U.S. GOVERNMENT PRINTING OFFICE

73–734PS WASHINGTON : 2001

MEDICARE REFORM: MODERNIZING MEDICARE

AND MERGING PARTS A AND B

HEARING

BEFORE THE

SUBCOMMITTEE ON HEALTH

OF THE

COMMITTEE ON ENERGY AND

COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

JUNE 14, 2001

Serial No. 107–40

Printed for the use of the Committee on Energy and Commerce

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/house

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Mail: Stop SSOP, Washington, DC 20402–0001

COMMITTEE ON ENERGY AND COMMERCE

W.J. ‘‘BILLY’’ TAUZIN, Louisiana, Chairman

MICHAEL BILIRAKIS, Florida

JOE BARTON, Texas

FRED UPTON, Michigan

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

JAMES C. GREENWOOD, Pennsylvania

CHRISTOPHER COX, California

NATHAN DEAL, Georgia

STEVE LARGENT, Oklahoma

RICHARD BURR, North Carolina

ED WHITFIELD, Kentucky

GREG GANSKE, Iowa

CHARLIE NORWOOD, Georgia

BARBARA CUBIN, Wyoming

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES ‘‘CHIP’’ PICKERING, Mississippi

VITO FOSSELLA, New York

ROY BLUNT, Missouri

TOM DAVIS, Virginia

ED BRYANT, Tennessee

ROBERT L. EHRLICH, Jr., Maryland

STEVE BUYER, Indiana

GEORGE RADANOVICH, California

CHARLES F. BASS, New Hampshire

JOSEPH R. PITTS, Pennsylvania

MARY BONO, California

GREG WALDEN, Oregon

LEE TERRY, Nebraska

JOHN D. DINGELL, Michigan

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

RALPH M. HALL, Texas

RICK BOUCHER, Virginia

EDOLPHUS TOWNS, New York

FRANK PALLONE, Jr., New Jersey

SHERROD BROWN, Ohio

BART GORDON, Tennessee

PETER DEUTSCH, Florida

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

TOM SAWYER, Ohio

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

KAREN MCCARTHY, Missouri

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

THOMAS M. BARRETT, Wisconsin

BILL LUTHER, Minnesota

LOIS CAPPS, California

MICHAEL F. DOYLE, Pennsylvania

CHRISTOPHER JOHN, Louisiana

JANE HARMAN, California

DAVID V. MARVENTANO, Staff Director

JAMES D. BARNETTE, General Counsel

REID P.F. STUNTZ, Minority Staff Director and Chief Counsel

SUBCOMMITTEE ON HEALTH

MICHAEL BILIRAKIS, Florida, Chairman

JOE BARTON, Texas

FRED UPTON, Michigan

JAMES C. GREENWOOD, Pennsylvania

NATHAN DEAL, Georgia

RICHARD BURR, North Carolina

ED WHITFIELD, Kentucky

GREG GANSKE, Iowa

CHARLIE NORWOOD, Georgia

Vice Chairman

BARBARA CUBIN, Wyoming

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES ‘‘CHIP’’ PICKERING, Mississippi

ED BRYANT, Tennessee

ROBERT L. EHRLICH, Jr., Maryland

STEVE BUYER, Indiana

JOSEPH R. PITTS, Pennsylvania

W.J. ‘‘BILLY’’ TAUZIN, Louisiana

(Ex Officio)

SHERROD BROWN, Ohio

HENRY A. WAXMAN, California

TED STRICKLAND, Ohio

THOMAS M. BARRETT, Wisconsin

LOIS CAPPS, California

RALPH M. HALL, Texas

EDOLPHUS TOWNS, New York

FRANK PALLONE, Jr., New Jersey

PETER DEUTSCH, Florida

ANNA G. ESHOO, California

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

JOHN D. DINGELL, Michigan,

(Ex Officio)

(II)

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C O N T E N T S

Page

Testimony of:

Means, Kathy, Senior Health Policy Advisor, Patton Boggs ........................ 41

Moon, Marilyn, Senior Fellow, the Urban Institute ...................................... 35

Scanlon, William, Director, Health Care Issues, U.S. General Accounting

Office .............................................................................................................. 15

Schulder, Dan, Legislative Director, Alliance for Retired Americans .......... 31

Young, Donald, Chief Operating Officer and Medical Director, Health

Insurance Association of America ................................................................ 27

Material submitted for the record by:

Scanlon, William, Director, Health Care Issues, U.S. General Accounting

Office, letter dated August 7, 2001, enclosing response for the record .... 64

(III)

(1)

MEDICARE REFORM: MODERNIZING

MEDICARE AND MERGING PARTS A AND B

THURSDAY, JUNE 14, 2001

HOUSE OF REPRESENTATIVES, COMMITTEE ON ENERGY AND COMMERCE, SUBCOMMITTEE ON HEALTH, Washington, DC.

The subcommittee met, pursuant to notice, at 10:04 a.m., in room

2123, Rayburn House Office Building, Hon. Michael Bilirakis

(chairman) presiding.

Members present: Representatives Bilirakis, Greenwood, Deal,

Ganske, Wilson, Bryant, Ehrlich, Pitts, Tauzin (ex officio), Brown,

Waxman, Strickland, Barrett, Capps, Pallone, Eshoo, Stupak,

Wynn, and Green.

Staff present: Patrick Morrisey, majority counsel; Erin Kuhls,

majority counsel; Kristi Gillis, legislative clerk; Bridgett Taylor, minority professional staff, Amy Droskoski, minority professional

staff; and Karen Folk, minority professional staff.

Mr. BILIRAKIS. Good morning. I call this meeting to order. Our

hearings this year have focused on ways to modernize the Medicare

program and to provide an updated benefits package, including a

prescription drug benefit. Today this subcommittee will examine

Medicare’s structure and organization with the goal of improving

the financial health of the program and securing the efficient management and delivery of high quality services to its beneficiaries.

Structural reform of Medicare is central to the broader goal of protecting and strengthening the Medicare program for the future.

Many experts agree that if Medicare were being designed today,

the two-part system that drives its payment policies would not be

adopted. At the same time proposals to combine A and B have significant policy implications, particularly for beneficiaries, and we

must proceed with caution in considering alternative approaches.

Private health insurance formerly organized with separate policies

for hospital and physicians services has also moved to a more comprehensive structure. As services once provided only in hospitals

are provided routinely on an outpatient basis in physicians’ offices

and beneficiaries’ homes, a reexamination of Medicare’s design is

warranted. Today we will assess the implications of redesigning

Medicare and merging parts A and B of the program.

I am pleased to welcome our panel of expert witnesses. Thank

you all for joining us here today. Our first witness is Dr. Bill Scanlon with the General Accounting Office. Recognized for his Medicare expertise, Dr. Scanlon will report on the benefits and technical

challenges of merging parts A and B of the program. I would also

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like to welcome Dr. Don Young, interim president of the Health Insurance Association of America. Mr. Young’s testimony about the

structure and organization of health insurance in the private sector

will be a valuable contribution to our discussion today.

Our third witness, Mr. Dan Schulder, the legislative director for

the alliance of retired Americans, will be able to best explain how

structural reform of the Medicare program will affect those the program serves—its beneficiaries.

And finally, Ms. Marilyn Moon, Senior Fellow from the Urban Institute, and Ms. Kathy Means, Senior Public Policy Advisor for Patton Boggs and former Senior Health Advisor to Senator Roth and

the Senate Finance Committee round out our panel of respected experts.

Having enjoyed the opportunity to work closely with you in your

previous capacity, Kathy, I am delighted to welcome you before the

subcommittee today. I am committed to protecting the long-term

solvency of the Medicare program and look forward to a productive

hearing today which can shed light on some of the fundamental

issues in this debate. The financial viability of this critical program, the cost-sharing liability of Medicare beneficiaries and the

management and delivery of high quality services for beneficiaries

are three of key issues that we will have a chance to explore.

This subcommittee has a strong record of working on a bipartisan basis. We must continue to work together to find bipartisan

solutions. This hearing is designed to bring us closer to accomplishing that goal as we evaluate the challenging issues inherent

in any Medicare reform proposal.

And in closing, I want to again thank our witnesses for their

time and effort and joining us to share their views on the important issue of Medicare reform.

And now I am pleased to recognize the ranking member, Mr.

Brown.

Mr. BROWN. Thank you, Mr. Chairman. I commend and fully

support your decision to hold this hearing. The Commerce Committee as a whole, and our subcommittee in particular, has a

strong history of successfully addressing important, albeit politically volatile issues and doing so on a bipartisan basis. We do not

always agree on the merits of different proposals. In fact, we often

express very strong and polar opposite opinions on the merits of

different proposals, but we are unified in our desire to give all credible Medicare options a fair hearing.

I want to thank Marilyn Moon and Dr. Young and the other witnesses for joining us this morning. We were fortunate to have a

distinguished panel to help us look at the implications of merging

Medicares part A and B. It is a particularly complex issue. Not

only does this proposal raise many issues, it raises many kinds of

issues, policy issues, political issues, even jurisdictional issues. And

overwhelming all of these issues is this one, we have not yet addressed the No. 1 issue in Medicare that is the Medicare benefits

package lacks coverage of prescription drugs. How can we possibly

justify diverting our attention toward changing the financing structure toward Medicare when we have not addressed the most pressing concern that we hear every day from our Medicare constituents?

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Merging A and B would not, in and of itself, take us closer to

prescription drug coverage, but it would certainly require time and

resources that could otherwise be devoted to establishing Medicare

prescription drug coverage. Again, it is important to look at the full

range of proposals that are currently under consideration by this

Congress and the administration, but when it comes to taking action, we should put our priorities in order and tackle prescription

drugs first.

But this hearing is about merging A and B. And I want to get

back to those issues. The impact of Medicare beneficiaries does not

depend explicitly on whether we merge parts A and B. It depends

on the objectives we are trying to fulfill by merging the two programs. If the objective is to create efficiencies in the administration

of Medicare, that is a pretty tall order. Medicare fee for service

spends less than 2 percent of its budget on administration.

Medicare+Choice spends as much as 30 percent of its budget on

administration. If the objective is to rationalize Medicare cost sharing, that is a laudable goal, but tricky one to accomplish. Simply

merging the two deductibles could reduce hospital costs for a few

beneficiaries while increasing physician and other costs for virtually every beneficiary. A net increase in beneficiary liability probably translates in a net increase in Medigap premiums.

It is also important to recognize we don’t need to merge parts A

and B to modify the cost-sharing requirements associated with

Medicare. If the objective is to control Medicare spending by capping the general revenues going into the program, hiding behind a

mechanical change and finance of accomplishing that goal does not

make the goal more palatable. Unless the plan is to increase payroll taxes, is to compensate for general revenues capping general

revenues means one of two things: either shifting more costs onto

beneficiaries or starving the Medicare program. Neither option, at

least to me, is acceptable.

As I mentioned previously you must consider the cost of implementing this change and given the scarce budget dollars available,

in large part because of the tax cut that Congress passed, we must

consider how merging parts A and B stacks up against other proposed Medicare modernization priorities like adding prescription

drug coverage, like bolstering preventive benefits like giving Medicare the tools and resources it needs to improve internal and contractor performance.

Finally, we should consider the political implications. I don’t

mean the potential fallout with Medicare beneficiaries or providers,

because the only political fallout that should be of concern to this

subcommittee is that which reflects harm to the beneficiary or unfair treatment of providers or the misuse of taxpayers dollars.

What I mean by political implications is this: The current administration has made absolutely no secret of the fact that it favors restructuring Medicare into an insurance voucher program, meaning

the Federal Government would help pay for private health insurance rather than helping to pay for private health care. Many

Democrats believe that privatization is basically a cop-out. It would

give Congress and the administration cover to shirk their responsibility for access and for quality. It would give Congress and the administration a mechanism by which to shift more and more the fiVerDate 11-MAY-2000 08:49 Sep 10, 2001 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 73734.TXT HCOM1 PsN: HCOM1
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nancial burden for Medicare onto the shoulders of retirees and retirees’ families. And ultimately, it would give Congress and the administration an out.

It is far easier to abandon a program when it is firmly ensconced

in the private insurance market than when it is still a federally administered program. If making Medicare fee for service financing

system looked more like Medicare+Choice financing system would

somehow help the administration or Chairman Thomas or any

other proponent of privatization convinced Congress to make the

traditional Medicare Program Act more like the Medicare+Choice

program, we must be sure to make that possibility transparent to

every beneficiary, and we must also carefully evaluate whether we

are willing to be coaxed down the path of privatization.

Mr. Chairman, if it is not clear from my comments, I admit to

a bias in regards to merging A and B . That is due in part on the

President’s budget proposal which merged parts A and B for purposes that I consider to be detrimental, in its part due to the fact

that I was around for the BBA debate in 1995 and participated

then in the fight against merging parts A and B. At that time,

merging the two programs, what that meant was clearly an attempt to starve the Medicare program and end the Medicare entitlement, thinking back to the comments of Speaker Gingrich and

then-Senator Dole about privatizing Medicare.

That said, I don’t doubt the chairman’s goal is to determining

whether merged financing can be accomplished in a way that actually does improve the Medicare program. I share the chairman’s

goals in that way and will consider the testimony of our witnesses

from that perspective. Thank you, Mr. Chairman.

Mr. BILIRAKIS. I thank the gentleman and I would suggest that

the gentleman that I have always considered hearings to be informational. This is why we hold hearings so we can learn. If we have

already predecided our position on a particular issue, I don’t see

the sense in holding a congressional hearing. This is the reason

why we are having a hearing because I too want to learn about this

particular subject. The chairman would yield to the chairman of

the full committee, Mr. Tauzin, who honors us with his presence.

Chairman TAUZIN. Thank you, Mr. Chairman. I am honored to

be here. I thank you for having this hearing particularly because

it focuses on a question that the committee often faces, and that

is whether structures that were designed in a different day and age

in our Nation’s history still make good sense for today’s economy

and environment and the method by which we deal with social

issues. We often come to this point. We come to it in telecommunications. We are coming to it in energy, and we are certainly coming

to it in health care.

It is important, I think in an informational hearing, to look at

the history of how we got where we are and whether or not it has

relevance in today’s world. And we should note that it was 36 years

ago, a very historic moment that President Johnson signed the

Medicare legislation into law. If we go back and look at those debates, we find there was significant controversy going on into that

decisionmaking process. There are those who argue that Medicare

should be limited to covering only hospital inpatient stays. In those

days, that was the most significant and costly form of coverage.

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Others were trying to make sure that other physicians and other

outpatient services would be covered in the package.

Some argued that health care covered in the package should be

paid for strictly through a dedicated payroll tax, and others wanted, obviously, a combination of general revenues and payroll taxes.

Some wanted the system to be automatically an entitlement, and

others wanted it to be made voluntarily. You know the cuts that

were made, a lot of compromises. And in 1965, the compromises

that were made basically reflected the structure of hospital care

and coverage of that age. In that day and age, private insurance

very often separated hospital insurance and physician insurance.

And that concept was adopted into the compromises and hospital

insurance called part A and physician insurance called part B were

separated in method of funding to reflect, again, the differences of

opinion, whether it would be payroll taxes or voluntary contributions that structured each program.

But as we sit here today, Mr. Chairman, and I think Mr. Brown

has articulated it well in his closing comments, we ought to consider whether those decisions make sense today. Whether having

a part A and a part B make sense in today’s health care coverage.

For example, private insurance today usually does not separate inpatient hospital coverage from physician services. Beneficiaries

today usually do not have a separate deductible for the purpose of

hospital inpatient and physician services in the private sector but

we have them in Medicare A and B. And significantly, prescription

drug coverage is no longer considered a luxury. I mean, it is an integral part today of a patient’s treatment regimen. All of us know

that.

All of us, most of us, are on some form of medication. Medicare

was still operating, in essence, in a 1960’s model, and the question

is does it work for the 21st century? Well, there are a number of

oddities in the A-B structure that we ought to focus on. One is that

part A deductible is $792, and this deductible increases every year.

And by contrast, part B is $100 that has not been indexed for inflation for 10 years. Private insurance companies have a unified deductible. Should Medicare have a unified deductible, and what

should it be? Tough question.

The part A trust fund is expected to go insolvent in the year

2029. Part B does not go insolvent because an ever increasing

amount of general revenues flows into the program. Is there anything more prudent to measure the long-term viability of Medicare

part A and B together particularly when part B is growing as it

is. Because of the distinctions between part A and B, it is extremely difficult for the program to implement comprehensive disease and case management strategies that focus on total services

provided to a beneficiary. Shouldn’t we have a system, for example,

that effectively tracks when a patient leaves an inpatient hospital

setting and moves to an outpatient setting? You think you would

if you wanted to manage long-term treatment.

Claims processing has to be performed by fiscal intermediaries

for part A and it is performed by carriers for part B. Shouldn’t A

and B processing functions be combined and performed by a single

contractor? By eliminating the distinction between fiscal intermediaries and characters, we probably could be able to reduce the

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number of contractors from the 50 or so today to 10. And that

might be a good reform. Partially because of the separate program

parts and the widely disparate cost-sharing structures, Medicare

currently does not place a cap on beneficiary liability. And the

question we should ask, Mr. Brown and all of us should ask who

love our seniors and love those of our family who are covered by

Medicare, shouldn’t we have a system reform that Medicare beneficiaries are better protected from liability for the prolonged illnesses that unfortunately plague us now? These are some of the

questions. Here is the most important one we should ask ourselves.

If we were building Medicare today from scratch instead of having

to deal with the decisions made in 1965, would we build this system the way it is currently constructed? You know that. And not

a person in this room, I think, would build it the way it is currently

constructed.

I think we make better decisions based upon the way in which

we provide health care services and coverage for seniors today. If

that is true, then this committee owes it to every single beneficiary

and patient care provider under this system to reform it. And this

is a hearing that is going to lead us hopefully to some of those answers, and I thank you for having it, Mr. Chairman.

[The prepared statement of Hon. W.J. ‘‘Billy’’ Tauzin follows:]

PREPARED STATEMENT OF HON. W.J. ‘‘BILLY’’ TAUZIN, CHAIRMAN, COMMITTEE ON

ENERGY AND COMMERCE

Thank you, Mr. Chairman for holding this important hearing. Our Committee has

spent a great deal of time examining Medicare structural reform in recent months,

so I am pleased that we are focusing attention on this critical issue of whether we

should merge Parts A and B of the Medicare Program.

Thirty six years ago—in a historic moment—President Johnson signed Medicare

legislation into law. For the first time in our nation’s history, we guaranteed seniors’ access to basic health insurance.

During the years leading up to the passage of Medicare, many ideas were debated

about how this new Program should be designed. Some argued that Medicare be

limited to covering hospital inpatient stays, since that was the most costly type of

coverage. Others insisted that physician and other outpatient services be included

in Medicare’s basic benefit package. Some argued that all of the health services covered under Medicare be paid for through a dedicated payroll tax; still others, demanded that the system be funded through a combination of general revenues and

beneficiary premiums. Some demanded that the Program be an automatic entitlement to seniors; others insisted that the Program remain voluntary.

These were just a few of the issues in dispute when the Program was created back

in 1965. Ultimately, however, these issues were resolved, and the basic structure

of Medicare—that remains today—was created.

As part of the legislative compromise in 1965, it was decided that Medicare should

essentially reflect the private insurance model of that time. Consequently, since private insurance was often separated into hospital insurance and physician insurance,

that concept was included in the legislation. Hospital insurance was called Part A

and physician insurance, Part B. At the time, that idea, along with many others included in the Medicare law, made sense because they were reflective of how people

believed health care services should be managed back in the 1960’s. Today, our health care system is considerably different from that of 1965. So we

need to ask ourselves: is there a better way to design this program so that it reflects

a 21st Century model of managing health care services. How can we best change

this design model—an essentially static one for 35 years’ and modernize it for today’s seniors?

I don’t have all of the answers to these questions.

But one thing we can say with certainty: many of the assumptions that were used

to design the Medicare Program in 1965 are no longer valid. For example, private

insurance no longer separates inpatient hospital coverage from physician services;

beneficiaries don’t have separate deductibles for hospital inpatient and physician

services in the private sector; and significantly, prescription drug coverage is no

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longer considered a luxury, it’s an integral part of a patient’s treatment regimen.

Medicare may still be operating under a 1960’s model, but we are now in the 21st

Century.

Today, we must begin to discard some of the relics of the 1960’s, including many

of the current distinctions between Medicare Parts A and B. This division no longer

reflects the needs of Medicare beneficiaries, both in terms of financing and costsharing structures.

Here are just a few oddities of the existing A/B structure:

Medicare’s Part A deductible is $792 per admission, and increases every year. By contrast, the Part B deductible is $100 and has not been indexed for inflation in

ten years. Private insurance employs a unified deductible. Why shouldn’t Medicare?

The Medicare Part A Trust Fund is expected to go insolvent in 2029. Part B, on

the other hand, will never go insolvent because an ever increasing amount of general revenue dollars will flow into the Program. Isn’t it more prudent to measure

the long term financial viability of the Program by looking at Parts A and B together?

Because of the distinctions between Medicare Parts A and B, it is extremely difficult for the Program to implement comprehensive disease and case management

strategies that focus on the total services provided to a beneficiary. Shouldn’t we

have a system that can effectively track when patients leave the inpatient hospital

setting and move to an outpatient setting?

Claims processing is currently performed by fiscal intermediaries for Part A services and carriers for Part B services. Why shouldn’t A and B claims processing functions be combined and performed by one contractor? By eliminating the distinction

between fiscal intermediaries and carriers, we will be better able to reduce the number of contractors from fifty to ten.

Partially because of the separate program parts and the widely disparate costsharing structures, Medicare currently does not place a cap on beneficiary liability.

Shouldn’t the system be reformed so that Medicare beneficiaries are better protected

from liability for prolonged illnesses?

These are just some of the issues that our Committee has been thinking about

on the important question of whether to merge Parts A and B. We may hear today

from some opponents of structural change that many of these suggested reforms can

be accomplished without merging the Program. In some cases, that may in fact be

true.

But ultimately, we at this Committee, should ask ourselves a more fundamental

question. If we had the opportunity to design a new, more modern Medicare Program, would we maintain the existing distinctions between Parts A and B? Wouldn’t

we all want to create a more unified program reflective of how health care is managed in the 21st Century?

I think most of us in this room know the answers to these questions.

Mr. Chairman, thank you very much for bringing this important issue to our attention and focusing on some of the deficiencies in the existing system. I look forward to hearing from our distinguished witnesses today and yield back the balance

of my time.

Mr. BILIRAKIS. And I thank the gentleman. Mr. Pallone, to make

an opening statement.

Mr. PALLONE. Thank you, Mr. Chairman and Mr. Brown for

holding this hearing. I want to express my concern over the issue

that we are discussing today, and that is merging part A and part

B of the Medicare program into one benefit package. I understand

that we will be hearing arguments in favor of merging the two

trusts funds, the hospital insurance trust funds and the supplemental insurance trust funds, much like the arguments we hear

when discussing the Breaux-Frist Medicare reform proposal.

When we talk about Breaux-Frist, the argument is made that redefining solvency by measuring the combined status of trust funds

will make Medicare’s financial status more clear. The President’s

budget has already endorsed this policy because it would help lawmakers reduce the amount of general revenues allocated to the

Medicare program. But I am opposed to these arguments in favor

of Breaux-Frist, and I oppose merging the HI and SMI trust funds

for several reasons. At a time when millions of our seniors and

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Medicare are financially strapped due to the rising cost of prescription drugs, any rise in the cost of the Medicare program would be

financially detrimental to seniors nationwide.

If both parts, A and B of Medicare are combined, it seems clear

that seniors would face a higher deductible. This is only because

of 15 percent of seniors utilize part A services and an overwhelming 85 percent of seniors use part B services in a given year.

Combining these two parts will surely present beneficiaries with a

higher deductible, placing an additional unnecessary burden on

seniors who are already paying an average of about $3,000 out-ofpocket cost for health services. This would only be exacerbated further by the fact that most seniors would see a rise in premiums for

their supplemental insurance policies. Many of these policies pay

for part A and part B co-insurance and deductibles, and if these

costs increase for merging the two parts, it is likely that employers

and beneficiaries will both have to makeup the difference in cost.

Mr. Chairman, I just want to express my concern over asking

beneficiaries to pay more out-of-pocket than they already do. We

hear every day from our constituents about how they cannot pay

for their prescription drug and we are working hard in this Congress to come up with a solution to this problem. The last thing we

need at this point is to merge the HI and SMI trust fund, thereby

increasing the cost of Medicare before we even add a prescription

drug benefit. There are a lot of important questions we need to ask

in this discussion of merging the two trust funds and how a combined program would be financed, but I just want to stress the cost

to seniors and the solvency of the Medicare program should be the

top priority. Thank you.

Mr. BILIRAKIS. I thank the gentleman. Dr. Ganske for an opening

statement.

Mr. GANSKE. Thank you, Mr. Chairman, I will be brief. I would

like to read a section from the staff memo on this hearing. If parts

A and B were combined, there may be increased pressure to use

general revenues to cover shortfalls, particularly as the number of

working contributors declines and the number of baby boomers begins to retire. Therefore, most proposals to merge parts A and B

of the Medicare program include an overall limit on general revenue expenditures. Such a cap would be controversial. I would say,

Mr. Chairman, that would be an understatement.

It goes on to say opponents to merging parts A and B suggest

that a cap on general revenues would restrict available services

and increase beneficiary cost-sharing liability. And I think that

very well may be the case. I think, Mr. Chairman, we need to face

up to the fact that when the baby boomers were starting to go to

school, the Nation decided to build more schools to cover the cost

of their education. Baby boomers are retiring, and we are more and

more going to be entering into the needs for health care. And to

set some type of arbitrary number on the amount of expenditures

for health care based on, say, a percent of GDP, I think, would be

very problematic for this Congress, and we need to face up to the

fact that because of demographics, we are going to be facing increased health costs in the not-too-distant future. In fact, in the

year 2012, baby boomers will start to retire and we will see one

new retiree every 8 seconds.

9

I think it is important to look at how the Health Care Financing

Administration is functioning to make sure it functions as efficiently as possible. I think we also need to be very careful when

we are talking about some very, very significant changes in the

structure of the Medicare program. With that I yield back.

Mr. BILIRAKIS. I thank the gentleman and certainly concur in his

statement. Ms. Capps for an opening statement.

Mrs. CAPPS. I will yield my time to Mr. Waxman.

Mr. BILIRAKIS. We will yield to Mr. Waxman.

Mr. WAXMAN. I want to thank you for holding this hearing Mr.

Chairman. I want to thank my two colleagues for being so courteous as to let me go ahead, because I have to go to another subcommittee of another committee, and others have to do it as well,

but they have been very nice to defer to my seniority and age.

As we approach this hearing today, there is a fundamental question that is bothering me. What is our goal here? What precisely

are we trying to achieve? I make this point because the topic, combining parts A and B of Medicare, gives us little clue to what precisely is proposed, and indeed, depending on how that question is

answered, what is the impact on the structure of the program, it’s

fiscal health and—most importantly—the millions of Medicare

beneficiaries.

I have puzzled over what precisely people mean when they talk

about this merger. Yes, we could make Medicare follow the structure of more traditional insurance models. Clearly today, unlike

when Medicare was established, private insurance would no longer

be split into two separate products, one for hospital coverage, one

for physicians and other outpatient services. But simply saying

that has no bearing, really, on whether there are reasons to change

Medicare. We have a program that currently has two separate financing structures—payroll deductions placed in the Medicare hospital insurance trust fund for part A and premiums and general

revenues for part B. If we combine the parts of the program, would

we use up the trust fund revenues and further destablize Medicare’s financing? Is the goal to limit the general revenue contribution and shift more of the cost to the beneficiary?

In the current program, we have automatic coverage for hospital

services without additional payments for part A, but voluntary enrollment in part B does require the payment of a premium. Would

we take away the automatic eligibility for hospital coverage if the

premium wasn’t paid? Would you require mandatory participation

in part B, whether or not you have other coverage or whether or

not you could afford the premiums?

In the current program, we have separate deductibles in parts A

and B. What would it mean if we combine the two programs?

Would there be a single deductible? Is that the intention? Are we

going to combine them and inevitably increase the out-of-pocket expenditures for the average Medicare beneficiary?

In the current program, we have intermediaries who have developed great expertise in dealing with hospitals and carriers who traditionally deal with doctors and other outpatient service. Would

combining them affect the services provided?

10

Right now Medigap coverage is built around the system as it is.

Do we have any idea what this change would mean for the cost and

availability of Medigap?

And finally, is there anything in the change that would address

the major deficiency in Medicare, the lack of prescription drug coverage?

To me, this looks like, this hearing, this idea of merging these

two parts of the program, looks like a solution in search of a problem. So I hope as we approach this hearing, we will be keenly

aware that what looks like a simple change on paper in the design

of law would have many complex effects in the real world. To make

these changes without certainty that the beneficiaries of this program would be better off seems to me to be the ultimate in folly.

Thank you very much.

Mr. BILIRAKIS. Mr. Pitts for an opening statement.

Mr. PITTS. No opening statement.

Mr. BILIRAKIS. Mr. Deal for an opening statement.

Mr. DEAL. Thank you, Mr. Chairman. Mr. Chairman, I share

some of the concerns that have been expressed by colleagues on

both sides of the aisle. But my primary concern relates to the overall programs and our ability to pay for them. One of the advantages we have had in having the part A and part B separated is

at least into part A, we have had the fiscal discipline of a dedicated

revenue stream of a portion of the FICA tax, because that is a dedicated revenue stream and is therefore finite, based on the number

of people working and paying into the system and the potential

bankruptcy of that revenue stream that led to such reforms as we

found in the 1997 Balanced Budget Act in order to keep the program solvent for a longer period of time. My concern is that if we

lose an attachment to a paying source such as FICA tax and become more and more dependent on the general revenue of this

country, it leads us in a very dangerous direction.

For one thing, I think it lends itself to the argument that after

all, total health care cost is the responsibility of the anonymous

government, without realizing that the government is, in fact, us.

It is very easy in this day and time of demanding more and better

health care, that that is more and more expensive, that we expect

someone else to pay for it. I am concerned that a merger might

lead us further and further in the direction of saying that we need

no link whatsoever to a dedicated revenue stream, and therefore

look totally to the general revenues of this country to pay for it.

That may sound good in many people’s ears, but I think it is a

direction that the originators of Medicare did not want us to go, because it more and more will place Medicare in the posture of a welfare program rather than a program that is dependent on a dedicated known quantity of a revenue stream.

And if that revenue stream is not sufficient, then obviously the

way to do a that is to raise the FICA tax to create a revenue

stream. But quite honestly, I think all of us know that neither side

of the aisle has advocated that as a solution to the problem. Nor

do I expect that to be the advocated solution in the near future.

Thank you, Mr. Chairman.

Mr. BILIRAKIS. I thank the gentleman.

Mr. Green.

11

Mr. GREEN. Thank you, Mr. Chairman. And I want to thank you

for holding our second hearing this week of the subcommittee. It

is good to be on an active subcommittee. This hearing to discuss

the feasibility of merging Medicare parts A and B. It is probably

fair to say that no one on this panel, or maybe in this room, unless

you are in Medicare, has one insurance policy for hospital stays

and another insurance policy for doctors’ visits. We probably all

have one policy with one deductible. Our Medicare system, however, was formed in just this manner, two different plans for different types of health care. And under our staff memo, it was

formed because of the opposition of physician groups in 1965. And

I remember those notices in my doctor’s office, even when I was 14,

15 years old, saying we are going to have socialized medicine under

Medicare. But now, that physician really believes in Medicare. We

wouldn’t recreate this model 35 years later any more than we

would create a Medicare system today that would not have a prescriptions drug benefit.

However, merging the programs is harder and is not so simple.

Issues surrounding financing, participation, cost sharing, and payment method all needs to be resolved before we can consider the

merger of the two. And in this context, we must ask ourselves what

are the goals for the Medicare program and would merging parts

A and B achieve those goals?

At a minimum, I believe the goals for the program should be to

improve access to the program, and ensure that costs are controlled. So what would merging the two programs do to achieve

these goals? We have held several hearings about the agency shortcoming with regard to making coverage decisions, its ability to educate providers about coding and payment procedure and its customer service operations.

Merging the program would eliminate some of the confusion surrounding these issues and can make it easier for beneficiaries and

providers to use the system. Merging payment and delivery services would also improve disease management services, coordination

of care and other important qualities issues. However, merging

these programs would create a whole new set of access questions

for beneficiaries. For example, the current deductible for Medicare

part A is $792 dollars. The current deductible for part B is $100.

While most beneficiaries meet their part B deductible, only 15 percent meet their part A deductible.

By combining these programs, we would raise the part B deductible, increase out-of-pocket costs for most beneficiaries, but not increase their benefits. As seniors who are already spending more

than $3,000 in out-of-pocket costs, we should think carefully about

increasing the burden. Also we must consider whether the merger

of part A and B would improve the long-term health of the Medicare program or include some of the costs associated with the program. With only 2 percent of the program funds currently to be

used for administration, it is unlikely that merging A and B would

achieve any real significant administration savings.

Most of our witnesses agree that merging the program would not

significantly extend the program’s solvency. Before we start making

substantial changes in the Medicare system, it is imperative that

we answer the questions. We should not change the program just

12

for the sake of change, just like we shouldn’t change a name without structural reform.

Mr. Chairman, I don’t have the answers to these issues, but I

have lots of questions and I yield back my time and I look forward

to the witnesses, thank you.

Mr. BILIRAKIS. Thank you, Mr. Green.

Let us see, Mr. Bryant to make an opening statement.

Mr. BRYANT. Mr. Chairman I took look forward to hearing from

this panel of witnesses, and to that end I would yield back the balance of my time.

Mr. BILIRAKIS. I thank the gentleman. Ms. Capps .

Mrs. CAPPS. Thank you, Mr. Chairman. I am pleased that we are

carefully examining the possibility of merging part A and part B

of Medicare. This idea has been floating around out there for some

time, but it is very complex and should not be easily accepted. If

we do not adequately review it and its consequences before trying

it out, we may do more harm than good. We want to keep in mind

that Medicare is a sacred program to today’s seniors. They count

on it and we want to make sure they can count on it in the future.

It is the most successful government health program in history. It

has assured the availability of health care for millions of older

Americans who previously had no options. We as a society have

made a pledge to them that they will have health care so we need

to follow through on this pledge.

So it is absolutely essential that we not damage the program as

we look to improve it. Any form of Medicare must meet certain requirements. It cannot cut benefits that seniors count on. It cannot

increase the cost to our seniors, especially when they are still paying for their own prescription drugs. And it cannot jeopardize the

existence of the program itself. Proponents of merging the two

parts often see it as a miracle cure for the challenges Medicare

faces, but there are too many variables for it to be any kind of miracle. For example, many supporters claim that merging the trust

funds would give us a more accurate view of Medicare solvency.

But they fail to mention that the two parts were designed to have

different definitions of solvency. Part A was meant to be a program

that remained solvent financing itself mostly with dedicated payroll

taxes. But part B is a more traditional government program without a specific source of funding beyond the U.S. Treasury and premiums collected from beneficiaries. It was meant to be dependent

on an annually fluctuating level of general revenues.

So merging the trust funds would change the underlying assumptions about financing Medicare and could allow Medicare’s opponents to handicap the program by capping or cutting off general

revenue funds.

Another questionable element of the merger is its effect on costsharing mechanisms. Right now, part A has a much larger deductible than part B, and part B requires 20 percent co-insurance and

has an annual premium. Merging them would probably lead to a

deductible between the two and possibly more costs sharing for

part A services, because in a given year most beneficiaries pay the

part B deductible, but probably do not need to pay the part A deductible, this merger would mean a high cost for most of them.

13

These are some of the many difficult policy implications that we

need to really understand before we try to implement this proposal.

Mr. Chairman, I hope that if this proposal is being seriously considered, that this will be the first of many hearings so that we can

be assured that we understand all of the ramifications. So I look

forward to working with you on this issue and am eager to hear

what the panelist have to say. I yield back.

Mr. BILIRAKIS. Thank you. Mr. Stupak for an opening statement.

Mr. STUPAK. Thank you, Mr. Chairman and thanks for holding

this hearing on the implications of merging parts A and B of Medicare. I believe it is the duty of this subcommittee to monitor and

take necessary action to improve our Nation’s health care system

of which Medicare plays a very large role. The most contentious

issue is the combining of part A trust fund with part B trust fund

and how this combination would affect the solvency of the program.

Currently, Medicare solvency is measured by the status of the HI, or part A trust fund. As of March, the Medicare trustees estimate

that the H-I trust fund will be solvent until 2029, the longest period of solvency in Medicare history. So the question must be

asked, do we want to jeopardize the solvency that we in Congress

have worked so hard to achieve? Combining the two trust funds

would force the Medicare program into insolvency more quickly, although some have argued it would provide a more complete picture

of Medicare’s financial status.

Another factor that must be considered in merging is the administrative angle. Is this merger designed to save money on administrative costs? HCFA’s administrative budget has been slashed to

keep their administrative costs running at below 2 percent. What

resources are left to implement these changes? Wouldn’t this

money be better spent improving the existing system and not in

tearing it down and rebuilding it all over again? Who would this

restructuring help? Certainly not the beneficiaries who Medicare

was specifically set up to assist. Merging A and B would most certainly result in a higher deductible, and this for seniors who already spend an average of over $3,000 a year in out-of-pocket

health care expenditures, including prescriptions drugs, make this

proposal unaffordable.

There are also so many policy questions tied up in restructuring

that I simply do not see the point. For example, would there be a

new combined deductible? This would be unfair to those seniors

who do not participate or who do not use the part A inpatient hospital portion. And would enrollment in a new improved Medicare

combined program be mandatory as part A participation is now?

How would a premium be set? How would the part B cost sharing

requirements be applied to the part A services?

I am in favor of Medicare reform, Mr. Chairman, but let us make

it meaningful reform and not a Band-Aid approach designed to

make ourselves feel good that we have done something. If we are

going to spend money on overhauling Medicare, let us concentrate

our efforts on such things as catastrophic coverage or prescription

drug coverage. These are real reforms, and real reforms actually

touch people’s lives and improve the quality of living. Let us improve the existing program but not create an entirely new monster.

14

Thank you, Mr. Chairman I yield back my time I look forward

to the testimony today.

Mr. BILIRAKIS. Let the record show the gentlelady from New

Mexico was here and has left for a vote. I believe that takes care

of the opening—I am going to cutoff the opening statement at this

point then. And without objection the opening statements of all the

members of the subcommittee will be made a part of record.

[Additional statements submitted for the record follow:]

PREPARED STATEMENT OF HON. ELIOT L. ENGEL, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF NEW YORK

Mr. Chairman, I want to thank you for having this hearing and continuing to examine different ways to improve Medicare for seniors. Today’s hearing focuses on

combining parts A and B of Medicare and the implications that it will have on the

program’s services, costs, and trust funds. However, we must consider this issue in

a broader light of providing a prescription drug benefit under Medicare and possibly

modifying the administrative process at the Health Care Financing Administration.

These are all issues that this Committee has focused on earlier in the year. All of

these considerations must be examined if there is to be a true Medicare reform bill.

To do less would be an injustice to the millions of seniors who rely on Medicare.

Medicare was created to provide seniors with affordable access to high quality

health care. It was enacted to prevent seniors from losing their life savings when

they become sick late in life. As President Johnson signed the Medicare legislation

into law, he said ‘‘No longer will illness crush and destroy the savings (seniors) have

so carefully put away over a lifetime so they might enjoy dignity in their later

life . . . No longer will this nation refuse the hand of justice to those who have given

a lifetime of service and wisdom and labor to the progress of this progressive society.’’ The 89th Congress had the pleasure of designing the Medicare program which

has endured many changes over the years. However, this Congress may be faced

with the most significant challenge since Medicare’s inception. Not only do we intend to provide a prescription drug benefit but are also undertaking the enormous

challenge of reforming and modernizing the Health Care Financing Administration

and the Medicare program as a whole.

As this and other Committees study different reform models that combine Parts

A and B with new cost sharing and benefit structures, streamline the administrative process, and alter the current financing structure of the Trust Funds, we must

keep in mind that this is a program designed for our elderly. It must remain affordable, it must maintain a high level of care, and it must allow seniors to live with

dignity.

I understand the complex changes that the delivery of health care has endured

over the last 35 years and realize that we need to take a good hard look at the

Medicare program. Seniors deserve high quality care and if changes are needed we

need to make them. I look forward to today’s testimony. I want to thank the witnesses for their time and effort in coming to this hearing. And I want to assure you

Mr. Chairman that this is an issue of great importance to me. I have had personal

experience with the complexities in dealing with Medicare. However, Medicare is essential to the health of our elderly population. I am pleased we are examining this

issue and hope that we can use the information gathered today in a constructive

manner.

PREPARED STATEMENT OF HON. JOHN D. DINGELL, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF MICHIGAN

Chairman Bilirakis, I am pleased that the Health Subcommittee is conducting

this hearing on Medicare reform. The Subcommittee will examine many important

and complex questions today, such as how to reduce the coinsurance that seniors

with lengthy hospital stays must pay and how to improve the administration of the

Medicare program. I would caution my colleagues, however, not to jump to the conclusion that merging Parts A and B of the Medicare program is the only way to

achieve these goals.

We can improve Medicares coverage of catastrophic expenses without necessarily

combining Parts A and B. We can give the Health Care Financing Administration

(HCFA) the flexibility to contract with one entity that can process both Part A and

Part B claims. We can reduce the complexity of the program for seniors by increasing the funding in beneficiary education programs. In fact, even if we were to merge

15

Parts A and B of Medicare, it would do nothing to accomplish these objectives without a corresponding commitment from Congress to increase the resources that

HCFA has to administer the Medicare program.

When discussing whether to merge Medicare Parts A and B, the most important

question is how will it affect the millions of Americans who depend on this program

for their health care, most of whom are living on fixed incomes and are already

spending a significant portion of their income on health care costs.

For that reason, we should acknowledge that the most important thing we can

do today to improve the Medicare program is to add a meaningful prescription drug

benefit that is available and affordable for every beneficiary. Before we embark on

a long and contentious debate about Medicare reform, Congress should show seniors

that we hear their most immediate concerns, and respond by creating a universal

prescription drug benefit in Medicare.

I look forward to hearing today’s witnesses, but I also eagerly await the opportunity to move forward on the reform that we all agree is most urgently needed:

Medicare prescription drugs.

Mr. BILIRAKIS. I ask the panelists to come forward and we will

break because we have two votes on the floor. We have a vote on

the previous question and a vote on the rule. So it should take us

approximately a half an hour, I am guessing. Thank you very

much.

[Brief recess.]

Mr. BILIRAKIS. Well, the hearing will come to order. Thank you

for your indulgence. The witness list consists of Dr. William J.

Scanlon, director of health care issues with GAO. Dr. Scanlon you

have been here many times and we appreciate it, sir. Dr. Donald

Young is chief operating officer and medical director of health insurance association of America. Doctor, welcome back. Mr. Don

Schulder is an executive legislative director of the alliance for retired Americans. Ms. Marilyn Moon is the senior fellow with the

Urban Institute, and Ms. Kathy Means, as I mentioned earlier, is

senior health policy advisor to Patton Boggs located here in Washington, DC.

I suppose all of you have submitted written statements. I have

not had a chance to look at them all. But your written statement

is a part of the record and we would hope that you would complement or supplement it, if you would. I am trying to decide here.

We will set the clock at 5 minutes, but certainly not cut you off if

you are going to go over a minute or two or whatever the case may

be there. I know it is the only panel and we do want you to have

an opportunity to present whatever statement it is you want us to

hear. So we will just set it for the purposes of having something

but not adhere to it too strictly.

Dr. Scanlon please proceed, sir.

STATEMENTS OF WILLIAM J. SCANLON, DIRECTOR, HEALTH

CARE ISSUES, U.S. GENERAL ACCOUNTING OFFICE; DONALD

A. YOUNG, CHIEF OPERATING OFFICER AND MEDICAL DIRECTOR, HEALTH INSURANCE ASSOCIATION OF AMERICA;

DANIEL J. SCHULDER, LEGISLATIVE DIRECTOR, ALLIANCE

FOR RETIRED AMERICANS; MARILYN MOON, SENIOR FELLOW, THE URBAN INSTITUTE; AND KATHLEEN E. MEANS,

SENIOR HEALTH POLICY ADVISOR, PATTON BOGGS

Mr. SCANLON. Thank you very much, Mr. Chairman, Mr. Chairman, Mr. Brown and members of the subcommittee. I am very

pleased to be here today as you continue to consider how the Medicare program might be modified to better serve beneficiaries, proVerDate 11-MAY-2000 08:49 Sep 10, 2001 Jkt 000000 PO 00000 Frm 00019 Fmt 6633 Sfmt 6602 73734.TXT HCOM1 PsN: HCOM1
16

viders and taxpayers. Medicare reform discussions have focused on

how to modernize the program, as you have heard, that has been

patterned after 1960’s era private insurance. Back then, different

policies for different services were the norm, and insurers were

passive bill payers that did not try to influence how care was delivered. While private insurers have moved on, Medicare still has two

distinct parts, parts A and B, and the traditional fee-for-service

program remains primarily a passive bill payer.

Viewing Medicare in its entirety could promote the use of a more

comprehensive and accurate measure the programs fiscal health.

The program’s fiscal well-being has generally been gauged by the

projected solvency of trust funds that are expected to grow as a

share of total spending. A variety of alternative measures could

provide a more complete picture. For example, the Medicare trustees already report total program spending as a share of gross domestic product. Having a more complete measure is a first step. Establishing a threshold to trigger action to rebalance revenues and

spending when needed is an equally important consideration.

The comptroller general has urged the adoption of comprehensive

measures and associated triggers, but the need for them would be

more acute if the trust funds were unified because a merger would

remove the powerful signal that impending part A insolvency has

provided. Unification of the trust funds would raise issues regarding the sources of financing and beneficiary eligibility, as you have

heard. What mix of payroll taxes, general revenues and benefit premiums to use to pay for the program would have to be determined.

A new formula for computing beneficiary premiums would need to

be specified.

And finally, whether eligible persons could only participate in the

entire program by paying premiums or whether the entitlement to

some services by virtue of having paid the payroll tax would be

maintained would also need to be resolved. A more comprehensive

view of the program could also facilitate development of better cost

sharing requirements. Health insurers today commonly design

deductibles, co-insurance and co-payments, to make beneficiaries

aware of costs and to encourage prudent service use. Medicare’s

current cost sharing structure does not do that. For example, Medicare imposes a relatively high deductible for hospital admissions

which are rarely optional but no cost sharing for home health services, which may be more discretionary. And unlike most private insurers, Medicare does not protect beneficiaries from high out-ofpocket costs, ignoring the effects of Medicare not covering an important service like prescription drugs.

Today many Medicare beneficiaries face substantial out-of-pocket

costs on services Medicare does cover, 3.4 million spend more than

$2,000, and 750,000 beneficiaries spent more than $5,000 on Medicare-covered services in 1997, the latest year for which such data

are available. Trading less first-dollar coverage for better catastrophic protection has been suggested as a way to make Medicare

provide more real insurance. While such a tradeoff might be generally acceptable, it would be important to consider appropriate

protections for low income beneficiaries so that costs do not become

a barrier to needed services or an undue burden. Restructuring a

relationship between parts A and B will not solve problems HCFA

17

faces in managing the traditional fee-for-service program more effectively by moving away from being a passive bill payer.

HCFA needs the capacity to merge part B and part A data to

support timely pertinent analyses of the program, whether or not

the parts are actually combined. HCFA lacks that capacity today,

not because of the separate parts, but because of its outdated and

inadequate information systems. Private insurers are using data

better today to try and promote more targeted use of services and

better health. Their efforts include targeted beneficiary education,

preferred provider networks, and coordination of services.

Adopting some of these approaches could potentially improve

Medicare, however consideration must be given to how to modify

them for such a large public program, and they need to be tested

adequately to understand their benefits and costs. HCFA has been

taking some steps in this regard to better manage services beneficiaries receive. For example, it has been able to implement broadbased education efforts to try and increase the use of important

preventative services, but private insurers go one step further and

target education to individual beneficiaries, such as those who have

not yet obtained a particular service.

If HCFA did something like that, beneficiaries and others might

have serious concerns about large government using personal medical information in such a way. HCFA has also tested a type of preferred provider arrangement making single global payments to hospitals for all services, both part A hospital and part B physician

services related to bypass surgery. The results were lower cost,

lower mortality and more satisfied beneficiaries. However, broad

application of such preferred provider techniques could evoke concerns about selection of providers and beneficiary choice. Essentially, initiatives like these to better manage services may not require a formal unification of parts A and B, but they raise important questions for you about some of the basic principals originally

incorporated into the program. Namely, beneficiary freedom of

choice, any willing provider participation, and minimal influence

over service use.

The evolution of health care since 1965 makes it seem reasonable

to ask whether changes at the margin in some of these areas would

benefit beneficiaries and the program.

Mr. Chairman, this concludes my statement. I would be happy

to answer any questions you or the members of the subcommittee

may have.

Mr. BILIRAKIS. Thank you, Dr. Scanlon. We didn’t hustle you

along there, did we? I intended you to present whatever information you had.

Mr. SCANLON. No, that is fine.

[The prepared statement of William J. Scanlon follows:]

PREPARED STATEMENT OF WILLIAM J. SCANLON, DIRECTOR, HEALTH CARE ISSUES, UNITED STATES GENERAL ACCOUNTING OFFICE

Mr. Chairman and Members of the Subcommittee: I am pleased to be here today

as you continue to consider how the Medicare program might be modified to better

serve beneficiaries, providers, and taxpayers. Discussions about how to reform and

modernize Medicare have, in part, focused on whether the structure that was adopted in 1965 remains optimal today. In that context, questions have been raised about

the desirability of maintaining Medicare’s division into two distinct parts, part A for

hospital and other institutional care and part B for physician, outpatient, and other

18

noninstitutional services. This bifurcated structure is no longer common among private insurance, as it was in the 1960s when insurers marketed separate policies for

different services.

Problems with financing beneficiary cost-sharing, and program management have

been linked with the fragmented structure of the program. Yet merging parts A and

B may not be the only way to make progress in addressing these problems. To assist

the Subcommittee as it considers restructuring Medicare, my remarks today focus

on how reforms based on a more unified view of the program might affect (1) program financing and assessment of the program’s financial health, (2) cost sharing

requirements, and (3) program management, including administration and promotion of quality care. These observations are based on previous and ongoing GAO

work on Medicare and private sector insurance, as well as other published research.

In summary, rethinking the relationship between parts A and B may encourage

use of a more comprehensive measure of Medicare’s financial health. The commonly

used measure, part A trust fund solvency, does not include the growing share of program spending on part B services. While a more complete picture of Medicare’s financial health can be obtained in a number of ways, the desire for a better picture

of the program’s financial prognosis is one argument for a single trust fund. Establishing a single trust fund would require agreement on how funds from payroll

taxes, general revenues, and beneficiary premiums would flow to the program. It

would require consensus on what measure would be used to track program finances

and spur action to increase revenue or curb spending when needed. It also would

require assessment of whether different beneficiary eligibility standards, similar to

those currently specified for parts A and B, would be maintained.

Rethinking the relationship between parts A and B also could facilitate development of better cost-sharing requirements. The current cost-sharing structure fails

to promote prudent use of services and protect beneficiaries from high out-of-pocket

costs. These concerns could be addressed under the current part A and B structure

or a more unified structure. Unifying the program completely would require some

beneficiaries who now have other coverage and are enrolled in only one part of the

program to pay additional premiums for coverage they already have. It also would

increase costs to the government for care that is now covered privately. Alternatively, partial benefits could be extended to those who chose not to fully participate in a unified program.

Rethinking the relationship between parts A and B would not fundamentally address challenges the Health Care Financing Administration (HCFA) faces in, efficiently managing the disparate services Medicare covers. HCFA’s outdated information technology (IT) systems have hindered its ability to develop data to improve

payment methods and the quality of care beneficiaries receive. Further, as a large

public program, Medicare is limited in its ability to incorporate innovations that private insurers have used to influence care delivery. These include targeted beneficiary education, preferred provider networks, and coordination of services. The National Academy of Social Insurance (NASI) has reviewed these private sector practices and concluded that they could potentially improve Medicare. However, they

would need to be tested to determine their impacts and evaluated to ascertain how

well they might be adapted to reflect the uniqueness of Medicare as both a public

program and the largest single purchaser of health care. Full implementation of

many of these innovations would require statutory changes to the program.

BACKGROUND

At its inception, Medicare’s design mimicked the structure of existing private insurance, which commonly included different policies for different sets of services. It

also was designed, like private insurance at the time, as a passive bill payer that

did not try to influence how care was delivered. In fact, because of concerns about

the potential influence of such a large government program, the original Medicare

statute requires that Medicare not influence providers’ practice of medicine and

gives beneficiaries access to all participating providers.

Medicare is administered by the HCFA, and pays for some $200 billion in health

care benefits each year for about 40 million elderly and disabled Americans. Individuals who are eligible for Medicare automatically receive Hospital Insurance (HI),

known as part A, which covers inpatient hospital, skilled nursing facilities (SNF),

certain home health, and hospice care. Beneficiaries generally pay no premium for

this coverage, having previously contributed payroll taxes from covered employment,

but they are liable for required deductibles, coinsurance, and copayment amounts.

(See tables 1 and 2.)

Medicare-eligible beneficiaries may elect to purchase Supplementary Medical Insurance (SMI), known as part B, which covers physician, outpatient hospital, laboraVerDate 11-MAY-2000 08:49 Sep 10, 2001 Jkt 000000 PO 00000 Frm 00022 Fmt 6633 Sfmt 6621 73734.TXT HCOM1 PsN: HCOM1
19

tory, and other services. Beneficiaries must pay a premium for part B coverage, currently $50 per month, and are also responsible for part B deductibles, coinsurance,

and copayments.

Most of Medicare’s 40 million beneficiaries are enrolled in both parts A and B.

However, approximately 2 million are enrolled only in part A. Another 400,000 are

enrolled only in part B. Those enrolled in only one part of the program often have

private insurance from an employer or other source to make up the difference.

Approximately 14 percent of Medicare beneficiaries enroll in Medicare+Choice

plans. These plans include health maintenance organizations and other private insurers who are paid a set amount each month to provide all Medicare-covered services. Beneficiaries must be enrolled in both parts A and B to join these plans, which

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.

Table 1: Medicare Part A and Part B Coverage, Eligibility, and Funding

Part A Part B

Coverage ... —Inpatient hospital ....................................................

—Skilled nursing facility (SNF) ...................................

—Home health.1 ..........................................................

—Hospice .....................................................................

—Physician services

—Laboratory services

—Outpatient hospital

—Home health.1

—Durable medical equipment

Eligibility ... —Individuals and their spouses over 65 who paid

the Medicare payroll tax for 10 years (40 quarters).

—Individuals over 65 who paid the Medicare payroll

tax for 30 to 39 quarters and who pay a $165

monthly premium.

—Individuals over 65 who paid the payroll tax for

less than 30 quarters and who pay a $300

monthly premium.

—Individuals eligible for Social Security disability

benefits.

—Individuals with end-stage renal disease ...............

—Individuals over age 65, disabled, or with endstage renal disease who pay a monthly premium

($50 in 2001)

Funding ..... Medicare payroll taxes ................................................. Premiums cover 25 percent and general tax revenue

covers 75 percent

1 Part A covers up to 100 home health visits following an inpatient hospital or SNF stay. Part B covers other home health visits.

Source: Medicare & You 2001, HCFA.

Table 2: Medicare Beneficiary Cost-Sharing for 2001

Copayments, coinsurance, and deductibles:

Part A services:

Inpatient hospital .................................................... $792 deductible per admission 1

$198 copayment per day for days 61 through 90

$396 copayment per day for days 91 through 150 2

All costs beyond 150 days

Skilled nursing facility (SNF) .................................. No cost-sharing for first 20 days

$99 per day copayment for days 21 through 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

Part B services:2

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

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

1 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.

20

2 After the first 90 days of inpatient care, Medicare may help pay for an additional 60 days of inpatient care (days 91 through 150). Each

beneficiary is entitled to a lifetime reserve of 60 days of inpatient coverage. Each reserve day may be used only once in a beneficiary’s lifetime. 3 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, HCFA.

Medicare pays for services out of two separate trust funds. Part A services are

paid for out of the HI Trust Fund. It is primarily financed through the Medicare

payroll tax that is exclusively dedicated to this trust fund. Part B services are paid

for out of the SMI Trust Fund. This trust fund is financed in part through the part

B premium, which is adjusted each year to equal 25 percent of expected part B

spending. The remaining 75 percent is paid for out of general tax revenues.

RESTRUCTURING RAISES FINANCING AND BENEFICIARY PARTICIPATION ISSUES

Medicare’s two parts have distinct financing and participation arrangements.

Modifying these arrangements could promote the use of a more comprehensive

measure of Medicare’s financial health and help policymakers anticipate future fiscal imbalances. In addition to selecting such a measure or measures, Congress could

also decide to establish thresholds that would trigger corrective actions designed to

rebalance Medicare revenues and spending. Unification of the now separate HI and

SMI trust funds would require consideration of these issues, but even without such

a merger, comprehensive financial measures and associated triggers would be useful. Unification would also require Congress to determine how the current mix of

payroll taxes, beneficiary premiums, and general revenues might be modified to

fund the program, as well as whether beneficiaries would be obligated to participate

in the full program or could obtain coverage for subsets of services.

Focus on HI Trust Fund Provides Misleading View of Medicare’s Financial Health

In the past, Medicare’s financial status has been generally gauged by the projected solvency of the HI trust fund. Looked at this way—and based on the latest

annual report from the Medicare Trustees—Medicare is viewed as solvent through

2029. Solvency is a popular measure, in part because the consequences of insolvency

are clear. If there is no money in the HI trust fund, the government cannot pay hospitals or other providers of part A services. Thus, the threat of insolvency can be

a powerful driver for action. In 1997, the Medicare Trustees estimated that the HI

trust fund would become insolvent in 2001. The HI trust fund had not been so close

to a crisis since 1972. Following the Trustees’ 1997 report, Congress enacted the

Balanced Budget Act of 1997, which contained substantial payment and other reforms designed to slow Medicare’s cost growth. These reforms, coupled with a strong

economy, helped to increase the life expectancy of the HI trust fund.

However, HI trust fund solvency is an incomplete measure of Medicare’s fiscal

health. It does not reflect the cost of the part B component of Medicare, which covers outpatient services and is financed through general revenues and beneficiary

premiums. Part B accounts for more than 40 percent of current Medicare spending

and is expected to account for a growing share of future total program dollars. The

concept of solvency does not apply to the trust fund for part B, SMI, because increases in expenditures are automatically matched with increases in general revenues and beneficiary premiums.

In addition, HI trust fund solvency does not mean that Medicare’s part A component is financially healthy. Although the trust fund is expected to remain solvent

until 2029, HI outlays are projected to exceed HI revenues beginning in 2016. As

the baby boom generation retires and the Medicare-eligible population swells, the

imbalance between outlays and revenues will increase dramatically. Thus, in 15

years the HI trust fund will begin to experience a growing annual cash deficit. At

that point, the HI program must redeem Treasury securities acquired during years

of cash surplus. The government will then need to increase taxes, increase borrowing (or retire less debt), impose spending cuts, or implement some combination

of these actions.

When part A expenditures outstrip payroll tax revenues, it may be tempting to

reallocate some expenditures from part A to part B. This would extend the solvency

of the HI trust fund, but would do little to improve Medicare’s overall financial

health. For example, BBA reallocated a portion of home health spending from part

A to part B. Although that action—phased in over time—reduces HI expenditures

and extends that trust fund’s solvency, it also increases SMI expenditures. Consequently, the home health reallocation increases the proportion of Medicare funded

by general revenues and beneficiary premiums.

21

1Medicare: Higher Expected Spending and Call for New Benefit Underscore Need for Meaningful Reform (GAO-01-539T, Mar. 22, 2001).

Comprehensive Measures Could Better Indicate Program Sustainability

Clearly, it is total program spending—both part A and part B—which determines

whether Medicare is sustainable over the long haul. Whether the program remains

in its current configuration, or the relationship between parts A and B are restructured, a more comprehensive measure of Medicare’s financial health could help Congress anticipate future fiscal imbalances. A variety of such measures exist now. For

example, the Medicare Trustees report total Medicare spending as a share of gross

domestic product (GDP). This measure clearly shows that total Medicare expenditures will likely consume an increasingly larger share of the national economy. Currently, combined HI and SMI expenditures account for 2.3 percent of GDP. This percentage is expected to rise to 4.5 percent in 2030 and 8.5 percent in 2075. Another

comprehensive indicator measures Medicare spending relative to the entire federal

budget. We estimate that Medicare’s share of the federal budget will increase from

10 percent in 2000 to over 23 percent in 2030 if the program’s spending growth continues unchecked.1

Fiscal Measures Could Trigger Congressional Action

The adoption of new financial health indicators for Medicare would be one step;

the next would be to decide what should trigger congressional action. Congress could

agree that it would take action to rebalance Medicare spending and revenues whenever a comprehensive measure reached a predetermined level. Possible actions could

include increasing general revenue contributions, payroll taxes, or beneficiary premiums; reducing benefits; cutting provider payments; or introducing efficiencies to

moderate spending. The 1999 Breaux-Frist Medicare reform proposal provides one

example of a potential trigger. Under that proposal, the two trust funds would be

unified and congressional action would be required in any year when general revenue contributions exceeded 40 percent of total Medicare expenditures.

The need for measures of program sustainability and thresholds that would trigger congressional action would be most acute if the trust funds are unified. Such

a reconfiguration could remove the powerful signal of the HI trust fund insolvency

and reduce the apparent urgency of corrective actions. If the trust funds remain separate, comprehensive measures of Medicare’s financial health and associated triggers could avoid the shortcomings that arise from a focus on the HI trust fund’s solvency.

Improved measures of Medicare sustainability and agreed-upon thresholds will

not, however, alter the difficult decisions facing this and future Congresses. A growing Medicare population and advances in expensive medical technology will increase

future demands for health care spending. Policymakers will need to find ways either

to control Medicare’s spending growth or obtain additional revenues to pay for it.

Any solution to address the financial imbalance will affect beneficiaries, taxpayers,

providers, or some combination of the three groups. Better measures of Medicare’s financial health may help identify the need for action, but will not lessen the difficulty of implementing a solution.

Unification of Trust Funds Raises Questions About Financing, Premiums, and Participation

Creating a unified trust fund for Medicare parts A and B would raise several new

issues Congress would need to address. One is program financing—Congress would

have to specify Medicare’s revenue sources and the share that each source would

contribute. Under the current arrangement, revenues come from the Medicare payroll tax, general revenues, and beneficiary premiums. Broadly speaking, the amount

financed from each revenue source depends upon the amount spent on Medicare

services and the classification of services into parts A and B. The payroll tax supports part A services. The amount of general revenues devoted to Medicare is set

equal to 75 percent of part B expenditures. Beneficiary premiums are collected to

pay for the remaining 25 percent of part B spending. If the trust funds were unified,

Congress would have to specify the funding mechanism. It could, for example, determine the share that general tax revenues, payroll tax revenues, and beneficiary premiums would each contribute to total Medicare spending. Alternatively, it could

adopt an allocation formula similar to the present one by designating some services

to be supported by the payroll tax and others to be supported by general revenues

and beneficiary premiums.

Beneficiary participation issues would also arise under a restructured program

with a unified trust fund. Currently, about 2 million individuals (5 percent of beneficiaries) are eligible for Medicare part B but do not participate in the voluntary proVerDate 11-MAY-2000 08:49 Sep 10, 2001 Jkt 000000 PO 00000 Frm 00025 Fmt 6633 Sfmt 6621 73734.TXT HCOM1 PsN: HCOM1
22

2Medicare: Cost Sharing Policies Problematic for Beneficiaries and Program (GAO-01-713T,

May 9, 2001. 3See Medicare Home Health Care: Prospective Payment System Will Need Refinement as Data

Become Available (GAO/HEHS-00-9, Apr. 7, 2000). 4The Kaiser Family Foundation and Health Research and Educational Trust, Employer

Health Benefits: 2000 Annual Survey.

gram. A smaller number of individuals do not qualify for coverage under part A,

although provisions allow certain individuals to buy into the program by paying a

monthly premium. Under a restructured program, Congress would need to determine beneficiary participation and premium options. For example, should participation in the full program and payment of any associated premium be mandatory? If

full participation is mandated, program costs could increase and some beneficiaries

would receive Medicare coverage for services covered by existing private policies. If

full participation is voluntary, what coverage should be provided to those individuals who choose less than full participation? Would individuals who had made payroll tax contributions but decline to pay the premium not receive coverage? Or

would reduced benefits—for example, coverage only for current part A services—be

available for such individuals?

BENEFICIARY COST-SHARING COULD BE IMPROVED

Rethinking the relationship between parts A and B could facilitate rationalization

of cost-sharing requirements and help make Medicare more like private sector and

Medicare+Choice plans. Medicare’s benefit 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’s current costsharing requirements in particular are not well structured to promote prudent use of discretionary services. At the same time, they can create financial barriers to care and

leave beneficiaries with extensive health care needs liable for high out-of-pocket

costs.2

Cost-Sharing Requirements Are Not Well Structured

Health insurers today commonly design cost-sharing requirements—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. Optimally,

cost-sharing would generally require coinsurance or copayrnents 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 most 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 2, Medicare

imposes a relatively high deductible of $792 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.3 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.

Beneficiary Liability Is Unlimited

Also unlike most employer-sponsored health plans for active workers, Medicare

does not limit beneficiaries’ cost-sharing liability. Employer-sponsored plans typically limit maximum annual out-of-pocket costs for covered services to less than

$2,000 per year for single coverage.4 In Medicare, however, current estimates suggest that the combination of cost-sharing requirements on covered services and the

cost of services not covered by Medicare leaves beneficiaries liable for about 45 percent of their health care costs. The average beneficiary is estimated to have incurred

23

5Stephanie Maxwell, Marilyn Moon, and Mesha Segal, Growth in Medicare and Out-Of-Pocket

Spending: Impact on Vulnerable Beneficiaries (Urban Institute, Dec. 2000). 6Maxwell, Moon, and Segal.

about $3, 100 in out-of-pocket expenses for health care in 2000—an amount equal

to about 22 percent of the average beneficiary’s income.5 Some beneficiaries face

much greater financial burdens. For example, 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.6

The average beneficiary who obtained services had a total liability for Medicare- covered services of $1,451, consisting of $925 in Medicare copayments and

deductibles in addition to the $526 in annual part B premiums in 1997, the most

recent year for which data are available on the distribution of these costs. The burden of Medicare cost-sharing can, again, be much higher for beneficiaries with extensive health care needs. In 1997 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.

Options for Addressing Cost-Sharing Concerns

Different approaches could be taken to address concerns about current costsharing

requirements. Cost-sharing for less discretionary services could be reduced or eliminated. Catastrophic protection could be added to the benefits package. In addition,

the part B deductible could be raised, or the part A and B deductibles could be combined.

Reducing or eliminating cost-sharing for less discretionary services, such as inpatient hospital care, could be done within the current program structure. Congress

has already taken similar action by reducing and eliminating costsharing requirements for various cancer screening tests and vaccinations in order to ensure that

affordability is not a barrier to these important services.

Adding catastrophic protection by capping how much beneficiaries are required to

pay out-of-pocket also could be done under current program structure. There would

need to be agreement on how to allocate between parts A and B the added cost to

the program and recognition of the time and resources needed to incorporate such

a change into HCFA’s information systems.

Raising the part B deductible or creating a combined deductible for part A and

part B services has been suggested to offset some of the additional cost of providing

catastrophic protection. It would also offset some of the real-dollar decline in the

part B deductible, which has not been adjusted for inflation or raised in any way

since 1990. These changes could be done under current program structure as well,

again with recognition of the time and resources needed to incorporate the change

into HCFA’s information systems. Most beneficiaries who incurred cost-sharing

would likely meet a combined deductible through their use of what are now part

B services. If the combined deductible is set higher than the current part B deductible, providing protection for low-income beneficiaries so that costs do not become

a barrier to needed services or an undue burden would be an important consideration.

Combining the deductible or providing catastrophic protection would again raise

the issue of whether to maintain individuals’ ability to participate independently in

A or B or to require full participation by all beneficiaries in the entire program. Requiring full participation for beneficiaries who now participate in only one part of

the program could result in additional costs for beneficiaries who have alternative

coverage as well as additional program costs. It also raises the issue of the entitlement for persons who have paid the required payroll tax, but choose not to pay the

premium.

Partial benefits could be extended to those who do not fully participate in the program. Alternatively, some of the effects of mandatory participation could be muted

by phasing in a unified program so that new beneficiaries would participate in the

full program while those who now participate in only part of the program could continue to do so.

CHALLENGES FOR MANAGEMENT AND PROMOTING CARE QUALITY REMAIN REGARDLESS

OF RESTRUCTURING

As noted earlier, the original Medicare statute reflected 1960s private health insurance practices that often included separate policies for different services as well

as a passive bill paying approach. In contrast to Medicare, which has not changed

much since its inception, private insurance has evolved over the last 40 years and

24

now offers comprehensive policies and employs management techniques designed to

improve the quality and efficiency of services purchased. Private insurers are able

to undertake these efforts because many have detailed data on service use across

enrollees and providers, as well as wide latitude in how they run their businesses.

Regardless of whether the relationship between parts A and B is restructured,

HCFA faces challenges in seeking to more efficiently manage Medicare services due

to its outdated and inadequate IT systems, statutory constraints, and the fundamental need for public accountability that accompanies a large public program.

These limitations have hampered the agency’s ability to administer the program and

incorporate new innovations. Private insurers have taken steps to influence utilization and patterns of service delivery through efforts such as beneficiary education,

preferred provider networks, and coordination of services. NASI has reviewed many

of these private sector activities and concluded that they could have potential value

for Medicare. However, they would need to be tested to determine their effects as

well as how they might be adapted to reflect the uniqueness of Medicare as both

a public program and the largest single purchaser of health care. In addition, HCFA

would likely need new statutory authority to broadly implement many of these innovations.

Effective Program Management Depends on Comprehensive and Timely Information

To effectively oversee claims administration and assess the effects of innovative

policies that private sector insurers have adopted, HCFA needs timely and comprehensive information on services and payments in the aggregate and for individual beneficiaries. HCFA lacks that capacity today, not because it has separate

contractors for parts A and B, but because of deficiencies in its information systems.

Some of the agency’s vital information systems are decades old, with some operating

software rarely used today by any entity other than HCFA, and lack the capacity

and flexibility that newer technology can offer. Consequently, HCFA has had difficulty assembling timely and comprehensive information about provider billing patterns and beneficiary service use.

Currently, data from parts A and B do flow to some common points—both during

claims processing and after. During claims processing, both part A and part B

claims are checked through a prepayment validation and authorization system operated by HCFA—the Common Working File (CWF). Claims approved for payment are

ultimately complied in the National Claims History (NCH) Me, which can be analyzed to look at broader payment trends within the program. The problem is that

this compilation of information occurs long after services have been delivered and

claims paid.

These system limitations are unfortunate because changes in Medicare payment

policy for one type of service can have reverberations in other areas. To understand

these effects requires analysis across a range of services beneficiaries may be receiving. A clear example of this occurred after the implementation of a prospective payment system (PPS) for hospitals, which pays hospitals fixed, predetermined amounts

for each hospital stay that vary according to patients’ diagnoses. Prior to this innovation, hospitals were paid on the basis of their costs, with little incentive to limit

patient stays or provide care efficiently. Paying a fixed amount for an episode of

hospital care creates incentives for hospitals to reduce lengths of stay and to shift

services that had been provided in the hospital to other settings. Understanding

these modifications in care delivery led to payment changes to prevent Medicare

from paying twice for the same service. More recent payment changes for home

health and SNF services, and the soon to be implemented PPS for inpatient rehabilitation services, will likely cause similar kinds of care shifts. It is essential that

HCFA has the ability to monitor changes in care delivery in a timely and objective

manner to determine how these payment policies may need to be adjusted in the

future.

Recent experience has also demonstrated HCFA’s difficulties in developing information to measure the effects of changing Medicare policies on beneficiaries and

providers in a comprehensive and timely manner. The Balanced Budget Act of 1997

(BBA) payment reforms represented bold steps to control Medicare spending by

changing the financial incentives for delivering care efficiently. Reforms affected

hospitals, home health agencies, SNFS, and providers of other services. Affected providers presented anecdotal evidence asserting that the BBA’s payment reforms

caused them financial difficulties and would impair beneficiary access, urging Congress to undo some of the act’s provisions. HCFA analysts were ill-equipped to assess the validity of these charges because the necessary program data were not

readily available.

Better and more timely information is a prerequisite to more effective program

management. It is essential to the development and refinement of payment methods

25

7From a Generation Behind to a Generation Ahead: Transforming Traditional Medicare, Final

Report of the Study Panel on Fee-for-Service Medicare, National Academy of Social Insurance,

Washington, D.C.: January 1998. 8 A number of studies prior to this experiment have found that hospitals with the greatest

volume of these types of surgeries generally had better outcomes, in regard to mortality and

complications.

for different service providers. It can also help policymakers understand the desirable and undesirable consequences of changes on beneficiaries, providers, and the

trust funds. Generating these data is not dependent on unifying part A and part

B, but rather on merging part A and part B data in a modern information system

capable of supporting timely, pertinent analyses.

Quality Promotion Efforts Could Reap Benefits But Face Many Obstacles

An expert panel convened by NASI has suggested that Medicare may benefit from

moving away from its passive bill paying approach by adopting some private insurers’ practices designed to improve the quality and efficiency of care.7 The panel focused on provider and beneficiary education, preferred provider networks, and coordination of services as potential improvements in Medicare. Educating beneficiaries or providers could improve the use of important preventive and other services currently being under-used and minimize questionable use of services. Developing a system of preferred providers selected on the basis of quality as well as cost

could improve care and help achieve savings. More actively coordinating care across

provider settings for beneficiaries with chronic diseases like diabetes or who have

recently experienced heart attacks might also help improve quality and efficiency.

HCFA has begun to implement some innovations and experiment with others.

Broadly implementing the experimental innovations that prove successful may require new statutory authority. Other private sector innovations, however, may be

difficult to incorporate, given Medicare’s size and the need for transparency in a

public program.

HCFA has been able to implement broad-based education efforts but has been stymied in implementing approaches targeted to individual beneficiaries most likely to

need the help. For example, it has an extensive effort underway to encourage colon

cancer screening that includes dissemination of more than 23,000 innovative posters. The posters include tear-off sheets that beneficiaries can hand to physicians to

facilitate discussions that otherwise might be avoided because of the unfamiliar

words, sensitive issues, and unpleasant options that can be involved. HCFA is also

involved in a multifaceted effort to increase flu vaccinations and mammography use

among beneficiaries. However, HCFA may be less able to undertake more targeted

education efforts that some private insurers are using, such as sending out reminders to identified enrollees about the need to obtain a certain service. Because of

Medicare’s size and status as a federal program, beneficiaries and others might have

concerns about HCFA using personal medical information from claims data to target

educational efforts. Providers might also object to a government insurance program

advocating certain medical services for their patients.

HCFA is providing more information to physicians about service use and typical

practice patterns in an effort to educate them about how their practice patterns

compare to the norm. For example, the Medicare peer review organizations encourage those who have unusual practice patterns to reconsider their service provision.

However, private insurers can go one step further and terminate providers who continue to have aberrant practice patterns. HCFA’s ability to terminate providers is

much more limited because of statutory requirements intended to protect beneficiaries’ choice of providers.

HCFA’s ability to encourage use of preferred providers is also limited. The Medicare statute generally allows any qualified provider to participate in the program.

HCFA has experimented with bundling payments for certain expensive procedures

performed by designated providers. For example, it tested the impact of making single ‘‘global’’ payments to hospitals for all services—both hospital and physician—related to coronary artery bypass graft surgery. The hospitals chosen for the experiment were among those with the best outcomes for these surgeries.8 The experiment

cut program costs by 10 percent for the 10,000 coronary artery bypass surgeries performed, and saved money for beneficiaries through reduced part B coinsurance payments. More important, compared to a group of beneficiaries not receiving this bundled care, beneficiaries who were treated in one of the selected hospitals had lower

mortality rates, were more satisfied with the quality of the nursing care, and appreciated the simplicity of a single coinsurance amount. HCFA has begun a similar experiment at selected acute care hospitals, which involves bundling payments for hosVerDate 11-MAY-2000 08:49 Sep 10, 2001 Jkt 000000 PO 00000 Frm 00029 Fmt 6633 Sfmt 6621 73734.TXT HCOM1 PsN: HCOM1
26

9Section 4016.

pital, physician, and other health care professionals’ services provided during a

beneficiary’s hospital stay for selected cardiovascular and orthopedic procedures.

However, more wide scale Medicare implementation of such hospital and physician partnership arrangements may be difficult. Providers have raised concerns

about a government program designating some providers as delivering higher quality care than others. In addition, bundling services for hospitals and doctors added

administrative burdens to the hospitals and took control of payments away from

doctors. In the end, it is not the separation of parts A and B that would impede

efforts to promote such preferred provider arrangements. Rather, it may be more

deep-seated concerns about government promotion of certain providers at the expense of others that serve as a barrier to this and other types of preferred provider

arrangements.

HCFA has also been conducting demonstrations to test how to better coordinate

care for certain patients since the 1980s. In addition, BBA 9 mandates that HCFA

find budget neutral ways to test methods of coordinating a range of services for

chronically ill beneficiaries in at least nine urban and rural sites. The law authorizes the Secretary of Health and Human Services to incorporate any components

proven to be cost-effective into Medicare through regulations and to expand the

number of demonstration sites.

While there is increasing interest in efforts to coordinate care, it is not clear that

they are always cost-effective. Some experience in both the private and public sectors suggests that such efforts can improve quality and achieve savings. For example, the Group Health Cooperative of Puget Sound and PacifiCare teamed with a

senior citizens center to offer supervised health promotion and chronic illness selfmanagement interventions to chronically ill seniors. The intervention included meetings with geriatric nurse practitioners to develop individually tailored health promotion plans, medication reviews, classes, support groups, and volunteer mentors.

Preliminary findings suggested that the case-managed group had fewer health problems and lower costs compared to a group that did not receive the services. However, other experiments, including those conducted by HCFA, have failed to demonstrate either quality improvements or cost savings. Furthermore, there would

need to be statutory changes to implement different coordination approaches in

Medicare if they involved coverage of new services, such as care coordinators, or involved control over the use of particular services or providers.

CONCLUDING OBSERVATIONS

The Medicare program faces many challenges. Clearly, the overarching issue is

how to ensure that Medicare remains sustainable for future generations of beneficiaries. Meeting that challenge will involve difficult decisions that will likely affect

beneficiaries, providers, and taxpayers. However, the financing issue should not obscure other important Medicare challenges. Medicare’s current cost-sharing arrangements are not well designed to encourage the efficient use of services without discouraging necessary care. Moreover, the lack of catastrophic coverage can leave

some beneficiaries liable for substantial Medicare expenses. Finally, some aspects of

Medicare’s program management are inefficient and lag behind modern private sector practices. Changes in Medicare’s program management could improve both the

delivery of health care to beneficiaries and the program’s ability to pay providers

appropriately.

Some view restructuring of the relationship between parts A and B as an important element of overall Medicare reform. Fundamentally, assessing the program as

a whole is an important first step in addressing Medicare’s challenges. Solutions to

many of these challenges could be crafted without restructuring. However, restructuring may provide opportunities to implement desired reforms—with or without

unifying the HI and SMI trust funds-while undoubtedly raising issues that will have

to be considered.

Mr. Chairman, this concludes my statement. I would be happy to answer any

questions that you or members of the Subcommittee may have.

Mr. BILIRAKIS. Dr. Young, you obviously have quite a background

in this subject, so we are eagerly awaiting to hear what you have

to say.

27

STATEMENT OF DONALD A. YOUNG

Mr. YOUNG. Thank you, sir. Chairman Bilirakis, Mr. Brown, distinguished members of the committee, I am Dr. Donald Young, interim president of the Health Insurance Association of America. I

am very pleased to be with you here today to discuss Medicare reform. I was previously executive director of the Federal Prospective

Payment Assessment Commission, ProPAC, the predecessor to

MEDPAC, and before that, deputy director of the policy bureau of

the Health Care financing administration. Given this background,

I am familiar with the world of private insurance as well as the

Medicare program. Medicare is obviously a very popular program,

something HIAA’s own research has confirmed. However, I believe

that lessons from the private insurance industry’s long history may

be useful as you consider how to make the program even stronger.

When Medicare was enacted in the 1960’s, it was patterned after

existing private insurance programs. But while the private sector

plans have changed to offer a variety of programs that improve the

coordination and delivery of care, the Medicare fee-for-service program has remained in its original form. For example, today, many

surgical procedures can be performed safely and effectively, both as

part A inpatient hospital services, and as part B, ambulatory services, the same procedure. Medicare beneficiaries, however, face

very different out-of-pocket costs, depending upon where the service is furnished. The resulting financial incentives may result in

the beneficiary not receiving care in the appropriate setting, thereby adversely affecting quality of care.

In contrast, private health insurance policies usually cover a

comprehensive array of health services, both in and out of a hospital, subject to a single annual deductible. This arrangement is

easier for insured people to understand and more efficient to administer. Under this private sector approach, claims for services

flow to a single responsible organization and inquiries by insured

individuals and their caregivers likewise could be made to one

party.

Among other things, this arrangement also facilitates disease

management program. Disease management programs take a systematic approach to medicine that encourages patients to follow

health promoting behaviors and promotes a strong patient-doctor

relationship. These program not only enhance the quality of care,

but they help reduce the need for hospitalization, emergency room

department visits, and other services. While beneficiaries in the

Medicare+Choice program have access to these programs, fee for

service beneficiaries do not and Medicare’s current structure would

create major challenges in designing such programs. A single program with centralized records allows plans to efficiently update

and maintain beneficiary coverage and claims files and to coordinate care.

These efficiencies result in reductions in the cost for providing

health care and help in treatment options and health outcomes.

This can only be carried out through the links between various

claims the beneficiary may have.

Combining information about different types of service is also extremely important for fraud detection programs. For example, a

claim for a physician’s hospital inpatient visit can be compared to

28

the dates on which a patient was hospitalized or a claim for laboratory work can be linked to the office visit at which the patient was

seen and sent for tests.

Recognizing the constraints of its current structure, Medicare

has, through the years, attempted to break down the barriers between its separate parts. HCFA has conducted various pilot

projects under its general demonstration authority or based on specific congressional mandates. Such programs have been very successful, demonstrating the flexibility and the design of care management and payment programs that is characteristic of private insurance programs. They have also been cost efficient for the Medicare program and its beneficiaries. But putting such programs in

place now requires special legislative or regulatory authority, in

part because of Medicare’s outmoded design.

The Medicare program is in need of substantial reform. Obviously, combining Medicare Parts A and B into a single program

would not, by itself, improve care coordination, disease management, program administration or oversight. But many of these reforms to work effectively, a necessary first step is to eliminate the

separation of the program into two parts as private insurers did

many years ago.

Thank you for providing me this opportunity to talk about Medicare reform from the perspective of the private health insurance

sector. I would be happy to respond any questions you might have.

[The prepared statement of Donald A. Young follows:]

PREPARED STATEMENT OF DONALD A. YOUNG, INTERIM PRESIDENT, HEALTH

INSURANCE ASSOCIATION OF AMERICA

INTRODUCTION

Chairman Bilirakis, distinguished members of the Committee, I am Dr. Donald

A. Young, Interim President of the Health Insurance Association of America (HIAA).

I am very pleased to be here today to discuss the issue of Medicare reform, especially as it relates to the program’s current division into two separate parts, Part

A, Hospital Insurance, and Part B, Supplementary Medical Insurance. My past

work history includes stints as executive director of the federal Prospective Payment

Assessment Commission and deputy director of the policy bureau at the Health

Care Financing Administration. Given this varied background, I am not only familiar with the world of private insurance, but also with the Medicare program, and

I hope that my contribution today will be of value to the committee.

Medicare is obviously a very popular federal program, something that HIAA’s own

recent national survey confirmed. However, I believe that lessons from the private

insurance industry’s long history may be useful as you consider how to make the

Medicare program even stronger.

When the Medicare benefits package was originally developed in the 1960s, it was

patterned after existing private sector insurance programs. But, while private sector

plans have changed to offer a variety of programs that are more efficient and consumer oriented, the Medicare program has remained in its original form. I will describe some of the improvements in chronic disease management that private insurers have put in place to improve quality. I will also describe increased efficiencies

and cost savings that result from more effective use of patient care data and improved oversight for fraud and abuse. The introduction of similar improvements in

the Medicare program is unnecessarily hampered by its current structure.

Medicare Part A, the Hospital Insurance Program, helps pay for inpatient hospital, skilled nursing facility, and hospice care services. Medicare Part B, Supplementary Medical Insurance, pays for physician, outpatient hospital, and a range of

other services, including ambulatory surgical services, physical, occupational and

speech therapy services, and durable medical equipment. Home health services are

covered under both parts. Medicare Parts A and B each have separate deductibles,

separate coinsurance and cost sharing policies, separate claims processing entities

and separate appeals processes. Frequently there are also different payment

29

amounts for the same service furnished by Part A and Part B providers. There is

certainly the potential for uncoordinated policy making and perverse incentives that

can diminish quality of care and increase program costs and beneficiary spending.

Claims for inpatient hospital services go to contractors known as fiscal intermediaries, while claims for outpatient hospital services and physicians’ services, including those provided during an inpatient hospital stay, go to a separate contractor, known as a carrier. Thus, Medicare beneficiaries with questions about the

handling of their claims must often contact two separate entities. Relatively poor

communication between fiscal intermediaries and carriers undoubtedly allows many

lost opportunities to coordinate patient care; make the Medicare program userfriendly for patients, providers and practitioners; and identify and address waste,

fraud and abuse.

THE PRIVATE SECTOR MODEL

In several important respects, Medicare’s current structure has made it difficult

for the program to keep pace with innovations implemented by private insurers— particularly those intended to improve the coordination and delivery of care. To put

this in context, let me briefly trace the evolution of the private health insurance

market.

Private policies covering hospital and medical expenses date back to the 1930s.

The earliest policies only provided daily benefits for hospitalization. Later, separate

policies provided fixed reimbursement amounts for various kinds of surgeries. In

those days, innovation meant developing stand-alone benefits for a widening array

of different kinds of medical care. There was no coordination, many incidental expenses fell ‘‘between the cracks,’’ and there was no overall protection against catastrophic medical costs.

Consumers soon realized that these ‘‘basic’’ policies were inadequate for prolonged

illnesses or expensive procedures. In 1949, the first ‘‘major medical’’ policy was offered as a supplement to the existing basic policies. Supplemental major medical

policies provided protection against catastrophic medical expenses, picking up where

basic policies left off. Typically there was a modest deductible, often some level of

coinsurance, and a relatively high maximum benefit limit.

During the 1960s and 1970s, the industry moved towards offering ‘‘comprehensive’’ major medical policies, which covered most serious medical expenses, without

any underlying ‘‘basic’’ plan. This provided for consistent, more easily understood

benefits that did not make artificial distinctions between types of medical services

or providers. Since that time, innovations have focused on efforts to improve the

quality, coordination and cost-effectiveness of care, rather than on the fundamental

structure of the coverage—a single, coordinated policy that handles a wide array of

medical expenses on a consistent basis.

In many ways, Medicare reflects the times in which it was developed, resembling

an old ‘‘basic’’ hospital/medical plan. Hospital and medical coverage are provided

through separate programs, and benefit levels are closely tied to the type of service,

type of provider and location of care. While this was not unusual when Medicare

was first enacted, private insurers have found that there are a number of advantages to more coordinated programs.

For example, today many surgical procedures can be safely and effectively provided to Medicare beneficiaries as a Part A inpatient hospital procedure or as a part

B ambulatory service. Medicare beneficiaries, however, face very different out-ofpocket costs depending on where the service is furnished. The resulting financial incentives may result in the beneficiary not receiving care in the appropriate setting,

thereby adversely affecting quality of care. In contrast, private health insurance

policies usually cover a comprehensive array of health care services, both in and out

of a hospital, subject to a single, annual deductible.

This arrangement is easier for insured people to understand and more efficient

to administer. Under this private sector approach, claims for services flow to a single responsible organization, and inquiries by insured individuals and their caregivers likewise can be made to one party. Among other things, this arrangement

also facilitates disease management programs, through which insurers seek to apply

the best practices to treatment of certain chronic diseases (e.g., asthma and diabetes

mellitus), in order to control their progression.

DISEASE MANAGEMENT PROGRAMS

Disease management programs involve a wide variety of interventions to address

patient needs in a timely and cost-effective way and support treatment by health

care providers. These programs include patient education, patient monitoring, and

the provision of specialized services. They are currently experiencing a period of treVerDate 11-MAY-2000 08:49 Sep 10, 2001 Jkt 000000 PO 00000 Frm 00033 Fmt 6633 Sfmt 6621 73734.TXT HCOM1 PsN: HCOM1
30

mendous growth. The goal of these programs is to improve the quality of care and

reduce costs by identifying patients with high risk conditions and contacting them

and/or their physicians regarding compliance with best practice guidelines, patient

non-compliance related to prescribed medications, tests ordered, and physician visits

(e.g., physician use of beta blockers after a heart attack and patient taking medicine

as prescribed). This concept aligns physicians and patients at the center of programs

designed to reach all members of a disease population, not just the acutely ill. Some

of the programs that have been developed include care management programs for

asthma, heart disease, low-back pain and diabetes.

Disease management programs take a systematic approach to medicine that encourages patients to follow health-promoting behaviors, support a strong patientdoctor relationship and include all members of a chronic disease population. Such

programs are designed by doctors and nurses, and focus on proven standards of

care. They rely on practice guidelines developed by the medical professional societies

and from other leading organizations such as the National Heart, Lung, and Blood

Institute; the Agency for Healthcare Research and Quality; and recommendations

of disease-based associations such as American Diabetes Association and the American Cancer Society. The programs provide education and supportive services for patients and respond to consumer demand for more personalized care. They provide

physicians with information about practice patterns, identifying potential opportunities for improvements. Employers who have been supportive of these programs have

seen improvement in employees’ health status that can lead to higher productivity.

Clinical and financial outcomes indicate improved quality of care, high levels of participant satisfaction, and reduced overall health care costs. In short, these programs

not only enhance the quality of care and patients’ quality of life, but they also help

reduce the need for hospitalization, emergency department visits, and other costly

services.

IMPROVING PROGRAM ADMINISTRATION

Some of the efficiencies achieved by the private sector are directly dependent on

the consolidation of coverage under a single program—access to centralized records

allows plans to more efficiently update and maintain beneficiary coverage and

claims files and coordinate care. These efficiencies result in reductions in the costs

of providing health care through such activities as utilization review (UR) and utilization management (UM) of health care claims. Both UR, to determine covered services, appropriate care, and establish fraud detection programs, and UM, to enhance

efficiency and to improve and maintain quality of care, help link treatment options

and health outcomes. This can only be carried out through links between all the

various claims a beneficiary may have, which may be for a brief episode of care or

for longer chronic disease states. This is particularly important for disease management programs mentioned above.

Sharing information about different types of services is extremely important for

fraud detection programs. Both public and private health care systems have

achieved substantial savings through their fraud detection activities. However,

many health plans have established centralized anti-fraud detection units to accommodate different benefit plans and services. Centralized units can more efficiently

service different benefits with specialized personnel and programs. Even more important than centralized units is access to centralized information made possible

through information links between various data files for providers, claims, and covered persons and services. For example, links between services performed by different providers, such as hospitals and physicians, can be compared for appropriate

diagnoses and dates of service. In this way a claim for a physician’s hospital in-patient visit can be compared to the dates on which a patient was hospitalized, or a

claim for laboratory work can be linked to the office visit at which the patient was

seen and sent for tests.

A recent audit report by the Office of the Inspector General provides a good example of the hazards involved in having separate claims processing entities for Medicare Parts A and B. This report points out that Medicare has been paying twice for

the same services—once to a skilled nursing facility (SNF) under the Medicare Part

A prospective payment system and again to an outside supplier under Medicare

Part B. Under current law, a SNF is reimbursed a prospective payment for covered

services rendered to its Medicare beneficiaries in a Part A stay, and consolidated

billing is required for all covered services. Outside providers and suppliers must bill

the SNF (not Medicare Part B) for most services and supplies provided. The potential improper payments to Part B providers and suppliers totaled $47.6 million in

1999, and occurred because edits had not been established to detect and prevent

supplier claims noncompliant with the consolidated billing provision.

31

SIDESTEPPING MEDICARE’S STRUCTURAL PROBLEMS

Recognizing the constraints of its current structure, Medicare has, through the

years, attempted to break down the barriers between its separate parts. HCFA has

conducted various pilot projects under its general demonstration authority or based

on specific Congressional mandates. For example, under one demonstration project,

a single combined payment was made for both inpatient hospital services and certain physicians’ services provided to Medicare patients undergoing a coronary artery

bypass graft (CABG) in selected hospitals participating in the demonstration. An

independent evaluation of this experiment found that it was quite successful, and

that the combined payment provided the incentive for hospital personnel and physicians to work together to identify the most effective and efficient means to care for

the affected patients. In other words, rather than have hospitals and physicians responding to the different and often conflicting incentives of separate hospital and

physician payment systems, this demonstration provided a single payment to an integrated system of care.

Another example of Medicare experimentation is the On Lok/Program of All-Inclusive Care for the Elderly (PACE), under which monthly capitation payments from

Medicare and Medicaid cover a comprehensive range of acute and long-term services

provided to a very frail elderly population, all of whom are certified as needing nursing home level of care. In the PACE program, services are provided by a multi-disciplinary care management team, which includes all caregivers having contact with

the patients, such as physicians, nurses, social workers, nutritionists, and physical

and occupational therapists.

Both of these programs have been very successful, demonstrating the flexibility

in the design of care management and payment programs that is characteristic of

private insurance programs. But putting such programs in place requires special

legislative or regulatory authority, in part because of Medicare’s outmoded design.

THE PROMISE OF A COMBINED MEDICARE PROGRAM

The Medicare program is in need of substantial reform. Obviously, combining

Medicare Parts A and B into a single program would not, by itself improve care coordination, disease management, and program administration and oversight. But,

for many of these more substantial reforms to work effectively, a necessary first step

is to eliminate the artificial and antiquated separation of the program into two parts

as private insurers did many years ago. Thank you for providing me this opportunity to talk about Medicare reform from the perspective of the private health insurance sector. I would be happy to respond to any questions you might have.

Mr. BILIRAKIS. Thank you very much, Doctor.

Mr. Schulder, as soon as you get to the mike.

STATEMENT OF DANIEL J. SCHULDER

Mr. SCHULDER. Thank you very much. My name is Dan Schulder.

I am the Legislative Director of the Alliance for Retired Americans,

and on behalf of the Alliance, I thank you and all members of this

committee for this opportunity to speak on Medicare changes and

Medicare issues.

The Alliance, which was established on January 1 of this year,

now has 2.6 million members across the Nation, retirees from affiliates of the AFL-CIO, community-based organizations and individual seniors have joined the Alliance to fight for social and economic justice and civil rights for all citizens.

As you know, Mr. Chairman, Medicare is one of society’s great

accomplishments. It has opened access to quality health services to

both older persons and persons with disabilities from every income

level.

Its pioneering role in restraining health care costs is one of its

many unheralded successes. It has demonstrated that overhead

costs can be kept low despite enormous volume and growing perplexity; and because of prudent management, the spending restraints of the Balanced Budget Act and revenues buoyed by the

32

economy over the last decade, there is no financial crisis facing the

system for years to come.

At the same time, the Alliance and its members recognize systemic shortcomings in this system, including a lack of dental and

vision care and routine preventive services such as checkups, limited nursing and home health care and mounting out-of-pocket

costs. Seniors now spend $1 in $5 of their income for health care,

and the older and poorer you get, the higher that proportion does

go.

Medigap policies with drug coverage are becoming unaffordable

and employer-based retiree health benefits are declining rapidly.

Over the past decade, Medicare coverage, compared to what most

workers receive under company plans, has declined. And in the

coming decades, millions of baby boomers will line up for their entitlement to quality health care; and the Alliance is dedicated to

making sure that that health care will be there for them.

In light of these needs and strengths, the Alliance stands for

those who want to assure that Medicare will be modernized, expanded, receive adequate revenues and resources and will have the

management capability to continue to deliver quality care to our

citizens. There is no more important claim on the Nation’s resources and energies over the coming years.

For the Alliance, our prime legislative objective this year is the

enactment of a universal and comprehensive Medicare prescription

drug benefit, standing alone or as part of other changes to the

Medicare program. That is the first on the list of our members in

the surveys that we have given to them.

You have asked us, in particular, to discuss the implications of

merging Parts A and B in Medicare. There is no specific description

in legislative proposals of exactly what such a merger might entail.

A long history of separate trust funds, revenue streams,

deductibles, cost-sharing differences, billings and contracting practices and solvency definitions all suggest there are no easy definitions of the desirability of such a merger. However, from the standpoint of beneficiaries, there are a number of questions that should

be addressed.

Will such restructuring enhance or retard work on enacting a

universal, comprehensive and defined pharmaceutical benefit?

What are the goals of restructuring?

If there are savings to restructuring, who benefits and who may

lose?

Will restructuring help to establish an overall cap on out-of-pocket costs to beneficiaries?

Will the process enhance services to rural communities?

Will the States be inspired to enroll more QMB and SLMB eligibles?

Will preventive services be provided without deductibles and copayments?

The Alliance believes that the central goal of modernization and

restructuring activities must be the enhancement and expansion of

quality services to beneficiaries and the overall strengthening of

the Medicare system working in their behalf. If the goals, however,

include covert attempts to cap annual expenditures, end the entitlement status of Medicare, create voucher systems and construct

33

a multitiered system of health services, the Alliance will oppose

them. It all depends, after all, on mechanics and motives.

It is also a question of priorities, Mr. Chairman. The need for a

prescription drug benefit presents a crisis for millions of Americans

today. The escalating costs of drugs has created Medigap policies

with premiums reaching $9,000 in annual costs for 75-year-old

women in some States.

Mr. Chairman, more than a million beneficiaries have lost HMO

coverage and there are more to come. Medicare pays for a declining

portion of health care costs and there is no limit on liability.

The Alliance does believe that there are certain aspects of Medicare administration that should be addressed. The first issue is the

adequacy of HCFA administrative resources. HCFA should examine better ways of contracting for services, create bundled payments for some services and use competition to select intermediaries and carriers. It should assess the benefits of creating a

primary care case management system to better guide treatment in

fee-for-service programs and look again at offering disease management services to enrollees, which could improve care while reducing

costs.

We also would call for an increase in SHIP programs, State

health insurance programs. For a small investment, lots of people

could get more information for more efficient use of the system. We

would like to see less paperwork and more consumer education. We

support these kinds of modernization directions because they are

both good for the beneficiaries and the system.

There is no question, Mr. Chairman, that the Medicare program

will need greater resources even if every acceptable efficiency and

cost-saving change is incorporated. A drug benefit will be expensive, as would an overall stop-loss cap. Millions of new persons will

become eligible in a few years. That is why the Alliance supports

the use of on-budget surplus funds to strengthen Medicare and extend solvency. We hope that the 2001 tax changes will not prevent

such an allocation, and if so, we would expect the Congress to revisit its actions on taxes and reassess national priorities. We also

foresee a review of the adequacy of current payroll taxes to support

expanded benefits and increased numbers of beneficiaries.

The Alliance does support your efforts, Mr. Chairman, to explore

ways to assure a more efficient and effective Medicare program,

and we trust that you agree with us and with millions of seniors,

their families and the health care workers treating them that the

focus of Medicare improvements in the short and the long term

must be the guarantee of first-class care for all Medicare beneficiaries. And on that basis, you can count on us and our members

to work with you and then with this committee.

Thank you.

[The prepared statement of Daniel J. Schulder follows:]

PREPARED STATEMENT OF DANIEL J. SCHULDER, ASSISTANT DIRECTOR, DEPARTMENT

OF GOVERNMENT AFFAIRS, ALLIANCE FOR RETIRED AMERICANS

On behalf of the Alliance for Retired Americans, its officers and members, I thank

you Mr. Chairman for the opportunity to present testimony today on Medicare reform and modernization issues including the merging of Medicare Parts A and B.

The Alliance, which was established on January 1 of this year, now has 2.6 million members across the nation. Retirees from affiliates of the AFL-CIO, communityVerDate 11-MAY-2000 08:49 Sep 10, 2001 Jkt 000000 PO 00000 Frm 00037 Fmt 6633 Sfmt 6621 73734.TXT HCOM1 PsN: HCOM1
34

based organizations and individual seniors have joined the Alliance to fight for social and economic justice and civil rights for all Americans. We believe that all older

and retired persons have responsibility to strive to create a society which incorporates these goals and rights.

As you know, Mr. Chairman, Medicare is one of this society’s great accomplishments. It has opened access to quality health services to both older persons and persons with severe disabilities from every income level. Its pioneering role in restraining health care costs is one of its many unheralded successes. It has demonstrated

that overhead costs can be kept low despite enormous volume and growing complexity. And, because of prudent management, the spending restraints of the Balanced Budget Act and revenues buoyed by the economy of the last decade, there is

no financial crisis facing the system for years to come.

At the same time, the Alliance and its members recognize systemic shortcomings

including a lack of dental and vision care, routine preventive care such as checkups, limited nursing and home-health care and mounting out-of-pocket costs. Seniors now spend one in five dollars of their income for health care and the older and

the poorer you get, the higher that proportion grows. Medigap policies with drug

coverage are becoming unaffordable and employer-provided retiree health benefits

are declining rapidly. Over the past decades, Medicare coverage compared to what

most workers have under company plans—has declined. And, in the coming decades,

the millions of baby boomers will line up for their entitlement to quality health care.

The Alliance is dedicated to making sure that Medicare will be there for them and

for all of our children and grandchildren.

In the light of these needs and strengths, the Alliance stands with those who

want to assure that Medicare will be modernized, expanded, receive adequate revenues and resources and will have the management capacity to continue to deliver

quality care to our citizens. There is no more important claim on the nation’s resources and energies over the coming years.

The Alliance’s prime legislative objective this year is the enactment of a universal

and comprehensive Medicare prescription drug benefit standing alone or as part of

any changes to the Medicare program. Of all improvements to Medicare, this benefit

is first on the list of Medicare improvements in surveys of our members.

You have asked us, in particular, to discuss the implications of merging Parts A

and B of Medicare. There is no specific description in legislative proposals of exactly

what such a merger might entail. What we understand is that the long history of

separate trust funds, revenue streams, deductibles, cost-sharing differences, billing

and contracting practices and solvency definitions all suggest no easy definitions of

the desirability of such a merger. However, from the standpoint of beneficiaries, a

number of questions should be addressed:

• Will such restructuring enhance or retard work on enacting a universal, comprehensive and defined pharmaceutical benefit?

• What are the goals of restructuring?

• If there are savings to restructuring, who benefits, who loses?

• Will such restructuring help to establish a overall cap on out-of-pocket costs to

beneficiaries?

• Will the process enhance services to rural communities; will the states be inspired

to enroll more QMB and SLMB eligibles; will preventive services be provided

without deductibles and copayments?

The Alliance believes that the central goal of all modernization and restructuring

activities must be the enhancement and expansion of quality services to beneficiaries and the overall strengthening of the Medicare system working in their behalf. If the goals, however, include covert attempts to cap annual expenditures, end

the entitlement status of Medicare, create voucher systems and construct a multitiered system of health services, the Alliance will oppose them. It all depends on

both mechanics and motives.

It is also a question of priorities, Mr. Chairman. The need for a prescription drug

benefit presents a crisis for millions of Americans. The escalating price of drugs has

created Medigap policies with premiums reaching $9,000 in annual costs for 75-

year-old women in some states. Mr. Chairman, more than a million beneficiaries

have lost Medicare HMO coverage and there are more to come. Medicare pays for

a declining portion of health care costs and there is no limit on liability.

The Alliance does believe that there are aspects of Medicare administration that

should be addressed. HCFA should examine better ways of contracting for services,

create bundled payments for some services and use competition to select intermediaries and carriers. It should assess the benefits of creating a primary care case

management system to better guide treatment in fee-for-service programs and look

again at offering disease management services to enrollees which could improve care

35

while reducing costs. We support such modernization directions because they can be

good for both beneficiaries and the system.

Mr. Chairman, there is no question that the Medicare program will need greater

resources even if every acceptable efficiency and cost saving change is incorporated.

A drug benefit will be expensive as would an overall stop-loss cap. Millions of persons will become eligible in a few years. That is why the Alliance supports the use

of on-budget surplus funds to strengthen Medicare and extend solvency. We hope

that the 2001 tax changes will not prevent such an allocation and if so, we would

expect the Congress to revisit its action on taxes and reassess national priorities.

We also foresee a review of the adequacy of current payroll taxes to support expanded benefits and increased numbers of beneficiaries.

The Alliance does support your efforts, Mr. Chairman, to explore ways to assure

a more efficient and effective Medicare program. And we trust that you agree with

us and with millions of seniors, their families, and the health care workers treating

them, that the focus of Medicare improvements, in the short and long term, must

be the guarantee of first-class care for all Medicare beneficiaries. On that basis, you

can count on us and our members to work with you and with this Committee.

Thank you.

Mr. BILIRAKIS. Thank you very much Mr. Schulder.

You know, on the point of contractors, we are told by HCFA that

the way the legislation now occurs, they really don’t have the flexibility to be able to choose the proper contractor; or even if a contractor doesn’t function as they well as they should, to be able to

make changes and that sort of thing. It is something that we are

looking at when we are talking in general in connection with the

prescription drugs portion of modernization, as we call it, of HCFA.

We, of course, think in terms of that as well as some of these other

things. I just wanted you to know that.

Mr. SCHULDER. Just giving me the authority to use the best contractors. Thank you.

Mr. BILIRAKIS. Ms. Moon, please proceed.

STATEMENT OF MARILYN MOON

Ms. MOON. Thank you for the opportunity to be here, Mr. Chairman, Mr. Brown and other members of the committee.

My perspective on Medicare comes from more than 20 years researching this program, serving from 1995 through 2000 as a member of the public trustees of the Board of Medicare Trust Funds,

and a long interest in beneficiary concerns in which now I have

been working to considerable degree with the Medicare Rights Center in New York which counsels beneficiaries and discusses with

them a number of their concerns.

I believe, overall, that combining Parts A and B of Medicare

would at best make only minor contributions to improvements

needed in the program. In fact, it is possible that too much attention on such a combination will deflect attention from other important issues that need to be discussed. Consider the four goals that

are mentioned in this today, about combining A and B, and I think

that those are goals in general that are laudable goals to achieve,

but go well beyond the A and B Trust Fund issue.

No. 1, simplifying the program: Medicare beneficiaries are often

confused about the Medicare program and Parts A and B, and HI

and SMI sound confusing; but the needs go beyond understanding

the two parts. The need is really for beneficiaries to have a single

point of entry into the system where they can call and get information—get help, that is—from people who are well informed about

the program, who answer the phone and who provide the kinds of

36

information and support that such beneficiaries need. This requires

resources and a commitment to a single point of entry, and it

doesn’t really matter how many different complicated parts there

are in the system as long as the individual sees that nice single

point of entry.

Improving cost-sharing: This is an area that people have talked

about a lot and is of particular interest to me. The combination of

deductibles and coinsurance for Medicare certainly does represent

an ad hoc selection of things that were done for strange historical

reason s, and it would be very nice to improve the cost-sharing

structure of this program for a number of purposes. But combining

A and B offers relatively few advantages for addressing these

issues. It would make it easier, for example, to create a combined

deductible, but that is hardly the problem with the benefit structure that we currently have.

Moreover, many private insurance plans continue to have multiple deductibles. My own plan has two deductibles, and one that

is different whether I am in or out of the preferred providers, as

well as a hospital deductible; and when I look at the FEHBP, I see

that some of have them have six deductibles, and they also have

a deductible for prescription drugs, depending on whether you are

in or out of the PPO.

The problems with the cost-sharing structure, though, deal much

more with, for example, issues of the high coinsurance that beneficiaries who have been in the hospital for a long period of time

have to pay, disadvantaging sicker beneficiaries, and as Bill Scanlon pointed out, deductibles and coinsurance that do little to affect

use because use is not discretionary for those individuals. So balancing that, the two different deductibles, might make good sense.

But more important would be to make sure that the cost sharing

does not put sicker beneficiaries at an enormous disadvantage.

One of the concerns I have, for example, with home health

copays is when we subject them to—for individuals who largely are

very sick for other reasons, they place an enormous burden on the

sickest of beneficiaries. Putting the home health under Part B of

the program, for example, was a good compromise that effectively

raised the premium on Part B and was asking people that get

home health to pay something more.

As other people have mentioned, catastrophic coverage would

also be particularly helpful.

The third goal I think of achieving greater efficiency in program

management and coordination has also been discussed to some

point. Again, providers probably deserve a single point of entry into

the system and careful coordination. An A-B merger probably

makes some sense in terms of doing the kinds of coordination of

care that Dr. Young spoke about, but again the most important

thing is to have the data and have one agency in charge of both

parts of the program, which means that you need, again, additional

resources to make data more timely, to try to do the kinds of care

coordination that I think many people believe is important.

Again, it is more a matter of resources than combinations.

And finally, Medicare and financing issues are another area of

particular attention for people who talk about an A-B contribution.

As others have expressed on this panel, I am concerned about makVerDate 11-MAY-2000 08:49 Sep 10, 2001 Jkt 000000 PO 00000 Frm 00040 Fmt 6633 Sfmt 6602 73734.TXT HCOM1 PsN: HCOM1
37

ing financing decisions on the basis of a technical adjustment. The

financing decisions are going to be tough ones. I think there are

going to need to be new revenues put into this program, but that

deserves a careful discussion of what is the right balance of payroll

tax burdens on individuals who are in the program and general

revenues, rather than setting up any kind of formula establishment.

Part A and Part B actually do grow together, even though Part

B has grown faster than A over time; and that is largely because

of the shifting out of services from Part A in hospital care to outpatient services. That is a success of the program that it has actually been flexible enough to handle that change. It has not been

flexible enough to handle the change of the greater reliance on prescription drugs because those have never been covered by the program. But—the Part B part of the program I don’t believe is as

troubled, but it certainly needs to be part of the financing discussion.

As Bill Scanlon also mentioned, Parts A and B are listed in the

Trustee’s reports every year as a share of GDP. That is a good

place to start. Perhaps some more attention to that, in understanding the implications, would help; but I think, again, that can

be done without necessarily combining the two parts of the program.

Thank you.

[The prepared statement of Marilyn Moon follows:]

PREPARED STATEMENT OF MARILYN MOON, THE URBAN INSTITUTE

Mr. Chairman and members of the Committee: I appreciate the opportunity to be

here today to testify on issues of combining Parts A and B of Medicare. As you are

well aware, there are many different reasons why people have advocated such a

combination over the years. In my testimony, I examine a number of the goals that

people have expressed, consider whether it is necessary to combine Parts A and B

to achieve those goals, and suggest other remedies that are also important to consider for modernizing Medicare. I conclude with several cautions about problems

that such a combination could create.

A BRIEF LOOK AT THE MEDICARE PROGRAM

It is instructive to look briefly at the history of Medicare and consider why there

are two parts of the program. Until very late in the legislative process, only Medicare Part A was under consideration. In the private sector, many people who had

health insurance had it only for hospitalization. As the most expensive part of

health care, it was considered the highest priority for an initial insurance program

for the elderly. Thus, the separation occurred in part because of the last minute inclusion of Part B. In addition, by making this a voluntary program and requiring

beneficiary premiums, it was thought to be more acceptable to physicians leery of

participating in a government program. It appeared to be more like insurance and

indeed was established with rules for a ‘‘hands off’’ approach to the practice of medicine.

Ironically, in the beginning, the Part A deductible of $40 was less than the $50

deductible for Part B. But Part A was indexed to the growth in hospital spending

while Part B has only been subject to two discreet increases. Today at $792, the

Part A deductible is much higher than the $100 Part B deductible, even though

many advocates of cost sharing would likely propose that the Part B deductible be

the higher one. While many observers of Medicare have appropriately suggested

that the benefit package is outmoded and inadequate, those criticisms are directed

more at the lack of upper bound protections and prescription drug coverage in the

basic package of benefits that Medicare covers.

Medicare has always relied upon private entities to process claims and perform

other insurance functions. Intermediaries serve Part A of Medicare, while Part B

uses Carriers. But even beyond the titles, there are many aspects of Medicare conVerDate 11-MAY-2000 08:49 Sep 10, 2001 Jkt 000000 PO 00000 Frm 00041 Fmt 6633 Sfmt 6621 73734.TXT HCOM1 PsN: HCOM1
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tracting that can and should be considered in reform. But it is not just the A/B distinction that matters; restrictive rules on who can have these contracts, prohibitions

against profits, and limitations on the Health Care Financing Administration’s ability to seek improvements in performance are also major issues.

Although Part B of Medicare is voluntary, nearly all those eligible pay the premium and participate in the program. The subsidy makes this coverage a good deal

for the elderly and disabled. Four groups make up most of those who choose not

to participate: those with very low incomes who cannot afford the Premium (and

who do not get help from Medicaid or related programs), those just coming on to

Medicare who have not yet enrolled, federal retirees who enroll in an HMO under

FEHBP, and those whose current employer (or spouse’s employer) provide health insurance that is primary to Medicare. This latter group almost always fares better

by relying on that private insurance for Part B-type services. And because their enrollment in the private sector saves money for the program, these individuals are

not required to pay a penalty to enroll in Part B when they give up that private

insurance.

THE GOALS

Combining Parts A and B of the program has often been suggested as part of

other reforms, at least implicitly suggesting that much of the confusion and complexity is due to this particular split. Further, even larger goals—such as financing

of Medicare—have also been linked to the importance of making such a change.

Four of the important goals mentioned are:

• Simplifying the program;

• Improving cost sharing and making it more rationale for beneficiaries;

• Achieving greater efficiency in the management of the program;

• Treating the Medicare program as a whole in considering financing issues.

These are laudable goals and need to be part of reforms that seek to make Medicare work better for beneficiaries, providers and taxpayers. But in many ways they

go well beyond what can be achieved with combining A and B. Indeed, there is a

danger in seeing that change as a major contribution and ignoring other key issues

necessary to meet these goals.

Simplifying the program. Medicare beneficiaries are often confused about the

Medicare program. They do not focus on the split between A and B; indeed, the terminology is confusing. But since most of them are in both parts of the program, this

is not particularly a problem in and of itself. Further, the new Medicare+Choice option added a confusing Part C to Medicare.

Confusion arising about contacting intermediaries or carriers might be reduced

with a A/B merger. However, problems for beneficiaries in getting help for the Medicare program goes well beyond confusion over who to contact. A modern, consumerfriendly program needs substantial resources and a commitment to simplifying customer service from the perspective of the consumer. Even a very complicated program can establish a single point of contact with well-informed workers helping

Medicare beneficiaries with problems. If that is the real goal, the A/B issue essentially becomes irrelevant. Instead, it is the resources and commitment to improvement that need to go into the development of such a framework that matter.

Improving Cost Sharing. The purpose of cost sharing is presumably to make

the user of health services more aware of costs and to discourage unnecessary use.

For persons with employer-provided insurance this usually means an initial, modest

deductible (or sometimes two) and then limited copays, usually for specific services.

For example, some plans have high coinsurance for non-emergency use of hospital

emergency rooms. Almost all have an upper bound on what their enrollees must pay

out of pocket (called a ‘‘stop loss’’). These cost sharing conventions have changed and

evolved over time, but Medicare has retained essentially the same structure since

1965.

The combination of deductibles and coinsurance for Medicare represents an ad hoc

collection of payments with little defensible justification as points of control for the

use of health care services. As mentioned above, cost sharing under Medicare is essentially a historical artifact. And since its inception, little careful attention has

been devoted to updating it to reflect cost sharing structures found in other health

plans. It is not the fact that there are two deductibles that makes Medicare unusual, but rather that the Part A deductible is so much larger than that for Part

B. Elsewhere, insurers often recognize that physician services tend to be more subject to discretion than hospital care and hence establish a higher deductible for physician services.

Another way in which cost sharing is unusual in Medicare is the linkage of the

hospital deductible and coinsurance to a ‘‘spell of illness’’ and imposition of the coinVerDate 11-MAY-2000 08:49 Sep 10, 2001 Jkt 000000 PO 00000 Frm 00042 Fmt 6633 Sfmt 6621 73734.TXT HCOM1 PsN: HCOM1
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surance only after 60 days. This sets cost sharing highest for those who are sickest.

The same problem arises with skilled nursing facility coinsurance. In addition, totally missing from Medicare is any upper bound limit on cost-sharing liabilities.

Most private plans offer such ‘‘stop loss’’ protection so that once patients have spent

a certain amount out of pocket, they no longer have to continue paying cost sharing.

But Medicare has no such provision. Beneficiaries with complicated illnesses (and

no Medigap protection) can end up owing tens of thousands of dollars towards the

costs of Medicare covered services. This is particularly the case under Part B of the

program where the 20 percent coinsurance can become quite large for those with

extensive medical bills. Part B cost sharing constitutes about two-thirds of all Medicare cost sharing liabilities.

But combining A and B offers relatively few advantages for addressing these

issues. It would make it easier, for example, to create a combined deductible. But

that is not the main problem and in fact, many private insurance plans also have

two deductibles. Moreover, that approach is problematic: To get a combined deductible that raises the same amount of contribution from beneficiaries would require

a deductible of about $400. For those who are hospitalized in a given year, this

would lower their cost sharing liability. But for the nearly 80 percent who do not

go into the hospital, they would only see a rise in the deductible from $100 to $400.

Such a large increase could be very unpopular with beneficiaries.

A better approach would be to lower the Part A deductible and eliminate both the

spell of illness concept and the coinsurance for hospital stays. A relatively modest

increase in the Part B deductible could offset much of those costs. Another important need is for a general upper bound on cost sharing, allowing at least some beneficiaries to forego purchasing private supplemental insurance.

Finally, one impact of a combined A/B Medicare program might reduce costs to

beneficiaries. That is, if the Part B premium were to become a combined premium

and linked as the Part B premium is now to the growth in costs of the benefits,

the new premium would grow more slowly than under current law. This is because

Part B is expected to grow more rapidly than Part A over time. For example, the

Part B premium is expected to rise over time to about 11 percent of total Medicare

spending, up from about 9 percent at present.

Making Medicare’s cost sharing structure more rational and protecting those with

the highest costs are important goals for Medicare reform. But it makes most sense

to do this in the context of a broad range of changes rather than focusing just on

a combined deductible.

Achieving Greater Efficiency in Program Management and Coordination.

One need not look very far to find critics of the Health Care Financing Administration and its management of Medicare. But the greatest problem here is lack of resources. Medicare’s administrative costs of less than 2 percent are so low that any

entity seeking to manage the program would be severely constrained. Even efficient

private sector plans require a budget of three times that level—or more—in order

to effectively oversee the complicated world of insurance. Only when there are sufficient resources will management improvements be possible. A considerable amount

of flexibility and authority needs to be given to the management team to allow them

to improve service both for beneficiaries and for providers of care.

Contractor reform is an essential piece of the changes that need to be made in

Medicare. Medicare needs to contract with companies that are most skilled at claims

processing, medical review and data collection and management. This may require

a number of different contractors; consolidation is less important than competence

and accountability. Again, a well managed organization can tolerate having a number of different entities as long as the lines of responsibility are clear and those contracted to do the job are skilled. The current system is a long way from there, but

not because of carriers versus intermediaries. Rather the problem is that the government allows Blue Cross to nominate the intermediaries, restricts what HCFA

can do in controlling these intermediaries, limits what types of organizations can

contract to provide services both as carriers and intermediaries, and disallows contracts allowing for profits (hence excluding a number of potential participants). Efforts to achieve greater efficiency need to focus on these issues first, and the A/B

split is only a small part of that issue.

Another important need for a well-functioning Medicare program is good coordination across different types of care for those who are still in traditional Medicare.

Fee-for-service arrangements are inherently weak in providing incentives for coordination, but the track record of many HMOs where such coordination is supposed

to be central leaves much to be desired as well. Consequently, the oversight of Medicare needs to focus on developing creative ways to bring coordination into the traditional program. This might be through disease management or case management

models, for example. In those cases, a combined A/B structure makes sense, alVerDate 11-MAY-2000 08:49 Sep 10, 2001 Jkt 000000 PO 00000 Frm 00043 Fmt 6633 Sfmt 6621 73734.TXT HCOM1 PsN: HCOM1
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though this could be achieved via a de facto approach as well. That is, good data

combining patient level information so that high cost cases can be identified and

tracked can be done without a formal merger of the two parts of Medicare. HCFA

already produces such data files, although more needs to be done in a timely way.

Medicare and Financing Issues. Critics of the current organization of Medicare

often point out that much of the focus of attention is on Part A of the program. Its

trust fund provides insights into the balance between the dedicated revenues from

payroll taxes and elsewhere and spending on Part A services. That trust fund thus

serves as an early warning signal of problems ahead and as a reminder that taxpayers have contributed over time more than enough to meet the needs of Part A.

In the future, when Part A needs to draw on the trust fund balance to pay benefits,

it will essentially be calling on the resources made available earlier. Any combination of A and B should keep these advantages.

The biggest danger with a combined approach is that a technical adjustment may

be used as a back door means for dramatically changing the financing of the program. Both Parts A and B of Medicare need to be part of any consideration of financing issues. But formally combining A and B raises a number of complicated

issues about how to view the financing of the program and how to think meaningfully about a trust fund structure. Financing issues are much broader than an A/

B combination discussion; that discussion is essential to Medicare’s future but ought

to look broadly at where the resources should come from to support this important

program.

The Bush Administration’s efforts in this regard offer a troubling example of casually combining A and B. That is, the initial budget blueprint document submitted

by the Administration treated Part B as if it were in deficit because it relies on general revenue financing. That is, it examined both A and B spending, but only part

of the financing of the program when looking at Medicare’s financial status. General

revenues have been a major funding source for Medicare since its passage in 1965

and that obligation is spelled out in statute. It makes no sense to treat Part B as

in ‘‘deficit’’ and thereby imply that payroll taxes should support both Parts A and

B. This is implicitly scaling back the funding for Medicare below its current level.

Such an argument makes no more sense than assuming that spending on Medicaid,

Veteran’s benefits or even defense should be covered by the Part A Trust Fund. All

of these other sources of spending have no more legal claim on general revenues

than does Part B.

Part of the case made in the Bush document for combining A and B in examining

Medicare was a criticism of the shift of some home health benefits from Part A to

Part B in the Balanced Budget Act of 1997. This change, which returned home

health closer to how it was treated in 1966, did make Part A look better and to that

extent it could also be misinterpreted as improving financing. But it is incorrect to

argue that it ‘‘had no economic consequences.’’ By shifting a majority of home health

care to Part B, beneficiaries costs rise since their Part B premium is 25 percent of

the costs of Part B services. Thus, this was an indirect, but intended, increase in

beneficiary contributions. In fact, beneficiaries’ share of combined A and B spending

will rise from about 9 percent prior to the BBA to nearly 11 percent when the phase

in of home health is completed in 2004. Over the ten year period, that translates

into a per capita premium increase of nearly $1200. Most beneficiaries would not

consider this a meaningless change; indeed they would likely welcome having home

health returned to Part A.

Another claim that is often made about Medicare is that the growth in Part B,

which has historically been higher than that for Part A, reflects problems with

health care spending in Medicare. The growth over time between the two parts,

however, represents a natural shift that has been occurring in health care for everyone. Surgery is more often done on an outpatient than an inpatient basis today, for

example. More procedures are undertaken in physicians’ offices. The improvements

in health care delivery that have allowed such changes reflect improvements that

speed recovery and enhance the quality of life of beneficiaries. Without such a shift,

Part A spending would have had to be much higher than it is today. Part B growth,

thus, does not represent a failure in health care.

Both parts of Medicare should be considered with regard both to their spending

and sources of income. In the Trustees’ report each year, information on the combined share of GDP that Parts A and B are projected to need over time are provided. This is a reasonable starting place to examine the combined impact, although

it understates Medicare’s possible financing by showing costs on a pay-as-you-go

basis. This allows no ability to build a reserve to smooth the impacts of the Baby

Boomers’ retirement or other demands, for example, as is the intent of the trust

fund for Part A.

41

Should there be limits or constraints on general revenue contributions to Medicare? Even those who have implicitly argued for such a limit usually do not propose

reducing general revenue contributions to zero. In a recent article, colleagues and

I created an artificial trust fund for Parts A and B in which we examined the effects

of one potential limit for general revenues. We assumed that the GDP share of general revenue going to Part B would remain constant. That provides one way to look

at both A and B in a combined framework, again with no formal combination of the

two. Interestingly, that approach indicated that, using the 2000 Trustees’ report

numbers, the date of exhaustion of the trust fund moves earlier by five years, but

still well into the future. But even this analysis can miss the point: Medicare will

need additional resources over the future to handle a doubling of the population

served and a near doubling of the share of the U.S. population served by this program. Efficiency improvements and other changes in Medicare can help, but will not

be sufficient to pay for another 36 million participants.

Both Parts A and B will need support. More willingness to raise revenues is needed to assure Medicare’s future. And a direct discussion of how the shares should be

broken out among payroll taxes, general revenues and beneficiary premiums needs

to get underway. For example, it may be reasonable to obtain a disproportionate

share of additional dollars from general revenues, which require people of all ages

to pay and in a progressive manner.

PROBLEMS WITH COMBINING A AND B

One of the chief concerns with combining Parts A and B of the program is how

to treat those who enroll only in Part A and not B. When beneficiaries do so because

they prefer their HMOs (in the case of FEHBP enrollees) or because they are still

working, the federal government saves money by their choice to decline or defer the

Part B subsidy. Special attention would need to be placed on how to treat these

beneficiaries. As the number of older workers increase over time, this may become

even more of an issue.

The other major problem has already been mentioned and that is the potential

for effectively decreasing the funding for Medicare if proper attention to a stable

base of support for Part B is not addressed in such a combination. Financing decision should not implicitly be made via technical adjustments.

In sum, Medicare’s concerns go well beyond the issue of a program with multiple

parts; the real concern needs to be ensuring that those parts are well coordinated,

however organized, that resources are devoted to improving the way the program

interacts with both beneficiaries and providers of care, and that the program is sufficiently financed to cover the care essential to this beneficiary population.

Mr. BILIRAKIS. Thank you, Ms. Moon.

Ms. Means, please proceed.

STATEMENT OF KATHLEEN E. MEANS

Ms. MEANS. Thank you, Mr. Chairman and Mr. Brown and other

members of the subcommittee, for inviting me to testify today.

I did want to mention to the members that I have worked in

Medicare for 32 years now. I started working in 1969 in The Bureau of Health Insurance, just a few years after Medicare was enacted; and so I have seen enormous changes in the design and evolution of the program. I also bring to this discussion some private

sector experience, having worked as Director of Health Benefits in

Chicago for the national Blue Cross and Blue Shield Association.

One of the first things I would like to say to you as a subcommittee is that I think using the terminology merging of Part A

and Part B is quite misleading. I am not here to talk about merging Part A and Part B. I am here to talk about good benefit design

for both A and B benefits. And the kind of ideas that I would like

to offer up to you do not require joining the financing or changing

the underlying structure, the financing structure of the program.

I think it is important in the context of adding an outpatient prescription drug benefit, of which I am a strong proponent, that it is

42

equally important to modernize the Part A and Part B benefits together with doing the drug benefit.

I think it is important to consider improving protection against

catastrophic cost, especially on the hospital side.

I think it is important to improve efficiencies for incentives in

economy overall in the program, and that includes, particularly, attention to Part B.

I also think it is important to minimize dislocation for beneficiaries entering the program and coming off of private health insurance policies, as they age into the program or as they enter

through disability. There are very significant differences between

what has become typical in the private insurance market, particularly through employer group health plans and the Medicare benefit design we have today.

Although this is outside of the scope of this testimony, I do support improving the business model for the Medicare+Choice program and I think one building block toward doing that is to establish a better benefit foundation for the Medicare+Choice program.

And you can do that both by adding a drug benefit and by making

some modernization to Part A and Part B.

And I would like to put a practical reason on the table for members as to why it might be useful to do some of these Part A and

Part B changes. That is that it actually contributes—potentially

contributes financing that you could capture to offset the cost of

adding the drug benefit. The resulting package, A-B reforms plus

a drug benefit, would be much richer in actuarial value than the

current law package, and the changes I would like to speak to you

about on the cost-sharing side would be much less so than the increased value of the benefits.

I am not going to spend the time identifying the deficiencies because I think the other witnesses have done that very well with respect to Part A and Part B. So I would like to immediately draw

your attention, if I could, to a chart that I included in the written

testimony—it is on page 8—and to share with you the details of a

proposal that was put forward last year in the Senate Finance

Committee that generated a great deal of bipartisan interest.

That’s not to say that every member of the Finance Committee

supported it; that is certainly not the case. I would have considered

it a miracle had it been the case. But I would like you to see some

of the ideas that were considered on the Senate side and that are

being actively considered by some in this session as well. And I recognize now, listening to some of this discussion, some of our own

language might be a little bit misleading, but I will just hit some

of the highlights.

What you will see is the proposal exactly as it was considered

last year in the committee. So it is describing key Medicare benefits in the year 2000. To the right are some of the proposals that

we put in front of the members of the committee.

Basically, it recommended combining the deductible for Part A

and Part B. That does not mean you are literally combining with

the deductible, but if you come up with a common deductible—we

propose $500—you are in effect reducing the Part A hospital deductible, you are raising Part B. This does not have to happen all

43

at once. These kinds of changes could occur over, say, a 3-to-5-year

phase-in period to meet in the middle.

There are a lot of good reasons for doing that. I have elaborated

on them in the written testimony.

One of the things that we proposed, that a lot of the members

supported, was going back and restoring some of the changes that

members had supported in 1988 as part of the Medicare Catastrophic Act. That was primarily to enhance the hospital benefits,

no separate inpatient deductible, eliminate the spell-of-illness concept.

I don’t recall whether any of the members, witnesses here have

mentioned that. Under the spell-of-illness concept, some small

numbers of beneficiaries can be hospitalized multiple times during

the year, depending on where their admissions occur. They can experience multiple inpatient deductibles; if you had three, you could

experience basically $2,400 in outpatient cost for that reason alone.

In addition, we also recommend just going to straight 365 days

of covered inpatient care. This is, in fact, typical of private insurance and it affects a very small number of people, but it’s very valuable insurance protection to people who are catastrophically sick.

We also proposed modified cost sharing on certain Part B benefits that have no cost sharing today. That basically was to reflect

the principle that there is no benefit in the package that ought to

be entirely a free good to beneficiaries, and—however, we were sensitive to some of the issues that I think Dr. Moon just referred to.

For instance, on the home health, we did not propose going to a

straight Part B 20 percent coinsurance rate. Instead, we proposed

a modest $5-per-visit cap at $100 per year.

So there are various options that you could consider to structure

modest levels of cost sharing for beneficiaries that I think most

people would find reasonable in today’s setting.

As I understand current law, any selected—any preventive benefits would not be subject to these deductibles; and in the Finance

Committee proposal, we recognize that some of the ideas changed

cost-sharing relationships and slightly increased obligations for all

beneficiaries, on average. That meant that we also restructured the

low-income subsidies to make sure that low-income beneficiaries

maintained their protection and access to benefits.

I just wanted to emphasize that these kinds of changes do not

require merging of the underlying health insurance and supplementary medical insurance trust funds or any change in the

sources of revenues to those trust funds.

I would like to address the question of how this could benefit you

in the larger prescription drug debate. In the Senate Finance Committee draft proposal that we examined last year, these changes

were paired with a fairly comprehensive prescription drug benefit.

For reasons that I will be pleased to explain, these kinds of

changes offer potentially offsetting savings, depending on how you

structure the changes and recognizing that the baseline has

changed and that some of CBO’s scoring procedures have changed

and certain assumptions about things have changed this year.

I think there is still an opportunity to explore some of the practical legislative scoring benefits of doing these things together; and

just to give you an example, last year we did a comprehensive drug

44

benefit with a $250 deductible, declining cost sharing with a full

continuum of drug coverage—no hole, so to speak, or donut in the

coverage. We tested the premium of an additional drug premium

of $40 per month. We paired that with these Part A and Part B

changes. That drug benefit scored at $240 billion over 10 years.

The kinds of Part A and Part B changes that you see detailed

on the chart resulted in about $70 billion in net savings, reducing

the cost of the drug benefit to $170 billion. So as you are looking

for ways to finance the benefit and also achieve other important

program goals, you might want to consider these kinds of modifications to the overall package.

And finally, Mr. Chairman, I would like to close by introducing

one more concept. It goes a little bit beyond the discussion of just

modifying Part A and Part B benefits, but it is an idea that I have

not heard openly discussed on the House side, but which is being

discussed by some on the Senate side. And that is—it is the concept of a replacement plan strategy for accomplishing all of the reforms that members would like to accomplish in Medicare over the

next decade.

This concept is well understood in private health insurance. It is

basically a technique that employers follow in large group health

plans when they want to introduce a new benefit package to employees and they already have a long-existing plan that employees

are enrolled in. What they basically do is offer a second comprehensive benefit package to their employees in the expectation that over

time the new package will gradually replace the old package.

This has one major advantage. It does not require any beneficiary to change or lose the coverage that they currently have in

the current law package, if it is working for them. This replacement plan concept allows you to—allows people to enroll and accept

the new benefits and the new changes in a different framework and

allows the other program to be phased out for as long a period of

time as members would like to do politically. It could literally be

phased out over a 30-year period if that was your preference.

Adapted to Medicare, this replacement plan strategy would bundle all of the reforms that you would propose to accomplish into the

new plan. One other major advantage of doing this is that it minimizes disruption to the Medigap market. I heard several of the

members in their opening statements express concern about what

changes to A-B benefits might mean for the supplemental market.

If you pursue the replacement plan approach, you could leave the

Medigap market essentially intact for those beneficiaries that remain in the current law package. For those beneficiaries who

choose to enroll in the new package, you would create new Medigap

offerings designed around that particular benefit plan. And I think

that is a significant advantage for members to think about.

The analogy that we used in discussing this on the Finance Committee last year was the very program that a lot of Federal employees are familiar with, but it was the introduction of the FERS pension plan compared to the Civil Service Retirement System. For

those of us who were working in the Civil Service Retirement System in 1983, we remember well when our pension plan was going

to be changed.

45

If you think Medicare beneficiaries care about their health insurance, I can tell you Federal employees care equally strongly about

their pension benefits. And so it is a very major change to introduce to people with long-term ramifications for their economic security. It was done in a very methodical way with a very intensive

education campaign, and people were given the choice of which system to stay in for the future.

I would just mention from former Chairman Bill Roth’s standpoint on the Finance Committee, he had worked on Government

Affairs, he had seen a very successful transition of FERS in lieu

of the Civil Service Retirement System and felt that was a very interesting model for members to consider with respect to Medicare.

I want to thank you, Mr. Chairman, for this opportunity to testify. I will be happy to answer any questions. Thank you.

[The prepared statement of Kathleen E. Means follows:]

PREPARED STATEMENT OF KATHLEEN E. MEANS, SENIOR PUBLIC POLICY ADVISOR,

PATTON BOGGS, LLP

INTRODUCTION

Mr. Chairman, thank you for the opportunity to appear before the Committee

today to discuss my views on the modernization of the Medicare program, with special attention to the current law benefits under Part A and Part B of Medicare. In

the context of the larger public debate over Medicare reform, including the addition

of an outpatient prescription drug benefit, fresh attention has been focused on the

current law package, independently of expanding coverage for drugs. In my view,

the current law package needs to be modernized for reasons I will describe below.

By way of background, immediately prior to joining Patton Boggs, I directed the

healthcare staff for the Chairman of the Senate Finance Committee in the 105th

and 106th sessions of the Congress. I have also served on the majority staff for the

Health Subcommittee on Ways and Means and in the Senior Executive Service in

the Health Care Financing Administration (HCFA). My private sector experience includes working for the Healthcare Leadership Council, as a Director of Health Benefits in the Blue Cross and Blue Shield system, and in private consulting. The testimony is organized to discuss the following matters:

1. Broader reform context for Medicare benefits modernization

2. Identification of major Parts A and B benefit design problems

3. Review of a comprehensive set of draft policies proposed last year by the former

Chairman of the Senate Finance Committee

4. Major fiscal and other implications of modernizing Medicare benefits

Section I. Broader Reform Context for Medicare Benefits Modernization

Social Security and Medicare hold a highly valued position in our society due to

the enormous contributions both programs have made to income security for millions of elderly and disabled Americans. Over time, Medicare has played a growing

role in protecting retired and disabled individuals from the high costs of health care,

in part because health care costs continue to grow at rates considerably in excess

of general inflation and in excess of the value of pension and cash benefits.

This widespread public support argues for the Congress to move in a thoughtful

fashion to reform the Medicare program, taking the time and steps necessary to

achieve significant reforms while also informing and educating the American public.

However, this Committee has received compelling testimony from the Congressional Budget Office and other experts about the demographic and fiscal challenges

facing Medicare over the next decade and beyond. I will not repeat those projections

and concerns. I will state that to be sustainable over the next fifteen to twenty-five

years, the hard work to modernize Medicare must begin now. The Congress, in consultation and partnership with the Administration, should begin this year.

It is highly likely that significant federal investments in Medicare will need to be

made as part of the modernization process. In this context, I recommend that the

Congress not incur major new benefit expansion costs without also putting into

place a framework for broader program reforms that promises to maintain the

longer-term financial viability of the Medicare program. The areas I most recommend action in include:

46

• Establish a Consumer-Choice Model—Create a viable consumer-choice health

plan model for Medicare that could be fully in effect by the period 2007-2010.

Such a model must address the financial access needs of lower-income beneficiaries and the program service requirements of beneficiaries incapacitated by

severe mental or physical impairments.

• Modernize Current Law Benefits—Modernize the entire range of Part A and

Part B benefits, including reconfiguration of beneficiary premium and cost-sharing liabilities, paired with selected benefit improvements, such as improved hospitalization and added drug coverage. In so doing, improve long-term fiscal stability of the Medicare program by building-in design features that promise to

improve incentives for efficiency and economy in the utilization of health benefits, without impeding access to medically necessary services.

• Add Outpatient Drug Benefits—Add outpatient prescription drug coverage in

both the fee-for-service plan and in the Medicare+Choice program.

• Improve Federal Management of Medicare—Take steps to ensure that the

structures and processes of the Health Care Financing Administration (HCFA)

and other entities within the Department of Health and Human Services support effective oversight and management of Medicare. Also ensure that HCFA,

in particular, receives the financial resources it needs to properly carry out the

responsibilities it has been given.

Section II. Identification of Major Design Shortcomings in Medicare’s Current Law

Benefits

Modernizing the current law Part A and Part B standard benefit package to address arcane benefit and cost sharing relationships is essential to creating a strong

platform for launching new premium and health plan competition concepts over the

next decade. Current Medicare benefits are outdated and poorly structured relative

to what is typical of health insurance benefits available to most Americans prior to

becoming eligible for Medicare. Indeed, certain features are relatively unchanged

since they first went into effect in the 1965—1966 period.

Summary of Major Deficiencies in Current Part A and Part B Benefits

The Medicare benefit package has not kept pace with changes and improvements

that have occurred in health insurance benefit design in the private sector. Not only

does it omit significant benefits, such as outpatient prescription drug coverage, but

the premium, deductible and other cost-sharing aspects of the benefit could be designed to better promote appropriate utilization of services, and to bring the Medicare benefit package more closely into alignment with what is customary in other

major insurance programs in government and in the private sector. Some payment

obligations, such as the inpatient hospital deductible, are viewed as very high relative to what is customary in private health plans, where annual deductibles of

$500 or less applicable to all services are more customary. Alternatively, the Part

B deductible has risen to only $100 from its initial level of $40 in 1966, although

Part B spending has increased many, many times over during the same period.

Medicare has an arcane spell-of-illness concept for inpatient hospital services that

can lead to payment of the inpatient hospital deductible multiple times in a given

year depending on the timing of repeat hospitalizations. Further, Medicare does not

cover catastrophic hospital stays, compared to most private health insurance that

covers 365 days of inpatient care, where medically necessary. Coinsurance and copayment amounts for a variety of other current benefits have not been reassessed

and recalibrated in accordance with the latest information on levels and use of services for many years. Also, private health plans typically contain annual limits on

total out-of-pocket spending to protect enrollees from excessive costs due to a catastrophic illness. Medicare’s current package does not contain such protections.

In addition, private insurance carriers marketing supplemental (i.e., Medigap)

policies are permitted to sell policies that permit existing deductibles and cost sharing obligations to be insured against for a premium cost to the beneficiary. While

it is widely held that individuals should be free to purchase insurance against risks

of any cost they prefer not to incur, this is a practice that the Congressional Budget

Office estimates significantly increases costs in the underlying Medicare program

and in some instances, may not be cost-effective for beneficiaries.

Major Benefit Improvement Options

To summarize, the following options merit the most consideration:

• Hospital benefits—Elimination of inpatient hospital spell-of-illness concept and

addition of catastrophic coverage of 365 days of inpatient care.

47

• Single deductible—Creation of a single, shared deductible applicable to spending under both Part A and Part B—this effectively requires a reduction of the

inpatient hospital deductible and an increase of the Part B deductible.

• Cost-sharing—Reassessment of cost-sharing to require at least a modest level of

beneficiary cost-sharing for all benefits, with the possible exception of preventative benefits such as mammograms or colorectal screenings.

• Out-of-pocket maximum limit—Creation of a limit on maximum out-of-pocket

liabilities for beneficiaries to provide protection against the costs of catastrophic

illnesses.

• Low-income subsidies—Restructuring of low-income subsidies around reconfigured deductible and cost-sharing obligations to ensure continued financial protection and access to services

• Medigap adjustment—Elimination of Medigap coverage of the unified deductible.

• Addition of outpatient drug coverage—Please refer to section IV discussion

of implications of modernizing the current law package.

Section III. Consideration of an Illustrative Package of Medicare Benefit Changes

In July of last year, the former Chairman of the Senate Finance Committee, Senator Bill Roth, proposed consideration of the following changes to bring Medicare’s

benefit package more into line with mainstream health insurance coverage (see

chart below). Under those recommendations, significant benefit enhancements were

paired with increased beneficiary cost sharing in selected areas. The resulting package improved areas where beneficiaries face the highest risk of catastrophic expenses, while expecting beneficiaries to contribute modestly more towards lowerend, more routine expenses. Subsidies for lower-income beneficiaries were restructured to ensure access to all benefits.

To summarize, Parts A and B of Medicare were treated as a unified, comprehensive benefit package without regard to either the underlying sources of revenue or

the current voluntary enrollment characteristic of Part B. In the following illustration, the separate Part A inpatient hospital and Part B deductibles were unified in

favor of a single deductible that applies to all benefits. A deductible of $500.00 per

year was proposed as generally consistent with private sector health benefits. To

minimize out-of-pocket liability adjustments for those beneficiaries that in the shortterm are primarily users of Part B services, it might be desirable to phase-up the

current Part B deductible, coupled with a phase-down of the inpatient hospital deductible over about a three-year period.

Further, the inpatient hospital spell-of-illness concept, daily hospital coinsurance

and lifetime reserve days were all eliminated and replaced by 365 days of inpatient

coverage. Note that other combinations of policies are equally possible. However,

this is consistent with private sector policies and comports with the earlier policies

adopted by the Congress in the 1988 Medicare Catastrophic Benefits Act, which was

subsequently repealed. Beneficiary cost sharing on all existing benefits was reevaluated. The lessons from the RAND Health Insurance Experiment of the 1980’s taught

us that, in general, it is sound benefit design to consider modest cost-sharing on virtually all medical services to promote appropriate utilization and better control program costs, while not impairing medical outcomes. Again, one possible exception is

preventative benefits.

Finally, this draft proposal did not include an overall aggregate stop-loss coverage

on total beneficiary cost-sharing liabilities on either an annual or lifetime basis.

While highly desirable from an insurance protection standpoint, it is potentially

very costly to the program, and was foregone in this proposal, in part, because this

proposal was paired with a drug benefit that was felt to be a higher overall priority

for beneficiaries.

Illustrative A/B Benefits Proposal: Senate Finance Committee; July 2000

Major Benefit Areas Medicare Plan in 2000 Proposed Plan

Plan Deductible ...................................... $776 Part A deductible (per hospital

admission).

$100 Part B deductible (for most Part

B services).

$500 deductible for all Part A and Part

B services (separate rules for a drug

benefit)

Maximum Out-of-Pocket ........................ None ....................................................... None

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Illustrative A/B Benefits Proposal: Senate Finance Committee; July 2000—Continued

Major Benefit Areas Medicare Plan in 2000 Proposed Plan

Inpatient Hospitalization ........................ After deductible, $194 copayment for

days 61 to 90; $388 copayment for

days 91 to 150.

No coverage for days beyond 150 for

regular inpatient hospitalization, and

the 60 reserve days may be used

only once.

365 days with no coinsurance, after

deductible is met

Skilled Nursing .......................................

(100 day limit on coverage)

0-20 days = 0 cost-sharing .................

21-100 days = $97 per day for 2000

(1/8 the hospital inpatient deductible).

0 - 10 days = 10% of national average per diem Medicare payment

($25 for 2000)

11-30 days = 20% ($50)

31-100 days = $97 for 2000

Home Health Services ............................ 0% for home health and 20% for durable medical equipment (DME).$5 copayment per visit, with annual

maximum of $100 per beneficiary.

20% for durable medical equipment.

Outpatient Hospitalization and Doctor

Visits.

20% after $100 deductible ................... 20% coinsurance of allowed charge,

after deductible is met

Outpatient Mental Health ...................... 50% coinsurance after $100 deductible 50% coinsurance, after deductible is

met

Imaging/Clinical Laboratory Services .... 0% for clinical lab services (also not

subject to Part B deductible).

Imaging and x-ray—20% after $100

deductible.

20% coinsurance of claims costing

$50 or more, after deductible is met

Prescription Drugs ................................. Not covered with limited exceptions ..... See section IV.

Section IV. Considerations in modernizing Medicare Benefits and in the Context of

Adding a Drug benefit

Following are some of the key questions and considerations for Members to evaluate:

1) Does treating the Medicare Part A and Part B package as if it were a

unified package require changes to the underlying financing structure

of the Part A Health Insurance (HI) and Part B Supplementary Health

Insurance (SMI) Trust Funds?

The simple answer is not necessarily, unless members choose to undertake larger

underlying financing reforms. The benefit reconfigurations can be adopted in each

part without changing the underlying sources of revenues (e.g. payroll taxes, premiums and general revenues) that currently apply. What would require legislative

and administrative attention is the accounting for Part A and Part B expenses so

that they are properly captured and credited to the unified deductible. Similar processes would be needed if the Congress adopted a maximum out-of-pocket limit,

whether applied on an annual or lifetime basis. Additionally, and especially if these

or similar changes are paired with the offering of a costly new drug benefit, any

savings should be captured and channeled into offsetting the cost of the new benefit.

2) What are the major concerns of ‘‘stakeholders’’ likely to be?

The reconfiguration of Part A and Part B benefits potentially affects a variety of

stakeholders, including beneficiaries, providers, State Medicaid programs and private insurers offering Medigap coverage. Beneficiaries would face tradeoffs between

selected new cost sharing on benefits that have no or minimal cost sharing now,

coupled with significant new protections in high-cost areas, such as lengthy or repeated hospitalizations. Selected providers would face new requirements and administrative costs to collect beneficiary cost sharing, with some possible exposure to bad

debt. Medigap carriers could be faced with the logistics of offering restructured

Medigap plan offerings tailored to the reconfigured Medicare package. In fact, the

Congress would need to consider obtaining independent assistance on this latter

issue of redesigning Medigap packages, as it has done in the past, from entities such

as the National Association of Insurance Commissioners. Finally, States will have

a strong interest in the structure of low-income subsidies and their interactions with

the Medicaid dually-eligible and other programs designed to assist low-income beneficiaries today.

3) Is there an option for minimizing the effects of changes that Parts A

and B benefit modernization would require in the approved Medigap plans,

or with respect to other ‘‘stakeholders’’, including beneficiaries and seVerDate 11-MAY-2000 08:49 Sep 10, 2001 Jkt 000000 PO 00000 Frm 00052 Fmt 6633 Sfmt 6621 73734.TXT HCOM1 PsN: HCOM1
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lected providers? In particular, how might one address some beneficiaries’

reluctance to accept changes in Medicare, perhaps even positive changes?

One option to address this question was offered last year in the draft Chairman’s

mark in the Senate Finance Committee, and I would draw the Committee’s attention to it. Simply, the proposal was to bundle all of the benefit modernization reforms, including a drug benefit, into one comprehensive and new benefit offering to

Medicare beneficiaries. Last year, this was referred to as the ‘‘Expanded Option

Plan (EOP).’’ A key element was that the current law package would remain completely unchanged and continue for the foreseeable future to be available to beneficiaries.

Under that approach, all of the major benefit design reforms (e.g., single A/B deductible, revised coinsurance, new catastrophic hospitalization expansion and outpatient drug coverage) would be ‘‘bundled’’ into the EOP. The EOP would be offered

to currently eligible Medicare beneficiaries and to individuals within five years of

Medicare eligibility, on a one-time enrollment choice basis. After the 5-year lookback window, all new enrollees into Medicare would be enrolled into the EOP, which

over an indefinite number of years would gradually replace the current law package.

Replacement Plan Concept: This approach is analogous to the phase-in model

followed by the federal government when it introduced major pension plan reforms

to federal employees in the early 1980’s, as steps were initiated to gradually replace

the Civil Service Retirement System (CSRS) with the Federal Employees Retirement System (FERS). In that model, CSRS-participating employees were given a

time-limited opportunity to choose whether to remain in CSRS or to switch to

FERS. These were binding elections upon the employee. After a specified effective

date, all new federal employees were permitted to only enroll in FERS. Such an approach, adapted to Medicare, has the major advantage of reassuring Medicare beneficiaries that ‘‘their Medicare’’ will remain for them if they choose to retain it.

Such an approach is also conceptually similar to what private employers do in

their employee health benefit plans when they offer their employees a ‘‘replacement’’

plan that they intend over time to replace current coverage or benefit designs. Generally, employers are motivated to minimize disruption in their employees existing

coverage by offering a new option that better meets the employer’s long-term objectives in benefit offerings, and that permits employees to choose between existing

coverage and new coverage for some period of time. The rate at which the older plan

is phased out and the circumstances for doing so are important political and administrative decisions.

Key Characteristics of the Expanded Option Plan

• Combined (single) deductible for Parts A and B services

• Enhanced inpatient hospital benefits (No separate inpatient deductible; eliminate

spell-of-illness concept that can require beneficiaries to pay more than one inpatient deductible if they have more than one hospital admission in a given year;

provide 365 days of covered care)

• Modified cost sharing on certain Part B benefits that have minimal or no cost

sharing today

• As under current law, selected preventive benefits not subject to the Part B deductible would also be exempt of the combined deductible under the Expanded

Option Plan.

• Addition of outpatient prescription drug benefit (see below)

• Separate drug deductible

• Continuous coverage above the drug deductible with increasing federal payments

as beneficiaries’ prescription drug costs increase.

• The Secretary of the Department of Health and Human Services would be required to conduct a major beneficiary education program and open enrollment

season in the year prior to implementation of the Expanded Option Plan to assist beneficiaries in making an informed enrollment selection.

• Medigap would remain unchanged for beneficiaries who elected the current law

package. Beneficiaries enrolling in the expanded option plan would not have

available to them Medigap coverage for the combined A/B deductible or the drug

deductible. Medigap would be permitted to fill-in all other beneficiary cost-sharing obligations.

• Low-income subsidies would be substantially improved.

In closing, it is important to restate that any benefit changes can be adopted directly into the current law structure without pursuing the replacement plan approach. However, there is a growing appreciation that the replacement plan approach may help Members solve certain political and policy issues in a constructive

way.

50

4) Can an outpatient drug benefit be offered as a stand-alone option (such

as through a new Medicare Part D option), or could it be fully integrated (now or in the future) into a modernized A/B benefit package?

Medicare spends approximately $4 billion a year currently on drugs provided to

Medicare beneficiaries under very circumscribed circumstances spelled out in the

law. However, the most glaring omission in the Medicare benefit package is the lack

of an outpatient prescription drug benefit. Medical and health insurance experts

have indicated consistently that if the Medicare program were designed today, drug

coverage would no more be excluded from the standard benefit package than would

any other major component of medical care, such as coverage for hospitalization or

physician services.

Under the Parts A and B modernizations discussed above, including the EOP option, a new outpatient drug benefit can be offered either as a stand-alone benefit

or integrated into the overall plan. The full integration approach implies a single

premium around the entire plan and other changes that could require a significant

revamping of the underlying financing structure of Medicare. This may be desirable

in the long-term, but it may not be desirable or necessary for Members to address

now. As a stand-alone benefit, the drug benefit could have separate premiums,

deductibles and cost-sharing obligations tailored specifically to that benefit.

5) Are there any fiscal advantages to pairing the offering of a drug benefit

with Parts A and B benefit modernizations?

There is one major consideration, aside from the intrinsic merits of improving current law benefit design. That is, even with significant, catastrophic hospital benefit

improvements, which add new costs, the net effect of all the other changes taken

together could generate significant long-term savings that could be captured to help

underwrite the costs of adding the drug benefit. These savings occur due to a variety of factors.

Under last year’s Senate Finance Committee proposal, the EOP options shown in

the chart above were paired with a comprehensive outpatient drug benefit. Preliminary Congressional Budget Office scores indicated savings in the range of $65 billion

over ten years could have accrued from the Parts A and B changes, offsetting the

cost of a drug benefit that had a gross score of about $240 billion over 10 years and

a net score of about $170 billion due to those offsetting savings. I must emphasize

that all scores are subject to significant re-estimation issues under the latest baselines and models, but the underlying concept and potential interactions are worth

your consideration.

CONCLUSION

Medicare at thirty+years is at a major crossroads. The Congress and the Administration have an historic opportunity to simultaneously begin redirecting the future

shape of the program, while also firmly maintaining commitment to the Medicare

program’s central role in the fabric of the Social Security system. The issues have

been widely vetted and consensus is growing around specific directions for change.

Any major change to a social program that is as embedded in our society as is Medicare requires significant bipartisan support. In that spirit, I thank you Mr. Chairman for this opportunity to testify, and I stand ready to help you and other Members in any way to advance your work in this important undertaking.

Mr. BILIRAKIS. Thank you very much, Ms. Means.

I know this is a very complicated subject, but you referred to approximately $70 billion worth of savings over 10 years by combining Parts A and B.

How much of that would result from the change in the deductible, the flat $500 deductible; or would most of that result from

other changes made as a result of combining the two efficiencies?

Ms. MEANS. It actually comes, Mr. Chairman, from three broad

concepts. One is partly the change in the deductible. It does generate savings on the Part B side. We would have gone immediately

to the $500 deductible. If you do a phase-in, you will reduce some

of the savings from that particular change.

Mr. BILIRAKIS. So if we are talking about a savings in that regard, we are talking about money coming out of the beneficiaries’

51

pockets, additional money coming out of their pockets for a period

of time?

Ms. MEANS. That is correct.

On the other hand, we were also offering that with an expanded

hospital benefit and a reduced inpatient hospital deductible.

It is absolutely correct, what I heard a couple of members say

earlier, that in any given year more beneficiaries touch the Part B

program than touch the Part A program or have an inpatient hospital admission. However, an insurance concept, you don’t want to

look at just 1 year in isolation; you really want to look over multiple periods of years for providing insurance; and the reduction on

the inpatient hospital side is very—the deductible is a very important insurance benefit to beneficiaries.

So it is a tradeoff. You are paying more for more routine, discretionary cost and less for catastrophic illness.

Mr. BILIRAKIS. But over a period of 5 years or 10 years, you are

saying that it probably would even out because of the smaller deductible for Part A, or for hospitalization?

Ms. MEANS. Yes.

Mr. BILIRAKIS. However, in marketing the plan to beneficiaries

out there I don’t know that they would think: ‘‘I may go into the

hospital 3 years from now or 5 years from now and I would save

money, it would cost me less money out of my pocket in that particular year; but in the meantime, it is going to be costing me

more.’’ Ms. MEANS. You had also asked, Mr. Chairman—some of the

other sources were, CBO assumed some improvement in utilization

ratings across services where we added cost sharing. So it was actually a change in the underlying utilization assumptions.

In addition, we would not have permitted Medigap to fill in the

deductible as is the case under current law. That generates—you

probably heard separate testimony, I believe from Mr. Crippen,

that allowing Medigap to fill in that basic deductible generates fairly significant underlying costs in the underlying benefit package

over time.

Mr. BILIRAKIS. Well, thank you.

I don’t have that much time left. Depending on how many people

we have here, we might be able to do a short second round.

Dr. Scanlon, in your written testimony you express a certain hesitancy, I think, in adopting policies and practices implemented by

the private health insurance industry. Now, recognizing Medicare’s

special status—and we must do that—one of the questions is, how

can these private sector practices be adapted for Medicare?

This is actually a bottom-line question for me: How can Medicare

use its special status as the largest single purchaser of health care

to improve the services it provides to beneficiaries, to enhance the

operation of the program and to include prescription drug coverage?

Now, that is going to take some time, so let’s just say that I will

use an additional 5 minutes and give everybody 10 minutes to inquire.

All right, go ahead, sir.

Mr. SCANLON. Yes, Mr. Chairman. You did perceive our hesitancy in our written statement in this regard, and it is because

52

Medicare is such a large program. While it provides some advantages in some dimensions, it creates responsibilities in others.

Medicare is the single largest payer of all services; therefore, it

is critical to the well-being of individual providers. It is also critical

to the system. Medicare is deciding how it is going to cover services; which services it is going to cover, and what it is going to pay

for them. This influences the services that are available not just for

Medicare beneficiaries, but for other individuals as well.

In that regard, I think what we need to focus on is for Medicare

to, in some respects, operate with restraint, to consider some of the

processes and procedures that are being employed in the private

sector to better manage care, to encourage better use of services,

but not necessarily apply them as strongly, because it cannot apply

them with the same kind of discretion that is used in the private

sector.

In a private sector arrangement, there will often be individual

negotiations going on between plans and providers that can lead to

sounder relationships that benefit the beneficiaries. Medicare’s a

national program. It can not engage in those kinds of individual negotiations. It is going to have to establish a set of rules and we are

going to have to live with those rules. We have to make those rules

ones that are protective of both beneficiaries and providers, and it

will mean that we, I think, hold back, so to speak, in terms of some

of these provisions.

An example in the testimony that we provided was the global fee

that was being used for bypass surgery where a single fee was

being paid to hospitals and physicians. This is a form of preferred

provider arrangement; it is a rather mild form of a preferred provider arrangement since beneficiaries are free to go to other providers and receive their traditional Medicare benefits. So that’s one

aspect.

The other thing I think that is important is, though in some

ways—I don’t know how we accomplish this—we have to overcome

our fear of Medicare; and this would relate to the idea of allowing

Medicare to inform beneficiaries about the value of services and to

remind them about services on an individual basis may actually

have some very positive benefits.

You have added in the recent past important services to the

Medicare program in the form of screening for cancers. Yet Medicare beneficiaries have made very limited use of those benefits. If

there was a more aggressive effort to encourage the use of those

benefits, there would be value accruing to both the beneficiaries

and to the program.

Right now, those efforts are relatively timid. They may be timid

in part because the administrative resources that HCFA has constrains their activities, but they are also timid in part because

Medicare identifying individuals and telling them specifically: you

have not gotten a mammogram; you have not taken advantage of

any of the colon cancer screening services that we cover; that is

something that we are not ready for at this point in time.

Mr. BILIRAKIS. You say we are not ready for it?

Mr. SCANLON. We are not ready for it in the sense of being comfortable with the idea of getting a letter from Medicare saying that

we have looked at your records and we know that you haven’t used

53

certain services and we encourage you to use them; there could be

some very significant concerns raised about that. It is my sense of

the possible response by individuals, being ‘‘what is the government doing looking at my health care?’’ Mr. BILIRAKIS. My question went to prescription drugs also.

You have become quite an expert. I know you have appeared before this committee many, many times. Can we afford to include

prescription drugs within the scope of Medicare, basically the way

Medicare functions now?

Mr. SCANLON. In terms of the administration of Medicare, looking at the affordability question, I think is a question of the resources that you feel can be devoted to the program. I think earlier,

in one of the opening statements—several of the opening statements—the issue was characterized in terms of priorities; and I

think that is the critical issue in terms of prescription drug coverage.

Administration of a prescription drug benefit is not a trivial task.

We estimated last year that there could be as many as a billion

claims a year for prescription drugs, which is more than the total

number of fee-for-service claims that are coming in now. Therefore,

we really need to focus on building the capacity to be able to process those kinds of claims. It is going to be purchased capacity, just

as we purchase the capacity to process claims today through the

fiscal intermediaries and the carriers. At issue, I think, is, do we

give HCFA resources to purchase that capacity, as well as to see

oversee it, effectively? One of the key things we have reported on

over the years is the ineffective oversight of contractors and the

fact that this puts the program at risk for inappropriate payments,

which far outweigh the shortsighted savings we may have gotten

on the administrative side. So we need to give HCFA the resources

to be able to do oversight effectively.

The second issue for you is the issue of, under what terms are

we going to buy that administrative capacity; and options have

been discussed of buying simply a third-party administrator to pay

these claims versus putting the entity doing this, such as the pharmacy benefit manager at some risk, so that they do the job even

better and apply the techniques that they have for more effective

management to the program’s benefit.

Mr. BILIRAKIS. Well, thank you, Doctor. I know it is a subject you

could probably spend an entire day on. In lieu of a second round,

I will allow every member to use 10 minutes for inquiring; and the

Chair now yields to Mr. Brown.

Mr. BROWN. Thank you, Mr. Chairman. My guess is I won’t go

the full 10 minutes.

Ms. Moon, I want to ask you about Breaux-Frist 1, as you recall,

suggested combining of A and B, and adding a new solvency test

to the Medicare program. My understanding is that if in any given

year general fund contributions exceeded 40 percent, or were projected to exceed 40 percent outlays, Medicare would be determined

to be ‘‘programmatically insolvent,’’ I believe. The bill actually prohibits general revenue transfers to exceed that 40 percent of Medicare, Medicare outlays.

Explain to me this solvency test and what, in fact, it would mean

for Medicare.

54

Ms. MOON. I believe—let me start and say, I believe that trust

funds were established, particularly the Part A Trust Fund, as

with Social Security, to be a protection for beneficiaries; to say,

here’s a dedicated source of revenue to make sure that there is

enough, far enough ahead, that there is not a problem.

From that perspective, then putting—establishing a Trust Fund

in which you then put specific limits on the contribution from general revenues, I think is contrary to that notion to a certain degree.

It also says that you—the limit will be based upon what is happening to the economy as well as what is happening to health care

spending. So it’s adding a whole range of additional concerns in

terms of thinking about what that trust fund means.

I am sympathetic to the notion that one wants to be prudent in

terms of the dollars that are devoted to a program of this sort, but

the whole goal of having an entitlement type of program is to allow

it to grow as necessary over time, and only then be controlled by

the rules that manage the program.

So I find it hard to conceive of exactly what that 40 percent

means, because it is going to vary for reasons that don’t have anything to do with whether the program is serving its beneficiaries

well or meeting other national goals in terms of the Medicare program.

Mr. BROWN. What would have happened if it exceeded 40 percent

and Congress had either failed to act or chose not to act? What

would happen there?

Ms. MOON. That is an interesting question, and like the statute

for Medicare, I think it is a little unclear.

Technically speaking, my understanding is that if there is not

enough money in the trust fund to pay benefits, you delay payment

for a while. You can only do that for a while; and then it is rather

unclear what happens, because you have, really, two conflicting

things. You have something that says you can’t pay benefits and

you have another part of the law that says people are entitled to

these benefits. So it really puts kind of Catch-22 on the system in

terms of requiring some change or to be a violation of part of the

statute.

Mr. BROWN. Okay.

Dr. Scanlon, Dr. Young in his testimony mentioned that combining A and B would allow HCFA to keep track of both inpatient

and outpatient services that seniors receive, and he went on to say

that, among other benefits, HCFA would be better able to fight

fraud under a merged Medicare program because the Office of Inspector General had said, in some cases, Medicare pays twice for

the same set of services, once to a Part B provider, once to a Part

A provider.

Is that the problem? My understanding is, the real problem is

HCFA’s information technology systems. Could we deal with the

fraud issue equally as well without the merger of A and B?

Mr. SCANLON. Certainly without the merger of the trust funds.

In some ways, you can deal with the problem by what I might

characterize as a virtual merger of the program through the information systems. The key here is that HCFA needs the capacity to

be able to look at services being used by a beneficiary in toto. It

actually has some of that capacity already. In the fact that claims

55

do flow through a common point, coming from both Part A and

Part B.

The reality, though, is that the information systems they flow to

are not capable of doing the kind of sophisticated screening that

would need to be done to make sure that we minimize inappropriate payments.

From our perspective, the administrative side of this issue is that

many things can be done keeping a separate Part A and a separate

Part B Trust Fund by looking at the program as a whole. And that

is critical. HCFA has been doing that to some extent; it needs to

be able to do it more.

Mr. BROWN. HCFA’s information technology system is, it is a

question of funding in large part?

Mr. SCANLON. It is, in part, a question of funding. They have had

difficulty in modernizing that system, as you probably are aware.

There was a bad experience in the mid-90’s with the Medicare

transaction system, and then having to turn, when that failed, immediately to the problem of dealing with Y2K and trying to correct

all of these old systems.

The final thing that I think has been a significant barrier to

modernizing the systems, frankly, has been the BBA and the refinements since the BBA. HCFA has really, in many respects, done

an admirable job in terms of implementing the system changes required to implement all of those provisions of the law. But in doing

that they have had to modify a set of systems that they know

someday are going to be scrapped, but today it is critical they be

modified. So payments are made in accord with the new policies

that have been enacted in the last 5 years.

Mr. BROWN. Well—and HCFA, as we have discussed here, has

over the last—well, when we had the four administrators here, the

four previous administrators, and the new one was at the back of

the room. And just the budget for HCFA has stayed pretty constant, even somewhat fewer dollars; and I am concerned that while

all of them said that the increase for HCFA’s budget should be—

as HCFA’s administrative costs are much less than

Medicare+Choice or any other insurance program we know of,

that—they all called for at least a 15 percent increase. Some called

for 50 percent over a couple of years.

But I am concerned that with this Congress and the President

passing a tax cut where benefits went—tax cut dollars went overwhelmingly to the richest people in the country that we are not

going to be able to do the things that we need to do to make HCFA

run better. To give it the kind of resources that we need and to

deal with the fraud issue that Dr. Young talked about and that you

talked about, it is clearly going to need some more resource s. And

while the HCFA administrators have called for more money, I don’t

know if this Congress will get its act together to be able to do it

in light of scarcity of resources again.

So I yield back the balance of my time. Thank you, Mr. Chairman.

Mr. DEAL. Thank you, Mr. Ehrlich.

Mr. EHRLICH. One specific question and one general question.

Dr. Scanlon, I was interested in your comment with regard to the

failure to communicate, I guess, with regard to the reforms that

56

have passed the Congress over the term or, two, regarding new

benefits, new services, new therapies and the like. I share your

concern with regard to your example that if one of my constituents

would receive such a letter, I would certainly hear about it.

What to do? Is a general communications plan better than specificity with regard to individual beneficiaries? How to make people

healthier, make the system run better, create a more knowledgeable health care consumer in light of reforms that have passed in

recent years?

Mr. SCANLON. Certainly, general education is the first step, and

HCFA has engaged in some activities in that regard. Whether they

are going to have a payoff in terms of improving over time the use

of these services is still not clear. But it is likely to be an insufficient step, and the dilemma is, how do you move from something

that’s general education to something as specific as I have characterized.

If we could find some trusted intermediary in the context of some

agent that could be the source of the specific education, we would

be able to potentially bridge the gap between the trust for government and the need for this service.

Mr. EHRLICH. Would physician providers fit the bill?

Mr. SCANLON. Physician providers may fit the bill, but at this

point in time, because of freedom of choice and the fact that there

isn’t a primary physician concept within Medicare, we have no ability to identify which physician we might want to involve in the

process of informing beneficiaries about the need for services.

In terms of people, a model that might be expanded but would

require a significant amount of thinking to determine how to expand it would be what we try to do on occasion with individuals

with chronic illnesses; in other words, to provide them some assistance in the form of someone to do coordination, to inform them

about need for services, to inform them about how to access services.

These can be positive in terms of encouraging the right use of

services, but we don’t have a framework, we don’t have a mechanism for that at this point in time.

Mr. EHRLICH. As a cost saving and better health care delivery

issue, it is certainly intriguing here.

General question, anybody and everybody; we are just about to

complete here, so I only have a few minutes.

I was not here, but I am familiar with the comments the chairman of the full committee, Mr. Tauzin, made with regard to, if he

had a magic wand and we were 36 years ago and we were able to

begin a new system, literally anew—let me ask the specific question:

If you all had the opportunity to create a new Medicare program,

would you combine A and B? Why and why not, which is, I guess,

the bottom line question in today’s hearing.

So, Doctor, I will start with you.

Mr. SCANLON. There are an incredible number of elements to

that question, which are not my province to respond to, that are

really your choices. They do involve issues of priority.

There were points that came up in some of the discussion earlier

about what should be the financing sources for this program? What

57

would be the relative importance of each of those financing

sources? How would we determine what beneficiaries should pay?

What would we do in terms of moving from—if we are starting in

1965, we wouldn’t have this issue, but we have it today. What

would we do in terms of people that have paid their payroll tax

their entire working lives and be saying to them, we now have a

unified program, but in order to get it, you have to pay a premium.

These are all choices that you would have to make.

From my perspective, I think it is critical that we would look at

this program from a unified perspective in terms of the management kinds of issues they have raised, and this comes back to a

choice for you.

We would also want to look at this program from the perspective

of, how good is the insurance that it provides? On the Part A side,

you have the high deductible and you have very high risk for very

sick people at the upper end in terms of hospital stays; and also

on the Part B side that if you are very, very sick and you have a

very large amount of physicians’ bills, there’s no limit.

With that, one would say, this is not good insurance and we want

to do something better. So we want to take into account what beneficiaries’ total liability might be and we want to provide protection

against that.

Mr. EHRLICH. Does anyone else want to comment, particularly

with regard not just to, clearly, No. 1, policy being quality of delivery of health care services, but also complexity?

Mr. YOUNG. I think, without a doubt, we wouldn’t even consider

the issue of separate A and B unless the issue of financing was

raised, and there is a possibility that one can draw a line between

the financing.

But in terms of care delivery coordination, disease management,

with what we know today—deductibles, out-of-pocket spending,

program administration, fraud and abuse, one single program is a

state-of-the-art, not two programs. The private insurance sector 20

years ago, 30 years ago, and even going back to the mid-1900’s, as

I briefly summarized in my testimony, did have different pieces;

and they got rid of that for very good reasons.

But I also agree, you have got some problems you are going to

have to deal with on the financing side in how you want to structure and deal with the financing side.

Ms. MOON. I would just like to add that there is a big difference

between if we started with the combined program and today, because today what you need to do is spend time on getting all of

that, the complexities, right that people have talked about here;

and I would rather see the time and effort go into getting some

other things right, improving consumer education and information

and coordination of data.

You can use, for example, I do in my research use combined A

and B data; you have to go through some hoops to do that, but you

certainly can link those data. That is not a difficult thing to do; it

just takes the resources and the will to do that. And as I mentioned

in my testimony, the complexity of the cost sharing certainly needs

to be reassessed, but the A-B deductible is not the big part of that.

It is the spell-of-illness issue. It is the very high cost on the Part

A side, for example, and the lack of stop loss.

58

Mr. SCHULDER. Hindsight is wonderful, but I was beginning to

be active near the Congress on getting the Medicare program

passed in 1965, 1962—1961, 1962, 1963, 1964, and you just have

to again recognize that we had Wilbur Mills in this building—well,

not this building, but next door. We had an enormous amount of

politics going into the passage of Medicare and often large amounts

of interest being explored, both the physicians’ side and the hospital side. So there could have been no way, it seems to me, to

project, outside of using a Blue Cross-Blue Shield model that this

could work and sharing the costs from premiums and payroll taxes,

that came up with something that worked and has worked reasonably well over the last, you know, whatever it is, 40 years; and the

framers of the Constitution had to come back and look at it and

make changes over the years, over the centuries.

So there is no way to really speculate what you would have done

differently in 1965, if you had a chance to redo it, except to say

that we have to keep saying again, the purpose is to make sure

that good health services, using the best technology, the best findings of pharmacology, of the health profession, the medical profession, gets to the users in an efficient and affordable way quickly;

and I can’t quite describe what that would look like, but that is the

goal.

Mr. EHRLICH. Thank you.

Mr. DEAL. Mr. Green.

Mr. GREEN. Thank you, Mr. Chairman. I apologize for being in

and out, but we have an E-911 hearing upstairs and that is also

part of the importance of what is going on here in Congress. But

I appreciate that our panel—and as I didn’t listen to your testimony, but as I read the testimony, I notice that each of you has

different goals for the Medicare program.

For example, Ms. Moon, your goals for the Medicare program

were simply simplifying the program, improving cost sharing and

making it more rational for beneficiaries, achieving greater efficiency in the management of the program and treating the Medicare program as a whole in considering the financial issues.

Mr. Schulder, you state that we should enhance expanded quality of the service to beneficiaries and strengthen the overall program.

Ms. Means, your statement reflects vastly different goals which

are to establish a consumer choice model, modernize current benefits, add outpatient drug benefits and improve Federal management of Medicare.

And, Dr. Young, your statement reflects the desire to make the

program more reflective of the private sector model and to include

disease management programs, improve program administration,

eliminate the program’s structural problems and other substantial

reforms.

These are all—some of the common goals in your testimony, that

for example, we need greater disease management, coordination of

the care and improved customer service. Are there ways to achieve

the more immediate success in these areas on which we agree without introducing some of the more complicated factors such as

changes in deductibles, program financing or benefits, and still

achieve what all of you seem to have in common?

59

Ms. MOON. I think one first step you could take, if you don’t

want to talk about additional resources is—or only modest additional resources is devoting the time to providing a better set of

goals and some modest increase in resources to improve the kinds

of coordination of care and beneficiary education that we are talking about. Those are very important to having the program work

well.

They don’t achieve some of the desires to expand or improve benefits, which I think are also there, but at the very least it seems

to me that the dollars that would be necessary to improve this program substantially and keep it at a reasonable level of expenditures, while being cognizant of fraud and by finding ways to better

coordinate and sometimes achieve savings, would be certainly

worth some initial investment.

Mr. GREEN. We can again do that without fighting the battle of

the changing deductibles or how we finance it in the benefits. Can

we do some of the commonality that would benefit the providers,

but also the beneficiaries?

Dr. Young.

Mr. YOUNG. There are a lot of things that can be done that are

unrelated to the A/B division and split, of course. I would, though,

encourage you to seriously consider adding to that list the deductible issue, because is it does have a lot of very perverse incentives

as I talked about in terms of quality of care and site of care. And

I think Mr. Scanlon referred to it as the virtual A/B merger. As I

said earlier, you might want to separate the issue of financing, but

there is an awful lot in the system that could benefit by a virtual

or real combination and elimination of some of the incentives that

can be very perverse to high-quality care.

Ms. MEANS. Congressman, I would echo that. I think even without adding resources in a budget-neutral fashion. You can restructure some of the A/B benefits in a way that would result in an

overall better package for beneficiaries from an insurance protection standpoint and also gain some savings and use it to offset

some of the improvements that you would make even within the

A/B benefit structure. And I would just emphasize what I said earlier in my testimony, that these kinds of changes are possible without in any way entering into changing the underlying financing

structure of the trust funds today.

Mr. GREEN. Mr. Schulder.

Mr. SCHULDER. On the questions of combined deductible, I just

want to make it clear to this committee that to increase the

deductibles for Part B services to $500, $400 is to put a dollar bar

to access the services for average and lower-income seniors, and we

will oppose that. The $100 deductible is doable, it is rational, but

to increase that to a substantial level such as 4- or $500 we think

is going to prevent services. People don’t for the most part shoot

their way into the doctor’s office or into hospital beds. They are

there because they need the service.

Mr. GREEN. Obviously I agree, and because I have seniors who say, I have to come up with $792 before I can go to the hospital,

even if they need it.

Mr. Schulder, some people believe that Congress should not add

a universal prescription drug benefit before substantially reforming

60

the entire Medicare program. It seems there is a lot of disagreement about reforming Medicare, but a near universal agreement on

finding some type of drug benefit. What is your view and Alliance’s

view on that matter?

Mr. SCHULDER. I don’t think beneficiaries or the Nation as a

whole can wait until we solve all the structural problems. We need

this benefit now. We need it as a part of the Medicare system, a

defined benefit, a universal benefit, a voluntary benefit, and a benefit that is going to use the pharmacological findings rapidly so

that people can find relief for their ills and their needs. We need

it now, and we don’t need it as part of an overall Medicare so-called

reform program. We need it first and foremost, and we would hope

to see this Congress this session do it.

Mr. GREEN. I don’t think I could say it better. I yield back my

time, Mr. Chairman.

Mr. DEAL. Thank you.

I want to follow up on a question Mr. Ehrlich asked you perhaps

to make it a little easier, without perhaps going into great discourse about it. Putting aside the decisions that were made in

1965, putting an aside the issue of trust fund and the financing

mechanisms that differentiate between the two programs, A and B,

and assuming that you are a panel assembled by Congress as advisors for Congress’s consideration of a Medicare program, as a matter of first impression, would any of you advise that we bifurcate

into the two sections A and B if we were for the first time adopting

such a program?

Mr. YOUNG. No.

Ms. MEANS. No.

Mr. DEAL. Anyone?

I believe I see universal agreement that you would not endorse

such a concept. That being the case, then, let’s, in the nature of reform which we are considering today, consider those things that

happened some 35 years ago or so and see why they should be an

impediment to us reaching this decision now. The first one, I suppose, is a philosophical question, and I think it is one that we

haven’t maybe as a Nation come to grips with. So I would put it

to each of you.

Philosophically is it the primary responsibility to pay for health

care—should that responsibility rest on the individual or their generation, or should that be a primary responsibility of the generation that follows them?

I don’t see any takers.

Mr. SCHULDER. Yes, it is the responsibility of society. If this society decides that the provision of health care services is a primary

citizenship right and a responsibility of the government for the

good of the whole community, it is a responsibility carried from

generation to generation, from generation to generation—the

microphone is gone—and now it is back.

Mr. DEAL. You have to give the right answer for it to work.

Mr. SCHULDER. It is pay as you go. You are suggesting maybe

this generation pays for it or the next generation. My parents use

Medicare, my children will use Medicare, I will be using Medicare

as soon as I leave employment. It is a societal responsibility, it

seems to me. It is not a simple generations thing.

61

Mr. DEAL. So it is a shared responsibility.

Mr. SCHULDER. It is shared. It depends on how we want to use

our resources. Do we want to include health care as one of basic

citizenship rights and responsibilities of government? At least that

is the way I look at it. You can cut it any way you want. Once you

create the system in terms of private market involvement or all the

rest, but it is the decision of this society do we want to make

health care services for older people, disabled persons or everyone

a basic part of citizenship rights.

Mr. DEAL. Dissecting the question a little bit further, and you

may elaborate on this, which of the funding mechanisms that we

currently have A or B in your opinion most appropriately represents where that responsibility for paying for health care costs

should be placed? Is it under the A formula, or is it under the B

formula?

Ms. MOON. I believe that the combination that we have of payroll

taxes, of individuals’ premium contributions, and of general revenues is a reasonable combination. The question is what is exactly

the right balance, and that is much more difficult to answer.

But general revenues have the advantage that they ask people

of all ages to pay on the basis of ability to pay so that high-income

seniors, for example, contribute to the Medicare program.

Payroll taxes are desirable from the standpoint of many beneficiaries and individuals because they have relatively painless tax

that comes out of your payroll. Americans like it much better than

economists like myself do. But they see it as a fair system to have

a basic small amount come out of their payroll to provide for the

future, and I believe that having beneficiaries pay a contribution

is also important to make them understand and appreciate the program.

So I believe that whether it is by accident or design, the notion

of having all three of these sources of revenues has been a very

good idea. The question to go forward into the future is what is the

fairest way to do the combination that is going to be necessary to

fund this program?

Mr. DEAL. So, in other words, if we are going to reform, then we

do not necessarily need to look at a different approach to funding.

It is the very question of where the additional cost—and I think everybody agrees there are going to be additional costs, especially if

we add a pharmaceutical benefit. The question is from which of

those sources, those combination of sources, do we ask this extra

burden to come from. Would everybody generally agree with that

proposition?

All right. Mr. Schulder and Ms. Moon, at least in your written

testimony both of you allude to the fact that we may need to revisit

the payroll tax portion of the funding formula. Have either of your

organizations taken a firm position on that issue?

Mr. SCHULDER. Speaking for the Alliance, no, we do not have a

firm position on that. We are a new organization, and we were

building a catalog of policy positions. We haven’t looked at that

quite yet. But it would seem to us and to me that all of us face

increased out-of-pocket costs to pay for our health care. Employees

are paying higher premiums.

62

It is not unreasonable to think that the payroll tax can be looked

at any point in time to see whether or not it is providing a fair

share, if that is the right word, to the overall costs of the program.

The trustees tell us we are about 1.97 percent of payroll that we

need to add to the system so it is in balance for 75 years. That is

about $300 a year and 1 percent for the workers’ side. One percent

for $30,000-a-year worker would amount to approximate $300 a

year in additional taxes, as well as for the employer the same

amount. That would bring the program into solvency for the full 75

years.

I am the not sure that 75 years means anything to any of us

given the nature of life and changes in medicine, but some small

increase in the payroll tax, it seems to me, should be considered.

Nobody likes to talk about it, but it is part of the basic financing,

and American workers with their productivity can afford to have

people take a look at that and consider an increase in the payroll

tax.

Ms. MOON. I don’t represent an organization. The Urban Institute doesn’t take positions on these things, so I represent me. I am

a baby boomer, and I am very cognizant of the fact that baby

boomers are going to be a drain on the system. I think, then, that

considering changes in financing that ask me as a baby boomer to

contribute over time are a good idea. The only way we now have

to try to establish a way to have me pay for some of my benefits

in the future is through a higher payroll tax contribution that

would go into the trust fund. General revenues can be asked of me

when I get to be 65 and 66 and I am on the program and to help

contribute as well.

So I think both of those have a role, but I think the payroll tax

because it is a dedicated tax, goes into a trust fund, and it is supposed to be there to smooth out some of these things, and it should

be looked at that way.

Mr. DEAL. That is consistent with your testimony that you believe that combining the programs may pose some jeopardy to the

trust fund portion of the surplus that has accumulated in that

trust fund over a period of years.

Let me shift to another issue, Ms. Means, and I will ask you the

question, so if you want to respond to that one, you may do so at

the same time. One of concerns raised by Ms. Moon is the issue of

combining the programs having an undue burden by raising the deductible issue. Would you address that, please, and also the other

previous question if you would like?

Ms. MEANS. When we were looking at this issue last year on the

Senate Finance Committee, the issue of raising the deductible on

the Part B side, clearly that is something that members have a

great deal of concern about, addressing their constituents’ issues

about that.

I think, first of all, the Part B deductible has stayed way, way

out of whack relative to the increase in spending. I think most of

the members understand very clearly the extent to which it has not

kept pace with its original design and purpose, which was to rise

over time in a way much more in step with the increase in spending, as the inpatient hospital deductible has done on the Part A

63

side. So there is a huge disparity in relative responsibility for those

deductibles toward affecting the total cost of the program.

When we were looking at this issue last year, we thought it was

very important to deal with the concerns of low-income beneficiaries. So in the context of proposing to raise the Part B deductible, we also proposed considerably more generous subsidies than

exist today under current law for low-income beneficiaries. We

raised the subsidies up to 150 percent of poverty, and they were

fully federally financed up to a certain level. So we did not put that

burden on States. Even with that increased cost, you can still gain

some overall savings because effectively more middle- and upperincome beneficiaries are contributing more to the Part B benefit

through the deductible.

Mr. DEAL. So you can achieve a favorable result.

Ms. MEANS. Yes. And as I mentioned earlier, you are getting improved insurance on the changes in Part A, and that should be

looked at not just in 1-year pieces, but over the life of the benefit.

Mr. DEAL. Thank you, Mr. Schulder.

Mr. SCHULDER. There are some people who would suggest that

the payroll taxes are relatively regressive, and there is some truth

to that.

Mr. DEAL. I believe the average individual pays more in payroll

tax than they do in income tax. So to raise it, as you had previously indicated might be a suggestion, would be very politically

difficult.

Mr. SCHULDER. I realize that, but overall we want progressive financing for this program. I would think that a significantly high

deductible for all services of, say, 500 is a very, very regressive

sickness tax, if you will, and we will oppose that. We do not think

that, again, raising the financial bar to seeking services is the way

to assure a healthy population of any age.

Mr. DEAL. Dr. Young, I am going to get you to comment maybe

on this sort of as a part of an answer, but you have alluded to the

fact that the merger of the two programs would be consistent with

the evolution that has occurred in the private insurance industry,

and you have made reference to that, and one of the things you

have said is that it would allow service to be rendered at the most

appropriate point of service. Would you expand on that a little bit,

and also this issue of the deductible as to whether or not that could

be accommodated to solve the problems that Mr. Schulder and Ms.

Moon have alluded to?

Mr. YOUNG. From the time the Medicare program was enacted

in 1965 to the present, where care is furnished has changed dramatically. Today care can be furnished in multiple sites, some of

which are Part A and Part B. I mentioned a surgical procedure

that could be a Part A hospital or an ambulatory Part B service.

Some acute care can be in a nursing home. It can be in a hospital.

The kind of services, where they are provided, and who provides

them has changed. So the Medicare structure and particularly the

out-of-pocket costs can penalize somebody from the appropriate

side of care or the side of care that happens to be local to where

they live based on their structuring. In the private sector having

the single deductible allows you to deal with that, and having the

contracting flexibility to negotiate fee schedules for different packVerDate 11-MAY-2000 08:49 Sep 10, 2001 Jkt 000000 PO 00000 Frm 00067 Fmt 6633 Sfmt 6602 73734.TXT HCOM1 PsN: HCOM1
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1Medicare Reform: Modernization Requires Comprehensive Program View (GAO-01-862T, June

14, 2001). 2See Low-Income Medicare Beneficiaries: Further Outreach and Administrative Simplification

Could Increase Enrollment (GAO/HEHS-99-61, April 9, 1999).

ages of services that the Medicare program does not have except

under waiver or special authority gives you a lot of flexibility to put

together the bundle of care that an individual really needs, by the

provider they need, without being constrained by Medicare’s payment policies based on the type of facility or out-of-pocket spending

or deductible policies.

Mr. DEAL. Well, I want to thank all of you. I believe we have exhausted the members, if not their questions. We, too, thank all of

you. This has been a very good panel. We appreciate your time in

coming and being with us today, and we invite you to come back

again. Thank you very much.

[Whereupon, at 12:47 p.m., the subcommittee was adjourned.]

[Additional material submitted for the record follows:]

UNITED STATES GENERAL ACCOUNTING OFFICE

WASHINGTON, DC 20548

August 7, 2001

The Honorable MICHAEL BILIRAKIS

Chairman, Subcommittee on Health

Committee on Energy and Commerce

House of Representatives

Subject: Medicare Reform: Post-Hearing Questions Related to Modernizing Medicare

and Merging Parts A and B

DEAR MR. CHAIRMAN: On June 14, 2001, I testified before the Subcommittee on

issues related to modernizing the Medicare program.1 Specifically, I discussed how

reforms based on a more unified view of the program might affect (1) program financing and assessments of the program’s financial health, (2) cost-sharing requirements, and (3) program management, including administration and promotion of

quality care.

This letter responds to your July 17, 2001, request that GAO provide answers to

questions related to the June 14 testimony. Your questions, along with our responses, follow.

Question 1. How would you design a protection for low-income beneficiaries so

that the cost of a combined deductible set higher than the current Part B deductible

does not become a barrier to needed services?

Some have suggested establishing a single deductible to replace Medicare’s current $792 deductible for part A hospitalizations and the annual $100 deductible for

part B services. A combined deductible, lower than the current part A deductible

but higher than the current part B deductible, could reduce financial barriers for

beneficiaries who need to be hospitalized. However, many beneficiaries who use

Medicare services are not hospitalized and would thus be responsible for higher outof-pocket costs.

Whether a combined deductible would prevent some beneficiaries from obtaining

necessary care would depend upon the details of the proposed deductible change as

well as other beneficiary cost-sharing reforms that might be adopted. Discussions

about specific actions designed to protect beneficiaries and avoid the creation of financial barriers should consider this larger context.

One way to help beneficiaries overcome financial barriers to care may be to better

promote existing programs, such as Medicaid, that assist qualified beneficiaries with

health care costs. Many eligible individuals do not participate in these programs,

in part because some are unaware that these programs exist and the requirements

for demonstrating eligibility are complex.2 The Congress could also consider whether

to adjust the current eligibility thresholds for Qualified Medicare Beneficiaries for

whom Medicaid pays Medicare cost-sharing obligation. Alternatively, the Congress

could consider other targeted options, such as establishing an income-related sliding

scale for the deductible, if existing programs did not adequately address any negative implications resulting from a combined deductible.

Question 2. In your testimony, you state that Medicare’s current cost-sharing requirements are not well-structured to promote prudent use of discretionary services.

65

How can a merger of Parts A and B improve Medicare’s cost-sharing requirements

and serve as a tool to curb excessive utilization of services?

Private insurers generally establish cost-sharing arrangements that require coinsurance or copayments for services that may be discretionary and could potentially

be overused, to encourage beneficiaries to consider their need for services and steer

patients to lower cost or better treatment options. Medicare’s current cost-sharing

structure fails to promote prudent use of services and to protect beneficiaries from

high out-of-pocket costs. Consequently, proposals have been introduced to reform

Medicare’s cost-sharing requirements.

Rethinking the relationship between parts A and B could facilitate the development of better cost-sharing requirements. It may be easier to revise Medicare’s costsharing requirements if these changes are made in conjunction with other revisions

to the part A and B structure. However, cost sharing could be revised under Medicare’s current structure without merging parts A and B. For example, the Congress

recently eliminated cost-sharing requirements for various cancer screening tests and

vaccinations to help ensure that affordability is not a barrier to these important

services.

Question 3. You mentioned in your written testimony that incorporating cost-sharing changes into Medicare’s information systems would take time and resources. Do

you have an estimate as to the time and resources needed to make these system

changes?

The adoption of cost-sharing reforms, such as implementing a single deductible

or an out-of-pocket spending cap, would require significant improvements in the

Centers’ for Medicare and Medicaid Services (CMS) ability to track service use by

beneficiary. CMS is limited in that capacity today, not because Medicare is split into

parts A and B, but because of deficiencies in the agency’s information systems. Currently, Medicare’s systems focus on processing and paying claims submitted by providers. As one step in that processing, both part A and part B claims are sent to

a single program, the Common Working File, where spending by an individual beneficiary can be tracked. However, this software program, like some other software

CMS uses, does not always perform adequately and is difficult to modify or improve

because it is so antiquated. Many changes have been made to CMS’ systems in recent years because of the Balanced Budget Act and subsequent legislated revisions.

Similar shorter-term fixes might be made to track beneficiary cost sharing. We do

not have an estimate of the resources or time that would be needed. However, it

would be critical that enough resources and time be devoted to ensure the changes

perform correctly from the outset to avoid confusing and troubling significant numbers of beneficiaries.

Question 4. In your written testimony, you mentioned a phase-in to a unified program. How would you design such a phase-in? How would it soften some of the impact of a merged program?

Approximately 2 million individuals (5 percent of beneficiaries) are eligible for

Medicare but do not participate in the voluntary part B program and pay its separate monthly premium ($50 for 2001). A much smaller number, 400,000, are enrolled only in part B but not part A. Those enrolled in only one part of the program

often have private insurance from a previous employer or other source to make up

the difference. If Medicare parts A and B are combined and beneficiaries are required to participate fully in the unified program, beneficiaries who are now enrolled in only one part of the program would have to pay additional premiums for

coverage they may already have from another source. Requiring full participation

in a unified program would also increase costs to the government for care that is

now covered privately.

If Medicare is unified, providing for a phase-in period is one approach that might

reduce any unintended negative effects resulting from the reform. The Congress

could, for example, require new beneficiaries to participate in the unified program

while allowing existing beneficiaries the option of remaining in the current program

with its separate part A and part B structure. Other approaches could also be explored. For example, reform provisions might include all beneficiaries in a unified

Medicare program but allow those individuals who choose not to participate fully

to receive partial benefits.

Question 5. In your written testimony, you discussed various pilot projects that

CMS has conducted to break down the barriers between Medicare’s Part A and Part

B. What lessons can be learned from these demonstration projects that can be applied to improve the care provided to all Medicare beneficiaries?

Private insurers employ management techniques designed to improve the quality

and efficiency of services purchased, such as targeted beneficiary education, preferred provider networks, and coordination of services. The National Academy of Social Insurance (NASI) reviewed such private sector practices. NASI concluded that

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private sector practices could potentially improve Medicare but would need to be

tested to determine how well they could be adapted to reflect the uniqueness of

Medicare both as a public program and as the single largest purchaser of health

care. Medicare has experimented with innovations that bridge part A and part B services. For example, it tested the impact of making single ‘‘global’’ payments to selected hospitals for all services both hospital and physician related to coronary artery bypass surgery. Based on the results of this and other experiments, such innovative approaches may have the potential to cut program costs, save money for

beneficiaries, improve health outcomes, and increase beneficiary satisfaction with

the quality of care.

However, wide-scale implementation of some innovations may be difficult in a

large, public program such as Medicare. Private insurers typically have wide latitude in how they run their business. The adoption of some private sector approaches

may require new statutory authority for CMS. For example, CMS’ ability to encourage the use of preferred providers is limited, in part because the Medicare statute

generally allows any qualified provider to participate in the program. However, it

is important that CMS continue to test private sector innovations to determine their

effects and whether they can be adapted to Medicare. The Congress can then decide,

based on the test results, whether Medicare should permanently adopt the innovations.

Question 6. One of the key shortcomings of the Medicare program is its lack of

an overall cap on out-of-pocket costs for beneficiaries. If such a cap were put in

place, how could the additional costs to the program be balanced? How would a

merged program help facilitate Medicare’s adoption of a catastrophic cap?

The average beneficiary who obtained services in 1997 had a total liability for Medicare-covered services of $1,451, consisting of $925 in Medicare copayments and

deductibles in addition to the $526 in annual part B premiums. Total Medicare cost

sharing can be much higher for beneficiaries with extensive health care needs. For

example, in 1997 approximately 750,000 beneficiaries (2.5 percent) were liable for

more than $5,000.

Some have suggested imposing a cap on beneficiary out-of-pocket costs to protect

those who require extensive health care services. The additional cost of providing

this catastrophic coverage could be offset by raising the part B deductible or creating a combined deductible for part A and part B services. This would increase outof-pocket costs for a share of beneficiaries. However, in return, they would receive

additional insurance in the form of protection from catastrophic costs. If such an approach were adopted, it would be important consider how the entire package of costsharing reforms might affect beneficiaries’ out-of-pocket expenses.

Capping beneficiaries’ out-of-pocket expenses may be more easily accomplished in

conjunction with other program reforms that could include the creation of a more

unified program. However, such protection could be added within the current program structure. In either case, the Congress would need to decide on how to allocate

the cost of such coverage among beneficiaries and taxpayers.

Question 7. It has been argued that many of the benefits to be achieved through

consolidating Parts A and B of the Medicare program could be achieved through administrative action. It’s obvious that administrative action hasn’t been taken in

many years. Why is that the case? Is there something inherently difficult in implementing such changes by administrative fiat? How would you suggest that we facilitate the timely implementation of these improvements?

Rethinking the relationship between parts A and B has many potential benefits.

Some of the changes discussed to modernize Medicare, such as restructuring cost

sharing, instituting a single deductible, and adding a cap on beneficiaries’ out-ofpocket costs do require statutory changes. However, adopting a more global perspective regarding parts A and B in administering and assessing the program can have

benefits. Currently, the financial health of Medicare is largely judged by the solvency of the part A trust fund. A more comprehensive view of the program can lead

to a better understanding of the financial challenges Medicare faces. It is not essential that policymakers combine the trust funds or take legislative action to obtain

this perspective. In fact, the Medicare Trustees currently report one comprehensive

indicator of the program’s financial status: estimated total Medicare spending as a

percentage of the Gross Domestic Product. What is important is that both the public

and policy makers recognize that more comprehensive measures can better inform

the debate over necessary Medicare reforms.

Accomplishing more administratively is handicapped by not being able to view the

entire program’s impact on beneficiaries and providers on a more timely basis. Our

previous work shows that the Health Care Financing Administration (HCFA) operated Medicare with outdated information technology systems unsuited to meet reVerDate 11-MAY-2000 08:49 Sep 10, 2001 Jkt 000000 PO 00000 Frm 00070 Fmt 6633 Sfmt 6621 73734.TXT HCOM1 PsN: HCOM1
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quests for basic management information within reasonable time periods. For example, the agency could not readily track payment and service-use data at the beneficiary level. It will be important for the Congress to ensure that CMS has the capacity to carry out its mission in the 21stcentury. Such capacity is critical to implement desired reforms, make administrative changes, or inform Congressional debate

when course corrections seem necessary.

If you or your staff have any questions regarding this letter, please contact me

or Laura Dummit at (202) 512-7114.

Sincerely yours,

WILLIAM J. SCANLON

Director, Health Care Issues