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74–223 2001

FIFTH IN SERIES ON MEDICARE REFORM:

STRENGTHENING MEDICARE: MODERNIZING

BENEFICIARY COST SHARING

HEARING

BEFORE THE

SUBCOMMITTEE ON HEALTH

OF THE

COMMITTEE ON WAYS AND MEANS

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

MAY 9, 2001

Serial No. 107–21

Printed for the use of the Committee on Ways and Means

(

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

PHIL ENGLISH, Pennsylvania

WES WATKINS, Oklahoma

J.D. HAYWORTH, Arizona

JERRY WELLER, Illinois

KENNY C. 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

PHIL 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.

iii

C O N T E N T S

Page

Advisory of May 2, 2001, announcing the hearing ............................................... 2

WITNESSES

Library of Congress, Jennifer O’Sullivan, Specialist in Social Legislation,

Congressional Research Service .......................................................................... 10

U.S. General Accounting Office, William J. Scanlon, Ph.D., Director, Health

Care Issues ........................................................................................................... 16

Commonwealth Fund, Karen Davis ....................................................................... 31

Direct Research, LLC, Christopher Hogan ............................................................ 25

SUBMISSION FOR THE RECORD

United Healthcare Insurance Company, statement ............................................. 68

(1)

FIFTH IN SERIES ON MEDICARE REFORM:

STRENGTHENING MEDICARE: MODERNIZING

BENEFICIARY COST SHARING

WEDNESDAY, MAY 9, 2001

HOUSE OF REPRESENTATIVES, COMMITTEE ON WAYS AND MEANS, SUBCOMMITTEE ON HEALTH, Washington, DC.

The Subcommittee met, pursuant to notice, at 2:11 p.m., in room

1100 Longworth House Office Building, Hon. Nancy Johnson

(Chairwoman of the Subcommittee) presiding.

[The advisory announcing the hearing follows:]

2

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

SUBCOMMITTEE ON HEALTH

FOR IMMEDIATE RELEASE CONTACT: (202) 225–3943

May 2, 2001

HL–7

Johnson Announces Fifth Subcommittee Hearing

in Series on Strengthening Medicare: Modernizing Beneficiary Cost Sharing

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

Health of the Committee on Ways and Means, today announced that the Subcommittee will hold a hearing on beneficiary cost sharing. The hearing will take

place on Wednesday, May 9, 2001, in the main Committee hearing room,

1100 Longworth House Office Building, beginning at 2:00 p.m.

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

hearing will be from invited witnesses only. Witnesses will include program experts

on beneficiary cost sharing under the Medicare benefit and Medigap insurance coverage. 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:

The structure of Medicare beneficiary cost sharing in the fee-for-service program

reflects the insurance practices at the inception of the Medicare program in 1965.

As such, more than 35 years later, beneficiaries are confronted with irrational and

confusing cost-sharing which does not reflect the current delivery of health care.

For example, the program has two different deductibles—a $792 deductible for

Part A and a $100 deductible for Part B. This means that when a beneficiary is

hospitalized for an in-patient procedure and less likely to be sensitive to pricing

issues, the beneficiary is faced with a significant deductible. In addition, after a beneficiary has been hospitalized for 60 days, the beneficiary must then pay $198 coinsurance per day for days 61 through 90. There is a separate $100 Part B deductible

for out-patient procedures, which is arguably more discretionary, never having been

indexed to inflation.

Unlike 97 percent of private health policies, the Medicare fee-for-service program

still lacks catastrophic insurance protection for those with serious health conditions.

Medicare Part B, which is financed 25 percent from beneficiary premiums—about

$50 per month—and 75 percent from the General Fund, has unlimited beneficiary

cost-sharing. Part B has different coinsurance depending on the service—none for

lab or home health, 20 percent for physician services and supplies, and close to 50

percent for hospital outpatient services.

In total, due to cost-sharing obligations and Medicare’s limited benefit package,

nearly half of seniors’ health care costs are not covered by Medicare. As a result,

90 percent of beneficiaries have some type of supplemental coverage. Those with retiree coverage from their former employers generally receive generous benefits, including catastrophic protection and good prescription drug coverage. The poorest

beneficiaries receive wrap-around coverage through Medicaid.

Medicare’s confusing and irrational cost-sharing has also induced 29 percent of

beneficiaries to purchase Medigap insurance. In 1990, Congress created 10 standardized Medigap policies. Nine out of 10 of those policies, which comprise more than

3

90 percent of the Medigap market, are required to cover the Part A deductible, and

the most popular Medigap policy covers both deductibles. Numerous studies have

demonstrated that covering the deductibles has led to markedly higher Medicare

spending because beneficiaries become insensitive to costs. In addition, only the

three most expensive Medigap plans cover prescription drugs, and that coverage is

limited. Yet, eight of the 10 plans are required to cover foreign travel insurance,

while most beneficiaries never leave the country.

In announcing the hearing, Chairwoman Johnson stated: ‘‘A critical element of

strengthening Medicare is modernizing the fee-for-service program’s byzantine costsharing structure. No one designing a seniors’ health program today would construct

such a convoluted and irrational cost-sharing structure for beneficiaries. The system

is a patchwork of outdated policies that fail to protect beneficiaries or taxpayers. We

must learn from our experience and work to ensure a more consistent and understandable system for the future.’’

FOCUS OF THE HEARING:

The hearing’s panel will include private and public experts on the Medicare feefor-service program’s beneficiary cost sharing. They will describe in detail the current structure of beneficiary cost-sharing and the incentives that have arisen from

the benefit design. In addition, there will be a focus on the structure and policy implications of Medigap.

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, Tuesday, May 23, 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 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://waysandmeans.house.gov’’.

4

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.

Chairwoman J

Today will be the fifth Subcommittee hearing on modernizing the

OHNSON. The hearing will come to order.

f Medicare program. In earlier hearings, we examined new ideas on

Medicare reform. We solicited proposals to reduce the regulatory

burden on providers and beneficiaries. We examined the adequacy

and the usefulness of the current definition of Medicare solvency.

We brought forth new information to lay the groundwork for a prescription drug benefit, and we heard about the importance of the

Medicare Plus Choice program to beneficiaries and evaluated ideas

to strengthen that program.

Today, we turn to modernizing the fee-for-service Medicare Program’s beneficiary cost sharing. The structure of Medicare beneficiary cost sharing in the fee-for-service program reflects the insurance practices at the inception of the Medicare Program in 1965.

As such, more than 35 years later, beneficiaries are confronted

with irrational and confusing cost-sharing requirements which do

not reflect the current delivery of health care.

For example, the program has two different deductibles, a $792

deductible for Part A and $100 deductible for Part B. This means

that when a beneficiary is hospitalized for an inpatient procedure

and least likely to be sensitive to pricing issues, the beneficiary is

faced with a significant deductible.

In addition, after a beneficiary has been hospitalized for 2

months, the beneficiary must then pay $198 coinsurance per day

for day 61 through 90. This simply makes no sense.

At the same time, the $100 Part B deductible for outpatient procedures, which are arguably more discretionary, has never been indexed to inflation. Unlike 97 percent of private health policies, the

Medicare fee-for-service program still lacks catastrophic insurance

protection for those with serious health conditions. Medicare Part

B has unlimited beneficiary cost sharing. Part B has different coinsurance depending on the service, none for lab or home health, 20

percent for physician services and supplies, and close to 50 percent

for hospital outpatient services and mental health services.

This Committee has made progress in three consecutive Medicare bills to substantially reduce beneficiary cost sharing for outpatient hospital services, but more needs to be done. In total, due

to cost-sharing obligations and Medicare’s limited benefit package,

nearly half of seniors health care costs are not covered by Medicare. As a result, 90 percent of beneficiaries have some type of supplemental coverage. Those with retiree coverage from their former

employers generally receive generous benefits, including catastrophic protection and good prescription drug coverage. The poorest beneficiaries receive wrap-around coverage through Medicaid.

Medicare’s confusing and irrational cost sharing has also induced

29 percent of beneficiaries to purchase Medigap insurance.

5

In 1990, Congress created 10 standardized Medigap policies.

Nine out of the 10 of those policies, which comprise more than 90

percent of the Medigap market, are required to cover the Part A

deductible, and the most popular Medigap policy covers both

deductibles. Numerous studies have demonstrated that covering

the deductibles has led to markedly higher Medicare spending because beneficiaries become insensitive to costs.

In addition, only the three most expensive Medigap plans cover

prescription drugs, and that coverage is limited. Yet, 8 of the 10

plans are required to cover foreign travel insurance while most

beneficiaries never leave the country. Between 1998 and 2000,

Medigap premiums have escalated by 15.5 percent for plans without drug coverage and 37 percent for those with drug coverage.

Modernizing beneficiary cost sharing must include appropriate

changes in Medigap.

A critical element of strengthening Medicare is modernizing the

fee-for-service programs’ byzantine cost-sharing structure. No one

designing a senior’s health program today would construct such a

convoluted and irrational cost-sharing structure for beneficiaries.

The system is a patchwork of outdated policies that fail to protect

beneficiaries or taxpayers. We must learn from our experience and

work to ensure a more consistent, understandable, and affordable

system for the future.

Mr. Stark.

[The opening statement of Chairwoman Johnson follows:]

Opening Statement of the Hon. Nancy L. Johnson, a Representative in Congress from the State of Connecticut, and Chairwoman, Subcommittee on

Health

Today will be the fifth subcommittee hearing on modernizing the Medicare program. In earlier hearings we examined new ideas on Medicare reform, we solicited

proposals to reduce the regulatory burden on providers and beneficiaries, we examined the adequacy and usefulness of the current definition of Medicare solvency, we

brought forth new information to lay the ground work for a prescription drug benefit, and we heard about the importance of the Medicare+Choice program to beneficiaries and evaluated ideas to strengthen that program. Today, we turn to modernizing the fee-for-service program’s beneficiary cost-sharing.

The structure of Medicare beneficiary cost sharing in the fee-for-service program

reflects the insurance practices at the inception of the Medicare program in 1965.

As such, more than 35 years later, beneficiaries are confronted with irrational and

confusing cost-sharing which does not reflect the current delivery of health care.

For example, the program has two different deductibles—a $792 deductible for

Part A and a $100 deductible for Part B. This means that when a beneficiary is

hospitalized for an in-patient procedure and least likely to be sensitive to pricing

issues, the beneficiary is faced with a significant deductible. In addition, after a beneficiary has been hospitalized for two months, the beneficiary must then pay $198

coinsurance per day for days 61 through 90. This simply makes no sense. At the

same time, the $100 Part B deductible for out-patient procedures, which are arguably more discretionary, has never been indexed to inflation.

Unlike 97 percent of private health policies, the Medicare fee-for-service program

still lacks catastrophic insurance protection for those with serious health conditions.

Medicare Part B has unlimited beneficiary cost-sharing. Part B has different coinsurance depending on the service—none for lab or home health, 20 percent for physician services and supplies, and close to 50 percent for hospital outpatient services.

This Committee has made progress in three consecutive Medicare bills to substantially reduce beneficiary cost-sharing for outpatient hospital services. But more

needs to be done.

In total, due to cost-sharing obligations and Medicare’s limited benefit package,

nearly half of seniors’ health care costs are not covered by Medicare. As a result,

90 percent of beneficiaries have some type of supplemental coverage. Those with retiree coverage from their former employers generally receive generous benefits, inVerDate 11-MAY-2000 11:28 Sep 21, 2001 Jkt 074223 PO 00000 Frm 00009 Fmt 6633 Sfmt 6621 E:\HR\OC\A223.XXX pfrm01 PsN: A223
6

cluding catastrophic protection and good prescription drug coverage. The poorest

beneficiaries receive wrap-around coverage through Medicaid.

Medicare’s confusing and irrational cost-sharing has also induced 29 percent of

beneficiaries to purchase Medigap insurance. In 1990, Congress created 10 standardized Medigap policies. Nine out of 10 of those policies, which comprise more than

90 percent of the Medigap market, are required to cover the Part A deductible, and

the most popular Medigap policy covers both deductibles. Numerous studies have

demonstrated that covering the deductibles has led to markedly higher Medicare

spending because beneficiaries become insensitive to costs. In addition, only the

three most expensive Medigap plans cover prescription drugs, and that coverage is

limited. Yet, eight of the 10 plans are required to cover foreign travel insurance,

while most beneficiaries never leave the country. Between 1998 and 2000 Medigap

premiums have escalated by 15.5 percent for plans without drug coverage and 37.2

percent for those with drug coverage. Modernizing beneficiary cost-sharing must include appropriate changes to Medigap.

A critical element of strengthening Medicare is modernizing the fee-for-service

program’s byzantine cost-sharing structure. No one designing a seniors’ health program today would construct such a convoluted and irrational cost-sharing structure

for beneficiaries. The system is a patchwork of outdated policies that fail to protect

beneficiaries or taxpayers. We must learn for our experience and work to ensure a

more consistent and understandable system for the future.

Mr. S

I agree that Medicare cost sharing can benefit from a fresh look.

TARK. Thank you, Madam Chair.

f The fact is that Medicare currently covers only about half of the

beneficiary health costs, and the beneficiaries spend a disproportionate share of their income on health expenses.

Now, much of the gap is due to the lack of coverage of prescription drugs, but it is also clear that the current cost-sharing arrangement continues to force too many beneficiaries to pay too

much.

We have made some modest progress to correct the coinsurance

quirk that forces beneficiaries to pay far more than we intended for

hospital outpatient services, but we have got a long way to go on

that one. Beneficiaries do shoulder an unfair percentage of the cost

for mental health services, and we have not corrected that.

I do not oppose efforts to develop or examine options in this area,

but I think we must keep foremost in our mind the effects that

these changes have on all Medicare beneficiaries.

For example, there are good reasons to slower the hospital deductible, but that is often considered in the context of raising the

Part B deductible. Given only that 90 percent of the beneficiaries

use Part B and only about less than 20 percent use the hospital

benefit, we could end up reducing expenses for a few, the 20 percent that use hospitals, and then kick all the Part B costs up, and

I am not sure if that is what we want to do.

While cost sharing can increase the cost awareness of beneficiaries, I see it as a sickness tax, and I have never been convinced

that beyond the nuisance value of a minimal $5, $10 copay that

people will overutilize medical care.

I think, mostly, we do not like going. We like doctors. Some of

us are married to them. Some of us have them as colleagues.

Chairwoman JOHNSON. Some of us lucky folks are married to

them.

Mr. STARK. Professionally, we do not like to visit them so much.

7

I have often said if I arranged with the George Washington Hospital for each one of these Subcommittee Members this afternoon

to go over to George Washington Hospital and for $10, you could

have a Pap smear or a proctoscopic examination, I do not think any

of you would go. This is not the kind of thing that we want to do

on a nice, sunny afternoon, and I do not think the Medicare beneficiaries are much different. I do not think they are out there saying, ‘‘Gosh, I do not have anything else to do. There is no ball

game. There is nothing on television. I think I will go and have an

examination.’’ Yes, I can see that there are some hypochondriac types that

abuse it, but you have got to make the case to me that we will not

prevent people from getting needed medical care if we raise that

barrier too high.

I think that it is tempting to look at CBO’s (Congressional Budget Office) projected savings from various options in this area, but

the dollars come from increasing or changing beneficiary cost-sharing responsibilities that might have unintended consequences. As

I say, we assume that utilization is bad, and maybe it is not.

I find it hard to believe that Medicare beneficiaries, as I said, go

out of their way to just get extra cost. That may not be true of the

providers or their advisors, but it certainly, I think, is true to the

beneficiaries.

Benefit packages under the OBRA ’90 rules could be tweaked,

but I would say we should be careful not to upset a precarious market, unless you choose to eliminate Medigap. Given the strong desire of beneficiaries to purchase this insurance, my personal belief

is that that would be politically unwise or, if you wanted to replace

it with a HCFA-sponsored (Health Care Financing Administration)

Medigap, I think politically unsellable at this time.

So I am just saying right now Medigap is the best we have got,

and unless we are ready to step up to the plate and think about

making it part of the Federal program, we should be very careful

that we do not destroy the private providers who are in the business.

I agree that regardless of what we do with first-dollar coverage,

Medigap needs improvements, and we have got beneficiaries who

missed the open enrollment and they are locked out forever. We

have got a problem with Medicare Plus Choice cancels. They are

limited in their options to go back into Medigap. None of them

have drug coverage. Maybe that will change if we have a drug benefit.

Disabled younger beneficiaries cannot get into the initial open

enrollment until they are 65. I think we should look at that.

Why? I guess the insurance industry basically does not want to

insure these folks, and I think we have to keep in mind their aversion to risk when we consider changes that we would ask the private insurance industry to take up.

So, while I am anxious to review what we are doing and improve

it, I hope we can be cautious because we could perhaps do more

harm. It is a program that is tenuous. We see people dropping out

of the Medigap. I mean we see insurers dropping out of the

Medigap market every year. We see it becoming more expensive,

and I hope this hearing will lead us toward some of the answers

8

that we might do to improve the Medicare Program for all of the

beneficiaries.

Thank you very much.

[The opening statements of Mr. Stark and Mr. Ramstad follow:]

Opening Statement of the Hon. Fortney Pete Stark, a Representative in

Congress from the State of California

Thank you, Madam Chairwoman, for holding this hearing. This is an impressive,

balanced panel, and I look forward to the discussion.

Medicare cost-sharing could benefit from a fresh look. Medicare currently covers

only approximately half of beneficiary health costs, and beneficiaries spend a disproportionate share of their income on health expenses. While much of the gap is

due to the lack of coverage under Medicare for prescription drugs and other important items or services, it is also clear that the current cost-sharing arrangement continues to force too many beneficiaries to pay too much.

We have made modest progress in our effort to correct the co-insurance quirk that

forces beneficiaries to pay far more than we intended for hospital outpatient services. But we have a long way to go. Beneficiaries also shoulder an unfair percentage

of the cost for mental health services.

For these and other reasons, it may initially seem attractive to rearrange costsharing obligations. I am not averse to developing or examining options in this area,

but we must keep in mind the effects of these changes on all Medicare beneficiaries.

For example, there are good reasons to lower the hospital deductible, but that is

often considered in the context of raising the Part B deductible. However, it is important to remember that 90 percent of beneficiaries use Part B services, while only

approximately 18 percent use the inpatient hospital benefit. Any policy that lowers

the hospital deductible while raising the Part B deductible reduces expenses for a

few at the expense of many. While cost-sharing can be used as a tool to heighten

‘‘cost consciousness’’ of beneficiaries, it can also be used as a sickness tax on those

who need health services the most.

I am sure that some of today’s discussion will center around the so-called ‘‘first

dollar coverage’’ under Medigap and its effect on Medicare spending. Some people

think that we should prohibit Medigap and other insurance from providing coverage

that essentially insulates beneficiaries from Medicare’s patchwork quilt of co-insurance and co-payment obligations. I know it is intriguing to look at the options book

produced by CBO and see the potential for enormous savings in some proposals, but

I think a few words of caution are in order before anyone heads down that particular road.

Too often, it is assumed that utilization is bad. While we certainly want to curtail

unnecessary utilization, cost-sharing is a blunt tool with which to accomplish that

goal. Too often, it results in decreased use of both necessary and unnecessary services. Certainly, steps can be taken to minimize or direct the effects of cost-sharing,

but we must keep in mind that cost-sharing requirements in a vulnerable lower-income population may result in adverse health effects. With very few exceptions, I

find it hard to believe that Medicare beneficiaries seek unnecessary services. Most

people are reluctant, not eager, to go to the doctor or be subject to procedures. Also,

except for showing up at a doctor’s office, most of us are unable to direct our care,

and cost-sharing has little impact on our choices, except to discourage compliance

with treatment regimens. After all, we can’t order our own tests or procedures or

prescribe other treatments.

In addition, the OBRA 1990 Medigap standardization legislation was desperately

needed to address rampant abuses in the Medigap market. And it has largely served

its purpose. Among other problems, there were reports of beneficiaries having dozens of policies, thanks to unscrupulous sales agents who preyed on unsuspecting

senior citizens. Not so anymore. I admit that the benefit packages may be in need

of some tweaking, but I remind my colleagues that they were designed through

painful, lengthy negotiated rule-making process that involved all relevant parties.

In addition, as we will hear from GAO, one-third of current Medigap policies have

been in force since before 1992 and have non-standardized benefits. If Congress decides to dramatically change the benefit packages, care must be taken to avoid further segmenting the market and risk pools. Unless, of course, Congress wishes to

force beneficiaries to give up the Medigap insurance they currently have. However,

given the strong desire of beneficiaries to purchase this insurance, my personal belief is that it would be politically unwise to force change. On the other hand, if it

is clearly a better deal, many may well be willing to voluntarily leave their current

policies.

9

We might also consider creating a HCFA-sponsored Medigap option to compete

with the private insurers. After all, given that Medigap’s administrative costs and

insurer profits total more than 20 percent of the premium, a HCFA option could

offer equivalent coverage at a much lower price.

Finally, I would be remiss if I didn’t advocate for some long-overdue Medigap improvements—regardless of what happens with respect to first-dollar coverage. Medicare beneficiaries essentially get one chance at purchasing Medigap when they first

turn 65 and enroll in Part B. If they fail to take advantage of the one-time open

enrollment period at that time, they may find themselves forever locked out of supplemental coverage. In addition, there are virtually no federal restrictions on underwriting or rating practices. That means that even if an insurer agrees to offer you

coverage, they can charge you whatever they want. Or they can entice you in at age

65 with an attractive premium, while raising it as your age and needs increase.

That’s one reason why enrollment in the Medigap drug packages is so low. Their

value is questionable, and most beneficiaries with any indication of need are priced

out of the plans. When Congress finally acted to allow beneficiaries whose circumstances change beyond their control (e.g., M+C plan cancels, employer benefits

drop, etc.) to get another chance at enrollment, we limited their ability to enroll or

re-enroll to just four options—none with drug coverage. Disabled younger beneficiaries are still waiting to get an initial open enrollment period upon first becoming eligible for Medicare. Right now, they have to wait until they are 65 to be guaranteed an opportunity to purchase Medigap. Why are these things so? Because the

insurance industry doesn’t want to insure these folks. Keep this aversion to risk in

mind as we consider other changes to Medicare that would increase the role of the

private insurance industry.

Caution is the watchword as we work in this important area. There is an opportunity for improvement, but also for destruction. I look forward to today’s testimony

and discussion.

Opening Statement of the Hon. Jim Ramstad, a Representative in Congress

from the State of Minnesota

f Madam Chairwoman, thank you for calling this important hearing today to continue exploring Medicare reform.

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

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

a prescription drug benefit to an already overburdened program.

I am particularly concerned about the costs that Medicare beneficiaries must pay

when they get sick and the plans they must purchase to cover their needs because

of Medicare’s copays and lack of catastrophic coverage.

For example, the program has a $792 deductible for Part A when the patient is

least sensitive to price; after 60 days in the hospital, a beneficiary must pay $198

coinsurance per day for days 61 through 90. In Part B, a beneficiary must pay a

$100 which has never been adjusted for inflation.

This problem is exacerbated by the fact that Medicare lacks catastrophic protection. This compares with 97% of private health policies which have this protection.

In total, Medicare’s limited benefits package, high copays and complete absence

of catastrophic coverage means that nearly half of our seniors’ health care costs are

not covered by Medicare.

This means that Medicare seniors must bear the cost themselves. In fact, 90% of

beneficiaries have some type of supplemental coverage which ranges from quite good

to very limited.

In my view, Madam Chairwoman, this is just another example of why we must

bring the Medicare program into the 21st century, and do it this year. 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 tomorrow’s seniors.

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

more from today

Chairwoman J

The panel that we are going to hear from today will start with

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

OHNSON. Thank you, Mr. Stark.

f Jennifer O’Sullivan who is the specialist in Social Legislation, DoVerDate 11-MAY-2000 11:28 Sep 21, 2001 Jkt 074223 PO 00000 Frm 00013 Fmt 6633 Sfmt 6602 E:\HR\OC\A223.XXX pfrm01 PsN: A223
10

mestic Social Policy Division of the Congressional Research Service;

Dr. William Scanlon who is the director of Health Care Issues at

the United States General Accounting Office; Dr. Christopher

Hogan, president of Direct Research of Vienna, Virginia; and Dr.

Karen Davis, president of The Commonwealth Fund of New York,

New York.

Ms. O’Sullivan, if you would start, please.

STATEMENT OF JENNIFER O’SULLIVAN, SPECIALIST IN SOCIAL LEGISLATION, CONGRESSIONAL RESEARCH SERVICE,

LIBRARY OF CONGRESS

Ms. O’SULLIVAN. Thank you, Madam Chairman and Members of

the Subcommittee. My name is Jennifer O’Sullivan.

Today, you have asked me to outline Medicare’s cost-sharing

structure, specifically what out-of-pocket expenses beneficiaries are

liable for when they use covered services. My testimony will highlight three points: first, Medicare’s cost-sharing requirements are

complex; second, the cost-sharing requirements differ in significant

ways from those applicable in the private market; and, third, Medicare’s requirements remain relatively unchanged since 1966.

There are very significant differences between the cost-sharing

requirements under Medicare Part A and Medicare Part B. Medicare Part A uses a spell-of-illness concept. A spell of illness, also

known as a benefit period, starts when a beneficiary enters a hospital and ends when he or she has not been in a hospital or skilled

nursing facility for 60 days. In each benefit period, the beneficiary

pays a $792 deductible for hospital stays up to 60 days. Longer

stays are subject to coinsurance charges. Days 60 to 90 are subject

to a daily charge of $198, and persons in the hospital over 90 days

may draw on 60 lifetime reserve days subject to a daily coinsurance

charge of $396. There is no coverage after 150 days.

The spell-of-illness concept gets even more complex when you

consider that an individual can have more than one benefit period

in a calendar year and, therefore, have to pay more than one deductible in a calendar year.

A person requiring post-hospital skilled nursing facility services

may get up to 100 days of care in a benefit period. There is a daily

coinsurance charge of $99 for days 21 to 100.

In general, cost sharing under Medicare Part B is somewhat simpler. In each calendar year, beneficiaries must first meet the $100

Part B deductible. Beneficiaries then generally pay 20 percent in

coinsurance. However, certain Part B services such as home health

services, lab services, and some preventive services are exempt

from either the deductible and/or coinsurance requirements. On the

other hand, mental health services are subject to 50-percent cost

sharing. Beneficiaries using hospital outpatient services pay a fixed

amount which varies by the service category, and this amount is

often considerably above 20 percent of the approved Medicare payment amount.

There are significant differences between Medicare’s cost-sharing

structure and that available to the under-age-65 population under

employer-based plans. Perhaps the most significant difference is

that private plans typically have an annual limit on out-of-pocket

11

expenses, sometimes referred to as a catastrophic cap. In contrast,

Medicare has on upper limit on cost-sharing charges.

Another key feature of the private insurance market is that over

95 percent of the under-65 population is enrolled in a managedcare arrangement compared to only about 15 percent of the Medicare population. These managed-care arrangements typically have

simpler cost-sharing structures. Many of the under-65 population

are enrolled in preferred provider plans. Individuals in these plans

have lower cost sharing when they use in-network providers and

somewhat higher cost sharing when they use out-of-network providers. These preferred provider arrangements are not available to

the Medicare fee-for-service population.

Several other observations can be made about Medicare’s cost

sharing. While the dollar amounts have changed, the structure is

virtually unchanged from that which was in effect when the program started in 1966. The Congress did enact legislation in 1988,

the Medicare Catastrophic Act, which would have significantly

modified the requirements, and one of the key features of that legislation was an annual out-of-pocket limit on Part B cost-sharing.

However, as you know, Congress repealed that legislation in the

following year.

I should note that the preceding discussion has focused on beneficiary liability in connection with their use of Medicare services.

Unlike the under-age-65 population, most beneficiaries have a second source of health insurance coverage. This supplementary coverage typically covers some or all of Medicare’s cost-sharing

charges. As a result, beneficiaries may not actually incur out-ofpocket costs at the time they use covered services.

This discussion only focuses on cost sharing for Medicare-covered

services. It does not address expenses beneficiaries may have for

non-covered services. As you know, Medicare does not cover certain

items such as hearing aids and dentures. It also provides very limited coverage for some other services such as outpatient prescription drugs and long-term care. As a result, Medicare only covers

about half of the beneficiary’s total health care bill.

Thank you.

[The prepared statement of Ms. O’Sullivan follows:]

Statement of Jennifer O’Sullivan, Specialist in Social Legislation,

Congressional Research Service, Library of Congress

Madam Chairman and Members of the Subcommittee. My name is Jennifer

O’Sullivan. I am a Specialist in Social Legislation at the Congressional Research

Service. Today you have asked me to outline Medicare’s cost-sharing structure-specifically what out-of-pocket expenses beneficiaries are liable for when they use covered services. I will briefly summarize Medicare’s requirements under the traditional fee-for-service program; more details are provided in the table included as

part of my written testimony. My testimony will highlight three points:

• First, Medicare’s cost-sharing requirements are complex;

• Second, the cost-sharing requirements differ in significant ways from those

applicable in the private market;

• Third, Medicare’s requirements have remained relatively unchanged from

1966.

There are significant differences between the cost sharing requirements for Medicare Part A and Medicare Part B. Part A uses the ‘‘spell of illness’’ concept. A spell

of illness, also known as a ‘‘benefit period’’ starts when a person enters a hospital

and ends when he or she has not been in a hospital or skilled nursing facility for

60 days. In each benefit period, the beneficiary pays a $792 (in 2001) deductible for

hospital stays of 1—60 days. Hospital stays beyond 60 days are subject to coinsurVerDate 11-MAY-2000 11:28 Sep 21, 2001 Jkt 074223 PO 00000 Frm 00015 Fmt 6633 Sfmt 6621 E:\HR\OC\A223.XXX pfrm01 PsN: A223
12

ance charges. Days 60—90 are subject to a daily charge of $198 (in 2001). Persons

in the hospital over 90 days may draw on 60 lifetime reserve days subject to a daily

coinsurance charge of $396 (in 2001). Hospital stays in excess of 150 days in a benefit period are not covered.

The spell of illness concept gets even more complex when you consider that an

individual can have more than one benefit period in a year and therefore have to

pay more than one deductible in a year. Potentially, an individual could even have

to pay coinsurance charges for more than one inpatient stay.

A person requiring post-hospital skilled nursing facility (SNF) services may get

up to 100 days of care in a benefit period. There is a daily coinsurance charge for

days 21—100 ($99 in 2001). There is no cost sharing for home health services and

nominal cost-sharing for hospice care.

In general, cost-sharing under Medicare Part B is somewhat simpler. In each calendar year, beneficiaries must first meet the $100 Part B deductible before the program will begin making payments. Beneficiaries are then subject to coinsurance

which equals 20% of Medicare’s approved amount. Certain Part B services, such as

home health care and some preventive services, are exempt from the deductible and/

or coinsurance requirements. On the other hand, mental health services are subject

to 50% cost sharing. Beneficiaries using hospital outpatient services pay a fixed

amount which varies by service category; this fixed amount is often substantially

more than 20% of the approved payment for the service under the new outpatient

prospective payment system.

There are a number of differences between Medicare’s cost-sharing structure and

that available to the under-65 population under private employer-based plans. Perhaps the most significant difference is that private plans typically have an annual

limit on out-of-pocket expenses—sometimes referred to as a catastrophic cap. In contrast, Medicare has no upper limit on cost-sharing charges.

Another key feature of the private insurance market is that over 90% of the under

65 population is enrolled in a managed care arrangement compared to only 15% of

the Medicare population. These managed care arrangements typically have simpler

cost-sharing structures. Many of the under-65 population are enrolled in preferred

provider plans. Individuals in these plans have lower cost-sharing charges when

they use specific network providers and higher cost-sharing when they use out-ofnetwork providers. These preferred provider arrangements are not available to the

fee-for-service Medicare population.

Several other observations can be made about Medicare’s cost-sharing. While the

dollar amounts have changed, the structure is virtually unchanged from that in effect when the program went into effect in 1966. For example, the concept of a spell

of illness was part of the original legislation. The Congress did enact legislation in

1988, the Medicare Catastrophic Coverage Act, which would have significantly

modified current requirements. One of the key features of that legislation was the

addition of an annual limit on Part B out-of-pocket spending. However, as you know,

this legislation was repealed the following year.

Medicare Part B cost-sharing applies to a broader range of services than when

the program first went into effect. This is true for two reasons. Medicare Part B

now covers a number of additional services. It also pays directly for some practitioner services previously covered indirectly under other service categories.

I should note that the preceding discussion has focused on beneficiary liability in

connection with their use of Medicare services. Unlike the under-age 65 population,

most Medicare beneficiaries have a second source of health insurance coverage. This

supplementary coverage typically covers some or all of Medicare’s cost sharing

charges, thus further complicating the picture. As a result of supplementary insurance, beneficiaries may not actually incur out-of-pocket costs at the time they use

covered services.

I should also note that this discussion only focuses on cost-sharing charges for

Medicare-covered services. It does not address expenses beneficiaries may have for

non-covered services. As you know Medicare does not cover certain items such as

hearing aids and dentures. It also provides very limited coverage for some other

services such as outpatient prescription drugs and long-term care. As a result, Medicare covers only about half of a beneficiary’s health care bill.

13

COMPARISON OF MEDICARE COST-SHARING AND BENEFITS—1966 AND 2001

1966 2001

Part A

Inpatient Hospital

Services.

Coverage up to 90 days in each

spell of illness:.

—Days 1–60: deductible ($40 in

1966).

—Days 61–90: daily coinsurance

equal to 1⁄4 of deductible ($10 in

1966).

No lifetime reserve days ................

[Deductible based on average per

diem rate for inpatient services.].

Same except:

—2001 deductible is $792 and

daily coinsurance is $198.

60 lifetime reserve days: daily coinsurance equal to 1⁄2 of hospital

deductible ($396 in 2001).

[Deductible set at $520 in 1987. It

is updated each year based on

the applicable percentage increase used for Medicare’s prospective payment rates, adjusted to reflect changes in real

case mix.]

Inpatient psychiatric hospital

services.

Maximum 190 days per lifetime

(covered as part of inpatient

hospital benefit).

Same.

Skilled Nursing Facility (SNF) Services.

Maximum of 100 post-hospital

days per spell of illness:.

—Days 1–20: No coinsurance ........

—Days 21–100: daily coinsurance

equal to 1⁄8 hospital deductible

($5 in 1967—first year benefit

in effect).

Same except daily coinsurance is

$99 in 2001.

Hospice Services ..... Not covered ..................................... Covered for terminally ill beneficiaries with life expectancy of

6 months or less. Limited costsharing for drugs and respite

care.

Blood deductible ..... Covered all but cost of first three

pints in spell of illness.

Same, except waived if blood replaced. [Any deductible required

under Part A or B offsets requirements under other Part.]

Part B

In General

Part B Premium ..... Set in law to cover 50% of program costs ($3.00/month 1966).Set in law to cover 25% of program costs ($50 a month in

2001).

Deductible ............... $50 ................................................... $100.

Blood deductible ..... No provision .................................... Medicare covers 80% of approved

amount after beneficiary pays

(or replaces) first 3 pints per

year. [Any deductible required

under Part A or B offsets requirements under other Part.]

Services

Physicians ............... Services provided by doctors of

medicine and osteopathy, and,

under limited circumstances,

dentists. Covered for 80% of

reasonable charges; beneficiary

pays 20%.

Services provided by doctors of

medicine and osteopathy, and,

under limited circumstances,

dentists. Also specific services

provided by doctors of optometry, podiatry, and chiropractic.

Covered for 80% of fee schedule;

beneficiary pays 20%.

14

COMPARISON OF MEDICARE COST-SHARING AND BENEFITS—1966 AND 2001—Continued

1966 2001

Non-physician Practitioners.Not paid directly ............................ Services provided by physician assistants, nurse practitioners,

clinical nurse specialists, clinical social workers, psychologists, certified registered nurse

anesthetists, and certified nurse

midwives. Covered for 80% of

approved amount; beneficiary

pays 20%.

Physical Therapists,

and Occupational

Therapists.

Not paid directly ............................ Services provided by therapists in

independent practice. Covered

for 80% of approved amount;

beneficiary pays 20%.

Durable Medical

Equipment.

Rentals covered for 80% of approved amount; beneficiary pays

20%.

Rental or purchase covered for

80% of approved fee schedule

amount; beneficiary pays 20%.

Prosthetic devices ... Covered for 80% of approved

amount; beneficiary pays 20%.

Same, except coverage for

orthotics added. Covered for

80% of approved fee schedule

amount; beneficiary pays 20%.

Outpatient Mental

Health Treatment.

Limited to the lesser of $250 or

50% of approved amount; beneficiary pays remainder.

Limited to 50% of fee schedule

amount; beneficiary pays 50%.

Partial Hospitalization Services for

Mental Illness.

Not covered ..................................... Covered for 80% of approved

amount; beneficiary pays 20%.

Outpatient Hospital

Services (excludes

services which

are paid under

another service

category).

Covered for 80% of approved

amount; beneficiary liable for

20% of charges.

Diagnostic services covered for

80% of approved amount under

Part A after beneficiary met deductible equal to 1⁄2 of Part A

deductible ($20 in 1966).

Covered under Part B. Beneficiary

pays fixed amount which varies

by service category; Medicare

pays the remainder.

Clinical Laboratory

Services.

Covered for 80% of approved

amount; beneficiary pays 20%.

Covered for 100% of fee schedule

amount. No cost-sharing.

Comprehensive

Outpatient Rehabilitation Facility

(CORF) Services.

No provision .................................... Covered for 80% of approved

amount; beneficiary pays 20%.

Ambulatory Surgical Center

(ASC) Services.

No provision .................................... Covered for 80% of approved

amount; beneficiary pays 20%.

Ambulance Services Covered for 80% of approved

amount; beneficiary pays 20%.

Same.

Benefit Category

Outpatient Prescription Drugs.Coverage limited to drugs and

biologicals which are not selfadministered and are incident

to physicians services. Covered

for 80% of approved amounts;

beneficiary pays 20%.

Same, except coverage also provided for:

—immunosuppressive drugs following a covered organ transplant;

—erythropoietin for treatment of

anemia for persons with chronic

renal failure;

—oral anti-cancer drugs comparable to chemotherapy drugs

which would be covered if they

were not self-administered; and

—hemophilia clotting factors.

15

COMPARISON OF MEDICARE COST-SHARING AND BENEFITS—1966 AND 2001—Continued

1966 2001

Immunizations ....... Not covered ..................................... Vaccine coverage for influenza,

pneumococcal pneumonia, and

Hepatitis B. No cost-sharing for

influenza and pneumococcal

pneumonia.

Screening mammography.Not covered ..................................... Pays up to limit ($69.23 in 2001)

for exam. Beginning 1/1/2002

paid under physician fee schedule. Beneficiary pays 20%. Deductible waived.

Screening pap

smear.

Not covered ..................................... Covered, generally at 3-year intervals (2-year intervals beginning

7/1/2001), for 100% of approved

amount.

Colorectal screening Not covered ..................................... Covered for 80% of approved

amounts according to periodicity

schedule; beneficiary pays 20%.

(No coinsurance for fecal occult

blood test. Coinsurance is 25% if

service performed in ambulatory

surgical center or hospital outpatient department.)

Diabetes self-management training

services.

Not covered ..................................... Covered for 80% of approved

amounts; beneficiary pays 20%.

Bone Mass measurement.Not covered ..................................... Covered for 80% of approved

amounts for high risk persons;

beneficiary pays 20%.

Prostate screening

exam.

Not covered ..................................... Covered for 80% of approved

amounts for digital rectal exam;

beneficiary pays 20%. No costsharing for prostate specific

antigen test.

Parts A and B

Home Health Services.Part A: Maximum of 100 post-hospital visits. Covered for 100% of

approved amount.

Part B: Maximum of 100 visits

per year (with no prior hospitalization requirement)—covered for 80% of approved

amount.

Covered for those who need it on

an intermittent basis without

visit limitations, coinsurance, or

deductibles. Over 1998–2003 period, home health visits that are

not part of the first 100 visits

following a hospital or SNF stay

are being transferred from Part

A to Part B.

End Stage Renal

Disease (ESRD).

Not covered ..................................... Services for ESRD patients are

covered under Part A and B, as

appropriate. For example, transplants are covered as Part A inpatient hospital services and

Part B physicians services. Dialysis is generally covered

funder Part B.

Chairwoman JOHNSON. Thank you.

Dr. Scanlon.

16

STATEMENT OF WILLIAM J. SCANLON, PH.D., DIRECTOR,

HEALTH CARE ISSUES, U.S. GENERAL ACCOUNTING OFFICE

Dr. SCANLON. Thank you very much, Madam Chairwoman and

Mr. Stark and Subcommittee members.

I am very pleased to be here today as you continue to consider

the need to modernize and strengthen Medicare and particularly as

you look into the area of beneficiary cost sharing.

Medicare provides valuable and extensive coverage, but it has

not kept pace with the changing health care needs and private insurance practices of today. Essentially, there are two issues with

cost sharing for Medicare beneficiaries. First, Medicare does not

provide genuine insurance; that is, protection from catastrophe.

Gaps in Medicare’s benefit package, such as the lack of prescription

drug coverage as well as required copayments for covered services,

can contribute to substantial financial burdens for beneficiaries.

Second, how that deficiency has been addressed, namely through

most beneficiaries having some form of supplemental insurance,

creates additional issues. Of particular concern are Medigap policies which can be expensive, not offer comprehensive protection,

and increase use of potentially discretionary services.

I would like to summarize some of the information on those two

points from my written statement before you today. Health insurers commonly include cost-sharing provisions in their policies to

make beneficiaries aware of cost. The goal is to encourage prudent

use of services that may be discretionary and at the same time

avoid creating financial barriers to necessary care.

Medicare cost-sharing rules diverge from these practices in important ways. While Medicare’s cost-sharing requirements can be

substantial, they are not designed well to discourage unnecessary

use of services. Given the example that you gave, Madam Chairman, Medicare imposes a relatively high deductible for hospital

stays and no coverage for extremely long stays, which are rarely

optional. In contrast, it requires no cost sharing for home health

care where utilization has been seen to vary widely raising concerns about the appropriateness of use.

Meanwhile, the lack of a cost-sharing limit on Medicare-covered

services can leave beneficiaries with extensive health care needs

liable for very large expenses. Employer-sponsored plans, as Ms.

O’Sullivan indicated, typically limit out-of-pocket costs to less than

$2,000 per year, but many Medicare beneficiaries pay much more

than that. In 1997, more than 3.4 million were liable for more than

$2,000 on covered services, and approximately 750,000 were liable

for more than $5,000.

In addition, uncovered services like prescription drugs add to

Medicare’s beneficiaries’ financial risk. On average, beneficiaries were estimated to spend about $3,100, or 22 percent of their incomes, on total out-of-pocket expenses, and this is excluding longterm care in the year 2000. Those in poor health without Medicaid

or supplemental coverage spent 44 percent of their incomes.

Most beneficiaries do have supplemental coverage, however.

Some get it from former employers, Medicare Plus Choice plans, or

State Medicaid programs. However, Medigap is the only supplemental coverage available to all elderly Medicare beneficiaries, and

more than one-fourth have purchased a Medigap policy.

17

Medigap itself, though, is problematic. These policies can be expensive. Annual premiums average more than $1,300. Premiums

for plans offering drug coverage are about $400 more and are rising

rapidly.

In the last year alone, these premiums increased 17 to 34 percent

for the three types of plan that offer drug coverage. Premiums vary

widely also across geographic areas and insurers. For example, in

Massachusetts, premiums average 45 percent more than the national average.

Many policies have premiums that rise with the purchaser’s age.

In addition, individuals in poor health can find policies difficult to

obtain or expensive as many insurers screen purchasers’ for poor

health status. Guaranteed access is only assured for that short period that generally follows initial enrollment into Part B.

Despite their high costs, Medigap policies do not fully protect

beneficiaries. Medigap prescription drug coverage, in particular,

can be inadequate because policies have relatively low caps on how

much is covered and require beneficiaries to pay most of the cost

of their drugs.

In addition, there is concern about Medigap’s so-called first dollar coverage that eliminates beneficiary liability for deductibles, copayments, and coinsurance. Employer-sponsored supplemental policies in Medicare Plus Choice plans typically reduce such liabilities,

but do not offer first dollar coverage. First dollar coverage undermines the objective of Medicare’s cost-sharing requirements to promote prudent use of services. As a result, some services may be

overused, ultimately increasing cost for both the beneficiary and

the program.

I would end by saying as you continue to consider how to modernize and to reform Medicare, focusing on beneficiaries’ financial

liabilities and risks is very important. Reconsideration of coverage

in cost-sharing policies, while difficult, both within the Medicare

program and with any supplemental options that may be available

could improve coverage for beneficiaries and the financial health of

the program.

Thank you very much, Madam Chairwoman. I would be happy

to answer any questions you or members of the Subcommittee may

have.

[The prepared statement of Dr. Scanlon follows:]

Statement of William J. Scanlon, Ph.D., Director, Health Care Issues, U.S.

General Accounting Office

I am pleased to be here today as you consider the need to modernize and strengthen the Medicare program and review the role of supplemental ‘‘Medigap’’ policies

that many seniors buy to help improve their Medicare coverage. Medicare provides

valuable and extensive coverage for beneficiaries’ health care needs. Nevertheless,

recent discussions have underscored the significant gaps that leave some beneficiaries vulnerable to sizeable financial burdens from out-of-pocket costs. Most

beneficiaries have additional supplemental coverage that helps to fill Medicare’s coverage gaps and pay some out-of-pocket expenses. Privately purchased Medigap is an

important source of this supplemental coverage because it is widely available to

beneficiaries. The other sources—employer-sponsored policies, Medicare+Choice

plans, and Medicaid programs—are not available to all beneficiaries. However, concerns exist that supplemental coverage can be expensive and may undermine the

legitimate role of cost sharing in a health insurance plan—to encourage cost-effective use of services.

18

1The Consolidated Appropriations Act of 2000 mandated that we report to the Congress by

July 2001 on various aspects of Medigap coverage. 2The premium amount is adjusted each year so that expected premium revenues equal 25

percent of expected Part B spending.

To assist the Subcommittee as it considers proposals to improve coverage for beneficiaries and the financial health of the Medicare program, my remarks today focus

on the design of Medicare’s benefit package and the role of private supplemental

coverage. Specifically, I will discuss (1) beneficiaries’ potential financial liability

under Medicare’s current benefit structure and cost-sharing requirements, (2) the

cost of Medigap policies and the extent to which they provide additional coverage,

and (3) concerns that Medigap’s so-called ‘‘first dollar’’ coverage undermines the cost

control incentives of Medicare’s cost-sharing requirements. My comments are based

on our prior and ongoing work 1 on Medicare and Medigap as well as other published research.

In summary, Medicare’s benefits package and cost-sharing requirements leave

beneficiaries liable for high out-of-pocket costs. As currently structured, Medicare

provides no limit on out-of-pocket spending and no coverage for most outpatient prescription drugs—a component of medical care that is of growing importance in treatment and rapidly increasing in cost. At the same time, Medicare’s cost-sharing requirements are poorly targeted and fail to promote prudent use of services.

Medigap policies that many Medicare beneficiaries purchase help to fill in some

of Medicare’s gaps but are themselves problematic. Premiums paid for Medigap policies averaged $1,300 in 1999, with 20 percent going to administrative costs. While

these policies pay for some or all Medicare cost-sharing requirements, they do not

fully protect beneficiaries from potentially significant out-of-pocket costs. In particular, some Medigap policies offer prescription drug coverage, however, this coverage can be inadequate because beneficiaries still pay most of the cost and the

maximum Medigap benefit is capped. In addition, Medigap first-dollar coverage

eliminates the effect Medicare’s cost-sharing requirements could have to promote

prudent use of services. The danger is that some services may be overused—ultimately increasing costs for beneficiaries and the Medicare program.

BACKGROUND

Individuals who are eligible for Medicare automatically receive Hospital Insurance

(HI), known as Part A, which helps pay for inpatient hospital, skilled nursing facility, hospice, and certain home health care services. Beneficiaries pay no premium

for this coverage but are liable for required deductibles, coinsurance, and copayment

amounts. (See table 1.) Medicare eligible beneficiaries may elect to purchase Supplementary Medical Insurance (SMI), known as Part B, which helps pay for selected

physician, outpatient hospital, laboratory, and other services. Beneficiaries must pay

a premium for Part B coverage, currently $50 per month.2 Beneficiaries are also responsible for Part B deductibles, coinsurance, and copayments.

Table 1: Medicare Coverage and Beneficiary Cost-Sharing for 2001

Beneficiary copayments, coinsurance, and deductibles:

Part A Coverage:

Inpatient hospital ............................ $792 deductible per admission.a

$198 copayment per day for days 61–90.

$396 copayment per day for days 91–150.

All costs beyond 150 days.

Skilled nursing facility .................... No cost sharing for first 20 days.

$99 copayment or less for days 21–100.

All costs beyond 100 days.

Home health ..................................... No cost sharing.

20 percent coinsurance for durable medical equipment.

Hospice ............................................. $5 copayment for outpatient drugs.

5 percent coinsurance for inpatient respite care.

Blood ................................................. Cost of first 3 pints.

Part B Coverage: b

Physician and medical ..................... $100 deductible each year.

20 percent coinsurance for most services.

50 percent coinsurance for mental health services.

Clinical laboratory ........................... No cost sharing.

Home health ..................................... No cost sharing.

20 percent coinsurance for durable medical equipment.

19

3Mercer/Foster Higgins National Survey of Employer-sponsored Health Plans 2000 William

M. Mercer, Incorporated (New York, New York). 4 In addition, many low-income beneficiaries who are eligible for Medicaid and other federal/

state programs to provide assistance with premiums and cost-sharing requirements may not enroll, in part due to limited awareness of these programs and the administrative complexity of

demonstrating eligibility. See Low-Income Medicare Beneficiaries: Further Outreach and Administrative Simplification Could Increase Enrollment (GAO/HEHS–99–61, April 9, 1999). Aiming

to increase awareness and enrollment in these programs, the Medicare, Medicaid, and SCHIP

Benefits Improvement and Protection Act of 2000 directed the Social Security Administration

to identify and notify potentially eligible individuals and the Department of Health and Human

Services to develop and distribute to states a simplified uniform enrollment application. 5The National Association of Insurance Commissioners reports that Medigap enrollment has

declined from about 14 million in 1994. 6 P. L. 101–508, Nov. 5, 1990.

Table 1: Medicare Coverage and Beneficiary Cost-Sharing for 2001—Continued

Beneficiary copayments, coinsurance, and deductibles:

Outpatient hospital ......................... Coinsurance varies by service and may exceed 50 percent.

Blood ................................................. Cost of first 3 pints.

20 percent coinsurance for additional pints.

a No deductible is charged for second and subsequent hospital admissions if they occur within 60 days of the

beneficiary’s most recent covered inpatient stay. b No cost-sharing is required for certain preventive services—including specific screening tests for colon, cervical, and prostate cancer, and flu and pneumonia vaccines.

Source: Medicare & You 2001, Health Care Financing Administration. Most Medicare beneficiaries have

some type of supplemental coverage to help pay for Medicare cost-sharing requirements as well as some benefits not covered by Medicare. They obtain this coverage either through employers, Medicare+Choice plans,

state Medicaid programs, or Medigap policies sold by private insurers.

About one-third of Medicare’s 39 million beneficiaries have employer-sponsored

supplemental coverage. These benefits typically pay for some or all of the costs not

covered by Medicare, such as coinsurance, deductibles, and prescription drugs. However, many beneficiaries do not have access to employer-sponsored coverage. A recent survey found that more than 70 percent of large employers with at least 500

employees did not offer these health benefits to Medicare-eligible retirees.3 Small

employers are even less likely to offer retiree health benefits.

Approximately 15 percent of Medicare beneficiaries enroll in Medicare+Choice

plans, which include health maintenance organizations and other private insurers

who are paid a set amount each month to provide all Medicare-covered services.

These plans typically offer lower cost-sharing requirements and additional benefits

compared to Medicare’s traditional fee-for-service program, in exchange for a restricted choice of providers. However, Medicare+Choice plans are not available in all

parts of the country. As of February 2001, about a third of all beneficiaries lived

in counties where no Medicare+Choice plans were offered.

About 17 percent of Medicare beneficiaries receive assistance from Medicaid, the

federal-state health financing program for low-income aged and disabled individuals. All Medicare beneficiaries with incomes below the federal poverty level can

have their Medicare premiums and cost sharing paid for by Medicaid. Beneficiaries

with incomes slightly above the poverty level may have all or part of their Medicare

premium paid for by Medicaid. Also, some low-income individuals may be entitled

to full Medicaid benefits (so called ‘‘dual eligibles’’), which include coverage for certain services not available through Medicare, such as outpatient prescription drugs.

However, the income level at which beneficiaries qualify for full Medicaid benefits

varies, as determined by each state, and many Medicare beneficiaries with low incomes may not qualify.4

Medigap is the only supplemental coverage option available to all beneficiaries

when the initially enroll in Medicare at age 65 or older. Medigap policies are offered

by private insurance companies in accordance with state and federal insurance regulations. In 1999, more than 10 million individuals—more than one-fourth of all

beneficiaries—were covered by Medigap policies.5 The Omnibus Budget Reconciliation Act (OBRA) of 1990 6 required that Medigap policies be standardized and allowed a maximum of 10 different benefit packages offering varying levels of supplemental coverage to be provided. All policies sold since July 31, 1992 have offered

one of the 10 standardized packages, known as plans A through J. (See table 2.)

Policies sold prior to August 1992 were not required to comply with the standard

benefit package requirements.

Table 2: Benefits Covered by Standardized Medigap Policies

Benefits Plan A Plan B Plan C Plan D Plan E Plan Fa Plan G Plan H Plan I 

Coverage for ......................................................................................... X X X X X X X X X 

• Part A coinsurance• 365 additional hospital days during lifetime• Part B coinsurance• Blood products

Skilled nursing facility coinsurance ................................................... X X X X X X X Part A deductible ................................................................................. X X X X X X X X Part B deductible ................................................................................. X X Part B balance billing b ........................................................................ X X X Foreign travel emergency .................................................................... X X X X X X X Home health care ................................................................................. X X X Prescription drugs ...............................................................................

X c X c 

Preventive medical care ...................................................................... X 

aPlans F and J also have a high deductible option of $1,580, under which beneficiaries also pay deductibles for prescriptions ($250 per year for Plan J) and foreign travel e

($250 per year for Plans F and J). bSome providers do not accept the Medicare rate as payment in full and ‘‘balance bill’’ beneficiaries for additional amounts that can be no more than 15 percent higher than the 

payment rate. Plan G pays 80 percent of balance billing; Plans F, I, and J cover 100 percent of these charges. cPlans H and I pay 50 percent of drug charges up to $1,250 per year and have a $250 annual deductible.

dPlan J pays 50 percent of drug charges up to $3,000 per year and has a $250 annual deductible.

Source: HCFA 2001 Guide to Health Insurance for People with Medicare. Note: This chart does not apply in Massachusetts, Minnesota, and Wisconsin, where alternative standa

21

7These protections were added by section 4003 of the Balanced Budget Act of 1997 (P.L. 105–

33, 111 Stat. 330). In addition to these federal protections, 21 states provide for additional

Medigap protections. 8See Medicare Home Health Care: Prospective Payment System Will Need Refinement as

Data Become Available (GAO/HEHS–00–9, Apr. 2000).

Under OBRA 1990, Medicare beneficiaries are guaranteed access to Medigap policies within 6 months of enrolling in Part B regardless of their health status. Subsequent laws have added guarantees for certain other beneficiaries. Beneficiaries who

either terminated their Medigap policy to join a Medicare+Choice plan or enrolled

in a Medicare+Choice plan when first becoming eligible for Medicare and then leave

the plan within one year are also guaranteed access to any Medigap policy. Also,

individuals whose employers eliminate retiree benefits or whose Medicare+Choice

plans leave the program or stop serving their areas are guaranteed access to 4 of

the 10 standardized Medigap policies (plans A, B, C, and F) but none of the policies

that include prescription drug coverage.7 Otherwise, insurers can either deny coverage or charge higher premiums to beneficiaries who are older or in poorer health.

MEDICARE COST-SHARING REQUIREMENTS AND BENEFIT DESIGN

ARE OUT OF STEP WITH CURRENT PRIVATE SECTOR PRACTICES

Medicare’s design has changed little since its inception 35 years ago, and in many

ways has not kept pace with changing health care needs and private sector insurance practices. Medicare cost-sharing requirements are not well designed to discourage unnecessary use of services. At the same time, they can create financial barriers

to care. In addition, the lack of a cost-sharing limit can leave some beneficiaries

with extensive health care needs liable for very large Medicare expenses. Moreover,

gaps in Medicare’s benefit package can contribute to substantial financial burdens

on beneficiaries who lack supplemental insurance or Medicaid coverage.

Medicare’s Cost-Sharing Requirements Not Well Structured

Health insurers commonly design cost-sharing provisions—in the form of

deductibles, coinsurance, and copayments—to ensure that beneficiaries are aware

there is a cost associated with the provision of services and to encourage them to

use services prudently. Ideally, cost sharing should encourage beneficiaries to evaluate the need for discretionary care but not discourage necessary care. Optimal costsharing designs would generally require coinsurance or copayments for services that

may be discretionary and could potentially be overused, and would also aim to steer

patients to lower cost or better treatment options. Care must be taken, however, to

avoid setting cost-sharing amounts so high as to create financial barriers to necessary care.

The benefit packages of Medicare+Choice plans illustrate cost-sharing arrangements that have been designed to reinforce cost containment and treatment goals.

Most Medicare+Choice plans charge a small copayment for physician visits ($10 or

less) and emergency room services (less than $50). Relatively few Medicare+Choice

plans charge copayments for hospital admissions. Plans that offer prescription drug

benefits typically design cost-sharing provisions that encourage beneficiaries to use

cheaper generic drugs or brand name drugs for which the plan has negotiated a discount.

Medicare fee-for-service cost-sharing rules diverge from these common insurance

industry practices in important ways. For example, as indicated in table 1, Medicare

imposes a relatively high deductible for hospital admissions, which are rarely optional. In contrast, Medicare requires no cost sharing for home health care services,

even though historically high utilization growth and wide geographic disparities in

the use of such services have raised concerns about the potentially discretionary nature of some services.8 Medicare also has not increased the Part B deductible since

1991. For the last 10 years the deductible has remained constant at $100 and has

thus steadily decreased as a proportion of beneficiaries’ real income.

Medicare Does Not Limit Beneficiaries’ Cost-Sharing Liability

Also unlike most employer-sponsored plans for active workers, Medicare does not

limit beneficiaries’ cost-sharing liability, which can represent a significant share of

their personal resources. Premiums, deductibles, coinsurance, and copayments that

beneficiaries are required to pay for services that Medicare covers equaled an estimated 23 percent of total Medicare expenditures in 2000. The average beneficiary

who obtained services in 1997 had a total liability of $1,451, consisting of $925 in

Medicare copayments and deductibles in addition to the $526 in annual Part B premiums required that year.

The burden of Medicare cost sharing can be much higher, however, for beneficiaries with extensive health care needs. In 1997, the most current year of availVerDate 11-MAY-2000 11:28 Sep 21, 2001 Jkt 074223 PO 00000 Frm 00025 Fmt 6633 Sfmt 6621 E:\HR\OC\A223.XXX pfrm01 PsN: A223
22

9The Kaiser Family Foundation and Health Research and Educational Trust, Employer

Health Benefits: 2000 Annual Survey. 10Stephanie Maxwell, Marilyn Moon, and Mesha Segal, Growth in Medicare and Out-Of-Pocket Spending: Impact on Vulnerable Beneficiaries, (Urban Institute, Dec. 2000). 11Maxwell, Moon, and Segal.

able data on the distribution of these costs, slightly more than 3.4 million beneficiaries (11.4 percent of beneficiaries who obtained services) were liable for more

than $2,000. Approximately 750,000 of these beneficiaries (2.5 percent) were liable

for more than $5,000, and about 173,000 beneficiaries (0.6 percent) were liable for

more than $10,000. In contrast, private employer-sponsored health plans typically

limit maximum annual out-of-pocket costs for covered services to less than $2,000

per year for single coverage.9

Cost of Uncovered Services Adds to Beneficiaries’ Financial Burden

Medicare does not cover some services that are commonly included in private insurers’ benefit packages. The most notable omission in Medicare’s benefit package

is coverage for outpatient prescription drugs. This benefit is available to most active

workers enrolled in employer-sponsored plans. More than 95 percent of private employer-sponsored health plans for active workers cover prescription drugs, typically

providing comprehensive coverage with relatively low cost-sharing requirements.

Current estimates suggest that the combination of Medicare’s cost-sharing requirements and limited benefits leaves about 45 percent of beneficiaries’ health care

costs uncovered. The average beneficiary in 2000 is estimated to have incurred

about $3,100 in out-of-pocket expenses for health care—an amount equal to about

22 percent of the average beneficiary’s income.10

Some beneficiaries potentially face much greater financial burdens for health care

expenses. For example, elderly beneficiaries in poor health and with no Medicaid or

supplemental insurance coverage are estimated to have spent 44 percent of their incomes on health care in 2000. Low-income single women over age 85 in poor health

and not covered by Medicaid are estimated to have spent more than half (about 52

percent) of their incomes on health care services.11 These percentages are expected

to increase over time as Medicare premiums and costs for prescription drugs and

other health care goods and services rise faster than incomes.

MEDIGAP POLICIES ADDRESS SOME MEDICARE SHORTCOMINGS BUT

ARE EXPENSIVE

While more than one-fourth of beneficiaries have Medigap policies to fill Medicare

coverage gaps, these policies can be expensive and provide only limited protection

from catastrophic expenses. Medigap drug coverage in particular offers only limited

protection because of high cost sharing and low coverage caps.

Medigap Fills Some Needs

More than 10 million Medicare beneficiaries have Medigap policies to cover some

potentially high costs that Medicare does not pay, including cost-sharing requirements, extended hospitalizations, and some prescription drug expenses. By offering

a choice among standardized plans, beneficiaries can match their coverage needs

and financial resources with plan coverage. Medigap policies are widely available to

beneficiaries including those who are not eligible for or do not have access to other

insurance to supplement Medicare, such as Medicaid or employer-sponsored retiree

benefits. In fact, most Medicare beneficiaries who do not otherwise have employersponsored supplemental coverage, Medicaid, or Medicare+Choice plans purchase a

Medigap policy, demonstrating the value of this coverage to the Medicare population.

Medigap Policies Can Have High Cost

Medigap policies can be expensive. The average annual Medigap premium was

more than $1,300 in 1999. Premiums varied widely based on the level of coverage

purchased. Plan A, which provides the fewest benefits, was the least expensive with

average premiums paid of nearly $900 per year. The most popular plans—C and F—

had average premiums paid of about $1,200. The most comprehensive plans—I and

J—were the most expensive, with average premiums paid around $1,700. (See table

3.)

23

12Premium quotes for policies available in 2000 and 2001 from most recently available state

guides for consumers on Medigap policies. 13Weiss Ratings, ‘‘Prescription Drug Costs Boost Medigap Premiums Dramatically,’’ March 26,

2001, at http://www.weissratings.com/NewsReleases/Ins—Medigap/20010326Medigap.htm. 14Federal law requires Medigap plans to spend at least 65 percent of premiums on benefits

for policies sold to individuals, and 75 percent for policies sold to groups.

Table 3: Distribution of Medigap Plans and Annual Premiums Per Covered Life, 1999

Medigap plan Covered lives

(percentage)

Average annual premium earned

per covered

life

A ........................................................................................................... .................... $877

B ........................................................................................................... 8.0 $1,093

C ........................................................................................................... 15.9 $1,151

D .......................................................................................................... 3.8 $1,032

E ........................................................................................................... 1.5 $1,067

F ........................................................................................................... 23.4 $1,217

G .......................................................................................................... 1.5 $980

H .......................................................................................................... 1.5 $1,379

I ............................................................................................................ 1.5 $1,704

J ........................................................................................................... 2.7 $1,669

Pre-standard (policies originally sold before July 1992) ................. 32.9 $1,573

Plans in states exempt from plan standardsa .................................. 4.5 $1,405

Total b .................................................................................................. 100.0 $1,322

aMassachusetts, Minnesota, and Wisconsin have alternative plans in effect and waivers that exempt them

from selling the national standard Medigap plans. bData reported by insurers to the National Association of Insurance Commissioners (NAIC) do not include

plan type for policies representing less than 9 percent of Medigap policy covered lives, with an average paid

premium of $1,016. These plans are not included in the plan distribution or average premiums reported in the

table.

Source: GAO analysis of data collected by the NAIC from the 1999 Medicare Supplement Insurance Experience Exhibit.

Premiums also vary widely across geographic areas and insurers. For example,

average annual premiums in Massachusetts ($1,915) were 45 percent higher than

the national average. While varying average premiums may reflect geographic differences in terms of use of Medicare and supplemental services and costs, beneficiaries in the same state may face widely varying premiums for a given plan type

offered by different insurers. For example, in Nevada, plan A premiums for a 65-

year-old ranged from $446 to as much as $1,004, depending on the insurer. Similarly, in Florida, plan F premiums for a 65-year-old male ranged from $1,548 to

$2,123; and in Maine, plan J premiums ranged from $2,697 to $3,612.12

Medigap policies are becoming more expensive. One recent study reports that premiums for the three Medigap plan types offering prescription drug coverage (H, I,

and J) have increased the most rapidly—by 17 to 34 percent in 2000. Medigap plans

without prescription drug coverage rose by 4 to 10 percent in 2000.13

A major reason premiums are high is that a large share of premium dollars are

used for administrative costs rather than benefits. More than 20 cents from each

Medigap premium dollar is spent for costs other than medical expenses, including

administration. Administrative costs are high, in part, because nearly three-quarters of policies are sold to individuals rather than groups.14 The share of premiums

spent on benefits varies significantly among carriers. The 15 largest sellers of

Medigap policies spent between 64 and 88 percent of premiums on benefits in 1999.

The share of premiums spent on benefits is lower for Medigap plans than either typical Medicare+Choice plans or health benefits for employees of large employers.

Also, 98 percent of Medicare fee-for-service funds are used for benefits.

Remaining Gaps Leave Beneficiaries at Significant Risk

While Medigap policies cover some costs beneficiaries would otherwise pay out of

pocket, Medigap policies have limits and can still leave beneficiaries exposed to significant out-of-pocket costs. Medigap prescription drug coverage in particular leaves

beneficiaries exposed to substantial financial liability. Prescription drugs are of

growing importance in medical treatment and one of the fastest growing components

of health care costs. Medigap policies with a drug benefit are the most expensive

yet the benefit offered can be of limited value to many beneficiaries. For example,

• Medigap policies offering drug coverage typically cost much more than policies without drug coverage—the most popular plan with prescription drug covVerDate 11-MAY-2000 11:28 Sep 21, 2001 Jkt 074223 PO 00000 Frm 00027 Fmt 6633 Sfmt 6621 E:\HR\OC\A223.XXX pfrm01 PsN: A223
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15While less is known about the benefits offered by prestandardized plans that were sold prior

to 1992—representing about 30 percent of Medigap enrollment in 1999—one expert estimated

that most are likely to have some coverage for prescription drugs but that this coverage is even

more limited than that offered by the standardized plans. See Deborah J. Chollet, Mathematica

Policy Research Inc., ‘‘Medigap Coverage for Prescription Drugs,’’ Testimony before the U.S. Senate Committee on Finance, April 24, 2001. 16 ‘‘Effects of Supplemental Coverage on Use of Services by Medicare Enrollees,’’ Christensen

and Shinogle, Health Care Financing Review, Fall 1997.

erage (plan J) costs on average $450 more than the most popular plan without

drug coverage (plan F)—although the benefit is at most $1,250 or $3,000, depending on plan type, and • under the Medigap plan with the most comprehensive drug coverage, type J, a beneficiary would have to incur $6,250 in prescription drug costs to get the

full $3,000 benefit, because of the plan’s deductible and coinsurance requirements.

That may explain why more than 90 percent of beneficiaries with one of the

standardized Medigap plans purchased standard Medigap plans that do not include

drug benefits.15 Further, Medicare beneficiaries who do not purchase Medigap policies when they initially enroll in Part B at age 65 or older are not guaranteed access

to the Medigap policies with prescription drug coverage in most states. Insurers may

then either deny coverage or charge higher premiums, especially to Medicare beneficiaries with any adverse health conditions.

The Medigap standard prescription drug benefit differs greatly from that typically

offered by employer-sponsored plans for active employees or Medicare-eligible retirees. The Medigap prescription drug benefit has a $250 deductible, requires 50 percent coinsurance, and is limited to $1,250 or $3,000 depending on the plan purchased. In contrast, employer-sponsored plans typically require small copayments of

$8 to $20 or coinsurance of about 20 to 25 percent, depending on whether the enrollees purchase generic brands, those for which the plan has negotiated a price discount, or other drugs. Further, few employer-sponsored health plans have separate

deductibles or maximum annual benefits for prescription drugs. These plans may

also offer enrollees access to discounted prices the plans have negotiated even when

the beneficiary is paying the entire cost.

FIRST-DOLLAR COVERAGE THROUGH MEDIGAP DISTORTS MEDICARE’S COST CONTROL FEATURES

Even though Medicare’s original design has been criticized as outmoded, it included various cost-sharing requirements intended to encourage prudent use of services. These requirements have also traditionally been features of private insurance.

However, Medigap’s first-dollar coverage—the elimination of any deductibles or coinsurance associated with the use of specific services—undermines this objective. All

standard Medigap plans cover hospital and physician coinsurance, while nearly all

beneficiaries with standardized Medigap plans purchase plans covering the full hospital deductible, and most purchase plans covering the full skilled nursing home coinsurance and Part B deductible. First-dollar coverage reduces financial barriers to

health care, but it also diminishes beneficiaries’ sensitivity to costs and could thus

increase unnecessary service utilization and total Medicare program costs.

A substantial body of research clearly indicates that Medicare spends more on

beneficiaries with supplemental insurance relative to beneficiaries who have Medicare coverage only. For example, an analysis of 1993 and 1995 data found that

Medicare per capita expenditures for beneficiaries with Medigap insurance were

from $1,000 to $1,400 higher than for beneficiaries with Medicare only. Medicare

per capita spending on beneficiaries with employer-sponsored plans was $700 to

$900 higher than for beneficiaries with Medicare only.

Some evidence suggests that first-dollar, or near first-dollar, coverage may partially be responsible for the higher spending. For example, one study found that

beneficiaries with Medigap insurance use 28 percent more medical services (outpatient visits and inpatient hospital days) relative to beneficiaries who did not have

supplemental insurance, but were otherwise similar in terms of age, sex, income,

education, and health status.16 Service use among beneficiaries with employer-sponsored supplemental insurance (which often reduces, but does not eliminate, cost

sharing) was approximately 17 percent higher than the service use of beneficiaries

with Medicare coverage only.

Unlike Medigap policies, employer-sponsored supplemental insurance policies and

Medicare+Choice plans typically reduce beneficiaries’ financial liabilities but do not

offer first-dollar coverage. Although there is a wide variety in design of employersponsored insurance plans, many retain cost-sharing provisions. Medicare+Choice

plans also typically require copayments for most services. Moreover, unlike the traVerDate 11-MAY-2000 11:28 Sep 21, 2001 Jkt 074223 PO 00000 Frm 00028 Fmt 6633 Sfmt 6621 E:\HR\OC\A223.XXX pfrm01 PsN: A223
25

ditional fee-for-service program, Medicare+Choice plans require referrals or prior

authorization for certain services to minimize unnecessary utilization.

CONCLUDING OBSERVATIONS

As Congress continues to consider proposals to reform Medicare, it is important

to examine all facets of the program and how they relate to other coverage that

beneficiaries may have. Current Medicare cost-sharing provisions do not reflect common insurance practices that have evolved over time to promote prudent use and

protect beneficiaries from catastrophic care costs. Medigap policies also fail to provide the comprehensive coverage needed by some beneficiaries. In addition, by offering first-dollar coverage, they may undermine incentives for prudent use of Medicare services. In light of how prevailing private sector coverage and practice have

evolved, reconsideration of coverage and cost-sharing policies, both within the Medicare program and within any supplemental options that may be available, would be

valuable to improve both coverage for beneficiaries and the financial health of the

Medicare program.

Madam Chairwoman, this concludes my statement. I would be happy to answer

any questions that you or Members of the Subcommittee may have.

GAO CONTACTS AND STAFF ACKNOWLEDGMENTS

For more information, regarding this testimony, please contact me or Laura

Dummit at (202) 512–7114. Rashmi Agarwal, Susan Anthony, James Cosgrove, Paul

Cotton, John Dicken, and Carmen Rivera-Lowitt also made key contributions to this

statement.

Chairwoman J

Dr. Hogan.

OHNSON. Thank you very much, Dr. Scanlon.

f STATEMENT OF CHRISTOPHER HOGAN, PH.D., PRESIDENT,

DIRECT RESEARCH, LLC, VIENNA, VIRGINIA

Dr. HOGAN. Madam Chairwoman, Members of the Subcommittee,

I am Christopher Hogan. I am an economist. I am an independent

consultant in the area of health services research.

I was invited here to deliver this message: Secondary insurance

raises Medicare’s cost substantially. For Medicare—and I mean the

tax-funded portion of Medicare—I estimate that the beneficiaries

who have secondary insurance, such as Medigap or employer-sponsored insurance, cost the taxpayers about $1,000 a year more than

those who do not, and that is after adjusting for their age and their

income and their health status. That is my estimate. It is clearly

a round number, but it is consistent with many other estimates of

that impact, including estimates by the staff of your own Congressional Budget Office.

In addition to raising the cost of the program, secondary insurance has another impact that is often overlooked in discussions of

reforming the Medicare program. Coinsurance and deductibles no

longer matter for determining service use for the 90 percent of

beneficiaries who have secondary insurance. Let me say that again.

Medicare’s copayment and deductible structure is essentially irrelevant from an economic standpoint. It helps to determine beneficiaries’ Medigap premiums, but it does not really affect them in

any other way.

From the beneficiary standpoint, you have to keep three things

in mind. First, the people who do not have secondary coverage are

poor. Second, those without secondary coverage use less of everything, including preventive care. Third, beneficiaries who have the

money and have the opportunity seem to express a strong desire

26

for first dollar coverage. At least that is my reading of the Medigap

market. If you look at what they buy, there is little demand for catastrophic-only policies substantial willingness to pay top dollar for

that first dollar coverage and strong evidence of little price-shopping on the part of beneficiaries.

Let me sum it up. Secondary insurance costs the program a lot

of money, but beneficiaries like it an awful lot. What are you going

to do?

Let me give you two thoughts that you may not hear from other

sources. First, it would be completely actuarially fair to charge a

lower Part B premium to the beneficiaries who do not have secondary coverage. They cost you $1,000 a head less. You charge

them the same amount of money. That is kind of regressive considering these are poor people. It would be actuarially fair. It is probably a little bit difficult to administer, but it would be fair, as I say.

Second, I wanted to bring an idea in front of you that was floated

by, of all people, the American Medical Association back in the

nineties, as a way of reintroducing economically effective copays

and deductibles in the Medicare program, if you wanted to do that.

What the AMA had suggested was essentially a prepaid refundable deductible for the Medicare Program. It is not insurance. It is

not a subsidy. I will just give you the bare bones of it.

You could ask beneficiaries to pay an additional amount every

month. For the purposes of illustration, I have put forth a rather

hefty amount, $80 a month; 80 times 12 is 960 bucks, you would

be asking beneficiaries to pay to HCFA. Medicare would then pay

the first $960 of copays and deductibles, no muss, no fuss, no secondary insurers, no paperwork. They would simply pay them. If a

beneficiary did not use 960 bucks, Medicare would give them their

money back, maybe with a nice note thanking them for the use of

money over the year. Beneficiaries that used more than 960 bucks,

those costs would be covered by the secondary insurers or not, as

they are now. This was the only feasible way that I saw to introduce economically rational coinsurance in the Medicare Program,

but not put the secondary insurers out of business. In effect, it

would work like a little miniature medical savings account, not for

all health care, not even for all the copays and deductibles, but for

whatever portion of the copays and deductibles that you thought

might be reasonable to ask beneficiaries to prepay.

Let me summarize. Secondary insurance raises the program’s

costs substantially. It disconnects those financial levers that you

call copay and deductible and makes them absolutely irrelevant to

the typical beneficiary, but beneficiaries like to be fully insured and

they will pay top dollar to become fully insured if they have the

money to do it. Those who cannot afford to pay, well, they are poor,

they are disadvantaged, and they use less of everything, including

good services like preventive care.

If you wanted to reintroduce economically important copays and

deductibles, economically active copays and deductibles back into

Medicare, the only thing I saw that would do that was this prepaid

deductible notion. It is very difficult otherwise because whatever

you do, secondary insurers fill in the copays and deductibles and

make care free.

27

If you want to consider this, that is great. If you do not and you

want to have copays and deductibles that matter, you are going to

have to restructure the secondary insurance market because your

copayments and deductibles do not matter. They control that now.

Thank you very much.

[The prepared statement of Dr. Hogan follows:]

Statement of Christopher Hogan, Ph.D., President, Direct Research, LLC,

Vienna, Virginia

Madam Chairwoman and members of the subcommittee, my name is Christopher

Hogan. I’m an economist familiar with the issues of coverage and cost in the Medicare program, having worked almost 10 years on the staff of the Medicare Payment

Advisory Commission and the Physician Payment Review Commission. Currently,

I am an independent consultant in the area of health services research.

I was asked to talk about the impact of secondary insurance on Medicare beneficiaries’ use and cost of services. In the next five minutes, I’d like to make a few

points about this, then sketch some possible policies you might pursue. First, I’d like

to talk about the impact that secondary insurance has on Medicare program costs.

Second, I’d like to talk about some of the beneficiary-oriented aspects of secondary

insurance, including impact on use of care. Finally, I’d like to sketch out some potential policy directions you might consider in this area.

The first fact for this discussion is that almost no one actually pays fee-for-service

Medicare’s copayment and deductible amounts in full. Analysts may quibble about

the exact fraction of the Medicare population that has only fee-for-service Medicare

and no secondary insurance, but everyone will agree that this fraction is small, on

the order of 10 to 15 percent of all non-institutionalized Medicare beneficiaries. The

rest have employer-sponsored coverage, individual purchase Medigap, Medicaid,

Medicare+Choice, some other coverage or some combination of the above.

Medigap plans by design typically provide first-dollar or very nearly first-dollar

coverage, filling in those copayment amounts completely. Employer-sponsored coverage is more of a mixed bag and can be coordinated with Medicare in a variety

of ways, but it is increasingly typical for employer-sponsored coverage to fill in only

part of Medicare’s copayment and deductible amounts. For example, beneficiary financial liability might be limited to the amounts that the employers’ policy specifies

for active workers.

The second major point I would like to stress is that by filling in Medicare’s co- payments and deductibles, secondary insurance raises the costs of the Medicare program substantially. Common sense suggests that individuals are more likely to use

care if it is free (although ‘‘pre-paid’’ is a better description than ‘‘free’’). The empirical evidence of this effect is very solid. Numerous researchers using a variety of

data sources, methods, populations, and time periods have all shown that removing

deductibles and copayments from an unrestricted fee-for-service health plan substantially increases health care use.

This is not news. In addition to research stretching back at least as far as 1972,

the impact of secondary insurance on Medicare program costs has been reported by

legislative-branch agencies including the Congressional Budget Office and the Physician Payment Review Commission. In fact, the last few years of CBO Budget Options books have included options for restructuring Medicare’s copayments and

deductibles and for reducing the impact of secondary insurance on Medicare program costs.

Even though there is no particular account or line-item labeled ‘‘additional Medicare spending due to secondary insurance’’, the evidence is so strong that it is not

really worth discussing whether or not secondary insurance raises Medicare’s costs.

Ask any actuary.

We could have some reasonable disagreement on exactly how much the presence

of secondary insurance adds to Medicare’s costs. The estimates of impact are all

based on statistical analyses, and I’m sure that some of you agree with Mark

Twain’s assessment of statisticians. On a more serious note, we can question whether the statistical analysis adequately controls for factors affecting spending, such as

age, health status, income, education and the like. Most analyses of this issue suggest that beneficiaries with secondary insurance cost anywhere between 15 and 30

percent more than beneficiaries with no secondary insurance, after accounting for

the factors listed above.

In round numbers, an additional $1,000 per beneficiary per year is a good figure

to use when discussing the magnitude of the effect of secondary insurance on the

costs of the Medicare program. That’s not very precise but it is about the right size,

28

which I think correctly characterizes the literature on the effect of secondary insurance on Medicare costs.

Most analyses also find that Medigap coverage raises Medicare costs somewhat

more than does employer-sponsored coverage. The assumption is that this is a result

of the copayment structure: Medigap coverage tends to be first-dollar coverage, but

some substantial portion of employer sponsored coverage requires some (reduced)

beneficiary copayments. That is a plausible explanation but there is not enough detail in available data sources to provide an easy, direct test of this assumption.

Estimated Impact of Secondary Insurance on Medicare Per-Capita Spending

Insurance Status Medicare Cost

Medicare+Medigap ............................................................. $5,400

Medicare+Employer-sponsored .......................................... $4,900

Medicare only ...................................................................... $4,000

Memo: Assumed Medicare cost per capita ....................... $5,000

Notes: For ease of presentation, this analysis was based on an assumed Medicare average cost of $5,000 per

beneficiary per year. Estimates were adjusted for numerous sociodemographic characteristics, including age,

gender, income, education, and health status.

Source: Calculated from PPRC 1997 Annual Report to the Congress, Chapter 15.

Beyond the issue of costs, filling in the deductibles and copayments of fee-for-service Medicare also affects the ability to modernize and improve the traditional Medicare program. Private insurance in many market areas evolved via the PPO model,

where individuals are offered modest financial incentives to use preferred providers.

Currently, this is the most popular approach for health insurance for the working

population. Properly done, modestly higher copayments for out-of-network use are

not coercive or hugely restrictive. Instead, subscribers who have no strong preferences about using any particular provider are channeled toward the plan’s preferred providers.

Traditional Medicare, by contrast, cannot evolve via that PPO model. Modestly

lower copayments for use of preferred providers simply will not work in Medicare

because almost no beneficiaries actually pay those copayments in the first place.

Medigap plans themselves can adopt this approach (as in Medicare Select), but the

Medicare program does not have these financial levers in its control. This tends to

put the traditional Medicare program into an evolutionary dead end. It is, to some

approximation, an unrestricted fee-for-service program with no copayments or

deductibles and no easy path for moving toward alternative approaches to financing

care. Turning now to the beneficiaries, the first fact to absorb is that beneficiaries without secondary insurance are, on average, poorer, more likely to be minority race,

and in worse health than the rest of the Medicare population. They can reasonably

be characterized as not poor enough for Medicaid, not having had a good enough

job to get employer-sponsored coverage, and not well-enough off to want to purchase

Medigap. Roughly speaking, the lack of coverage appears driven more by wealth

than by health. The disabled (under-65) are also disproportionately represented in

this group.

It is worth noting that the cost-increasing effects of secondary insurance are

therefore substantially regressive. Medicare costs (and hence the Part B premium)

are inflated by better-off beneficiaries who have some secondary insurance. Those

without secondary insurance have far lower use of service, but pay a Part B premium that largely reflects the high use of those with complete insurance coverage.

In effect, they pay a share of the high costs incurred by better-off, fully-insured

beneficiaries.

The second fact to consider is that beneficiaries without secondary insurance consume less of all types of health care services. This includes things that are generally

viewed as ‘‘good’’ care, such as preventive services. For five preventive services that

can easily be tracked in the 1997 Medicare Current Beneficiary Survey (some physician visit during the year, flu shot, pneumonia shot, mammogram, pap smear),

beneficiaries with no secondary insurance had lower use of every service, with use

rates ranging from 13 to 30 percent lower than beneficiaries with employer-sponsored or Medigap coverage. (Those use rates were adjusted for differences in age,

gender, race, income, health status, and self-reported presence of diseases.)

It is inherently difficult to demonstrate whether or not this has an impact on

beneficiaries’ health. The definitive study of this issue for the under-65 population

was the RAND National Health Insurance Experiment. The conclusion from that research (summarized in the book Free for All by Joseph Newhouse and colleagues)

was that modest copayments did not noticeably reduce health status, with the subVerDate 11-MAY-2000 11:28 Sep 21, 2001 Jkt 074223 PO 00000 Frm 00032 Fmt 6633 Sfmt 6621 E:\HR\OC\A223.XXX pfrm01 PsN: A223
29

stantial exception of low income individuals with mental health problems. For the

Medicare population, the research is less clear-cut. One study found that individuals

without secondary insurance were more likely to move from no disability to some

disability (limitation on activity of daily living) over a two-year period, but that the

progress to higher levels of disability beyond that occurred at the same rate regardless of secondary insurance coverage. In other studies, some have found no differences in outcomes for specific diseases such as cancers, others have found differences in treatment and outcome.

The third relevant fact about beneficiaries and secondary insurance is the strong

desire for complete (first-dollar) coverage, to the point of behavior that economists

would label irrational or inefficient. Beneficiaries will indeed pay more than $100

to insure the cost of the Part B deductible. Prior to 1990, in the rare instances when

beneficiaries were offered inexpensive catastrophic-only Medigap or expensive firstdollar Medigap, few individuals opted for the catastrophic-only plans. After 1990,

faced with standardized Medigap products with wildly varying prices, almost no

beneficiaries shopped and switched insurers. In a 1996 report, the GAO estimated

that, of individuals owning Medigap policies in 1991 and alive in 1994, only about

1 percent had switched insurers over that three-year period. I do not know whether

shopping for policies remains as rare in the Medigap market now as it was then.

The point here is that if you expect beneficiaries to engage in what economists

would like to think of as reasonable, rational, efficient behavior toward Medigap

coverage, you will be sorely disappointed. Behavior in the Medigap market does not

suggest that beneficiaries typically act as cost-minimizing rational shoppers. Instead, behavior far more strongly suggests that beneficiaries want first-dollar coverage regardless, and that once they have it they do not want to change coverage.

Allow me to summarize the points in the presentation so far, then to describe

some potential directions for policy.

• Only 10 to 15 percent of beneficiaries have fee-for-service Medicare with no

secondary insurance.

• Secondary insurance fills in Medicare’s deductible and copayment liabilities, increases use of services, and raises Medicare’s costs substantially. A reasonable round number for discussion is that secondary insurance raises Medicare outlays by around $1,000 per beneficiary per year.

• Those without secondary insurance tend to be poorer, in worse health, and

are more likely to be minorities.

• Individuals without secondary insurance use less of all types of care, including ‘‘good’’ preventive services. It is difficult to say empirically whether their

health does or does not suffer as a consequence of that.

• Behavior in the market for Medigap insurance reveals a strong apparent

preference for first-dollar insurance coverage and little evidence of price-shopping.

Given these observations on the Medicare beneficiaries’ secondary insurance, what

types of policy options could you reasonably consider? Several years ago I engaged

in discussions of fairly radical approaches in this area, both at the Physician Payment Review Commission and in testimony to the National Bipartisan Commission

on the Future of Medicare. These proposals included banning or taxing Medigap, or

requiring Medigap insurers to become full-risk plans under Medicare+Choice. My

impression from that earlier experience was that even if the potential cost and cost

savings are as exactly as stated above, few would be willing to risk the disruptions

that such radical changes might create. Based on my earlier experience, I will limit

my suggestions in this testimony to more incremental approaches that would not

eliminate Medigap insurance.

Discussion of the issues centers around which concerns you are trying to address.

Is your interest on the cost-increasing effects of secondary insurance? Is your concern with the well-being of the 10 to 15 percent who have no secondary coverage?

Or is concern on the high prices that beneficiaries and employers must pay to obtain

that secondary insurance coverage?

First, I would like to draw your attention to the February 2001 CBO Budget Options book, where there is a short discussion of budget-neutral restructuring of

Medicare’s copayment and deductible liabilities. In particular, they show a restructuring that would provide maximum out-of-pocket protection for Medicare beneficiaries and generate some small cost savings for Medicare. Nothing is free: in order

to provide a stop-loss provision of $2,000, the CBO option would require a combined

A/B deductible of $1,000 and a 20 percent copayment for all care above the deductible. So, discussion can start from that basis. It is absolutely feasible to limit beneficiaries’ total out-of-pocket costs for Medicare-covered services to $2,000 annually,

in exchange for higher payments for care below that catastrophic cap.

30

A second option would be to try to offer some sort of advantage to that 10 to 15

percent of beneficiaries who have no secondary insurance coverage. It would certainly be fair to offer them a lower Part B premium, since their spending is substantially below that of other beneficiaries. From an actuarial standpoint, that’s reason- able. From an operational standpoint, having beneficiaries sign up for this, certify

that they don’t have secondary insurance, and receive a reduced or zero Part B premium in response is likely to be a difficult system. Hence, this option probably has

more theoretical than practical merit.

A third option focusing on those without secondary insurance would be to eliminate Medicare copayment liabilities on selected preventive services. For example, if

good health care requires that beneficiaries see a doctor at least once a year, then

Medicare could make that first office visit free. This type of approach is likely to

have a very high cost per net new preventive service delivered. Not only would it

make services free for the vast majority of beneficiaries who have secondary insurance, research shows that most beneficiaries will not obtain preventive care at the

recommended rates even when it is free. Thus, the likely cost per additional preventive service actually delivered to those without secondary insurance is likely to be

high.

A fourth option would be to take a new benefit design and impose it on the

Medigap industry, either for existing policies or, more likely, for all newly-issued

policies. For example, first dollar coverage could be replaced by a low and simple

copayment structure (e.g., $10 per office visit), while again certain key items of preventive care might be covered in full. This would not achieve the technical efficiencies potentially available in a federally-run alternative (such as paperwork reduction and elimination of overhead costs), but would not displace the current private-sector providers of such insurance. Applying the restructured benefits only to

newly issued policies would avoid disrupting Medigap insurers’ ongoing lines of

business.

In any revised Medigap benefit structure, there has to be some caution about paperwork burden relative to amounts collected. The cost of the paperwork for small

copayment amounts may exceed the cost of the copayments. The current first-dollar

Medigap system typically results in two financial transactions per service when the

Medigap insurer’s systems are coordinated with Medicare’s. There is a large payment from Medicare to the provider, and a smaller payment from the Medigap insurer to the provider, with the Medicare carrier passing along the bill for the copayment directly to the Medigap insurer. Adding yet a third, even smaller payment directly from the beneficiary to the provider may increase the overall administrative

burden of the system unless that payment is very simply structured and is routinely

handled at the time of the service, such as a flat $10 copayment per visit.

Finally, I would like to mention an option that was developed in the mid-1990s

by the American Medical Association. They proposed a plan that amounted to a prepaid, refundable deductible for Medicare, in effect creating a small Medical Savings

Account (MSA) within Medicare for each beneficiary. Beneficiaries would pay an additional monthly premium of (say) $80 to Medicare. All Medicare copayment and deductible liabilities for the year below $960 (80 x 12) would be paid from this prefunded amount, with no paperwork burden involved. Beneficiaries with under $960

in copayment/deductible liabilities would receive a refund at year-end (similar to an

MSA). Those with copayment/deductible liabilities in excess of this amount would

pay them as in the current Medicare program. Secondary insurers would be free to

cover copayment/deductible liabilities in excess of this $960 limit, but would never

see anything below the $960 limit. Employers or others would be free to pay the

beneficiary’s $80 monthly premium. In effect, this proposal would take the first $960

of current copayment and deductible liabilities and simply make them off-limits to

secondary insurers, handling them internally within Medicare instead.

This proposal provides a potential efficiency-versus-equity tradeoff. On the efficiency side, it reduces but does not eliminate the role of secondary insurers and the

paperwork burdens from copayment/deductible liabilities. The potential for a rebate

provides incentive to constrain use of care (as in an MSA). (If third parties paid the

monthly premium and collected any year-end rebate, that would nullify incentives

for reduced use of care.) But like the MSA proposal, this approach reduces pooling

of risks. Healthy beneficiaries would pay the least and those with high use of care

would face an effective $960 deductible, plus any copayment liabilities incurred excess of that (if any). The overall tolerance for this efficiency-versus-equity tradeoff

could be fine-tuned by lowering or raising the amount of the prepaid, refundable deductible.

In conclusion, there are few obvious alternatives for restructuring Medicare copayments, liabilities, and secondary insurance. First-dollar coverage from secondary insurance raises Medicare costs and is probably not the most efficient way to strucVerDate 11-MAY-2000 11:28 Sep 21, 2001 Jkt 074223 PO 00000 Frm 00034 Fmt 6633 Sfmt 6621 E:\HR\OC\A223.XXX pfrm01 PsN: A223
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ture payment. Yet, beneficiaries’ demand for Medigap reveals a strong desire for

such coverage. Reworking Medigap to require small copayments for each service

would likely be unpopular and might increase paperwork burden disproportionate

to the amounts of money involved. As CBO has demonstrated, we could restructure

Medicare rather than restructure Medigap, protecting beneficiaries from catastrophic costs at the expense of higher payments from non-catastrophic users. A

final alternative that seems plausible is to create, in effect, a mini-MSA for the first

few hundred dollars of Medicare copayment/deductible liabilities. This might allow

some reductions in overhead and paperwork burdens (and possibly some reduction

in service use) without eliminating the private provision of secondary insurance.

Chairwoman J

Dr. Davis.

OHNSON. Thank you, Dr. Hogan.

fSTATEMENT OF KAREN DAVIS, PH.D., PRESIDENT,

COMMONWEALTH FUND, NEW YORK, NEW YORK

Dr. DAVIS. Thank you, Madam Chairman, Mr. Stark, Members

of the Subcommittee for this invitation to testify on Medicare’s cost

sharing.

I think it is important to remember that Medicare was created

in 1965 to ensure financial protection for older Americans against

the cost of medical expenses and to ensure access to quality health

care. Modernizing Medicare’s benefit should involve adding prescription drugs and reducing the burdensome deductibles and cost

sharing that we have heard about this afternoon.

Remember that Medicare beneficiaries already spend a high proportion of their income on health care. Last year, the average elderly Medicare beneficiary spent over $3,000 per person on health

care expenses, or 22 percent of income. By 2025, that figure will

increase to 30 percent of income.

We should also remember that Medicare beneficiaries are sick or

poor. Two out of three either have serious health problems or incomes below twice the poverty level. In fact, one-third of Medicare

beneficiaries are cognitively impaired or have serious physical limitations, and those third account for 60 percent of all Medicare outlays.

Cost sharing has risen more rapidly than both inflation and the

incomes of beneficiaries, eroding the protection that the program

was designed to provide. If Medicare’s 1966 cost sharing had only

risen with general inflation, today’s Part A deductible would be

$218, not almost $800, and the Part B annual premium would be

$196, not $600.

The sickest beneficiaries or those without good supplemental insurance bear the heaviest brunt of out-of-pocket spending. Medicare cost sharing contributes to beneficiary access and bill problems, especially for lower income beneficiaries. Two out of five

beneficiaries who are most at risk report either problems obtaining

needed services or problems paying their medical bills. Cost sharing and the absence of supplemental insurance contribute significantly to failure to obtain preventive services and proper management of chronic conditions.

Medicare cost sharing is higher than typical employer plans.

Non-elderly Americans spend 9 percent of their incomes on health

care, compared with 22 percent for elderly beneficiaries.

32

Deductibles and premiums under employer plans are lower than

they are in Medicare, and as we have heard today, they typically

include catastrophic ceilings. They also cover physical exams and

prescription drugs, which Medicare does not.

Despite this, in fact, Medicare beneficiaries report higher satisfaction with Medicare than working families do with employer coverage.

Medicare beneficiaries need supplemental insurance coverage,

but it is increasingly unaffordable or unavailable. As we have

heard, 9 out of 10 have supplemental coverage, but Medigap premiums are expensive, over $100 a month, and for some plans in

some geographic areas as high as $3,000 a year. Employers are cutting back on retiree coverage, and Medicare Plus Choice enrollment

is dropping.

There are a number of options for improving Medicare benefits

and reducing cost sharing. In a report being released today by my

organization, The Commonwealth Fund, Marilyn Moon and colleagues and the Urban Institute simulate the impact on beneficiaries of improving Medicare benefits and cost sharing. Under all

four of the options simulated, both the elderly and the disabled

would experience a reduction in total out-of-pocket expenses, including private insurance premiums. Savings would be greatest for

beneficiaries with serious health problems. It would reduce the percent of income from 22 percent to 20 percent or, in one option,

down to 16 percent. By eliminating or reducing the need for private

supplemental insurance, efficiency and coverage would be improved. State Medicaid programs would also be expected to benefit

because they now pick up many of these costs for low-income beneficiaries.

Finally, Medicare beneficiaries have a claim on a portion of the

budget surplus. As you know well, the Balanced Budget Act

achieved major savings largely from the Medicare Program. Together, the slowdown in Medicare and Medicaid outlays in the late

nineties account for $1 trillion out of the $5.6-trillion 10-year budget surplus. More than $50 billion of the 10-year budget surplus is

attributable to the higher premiums that were part of the 1997

Balanced Budget Act. Returning this contribution to beneficiaries

in the form of the improved benefits and reduced cost sharing is

worthy of consideration.

Thank you.

[The prepared statement of Dr. Davis follows:]

Statement of Karen Davis, Ph.D., President, Commonwealth Fund, New

York, New York

Thank you, Madam Chairman, Mr. Stark, and members of the committee, for this

invitation to testify on Medicare’s cost-sharing. Medicare provides health insurance

for 40 million elderly and disabled beneficiaries. The program was created in 1965

to provide older Americans with financial protection against the cost of medical expenses and to ensure access to quality health care. At the time, half of the elderly

were uninsured, since few had retiree coverage through work or could afford private

coverage on their own. Today, nearly all of the elderly have basic coverage through

Medicare.

However, Medicare’s cost-sharing has risen more rapidly than inflation and the

incomes of beneficiaries, eroding the protection Medicare was designed to provide.

In 2000, the average elderly Medicare beneficiary spent $3,142 on their own health

33

1Stephanie Maxwell, Marilyn Moon, and Misha Segal, Growth in Medicare and Out-of-Pocket

Spending: Impact on Vulnerable Beneficiaries, The Commonwealth Fund, January 2001. 2Patricia Neuman, Cathy Schoen, Diane Rowland, Karen Davis, Michelle Kitchman, Elaine

Puleo, and Drew Altman, ‘‘Understanding the Diverse Needs of the Medicare Population: Implications for Medicare Reform,’’ Journal of Aging and Social Policy, 10(4), pp. 25–30, 1999. 3Marilyn Moon and Matthew Storeygard, One-Third at Risk: The Special Circumstances of

Medicare Beneficiaries with Health Problems, The Commonwealth Fund, May 2001. 4 National Center for Health Statistics, Health, United States, 2000, HHS/CDC/NCHS, July

2000. 5 Cathy Schoen, Patricia Neuman, Michelle Kitchman, Karen Davis, and Diane Rowland,

Medicare Beneficiaries: A Population at Risk—Findings from the Kaiser/Commonwealth 1997

Survey of Medicare Beneficiaries, Henry J. Kaiser Family Foundation and The Commonwealth

Fund, December 1998. 6 Author’s calculations based on average inflation rates applied to the original deductibles and

premium.

care expenses, or nearly 22 percent of income.1 By 2025, that will increase to $5,248

(in constant 2000 dollars)—almost 30 percent of income. Financial burdens on beneficiaries need to be reduced, not increased.

Medicare Beneficiaries are Disproportionately Poor and Sick

Some argue that Medicare cost-sharing is necessary to encourage beneficiaries to

be cost-conscious when making choices about their health care. Any discussion of

restructuring Medicare cost-sharing should be firmly rooted in an understanding of

the characteristics of beneficiaries, their financial contributions to their care, and

the difficulties they have obtaining access to care and paying medical bills.

Two of three Medicare beneficiaries are either sick or poor.2 Of all groups in society, they are perhaps the least able to ‘‘help the market work’’ by making cost-conscious choices. Eleven million beneficiaries have less than a high school education.

One-third of Medicare beneficiaries are cognitively impaired or have serious physical

limitations; 3 these beneficiaries account for 60 percent of all Medicare outlays. Included in this figure are over 9 million beneficiaries who are cognitively impaired,

accounting for 42 percent of Medicare outlays. One and a half million Medicare

beneficiaries are in nursing homes.4 Terminal illness strikes 2.4 million beneficiaries each year. The majority of beneficiaries suffer from a chronic condition such

as diabetes, arthritis, heart disease, cancer, or recurrent stroke. Three-fourths must

regularly take prescription drugs.5

Beneficiaries with the lowest incomes are also the sickest. Over half of those with

incomes below the poverty level ($8,259 for a single elderly person in 2000, $10,409

for a couple) are in fair or poor health. One-fourth of the poor need assistance with

at least one activity of daily living, such as eating or bathing.

Medicare Beneficiary Cost-Sharing is High

When Medicare began in 1966, the major expenses for which beneficiaries were

responsible were the average cost of the first day of hospital care under Part A, a

deductible for Part B physician and other ambulatory services, 20 percent coinsurance for Part B services (plus any physician charges over the allowed fees), and a

Part B premium. Even adjusting for inflation, today’s Part A hospital deductible and

Part B premium are three to four times higher than they were in 1966. The rapid

growth in the Part A deductible reflects changes in health care technology that have

led to shorter but more intensive hospital stays, driving up the average daily cost.

Only the Part B deductible is lower today in real terms than it was in 1966. If these

cost-sharing amounts had remained constant, adjusted for inflation, today’s Part A

deductible would be $218, not $792; the Part B deductible would be $272, not $100;

and the Part B annual premium would be $196 ($16 a month), not $600.6

These cost-sharing amounts or the supplemental insurance premiums required to

cover them represent significant financial burdens on Medicare beneficiaries. In

2000, elderly Medicare beneficiaries spent, on average, $3,142 out-of-pocket on

health care. About half of this amount came from cost-sharing for covered services

or private supplemental insurance premiums to pick up costs not covered by Medicare. About one-fifth is Part B premiums, and the remaining 30 percent is for services not covered by Medicare, primarily prescription drugs.

Despite Medicaid and other programs to subsidize Medicare cost-sharing and premiums for low-income beneficiaries, burdens on low-income beneficiaries are particularly heavy. The poorest beneficiaries spend 30 percent of income on health care.

Only 40 percent of low-income beneficiaries eligible for Medicaid and other programs

(Qualified Medicare Beneficiaries (QMB), Supplemental Low Income Medicare BeneVerDate 11-MAY-2000 11:28 Sep 21, 2001 Jkt 074223 PO 00000 Frm 00037 Fmt 6633 Sfmt 6621 E:\HR\OC\A223.XXX pfrm01 PsN: A223
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7Stephanie Maxwell, Marilyn Moon, and Matthew Storeygard, Reforming Medicare’s Benefit

Package: Impact on Beneficiary Expenditures, The Commonwealth Fund, May 2001. 8Stephanie Maxwell, Marilyn Moon, and Misha Segal, Growth in Medicare and Out-of-Pocket

Spending: Impact on Vulnerable Beneficiaries, The Commonwealth Fund, January 2001. 9 Cathy Schoen, Patricia Neuman, Michelle Kitchman, Karen Davis, and Diane Rowland,

Medicare Beneficiaries: A Population at Risk, The Commonwealth Fund, December 1998. 10 Janice Blustein, ‘‘Medicare Coverage, Supplemental Insurance, and the Use of Mammography by Older Women,’’ New England Journal of Medicine 332:1138–1143, April 27, 1995. 11 Jan Blustein, ‘‘Drug Coverage and Drug Purchases by Medicare Beneficiaries with Hypertension,’’ Health Affairs 19 (March/April 2000):219–230.

ficiaries (SLMB), Qualified Individuals) participate.7 Outreach efforts to inform and

enroll eligible beneficiaries have been limited.

A study by Marilyn Moon and colleagues at the Urban Institute supported by The

Commonwealth Fund modeled average out-of-pocket costs for six cohorts of beneficiaries to illustrate how widely costs vary depending on health and income. For

each group, the estimates provide averages given the groups’ likely health expenses.

The six groups include:

• All elderly

• Elderly with physical or cognitive health problems with no supplemental

coverage

• Disabled beneficiaries ages 45 to 64

• Beneficiaries ages 65 to 74 with incomes above $50,000 and employer-sponsored supplemental coverage

• Women with QMB coverage

• Women age 85 and older with physical or cognitive health problems and incomes between $5,000 and $20,000.8

Out-of-pocket spending as a percent of income ranges from 6 percent for younger,

higher-income beneficiaries with employer supplemental coverage to 52 percent for

older women in poor health with limited incomes. It averages 22 percent for all elderly, and 29 percent for disabled ages 45 to 64. On a per capita basis, expenses

average $3,142 for all elderly beneficiaries, and $3,870 for disabled beneficiaries

ages 45 to 64. They reach as high as $4,815 for those elderly in poor health with

no supplemental coverage, and $5,969 for older, low-income women in poor health.

These are staggering amounts for a retired population with little income and limited

savings.

Medicare Cost-Sharing Contributes to Beneficiary Access and Bill Problems

Not surprisingly, Medicare’s cost-sharing affects access to care. This is particularly true for lower-income beneficiaries and for those with serious health problems.

The Kaiser/Commonwealth 1997 Survey of Medicare Beneficiaries found that about

15 percent of Medicare beneficiaries experience difficulty obtaining needed care.9 Almost one-fourth of those with incomes below the poverty level have access problems,

as do one-third of the disabled under age 65. Problems paying medical bills were

reported by 14 percent of all beneficiaries, by one-fourth of those below poverty, and

by nearly one-third of the disabled under age 65.

About two of five of the most at-risk beneficiaries reported either difficulties obtaining needed services or problems paying medical bills. This includes 41 percent

of those with incomes below the poverty level, 39 percent of those in fair or poor

health, 47 percent of the disabled under age 65, and 40 percent of those needing

help with one or more activities of daily living.

Financial barriers to health care particularly affect use of preventive care. A 1995

study supported by The Commonwealth Fund found that elderly women were less

likely to receive a mammogram if they did not have supplemental health insurance

coverage.10 Medicare has since covered mammograms without subjecting services to

the Part B deductible.

The absence of coverage for prescription drugs, however, continues to lead to underutilization of services and inadequate maintenance of chronic conditions. A 2000

study supported by The Commonwealth Fund found that absence of supplemental

coverage for prescription drugs was a major reason why many Medicare beneficiaries with hypertension fail to receive appropriate medication.11

Rates of hospital admissions that could have been prevented with better preventive or primary care are particularly high for poor and minority elderly—indicating

inadequate access to primary care. In sum, poor and near-poor elderly are more likely to experience health problems that require medical services than elderly people

who are economically better off. Yet they are less able to afford needed care because

of their lower incomes.

35

12 Agency for Healthcare Research and Quality, Center for Cost and Financing Studies, Medical Expenditure Panel Survey, 1996. 13 Henry J. Kaiser Family Foundation/Health Research and Educational Trust, Employer

Health Benefits, 2000 Annual Survey. 14 Henry J. Kaiser Family Foundation and The Commonwealth Fund, Working Families at

Risk: Coverage, Access, Costs, and Worries, Kaiser/Commonwealth 1997 National Survey of

Health Insurance, December 1997. 15 Cathy Schoen, Elisabeth Simantov, Lisa Duchon, and Karen Davis, Counting on Medicare:

Perspectives and Concerns of Americans Ages 50 to 70, The Commonwealth Fund, July 2000. 16Stephanie Maxwell, Marilyn Moon, and Matthew Storeygard, Reforming Medicare’s Benefit

Package: Impact on Beneficiary Expenditures, The Commonwealth Fund, May 2001.

Medicare Cost-Sharing is Higher than Typical Employer Plans

Nonelderly Americans spend about 9 percent of their income on health care— much less than what the elderly spend.12 In large part, this reflects extensive employer-sponsored health insurance with lower cost-sharing, and better benefits. Most

employer plans include a ceiling on out-of-pocket expenses; Medicare does not. In

the generosity of its benefit package, Medicare ranks in the bottom decile of insurance plans.

The average deductible for all services—including hospital, physician, and other

services—is $239 in conventional fee-for-service plans offered by employers.13

Deductibles are even lower in managed care plans including preferred provider option (PPO) plans and point-of-service (POS) plans, and are virtually nonexistent in

health maintenance organizations (HMOs). The typical ceiling on out-of-pocket expenses in conventional employer plans is $1,500. Benefits are substantially more

comprehensive: 71 percent of firms cover adult physical exams, which Medicare does

not; 87 percent cover prescription drugs; and 25 percent cover dental care. Employers pick up, on average, 86 percent of the premium for single coverage for workers,

leaving the worker with a monthly premium share of $28. In contrast, a Medicare

beneficiary’s monthly premium share is $50 (on top of Medigap premiums that aver- age over $100 a month).

Over an individual’s lifetime, health care expenses are greatest after reaching retirement, when incomes are lower and savings are being drawn down. Improving

Medicare benefits—even if financed by greater contributions during the working

years—would smooth lifetime health spending patterns and afford greater economic

security in older age.

Despite the fact that Medicare’s benefits do not compare favorably with employer

coverage, it is noteworthy that Medicare beneficiaries report higher satisfaction with

Medicare than do working families with their own coverage. Fifty-seven percent of

Medicare beneficiaries say they are very satisfied with Medicare, compared with 46

percent of working families covered by employer health insurance.14

A Commonwealth Fund survey of 50-to-70-year-old adults finds strong support for

Medicare.15 Older adults trust Medicare and value its reliability. Nearly two-thirds

of all adults 50 to 64 would like the option of buying into Medicare early, while 86

percent of uninsured older adults would like that option. Preference for Medicare

may reflect the predominance of the program’s fee-for-service option; most employer

plans are limited to one or more managed care plans. But it may also reflect an

appreciation for the fact that Medicare will be there for them over time, as well as

a concern that private coverage may be unavailable or unaffordable when serious

illness or disability strikes or when older adults are no longer able to work.

Supplemental Coverage Needed by Medicare Beneficiaries

While workers with employer health insurance rarely purchase supplemental coverage, nine of 10 Medicare beneficiaries obtain supplemental coverage to augment

Medicare’s benefits. About 38 percent of Medicare beneficiaries have supplemental

coverage from a current or former employer.16 About 23 percent are covered by individually purchased private supplemental insurance (Medigap), 15 percent are enrolled in Medicare+Choice plans, and 13 percent are covered in part or in full by

Medicaid. About one of 10 Medicare beneficiaries are covered by traditional Medicare only. The ability of Medicare beneficiaries to supplement Medicare’s benefit

with additional coverage is undoubtedly a factor in the high satisfaction with Medicare reported by beneficiaries. On the other hand, the widespread need for supplemental coverage attests to the perceived inadequacy of the Medicare benefit package.

Not all Medicare beneficiaries are able to afford supplemental coverage, nor is

coverage with prescription drug benefits available to those with serious health problems. A recent study by a team of investigators at the University of California, Los

Angeles, that was supported by The Commonwealth Fund reported that 17 percent

of beneficiaries with incomes below $10,000 had no supplemental coverage, comVerDate 11-MAY-2000 11:28 Sep 21, 2001 Jkt 074223 PO 00000 Frm 00039 Fmt 6633 Sfmt 6621 E:\HR\OC\A223.XXX pfrm01 PsN: A223
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17 Nadereh Pourat, Thomas Rice, Gerald Kominsky, and Rani E. Synder, ‘‘Socioeconomic Differences in Medicare Supplemental Coverage,’’ Health Affairs 19 (September/October 2000). 18 Bruce Stuart, Dennis Shea, and Becky Briesacher, Prescription Drug Costs for Medicare

Beneficiaries: Coverage and Health Status Matter, The Commonwealth Fund, January 2000. 19Quotesmith.com, as cited in Marilyn Moon, Assessing the President’s Proposal to Modernize

and Strengthen Medicare, The Commonwealth Fund, January 2000. 20General Accounting Office, Medigap Insurance: Insurers’ Compliance with Federal Minimum

Loss Ratio Standards, 1988–93, August 12, 1995; and Lutzky, Alecxih, Pankaj, Laud, and

Schaab, Restricting Underwriting and Premium Rating Practices in the Medigap Market: The

Experience of Three States, AARP Public Policy Institute, January 2001. 21McArdle, Coppock, Yamamoto, and Zebrak, Retiree Health Coverage: Recent Trends and Employer Perspectives on Future Benefits, Hewitt Associates, October 1999. 22Marsha Gold and Lori Achman, Trends in Premiums, Cost-Sharing, and Benefits in

Medicare+Choice Health Plans, 1999–2001, The Commonwealth Fund, April 2001. 23Stephanie Maxwell, Marilyn Moon, and Matthew Storeygard, Reforming Medicare’s Benefit

Package: Impact on Beneficiary Expenditures, The Commonwealth Fund, May 2001.

pared with 5 percent of those with incomes above $25,000.17 Similarly, employersponsored supplemental coverage is much lower as is Medigap coverage for lowerincome beneficiaries.

Nor does supplemental coverage always include prescription drug benefits. Only

half of Medicare beneficiaries have year-long supplemental prescription drug coverage.18 Prescription drug coverage is quite expensive, and Medigap plans that cover

drugs (Plans H–J) are subject to underwriting and exclude beneficiaries who are

deemed poor health risks. In 2000, Medigap annual premiums for Plan J, including

prescription drugs, averaged $3,252 for a 65-year-old woman.19 Even Plan E plans

that exclude prescription drugs average annual premiums of $1,320 ($110 a

month)—an amount on top of Medicare Part B premiums that are now $600 a year.

While standardization of Medigap policies has reduced confusion, not all plans are

in compliance with federal standards on the ratio of benefits to premiums and many

plans offer poor value at high cost.20

Most disturbing is the trend in future coverage. Eighty-one percent of employers

report that they are planning to increase retiree health premiums and/or cost-sharing in the future, and 40 percent are cutting back on prescription drugs.21 Thirty

percent are planning to terminate coverage for future retirees.

Medicare+Choice plans have enrolled about 6 million beneficiaries. Better benefits

and lower cost-sharing are major reasons why beneficiaries choose managed care

plans. But instability in the managed care market and the withdrawal of plans either nationally or from selected geographic areas raise questions about the longterm future of this option. Medicare+Choice plans are increasing monthly premiums

and reducing benefits, especially prescription drug benefits.22 As a result, the number of beneficiaries enrolled in Medicare+Choice peaked in 1999 at 6.3 million; such

plans now cover 5.6 million people.

If private market trends continue, Medicare beneficiaries will be increasingly reliant on the individual, Medigap market to supplement Medicare’s basic benefits.

There are now signs that premiums in this market—where costs cannot be pooled

through employer groups or managed care health plans—are beginning to spiral upward for policies that include prescription drug coverage (and that already feature

high administrative costs). Further increases may well expand the proportion of

beneficiaries who can afford only basic Medicare benefits.

Options to Improve Medicare Benefits and Reduce Cost-Sharing

Given the increasing unreliability of supplemental coverage and the serious financial burdens and barriers to needed care that Medicare beneficiaries face, consideration should be given to improving Medicare’s benefits. In a Commonwealth Fundsupported study by Marilyn Moon and colleagues at the Urban Institute being released today,23 four options for improving Medicare’s benefit package are simulated:

• Option 1 combines Part A and Part B, replaces the current deductibles with

a single combined annual deductible of $400, and introduces a $3,000 annual

beneficiary limit on cost-sharing and deductible expenses. It would increase

Medicare outlays by an estimated $3.2 billion in 2000.

• Option 2 reduces the Part A deductible to $200 per spell of illness and increases the Part B deductible to $200. Part B coinsurance is reduced to 10 percent, a new 10 percent coinsurance on home health services is introduced, and

all cost-sharing and deductible expenses are subject to a $2,000 annual beneficiary limit. This option would increase Medicare outlays by an estimated $16.4

billion in 2000.

• Option 3 eliminates the Part A deductible and all Part A cost-sharing.

While increasing the Part B deductible to $200, it eliminates Part B coinsurVerDate 11-MAY-2000 11:28 Sep 21, 2001 Jkt 074223 PO 00000 Frm 00040 Fmt 6633 Sfmt 6621 E:\HR\OC\A223.XXX pfrm01 PsN: A223
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24 U.S. House of Representatives, Committee on Ways and Means, 2000 Green Book, October

6, 2000.

ance. This improved coverage is financed by increasing the Part B premium to

$105 per month, achieving virtual budget-neutrality.

• Option 4 adds a prescription drug benefit with 50 percent coinsurance, a

$2,500 limit on beneficiary cost-sharing, and a $26 monthly premium. This option would increase Medicare spending by $13.9 billion in 2000.

The first three options reduce out-of-pocket spending by improving covered Medicare benefits and/or reducing or eliminating the need to purchase costly Medigap

coverage. The fourth option introduces coverage for a currently uncovered benefit,

prescription drugs, and could be combined with any one of the first three options.

Under all four options, both the elderly and the disabled would experience a reduction in total out-of-pocket expenses, including private insurance premiums, costsharing for covered services, and expenses of noncovered services. The elderly would

save $27 per capita under Option 1, $240 under Option 2, and $763 under Option

3. Disabled beneficiaries ages 45 to 64 would save $103, $280, and $408, respectively, under Options 1, 2, and 3. The disabled would particularly benefit from a

prescription drug benefit: Option 4 would save the elderly $181 per person, while

the disabled ages 45 to 64 would save $824 per person.

Savings would be greater for beneficiaries with serious health problems. The

Urban Institute team estimates that elderly beneficiaries in poor health without

supplemental coverage would save $285, $587, and $1,591 per person, respectively,

under Options 1, 2, and 3. For low-income women over age 85 and in poor health,

savings would be even greater—$495, $753, and $2,092.

On average, out-of-pocket spending for elderly beneficiaries would decline from

the current rate of 21.7 percent of income to 21.5 percent under Option 1, 20.0 percent under Option 2, and 16.4 percent under Option 3. Option 4, if enacted alone,

would reduce spending to 20.4 percent of income.

Option 3, by eliminating the need for private supplemental insurance, represents

an important way to improve efficiency in coverage for Medicare beneficiaries. Consolidating coverage under Medicare produces savings through reduced administrative costs by eliminating the need to coordinate two sources of coverage. Medicare

administrative costs are also lower than private insurance plans. Medicare does not

need to maintain reserves to protect against adverse risk selection, nor are marketing or sales commissions needed.

Some beneficiaries, however, could face higher costs. About 20 percent of Medicare

beneficiaries are hospitalized in a given year.24 Under Option 1, replacing the current Medicare Part B $100 deductible with a combined A/B deductible of $400 would

result in higher costs for the 80 percent of beneficiaries without a hospital episode

during the year. For beneficiaries lacking supplemental coverage, the immediate effect would be a substantially higher overall deductible.

Similarly, for retirees with employer-sponsored coverage, much depends on how

employers respond to improved Medicare benefits. If employers pick up the higher

Part B premiums under Option 3, most beneficiaries with retiree coverage would

gain. If any savings to employers were devoted to improving other benefits (such as

prescription drugs), beneficiaries would gain further. But employers could use the

improvement in Medicare benefits as an opportunity to drop retiree coverage even

more rapidly than is currently anticipated.

State Medicaid programs would also be expected to benefit from an improvement

in Medicare benefits. This is particularly true under Option 4 with the addition of

prescription drugs to Medicare, a benefit now covered by most Medicaid programs.

But the reduced cost-sharing under Options 1, 2, and 3 would also provide fiscal

relief to state governments. Improved Medicare benefits might be coupled with increased state responsibility for coverage of low-income families under Medicaid or

the Children’s Health Insurance Plan.

Conclusion

For more than 35 years, the Medicare program has assured health and economic

security for older and disabled Americans. Understanding the strengths of the program and its contributions to improving health outcomes and access to health services is an important foundation on which to build.

Medicare beneficiaries are heterogeneous. Some fit the stereotype of vigorous and

well-to-do seniors. But others are older widows living alone, some are in nursing

homes, some are terminally ill, and some live on quite modest incomes. These are

the faces of Medicare, and they should be kept foremost in mind as new ideas for

modernizing Medicare’s benefits are developed and considered. Improving MediVerDate 11-MAY-2000 11:28 Sep 21, 2001 Jkt 074223 PO 00000 Frm 00041 Fmt 6633 Sfmt 6621 E:\HR\OC\A223.XXX pfrm01 PsN: A223
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25Karen Davis, Cathy Schoen, and Stephen C. Schoenbaum, ‘‘A 2020 Vision for American

Health Care,’’ Archives of Internal Medicine, 260, December 11/25, 2000. 26Marilyn Moon, Barbara Gage, and Alison Evans, An Examination of Key Medicare Provisions in the Balanced Budget Act of 1997, The Commonwealth Fund, September 1997.

care’s benefits—not just looking for savings or shifting costs to beneficiaries—should

be an important priority.

Reducing the financial burden beneficiaries already bear, as well as the increasing

burden they are expected to face over the next 25 years, should be a priority for

use of federal budget outlays. We should remember that a considerable portion of

the federal budget surplus was generated by the Balanced Budget Act (BBA). An

estimated $1 trillion of the $5.6 trillion 10-year surplus was derived from a slowdown in Medicare outlays, in large part as a result of BBA, and from the slow-down

in Medicaid outlays, an unintended consequence of welfare reform.25

Ten percent of the Medicare BBA savings came from increased beneficiary premiums, as home health services were moved from Part A to Part B and subjected

to 25 percent beneficiary premium contributions.26 For example, the Part B premium in 2006 was raised more than 50 percent by the BBA. As a result of the BBA,

over $50 billion of the 10-year budget surplus was from higher premiums charged

to Medicare beneficiaries. Returning this contribution to beneficiaries in the form

of improved benefits and reduced cost-sharing is worthy of consideration.

Thank you for this opportunity to testify. I would be pleased to answer any questions.

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Chairwoman J

Dr. Davis, you make the point that Medicare needs to be modernOHNSON. I thank the panel for their contribution.

f ized both in terms of benefits, and you point to prescription drug

benefits, and in terms of cost sharing. While I appreciate your comVerDate 11-MAY-2000 11:28 Sep 21, 2001 Jkt 074223 PO 00000 Frm 00056 Fmt 6633 Sfmt 6602 E:\HR\OC\A223.XXX pfrm01 PsN: A223
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ments about what we have saved from Medicare, it is true that

Medicare costs will double in 10 years. It is a very big program,

and it is growing very rapidly. That is without prescription drugs

or annual physicals or any of the other things that we ought to be

doing to modernize the benefit package.

If this is your recommendation, how would you control costs? In

the private sector, we just heard that 90 percent are in some form

of managed care, but in Medicare, only 15 percent. What would you

do to control costs if you are going to expand the benefit package

and reduce cost sharing?

Dr. DAVIS. You are certainly correct, Madam Chairman, that

Medicare outlays will increase as costs go up and as there are more

baby-boomers retiring, but costs will also go up for beneficiaries so

that the average amount beneficiaries will pay will go up from

$3,000 to over $5,000 a person, and that is holding constant for inflation.

Chairwoman JOHNSON. Right. That is holding constant for inflation and no new benefits. So that has got to be of concern to us,

but if that is a concern to us under the current program, what is

it that you propose that might control costs so that this would be

affordable, so that beneficiaries would not be harmed?

Dr. DAVIS. Right. The first thing I am saying is that we do not

want to just shift more costs onto beneficiaries to protect the Federal budget. That will make the beneficiary situation worse.

We are all looking for the magic bullet that would achieve savings.

Chairwoman JOHNSON. We did use a few good ones.

Dr. DAVIS. The one that is proposed in this testimony is eliminating dual coverage by integrating that into one source of coverage.

Certainly, right now, Medicare’s administrative costs run 2 percent a year. As we have heard from the General Accounting Office,

Medigap administrative costs run 20 percent a year. One way to

achieve savings is to cover those benefits under Medicare at a 2-

percent administrative cost instead of a 20-percent administrative

cost add-on. That would mean beneficiaries would be paying a premium, an additional premium to Medicare, but they would achieve

savings by having no or lower Medigap coverage premiums.

So one source of efficiency is instead of having two plans covering

the same benefits, having one plan integrated, under Medicare, a

single premium being paid to Medicare, and realizing those administrative savings.

Chairwoman JOHNSON. All of that would actually increase costs

significantly since Medigap covers new benefits. So, if you were

going to merge those premiums, you would have to also merge the

benefits.

So you really are obliged to give us some ways to control costs.

The private sector has controlled costs by adopting a managed care

protocol that, while it has some failings, has both better integrated

care and, in many instances, responsibly controlled costs.

So I hear what you are saying about improving benefits and reducing the beneficiary burden, but without better research and recommendations in terms of overall cost control, we cannot be blind

by the fact that the program is growing by leaps and bounds. In

54

only 10 years—that is before the baby-boomers will retire—the program will double, with no improvements.

Dr. Scanlon and anyone else who wants to pitch in on this, what

is the research that demonstrates that deductibles have an impact

on usage, utilization, and, therefore, cost? How much does that research tell us about that personal discipline over utilization? Does

it eliminate needed care as well as unneeded care? What do we

know about deductibles and cost control? Dr. Scanlon?

Dr. SCANLON. Madam Chairwoman, what we do know is that the

absence of cost sharing does lead to a significant increase in cost.

I think as Dr. Hogan’s testimony points out in detail, studies have

indicated that costs may increase as much as 25 percent when

there is first dollar coverage because one has a Medigap plan.

When one has employer-based insurance, which still has reduced

deductible, there is an increase in utilization compared to those

without any supplement coverage at all, but it is less than having

first dollar coverage. So we do know that there is a very positive

increase in terms of utilization.

Being able to sort what are necessary services that are being

used because there is no longer a financial barrier versus those

which are discretionary or unneeded, is not something that has

been possible to do.

We have done work in looking at other aspects of Medicare, in

particular, looking at laboratory services under the End Stage

Renal Disease (ESRD) program. We find where there is no cost

sharing a totally inexplicable pattern of service use: extensive overuse as well as underuse. We had a panel of nephrologists review

the tests that were being provided. In some instances, tests were

being provided every week, and the nephrologist panel said they

never understood why you would ever provide this kind of a test.

So the absence of cost sharing creates lack of discipline. Having

cost sharing potentially creates some barriers. Finding the balance

between those two is the challenge that we face.

Chairwoman JOHNSON. Thank you. Does anyone else wish to

comment on that point? Is that what you mean, Dr. Hogan, by

Medigap costing us $1,000 per beneficiary?

Dr. HOGAN. That is right. Once all of the copays and deductibles

are paid, when care is free, beneficiaries will use more.

Chairwoman JOHNSON. You say that, but Mr. Stark in his opening statement did not agree with you. So you need to document

that if you believe that is true.

Dr. HOGAN. Yes. If I wanted to point to some particular pieces

of research, the Congressional Budget Office has their own studies.

Joe Newhouse at RAND had the National Health Insurance Experiment in the eighties. It was an under-65 population, but it was a

true experiment. They literally assigned people to different plans

and looked at their expenditures and that found the same result.

I can guarantee you that every cost estimate you see for the cost

of a drug benefit will have such an effect embedded in it, and every

cost estimate comes out of the actuary’s office and HCFA will have

such a cost estimate.

I am kind of an agnostic on the whole concept of necessary care.

I do not think that is the way decisions are actually made. It is not

healthy beneficiaries who are using services frivolously. Most beneVerDate 11-MAY-2000 11:28 Sep 21, 2001 Jkt 074223 PO 00000 Frm 00058 Fmt 6633 Sfmt 6602 E:\HR\OC\A223.XXX pfrm01 PsN: A223
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ficiaries have something wrong with them, and if you look at the

services where Medicare pays the most money, Part B—Part B is

what I know. I worked for the Physician Payment Review Commission for a number of years. Cataract surgery is the number-one

service for which Medicare pays physicians. What is the indication

for cataract surgery? Well, you have to have some loss of visual

acuity. It is not a necessary or unnecessary decision. If you say to

a beneficiary, ‘‘Now with current technology, cataract surgery is

quick, painless, and has almost no complications,’’ you say to a beneficiary, ‘‘We can fix your visual deficit and it is free’’ versus ‘‘We

can fix your visual deficit and it will cost you $600 or $700,’’ I think

that is enough to deter enough people to at least think about it a

while. So I just want to say I am an agnostic on the concept of necessary care.

You definitely find that people will use fewer preventive services

when they have to have copays and deductibles, but they use fewer

services right across the board.

Chairwoman JOHNSON. Thank you.

Mr. Stark.

Mr. STARK. Madam Chair, I would like to follow on that.

In your chart, Dr. Hogan, you suggest that you are using $5,000

per beneficiary per year, and then you are comparing and you are

saying that with employer-based Medicare plus some kind of an

employer base-sponsored supplement, you save 100 bucks, it is

$4,900. With Medicare and a Medigap policy, you are suggesting

the cost is $5,400. So that is $400 more. What you further say to

get to that $1,000 savings is that those people with Medicare only,

only costs $4,000, right? But you further said that that is only 10

percent of the Medicare beneficiaries, right? I think it follows that

they are the very poorest of the Medicare beneficiaries, right, and

least apt to have medical services available and, and, and, and. So

that, I think that the idea of suggesting that these copays cost us

1,000 bucks may not be entirely based in the supplemental payments is what I am getting at. We are talking about 10 percent

who arguably are the most challenged of our beneficiaries.

Further, we did not get into this. Dr. Scanlon, what is the average per-capita Medicare cost for the 40 million beneficiaries? Do

you have a number off the top of your hat?

Dr. SCANLON. I think it is approximately $6,000 per year.

Mr. STARK. OK, it is 6,000 bucks. So Dr. Hogan used $5,000 just

as an estimate here.

But if you take the $6,000 figure and take the Medicare Plus

Choice, we have been told that if we risk the Plus Choice, we would

be paying 7-percent less, so there is a $420 overpayment in Plus

Choice. It certainly does not have any deductibles, I do not think,

any Plus Choice. It may have some modest copays. But I am not

sure that we can just capriciously suggest that a variety of charges

tacked on hither and yon will save money that we want to save because, in none of these purely numeric calculations, I do not believe, any of our witnesses have talked about whether the savings

came from unnecessary medical procedures.

You did not take that into account, did you, Dr. Hogan? You do

not make a judgment here as to whether the difference in the

56

$4,000 for Medicare only was a savings of 1,000 bucks on services

that were unnecessary.

Dr. HOGAN. In my written testimony, I point out it is, more or

less, across the board. In fact, all of the five preventive services

that can easily be identified in the current beneficiary survey are

used less by the beneficiaries who have to pay their own copays

and deductibles.

Mr. STARK. I guess you could get a fight in any bar in town as

to whether or not preventive services are worthwhile and which

ones we ought to be paying for, but this Subcommittee has added

preventive services. We may all have a different list of priorities,

but I think many of us have some we still do not pay for that we

would like to add.

So all I would like my colleagues to consider in this is that while

there can be some savings in ratcheting up copays or certainly in

deductibles in going to the hospital for a day where it is $600 or

$700 is that what we want to do? There are ways to save money,

and we have got a whole litany of those, but I just want to urge

us to be cautious that we do not eliminate necessary medical procedures and overlook unnecessary ones. I am not sure that just dealing with broad copays or Medigap does that.

I do not have any answer, but I just want to remind us that we

could do some real harm here to people who need services.

Chairwoman JOHNSON. I certainly appreciate the barrier that copayments can cause, but that is why I asked Dr. Scanlon and Dr.

Hogan and they did name off a number of research projects that

have been done that demonstrate that deductibles do lead people

to think about whether they need the service or not. In the employer sector or even actually in Medicare, there does not seem to

be any evidence that deductibles have been a barrier to care.

Now, in Medicare, there are a lot of other barriers to care. So it

is a little hard to make the comparison.

Why don’t I recognize Mr. McCrery and see if others pursue this

topic and can come back to it. I think the point is we really have

to have better documentation on this issue of deductibles because

it does seem to be a factor, and we need to understand what kind

of factor it could be for us as we face governing a program whose

costs are exploding.

Mr. McCrery.

Mr. MCCRERY. I appreciate the testimony and especially the references to other studies that have been done on the effectiveness

of copays and deductibles in discouraging over utilization.

My own sense is, though, that discouragement is probably greater in the under-65 population than it is the over-65 population. The

over-65 population, generally speaking, probably has more need to

go for services than the under-65 population.

Having said that, though, I do believe that there ought to be

some requirement on the part of beneficiaries to pay some copayment or some deductible. The question to me is finding the right

balance between discouraging over utilization and discouraging

proper utilization, and I have not heard any of you give us that

magic formula today.

I was intrigued, though, Dr. Hogan, by your proposal or, I think

it was, the AMA’s proposal that you mentioned for a prepaid deVerDate 11-MAY-2000 11:28 Sep 21, 2001 Jkt 074223 PO 00000 Frm 00060 Fmt 6633 Sfmt 6602 E:\HR\OC\A223.XXX pfrm01 PsN: A223
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ductible that they could get back at the end of the year if they did

not use. Have you thought about what effect that proposal would

have on the secondary insurance market?

Dr. HOGAN. Really, the point of that proposal is twofold. For better or worse, it works like a small medical savings account.

Mr. MCCRERY. Right.

Dr. HOGAN. But, mostly, it creates a little space where Medicare

says for the amount that we are comfortable with, it might be a

few hundred dollars, copays and deductibles shall apply, and the

secondary insurers will not touch that. So the main point of it is

to assert a small amount of money over which Medicare controls

the copays and deductibles, not the secondary insurers.

Their Medigap premiums would fall because they would not pay

that first few hundred dollars of copays and deductibles, but would

not fall a whole lot because you have to realize there is an awful

lot of money out there on the far tail of spending. There is a few

catastrophic cases that account for most of the costs, but other than

that, if they would make their packages conform to Medicare’s new

structure, they would simply take it in stride. They would have a

new set of plans, A through whatever, and they would charge

somewhat lower premiums to cover the amounts beyond that prepaid deductible.

Mr. MCCRERY. So, in other words, you would not allow secondary

insurance to cover that prepaid deductible?

Dr. HOGAN. No. The whole point is you would not allow secondary insurance to cover the prepaid deductible.

Mr. MCCRERY. That is a very interesting proposal, Madam Chair,

and I hope that we will explore that further. It might be that we

could even encourage it by making it like an MSA (medical savings

account) and making it pre-tax dollars to be put into the account,

and it could be rolled over from year to year if they so desired.

Dr. Davis, you encouraged us to look at providing more services,

prescription drugs, lower deductibles, and so forth, and it rang familiar. Isn’t what you are describing very much like the catastrophic plan that Congress adopted back in 1988, I believe it was?

Dr. DAVIS. Obviously, the catastrophic plan was designed to improve benefits. It was designed to put a ceiling on total spending

that the elderly would have to pay, and it did have a prescription

drug benefit.

There are some significant differences. That particular proposal

was financed by an income-related premium. That was a very

sharp increase for beneficiaries that currently have employer supplemental coverage. So they saw themselves as getting no new benefits and, yet, paying a higher premium.

What is laid out in this report that we have released today are

four options, one with prescription drugs, three to change the cost

sharing. All of them actually would increase the Part B deductible

slightly, up to $200 from $100. That is the one deductible that has

not increased in real terms, but they would markedly reduce the

Part A deductible.

One of the effects of that, for example, one of the options reduces

the Part A deductible to $200. More people would be willing to do

without supplemental coverage if they knew the most they had to

pay for Part B was $200, the most they had to pay for Part A was

58

$200, and there was a total ceiling of $2,000 on any cost sharing

and deductibles overall.

So, in fact, it is restructuring it, but the basic effect is to lower

the average amount that beneficiaries pay as a percent of income

across all services.

Mr. MCCRERY. Did your study estimate a cost of the proposal?

Dr. DAVIS. Yes.

Mr. MCCRERY. What was that?

Dr. DAVIS. There are cost estimates attached to those. If you

think about, say, the year 2000 as a typical base, the first option

increases Medicare outlays by about 2 percent, option two by about

7 percent, option three is budget-neutral. Obviously, if you were to

do that, you would want to do participation rates, and you would

want to do estimates over time and behavioral shifts, but there are

estimates in percentage terms and in dollar terms. Option one is

$3.2 billion in the year 2000; option two, 16.4. Option three is financed by increasing the Part B premium to $105 a month. So

there is actually budget neutrality in that particular option, but

there are cost estimates provided, to give you a sense of what these

would entail.

Mr. MCCRERY. Thank you.

Chairwoman JOHNSON. Mr. Kleczka.

Mr. KLECZKA. Thank you, Madam Chair.

Dr. Hogan, in your testimony, you indicated those folks with supplemental insurance or Medigap actually cost the Medicare Program on average about $1,000 more.

Can you point out specifically what services are being over utilized or where we are being taken advantage of or where the Federal Government is paying more?

Dr. HOGAN. I keep telling you folks necessary care is a fiction

that physicians created. I do not think there is any such thing.

There are some clear-cut cases. There are some cases that are

not clear-cut. Most medical care is kind of gray, and I do not think

it is particularly profitable to talk about necessary and unnecessary

care. Maybe ‘‘value’’ is the better word, whether the value of the

services that you get with zero copay is——

Mr. KLECZKA. But if, in fact, you are going to contend that on average, we are spending for the program $1,000 more, I would

think that at least you could pinpoint where. Is it just doctor’s visits?

Dr. HOGAN. Oh, no, no. If you look at the research, the research

shows that the impact is much higher on the B side than on the

A side. So it is not the hospitalization. That is the typical research.

Mr. KLECZKA. So with physician’s visits, OK.

Dr. HOGAN. Right. So it is physician visits and tests and procedures and images. That is where the largest dollar impact is.

If you go back to the national health insurance experiment,

which is the under-65 and it is old, Joe Newhouse found that when

you charge copays and deductibles, their utilization fell mostly,

again, for physician services, but it did not seem to affect their

health status as far as he could tell with some important exceptions, and the exceptions were pretty obvious once you saw them.

Poor people with mental health problems: If you charge them

copays and deductibles, their health deteriorates. So there is a bit

59

of research to tell you where you should not charge copays and

deductibles, and poor people with mental health problems is one of

them.

Beyond that, doctors cannot tell you what is necessary and unnecessary. You certainly would not want to ask an economist to tell

you that.

Mr. KLECZKA. But if I were a doctor, I would want to do more

versus less because medicine is an imprecise science, and so, if I

am trying to do a decent analysis of a patient, I am going to have

to maybe do another test which you say if it was not for this

Medigap policy, this doctor would have done it, anyway. It gets

kind of murky and cloudy.

This is an interesting discussion, and I guess it is a rhetorical

question. However, what I am wondering about is what is the actual purpose of copays. Is the purpose of copays and deductibles to

have the patients share in the cost, or is it to try to restrict utilization, or is it a combination of both? If it is an effort to restrict utilization, then the answer for this Committee and the Congress is

raise those copays and people just will not go. So, in your view, Ms.

O’Sullivan, what are we trying to accomplish with copays and

deductibles?

Ms. O’SULLIVAN. It is essentially a combination of the two.

Mr. KLECZKA. That is what I was afraid of.

Ms. O’SULLIVAN. You are trying to make beneficiaries cost-conscious at the point when they use services, but not make the cost

sharing so high that they will forego needed services and then perhaps incur larger expenditures down the road.

Mr. KLECZKA. Do you agree with Dr. Hogan’s contention that because of supplementals and Medigaps that we are under a Medicare Program paying about $1,000 more?

Ms. O’SULLIVAN. There is research that shows that Medicare

beneficiaries that also had Medigap policies do cost the Medicare

Program more.

I think you should remember that people who buy Medigap policies are buying a policy that they know is going to cover most, if

not all, of their cost sharing, and they probably purchased a policy

based on the expectation that they are actually going to need covered services. So there is some of that entering the picture, also.

We know that people that have employer-based policies cost

Medicare more. They cost about 10 percent more than people that

have no coverage. Arguably, people that have no coverage are the

people that are low income, but above the Medicaid line. So any

cost sharing could seem fairly burdensome to them. For them, cost

sharing has a fairly big implication for them, and they may well

be foregoing services that they actually need.

The other comment I would make is when you are talking about

impact of change in cost sharing, we do not have one supplementary market out there. We have Medigap. We have the Qualified Medicare Beneficiaries and the Specified Low-Income Beneficiaries (QMB/SLMB) populations for whom Medicaid is paying

Medicare’s cost-sharing charges. We have employer-based policies

which have various ways of wrapping around Medicare, and we

also have Medigap and there are 10 of those. So any tweaking of

Medicare will have differential impacts.

60

Mr. KLECZKA. Fine. Thank you.

Chairwoman JOHNSON. Mr. Ramstad.

Mr. RAMSTAD. Thank you, Madam Chairwoman, and thank you

for calling this important hearing on Medicare beneficiary cost

sharing.

I am concerned like you, Madam Chair, about the costs that

beneficiaries must pay when they get sick, the plans they must

purchase to cover their needs because of Medicare’s copays and the

lack of catastrophic coverage, and, of course, I am also concerned

about the fact that this problem is really exacerbated because

Medicare lacks catastrophic protection. That is contrasted with 97

percent of private health policies which have such protection.

So I think in total, when you look at Medicare’s limited benefits

package, it is high copays, and the complete absence of catastrophic, that means that nearly half of our seniors’ health care

costs are not covered by Medicare. That practically means that

Medicare seniors must bear the cost themselves. This fact of lack

of coverage is unacceptable and needs to be addressed through our

comprehensive reform.

In that vein, I would like to ask you, Dr. Scanlon, first, does the

status quo in Medicare cost saving make sense to you when compared to private-sector health insurance plans which structure, of

course, are out-of-pocket obligations?

Dr. SCANLON. No, sir, they do not.

Clearly, as you indicated, the lack of catastrophic protection is

something that private insurance does not have, and it is sorely

lacking in Medicare. It creates a situation where we do not really

have a true insurance policy. You can be catastrophically harmed

by your medical expenses, and that is something that we would

hope for as the first thing to accomplish in a Medicare reform.

Second, what has happened is over time, the cost sharing that

was put into place in 1966 and has been modified, as Ms.

O’Sullivan indicated, only slightly since then has evolved in ways

that distort it even further than what it was before.

We did not expect in 1966 hospital costs to be growing so much

so that the deductible would be close to $800 today, so that a single

hospitalization alone creates a large expense for individuals.

We have not seen the Part B deductible keep pace with inflation.

So it is withering in terms of the share of real income that it represents.

These are not the kinds of things you would see in most private

insurance plans because they have been adjusted over time to try

and reflect the changes in medicine as well as the changes in the

cost of medicine.

Mr. RAMSTAD. Dr. Scanlon, I think your summary statement says

it all when you said that Medicare beneficiaries do not really have

a true insurance policy. That should concern all of us on this panel,

as I know it concerns so many people in the Medicare system.

Let me ask you, Dr. Hogan, if you will, please. In your testimony,

you stated that the current Medicare supplemental system is, to

use your words, regressive and disproportionately affects the poor.

Could you just expand on those comments?

Dr. HOGAN. I will not say it is the worst of all possible worlds,

but beneficiaries who can most afford to pay the copayments do

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not. They buy Medigap. The beneficiaries who cannot afford to pay

the copayments cannot afford Medigap, and those who can afford

Medigap drive up costs for everyone, including the Part B premiums that poor people have to pay.

So I could think of two reasonable approaches. Either make it

free for everybody or make everybody pay, but allowing the working stiffs who do not have a decent job and do not have decent employer-sponsored coverage have to pay those copayments, those irrational copayments out of pocket, and everybody else has enough

money to buy Medigap. That is not sensible.

Mr. RAMSTAD. I thank you for that very honest and, I think, accurate response.

I think oftentimes a statement made earlier this year by our colleague working on Medicare reform on the Senate side, Senator

Breaux, who said right now what we are doing with respect to the

Medicare system is analogous to putting gasoline into a 1965

Chevy when, in fact, we need a new car, and I think all of you

would agree to that statement as to the need for overall comprehensive Medicare reform.

I thank you for your testimony here before the Subcommittee,

and your continuing counsel is definitely appreciated. Thank you,

and I yield back the balance of my time.

Chairwoman JOHNSON. Congresswoman Thurman.

Mrs. THURMAN. Thank you, Madam Chairman.

I want to thank the witnesses for being here today and giving

us some information here.

I go through this every time we have a group before us. So you

guys kind of need to help me here. If a Medicare beneficiary chooses to enroll in a Medicare Plus program, he or she then does not

have to have a Medigap coverage. We all know that because they

have no deductibles. They have maybe some co-payments.

Then, in an article—and I just kind of would like your all’s opinion about this—published in Health Affairs in January 1999, Gail

Wilensky and Joe Newhouse suggested—and I will quote them

here—that, ‘‘In an informed program, additional benefits should be

provided through the Medicare Program and not through a

Medigap plan.’’ In other words, my understanding of this is to create a level playingfield between traditional Medicare and Medicare

Plus Choice plans, Medigap should be merged into traditional

Medicare fee-for-service plans so that the Medicare beneficiaries

would not have to purchase separate Medigap insurance.

So the question is do you agree or not agree with that summary,

and if so, why, and if not, why. I will ask all four of you that question.

Dr. DAVIS. I certainly have a lot of agreement with the idea that

Medicare benefits ought to be improved to the extent that people

would not need to buy Medigap. So that means covering prescription drugs, which is covered in most Medicare Plus Choice plans.

It means getting the deductibles down to modest amounts that people can afford to pay without filling in, and to really have a modern

benefit package.

We talked a lot about employer plans. The typical employer con- ventional fee-for-service plan has a $239 deductible across all services. Medicare has far more than that. It has a $1,500 ceiling on

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a lot of out-of-pocket expenses, and that is for conventional fee-forservice. For their preferred provider plans, their point-of-service

plans, those amounts are lower. So I think modernizing Medicare’s

benefits means you do not have to buy supplemental.

People with employer coverage do not go buy supplemental coverage. The fact that 90 percent of Medicare beneficiaries have to

go buy something else means that what they have, they certainly

perceive as inadequate. I think there are, as I have mentioned, efficiencies to be gained by simply consolidating that benefit within

the Medicare Program.

Mrs. THURMAN. And just to add to that, I would further think

that it puts everybody then on that level playingfield. Right now,

we have so many things going on in Medicare, quite frankly, that

just because of where your geographical location is does not give

you the same benefit even though the payment is coming still directly from the government.

Dr. Hogan.

Dr. HOGAN. While I agree with the sentiment of that, there are

a few little details. I only say this because I used to work for Joe

and Gail. I was on the staff of one of their commissions, and there

are a few little details you have to keep in mind. How much are

you going to charge for the Medicare-sponsored Medigap policy,

and are you going to pay less if you do not have it? If you add the

Medigap premium to my $1,000 cost estimate, there would be almost $2,000 difference between what you would want to have, a

beneficiary with no supplemental insurance pay and a beneficiary

who has the Federally sponsored Medigap pay. So there may be a

premium attached to that, that might be kind of unpleasant to look

at.

The second issue is what about the people who have employersponsored coverage now. How are you going to make their employers continue to pay for that coverage, or are you just going to let

them skate and have the taxpayers pay for it? So it is not as easy

as you might think.

Nevertheless, what Karen said is exactly right. You would certainly get some efficiencies just from the overhead alone rolling

Medigap into the Medicare program because their overhead

charges are lower, and it is a lot easier for Medicare to run the individual purchase policy than it is for the private sector to do it.

Having said that, this sentiment is correct, but there is a devil

in the details that you really have to pay attention to.

Dr. SCANLON. I agree, and I think there is a rationality to improving Medicare so that the need for a Medigap policy declines.

There is a reality today that there is a rational need to buy catastrophic protection. It is somewhat irrational to be buying first dollar coverage. Essentially, what you are doing is for that first $100

of medical care that you are going to use, you are paying someone

$120 to write that check. That does not make a lot of sense.

So the idea of incorporating these types of protections into a better Medicare program and offering it to beneficiaries, I think,

would reduce the need for Medigap.

Mr. Stark indicated, also, we have a very complex system that

has developed here in terms of the different participants and that

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we would be creating some very significant disruption in terms of

making a change like that.

Mrs. THURMAN. But aren’t we creating some problems out there

with the Medicare population, anyway, because their benefits are

so different depending, again, whether they can have prescription

drugs, whether they can have eyeglasses, whatever other procedures, and in Medicare Choice, really catastrophic? I mean, they

have a catastrophic payment, and that is us.

Dr. SCANLON. We definitely are.

Our problem is we sometimes have trouble making the transition

to a new system. If you look at the statistics on Medigap policies

fully, a third today are policies that existed before 1992, many of

which have much poorer coverage than the policies that are available today.

There may be issues of people not being able to get access to

these benefits because of health status, but a full third are those

are in older policies which have relatively limited coverage.

Ms. O’SULLIVAN. Certainly, one advantage of expanding Medicare’s benefits would presumably make it more in line with the coverage people are used to up through age 65. Now, when they transition to Medicare, they are faced with a whole new set of requirements. So, from that perspective, it could potentially be easier for

the population. Obviously, of course, this is a much more expensive

population group than the under-65 population, and also, as has

been mentioned here, you have to think of what the implications

are for people with employer-based policies, would they just wrap

around to the new Medicare coverage. Presumably, it could potentially be cheaper for some of the employers, though we also know

a lot of employers who are getting out of the business of retiree

coverage, anyway. So whether this would speed it or slow it down

is a question you could ask.

But, yes, there are certainly some advantages. So, obviously, it

has many implications when you flesh out the details.

Chairwoman JOHNSON. Mr. McCrery.

Mr. MCCRERY. Thank you, Madam Chair.

Since we have such a distinguished panel—I read a news report

just a couple of days ago or maybe yesterday about a study that

was done recently that indicated that seniors are in better health

than they used to be, basically, and that because they are in better

health, they are costing less and that that might have fairly significant, positive consequences for Medicare spending in the out years.

Did you all see that report, and do you have any comment on it?

Dr. HOGAN. May I be the first to jump in here?

Mr. MCCRERY. Sure.

Dr. HOGAN. Ken Manton, who did that report, is a well-respected

demographer, and if he says it, I imagine it so. I certainly have not

seen that come through in any statistics that I look at, but I do

not look at a long-time series.

The only point I really want to make is this.

Mr. MCCRERY. I am from Louisiana. If you would talk just a little slower.

Dr. HOGAN. I am sorry, and I need less caffeine.

Jim Lubitz, years ago, did a study. Jim Lubitz is a researcher at

the Health Care Financing Administration and did a study of beneVerDate 11-MAY-2000 11:28 Sep 21, 2001 Jkt 074223 PO 00000 Frm 00067 Fmt 6633 Sfmt 6602 E:\HR\OC\A223.XXX pfrm01 PsN: A223
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ficiaries’ lifetime spending. What you find is the longer you live,

the more you cost Medicare, period.

Mr. MCCRERY. All right.

Dr. HOGAN. You will spend less in the last couple of years of life,

but extending lifespan or coming in a little bit healthier and living

a little bit longer, it is arguable that that will reduce. Even if it

is true, it is arguable that that will reduce costs.

Dr. DAVIS. I do think it is a very important study that the National Academy of Sciences has published showing that disability

rates of the elderly have dropped markedly from 1982 to 1997. If

you really break it down by the kinds of conditions, you do see that

we have had a major reduction in strokes over that period and

much better control of hypertension over that period, breakthroughs in treatment for heart disease over that period. There is

another major study supported by the Lasker Foundation that really looks at the benefits to the economy of that improved health,

particularly in the last half of the 20th century that comes from

these kinds of improvements, both in preventive care and breakthroughs like beta blocker treatment for heart attack victims.

They argue that the gains to the economy in the last half of the

20th century from these advances in health care equal the gains

that have come from increased productivity over that period. So

they really are quite significant. It is not just a matter of looking

at how they affect Medicare spending. The longer we live, certainly

there are going to be more years that we are on the Medicare program. That is, in part, the goal. The fact that we are improving life

expectancy, we are reducing disability, I think it is quite significant.

I think it plays in today’s discussion in the following way. When

you talk about cost sharing, we have emphasized preventive services like getting mammograms or Pap smears or colonoscopies, but

it is also important to have chronic conditions well maintained.

If you have got hypertension, if you have got diabetes, if you

have got high cholesterol or arthritis, you need to be making regular visits to physicians. Many times, you need to be on a prescription medication to control that condition to avoid these adverse consequences of strokes and mortality from heart disease or disability

from heart disease.

So, if you deter people from getting proper maintenance of chronic conditions—we supported, for example, a study that showed that

people without supplemental drug coverage are much less likely to

get hypertensive medication for people with hypertension than

those that have supplemental drug coverage. So these issues of cost

sharing and supplemental coverage and the quality of the benefits

do affect these issues of life expectancy, disability, and quality of

life.

Mr. MCCRERY. Dr. Scanlon.

Dr. SCANLON. Yes. I think the studies indicate some of the very

positive things that have happened with medicine over the last 30

years, and that is part of why we are so concerned about getting

people access to health care.

Dr. Hogan’s comment about the lifetime expenditures, we do not

know how that is going to work out yet because we have a new cohort of people who are aging with a very different life history than

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the cohorts of the past—better nutrition, better medical care, different lifestyles—and we will wait to see how that happens. That

is the positive side.

In terms of your question of how much relief this provides us, it

may provide some relief in terms of per-capita spending, but as I

have heard others say, it is not the per capita that is our problem.

It is the capitas. It is when those baby-boomers come and they multiply whatever per-capita amount we are going to spend. That is

the challenge, I think, that we are overwhelmed by.

Mr. MCCRERY. Ms. O’Sullivan.

Ms. O’SULLIVAN. I would agree with Dr. Scanlon.

Mr. MCCRERY. Madam Chair, it was a very interesting summary

of the study that I read, and it might be that ina future hearing,

we would like to bring in the authors of that study and others on

the panel that might want to comment on the study. It would be

very interesting for this Subcommittee to investigate.

Chairwoman JOHNSON. Thank you.

Let me ask the panel one final question. If you added the

deductibles and the premiums under Part B or I guess you would

probably want to exclude the deductibles since Medigap covers

that—I mean, I am impressed that so many of my seniors are paying Part B and also Medigap premium. The Medigap premiums

right now are pretty steep. They have gone up considerably.

So, if you just took the two of those and made them the deductible, then the out-of-pocket expenditure—I mean, I am not really

proposing this. I just want to get your opinion. This is what seniors

are spending now, a big chunk of them. If they spend it in a different pattern and if instead of spending it for premiums, it was

a deductible or it was some kind of prepare bank account like Dr.

Hogan proposes, then what would be the impact? Would you get

the benefits of first dollar expenditure thinking? On the other

hand, the exposure would not be any greater? See, if you do that,

there are some advantages for low-income people, just above the

levels that we now subsidize. You could subsidize those premiums,

but that is, in fact, what seniors are spending now. If we are going

to merge these and rationalize the program and broaden its coverage, then what would be wrong with broadening the deductible

to cover, in a sense, what they are already paying and turn it in

from a premium to a deductible and subsidize the premium for people in that group that now cannot afford either? That is one way.

Would that have any impact on cost, Ms. O’Sullivan?

Ms. O’SULLIVAN. I believe your proposal is saying basically you

take the Part B premium which is $600 a year and you would be

adding to that an average Medigap premium which is $1,300,

$1,500 a year. So you would be talking something——

Chairwoman JOHNSON. Except the Medigap premium usually

pays the Part B premium.

Ms. O’SULLIVAN. No. No, it does not. It is separate.

Chairwoman JOHNSON. Or, just the deductible?

Ms. O’SULLIVAN. It is separate. So you would be talking something close to $2,000 as a deductible.

We know that beneficiaries, regardless of how you present something to them, are very risk-averse, and they do not want to be liaVerDate 11-MAY-2000 11:28 Sep 21, 2001 Jkt 074223 PO 00000 Frm 00069 Fmt 6633 Sfmt 6602 E:\HR\OC\A223.XXX pfrm01 PsN: A223
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ble for even that first dollar coverage. Many of them might view

the $2,000 as a very large gap before the program—— Chairwoman JOHNSON. They might, and I understand the fear

issue, but they would not have any monthly payments.

Ms. O’SULLIVAN. Correct. The issue would be it would have to be

presented, I believe, in a very simple form to be understood by everybody and people would have to understand what the tradeoffs

are and you would probably also have to think about the implications of the people on the lower end of the income scale.

Chairwoman JOHNSON. Oh, you certainly would have to think

about that, no question about that, but it is sort of interesting to

contemplate. You have got a lot of people out there putting a lot

of money out and not getting much for it, frankly, except peace of

mind. Peace of mind is worth a lot, but it is not buying medical

care.

Dr. Scanlon.

Dr. SCANLON. You do need to look at all of the sources of cost

to the elderly, but you do need to break up these, the Medicare

beneficiary population into the different groups because they are

having very different experiences right now.

Those that are paying the Medigap premium are about a quarter

of all beneficiaries. We have got more than a third who have employer coverage, and they are paying more in premiums today than

they used to in the past, but they may be paying much lower premiums.

We have the people in Medicare Plus Choice plans. They are paying more today than they used to, but they still may be paying a

lot less.

Then, finally, we have those who are Medicaid-eligible. That is

a key part of this equation that you are thinking about in terms

of how do you balance a restructured cost-sharing framework with

affordability while avoiding negative impacts. The Medicaid dual

eligibles and the QMB program provide you one of the mechanisms

that you have already in place to think about how to protect people

with lower income.

Chairwoman JOHNSON. Yes. The reason this is very important is

that, as you say, there are different populations with different coverage. There is a third that has pretty good coverage, not just for

prescription drugs, but for a lot of things that Medicare does not

cover. Then there is this other third with Medigap who are paying

an awful lot of money and, for the most part, not getting much in

terms of prescription drugs. Then you have the ones that are Medicaid-eligible, as we say in our slang down here, SLMBs and QMBs,

but they get everything for the most part. Some of them pay a little

premium, but they are pretty well cared for and covered.

So you have then the group just above 100 percent of poverty income, and people in that level of income that can afford Medigap

insurance, in a sense, they are the worst off. They have the Medicare-only plan. They have the Medicare premium of about $50

every month, and they have all the copayments under Medicare. If

you look at all of the prescription drug plans, regardless of which

party they originated from, they provide the least help to that very

group because the other groups would have plans that would wrap

around the help that is provided. So they will all do better under

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a prescription drug program, but the group that has the least will

pay an additional premium which they can ill afford, and then they

will get 50 percent of their cost of drugs up to $2,000. This is not

a big benefit in today’s world of drug prices.

So I hear, Dr. Davis, your concern for the beneficiary cost issue,

but I do not see the solutions directing themselves to the beneficiaries who right now have the highest costs with the least

means, and I do not see how you can, frankly, in good faith deal

with their concerns fairly and honestly and provide retirees with

comfortable incomes the same benefits.

I do not think it is outright fair that my husband and I would

have the same catastrophic level of coverage that I think many of

these seniors need, which I think is about $1,000. I do not even

know where some of them would get $1,000 to meet the catastrophic coverage, but many seniors we are most concerned about

will never meet the threshold, the $4,000 catastrophic coverage. So

I am very concerned that we talked blithely about helping the beneficiary, but the group that is least helped by any of these plans

is the group that is least helped by any of the reform proposals unless you take Dr. Davis’ that is very much richer in every, every

case, but, frankly, I think would be unaffordable.

I will look at your cost estimates, but I cannot imagine without

some means testing that you could do all the things you want to

do and have no disincentive to buy because there is too much evidence in every market, employer-provided market, every market

that people buy more health care than they actually need.

I will look more closely, and I will help the Committee look more

closely at the evidence of the discipline of first dollar coverage. I

think we absolutely are obliged to look at that and any other proposals you can think of to help us look at cost discipline because

the more we rationally govern costs, the more we can help those

who need it most to have the resources to get a fair and reasonable

health plan.

If you have any closing comments, you may comment. Otherwise,

we will close the hearing.

Dr. DAVIS. Just to stress that all of the options I laid out are not

first dollar. They all have at least a $200 Part B deductible.

Chairwoman JOHNSON. Oh, yes. I am sorry. I forgot that. I was

glad to hear that.

Dr. DAVIS. A Part B deductible of $200, which is the typical employer plan, but I think the idea of charging a $2,000 deductible

for beneficiaries, two-thirds of whom are either very sick and paying an awful lot of money already or have very modest incomes

below——

Chairwoman JOHNSON. But you could not do it outright.

Dr. DAVIS. Twenty thousand dollars is just not an affordable kind

of benefit package.

Chairwoman JOHNSON. What I guess I am suggesting is if you

think of what are currently paid as ‘‘premiums,’’ as instead a kind

of savings account, that if you did not use it all, you could roll it

over for future expenses, we need some creative thinking, and that

would functionally be a higher deductible, but it would be paid out

like a premium into a savings account.

68

Anyway, we will talk about these ideas, and I hope you will all

think about them because we do not really have the ideas that we

need yet, and I hope you will be a part of generating them. I think

the old way of linear thinking, sort of using the old employer

model, is for this population not very useful because the costs are

so extraordinarily variable and we are insuring people now, so very

many years, with varying different means and capacities to participate in the costs themselves, and also with an urgency to keep in

the market a variety of solutions, the employer solution, the choice

solution, as well as a decent fee-for-service plan.

I hope you will draw from this hearing that we are really at the

beginning of the road, and we are really not toward the end.

Thank you.

[Whereupon, at 3:37 p.m., the hearing was adjourned.]

The United HealthCare Insurance Company (United) is pleased to provide the

[Submission for the record follows:]

Statement of the United HealthCare Insurance Company

f Subcommittee with this written statement to supplement the transcript of the Subcommittee’s May 9 hearing on modernizing beneficiary cost sharing in Medicare.

The United HealthCare Insurance Company underwrites Medicare Supplement Insurance plans provided to AARP members through AARP’s Health Care Options

program. The views expressed in this statement are solely those of the United

HealthCare Insurance Company and are not necessarily the views of AARP.

Medicare cost sharing is an important issue. Over the years, beneficiaries have

been asked to cover an increasing share of their health costs. Today, Medicare covers roughly half of a typical beneficiary’s health care costs, and it is likely that this

proportion will continue to decline.

To remain viable, Medicare has relied upon supplemental coverage from a number

of sources, including employers and Medicare Supplement carriers. Without this

supplemental coverage, many seniors would not be able to meet their cost-sharing

obligations.

Roughly one third of Medicare beneficiaries have a Medicare Supplement policy.

For many beneficiaries, particularly in rural areas, Medicare Supplement policies

are the only available supplemental insurance option. Therefore, it is extremely important that Congress consider the impact upon Medicare Supplement of any potential legislation to reform or modernize Medicare.

Issues for Consideration

In reviewing the supplemental insurance market, Congress should consider

whether to revise the existing standardized benefits and whether there are ways to

make supplemental insurance more affordable and accessible to beneficiaries.

Standardization was intended to provide consumers with a common set of benefits

around which carriers would compete based upon price and service. Ten years of experience, however, has shown that standardization has not achieved all of its original goals.

First, although there are ten plans, only a few are frequently purchased by consumers. This suggests that some of the benefits need to be reexamined in light of

the existing market and changes that have been implemented in Medicare.

Second, premiums have increased substantially, primarily due to medical inflation

and additional requirements placed on Medigap carriers, such as coverage for beneficiaries under age 65. At the same time, many carriers have switched to attained

age rating, a pricing system that raises premiums annually based solely upon age.

To ensure that fee-for-service remains viable, Medicare Supplement plans need to

be affordable for seniors of all ages.

Finally, since standardization, most Medicare Supplement carriers have imposed

substantial medical underwriting requirements, excluding many people with high

cost health conditions. At the same time, recent changes in guaranteed issue rights

have created an extremely complex set of requirements that are almost impossible

to administer. Underwriting requirements and guaranteed issue rules should be exVerDate 11-MAY-2000 11:28 Sep 21, 2001 Jkt 074223 PO 00000 Frm 00072 Fmt 6633 Sfmt 6621 E:\HR\OC\A223.XXX pfrm01 PsN: A223
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amined to ensure that Medicare Supplement plans are as widely available as possible.

Options for Reform

There are a number of reform options that Congress should consider in examining

the Medigap market. First, because only a few plans are popular among consumers,

Congress should consider combining existing plans and adding new benefits that

consumers want, such as alternative medicine.

Similarly, Congress should review the prescription drug benefit in plans H, I, and

J. Despite consumer desire for prescription drug coverage, these plans are not as

popular as the non-drug plans. Moreover, most companies do not offer the drug

plans in many areas. United is the only carrier offering at least one of the three

drug plans in every state and, as a result, sells roughly half of all Medicare Supplement drug plans in the country.

Second, Congress should consider standardizing the rating methodology by which

carriers establish premiums. Although standardization was intended to simplify the

market, multiple rating methodologies are confusing to seniors and, particularly

with attained age rating, create market incentives that actually disadvantage seniors. A uniform rating methodology would help accomplish one of the original goals

of standardization—competition based upon comparable prices, value, and service.

Third, Congress should consider options that reduce premiums and utilization,

such as co-pays and additional deductibles. Although these low-cost options should

not be in every plan, they could provide broader benefit choices for people who want

to reduce or minimize their monthly payments.

Finally, Congress should consider other reforms designed to reduce premiums and

increase benefits to consumers, such as standardizing enrollment and other regulatory requirements, implementing ‘‘speed to market’’ measures that reduce administrative burdens on states and insurers, and allowing standardized plans as additional options in waiver states.

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