proposals would require that quality assurance, drug use review, and medication therapy management

services be provided to Medicare beneficiaries under these plans. Medication therapy management services include disease state management, medication compliance

programs, and drug use review. These programs have been documented to improve

prescription use, reduce medication errors, and save money.

Community retail pharmacy believes that the provision of medication therapy

management services is an important part of a Medicare pharmaceutical benefit. As

prescription medication therapy becomes more potent and complex, the need for

these services will only increase. Pharmacists have been performing these functions

for many years to improve quality patient care.

However, most PBMs do not incorporate medication therapy management programs into their benefit packages. Pharmacists are usually paid for dispensing pharmaceuticals only, not for the important activities involved in helping to manage the

appropriate use of pharmaceuticals by patients. While it is the local community

pharmacist that provides these services, insurance companies and PBMs continue

to squeeze down on the pharmacist reimbursement for prescriptions—so much so,

that it is impossible for them to provide these important patient care services. We

have to make sure that Medicare beneficiaries have access to these services, and

that pharmacists are compensated for providing them.

So . . . What Works for Seniors?

What works for seniors in terms of providing them a meaningful pharmacy benefit?

For the short term, we believe that the best course that Congress can take is to

provide Federal funds to states to help low income seniors obtain this pharmacy

benefit. We know that there are many mixed feelings among Members of Congress

about this approach. However, given that almost every state is now considering enacting or developing some form of prescription assistance program for seniors, we

believe that states are in a good position, right now, to help those most in need.

And data indicate that 60 percent of those seniors without prescription drug coverage, or about 7.2 million seniors, have incomes of less than 200 percent of poverty.6 We see many of these seniors in our pharmacies every day, struggling to pay

their prescription bills. For them, they just want some help to get them their medications.

For the long term, we want to work with this Committee, the rest of the Congress,

and the Administration to achieve long term reform of the Medicare program to provide the type of quality pharmacy benefit that seniors need and deserve.

We believe that this benefit should:

• promote the utilization of generic drugs when appropriate;

• provide seniors with access to meaningful, community-based medication therapy

management services with appropriate compensation for pharmacies;

• not be financed through risk-based capitation because of an inability to control

prescription utilization, with a potential negative impact on seniors’ quality of

care;

• give seniors access to the community-based pharmacy provider of their choice;

• not economically coerce seniors to use other prescription delivery mechanisms,

such as out-of-state mail order;

• not include price controls on retail pharmacy prices, including prescription cash

discount card programs; and,

• assure that community pharmacies are adequately compensated in providing

services to meet the needs of our nation’s seniors.

We look forward to working with you and the Committee on these issues, and

thank you for the opportunity to submit these comments today for the record.

Chairman Johnson and members of the Subcommittee, we thank you for holding

Statement of TREA Senior Citizens League, Alexandria, Virginia

f this series of hearings to discuss Medicare reform and a prescription drug benefit.

TREA Senior Citizens League (TSCL) is a national group of over 1.3 million politically active seniors concerned about the protection of their earned Social Security,

Medicare, military, and other retirement benefits. Our supporters are among the

poorest of the poor and the oldest of the old. Every day we receive letters and mail

84

urging us to help these folks get by. A huge part of the problem they face is in covering prescription drug costs.

Poverty in our country is defined as individuals having incomes below $8,350 and

couples with incomes of $11,250 or below. Many of our members, who have no other

financial resources except Social Security and Medicare, already live below, or are

at risk of falling below, the poverty line.

Think for a minute about how you would live on $8,350 a year.

Why We Need Medicare Reform Now

The Medicare program has been responsible for a major reduction in poverty in

our country and improvement in the health of American seniors, but the safety net

is unraveling. The program needs modernization to cover prescription drug and catastrophic costs. In addition changing demographics pose tremendous future financial

challenges.

Forty million Americans receive Medicare benefits. Currently Medicare recipients

are often forced to piece together a patchwork of stop-gap measures in order to afford health care. Currently, only one in four employers provides health care benefits

for retirees, down from 40% in 1994. Since 1998, more than 1.6 million Medicare

recipients have been forced to find other health care plans when their private managed care plan raised premiums, cut benefits or withdrew from Medicare altogether.

According to our studies of the insurance industry, Medigap health care premiums

are expected to rise this year by an average 18%, following increases in 2000 of

10%–30%. Spending on prescription drug costs is expected to rise by about 21% in

2001 after an increase of about 18.4% in 2000. The average senior spends $3,142

a year in out-of-pocket health care costs. Those in poor health and with no supplemental insurance must spend even more—$4,478.

Nationally, about one third of all Medicare recipients have some prescription drug

coverage, but approximately 44% of TSCL members report that they have no prescription drug coverage.

How We Should Proceed

Currently, the debate over reforming Medicare and adding prescription drug coverage has centered on the following three approaches:

• Adding a universal prescription drug benefit to traditional fee-for-service Medicare and Medicare+Choice plans now, and reform the program later.

• Providing temporary block grants to the states for prescription drug assistance

for low-income Medicare recipients until the program can be reformed.

• Offering a universal prescription drug benefit within the context of an overall

Medicare reform. This would include a Federal Employee Health Benefit Plan

‘‘premium-support’’ model in which a fee-for-service Medicare program would

compete for business, along with private plans.

TSCL favors adding a voluntary universal prescription benefit now, with some

modernization. More extensive reform could be implemented slowly and incrementally. TSCL feels temporary block-grants to the states are only a stop-gap measure

that would take too much time to implement to be effective. To date, only 22 out

of 50 states already have prescription drug plans. States without the programs

would have to go through the legislative process of setting one up and by that time

the four-year funding would be over. Statistics show that a large majority of seniors

who are eligible for such programs do not receive the help to which they are entitled, some, because they don’t know it exists—others because they don’t want to feel

they must accept welfare.

On the other hand, Medicare reforms should not be rushed. In 1997 Congress and

President Clinton passed the most sweeping reforms since the Medicare program

was enacted. Those reforms led to the unintended consequences of widespread nursing home bankruptcies, severe cut-backs in home health services, and more than

1,634,000 Medicare managed care patients being forced out of their Health Maintenance Organizations (HMOs)—all of which translated to higher out-of-pocket costs

for beneficiaries.

Regardless of what features a reformed Medicare takes, however, prescription

drugs will be part of it. Therefore, adding the benefit now would be the critical first

step. TSCL feels that the following criteria are essential to designing a prescription

drug benefit. A prescription drug benefit should be:

Universal—Medicare serves 40 million Americans. The benefit package is universal, and therefore any new benefits must also be universal, not just offered to

one group, or in one region of the country.

Voluntary—Medicare recipients who are happy with their current prescription

drug coverage should not be forced to give up. In like manner, the government

should not create perverse incentives for employers to REDUCE retiree health care

85

and prescription drug benefits, but should give incentives for retention of benefit

plans.

Provides choice—Although much attention is given to reforming Medicare along

the lines of private managed care and the Federal Employee Health Benefit Plan,

it has not been proven that either model saves the government money. The majority

of Medicare recipients continue to receive their care through traditional fee-for-service Medicare. Medicare recipients should have the freedom to remain in the type of

health care plan of their choice.

Affordable—Driven by rising prescription drug costs, many health plans are reducing prescription drug benefits. Prescription drug coverage is increasingly an option available only to higher income retirees or those on Medicaid. TSCL favors prescription drug plans that provide full support to seniors below 135 percent of the

poverty line. In addition, TSCL supports plans priced so that middle income seniors,

(individuals with incomes of $15,000 to $20,000) can afford to purchase coverage.

A plan that is so expensive that no senior will purchase it is no protection at all.

Guarantees a standard basic drug benefit—Seniors need a reliable basic benefit.

Such coverage should include an affordable deductible, fair and reasonable costsharing arrangements, and catastrophic coverage for those with large drug costs.

Medicare recipients should not be forced to comb through the fine print of marketing materials to ensure their plan actually covers their needs.

Provides greater cost efficiencies—Modern drug coverage plans use private pharmacy benefit managers (PBMs) to negotiate lower prices and administer drug plans.

In like manner, such PBMs can help Medicare contain costs either under a traditional or modernized program. TSCL also believes that greater use of generics, alternative treatments, and improved management of prescription drug therapies to reduce over-medication and dangerous drug interactions would lead to better health

care outcomes at lower cost.

How Will We Pay For A Prescription Drug Benefit?

TSCL thanks President Bush and the members of Congress from both parties who

have promised to provide prescription drug benefits and protect Medicare. While our

nation still has the finances to do so, we urge Congress not only to set aside the

$400 billion of surplus in the Medicare lock box, we also urge Congress to set aside

an additional amount to finance a new prescription drug benefit.

This is important because Medicare is financed to two parts. Hospital costs (Part

A) are financed out of Medicare payroll taxes. This is the lock box surplus. Part B

Medicare, however, is financed 75% from the general revenues (the non-trust fund

surplus) and 25% from premiums paid by Medicare recipients. Part B currently represents about 40% of total Medicare expenditures and is growing faster than Part

A expenditures. A new prescription drug benefit will add new costs. TSCL therefore

urges Congress to set aside a reasonable portion of the budget surplus from the general revenues PRIOR to enacting a tax cut in order to shore up Medicare Part B

and to pay for a prescription drug benefit.

TSCL further believes that Congress should consider that U.S. taxpayers, through

taxpayer-subsidized research, are ‘‘co-investors’’ with the pharmaceutical companies

that have profited financially from drug patents. We therefore feel it appropriate to

consider measures that would more equitably ‘‘share the profits’’ of taxpayer-subsidized research with Americans most in need of the product—Medicare recipients.

We are honored for this opportunity and thank you again for your leadership.

TSCL appreciates all efforts of the Bush Administration and Congress. We look

forward to working together to find solutions that would best benefit all older Americans.

TSCL is registered as a 501(c)(4) citizens action organization. Open to anyone concerned about protecting earned benefits, TSCL is registered to conduct grass roots

lobbying, public education, and fundraising activities in nearly every state. No government moneys are accepted or utilized by TSCL.

Æ