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STRENGTHENING AND IMPROVING MEDICARE

HEARING

BEFORE THE

SUBCOMMITTEE ON HEALTH

OF THE

COMMITTEE ON ENERGY AND

COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

APRIL 9, 2003

Serial No. 108–22

Printed for the use of the Committee on Energy and Commerce

(

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

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

RICHARD BURR, North Carolina

Vice Chairman

ED WHITFIELD, Kentucky

CHARLIE NORWOOD, Georgia

BARBARA CUBIN, Wyoming

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi

VITO FOSSELLA, New York

ROY BLUNT, Missouri

STEVE BUYER, Indiana

GEORGE RADANOVICH, California

CHARLES F. BASS, New Hampshire

JOSEPH R. PITTS, Pennsylvania

MARY BONO, California

GREG WALDEN, Oregon

LEE TERRY, Nebraska

ERNIE FLETCHER, Kentucky

MIKE FERGUSON, New Jersey

MIKE ROGERS, Michigan

DARRELL E. ISSA, California

C.L. ‘‘BUTCH’’ OTTER, Idaho

JOHN D. DINGELL, Michigan

Ranking Member

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

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

KAREN MCCARTHY, Missouri

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

LOIS CAPPS, California

MICHAEL F. DOYLE, Pennsylvania

CHRISTOPHER JOHN, Louisiana

JIM DAVIS, Florida

THOMAS H. ALLEN, Maine

JANICE D. SCHAKOWSKY, Illinois

HILDA L. SOLIS, 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

CHARLIE NORWOOD, Georgia

Vice Chairman

BARBARA CUBIN, Wyoming

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi

STEVE BUYER, Indiana

JOSEPH R. PITTS, Pennsylvania

ERNIE FLETCHER, Kentucky

MIKE FERGUSON, New Jersey

MIKE ROGERS, Michigan

W.J. ‘‘BILLY’’ TAUZIN, Louisiana

(Ex Officio)

SHERROD BROWN, Ohio

Ranking Member

HENRY A. WAXMAN, California

RALPH M. HALL, Texas

EDOLPHUS TOWNS, New York

FRANK PALLONE, Jr., New Jersey

ANNA G. ESHOO, California

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

GENE GREEN, Texas

TED STRICKLAND, Ohio

LOIS CAPPS, California

BART GORDON, Tennessee

DIANA DEGETTE, Colorado

CHRISTOPHER JOHN, Louisiana

JOHN D. DINGELL, Michigan,

(Ex Officio)

(II)

C O N T E N T S

Page

Testimony of:

Berenson, Robert A., Senior Consultant, Academy Health ........................... 19

Buddy, Robert ................................................................................................... 50

Foster, Richard S., Chief Actuary, Center for Medicare and Medicaid

Services .......................................................................................................... 8

Grealy, Mary R., President, Healthcare Leadership Council ....................... 41

Kennelly, Barbara B., President, National Committee to Preserve Social

Security and Medicare .................................................................................. 46

Moon, Marilyn, Senior Fellow, The Urban Institute ..................................... 28

Rawlings, Susan, Head, Retiree Markets, Aetna Inc .................................... 23

Material submitted for the record by:

Alliance to Improve Medicare, prepared statement of .................................. 76

(III)

(1)

STRENGTHENING AND IMPROVING MEDICARE

WEDNESDAY, APRIL 9, 2003

HOUSE OF REPRESENTATIVES,

COMMITTEE ON ENERGY AND COMMERCE,

SUBCOMMITTEE ON HEALTH,

Washington, DC.

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

2322, Rayburn House Office Building, Hon. Michael Bilirakis

(chairman) presiding.

Members present: Representatives Bilirakis, Barton, Deal, Norwood, Shadegg, Buyer, Brown, Pallone, Stupak, Engel, Green,

Strickland, and Capps.

Staff present: Steve Tilton, health policy coordinator; Kathleen

Weldon, professional staff; Eugenia Edwards, legislative clerk; Amy

Hall, minority professional staff; Bridgett Taylor, minority professional staff; and Karen Folk, minority special staff.

Mr. BILIRAKIS. Good morning. I now call this hearing to order.

Obviously, the rule regarding opening statements and deferring

opening statements, etcetera, is in place.

Our hearing yesterday focused on designing a prescription drug

benefit as part of Medicare. Today, the Health Subcommittee will

consider ways to strengthen and improve Medicare with the goal

of improving the financial health of the program and ensuring that

future beneficiaries will be able to enjoy the security Medicare has

provided millions of Americans for almost 40 years.

Today there are 34 million Americans over the age of 65, 5.5 million people with disabilities, and 240,000 people with end stage

renal disease that participate in the Medicare program. The Federal Government spends nearly $250 billion annually to provide

health care benefits to these people. It is estimated that Medicare

will serve 77 billion Americans by 2030.

Medicare was established in 1965 by Congress and was structured around an acute patient care model to cover hospitalization

and physician visits. As we all know, the program has had great

difficulty keeping up with advances in medicine over the past 38

years, with the most glaring example being the fact that traditional

fee for service Medicare does not provide prescription drug coverage.

Medicare also does not cover preventative services in any rational fashion. While Medicare does cover preventative services for 10

different diseases and conditions, it does not offer other preventative benefits that would seem like common sense aspects of a modern, comprehensive health insurance product.

2

That is why it is essential for Congress to find ways to strengthen and improve Medicare, so it is truly a 21st century benefit and

to ensure its continued financial viability. As we will hear from

Rick Foster, the chief actuary for the Center for Medicare and Medicaid Services, the Hospital Insurance Trust Fund will go bankrupt

in the year 2026 under the current benefit structure, with HI Trust

Fund revenues falling short of program expenditures beginning in

2013.

In addition, it will take significant increases in beneficiary premiums to subsidize the Supplemental Medical Insurance Trust

Fund, which pays for Medicare Part B services. We are shirking

our responsibility to continue to argue that the solution to our

problems with Medicare is to tack on trillion dollar benefits with

no hint of meaningful reforms.

As Congress continues to debate the future of Medicare, this program and other entitlements are eating up a larger and larger

share of our gross domestic product. This is an unsustainable rate

of growth, and no amount of partisan rhetoric on either side of the

aisle is going to change that.

We have seven excellent witnesses here today. I hope that members take advantage of them and keep the grand-standing to a minimum. I know at the end of the day we all share the same goal—

and that is heartwarming; we all share the same goal—and that

is protecting Medicare’s future while finding ways to provide comprehensive health care coverage for our seniors and people with

disabilities.

I am now pleased to recognize the gentleman from Ohio for an

opening statement. Mr. Brown.

Mr. BROWN. Thank you, Mr. Chairman, and I apologize for being

a few minutes late.

I want to welcome my former colleague, Ms. Kennelly. Nice to

see you. And Ms. Moon—thank you, Dr. Moon, for joining us, and

all of you on the panel.

If yesterday’s hearing is any guide, there will be discussion in addition to discussions about strengthening and improving Medicare,

about whether we can afford to strengthen and approve this program or even maintain the program the way that it is. Let us dispense with that issue first.

During yesterday’s hearings, several colleagues expressed concern that Medicare is simultaneously barrelling toward insolvency

and jeopardizing the Nation’s economy by absorbing so much of our

GDP. How can a program partially funded out of general revenues

be barreling toward insolvency? Does the fact that we just increased the tax dollars devoted to the Department of Defense mean

that we rescued it from the brink of insolvency?

Taxes are a flexible funding mechanism. The President clearly

recognizes that taxes are not set in stone. He hasn’t hesitated to

propose tax cuts, even when those cuts produce budget deficits or

perhaps they produce insolvencies. But surely neither the President nor my friends on the other side of the aisle would propose

tax cuts if we truly believe that Medicare is at risk.

In his State of the Union address, the President called Medicare

the binding commitment of a caring society. I am sure the PresiVerDate 11-MAY-2000 08:38 Aug 12, 2003 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 87482.TXT HCOM1 PsN: HCOM1
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dent wouldn’t say that and then turn around and cut trillions from

Federal revenues while Medicare withers on the vine.

This Nation can afford Medicare. The President’s tax cuts will

cost between 2.3 percent and 2.7 percent of GDP over the next 75

years. The combined deficit in Medicare and Social Security—the

combined deficit in Medicare and Social Security will cost one-third

to one-half of that.

To paraphrase Jeanie Lambrew, a witness at one of last year’s

Medicare hearings, this isn’t about dollars. It is about priorities.

The question then becomes: how do we strengthen and improve

Medicare? Some of my Republican colleagues believe we should

abandon the traditional Medicare program. Seniors would be better

off, they say, choosing between and among private health plans.

The premise that insurance is like a car, that seniors would be

better off customizing their coverage to fit their health care needs,

is the biggest fallacy of the privatization campaign. People generally don’t attempt to customize their health insurance based on

their unique health care needs, because people generally can’t anticipate their unique health care needs.

When people do try to pick and choose coverage based on known

health care, you know, based on known health conditions, it is

called adverse selection. Creating a system characterized by multiple benefit packages and adverse selection means creating a system that is unstable and unfair. Some plans will be overpaid, some

underpaid. Some enrollees will bear disproportionate risk, others

will get off easy.

A reliable risk adjuster would help mitigate the problem, but we

don’t have a reliable risk adjuster, and God knows we have tried.

The fact is there is no incremental benefit to multiple benefit designs, the relative value of which is impossible for a prospective enrollee to assess.

We all need health insurance that covers medically necessary

care delivered by the health care providers we trust. Sounds a lot

like Medicare. And we all need coverage that lasts. Disappearing

health plans and shrinking benefits are hallmarks of the privatization efforts, the Medicare+Choice Program.

Instead of alleviating uncertainty, these plans breed it. No one

really wants coverage like that. Proponents of privatization argue

that Federal employees have a choice of private health plans. The

fact that FEHBP features a plethora of private health plans does

not mean FEHBP is a better system than Medicare or the best system out there.

FEHBP programs grew 11 percent in 2003. Senior social security

income grew by less than 4 percent. Last year seniors earned about

$14,000 on average. There is not much cushion there for unpredictable premium increases.

Some privatization proponents argue that plan choice makes

sense, not because health needs vary but because income does. The

premise that we are seeing is that wealthier individuals should be

able to choose less generous coverage because they can afford to

pay any balance out of pocket. But as we know from the under 65

market, it won’t be individuals, it won’t be wealthy individuals who

will go without comprehensive health insurance.

4

Lower income beneficiaries would be the ones relegated to inferior health plans, if we abandon traditional Medicare. It is difficult

to imagine how creating a two-tier health system featuring health

plans that may or may not provide lasting coverage, and may or

may not provide reliable coverage, that they possibly qualify as a

strategy for strengthening and improving Medicare.

We keep coming back to the same question: are we considering

Medicare privatization because there is merit to it or because my

friends on the other side of the aisle don’t like government programs?

The Heritage Foundation launched a Mediscare campaign in

1995. The goal was to privatize Medicare. This seems to be the culmination of those efforts. Medicare, the President said, is the binding commitment of a caring society. Should ideology or should common sense guide its future?

Thank you, Mr. Chairman.

Mr. BILIRAKIS. I thank the gentleman. Mr. Buyer for an opening

statement. I know you are chomping at the bit. Go ahead.

Mr. BUYER. No, I just—I can’t believe I work in the same institution as Mr. Brown.

Mr. BILIRAKIS. Well, you do.

Mr. BUYER. I mean, I remember in April 1995 getting a letter

from the Medicare trustees, many of whom were on President Clinton’s cabinet, of whom said Medicare was going to go bankrupt. So

let us don’t advance this 6 years later and then say someone else

made it up. That just—boy, I don’t understand that.

I like to have a clean record, and that really bothered me, Mr.

Brown. You just can’t make it up as you go. And I know sometimes

we get excited in the rhetoric, but, please, I would invite you to

look at the April letter of 1995 from the Medicare trustees.

I will yield back, so I can retain the rest of my time.

Mr. BILIRAKIS. The gentleman yields. Ms. Capps. Let us see, no,

Mr. Pallone.

Ms. CAPPS. I am going to waive.

Mr. BILIRAKIS. You are going to waive?

Ms. CAPPS. I have an opening statement to submit.

Mr. BILIRAKIS. Mr. Pallone.

Mr. PALLONE. Thank you, Mr. Chairman. I am opposed to

privatizing Medicare, both in general as well as for purposes of providing a prescription drug plan. And my fear, Mr. Chairman, is

that the Republicans will propose a voucher-type system under

which private health plans compete with one another as well as

with traditional Medicare.

And such a proposal raises several problems for me, Mr. Chairman. First, it is likely that healthier beneficiaries will be the ones

to sign up for private plans, and this leaves the sicker beneficiaries

in a traditional Medicare program. This will inevitably drive up the

costs of traditional Medicare, and as a result the per person cost

of the traditional Medicare program will escalate, putting people

who need health care the most at greater risk of higher expenses

and fewer benefits.

Also, private health plans have abandoned hundreds of thousands of seniors for Medicare+Choice plans, and yet the Republican

proposals seem to rely on private health plans for Medicare reVerDate 11-MAY-2000 08:38 Aug 12, 2003 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 87482.TXT HCOM1 PsN: HCOM1
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structuring. In the last 2 years, over 100 plans dropped out of the

Medicare+Choice system all together, and over 100 plans reduced

their service areas. And many other plans increased premiums and

reduced benefits.

Compared to private health insurance plans, Medicare has done

a much better job at controlling per person health care costs.

Therefore, there is no reason to turn Medicare over to the private

sector. Empirical data has shown over the last 30 years that per

person private health insurance quotes have increased faster than

Medicare. Therefore, protecting Medicare’s solvency should not depend on private health plans. I don’t understand the rationale.

Some of the Republican proposals give unwarranted credence to

the Federal Employees Health Benefit Plan as the model for restructuring Medicare. But that system has not moderated costs better than Medicare. It serves a much smaller population that is

younger, healthier, wealthier, and more attractive to private insurers. And the number of HMOs offering health coverage to Federal

employees and retirees declined from 476 in 1996 to 277 in 2000.

My point, Mr. Chairman, is that the Medicare program is popular and effective. It has served seniors well for 37 years, and proposals to restructure the program seem unreliable and likely to deliver less services to seniors at essentially greater cost.

Most private health plans that provide services for seniors have

unimpressive records of covering prescription drugs. Seniors should

not have to rely on private health plans as proposed by President

Bush to receive crucial prescription drug coverage.

In summary, Mr. Chairman, of course this is the same thing I

essentially said yesterday. Whether you are talking about Medicare

restructuring in general, or you are talking about trying to provide

a prescription drug plan, there is no empirical evidence based on

what we have seen in the last few years to suggest that privatization or competition with privatization is going to improve the situation, either in terms of an overall restructuring of Medicare or in

providing prescription drugs.

And I don’t understand how either the President or the Republicans think that somehow they are going to drive—they are going

to operate on the experience of the last few years to improve the

system using private plans. It doesn’t make sense.

Mr. BILIRAKIS. The gentleman’s time has expired. Had you finished?

Mr. PALLONE. Yes, thank you.

Mr. BILIRAKIS. Okay. Dr. Norwood.

Mr. NORWOOD. Mr. Chairman, I am still breathless from Mr.

Brown’s opening statement, so I will waive my time and ask for a

lengthy 8 minutes in questioning.

Mr. BILIRAKIS. Let us see. Who is—Mr. Green.

Mr. GREEN. Thank you, Mr. Chairman, and I will give my opening statement because I am getting ready to go to a markup in the

Telecom Subcommittee. But I appreciate your continuing effort on

having these hearings, particularly yesterday, and I would like to

welcome a fellow Texan.

The Houstonian, Robert Buddy, who is on the panel today, lives

just northwest of our district, I know in Congressman Brady’s disVerDate 11-MAY-2000 08:38 Aug 12, 2003 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 87482.TXT HCOM1 PsN: HCOM1
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trict. And I have up until 1960 there, so you are just northwest of

us.

I think we all agree, especially after yesterday’s hearing on Medicare prescription drug benefit, that there is little doubt that the

Medicare program needs improvement. The most obvious need is to

modernize Medicare to include prescription drug benefit, although

additional improvements in the area of disease management, care

coordination, and prevention service should also be discussed.

I have two pieces of legislation. One, the first, the Geriatric Care

Act of 2003, would make sure we have enough geriatricians physicians to treat our elderly. There is an artificial ceiling in the law,

and right now there are only 9,000 certified geriatricians. And that

number is expected to decline over the years, so we need to address

that.

The other bill is the access to diabetes screening services for

Medicare coverage for recipients. Diabetes is so important, not only

in Medicare but also to our whole population, but we need to do

better on screening for diabetes, particularly with senior citizens.

These two bills are examples of how we can make traditional fee

for service Medicare respond to the needs, and should be considered in the context of Medicare reform.

Unfortunately, there are far too many people who disregard ideas

of reform fee for service Medicare, because they want to keep Medicare program outdated to justify the desire to turn it into a premium support or defined contribution program. By shifting to a defined contribution rather than defined benefit, we can limit the

amount the Federal Government will spend on health care. And we

are concerned about that, but we also know with our elderly population increasing we are going to spend more money.

Mr. Chairman, I would like to read from an editorial in The

Houston Chronicle just this last Monday. And I will ask unanimous

consent for both my statement and the editorial to be placed into

the record.

Mr. BILIRAKIS. Without objection.

Mr. GREEN. It talks about, ‘‘Take Care, President’s Promise, One

Health Policy and Proposes Another One. Under the President’s

plan, full coverage of prescription drugs should be withheld from

Medicare patients who do not agree to join managed care plans.

Such plans sometimes provide affordable health care precisely because they limit patient choice, discourage expensive or innovative

treatment, and reserve for company bean counters many decisions

once made by patients’ doctors.’’

‘‘Competition among private insurance plans intended to keep

the Medicare program from going broke in 2030 or before. Unfortunately, competition is just as likely to produce insurance company

losses leading to lost of disrupted coverage and the care for patients. That is the case in Houston where several HMOs pulled out

of the market, leaving thousands of Medicare patients without a

doctor and scrambling to make alternative arrangements. Nowadays many doctors—their eyes are fixed on the bottom line—

refuse to see new elderly patients.’’

I would like to put the whole editorial into the record. And thank

you, Mr. Chairman.

Mr. BILIRAKIS. Without objection.

7

Mr. GREEN. I yield back my time.

Mr. BILIRAKIS. The Chair thanks the gentleman. Mr. Strickland

for an opening statement.

Mr. STRICKLAND. I would like to have 8 minutes for questioning.

So thank you, Mr. Chairman.

Mr. BILIRAKIS. You have that right. Thank you.

Without objection, of course, the opening statement of all members of the subcommittee will be made a part of the record. We will

now go into——

[Additional statement submitted for the record follows:]

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

ENERGY AND COMMERCE

Thank you, Mr. Chairman for holding this very important hearing. The Medicare

program is a critical part of our health care system, providing

health insurance for 40 million aged and disabled beneficiaries. Yet this program

suffers from a number of shortcomings. Because the program has not been significantly updated since its creation in the 1960s, it does not provide many of the benefits that are now commonplace in the private health insurance sector, most notably

prescription drugs.

When it was created in 1965, the Medicare program mirrored the type of insurance that was available in the private sector. But because each significant change

to Medicare requires an act of Congress, the program has not adapted to the changing healthcare marketplace as quickly as private sector plans, leaving beneficiaries

without coverage that is commonplace in other forms on insurance.

Medicare also faces some very serious long-term fiscal challenges. As the President notes in his budget, the present value of Medicare’s unfunded liabilities totals

$13.3 trillion—that’s the excess of benefits promised to future retirees over the expected tax revenues dedicated to Medicare. We clearly need to add a prescription

drug benefit to Medicare to meet the needs of our seniors. But we must also remain

cognizant of the fiscal burden we are placing on our children and grandchildren by

expanding entitlement spending.

Currently, Social Security, Medicare, and Medicaid comprise more than 40 percent of the federal budget. According to the General Accounting Office, these three

programs alone could consume nearly three-quarters of the federal budget by 2030

if no changes are made. Such a scenario will leave little room for spending on other

priorities.

Looking at these numbers another way, in 2000, spending on these three entitlement programs was 7.6 percent of our nation’s gross domestic product (GDP). If no

changes are made in these programs, by 2030 they will consume nearly 14 percent

of GDP, and by 2075, more than 20 percent of our nation’s resources—one-fifth of

our economic output—will be going to government entitlement programs. This is

simply not sustainable.

Consider also that since World War II, federal tax revenues have generally been

between 17 and 20 percent of GDP. If entitlement programs alone are consuming

more than 20 percent of GDP by 2075, we will either be experiencing an unprecedented level of taxation to pay for these programs—while maintaining other discretionary spending—or else all other functions of the federal government will have

ceased to exist.

If we allow our entitlement programs to simply continue on their current course,

without any changes, we will have one of two options. We will either have to raise

taxes on working families, making it harder for those families to make ends meet,

provide for their children, send their kids to college, and save for their own retirement. Or we will have to cut back on the other services the government provides,

such as education funding, medical research, defense, and homeland security. These

are stark choices.

Therefore, as we address the short-term concerns we have with Medicare, we

must also consider the long-term implications of our actions. Simply adding to the

costs of our entitlement programs, without enacting reforms to strengthen these programs for the future, will increase the burden we leave for our children and grandchildren.

As the Energy and Commerce Committee takes up its Medicare modernization

legislation, we will do our best to balance the needs of both beneficiaries and taxpayers. We will be looking to improve the Medicare benefit package, increase the

8

choices available to our seniors, put the program on a sound financial footing, and

bring Medicare into the 21st century.

Thank you. I look forward to hearing from all of our witnesses.

Mr. BROWN. Mr. Chairman, can I ask unanimous consent to

place in the record this chart from the trust fund report? It shows

that the 1995-96, the Medicare trust fund’s life expectancy in response to Mr. Buyer, was only 5 years. Now it is 23 years, and I

would just like to put that——

Mr. BILIRAKIS. Without objection, that will be the case.

All right. I want to, again, thank the witnesses for being here.

Your written statement that you have submitted is a part of the

record. We would hope that what you would do is supplement or

complement it. And start off with, I think probably rightly so, with

Mr. Foster.

Mr. Rick Foster is the Chief Actuary of the Center for Medicare

and Medicaid Services. I am going to introduce all of you here at

one time I guess, if I may. Dr. Robert Berenson is Senior Consultant with Academy Health, located here in Washington, D.C. Ms.

Susan Rawlings is Head of the Retiree Markets with Aetna Inc.

Marilyn Moon, Dr. Marilyn Moon is Senior Fellow at The Urban

Institute. Ms. Mary Grealy is President of Healthcare Leadership

Council. Ms. Barbara Kennelly, a former colleague of ours, longtime colleague of ours—welcome, Barbara——

Ms. KENNELLY. Thank you.

Mr. BILIRAKIS [continuing] is President of the National Committee to Preserve Social Security and Medicare. And Mr. Robert

Buddy is a Medicare recipient, as I understand it.

Mr. Buddy, I hope you hear all of this rhetoric up here. We talk

about wanting to improve things. We don’t say what plan we want.

Nowhere in my opening statement did I talk about a particular

plan privatizing or anything of that nature, but we still try to get

the job done in spite of the fact that a lot of the grand-standing

that I had hoped we would not have has taken place. Please don’t

get too discouraged.

In any case, let us start off, Mr. Foster. Please proceed, sir. You

have 5 minutes.

STATEMENTS OF RICHARD S. FOSTER, CHIEF ACTUARY, CENTER FOR MEDICARE AND MEDICAID SERVICES; ROBERT A.

BERENSON, SENIOR CONSULTANT, ACADEMY HEALTH;

SUSAN RAWLINGS, HEAD OF RETIREE MARKETS, AETNA

INC.; MARILYN MOON, SENIOR FELLOW, THE URBAN INSTITUTE; MARY R. GREALY, PRESIDENT, HEALTHCARE LEADERSHIP COUNCIL; BARBARA B. KENNELLY, PRESIDENT, NATIONAL COMMITTEE TO PRESERVE SOCIAL SECURITY AND

MEDICARE; AND ROBERT BUDDY

Mr. FOSTER. Thank you. Chairman Bilirakis, Representative

Brown, distinguished members of the subcommittee, thank you for

inviting me to testify today about the financial outlook for the

Medicare program. I will briefly summarize the most important

findings from the 2003 Annual Report of the Medicare Board of

Trustees.

Let me emphasize that the purpose of the trustees’ report is to

evaluate the financial status of the Medicare trust funds. SpecifiVerDate 11-MAY-2000 08:38 Aug 12, 2003 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6602 87482.TXT HCOM1 PsN: HCOM1
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cally, are the trust fund income and assets provided under current

law sufficient to enable the payment of benefits and administrative

expenses?

This is a fundamentally important question, because the existence of a positive trust fund balance provides the statutory authority to pay benefits. But it is not the only question. One can also

ask about the long-range financial sustainability of Medicare.

Mr. BILIRAKIS. Can you pull that mike closer, Mr. Foster? I am

not sure how much help it might be, but——

Mr. FOSTER. Sure. Is that any better?

Mr. BILIRAKIS. Yes. Can you hear back there? That is the point.

It is a little better, yes.

Mr. FOSTER. You can also ask about the financial impact of Medicare on the Federal budget. These issues are very different, but

they are often confused and treated interchangeably, which they

should not be.

I will focus on the financial status of Medicare, and, in particular, I will note that the two Medicare trust funds are financed

by completely different approaches. The Hospital Insurance Trust

Fund, or Part A of Medicare, is financed primarily by a portion of

the FICA and SECA payroll taxes on workers’ earnings. And the

Hospital Insurance or HI tax rate is fixed into law. It won’t change

without further legislation.

In contrast, supplementary medical insurance, or Part B of Medicare, is financed about 25 percent by beneficiary premiums and

about 75 percent by Federal general revenues. And under the law,

these amounts are, in fact, changed, updated every year, to match

the current level of costs.

Now, by law, these two trust funds are distinct financial entities.

There is no provision for interchanging amounts back and forth between them, and that is why you have to look at the financial status of the two funds separately.

The projections that the trustees make are made assuming that

current law continues without change indefinitely. These projections are necessarily uncertain, especially over very long time horizons like the trustees’ 75-year projection period. So the projections

are useful for informing policy development, but they should be

used only with the full awareness of their limitations and their uncertainty.

I don’t think I need to tell any of you that the basic challenge

in financing health care, not only Medicare but health care generally, relates to the fact that expenditures tend to grow by the increases in health care prices, utilization, and the intensity or the

average complexity of health care services. And the collective

growth in these factors is almost always greater than the increase

in workers’ earnings or the economy.

Moreover, for Medicare of course we are facing the well-known

problem associated with the retirement of the baby boom, such that

in the future the number of beneficiaries will increase much more

rapidly than the number of workers. Together these factors give us

the following projection—that total Medicare costs, as a percentage

of GDP, would increase from about 2.6 percent today to over 5 percent by 2035, and over 9 percent by the end of the 75-year period.

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The Hospital Insurance Trust Fund itself is in reasonably good

shape for the near future. The income to the trust fund is projected

to be adequate to cover expenditures for roughly the next 15 years.

Thereafter, assets would have to be drawn down to cover the trust

fund deficits. And as Chairman Bilirakis mentioned, the assets

would be exhausted in 2026 under the trustees’ intermediate projections without corrective legislation.

At the end of the 75-year period, the scheduled tax revenue for

hospital insurance would be sufficient to cover only a little less

than one-third of the projected benefits.

For the Supplementary Medical Insurance Trust Fund, remember, the fundamental difference from hospital insurance. Namely,

we reset the financing every year, so SMI Trust Fund income will

keep pace with expenditures, and the trust fund will not go broke.

That is the good news.

However, there are significant adverse implications that continue

in rapid growth in SMI expenditures, both for beneficiaries and for

the Federal budget. A good example occurred—or a bad example—

in 2002 when SMI costs increased 11.6 percent. We can talk about

the reasons for that if time permits. That growth rate, together

with the consolidated appropriations resolution that was recently

enacted increasing physician payments, together will imply that

this year we expect to run a deficit in SMI of about $7.4 billion.

So we will have to raise beneficiary premiums and general revenues for next year by over 12 percent to match this new higher

level of expenditures.

Based on these projections, the Board of Trustees recommends

prompt attention to the financial challenges facing Medicare, and

I pledge the Office of the Actuary’s continuing assistance, with the

efforts by Congress and the administration, to develop effective solutions to these challenges.

[The prepared statement of Richard S. Foster follows:]

PREPARED STATEMENT OF RICHARD S. FOSTER, CHIEF ACTUARY, CENTERS FOR

MEDICARE & MEDICAID SERVICES

Chairman Bilirakis, Mr. Brown, distinguished Subcommittee members, thank you

for inviting me to testify today about the financial outlook for the Medicare program

as shown in the recently released 2003 annual report of the Medicare Board of

Trustees. I welcome the opportunity to assist you in your efforts to ensure the future financial viability of the nation’s second largest social insurance program—one

that is a critical factor in the income security of the aged and disabled populations.

The Trustees Report focuses on the financial status of the Medicare trust funds

under current law—that is, whether these funds have sufficient revenues and assets

to enable the payment of Medicare benefits and administrative expenses. This analysis compares each trust fund’s statutory income, from all sources, to its expenditures and determines whether the fund is operating with a surplus or a deficit in

a given year. Most of my testimony is based on this traditional ‘‘trust fund perspective.’’ I will also comment briefly on a ‘‘budget perspective,’’ that is, the impact of

Medicare on the Federal budget.

The financial outlook for the Medicare program presents a mixed picture. Over

the next 10 years, the Hospital Insurance (HI) and Supplementary Medical Insurance (SMI) trust funds are adequately financed and meet the Trustees’ formal tests

for short-range financial adequacy. However, HI and SMI expenditures are projected

to continue to grow more rapidly than workers’ earnings or the economy. HI tax revenues are projected after 2012 to fall increasingly short of program expenditures,

eventually covering less than one-third of estimated costs by the end of the Trustees’

75-year projection period. The depletion of the HI trust fund, which had been projected for 2030 in last year’s Trustees Report, is now projected to occur in 2026. For

SMI, continuing rapid expenditure growth would place growing financial burdens

11

1Federal Insurance Contributions Act and Self-Employment Contributions Act, respectively.

both on beneficiaries and on the Federal budget. The SMI trust fund would remain

in financial balance indefinitely, however, due to the annual redetermination of program financing.

Background

Roughly 41 million people were eligible for Medicare benefits in 2002. HI, or ‘‘Part

A’’ of Medicare, provides partial protection against the costs of inpatient hospital

services, skilled nursing care, post-institutional home health care, and hospice care.

SMI (‘‘Part B’’) covers most physician services, outpatient hospital care, home health

care not covered by HI, and a variety of other medical services such as diagnostic

tests, durable medical equipment, and so forth.

Only about 22 percent of HI enrollees received some reimbursable covered services

during 2002, since hospital stays and related care tend to be infrequent events even

for the aged and disabled. In contrast, the vast majority of enrollees incur reimbursable SMI costs because the covered services are more routine and the annual deductible for SMI is only $100.

The two parts of Medicare are financed on totally different bases. HI costs are

met primarily through a portion of the FICA and SECA payroll taxes.1 Of the total

FICA tax rate of 7.65—percent of covered earnings, payable by employees and employers, each, HI receives 1.45—percent. Self-employed workers pay the combined

total of 2.90 percent. Following the Omnibus Budget Reconciliation Act of 1993, HI

taxes are paid on total earnings in covered employment, without limit. Other HI income includes a portion of the income taxes levied on Social Security benefits, interest income on invested assets, and other minor sources.

SMI enrollees pay monthly premiums ($58.70 in 2003) that cover about 25 percent

of program costs. The balance is paid by general revenue of the Federal government

and a small amount of interest income.

The HI tax rate is specified in the Social Security Act and is not scheduled to

change at any time in the future under present law. Thus, program financing cannot be modified to match variations in program costs except through new legislation.

In contrast, SMI premiums and general revenue payments are reestablished each

year to match estimated program costs for the following year. As a result, SMI income automatically matches expenditures without the need for legislative adjustments.

Each part of Medicare has its own trust fund, with financial oversight provided

by the Board of Trustees. My discussion of Medicare’s financial status is based on

the actuarial projections contained in the Board’s 2003 report to Congress. Such projections are made under three alternative sets of economic and demographic assumptions, to illustrate the uncertainty and possible range of variation of future

costs, and cover both a ‘‘short range’’ period (the next 10—years) and a ‘‘long range’’

(the next 75 years). The projections are not intended as firm predictions of future

costs, since this is clearly impossible; rather, they illustrate how the Medicare program would operate under a range of conditions that can reasonably be expected

to occur. The projections shown in this testimony are based on the Trustees’ ‘‘intermediate’’ set of assumptions.

Short-range financial outlook for Hospital Insurance

Chart 1 shows HI expenditures versus income over the last 10 years and projections through 2012. For most of the program’s history, income and expenditures

have been very close together, illustrating the pay-as-you-go nature of HI financing.

The taxes collected each year are intended to be roughly sufficient to cover that

year’s costs. Surplus revenues are invested in special Treasury securities.

During 1990-97, HI costs increased at a faster rate than HI income. Expenditures

exceeded income by a total of $17.2 billion in 1995-97. Prior to the Balanced Budget

Act of 1997, this trend was expected to continue, with costs growing at about 8 percent annually, against revenue growth of only 5 to 6 percent. The 1995-97 shortfalls

were met by redeeming trust fund assets, but in the absence of corrective legislation, assets would have been depleted in about 2001. The Medicare provisions in the

Balanced Budget Act were designed to help address this situation. As indicated in

chart 1, these changes—together with subsequent low general and medical inflation

and increased efforts to address fraud and abuse in the Medicare program—resulted

in lower HI—expenditures during 1998-2000 and trust fund surpluses totaling $61.8

billion over this period.

The Board of Trustees has recommended maintaining HI assets equal to at least

one year’s expenditures as a contingency reserve. As indicated in chart 2, HI assets

at the beginning of 2003 represented about 150 percent of estimated expenditures

12

for the year. The HI trust fund is estimated to continue to experience significant

surpluses for roughly the next 15 years. After 2017, however, expenditures are projected to again exceed income. As shown in chart 2, assets would initially accumulate rapidly but then be drawn down to cover the resulting shortfalls. The trust fund

would be exhausted in 2026 under the Trustees’ intermediate assumptions.

The depletion date estimated in the 2003 Trustees Report represents a significant

deterioration compared to last year’s estimate (2030). The change arises both from

lower projected payroll tax revenues and higher projected inpatient hospital expenditures. The lower payroll taxes are the result of a downward revision by the Bureau

of Economic Analysis to their estimates of historical wage and salary disbursements.

The higher inpatient hospital cost projections result from more inpatient hospital

admissions in 2002 than previously estimated and a greater increase in the average

complexity of admissions. Overall, Medicare payments for inpatient hospital care increased by almost 10—percent in 2002—significantly above normal rates of growth.

Long-range financial outlook for Hospital Insurance

The interpretation of dollar amounts is very difficult over extremely long time horizons like the 75-year projection period used in the Trustees Report. For this reason, long-range tax income and expenditures are expressed as a percentage of the

total amount of wages and self-employment income subject to the HI payroll tax (referred to as ‘‘taxable payroll’’). The results are termed the ‘‘income rate’’ and ‘‘cost

rate,’’ respectively. Projected long-range income and cost rates are shown in chart

3 for the HI program.

Past income rates have generally followed program costs closely, rising in a stepwise fashion as the payroll tax rates were adjusted by Congress. Income rate growth

in the future is minimal, due to the fixed tax rates specified in current law. Trust

fund revenue from the taxation of Social Security benefits increases gradually, because the income thresholds specified in the Internal Revenue Code are not indexed.

Over time, an increasing proportion of Social Security beneficiaries will incur income taxes on their benefit payments.

Past HI cost rates have generally increased over time but have periodically declined abruptly as the result of legislation to expand HI coverage to additional categories of workers, raise (or eliminate) the maximum taxable wage base, introduce

new payment systems such as the inpatient prospective payment system, etc. Cost

rates decreased significantly in 1998-2000 as a result of the Balanced Budget Act

provisions together with strong economic growth. The cost rate increased somewhat

in 2001 and 2002 as a result of the Benefit Improvement and Protection Act of 2000

and the 2001 economic recession. In general, HI costs are expected to increase faster

than taxable payroll, because increases in the prices, utilization, and intensity of

health care services collectively exceed increases in workers’ earnings. After 2006,

cost rates are projected to increase steadily for these reasons and to accelerate significantly with the retirement of the baby boom, beginning in 2010. By the end of

the 75-year period, scheduled tax income would cover less than one-third of projected expenditures.

The average value of the financing shortfall over the next 75 years—known as the

actuarial deficit—is 2.40 percent of taxable payroll. This deficit could be closed by

an immediate increase of 1.2 percentage points in the HI payroll tax rate, payable

by employees and employers, each. (The projected deficit could also be eliminated

by many other revenue increases and/or expenditure reductions.) Note, however,

that such a change would correct the deficit only ‘‘on average.’’ Initially, HI revenue

would be significantly in excess of expenditures, but by the end of the period, only

about one-third of the projected deficit would be eliminated.

The effect of the baby boom’s retirement on Social Security and Medicare is relatively well known, having been discussed at length for nearly 30 years. Basically,

by the time the baby boom cohorts have retired, there will be nearly twice as many

HI beneficiaries as there are today. When the HI program began, there were 4.5

workers in covered employment for every HI beneficiary. As shown in chart 4, this

ratio for 2002 is just under 4.0 workers per beneficiary. With the advent of the baby

boom’s retirement, the number of beneficiaries will increase more rapidly than the

labor force, resulting in a decline in this ratio to 2.4 in 2030 and 2.0 in 2077, based

on the intermediate projections. Other things being equal, there would be a corresponding increase in HI costs as a percentage of taxable payroll.

There are other demographic effects beyond those attributable to the varying

number of births in past years. In particular, life expectancy has improved substantially in the U.S. over time and is projected to continue doing so. The average remaining life expectancy for 65-year-olds increased from 12.4 years in 1935 to 17.5

years currently, with an estimated further increase to about 22—years at the end

of the long-range projection period. Medicare costs are also sensitive to the age disVerDate 11-MAY-2000 08:38 Aug 12, 2003 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6621 87482.TXT HCOM1 PsN: HCOM1
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2Financing for calendar year 2003 was set in September 2002, before data showing the full

extent of the 2002 expenditure increase were available and before the Consolidated Appropriations Resolution, 2003 was enacted. 3The growth in average copayment costs over this period is reduced significantly by (i) the

fixed $100 deductible applicable to SMI services, and (ii) the gradual correction of an excessive

level of beneficiary coinsurance on outpatient hospital services, as provided for in the Balanced

Budget Act of 1997 and subsequent legislation.

tribution of beneficiaries. Older persons incur substantially larger costs for medical

care, on average, than younger persons. Thus, as the beneficiary population ages

over time they will move into higher-utilization age groups, thereby adding to the

financial pressures on the Medicare program.

Financial outlook for Supplementary Medical Insurance

Chart 5 presents estimates of the short-range outlook for SMI and is generally

similar to the information presented in chart 1 for the HI trust fund. Two key differences are evident: First, the income and expenditure curves for SMI are nearly

indistinguishable in the future. As noted previously, SMI premiums and general

revenue income are reestablished annually to match expected program costs for the

following year. Thus, the program will automatically be in financial balance, regardless of future program cost trends. The second difference is that—in contrast to the

decline in HI expenditures during 1998-2000—SMI expenditures increased at an average rate of 6.9 percent over this period.

As with HI, the 2002 SMI expenditures were significantly higher than expected,

having increased 11.6 percent for the year. Preliminary data indicate that the rapid

growth was due in part to (i) the continuing transfer of certain home health services

from HI to SMI as specified in the Balanced Budget Act of 1997, (ii) a 7-percent

increase in spending on physician services, despite a negative 5.4-percent payment

update, (iii) a 20-percent increase in durable medical equipment spending, and (iv)

a 25-percent rise in physician-administered drug spending. These cost increases, together with the recent enactment of legislation increasing Medicare payment rates

to physicians effective March 1, 2003, will result in an estimated SMI trust fund

deficit of $7.4 billion in 2003.2 Program financing for 2004 and later will be established at levels sufficient to cover the higher expenditures. As a consequence, the

monthly SMI premium is estimated to increase from $58.70 in 2003 to about $66

in 2004, with general revenue transfers increasing at a correspondingly rapid rate.

Chart 6 shows projected long-range SMI expenditures and premium income as a

percentage of GDP. Under present law, beneficiary premiums will continue to cover

approximately 25 percent of total SMI costs, with the balance drawn from general

revenues. In the long run, expenditures are projected to increase at a significantly

faster rate than GDP, for largely the same reasons underlying HI cost growth.

Although SMI is automatically in financial balance, the program’s continuing

rapid growth in expenditures places an increasing burden on beneficiaries and the

Federal budget. In 2002, for example, about 6.8 percent of a typical 65-year-old’s Social Security benefit was withheld to pay the monthly SMI premium of $54.00, and

another 8.9 percent was required to cover average deductible and coinsurance expenditures for the year, for a total of 15.7 percent. Twenty years later, under the

intermediate assumptions, the same beneficiary’s premium and copayment costs

would average 23 percent of his or her benefit.3 Similarly, SMI general revenues in

fiscal year 2002 were equivalent to 7.8 percent of the personal and corporate Federal income taxes collected in that year. If such taxes remain at their current level,

relative to the national economy, then SMI general revenue financing in 2070 would

represent 30 percent of total income taxes.

Combined HI and SMI expenditures

The financial status of the Medicare program is appropriately evaluated for each

trust fund separately, as summarized in the preceding sections. By law, each fund

is a distinct financial entity, and the nature and sources of financing are very different between the two funds. This distinction, however, frequently causes greater

attention to the HI trust fund—its projected year of asset depletion in particular—

and less attention to SMI, which does not face the prospect of depletion. It is important to consider the total cost of the Medicare program and its overall sources of

financing, as shown in chart 7. Interest income is excluded since, under present law,

it would not be a significant part of program financing in the long range.

Combined HI and SMI expenditures are projected to increase from 2.6 percent of

GDP to about 9.3 percent in 2077, based on the Trustees’ intermediate set of assumptions. In past years, total income from HI payroll taxes, income taxes on Social

Security benefits, HI and SMI beneficiary premiums, and SMI general revenues was

very close to total expenditures. Over the next 10 years, such Medicare revenues

14

are estimated to slightly exceed program expenditures, reflecting the automatic financing of SMI plus an expected excess of HI tax income over expenditures. Thereafter, however, overall expenditures are expected to exceed aggregate revenues.

Again, the growing difference arises from the projected imbalance between HI tax

income and expenditures—since throughout this period, SMI revenues would continue to approximately match SMI expenditures.

Over time, SMI premiums and general revenues would continue to grow rapidly,

since they would keep pace with SMI expenditure growth under present law. HI

payroll taxes are not projected to increase as a share of GDP, primarily because no

further increases in the tax rates are scheduled under present law. Thus, as HI

sources of revenue become increasingly inadequate to cover HI costs, SMI premiums

and general revenues would represent a growing share of total Medicare income.

‘‘Trust fund’’ versus ‘‘budget’’ perspectives

Medicare’s financial operations can be considered from two different viewpoints:

a ‘‘trust fund perspective’’ and a ‘‘budget perspective.’’ The Trustees Report reflects

the perspective of the trust funds, since its purpose is to determine the financial

status of these funds by assessing whether they have sufficient revenues and assets

to enable the payment of Medicare benefits and administrative expenses. From this

trust fund perspective, all types of income are equivalent, and their collective adequacy in covering expenditures is paramount.

In particular, the existence of trust fund assets provides the statutory authority

to make benefit payments and cover other expenditures. Medicare benefits can be

paid if and only if the relevant trust fund has sufficient assets. Congress established

the trust fund mechanism for financing Medicare (as well as Social Security and certain other Federal programs) in part for the financial discipline it imposes and also

to serve as an early warning if program financing and expenditures fall out of balance. In contrast, the Federal budget focuses on taxes and other amounts received by

the government from the public and on amounts paid to the public in the form of

benefits, government purchases from the private sector, wages to Federal employees, etc. If aggregate receipts from the public exceed total outlays to the public, then

the Federal government has a budget surplus; the opposite relationship results in

a Federal budget deficit. In the context of the Federal budget, amounts paid from

the general fund of the Treasury to a Federal trust fund, referred to as

‘‘intragovernmental transfers,’’ have no impact on the overall budget surplus or deficit and consequently are excluded from consideration.

In the budget context, one can look at the public receipts and outlays associated

with Medicare and determine the program’s impact on the Federal budget—that is,

whether Medicare is making a net contribution to the budget or is drawing from

the budget. Whether the HI or SMI trust fund is running a surplus or deficit may

have little or nothing to do with whether Medicare is contributing to a Federal

budget surplus or deficit. Due in part to the similar terminology, however, people

have sometimes confused these two different issues.

The differences between the trust fund and budget perspectives can be clarified

by examining how Medicare revenues are treated under each approach. The following table shows estimated Medicare income by category for 2003 under the

Trustees’ intermediate assumptions and compares these amounts with expenditures

under the two perspectives.

Estimated Medicare trust fund operations in calendar year 2003: ‘‘Trust fund perspective’’

versus ‘‘budget perspective’’

(In billions)

HI SMI Total

Income:

Receipts from the public:

Payroll taxes ......................................................................................................................... $155.6 — $155.6

Income taxes on Social Security benefits ............................................................................ 6.3 — 6.3

Premiums .............................................................................................................................. 1.6 $27.4 29.0

Other ..................................................................................................................................... 0.7 — 0.7

Subtotal ............................................................................................................................ 164.1 27.4 191.5

Intragovernmental transfers:

Interest on trust fund assets ............................................................................................... 15.3 2.0 17.3

General revenues .................................................................................................................. 0.4 86.2 86.6

15

Estimated Medicare trust fund operations in calendar year 2003: ‘‘Trust fund perspective’’

versus ‘‘budget perspective’’—Continued

(In billions)

HI SMI Total

Subtotal ............................................................................................................................ 15.7 88.2 103.9

Total trust fund income ............................................................................................................ 179.8 115.6 295.4

Expenditures ............................................................................................................................. 156.1 123.0 279.2

Trust fund surplus or deficit 1 .................................................................................................. 23.7 -7.4 16.3

Net impact on Federal budget 2 ............................................................................................... 8.0 -95.7 -87.7

1 Total trust fund income less expenditures.

2 Total receipts from the public less expenditures.

As indicated in the table, all revenue categories are counted for determining trust

fund financial status, and the HI trust fund is shown to have an estimated surplus

of $23.7—billion in 2003. As noted previously, income from all sources to the SMI

trust fund is projected to fall short of expenditures in 2003 by $7.4 billion, requiring

the redemption of $7.4 billion in trust fund assets to cover the deficit.

From the budget perspective, in contrast, only tax receipts and beneficiary premiums are counted, since interest earnings and general revenue payments represent

intragovernmental transfers. HI is projected to have total receipts from the public

in 2003 that exceed payments to the public by $8.0 billion. For SMI, the only receipts from the public are the beneficiary premiums, which total $95.7 billion less

than SMI expenditures. Accordingly, HI can be thought of as making an estimated

net contribution to the Federal budget of $8.0 billion in 2003, while SMI is expected

to draw $95.7—billion from the budget. Medicare, overall, is thus projected to draw

a net amount of $87.7 billion from the budget.

Each viewpoint—the trust fund perspective and the budget perspective—is appropriate for its intended purpose. One point of view cannot be used to answer questions related to the other, however. Trust fund surpluses or deficits reveal nothing

about the impact of Medicare on the Federal budget, and the impact of Medicare

on the Federal budget offers no insight into whether a trust fund has sufficient assets to permit payment of benefits.

Conclusions

In their 2003 report to Congress, the Board of Trustees emphasizes the continuing

financial pressures facing Medicare and urges the nation’s policy makers to take

further steps to address these concerns. They also argue that consideration of further reforms should occur in the relatively near future. The earlier that solutions

are enacted, the more flexible and gradual they can be. In addition, the Trustees

note that early action increases the time available for affected individuals and organizations—including health care providers, beneficiaries, and taxpayers—to adjust

their expectations.

I concur with the Trustees’ assessment and pledge the Office of the Actuary’s continuing assistance to the joint effort by the Administration and Congress to determine effective solutions to the remaining financial problems facing the Medicare

program. I would be happy to answer any questions you might have on Medicare’s

financial issues.

16

17

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Mr. BILIRAKIS. Thank you very much, Mr. Foster.

Dr. Berenson.

STATEMENT OF ROBERT A. BERENSON

Mr. BERENSON. Thank you, Chairman Bilirakis, Representative

Brown, and members of the committee. I very much appreciate the

opportunity to provide comments on the important topic of

strengthening and improving Medicare.

I have enjoyed a diverse professional experience from which I am

basing my views about the future of Medicare. I practiced internal

medicine for over 20 years, including 12 in a private practice in the

Capitol Hill community about seven blocks from here.

I served 10 years as a co-founder and medical director of the National Capital PPO, a broker model PPO that was serving nearly

150,000 people when I left in 1996. In the last 3 years of the Clinton Administration, I had the privilege of serving as Director of the

Center for Health Plans and Providers in the agency then known

as HCFA. In that position I had the honor of testifying before this

subcommittee on a few occasions. Today I am speaking only for myself.

In preparing my remarks, I relied on the White House press release of March 3, 2003, titled, ‘‘21st Century Medicare: More

Choices, Better Benefits, a Framework to Modernize and Improve

Medicare,’’ which provides a glimpse of the President’s ideas for

Medicare restructuring.

I am troubled by the framework’s clear preference for private

health insurance options to the detriment of the traditional Medicare program that has served the public so well for over 35 years.

It appears that the fundamental assumption underlying the President’s framework is that the traditional Medicare program is incapable of controlling costs, assuring access, and improving quality.

I believe strongly that that assumption represents an ideological

position, not based on objective review of the evidence. Further, unless the administration proposes a draconian defined contribution

type model that shifts substantial costs onto the backs of beneficiaries, there is no reason to believe that greater reliance on private plans will actually reduce expenditures or put the program on

sounder financial footing.

The framework seems designed more as part of an ongoing attack on the government’s role in health care in the face of evidence

showing that Medicare has been a remarkably successful social insurance program.

The framework’s option 2, enhanced Medicare, calls for massive

expansion in private health insurance options that are mere variations on indemnity insurance approaches. In my opinion, this option will add costly administrative expense to Medicare and will

further segment detrimentally the beneficiary insurance pool.

Private plans will become financial winners if they design benefits that attract healthier than average beneficiaries, while the

costs of maintaining the fallback traditional program could become

unsustainable. In thinking about Medicare reform, it is important

to understand crucial but rarely appreciated differences between

the challenges faced by private and public employers in arranging

20

health insurance for their employees and covered retirees and by

the Medicare program.

In distinct contrast to Medicare, even the largest national employers have limited market shares in most of the markets in

which their employees reside. As a result, these employers need to

rely on managed care products, which increasingly are PPOs, primarily as a way to get physicians, hospitals, and other providers

to agree to negotiated contractual payment rates.

In short, PPOs and many IPA model health maintenance organizations carry out one function and one function only for employers.

They negotiate prices with providers. But the traditional Medicare

program has no need for private plans to negotiate prices on its behalf.

The problem private health plans have setting up provider networks in rural areas illustrates the point about the different challenges employers in Medicare face. Medicare+Choice has private

fee for service plans only because Congress decided to allow these

private plans to impose traditional Medicare prices on providers.

Similarly, all coordinated care, Medicare+Choice plans, get to use

Medicare payment rates for out-of-network coverage. The Center

for Studying Health System Change and MedPAC have documented that overall traditional Medicare pays providers substantially less than private plans do.

The point is that Medicare has no need for private plans if all

they are really doing is negotiating payment rates with providers.

And unfortunately, that is basically all that many private plans actually do.

Some assert that beneficiaries, when aging into Medicare, want

the same set of insurance choices that they had as employees or

retirees covered under employer plans. I respectfully disagree.

What beneficiaries aging into Medicare want most is the ability to

keep the same physicians from whom they have been receiving

care, not the same insurance arrangements.

If the traditional Medicare program’s benefits were improved to

provide prescription drugs, catastrophic expense protection, and

other enhancements that the President would provide only in private plans, beneficiaries would be able to have the kind of choice

of professionals and providers that they want.

As I noted earlier, the President’s framework implicitly belittles

the documented successes of the traditional Medicare program. Actually, the history of Medicare is replete with innovation, many of

which have been adopted by commercial market plans and payers.

Although many of us casually but inaccurately refer to the traditional program as fee for service Medicare, in fact most payment

systems are now prospective—many paying per episodes of care.

They are not fee for service. The physician fee schedule stands out

as the exception, and that payment system similarly should be reformed.

Recently, I co-authored a Health Affairs article recommending

payment innovations in the traditional program to improve the

care provided to the large majority of Medicare beneficiaries who

have long-standing——

Mr. BILIRAKIS. Will you please summarize, Doctor?

Mr. BERENSON. Pardon me?

21

Mr. BILIRAKIS. Please summarize, if you would.

Mr. BERENSON. Okay. Basically, there are a number of tools that

traditional Medicare could use to innovate, to hold down costs, and

perhaps a little later we will have an opportunity to talk about

what some of those area. The bottom line is I see no need to privatize Medicare.

Mr. BILIRAKIS. Well, we certainly are very interested in those

ideas. If you don’t get it across during the inquiry, by all means

submit it to us in writing.

Mr. BERENSON. Very good.

[The prepared statement of Robert A. Berenson follows:]

PREPARED STATEMENT OF ROBERT A. BERENSON, SENIOR CONSULTANT, ACCADEMY

HEALTH

Chairman Bilirakis, Mr. Brown, and members of the committee. I appreciate the

opportunity to provide comments on the important topic of ‘‘Strengthening and Improving Medicare.’’ I have enjoyed a diverse professional experience from which I

am basing my views about the future of the Medicare program. I practiced Internal

Medicine for over 20 years, including twelve in private practice in the Capitol Hill

community, about seven blocks from here. I served ten years as a co-founder and

medical director of the National Capital PPO, a broker model preferred provider organization (PPO) that was serving nearly 150,000 people when I left in 1997. And

in the last three years of the Clinton Administration, I had the privilege of serving

as Director of the Center for Health Plans and Providers in the agency then known

as the Health Care Financing Administration (HCFA). In that position I had the

honor of testifying before this subcommittee on a few occasions.

My job at HCFA gave me an unusual perspective on the issues being discussed

here today, as I had responsibility for contracting with Medicare + Choice (M+C)

plans, as well as for payment policies in the traditional Medicare program. I was

able to gain insights about the relative strengths and weaknesses of the two sides

of Medicare, and I will reflect on some of those today.

In preparing my remarks, I relied on the White House press release of March 3,

2003, titled ‘‘21st Century Medicare: More Choices—Better Benefits. A Framework

to Modernize and Improve Medicare,’’ which provides a glimpse of the President’s

ideas for Medicare restructuring. I am troubled by the framework’s clear preference

for private health insurance options to the detriment of the traditional Medicare

program that has served the public so well for over 35 years.

It appears that the fundamental assumption underlying the President’s Framework is that the traditional Medicare program is simply incapable of controlling

costs, assuring access, and improving quality. I believe strongly that that assumption represents an ideological position, not based an objective review of the evidence.

Further, unless the Administration proposes a draconian defined contribution model

that shifts substantial costs onto the backs of beneficiaries, there is no reason to

believe that greater reliance on private plans will actually reduce expenditures or

put the program on a sounder financial footing. The Framework seems designed

more as part of an ongoing attack on government’s role in health care, in the face

of the evidence showing that Medicare has been a remarkably successful social insurance program.

The Framework’s ‘‘Option 2—Enhanced Medicare’’ calls for massive expansion in

private health insurance options that are mere variations on indemnity insurance

approaches. In my opinion, this Option will add costly administrative costs to Medicare and will further segment detrimentally the beneficiary insurance pool. Private

plans will become financial winners if they design benefits that attract healthier

than average beneficiaries, while the costs of maintaining the ‘‘fallback’’ traditional

program could become unsustainable.

In thinking about Medicare reform, it is important to understand crucial, but

rarely appreciated, differences between the challenges faced by private and public

employers in arranging health insurance for their employees and covered retirees

and by the Medicare program. In distinct contrast to Medicare, even the largest national employers have limited market shares in most of the markets in which their

employees reside. As a result, these employers need to rely on managed care products, which increasingly are PPOs, primarily as a way to get physicians, hospitals,

and other providers to agree to negotiated, contractual payment rates. Without

these insurance products that aggregate insured lives to provide negotiating leverVerDate 11-MAY-2000 08:38 Aug 12, 2003 Jkt 000000 PO 00000 Frm 00025 Fmt 6633 Sfmt 6621 87482.TXT HCOM1 PsN: HCOM1
22

age, many employers would be paying the highly inflated charges that individuals

without insurance or insurers without provider contracts face.

In short, PPOs and many Individual Practice Association—model (IPA) health

maintenance organizations (HMOs) carry out one function, and one function only,

for employers—they negotiate prices with providers. When I was in charge of the

M+C program, PPOs made it clear that they wanted to be exempt from quality improvement activities and even from basic quality reporting requirements. They told

me they had no ability to affect quality, and Congress accommodated their wishes.

In short, the array of indemnity-type insurance products envisioned under the Enhanced Medicare Option would offer additional choices, but not choices that add

value to the Medicare program.

But the traditional Medicare program has no need for private plans to negotiate

prices on its behalf. The program already has market power, and it has used its

authority to set administered prices that providers accept. In setting these rates, the

program has a fundamental obligation to find a reasonable balance between assuring continued access for beneficiaries and restraining provider prices. Guided by

MedPAC, the General Accounting Office and the health services research and policy

community, the Congress and the Centers for Medicare and Medicaid Services

(CMS), for the most part, have done a good job of finding that balance.

The problem private health plans have setting up provider networks in rural

areas illustrates the point about the different challenges employers and Medicare

face. Medicare + Choice has private fee for service plans only because Congress decided to allow these private plans to impose traditional Medicare prices on providers. Similarly, all coordinated care, M+C plans get to use the Medicare payment

rates for out-of-network coverage. Further, The Center for Studying Health System

Change and MedPAC have documented that, overall, traditional Medicare pays providers substantially less than private plans do. The point is that Medicare has no

need for private plans if all they are really doing is negotiating payment rates with

providers. And, unfortunately, that is basically all that many private plans do.

Some assert that beneficiaries when aging into Medicare want the same set of insurance choices that they had as employees or retirees covered under employer

plans. I respectfully disagree. What beneficiaries aging in to Medicare most want

is the ability to keep the same physicians from whom they have been receiving care,

not the same insurance arrangements. If the traditional Medicare program’s benefits were improved to provide prescription drugs, catastrophic expense protection,

and other enhancements that the President would provide only in private plans,

beneficiaries would be able to have the kind of choice of professionals and providers

they want.

As I noted earlier, the President’s Framework implicitly belittles the documented

successes of the traditional Medicare program. Actually, the history of Medicare is

replete with innovation, many of which have been adopted by commercial market

plans and payers. Although many of us casually, but inaccurately, refer to the traditional program as ‘‘fee for service Medicare,’’ in fact, most payment systems are now

prospective, many paying for episodes of care. They are not fee for service. The physician fee schedule stands out as the exception, and that payment system similarly

should be reformed.

Recently, I co-authored a Health Affairs article recommending payment innovations in the traditional program to improve the care provided to the large majority

of Medicare beneficiaries who have long-standing, chronic conditions. Currently,

CMS is monitoring demonstrations of disease management programs in Medicare.

If these demonstrations prove successful, traditional Medicare can contract with disease management vendors just as managed care plans do.

In addition, to help rationalize and limit expenditures, CMS should be given authority to use selected managed care tools in its administration of the program, as

well as the requisite administrative resources to function as a value purchaser. Examples of tools the program should be allowed to use include promoting centers of

excellence, providing incentives for beneficiaries with multiple chronic conditions to

have a ‘‘medical home,’’ and using prior authorization for select high cost, elective

procedures.

For the most part, managed care failed in its execution of what were and still are

potentially useful care delivery innovations. Further, managed care plans rarely provided the kind of transparency that patients and contracting professionals rightly

expect and deserve. Of course, given its market power and the fact that it is the

government, there is justifiable concern about how CMS and its administrative

agents would function as a value purchaser. Nevertheless, from my experience, I believe that requirements for public rule-making, a commitment to fair process and

disclosure, and, in general, program accountability to the Congress and the public

suggest that the traditional Medicare program is actually better positioned than

23

most managed care plans to actually deliver on the unrealized promise of managed

care to provide high quality, affordable health care.

There should be a prominent place in Medicare for innovative private health

plans, particularly group and staff model HMOs, that offer true alternative delivery

systems from that offered under traditional Medicare. Those plans can and should

be accommodated in a modified Medicare + Choice program. However, at a time

when the managed care industry has lost its credibility and when plans have reverted to being passive insurance companies, making money by charging high premiums and generating investment income on their reserves, I do not understand

why Congress would want to privatize Medicare.

Mr. BILIRAKIS. Ms. Rawlings.

STATEMENT OF SUSAN E. RAWLINGS

Ms. RAWLINGS. Thank you. Mr. Chairman and members of the

subcommittee, my name is Susan Rawlings. I am Head of Retiree

Markets and Vice President for Aetna Incorporated. I am very

pleased to be here today.

Aetna has a long history of serving the Medicare program. As a

matter of fact, we processed the first Medicare claims in 1965. I am

very pleased to be here to share with you our thoughts on Medicare, Medicare+Choice, and how private plans can participate successfully with you.

I should also note for you that our chairman and chief executive,

Dr. Jack Rowe, is a geriatrician by training and is also a commissioner on MedPAC and is very interested in the evolution of the

program.

I have submitted some written testimony for the subcommittee,

and I would like to summarize that for you now.

Mr. BILIRAKIS. Please.

Ms. RAWLINGS. Aetna believes very strongly that we should work

together to involve——

Mr. BILIRAKIS. Hold the mike a little—maybe down a little

bit——

Ms. RAWLINGS. Down a little bit?

Mr. BILIRAKIS. [continuing] toward your——

Ms. RAWLINGS. Is that better?

Mr. BILIRAKIS. That is better.

Ms. RAWLINGS. Okay. Aetna believes we must work together to

evolve the program and modernize it. As we all know, the population is growing and living longer. There is greater technology

available, and there are more choices available for beneficiaries.

We believe very strongly that the expertise and learnings of the

private sector should be fully leveraged.

We work together successfully in many capacities today in serving other parts of the Federal Government programs such as the

FEHBP, Tricare, and Medicare, as well as Medicare+Choice programs today.

Aetna believes there are five key foundational blocks to building

and evolving the program. We think we are starting from a reasonably comprehensive place at the moment. But we believe as we

evolve we should consider five things, key things.

The first one is adequate funding. This is critical to the stability

and sustainability of any program long term, and we believe it is

critical we keep that in mind as we proceed. We also believe that

the government must fund Medicare programs commensurate with

its promises to its beneficiaries.

24

Second, we do support fully the addition of pharmacy benefits

into the Medicare program. We believe medication coverage is imperative for improving and maintaining health status, and we want

to work with the Federal Government to help that become available.

Third, we believe access is critical for the program for beneficiaries. It should be available all over the country, which it is

today, and choices should likewise be available. Health care is delivered locally. Beneficiaries need to have access to the care in their

local community’s choices and the ability to address their own financial resources with the choices that are available for them.

And finally, we believe very strongly in the aspect of coordination

of care, which is something we believe most Medicare+Choice programs and other private plans have been able to provide over time.

This particular population is very care-needy. And as people age,

as we all know, we become typically more chronically ill rather

than acute.

We believe promoting self-care and promoting—focusing on preventive benefits we believe we have additional benefits for beneficiaries to maintain quality of life as well as to keep costs consistent.

I would like to highlight a few things we believe the private

plans bring to value today to the government and to the beneficiaries. The first one is that we provide richer benefits than the

traditional program. As a matter of fact, in 2002, 72 percent of

Medicare+Choice beneficiaries actually had access to prescription

drugs.

We provide affordable access for low income and minority beneficiaries. Forty percent of African-Americans with no group or Medicaid coverage, as well as 52 percent of Hispanics and 40 percent

of the people with incomes between $10,000 and $20,000 per year,

are in Medicare+Choice today.

We provide better quality than traditional fee for service. This is

not necessarily because fee for service is not a wonderful program.

It is because we take a different approach. Traditional fee for service is an indemnity-style program. The Medicare+Choice programs

and the private plans typically focus on more preventive care and

a holistic approach, preventive services, and comprehensive benefits.

Today we also offer better choice. We have HMO options, PPO

options, private fee for service options. As a matter of fact, Aetna

is participating in the PPO demonstration project that was

launched January 1 in 21 counties in three States.

Medicare is at a crossroads as government tries to sort out the

best public and private sector roles going forward. It is Aetna’s

view that the private sector role must be expanded or the program

will fail to grow sufficiently to keep pace with the demands of a

growing and longer living population.

It wasn’t too long ago that the prior—the previous program

Medicare Plus—previous program to Medicare+Choice, the Medicare Risk Program, was able to offer very competitive comprehensive benefits, including pharmacy benefits, at no cost. This is something we should strive for. This semblance of quality and coverage

we should strive for together.

25

Aetna is committed to serving Medicare beneficiaries and is

ready and willing to partner with the Federal Government to develop workable solutions for this population. We appreciate the opportunity to testify today.

[The prepared statement of Susan E. Rawlings follows:]

PREPARED STATEMENT OF SUSAN E. RAWLINGS, VICE PRESIDENT AND HEAD OF

RETIREE MARKETS, AETNA INC.

Mr. Chairman and members of the Subcommittee, I am Susan Rawlings, vice

president and head of retiree markets for Aetna. Thank you for the opportunity to

testify before you today.

Aetna believes that a modernized Medicare program must leverage the expertise

and build upon the learnings of the private sector. The Medicare+Choice program—

is one example of the level of quality, choice, and affordability that could be available to Medicare beneficiaries if the private sector is fully leveraged by the Medicare

program. Despite a critical shortfall in government funding, about five million Medicare-eligible seniors and disabled choose to participate in Medicare+Choice, enjoying

access to extra benefits—including prescription drug coverage, preventive care,

wellness and disease management programs. These benefits are not available under

Original Medicare.

Medicare+Choice provides Medicare beneficiaries with better benefits, better quality and better choices than the fee-for-service program. But, as I said, it is only one

example of what can be accomplished when the private and public sectors work together to develop solutions for Medicare beneficiaries. Based on our experiences

with this program and our knowledge of the population that it serves, we ask you

to consider a number of important issues critical to the successful modernization of

the Medicare program.

These issues include:

• Adequate funding. Increased funding is necessary for stability and sustainability of private offerings of comprehensive benefits packages year after year.

The government must fund its programs commensurate with the promise made

to its Medicare beneficiaries.

• Prescription drug benefits. Medication coverage is imperative for improving

and maintaining the health status of beneficiaries. A funded prescription benefit allows treatment of the many chronic conditions of seniors in the ambulatory setting, thus avoiding unnecessary inpatient acute care stays. It simply

doesn’t make sense for the program to cover heart disease surgery, but not the

medication that could have prevented the need for surgery.

• Nationwide accessibility. Health care services must be available to all beneficiaries. Flexibility in patterns of health care delivery must be created to include network and non-network private offerings—with the protection of the

Medicare allowable fee schedules—to avoid excessive out-of-pocket spending by

Medicare beneficiaries.

• Choice of plan design. Multiple private plan designs are necessary to meet the

needs of seniors in terms of benefits requirements, benefits choices and financial

resources.

• Coordination of care. Medicare beneficiaries are a care-needy population. In

order to meet the multiple chronic care needs and acute care needs of beneficiaries, there must be coordination and communication across settings such as

inpatient acute care, rehabilitation care to restore function, skilled nursing care

and home care to improve health status. This coordination should be focused

on promoting self-care and avoiding duplicative and redundant diagnostic and

treatment protocols.

While we ask that you consider all of these issues as part of your efforts to modernize the program, we’d also like you to take a step back and consider the myriad

successes experienced by the Medicare+Choice program. We hope that you will

agree that these successes provide further proof of the importance of involving the

private sector in this public program.

PRIVATE SECTOR MEDICARE PLANS PROVIDE RICHER BENEFITS

The Original Medicare program does not provide a number of benefits that are

commonly covered in private sector health plans. Every Medicare+Choice plan, for

example, provides enrollees with the FFS benefits package and additional benefits.

According to an analysis by Mathematica Policy Research, 72 percent of all beneficiaries in Medicare+Choice plans had access to a prescription drug benefit in 2002.

26

Last year, health plans also provided added benefits not covered by FFS Medicare,

including physical exams (100 percent of all enrollees in Medicare+Choice), vision

benefits (87 percent), and hearing aid benefits (54 percent).

In addition, Medicare+Choice plans also offer a number of chronic care, wellness

and preventive benefits that are so important to keeping older and disabled Americans healthy. These services often include patient education, disease management

programs, calls from nurse case managers to remind patients of optimal care, phone

calls from the health plan to remind members to keep their appointments and to

have the screenings necessary to avoid complications, caregiver education, and reminders and reports to physicians about their patients’ status and the services they

have received or missed.

Aetna, for example, has a program to conduct health risk assessments for all of

our Medicare+Choice members. Members who are identified in their health risk assessment as being at high or moderate risk will be contacted by an Aetna nurse case

manager to determine if case management can be of assistance in helping to maintain or improve their health status. This program allows us to proactively identify

health issues and work with members, their physicians and other community resources to help confirm that the member is both engaged in the right programs, and

motivated to actively participate in them.

Studies demonstrate that these extra benefits reduce out-of-pocket costs for beneficiaries. According to the Kaiser Family Foundation, ‘‘M+C HMOs have typically

charged lower premiums than Medigap plans and offered coverage for a variety of

services that Medicare does not, potentially lowering overall costs for enrollees.’’

(Snyder, et al. January 2003) The Kaiser study also found that total out-of-pocket

spending was reduced considerably for beneficiaries in Medicare+Choice plans compared to enrollees in FFS Medicare and Medigap plans.

Medicare+Choice plans play an important role in providing health coverage to

low-income and minority beneficiaries who cannot afford the high out-of-pocket costs

they would incur under the Original Medicare program. A recent study reports that

‘‘about 40 percent of African-Americans with no group or Medicaid coverage are in

M+C plans, as are 52 percent of Hispanics and 40 percent of those with incomes

between $10,000 and $20,000 regardless of race or ethnicity.’’ (M. Gold, Health Affairs Web exclusive, April 2003) According to an April 2002 study by Kenneth

Thorpe for the Blue Cross Blue Shield Association, if the Medicare+Choice program

did not exist, 42 percent of Medicare-enrolled African-Americans currently in

Medicare+Choice plans would be forced to go without coverage for prescription

drugs and other supplemental benefits. Aetna has a corporate initiative to reduce

health care disparities, which have been documented to exist based upon race and

ethnicity, and our efforts have been recognized and supported by the Department

of Health and Human Services.

PRIVATE SECTOR MEDICARE PLANS PROVIDE BETTER QUALITY

Medicare+Choice plans offer a different approach to health care than beneficiaries

experience under the Original Medicare program. Instead of focusing almost exclusively on treating beneficiaries when they are sick or injured, Medicare+Choice

plans place a strong emphasis on preventive health care services that help to keep

beneficiaries healthy, detect diseases at an early stage, avoid preventable illnesses,

and improve quality of life.

Aetna, for example, has a program to proactively reach out to each member over

the age of 50 to remind them to receive influenza and pneumococcal pneumonia immunizations and colorectal cancer screenings. These simple but important steps in

preventive care can help Medicare beneficiaries avoid serious, life-threatening illnesses.

Research studies show that enrollees in Medicare+Choice plans receive care that

is comparable to, or better than, beneficiaries enrolled in Medicare FFS:

• An analysis of data published in the Journal of the American Medical Association

(Jencks, et al. JAMA, January 15, 2003) and data compiled by the National

Committee for Quality Assurance finds that Medicare+Choice plans outperform

Medicare fee-for-service in five of seven key HEDIS quality measures: beta

blockers after heart attacks; annual flu vaccines; breast cancer screenings; diabetes testing; and diabetes lipid screening. (AAHP 2003)

• A study by CMS and the National Cancer Institute (NCI) found that Medicare

managed care enrollees were less likely than fee-for-service patients to have

their breast cancer diagnosed at late stages. Only 7.6 percent of Medicare managed care enrollees had a late-stage diagnosis, compared to 10.8 percent of feefor-service patients. (G. Riley, Journal of the American Medical Association, Vol.

281, February 24, 1999)

27

• A large-scale study comparing quality of care for elderly heart attack patients covered by Medicare managed care plans and Medicare fee-for-service coverage

found that health plans offer access to care equal to or better than fee-for-service coverage. All indicators of timeliness and quality of care for elderly patients

with acute myocardial infarction were higher or similar under Medicare managed care coverage compared with fee-for-service coverage. Enrollees in Medicare managed care plans were more likely to receive beta blocker therapy (73

percent vs. 62 percent). (S. Soumerai, Archives of Internal Medicine, Vol. 159,

1999)

• Another study found that Medicare managed care enrollees were more likely to

have had a mammogram in the previous year compared to fee-for-service beneficiaries (62 percent vs. 39 percent). (L. Nelson, Access to Care in Medicare Managed Care, November 1996)

• Research also has shown that Medicare managed care enrollees were diagnosed

at considerably earlier stages, and therefore more treatable stages, than fee-forservice patients for four types of cancer: breast, cervix, melanoma and colon.

Among patients with cervical cancer, 76 percent of Medicare managed care enrollees were diagnosed at early stages, compared to 55 percent of fee-for-service

patients. (G. Riley, American Journal of Public Health, October 1994)

In recognition of the value that Medicare+Choice plans provide, the Medicare program has developed initiatives that reward Medicare+Choice plans that meet certain goals. For example, CMS has implemented a program that provides ‘‘Extra Payment in Recognition of the Costs of Successful Outpatient Congestive Heart Failure

Care.’’ Under this program, qualifying Medicare+Choice organizations that meet

CMS performance criteria receive extra payments for enrollees with CHF who were

not hospitalized as a result of effective management of their disease. Aetna supports

this initiative and recommends that CMS consider similar programs for other disease states. Aetna participates in the Congestive Heart Failure initiative and has

successfully maintained members in the ambulatory setting with appropriate medical services, medication and disease management.

PRIVATE SECTOR MEDICARE PLANS PROVIDE BETTER CHOICES

Consumers in the private sector have benefited from the widespread availability

of health plan options, which has promoted access to affordable, comprehensive coverage. Despite the chronic underfunding of the Medicare+Choice program,

Medicare+Choice plans are currently offering many Medicare beneficiaries innovative health plans that are targeted to meet specific needs. Almost 60 percent of all

Medicare beneficiaries have access to Medicare+Choice plans. These include coordinated care plans (HMO), preferred provider organizations (PPOs), private fee-forservice plans, and plans specifically targeted to the needs of frail elderly and disabled beneficiaries.

Aetna is currently participating in the Centers for Medicare and Medicaid Services’ (CMS) Preferred Provider Organization (PPO) demonstration project. Through

this demonstration project, which began operating in January of this year, Aetna

is offering new choices to Medicare beneficiaries in 21 Maryland, New Jersey and

Pennsylvania counties. Our Aetna Golden Choice Plan is an HMO-based point-ofservice plan that allows members to receive care within or outside the Aetna provider network, without obtaining referrals or selecting a primary care physician. Notably, the plan also provides coverage for prescription drugs, which are not covered

under Original Medicare. Aetna Golden Choice Plan members receive generic drug

coverage with no annual dollar limit, paying only a $15 copay per prescription.

Medicare is at a crossroads as government tries to sort out the best public and

private sector roles. Going forward it is Aetna’s view that the private sector role

must be expanded or the program will fail to grow sufficiently to keep pace with

the demands of a growing and longer-living population. At one time ‘‘ before the now

infamous Balanced Budget Act of 1997 ‘‘ Aetna provided Medicare beneficiaries with

a comprehensive benefits package that included vision and dental coverage, preventive, wellness and disease management programs, and prescription drug coverage ‘‘

all for a zero-dollar premium. Competitive markets and adequate funding allowed

for this, and returning to some semblance of this level of quality coverage should

be our mutual goal.

CONCLUSION

Aetna is committed to serving Medicare beneficiaries, and ready and willing to

partner with the federal government to develop workable solutions for this population. However, we need to recognize that, in order to provide a strong foundation

28

of expanded choices for beneficiaries, private sector Medicare programs must be adequately funded.

Since 1998, many Medicare+Choice beneficiaries have been enrolled in health

plans to which payments increased by only the minimum annual update—which has

been set at two percent since 1998 (but was temporarily increased to three percent

in 2001 only). To underscore the inadequacy of government payments to

Medicare+Choice plans, it is useful to compare Medicare+Choice to other government health programs and private sector health coverage. In 2003, funding for the

health benefits of all Medicare+Choice enrollees increased by only two percent. The

following facts highlight the inadequacy of this increase:

• The Office of Personnel Management (OPM) has estimated that, on a per-enrollee

average, total premiums collected by health plans in FEHBP increased by 10.5

percent in 2001 and by 13 percent in 2002;

• PricewaterhouseCoopers has estimated that health insurance premiums increased

by an average of 13.7 percent for large employers between 2001 and 2002; and

• The William M. Mercer consulting firm has released survey findings showing that

spending for employer-sponsored health coverage increased by an average of

11.2 percent in 2001 and 14.7 percent in 2002.

Any effort to modernize the Medicare program must directly address these concerns by committing a significant level of additional funds to support the health

benefits of Medicare enrollees. Over the past two years, more than 120 Members

of Congress ‘‘ including 79 Democrats and 43 Republicans ‘‘ have cosponsored bills

or signed letters indicating their support for legislation to address the

Medicare+Choice funding crisis. The Bush Administration has also proposed additional funding to stabilize the Medicare+Choice program. Building upon this strong

base of bipartisan support, it is critically important for Congress to pass legislation

to provide additional funding to protect the health care choices and benefits of

Medicare+Choice enrollees.

Aetna appreciates this opportunity to testify before the subcommittee today. Private sector Medicare plans provide benefits, quality and choices that are not available to enrollees in Original Medicare. This is why we believe that a modernized

Medicare should be built upon increased private sector involvement in the program.

We are pleased that Congress is considering expanding the range of choices available to Medicare beneficiaries. As Congress moves forward it should ensure that the

government will provide funding sufficient to allow individuals a reasonable level

of choice within an area, and that the choices should remain available and stable

over time.

Any Medicare reform proposal should also include prescription drug benefits, nationwide accessibility, choice of plan design and coordination of care.

Finally, Congress should also ensure that a reformed Medicare program is administered under a framework designed to achieve a fair and sound balance between

the need for regulatory oversight and the promotion of innovative, quality coverage

solutions for all Medicare beneficiaries.

Mr. BILIRAKIS. Thank you very much, Ms. Rawlings.

Dr. Moon.

STATEMENT OF MARILYN MOON

Ms. MOON. Thank you, Mr. Bilirakis, Mr. Brown, members of the

committee. I am very pleased to be here today to be able to testify

on this very important issue. My testimony essentially makes five

points, and I am going to talk primarily about one of them, because

I think a number of the other issues have been raised already

today.

First, the drivers of health care costs for Medicare beneficiaries

are essentially the same drivers of health care costs for people in

the private sector. We know that technology and the improvements

in health care that have come along have not come cheaply in the

United States, and this is true for Medicare beneficiaries as well

as for anyone else.

It is not Medicare’s problem. It is Medicare’s problem, but it is

not Medicare’s fault that health care costs on a per capita basis are

rising for the most part.

29

Second, and where I want to put much of my emphasis, is on alternative measures of affordability, and when people talk about

whether or not Medicare is affordable over time. I would underscore Rick Foster’s testimony that the trust funds and part of

Medicare are separate. Part A and Part B are separate and need

to be thought of that way. We need to be very careful not to inappropriately put them together in looking at issues.

Part A is better off than many people have believed and has been

for the last few years. I served as a public trustee for 5 years, just

after 1995, and to the year 2000. I would like to argue that I am

responsible for the great improvements in the trust fund, but that

is not the case.

What happened is that the Congress and other factors going on

in the economy conspired to help the Medicare program look a lot

better. We had strong economic growth, which is crucial, and we

had efforts, continuing efforts to change the program over time,

which is also a crucial factor in terms of looking at how things will

do well over time.

I would also point out that over the next 10 years revenues are

expected to exceed what the spending will be in Part A by over

$500 billion—a much better track record than we are seeing for

much of the activities of the Federal budget at the moment.

But I also understand people’s interest and desire to look at

Medicare in terms of the full cost of the program. It is important

to think about both Part A and Part B and not focus just on one

part of the program. And there are ways in which people have done

that—sometimes to look at the worker-to-retiree ratio, sometimes

to look at the share of GDP.

Those are both valuable measures, but they don’t capture the

fact that over time the share of the pie will have to rise to support

Medicare. That is absolutely right. But that pie is going to be much

larger.

We will have the resources to provide that support. The question

is: will we have the willingness to do so?

If you control for inflation and look into the future of the Medicare program, you will find that on a per worker basis GDP, using

the assumptions in the 2003 trustees report, that GDP will rise

after controlling for inflation by about 54 percent, 54.9 percent over

the next 35 years, or until 2035 at least. It is not quite 35 years.

And what that means is that workers, on average, will have command of resources 11⁄2 times greater than today, even after controlling for inflation. If you take out of that the burden that Medicare

will mean for workers over time, and treat, then, what the resulting net growth will be, it will have fallen because Medicare will

have risen as a share of GDP, but only to 51 percent.

This is an affordable program. The question is: are we willing to

put the resources into that? And if so, how will we do so?

The third point that I make in the testimony is that we do need

to have change in Medicare, but that it is not necessarily private

sector changes that will do a good job of that. And I think that Bob

Berenson’s testimony bears credit for a lot of that, and I would

refer you to him.

Fourth, we do need to have change in the basic Medicare program. And I think that that program should change in ways that

30

1The material presented in this testimony represents the opinions of the author and not of

the Urban Institute, its officers or funders. Much of the research reported here was funded by

the Commonwealth Fund and the Henry J. Kaiser Family Foundation.

many people have talked about. Certainly, prescription drugs are

very important, and that is a key factor. It should be a factor for

traditional Medicare as well as for the program as a whole in terms

of use and reliance on the private sector.

But I would like to see the private sector used for presumably

what the private sector is supposed to be good at, and that is coordination of care, which we have seen them do very little of in

practice. If they were doing a good job, I think then we would have

a very different story.

Finally, traditional Medicare also needs to look at a lot of ways

to improve coordination of care. It is going to be the default mechanism for many years to come, and it needs to change as well and

we need to be creative there.

Thank you very much.

[The prepared statement of Marilyn Moon follows:]

PREPARED STATEMENT OF MARILYN MOON,1 SENIOR FELLOW, THE URBAN INSTITUTE

Mr. Chairman and Members of the Committee: Thank you for inviting me to testify at this hearing.

The long term financing challenges facing Medicare are formidable. Largely because of advances in medicine and technology, spending on both the old and the

young has grown at a rate faster than spending on other goods and services. Combining a population that will increasingly be over the age of 65 with health care

costs that will likely continue to rise over time is certain to mean an increasing

share of national resources devoted to this group. In order to meet this challenge,

the nation must plan how to share that burden and adapt Medicare to meet new

demands.

But this should not lead to the conclusion that Medicare cannot continue nor that

it must be dramatically altered. Medicare’s future will require additional financing,

but the demands on society are within our resources. The bigger long term challenge

will be in deciding how the rising costs of healthcare for this population need to

shared.

In my testimony today, I raise five major issues:

• First, the drivers of healthcare costs are not unique to Medicare, and it is important to recognize that Medicare needs to grow in concert with changes in the

healthcare system as a whole. • I offer an alternative measure of affordability to illustrate that even with no

changes in the basic program, the burdens from Medicare are not excessive in

the context of reasonable expectations about economic growth in the future. • While society can afford to spend more on healthcare for older and disabled persons, passing greater costs onto older and disabled Americans must be done

with caution. • Change in Medicare will be needed but the answer may not rest with turning the

program over to the control of the private sector. Medicare actually has a better

track record over the last thirty years than does private insurance. • Traditional Medicare can and should remain a major part of the overall program;

but it too needs a number of changes.

REASONS FOR RISING COSTS

Projections from the 2003 Medicare Trustees Report indicate that Medicare’s

share of the Gross Domestic Product (GDP) will reach 4.75 percent in 2030, up from

2.56 percent in 2002. Although this is a substantial increase, it is actually smaller

than what was being projected just a few years ago. In 1996, for example, the projection for 2030 was 7.39 percent of GDP—or 56 percent higher than the projection

made this year. This slowdown in growth does not eliminate the need to act, but

it does allow time for study and deliberation before putting substantial changes into

place.

Projected increases in Medicare’s spending arise because of growing numbers of

people eligible for the program and the high costs of health care. The beneficiary

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1 Although there is also a Part B Trust Fund, it serves a much different purpose and is intentionally kept at a small positive level.

population is rising because of increased life expectancy (in part reflecting the success of the Medicare program) and that growth will be accelerated in the future by

the retirement of the baby boom. The number of younger disabled beneficiaries is

also expected to remain high. This creates challenges for Medicare and represents

a major component of spending projection increases. By 2030, for example, the number of beneficiaries will reach 79 million—nearly double today’s number.

Technological advances that raise the costs of care are the primary reason for

higher per capita spending over time, and this phenomenon occurs systemwide, not

just in Medicare. The problems driving Medicare costs upward are not unique to the

public sector. They are found throughout our nation’s healthcare system, and the

crisis of rising healthcare costs affects all payers: individuals, businesses, and governments. And just as Medicare is influenced by the overall healthcare system, the

opposite is true as well. Medicare has been a leader in experimenting with options

for curbing the costs of care, both in terms of increasing prices and use of services.

Further, while costs continue to rise, efforts through time to hold down these costs

have led to a better outlook than was the case in the mid-1990s. Similar re-evaluation of the program to make changes where needed will be an important part of

Medicare’s future.

MEASURING MEDICARE’S FINANCIAL BURDENS

Medicare is currently financed in a variety of ways. Part A relies mainly on payroll taxes with a modest contribution from part of the taxes imposed on Social Security benefits. Part B, on the other hand, is financed by enrollee premiums set at

25 percent of the costs of Part B benefits for elderly beneficiaries and by general

revenue contributions sufficient to cover the remaining costs.

Medicare’s financial health can be viewed from several perspectives. The appropriate question over time is whether, as a society, we can afford to support Medicare. But the measures often used actually focus on a narrower issue of solvency,

particularly that of the Part A Trust Fund. That measure does point to the need

for some type of policy change in the future, but that could simply mean increasing

the revenues going into the trust funds, for example.

Solvency Measures

Solvency, as measured by the date of exhaustion of the Part A Trust Fund, is one

of the most commonly reported statistics about Medicare.1 This is just one of many

measures reported in the Medicare Board of Trustees annual reports on Medicare’s

financial outlook. Critics of Medicare often emphasize the solvency of the Part A

Trust Fund as an indicator of affordability as well as solvency. This implicitly treats

the Part A Trust Fund as establishing a limit on what can be spent on Part A.

The Part A Trust Fund was designed to assure that the specified payroll tax contribution would be used specifically for Part A spending. As dedicated revenues, payroll and other revenue sources that exceed the amount necessary to cover Part A

benefits go into the Trust Fund and collect interest. When the trust fund forecasts

indicate a declining balance, this serves as an early warning of the need for an adjustment either in revenue contributions or spending on the program. Over the next

ten years, Medicare revenues will exceed spending by over $500 billion.

Projections of the Medicare Part A trust fund in the most recent Trustees’ Report

indicate that it will maintain a positive balance through 2026. Considered in historical context, the date of projected insolvency historically is far into the future as

compared to what it has been in earlier years (Figure 1). The trust fund is expected

to grow until 2014, after which the trust fund’s balances will begin to decline. At

that point, payroll tax and other receipts are insufficient to cover all expenditures.

After 2014, Part A of Medicare must supplement tax revenues with funds accumulated in the Part A Trust Fund.

Another solvency measure that was contained in the Administration’s budget documents for this year indicated that there was a $13.3 trillion unfounded liability

facing Medicare over the next 75 years. But this is based on very misleading figures.

The text implies that payroll taxes are the only revenue source from which Medicare

is allowed to draw to cover its costs. While Part A is largely funded by payroll taxes,

Part B by law has always relied on general revenues. Including its costs in an analysis of the adequacy of the current payroll tax has as much validity as treating any

other expenditure covered by general revenues (such as defense) as having large unfounded liabilities as well. If done correctly, the ‘‘unfounded promises’’ under Medicare would be much lower, more in the range of $5 trillion.

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2The figure used here is based on the intermediate projections from the 2002 Trustees Report,

which assumes a 1.1 percent real growth in per worker wages each year. Over the past 50 years,

productivity has been higher than this amount, averaging over 1.5 percent per year.

That is not to say that this is not a large amount, but rather that the size is more manageable than the $13.3 trillion implies. It is important to note, for example, that

in the next ten years, Part A revenues will exceed Part A spending by over $500

billion.

Affordability Measures

Assessing affordability using the solvency of the Part A Trust Fund as the measure is analogous to individuals arguing that they cannot pay all their bills because

the balance in one of their checking accounts is too low. Affordability is a broader

issue that turns on whether we as a society can support Medicare into the future.

The need for healthcare for this segment of the population will not go away simply

because we decide to cut back on government’s contribution. But the ability of Medicare beneficiaries to absorb higher healthcare costs if no new revenues are forthcoming would be in serious doubt.

The Medicare Trustees Annual Report offers two broader measures of affordability

described below, although each are limited in scope. Thus, an alternative measure

presented here proposes a more comprehensive way to examine affordability.

The Worker-to-Beneficiary Ratio. The ratio of workers contributing to Medicare at any point in time compared to the number of beneficiaries shows that the

number of younger persons relative to older ones will decline in the future given

the aging of society. This declining ratio of workers to retirees indicates that each

worker will have to bear a larger share of the cost of providing payroll tax-financed

Medicare benefits.

Between 2002 and 2030 (about the time when most Baby Boomers will have become eligible for Medicare), the ratio of workers to beneficiaries will fall from 3.9

to 2.4. Indeed, this is one of the statistics commonly cited by those who claim the

program is ‘‘unsustainable.’’ This measure does signal the need for more revenues

per worker—a legitimate issue for debate. However, it fails to assess the level of

burden relative to ability to pay from each future worker, ignoring any improvement

in the economic circumstances of workers over time due to per capita economic

growth.

Medicare Spending as a Share of GDP. A second measure is the sum of Part

A and B spending as a share of GDP. In 2002, Medicare’s total share was 2.56 percent and is projected to rise to 4.75 percent in 2030. This represents a doubling of

the GDP share. Such an increase reflects the fact that health care costs per capita

are expected to continue rising, and the number of people covered will double over

that time period. But again, this measure is not as helpful in the debate on Medicare’s future because it does not consider how well off we will be as a society as

the level of GDP grows. Some goods and services, like health care, may appropriately grow as a share of GDP in response to higher living standards and preferences of the population. What is needed is more information to be able to understand the consequences of devoting a higher share of society’s resources to Medicare.

A More Comprehensive Measure of Affordability. Another way to look at affordability is to focus not just on the number of workers that contribute to payroll

and income taxes or on aggregate GDP, but instead on how the Medicare per capita

burden will affect workers over time. While the share of the pie (GDP) going to

Medicare is likely to rise, if the pie (on a per capita basis) is also much larger, then

an increasing share is less of a burden. If the future leads to increased national

well-being, additional resource sharing would be affordable. Thus, another way to

examine affordability is to focus on whether taxpayers of the future will be better

off even after they pay higher amounts for Medicare.

This approach measure begins with computing per worker GDP over time, resulting in a measure of the nation’s output of goods and services divided across the

working population. This provides the base for assessing Medicare’s burden on

workers, who pay for the bulk of support for the program. Per worker GDP—even

after adjusting for inflation—rises substantially, from $69,000 per worker in 2002

to just under $107,000 in 2035 (in 2003 dollars).2 This is an increase of 54.9 percent

in per worker GDP, a substantial increase in financial well-being.

What about Medicare’s costs over this period? The burdens from Medicare spending on each worker are projected to rise at a faster rate than per capita GDP because both numbers of beneficiaries and their inflation-adjusted spending will rise

over time. But because per worker GDP is a much larger dollar amount than the

dollars of Medicare burdens, the reduction in well-being that this entails for workers

is modest.

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To calculate this per worker burden from Medicare, several adjustments are necessary. First, each worker will bear an increasing share of Medicare over time because of the change in the ratio of workers to retirees. Further, per capita Medicare

costs are expected to rise by 90 percent in real terms by 2035, also increasing the

real dollar burden on workers. But not all of Medicare’s costs are borne by workers.

Thus, costs are adjusted downward by the contributions that will be made by beneficiaries themselves. The Part B premium accounts for about 10 percent of Medicare’s costs. In addition, beneficiaries make further contributions because some of

the taxation of Social Security benefits goes into Part A and older and disabled persons also pay income taxes that help support Part B. Thus, those costs need to be

netted out.

The resulting real per worker burden estimates range from $1,556 in 2002 to

$4,993 in 2035 (in 2002 dollars). In Figure 2, the bar graph indicates per worker

GDP in inflation-adjusted dollars, and the line graph indicates how much would be

left after accounting for the Medicare burden.

From 2002 to 2035, the increase in net (after subtracting Medicare) per worker

resources would be 51.0 percent as compared to the 54.9 percent increase in per

worker GDP. That is, workers would still be substantially better off than today,

even after paying the full projected costs of Medicare. The pie will indeed have gotten larger, making it possible to absorb Medicare’s higher costs. Essentially our estimates indicate that Medicare’s greater burdens would ‘‘consume’’ about 7 percent of

increased well-being for workers over that period. There will, of course, be other demands on these resources as well, but this approach puts demands from Medicare

into a broader perspective. This measure for examining affordability takes into account Parts A and B of Medicare, and it puts the issue of the burdens of the program into a per worker context.

This more comprehensive measure of net per worker output also suggests that,

as a society, we will be able to afford Medicare without an inordinate burden on

workers or taxpayers once even modest estimates of productivity growth over time

are taken into account. A greater challenge will be for society to decide whether it

is willing to share these costs.

HOW MUCH SHOULD BENEFICIARIES BE ASKED TO PAY?

The burdens of higher health care costs in the future will likely need to be shared

between beneficiaries and younger taxpayers in some manner deemed reasonable.

The numbers above already give a sense that future workers will be in a reasonable

position to pay more. What about beneficiaries?

Options for passing more costs of the program onto beneficiaries, either directly

through new premiums or cost sharing or indirectly through options that place them

at risk for health care costs over time, need to be carefully balanced against beneficiaries’ ability to absorb these changes. Just as Medicare’s costs will rise to unprecedented levels in the future, so will the burdens on beneficiaries and their families.

Even under current law, Medicare beneficiaries will be paying a larger share of the

overall costs of the program and more of their incomes in meeting these health care

expenses. In 2003, beneficiaries will spend about 23 percent of their incomes on average for acute health care. In a study I did with Stephanie Maxwell and Misha

Segal, we projected per capita out-of-pocket spending based on projected Medicare

growth into the future and found that the average beneficiary in 2025 would likely

have to pay nearly 30 percent of her income on health care because the costs of care

grow faster than incomes over time. Figure 3 also indicates how these burdens

would grow for other groups of the Medicare population.

Thus, a difficult question to answer will be how much more can be shifted onto

beneficiaries over time? If incomes rise faster than anticipated and health care

spending moderates, there will certainly be room for greater contributions. But a

full shifting of additional costs does not seem to be a viable option. Moreover, it will

be very important to take special care with the most vulnerable beneficiaries.

In addition, options to increase beneficiary contributions to the cost of Medicare

further increase the need to provide protections for low-income beneficiaries. The

current programs to provide protections to low-income beneficiaries are inadequate,

particularly if new premium or cost-sharing requirements are added to the program.

Participation in the Medicare Savings programs is low, likely in part because these

programs are run by Medicaid and are thus tainted by association with a ‘‘welfare’’

program. Further, states, which pay part of the costs, tend to be unenthusiastic

about these extra program and likely discourage participation.

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WOULD RELYING ON THE PRIVATE SECTOR MAKE MEDICARE A MORE VIABLE PROGRAM?

Much of the debate over how to reform the Medicare program has focused on

broad restructuring proposals, moving the management and oversight increasingly

under the control of private insurance. What are the tradeoffs from increasingly relying on private plans to serve Medicare beneficiaries? Most important, there is little evidence to suggest even modest savings to Medicare from increased competition

and the flexibility that the private sector enjoys. Further, the effort necessary to create, in a private plan environment, all the protections needed to compensate for

moving away from traditional Medicare seems too great and too uncertain.

Claims for savings from options that shift Medicare more to a system of private

insurance usually rest on two basic arguments: first, it is commonly claimed that

the private sector is more efficient than Medicare, and second, that competition

among plans will generate more price sensitivity on the part of beneficiaries and

plans alike. Although seemingly credible, these claims do not hold up under close

examination.

Looking back over the period from 1970 to 2000, a recent study I completed with

Cristina Boccuti found that Medicare’s cost-containment performance has been better than that of private insurance even after controlling for coverage of comparable

services. Starting in the 1970s, Medicare and private insurance plans initially grew

very much in tandem, showing few discernible differences (See Figure 4). By the

1980s, per capita spending had more than doubled in both sectors. But Medicare

became more cost-conscious than private health insurance in the 1980s, and cost

containment efforts, particularly through hospital payment reforms, began to pay

off. From about 1984 through 1988, Medicare’s per capita costs grew much more

slowly than those in the private sector.

This gap in overall growth in Medicare’s favor stayed relatively constant until the

mid 1990s when private insurers began to take seriously the rising costs of health

insurance. At that time, growth in the cost of private insurance moderated in a

fashion similar to Medicare’s slower growth in the 1980s. Thus, it can be argued

that the private sector was playing ‘‘catch up’’ to Medicare in achieving cost containment. Private insurance thus narrowed the difference with Medicare in the 1990s,

but as of 2000, there was still a considerable way for the private sector to go before

its cost growth would match Medicare’s achievement of lower overall growth. When

comparison is made on rates of growth for comparable benefits, Medicare’s cumulative rate is 19 percent below that of private insurance.

Technological change and improvement represents a major factor driving high

rates of expenditure growth. To date, most of the cost savings generated by all payers of care has come from slowing growth in the prices paid for services and making

only preliminary inroads in reducing the use of services or addressing the issue of

technology. Reining in use of services will constitute a major challenge for private

insurance as well as Medicare in the future, and it is not clear whether the public

or private sector is better equipped to do this.

Reform options such as the premium support approach also seek savings by allowing the premiums paid by beneficiaries to vary such that those choosing higher cost

plans pay substantially higher premiums. The theory is that beneficiaries will become more price conscious and choose lower cost plans. This in turn will reward private insurers that are able to hold down costs. And there is some evidence from the

federal employees system and the Calpers system in California that this has disciplined the insurance market to some degree. Studies that have focused on retirees,

however, show much less sensitivity to price differences. Older persons may be less

willing to change doctors and learn new insurance rules in order to save a few dollars each month. Thus, what is not known is how well this will work for Medicare

beneficiaries.

For example, for a premium support model to work, at least some beneficiaries

must be willing to shift plans each year (and to change providers and learn new

rules) in order to reward the more efficient plans. Without that shifting, savings will

not occur. In addition, there is the question of how private insurers will respond.

(If new enrollees go into such plans each year, some savings will be achieved, but

these are the least costly beneficiaries, and may lead to further problems as discussed below.) Will they seek to improve service or instead focus on marketing and

other techniques to attract a desirable, healthy patient base? It simply isn’t known

if the competition will really do what it is supposed to do.

In addition, new approaches to the delivery of health care under Medicare may

generate a whole new set of problems, including problems in areas where Medicare

is now working well. For example, shifting across plans is not necessarily good for

patients; it is not only disruptive, it can raise costs of care. Some studies have

shown that having one physician over a long period of time reduces costs of care.

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And if it is only the healthier beneficiaries who choose to switch plans, the sickest

and most vulnerable beneficiaries may end up being concentrated in plans that become increasingly expensive over time. The case of retirees left in the federal employees high-option Blue Cross plan and in a study of retirees in California suggest

that even when plans become very expensive, beneficiaries may be fearful of switching and end up substantially disadvantaged. Thus, the most vulnerable may stay

in plans that become inordinately expensive. Further, private plans by design are

interested in satisfying their own customers and generating profits for stockholders.

They cannot be expected to meet larger social goals such as making sure that the

sickest beneficiaries get high quality care; and to the extent that such goals remain

important, reforms in Medicare will have to incorporate additional protections to

balance these concerns as described below.

Ultimately, projected cost savings from a private insurance initiative arise from

passing costs off onto beneficiaries through higher premiums or increased cost sharing requirements. If that indeed is the case, then this approach merely represents

an elaborate way to avoid an honest debate about how to share future burdens.

CHANGES TO IMPROVE MEDICARE

Making changes to Medicare that can improve its viability both in terms of its

costs and in how well it serves older and disabled beneficiaries should certainly be

pursued. Further, it makes little sense to look for a solution that takes policy makers permanently out of Medicare’s future. The flux and complexity of our healthcare

system will necessitate continuing attention to this program. At present a number

of areas in Medicare need attention.

What I would prefer to see instead is emphasis on improvements in both the private plan options and the traditional Medicare program, basically retaining the current structure in which traditional Medicare is the primary option. Rather than focusing on restructuring Medicare to emphasize private insurance, I would place the

emphasis on innovations necessary for improvements in health care delivery regardless of setting.

Critics of Medicare rightly point out that the inadequacy of its benefit package

has led to the development of a variety of supplemental insurance arrangements

which in turn create an inefficient system in which most beneficiaries rely on two

sources of insurance to meet their needs. It is sometimes argued that improvements

in coverage can only occur in combination with structural reform. And some advocates of a private approach to insurance go further, suggesting that the structural

reform itself will naturally produce such benefit improvements. This implicitly holds

the debate on improved benefits hostage to accepting other unrelated changes. That

logic actually should run in the other direction. It is not reasonable to expect any

number of other changes to work without first offering a more comprehensive benefit package for Medicare. In that way, payments made to private plans can improve, allowing them to better coordinate care. And the fee for service system will

also be able to change in ways that might encourage better care delivery. For example, it is not reasonable to ask patients to participate in a program to reduce hypertension (which can save costs over the long run) without covering the prescription

drugs that are likely to be an essential part of that effort. In addition, a better benefit package will also allow at least some beneficiaries to forego the purchase of inefficient private supplemental insurance. That itself should be a goal of reform.

In addition, better norms and standards of care are needed if we are to provide

quality of care protections to all Americans. Investment in outcomes research, disease management and other techniques that could lead to improvements in treatment of patients will require a substantial public commitment. This cannot be done

as well in a proprietary, for-profit environment where dissemination of new ways

of coordinating care may not be shared. Private plans can play an important role

and may develop some innovations on their own, but in much the same way that

we view basic research on medicine as requiring a public component, innovations

in health delivery also need such support. Further, innovations in treatment and coordination of care should focus on those with substantial health problems—exactly

the population that many private plans seek to avoid. Some private plans might be

willing to specialize in individuals with specific needs, but this is not going to happen if the environment is one emphasizing price competition and with barely adequate risk adjustors. Innovative plans would likely suffer in that environment.

A good area to begin improvements in knowledge about the effectiveness of medical care would be with prescription drugs. Realistically, any prescription drug benefit will require efforts to hold down costs over time. Part of that effort needs to

be based on evidence of the comparative effectiveness of various drugs, for example.

Establishing rules for coverage of drugs should reflect good medical evidence and

36

not just on which manufacturer offers the best discounts. Undertaking these studies

and evaluations represents a public good and needs to be funded on that basis.

Within the fee-for-service environment, it would be helpful to energize both patients and physicians in helping to coordinate care. Patients need information and

support as well as incentives to become involved. Many caring physicians, who have

often resented the low pay in fee for service and the lack of control in managed care,

would likely welcome the ability to spend more time with their patients. One simple

way to do this would be to give beneficiaries a certificate that spells out the care

consultation benefits to which they are entitled and allow them to designate a physician who will provide those services. In that way, both the patient and the physician

(who would get an additional payment for the annual or biannual services) would

know what they are expected to provide and could likely reduce confusion and unnecessary duplication of services that go on in a fee for service environment.

Additional flexibility to CMS to manage and develop payment initiatives aimed

at using competition where appropriate also could result in long term cost savings

and serve patients well. In the areas of durable medical equipment and perhaps

even some testing and laboratory services, contracting could be used to obtain favorable prices.

These are only a few examples of changes, none of which promise to be the magic

bullet, but which could aid the Medicare program over time.

CONCLUSION

It is important to consider the broader issue of affordability in thinking about

Medicare’s future and not just the usual measures of solvency on which people often

depend. And while Medicare at its current level is certainly affordable, a number

of changes will need to be made. Over the years, the financial viability of Medicare

has been improved by enacting a range of changes in the program. Further improvements in the program will be needed in the future. Nonetheless, we simply cannot

expect as a society to provide care to the most needy of our citizens for services that

are likely to rise in costs and to absorb a rapid increase in the number of individuals

becoming eligible for Medicare without taking the financing issue head on. As a successful program, it makes sense to continue Medicare for the future, but that will

require additional revenues.

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Mr. BILIRAKIS. Thank you very much, Dr. Moon.

Ms. Grealy.

STATEMENT OF MARY R. GREALY

Ms. GREALY. Chairman Bilirakis, Congressman Brown, members

of the subcommittee, thank you for your invitation to testify today.

And thank you for the commitment and energy you are bringing to

this very necessary goal of strengthening and improving Medicare.

The Health Care Leadership Council is a coalition of chief executives of some of our Nation’s most important and innovative health

care companies and institutions. Our members share a commitment to a patient-centered health care system that is characterized

by innovation, value, and constantly improving quality. We believe

these are words that should be used to describe our Nation’s Medicare program.

I think we can all agree upon certain goals for the health program that serves older and disabled Americans. Medicare should

have a prescription drug benefit. In fact, we support President

Bush’s budget request for a drug benefit. Medicare should offer a

high level of health care quality and innovation to its beneficiaries.

Medicare should offer good value to both beneficiaries and to taxpayers.

We believe that Medicare can be improved in both financial and

health care quality terms by moving toward a delivery model that

utilizes competition and invests beneficiaries with the power of consumer choice. This model works well today for tens of millions of

people who are either in large employer-sponsored health plans or

in the Federal Employees Health Benefit Program.

These programs deliver better benefits, including prescription

drugs, lower out-of-pocket costs, and the ability to choose a plan

that is best suited to individual needs.

This morning I would like to make three critical points about

what can be gained from a competitive Medicare model. First, there

is a level of quality that can be achieved through a market-based

incentive that simply does not occur in a price-controlled, regulated

environment.

Mr. Chairman, there is no question that Medicare beneficiaries

are missing out on quality health care innovations that are being

delivered to millions of health care consumers throughout the country. Private health plans and other providers have created effective

care management programs that lead to better health outcomes,

greater patient satisfaction, and cost efficiencies.

By contrast, Medicare does have an inherent difficulty in keeping

pace with the changing state of health care. Changing the Medicare

benefit package requires an act of Congress, and the administrative

process for determining whether Medicare should cover a new

treatment or procedure is painfully complex.

And, consequently, Medicare beneficiaries did not then have access to the most effective preventive care available. Within the

FEHBP program, health plans respond quickly to changing beneficiary needs, to new treatments, and to the availability of new

technologies.

My second point concerns the undeniable linkage between choice

and quality. Consumers influence the quality of their care by choosVerDate 11-MAY-2000 08:38 Aug 12, 2003 Jkt 000000 PO 00000 Frm 00045 Fmt 6633 Sfmt 6602 87482.TXT HCOM1 PsN: HCOM1
42

ing health plans that demonstrate better outcomes. Consumers can

also influence the value of their care by choosing health plans that

offer the best product for the lowest price.

Doesn’t it stand to reason, then, that Medicare beneficiaries,

given this power of choice, can be the drivers of greater quality and

greater value. Some have said that it would be a confusing imposition to give seniors these choices. We should not sell older Americans short. And with more retirees having experienced some form

of managed care during their working years, modern Medicare

beneficiaries will be increasingly comfortable with, and accustomed

to, selecting and joining private health plans.

Finally, I would like to say a word about the financial aspects of

Medicare and how best to move the program toward sound footing

for future generations. Some would argue that the right answer for

Medicare involves government price controls and periodic spending

reductions like those that were included in the 1997 Balanced

Budget Act legislation.

And, yes, those actions have kept Medicare spending growth at

a comparatively lower rate. But at what price? Today’s Medicare

program can control spending growth, because it does not provide

an outpatient prescription drug benefit. And it does not always

keep up with new health technologies as quickly as the private sector does.

And providers can only continue to meet and treat Medicare patients at low reimbursement rates by making up for that through

some of—or making up for some of their losses through other payers. You can find savings through price controls and spending cuts,

but you pay through an erosion in access and in quality.

It would make far more sense and be better for Medicare beneficiaries to use market-based incentives to increase value and to

use the power of consumer choice to simulate cost efficiencies and

to use preventive care and health innovations to reduce the need

for costly acute care and lengthy hospitalizations.

We can have a Medicare program that offers both quality and

value, and that is geared to meet the needs and challenges of this

century. We look forward to working with this committee to pursue

these essential goals.

Thank you.

[The prepared statement of Mary R. Grealy follows:]

PREPARED STATEMENT OF MARY R. GREALY, PRESIDENT, HEALTHCARE LEADERSHIP

COUNCIL

Thank you, Chairman Bilirakis, Congressman Brown, members of the subcommittee for your invitation to testify today. The Healthcare Leadership Council

shares your commitment to a strong Medicare program, and I look forward to sharing our members’ views on how this valuable program can be improved.

The Healthcare Leadership Council (HLC) is made up of chief executives of the

nation’s premier health care companies and institutions. Our members are health

industry leaders who share a vision of a patient-centered health care system characterized by innovation, value and constantly-improving quality. The HLC is one of

the governing members of the Alliance to Improve Medicare—a broad-based coalition of health, employer and retiree organizations dedicated to a stronger Medicare

program that embodies the best qualities of American health care.

Clearly, steps must be taken to improve Medicare, in both financial and health

care quality terms. Today, Medicare spends an average $6,200 annually for each

beneficiary in the fee-for-service program. Ten years from now, that cost will increase to about $9,500. That’s a 50 percent increase in cost to simply maintain the

43

program we have today, with no outpatient prescription drug coverage, no significant overall quality improvements or added value for beneficiaries.

I think we can all agree that Medicare should have a prescription drug benefit.

In fact, the HLC supports President Bush’s generous $400 billion budget request for

a prescription drug benefit and the work done last year by the Committee. Medicare

should also offer a higher level of health care quality and innovation, and should

offer greater value to both beneficiaries and taxpayers.

We believe these goals can be achieved if Medicare moves toward a delivery model

that utilizes competition, flexibility and invests beneficiaries with the power of consumer choice. This model works well today for the tens of millions of Americans who

receive their health care through large employer-sponsored plans or through the

Federal Employees Health Benefits Program (FEHBP). People enrolled in these programs generally receive better benefits, including prescription drugs, lower out-ofpocket costs and the ability to choose a health plan best suited for their needs.

Medicare, as it is structured today, bound by government micromanagement, cannot offer these advantages.

REGULATED QUALITY VERSUS INCENTIVE-BASED QUALITY

Today’s Medicare program has inherent barriers that prevent it from offering the

same kind of coordinated care, medical innovation and continuous quality improvement offered in the private health insurance market.

Medicare’s administered pricing system and its complex regulations don’t provide

incentives for quality improvements. Medicare’s regulations achieve a defined, and

often outdated, regulatory standard—in essence, a ‘‘ceiling’’ of health care quality.

This regulatory rigidity doesn’t recognize that quality improvement is never static.

It is constantly evolving. Today’s best practices, which regulations lock into place,

could be outdated a few months from now.

Medicare beneficiaries are missing out on quality achievements taking place elsewhere. Private health plans, pharmacy benefit managers and other health care providers have created effective care management programs that lead to better health

outcomes, greater patient satisfaction and cost efficiencies. Members of one nationally-known health plan can, for example, use the Internet to compare hospital quality information for a wide variety of medical conditions and surgical procedures,

compare prescription drug choices for cost and potential side effects and access information on thousands of health and medical topics. Additionally, beneficiaries can

utilize a 24-hour telephone service to get professional case management services for

serious and complex medical conditions. This is emblematic of the efforts and innovations being undertaken by health plans to keep Americans healthier. Medicare

simply does not have any built-in incentives to guide beneficiaries toward the few

preventive benefits the program covers.

And private plans, not conventional Medicare, utilize the services of pharmacy

benefit management companies, which have developed impressive programs to improve the quality and safety of pharmaceutical regimens while also containing costs.

Competition, flexibility and consumer choice create these positive results. Health

plans must pursue and develop constant improvements in order to compete for employers shopping for greater quality and value in health coverage.

The Medicare+Choice program, its flawed structure notwithstanding, has provided

us with valuable information on the steps private health plans will take to keep patients well. Ninety-five percent of Medicare+Choice plans have diabetes management programs. Three of every four have asthma and coronary heart disease management programs. And, every single Medicare +Choice plan provides annual physical examinations. By contrast, fee-for-service Medicare has just started implementing limited disease management demonstrations.

In a recent paper, Dr. John Wennberg, author of the renowned Dartmouth Atlas,

discussed the linkage between a health system’s organizational structure and the

usage of effective health care practices. For example, the percentage of female Medicare beneficiaries who received a mammogram at least once over a two-year period

fell below the ‘‘best practice’’ benchmark in every geographic region of the country—

ranging from a high of 77 percent to a disturbing low of 21 percent.

Why is there such variation in effective care? Dr. Wennberg wrote that a critical

factor is the lack of infrastructure to ensure compliance with well-accepted, evidence-based standards of practice.

Dr. Wennberg’s analysis is extremely important in discussing the future of Medicare. We can’t automatically improve the quality of care for Medicare beneficiaries

by adding new benefits, on an ad hoc basis, to the existing fee-for-service program.

Even the few preventive benefits covered by Medicare are used sporadically, according to a 2002 General Accounting Office report. There are a lack of incentives and

44

organizational systems to encourage beneficiaries to take advantage of services that

can keep them healthier.

THE LINK BETWEEN QUALITY AND CHOICE

Beneficiary choice is a highly effective regulator of quality. Consumers influence

the quality of their care by choosing health plans that demonstrate better outcomes.

Consumers influence the value of their care by choosing plans that offer the best

product for the lowest price. It stands to reason that Medicare beneficiaries, given

the power of consumer choice, will be the drivers of greater quality and value within

a modernized Medicare program.

In fact, beneficiaries who are provided user-friendly, customized information on

health care choices can bring about greater efficiency in the overall Medicare program by reducing the need for top-down federal micromanagement.

We object to the contention that Medicare beneficiaries would not be up to managing a greater degree of consumer choice. This argument sells today’s seniors short.

With more retirees having experienced some form of managed care during their

working years, and with fewer employers offering retiree health benefits, ‘‘modern’’

Medicare beneficiaries will be increasingly more willing to join private plans.

Statistics bear out this trend. In 1992, about 63 percent of the under-65 population with health coverage were enrolled in traditional fee-for-service health plans,

with the remainder enrolled in HMOs, preferred provider organizations and pointof-service plans. By 1999, fee-for-service enrollment had decreased to only nine percent of the under-65 covered population, with the other categories having greatly expanded participation. These newer beneficiaries will enter Medicare eligibility experienced in choosing health plans based on quality measures, tailored benefit packages and cost-sharing advantages.

Further, moving Medicare toward an FEHBP model would likely open a greater

variety of plan options, as has happened in the private sector. One can assume the

emergence of preferred provider organizations and private fee-for-service plans, as

well as the more organized systems of delivery already discussed. In a truly competitive environment, beneficiaries will have different plan structures, premium differentials and, very importantly, quality comparison information. Just as federal

employees do today, beneficiaries and their families will have the information conveniently at hand to choose a plan and benefits that best suit their individual needs.

Debate over whether a more competitive Medicare model should be developed inevitably includes discussions of the Medicare+Choice program. We can learn a great

deal from the flaws of the Medicare+Choice structure, and use that knowledge to

shape Medicare reform that will attract plan participation in Medicare and make

health plans attractive to Medicare beneficiaries.

MEDICARE+CHOICE: LEARNING LESSONS TO AID TRUE REFORM

Some have made the assertion that a competitive model for Medicare cannot

work. They use Medicare+Choice as an example. That is a flawed argument.

It is true that Medicare+Choice has not yielded enough participating plans to generate meaningful competition. This is largely due to the fact that Medicare+Choice

plans have not had the opportunity to offer a competitive alternative to the Medicare fee-for-service program.

Over the last five years—the time frame during which the Medicare+Choice program has phased in—there has been an increasing gap between what the traditional

fee-for-service Medicare program spends on a beneficiary and the amount a

Medicare+Choice plan is paid to provide care to a Medicare beneficiary in the same

geographic area. This widening payment differential forced Medicare+Choice plans

to reduce extra benefits they could use to attract beneficiaries. It has also forced

increased beneficiary cost-sharing. The concept of fair competition was rendered impossible.

An important lesson learned from Medicare+Choice is that competition based on

quality and value cannot take place in an environment of price controls and inflexibility. It is critical to keep this in mind in designing a better Medicare program.

Medicare+Choice could not achieve its full potential because it ran into the impassable barrier of unbalanced competition. Lawmakers will be faced with the task of

creating a level field of competition while maintaining the current fee-for-service

program. This will be difficult, both politically and technically. It is, however, absolutely essential to inject competition into the Medicare program if we are to provide

current and future beneficiaries with comprehensive, high-quality health care.

45

A SUPERIOR MEDICARE MODEL

Our society has changed tremendously since Medicare was created in 1965. The

Medicare of that time offered seniors what they needed most—the acute care that

so many older Americans required not long after they reached retirement age.

Today, though, our senior population is greatly changed. Thanks to modern medicine and greater knowledge about healthy lifestyles, life expectancy is much greater

than it was in 1965. Now, what seniors need most is to better manage, or even prevent, chronic disease. Today’s Medicare, though, is still offering a 1965 prescription

for a 21st century diagnosis.

Creating a competitive FEHBP-style model for Medicare would directly address

many of the inherent flaws that prevent senior citizens from receiving the benefits

of health care innovation and advancements.

Today’s Medicare program is highly regulatory and inflexible, although HHS Secretary Thompson deserves considerable credit for his efforts to address this problem.

The program is still afflicted with over 100,000 pages of regulations, rules, manuals,

instructions, letters, alerts and notices. The administrative process for determining

whether new medical treatments or procedures merit coverage under the Medicare

benefits package is excruciatingly complex. Consequently, Medicare is always a few

steps behind the current state and quality of American health care, and patients

pay the price for this lag.

We have to ask ourselves, should seniors have to wait for an act of Congress to

modify the Medicare benefit package in order to have access to the most effective

preventive health services available?

HLC members believe an FEHBP-style model for Medicare would represent the

best possible partnership between the public and private sectors to provide quality

health care to America’s seniors. In this model, it would be a proper and essential

role for government to provide oversight of private health insurance programs, as

is the case with FEHBP.

We can draw a sharp contrast, though, between the FEHBP model and conventional Medicare, in that the former requires a minimal amount of regulation. This

competitive model would provide better benefits, lower out-of-pocket costs and much

quicker access to lifesaving and life-enhancing medical innovations. In the FEHBP

model, health plans respond swiftly to changing beneficiary needs, to new treatments and to the availability of new technologies. Medicare, under this model, could

better keep pace with advances in health care and, most importantly, prevent and

manage disease instead of simply responding to individual episodes of illness. That

is the care today’s seniors need.

CONCLUSION

Mr. Chairman, in discussing Medicare reform, there are important facts that

should come to the forefront of consideration—facts about care management programs, about preventive care, about pharmacy benefit management programs, about

all of the beneficial approaches and innovations that private plans are utilizing and

Medicare is not. It is possible to modernize Medicare to better serve the health

needs of America’s seniors and to do so cost-efficiently.

As we look at Medicare’s financial challenges, some will argue that the right answer for Medicare involves government price controls and periodic spending reductions such as those legislated in the 1997 Balanced Budget Act. They will say that

these tools have traditionally kept Medicare spending growth at a lower rate than

private health care spending.

But, looking at the health care economy as a whole, these savings are false. In

the bifurcated world of Medicare versus private health care, payment reductions in

Medicare just result in shifts from one side of the payment world to the other. Providers are only able to continue treating Medicare patients at such low rates because they make up for some of these losses through other payers.

Additionally, Medicare’s slower growth is partially due to the fact that it does not

provide an outpatient prescription drug benefit and it does not keep up with new

technologies as well as the private health care sector does.

Using draconian payment cuts to control Medicare spending, instead of building

in incentives to increase the value of care, cheats Medicare beneficiaries out of the

potential quality innovations being achieved by providers and plans competing for

millions of federal employees and private sector workers. Such cuts ignore also the

fact that providers deserve and must have adequate payment in order to provide

high quality health care to Medicare beneficiaries.

The Healthcare Leadership Council compliments this committee for its efforts to

look toward a future for Medicare that embraces both long-term financial health for

46

the program as well as better health care for its beneficiaries. We look forward to

working with you to achieve these important goals.

Thank you again for this opportunity to share our views.

Mr. BILIRAKIS. Thank you very much, Ms. Grealy.

Ms. Kennelly.

STATEMENT OF BARBARA B. KENNELLY

Ms. KENNELLY. Thank you, Chairman Bilirakis and ranking

member Mr. Brown, and other distinguished members of the committee. I am honored to be here to comment, and I thank you very

much for holding this very important hearing.

The national committee of which I am president is a membership

organization. It is a nonprofit, and it is bipartisan. And I am here

today to tell you a little bit about it. We have a lobbying division.

We have a grass-roots division. But we also have a membership division, which receives 600 calls a week. And this is what our members tell us consistently.

Our members want preventive benefits which help keep them

healthy and out of the hospital. They favor reforms that keep Medicare as a program in which everybody contributes, everyone gets

the same benefits, and those benefits are guaranteed.

The national committee supports a prescription drug benefit that

is universal, voluntary, and affordable. It should be readily adjusted to account for inflation and offered as a standard benefit

under Medicare. We support chronic disease management and preventive benefits, and, most importantly, we are committed to preserving the social insurance nature of Medicare.

We all want meaningful prescription drug coverage, yet it seems

when I look at what the administration is proposing that this

would not give seniors the assurances that they need. Instead, it

uses the promise of prescription drug coverage for some to restructure Medicare, and eventually undermine its social insurance principle.

We recognize that the country faces a deficit and fiscal constraints. We also recognize the administration’s suggestion of

spending $400 billion—and that is a lot of money—in 10 years,

probably will not do it because we know CBO tells us that $1.8 trillion will be spent by seniors on medications. But we hope that

Medicare is improved in a way that allows us to build on this beginning and provide meaningful prescription drug coverage to every

senior who needs it.

Can private insurance models provide these seniors the affordable, predictable, and reliable health coverage they say they need?

Let us examine this scenario. Beneficiaries in different plans would

have different benefits and costs. These costs and benefits would

have—could dramatically change, as they have done in managed

care plans in the past.

Your premiums and costs increase. Poor and sicker beneficiaries

might not be able to afford the same coverage as others. So far evidence does not indicate that private insurance can promise seniors

that premiums will not fluctuate substantially from year to year.

Our seniors, who like 85 percent of Medicare beneficiaries enrolled in traditional fee for service Medicare, tell us how much they

depend on Medicare and on its quality care. The administration’s

47

plan creates a new category of private Medicare insurance to deliver prescription drug coverage, and this could be problematic.

The shortcomings are well documented. We recently had one of

our members testify in front of another committee—Lucille Bryson.

She joined a Medicare+Choice program 5 years ago. Paying $19.98

a month, she thought she really had a good deal. Over 3 years, her

premium increased to $80 a month, and her benefits were cut. Mrs.

Bryson is not unique.

I look at the proposals that claim to model the FEHBP plan, of

which I am a member, as a delivery model, which the administration advocates. Also, we don’t think that meets the test of evidence.

Seniors are much older and tend to have a higher rate of chronic

illness than the FEHBP working population.

The average age of an FEHBP employee is 47, and the average

annual income is over $54,000. This is hardly comparable to a senior over 65 years of age whose annual income is $22,000.

Chairman Bilirakis, I would also like to associate myself with the

remarks yesterday of Bruce Vladeck. I know you have worked very

closely with him on one of the bipartisan commissions, and you

have disagreed with him. But you also understand that he is an

expert, as Dr. Moon is an expert.

And I read his testimony last night, and I really would like to

associate myself with it, because he spoke eloquently about the importance of the universality of Medicare. He also said how this has

to be a meaningful benefit. One-third of those on Medicare have

under $500 spent in a year on drugs. Ten percent spend over

$6,000. So the majority spend $2,500, and they are the ones that

really need the help.

We also—I read some interesting things that I hadn’t even

thought of, that we really would find it very difficult to mean test

Medicare, because we are so unknown exactly what senior incomes

are, and so many seniors have low income.

And then, I look to Aetna here, Mother Aetna, who I live right

down the block from, and they are a wonderful company and I

want them to succeed. But they don’t have a very good record with

seniors. We know so far they haven’t saved any money for Medicare. We know they don’t work very well in rural areas. And we

also know that if they don’t make a profit, they have to get out of

the business, because they have shareholders and they have to

make a profit.

So I come here this morning not as an expert but as an advocate

for 1.5 million seniors to say that I really think Medicare has

worked and will continue to work.

But, Chairman Bilirakis, what I really want to thank you is for

all of your hundreds and hundreds of hours of hard work. I sit and

look at you and think of the time you have spent trying to solve

this problem, and I say with Bruce Vladeck, as he said yesterday,

don’t think about the ideology, don’t think about the philosophy or

the theories. Take all of your knowledge and put it together and

fix Medicare with a prescription drug.

Thank you, Mr. Chairman.

[The prepared statement of Barbara B. Kennelly follows:]

48

1 ‘‘Medicare and Prescription Drug Fact Sheet,’’ Kaiser Family Foundation, February 2003.

2 ‘‘Projected spending for prescription drugs by and on behalf of Medicare enrollees,’’ Congressional Budget Office, February 3, 2003. 3 ‘‘Medicare Privatization: Bad for Seniors and People with Disabilities,’’ Public Citizens, February 2003. 4 ‘‘Average Out-of-Pocket Health Care Costs for Medicare+Choice Enrollees Increase Substantially in 2002,’’ Issue Brief, Commonwealth Fund, November 2002.

PREPARED STATEMENT OF BARBARA B. KENNELLY, PRESIDENT AND CHIEF EXECUTIVE

OFFICER, NATIONAL COMMITTEE TO PRESERVE SOCIAL SECURITY AND MEDICARE

Good morning, Chairman Bilirakis, Ranking Member Brown and distinguished

members of the committee. I appreciate the opportunity to comment today about

proposals to change Medicare and what that means for seniors. Thank you for holding this very important hearing.

The National Committee averages more than 600 calls per week from seniors

throughout the country. For our seniors, Medicare reform means getting a comprehensive drug benefit under traditional Medicare, and—like most seniors, who are

living on fixed incomes—coverage that is affordable and does not fluctuate substantially in price. They like preventive benefits, which help keep them healthy and out

of the hospital. They favor reforms that keep Medicare as a program in which everyone contributes, everyone gets the same benefits, and those benefits are guaranteed.

The National Committee supports a prescription drug benefit that is universal,

comprehensive in coverage, affordable, regularly adjusted to account for inflation,

voluntary, guaranteed to all who want it regardless of income or health status, and

offered as a standard benefit under Medicare. We support chronic disease management and preventive benefits and advocate for such improvements. And, most importantly, we are committed to preserving the social insurance nature of Medicare. Seniors are spending an average of $200 a month on prescription drugs 1 and they

need the assurance of meaningful prescription drug coverage. This is something we

all recognize and wish to do something about. Yet the administration’s Medicare

proposal, as well as other legislative proposals, would not give seniors this assurance. Instead, they use the promise of prescription drug coverage for some to restructure Medicare and eventually undermine its social insurance principle—the

same social insurance principle that now assures all seniors a defined set of benefits

and should guarantee all seniors a defined prescription drug benefit.

We recognize that the country faces a deficit and fiscal constraints, just as we all recognize that the administration’s suggestion of spending $400 billion over 10 years

for Medicare changes, including drug coverage, covers a fraction of the $1.8 trillion

seniors will be spending on drugs over the next decade.2 But we hope that Medicare

is improved in a way that allows us to build on this beginning and provide meaningful prescription drug coverage to every senior who needs it.

Can private insurance models provide these seniors the affordable, predictable

and reliable health coverage they say they need? Let’s examine the scenario. Beneficiaries in different plans would have different benefits and costs. Those costs and

benefits could dramatically change every year, as they have done in managed care

plans in the past five years, and seniors would not be able to plan for their

healthcare costs. If premiums and costs increased, poorer and sicker beneficiaries

might not be able to afford the same coverage as others. So far, evidence does not

indicate that private insurance can promise seniors that premiums would not fluctuate substantially from year to year.

Our seniors—who like 85 percent of Medicare beneficiaries who are enrolled in

traditional fee-for-service Medicare—tell us how much they depend on Medicare and

on quality care. There is an underlying assumption operating in a number of Medicare proposals that private plans give better care. Certainly this assumption is

present in the administration’s plan, which creates a new category of private Medicare insurance plans and uses private plans to deliver prescription drug coverage.

That private plans give better care is unsupported by historical evidence. The

shortcomings are well documented, from the earliest unsuccessful Medicare-risk

HMO demonstration projects to today’s uncertain Medicare+Choice. Since the enactment of the Balanced Budget Act of 1997 that created Medicare+Choice, managed

care plans have dropped more than 2.4 million seniors,3 many of whom enrolled for

the drug coverage the plans provided. When plans drop seniors, there often is not

another Medicare managed care plan in the area, especially in a rural setting. Many

in this position fall back on traditional fee-for-service Medicare because other plans

did not work out.

Medicare+Choice premiums have increased dramatically, by 37 percent,4 com- pared to an 8 percent increase in Medicare Part B premiums. For example, one of

our members, Lucille Bryson, joined a Medicare+Choice program five years ago, payVerDate 11-MAY-2000 08:38 Aug 12, 2003 Jkt 000000 PO 00000 Frm 00052 Fmt 6633 Sfmt 6621 87482.TXT HCOM1 PsN: HCOM1
49

5 ‘‘Medicare Privatization: Bad for Seniors and People with Disabilities,’’ Public Citizens, February 2003. 6 ‘‘Comparing Medicare and Private Insurers: Growth Rates in Spending Over Three Decades,’’

Health Affairs, March/April 2003. 7Federal Civilian Workforce Statistics: The Fact Book, Office of Personnel Management, 2002. 8 ‘‘Characteristics and Perceptions of the Medicare Population,’’ Centers for Medicare and Medicaid Services, 1999. 9Medicare Chart Book, Kaiser Family Foundation, Fall 2001. 10 ‘‘The Uninsured and their Access to Healthcare,’’ Kaiser Family Foundation, January 2003.

ing $19.98 a month. Over the next three years, her premiums increased to $80 a

month and she says that her benefits are now being cut. Mrs. Bryson is not unique.

Also, HMOs have spent, on average, between 10 and 15 percent of their revenue

on administrative costs,5 compared to Medicare’s 2 percent. The dramatic increase

in premiums and sizable administrative costs are further evidence that the private

sector does not have the track record to support the assertion that it can provide

seniors adequate prescription drug coverage for a reasonable cost.

Even now, managed care plans continue to ask Congress for more money to run

the Medicare+Choice programs or they threaten to no longer cover seniors. When

Congress did increase payments of $1 billion to plans in 2000 through the Benefits

Improvement and Protection Act, more than 544,000 beneficiaries still lost coverage.

And, according to a recent Urban Institute study by Marilyn Moon, private health

insurance companies spend more per beneficiary than does Medicare.6

This information gains significance when considering whether to divert prescription drug coverage to the hands of private plans and funnel beneficiaries to private

Medicare plans. The administration’s plan could result in seniors who wanted more

than just a drug discount card leaving traditional fee-for-service and going to a private insurance plan. Plans, if modeled after Medicare+Choice, could perform in a

manner similar to that of managed care: Evidence indicates that they would be likely to participate in favorable risk selection by offering Medicare beneficiaries lowcost, low-coverage plans that attract younger, healthier seniors, leaving the sickest

and oldest unable to afford the more generous plans.

Proposals to use the FEHBP program as a delivery model, which the administration has advocated, also do not meet the test of evidence. Seniors are much older

and tend to have a higher rate of chronic illnesses than the FEHBP working population. The average age of an FEHPB employee is 47 and the average annual income over $54,000. This is hardly comparable to a senior over 65 years of age, with

an average, and usually fixed, annual income of $22,000.7

The National Committee supports a prescription drug benefit that is universal,

comprehensive in coverage, affordable, regularly adjusted to account for inflation,

voluntary, guaranteed to all who want it regardless of income or health status, and

offered as a standard benefit under Medicare. We also support disease management

and preventive measures, and we are pleased that Department of Health and

Human Services Secretary Tommy Thompson recently announced a three-year, 10-

state demonstration proposal for chronic disease management for Medicare beneficiaries. According to the Centers for Medicare and Medicaid Services, 73 percent

of women and 65 percent of men who are Medicare beneficiaries have two or more

chronic conditions,8, and many of them are among the six percent of Medicare beneficiaries that account for more that half the program’s spending.9 Improvements

such as care coordination, chronic disease management and preventive services not

only are very important to keeping seniors healthy and out of the hospital, they also

have the potential to save the program a significant amount of money. These improvements can be added to traditional Medicare right now. It’s not necessary to

create private plans to implement them.

As we move forward, let us keep in mind that before Medicare, only 50 percent

of seniors had health insurance. Today, 99 percent of seniors are covered. Society

has benefited and we are all better off. This is what the social insurance principle,

on which Medicare is based, is all about.

Ultimately, if we want to improve Medicare, we have no choice but to consider

it in the context of the health care system of which it is a part. That system has

41 million Americans under 65 with no health insurance, and they are forcing hospitals to absorb costs and helping to drive double-digit health inflation.10 We must

look to the source of everybody’s inflation—the 41 million uninsured, new medical

testing and devices, and research and development—if we are to improve the components of the healthcare system that the inflation affects, including Medicare.

In conclusion, I want to thank Chairman Bilirakis, who has tried so hard to address seniors’ needs and continues to work to address the needs of his constituents

in Florida. And I want to thank all of the members of this body and their staff who

are carefully considering how the Medicare proposals would impact seniors. I appreVerDate 11-MAY-2000 08:38 Aug 12, 2003 Jkt 000000 PO 00000 Frm 00053 Fmt 6633 Sfmt 6621 87482.TXT HCOM1 PsN: HCOM1
50

ciate the opportunity to appear before you today and I look forward to any questions

the distinguished members of this committee may have. Thank you for your time.

Mr. BILIRAKIS. Thank you for that, Ms. Kennelly. You know, this

would be a much more interesting hearing I think if we just allowed you all to debate to each other.

I have always wanted to do that, to be perfectly honest with you.

Mr. Buddy, please pull the mike over, sir, and speak into it, if

you can.

STATEMENT OF ROBERT BUDDY

Mr. BUDDY. Good morning, Mr. Chairman and members of the

committee. My name is Robert Buddy, and I am a highly satisfied

member of a Medicare+Choice health plan in Houston, Texas.

Mr. BILIRAKIS. We can’t——

Mr. BUDDY. Can you hear me? Okay. Not too well.

I would like to take this opportunity to thank the committee for

inviting me to participate in this hearing on behalf of all seniors.

It is a privilege and an honor to attend, and I sincerely hope that

my comments can make a constructive contribution to the proceeding.

I will describe as concisely as possible how my wife and I have

benefited from the Medicare+Choice program and why I believe

this important program should be preserved.

While certain aspects of our experience are unique, the important

point is that millions of seniors have had similar experiences. My

objective, then, is to try to put a human face on a Medicare program that is working for me and for millions of other seniors who

have chosen to join a Medicare+Choice health plan.

My wife and I are now both 76 years of age. In 1993, when we

both turned 65, we became eligible for Medicare, and we were relieved and delighted to become eligible for this benefit. We purchased a Medicare supplement policy to supplement the Medicare

benefits at a combined cost of about $4,000 a year.

A year later we were introduced to the idea of a privatized

version of Medicare through an HMO. Today this program is

known as Medicare+Choice, soon possibly to be Medicare Advantage. The advantages of this plan were the emphasis on early detection and treatment of illness, its promotion of wellness, the opportunity it provided us to become active participants in our medical care with our primary care provider as a partner.

Because this approach resulted in a more efficient utilization of

resources, the plan offered broader benefits, including both brand

name and generic prescription drug coverage at a lower cost—in

fact, at no cost at all, in terms of premium, that is.

The emphasis on early detection and treatment had particular

appeal to me because of what had happened to my father. The traditional way of dealing with medical problems was to wait until

there were symptoms. Unfortunately, by the time symptoms appear, it is usually very late and possibly too late.

In my father’s case, just when he was at the peak of his career,

he became severely disabled by an acute case of glaucoma at the

age of 55. There had been no symptoms whatsoever. After a series

of unsuccessful operations, he became totally blind at the age of 63.

He also suffered from serious, but undetected and, therefore, unVerDate 11-MAY-2000 08:38 Aug 12, 2003 Jkt 000000 PO 00000 Frm 00054 Fmt 6633 Sfmt 6602 87482.TXT HCOM1 PsN: HCOM1
51

treated, hypertension, the silent killer, and died of a massive heart

attack at age 69.

Thus, the lack of proper preventative medical care resulted in his

being blind-sided by a major disabling illness and the resulting

total destruction of his ability to lead a productive life. Since both

of these illnesses tend to be hereditary, I assumed that I would suffer a similar fate at some time in the future.

Thanks to the significant emphasis on early detection and treatment inherent in the Medicare+Choice program, that fate did not

become a reality. Instead, my primary care physician carefully

monitored my progress and made periodic referrals to appropriate

specialists.

As a result of having the ophthalmologist monitor the pressure

in my eyes, I was able to get laser surgery in both eyes which

saved my eyesight. As a result of careful monitoring of my blood

pressure, my primary care physician has gradually phased in three

separate medications, and the pressure has stabilized at a normal

level with good control.

As a result of detecting an elevated PSA, prostate screening, we

were able to treat my prostate cancer in a timely fashion, and the

followup has shown stability of the PSA at a very low level. As a

result of detecting an abnormal-looking lesion on my right leg, a

malignant melanoma was detected and treated immediately with

an incision, and there has been no recurrence in 5 years.

Had I not had the benefit of early detection and treatment, I

would either be blind or terminally ill, or perhaps both. So this experience has, understandably, made a believer out of me.

However, this is not the only benefit. By using managed care, my

wife and I have saved an estimated $60,000 over the years, taking

into consideration the cost of Med sup premiums, the cost of drugs,

the benefits in the form of eyeglasses and drastically reduced dental costs.

We have used some of these savings to invest in ourselves with

a wellness program, including a vigorous cardiovascular routine

and resistance training at the local YMCA, and a heart healthy

diet long on fresh fruits and vegetables, no fat dairy products, with

lots of protein and more exotic items like veggie burgers and salmon burgers.

Most important of all, we have benefited from a very high quality

of medical care from our primary care providers, our specialists,

and our medical facilities. We believe that we have benefited from

an approach that emphasizes disease management programs and

enables patients to play a larger role in their own care.

By making the necessary changes in our lifestyle, we have attempted to monitor our progress through fitness through a gradual

process wherein we are partners with our physician and our

health, rather than relying on him after symptoms appear or expecting a major bullet.

We are extremely fortunate to be living in a society that has

made such great strides in medical research, and we are very

grateful for Medicare. What we need to do now is strengthen the

Medicare+Choice program so that it continues to provide incentives

for prevention, so that seniors can hold up their share of the barVerDate 11-MAY-2000 08:38 Aug 12, 2003 Jkt 000000 PO 00000 Frm 00055 Fmt 6633 Sfmt 6602 87482.TXT HCOM1 PsN: HCOM1
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gain by being proactive in wellness and early detection and treatment.

With adequate funding, the Medicare+Choice program offers the

potential for seniors to remain not only healthy but also productive

and active contributors to their families, their communities, and to

society as a whole.

Thank you for providing me this opportunity to testify.

[The prepared statement of Robert Buddy follows:]

PREPARED STATEMENT OF ROBERT BUDDY

Good morning, Mr. Chairman and members of the committee. My name is Robert

Buddy and I am a highly satisfied member of a Medicare plus Choice health plan

in Houston, Texas. I would like to take this opportunity to thank the committee for

inviting me to participate in this hearing on behalf of all seniors. It is a privilege

and an honor to attend, and I sincerely hope that my comments can make a constructive contribution to the proceedings.

I will describe as concisely as possible how my wife and I have benefited from the

Medicare plus Choice program and why I believe that this important program

should be preserved.

While certain aspects of our experience are unique, the important point is that

millions of seniors have had similar experiences. My objective, then, is to try to put

a human face on a Medicare program that is working for me and millions of other

seniors who have chosen to join a Medicare plus Choice health plan.

My wife and I are now both 76 years old. In 1993, when we both turned 65, we

became eligible for Medicare, and we were relieved and delighted to become eligible

for this benefit. We purchased a Medicare Supplement policy to supplement the

Medicare benefits, at a combined cost of about $4,000 a year.

A year later, we were introduced to the idea of a privatized version of Medicare

through an HMO. Today, this program is known as ‘‘Medicare plus Choice.’’ The advantages of this plan were its emphasis on early detection and treatment of illnesses, its promotion of wellness, and the opportunity it provided us to become active participants in our medical care with our primary care provider as a partner.

Because this approach resulted in a more efficient utilization of resources, the plan

offered broader benefits, including both brand name and generic prescription drug

coverage, at a lower cost—in fact, no cost at all.

The emphasis on early detection and treatment had particular appeal to me because of what had happened to my father.

The traditional way of dealing with medical problems was to wait until there were

symptoms. Unfortunately, by the time symptoms appear, it is usually very late and

possibly too late.

In my father’s case, just when he was at the peak of his career, he became severely disabled by an acute case of glaucoma at the age of 55. There had been no

symptoms whatsoever. After a series of unsuccessful operations, he became totally

blind at age 63.

He also suffered from serious, but undetected, and therefore untreated hypertension—the ‘‘silent killer’’—and died of a massive heart attack at age 69.

Thus, the lack of proper preventive medical care resulted in his being blindsided

by major disabling illness and the resulting total destruction of his ability to lead

a productive life.

Since both of these illnesses tend to be hereditary, I assumed that I would suffer

a similar fate at some time in the future.

Thanks to the significant emphasis on early detection and treatment inherent in

the Medicare plus Choice program, that fate did not become a reality. Instead, my

primary care physician carefully monitored my progress and made periodic referrals

to appropriate specialists.

As a result of having the ophthalmologist monitor the pressure in my eyes, I was

able to get laser surgery in both eyes in time, which saved my eyesight.

As a result of carefully monitoring my blood pressure, my primary care physician

has gradually phased in three separate medications, and the pressure is stabilized

at a normal level with good control.

As a result of detecting an elevated PSA (prostate screening), we were able to

treat my prostate cancer in a timely fashion and the follow up has shown stability

of the PSA at a very low level.

53

As a result of detecting an abnormal looking lesion on my right leg, malignant

melanoma was detected and treated immediately with an incision, and there has

been no recurrence in 5 years.

Had I not had the benefit of early detection and treatment, I would be either blind

or terminally ill—or perhaps both—so this experience has understandably made a

believer out of me.

However, that is not the only benefit. By using managed care, my wife and I have

saved an estimated $60,000 over the years, taking into consideration the cost of

Med-sup premiums, the cost of drugs, the benefits in the form of eyeglasses, and

drastically reduced dental costs.

We have used some of these savings to invest in ourselves with a wellness program, including a vigorous cardiovascular routine and resistance training, at the

local YMCA and a heart healthy diet long on fresh fruits and vegetables, no-fat

dairy products with lots of protein, and more exotic items like veggie-burgers and

salmon burgers.

Most important of all, we have benefited from a very high quality of medical care

from our primary care providers, our specialists, and our medical facilities.

We believe that we have benefited from an approach that emphasizes disease

management programs and enables patients to play a larger role in their own care.

By making the necessary changes in lifestyle, we have attempted to monitor our

progress toward fitness through a gradual process wherein we are partners with our

physician in our health—rather than relying on him after symptoms appear or expecting a magic bullet.

We are extremely fortunate to be living in a society that has made such strides

in medical research and we are very grateful for Medicare. What we need to do now

is strengthen the Medicare plus Choice program so it can continue to provide incentives for prevention and so seniors can hold up their share of the bargain by being

proactive in wellness and early detection and treatment.

With adequate funding, the Medicare plus Choice program offers the potential for

seniors to remain not only healthy—but also productive and active contributors to

their families, their communities, and to society as a whole.

Thank you for providing me this opportunity to testify.

Mr. BILIRAKIS. Thank you. Thank you, Mr. Buddy.

Well, I guess I would prefer a nice debate.

Mr. Buddy, you are, by your own admission, 10 years from 19—

from when you turned 65——

Mr. BUDDY. Yes, sir.

Mr. BILIRAKIS. [continuing] you are about mid-70’s now.

Mr. BUDDY. 76.

Mr. BILIRAKIS. Yes, 76.

Mr. BUDDY. And so is my wife.

Mr. BILIRAKIS. You apparently feel that you are able to make

choice, you are able to study different—a variety of plans. Is that

what you did, you studied a variety of plans to decide what plan

would be best for you?

Mr. BUDDY. Yes, I did. I have been in a health insurance program for many years, and my wife is, too, and so we had had some

practical experience in the commercial area.

Mr. BILIRAKIS. All right. You had the experience.

Mr. BUDDY. Yes, sir.

Mr. BILIRAKIS. Okay. Now, if you had not had that experience,

or let us say if you were 4 years older—I mean, nobody knows

when you are going to—what things will be 4 years from now, but

are you concerned, based on your personal experience, not from

your personal experience but experience maybe with neighbors,

with friends, and what not, who might be older, who might be—

maybe had the same background that you have had, maybe the

same education, and what not, are you conserved that they may

not be able to well determine what choice they should choose, what

54

plan they should choose, be able to study the plans adequately,

etcetera, etcetera? Do you get my question?

Mr. BUDDY. I do, and it is an excellent one. I think the seniors

are surprisingly sophisticated as a matter of necessity. Health care

at this age is such an urgent thing that they can’t afford to make

a mistake, so they scrutinize these plans relatively carefully.

And we have been able to exchange—communicate with perhaps

several hundred seniors through various programs, senior programs. And I find that, generally speaking, they are very rational

in their choices, and they appreciate the benefits, particularly of a

Medicare+Choice plan. The one concern that is experienced—it

seems almost too good to be true. So if anything, there is a little

bit of credibility gap. But in terms of the merits of the relative programs, they are sophisticated enough to make rational and prudent

decisions.

Mr. BILIRAKIS. So you feel that the average senior is sophisticated enough and knowledgeable enough and would have the

wherewithal to be able to make an intelligent decision.

Mr. BUDDY. Very much so. Yes, sir.

Mr. BILIRAKIS. Well, you should know, I would think.

Mr. Foster, do you feel that it is incumbent upon us to make sure

that Parts A and B remain separate, as Dr. Moon indicated?

Mr. FOSTER. No, sir, I don’t think it is necessary to keep them

separate. Legislative historians will recognize that the two parts of

Medicare were actually separate proposals way back when, artfully

put together by Wilbur Mills to consolidate political support. The

two parts are very different. There is no particular reason they

have to be that way. If Congress chose to combine them, there is

no particular reason not to.

Mr. BILIRAKIS. Thank you.

Coordination of care—certainly, a number of you have placed emphasis on that. Certainly, Ms. Rawlings did when she discussed her

emphasis on wellness, preventative medicine, and chronic disease

management. Ms. Grealy, of course, referred to it. I think it was

Dr. Moon who made the comment that—I don’t know whether you

were referring to Aetna or in general—managed care plans would

not do—or do not do a good job—I think those are your exact

words—regarding coordination of care.

So let us have a little bit of a—I don’t have much time left. But,

Ms. Rawlings, respond quickly. I want to hear from Ms. Grealy and

maybe from Dr. Moon, too, if we have time.

Ms. RAWLINGS. I think—in fairness, I think private plans historically have made efforts at coordination of care, but I think there

have been significant improvements over the last several years as

awareness of aging and awareness of what that means to health

plans and to beneficiaries as our customers—what that means and

how significant that is. And I know in Aetna’s case, in particular,

we have made significant strides in the last 2 years to significantly

improve our coordination of care efforts to improve the beneficiaries’ experience of the plan.

Mr. BILIRAKIS. And fee for service, there is no emphasis at all on

that, is that right?

Ms. RAWLINGS. Not to my knowledge. I am not exactly sure how

that would be constructed. There is not an infrastructure there. It

55

is more of an insurance—traditional indemnity insurance type program.

Mr. BILIRAKIS. Ms. Grealy?

Ms. MOON. I agree that——

Mr. BILIRAKIS. All right. Since you have the mike in

possession——

Ms. MOON. I am sorry.

Mr. BILIRAKIS. Go ahead.

Ms. MOON. I agree that there are valuable plans that are out

there that do a good job of coordinating care. But if you look at a

large number of commercial plans that were put together not necessarily to really coordinate care but to get discounts from doctors

and hospitals and operate in that fashion, that has never been a

strong suit of theirs, and it has been a problem for many beneficiaries that are in those plans.

Mr. BILIRAKIS. Can a good coordination of care—and this is so

very important. And believe it or not, that is part of our discussions

constantly when we talk about reforming Medicare. So it isn’t always concern about privatizing, etcetera, etcetera. It is doing some

real good things.

Can, under fee for service, we do that?

Ms. MOON. I believe that there are ways in which you can do it.

It is clearly harder than in a capitated world. There is no doubt

about it. But I believe that most people have demonstrated that

they prefer the fee for service world. And the lack of ability of a

lot of plans to do it that are presumably HMOs suggests to me we

should give that a try as well.

Mr. BILIRAKIS. Ms. Grealy, very briefly, please. Thank you.

Ms. GREALY. Well, I think a critical distinction is we are seeing

these things in the private sector. And the ability to quickly respond to consumer demand, consumer preference, is something

that we don’t have in the existing Medicare program.

We see the existing Medicare program, I think, playing catch up,

seeing that disease management programs are beneficial, and perhaps we should look at those, do a demonstration project. So I

think the real value of looking at some of these private sector models, again, is how quickly they can respond and the flexibility that

they have to respond to their customers, their beneficiaries.

Mr. BILIRAKIS. Thank you very much. Five minutes does go awfully quickly.

Mr. Brown.

Mr. BROWN. Thank you, Mr. Chairman.

Mr. Buddy, thank you for your comments especially, and I hope

that we can reform Medicare, that traditional Medicare can offer

that kind of preventive care and management of care and coordination of care. So thank you for that.

There was an article in The Wall Street Journal about 2 weeks

ago. I want to read one paragraph. ‘‘The Congressional Budget Office Chief tells Republican Senators the Medicare overhaul plan

could add hundreds of billions of dollars in costs. Administration

cost-saving claims for its plan also are belied by early data from

a demonstration project. Small savings from encouraging seniors to

opt for private plans are offset by high administrative costs.’’ Ms.

Moon, the people that argue for FEHBP tell us that seniors should

56

have an incentive to choose plans with lower premiums. That

would save the government money. Would restructuring Medicare

in an FEHBP-like program save Medicare from insolvency?

Ms. MOON. No, I don’t believe that it would. I think that it is

very difficult to imagine that you can double the number of people

in this program for a product that people value and which the costs

we assume are going to continue to rise over time will come about

through any kind of greater efficiency alone.

I also believe that we have to be very careful in making the distinction between passing off higher costs on to beneficiaries

through higher premiums, higher out-of-network expenses, and so

forth, and referring to that as reform or as improving the program

necessarily.

Mr. BROWN. So if, in fact, it would save money, you are suggesting the cost—it would save the government money ultimately,

if, in fact, it would, you are suggesting that the way that—the only

way to really do that is to shift costs more onto seniors?

Ms. MOON. I wouldn’t say the only way. I think there are modest

savings that can be gotten from improving coordination of care, and

so forth. But that takes a lot of attention and time, and the administrative costs are higher. And so to do it well, you have to have

higher administrative costs, sort of by necessity.

So I have not seen evidence that suggests massive savings from

that kind of an approach, but, rather, more modest savings.

Mr. BROWN. Those who argue for privatization often talk about

their—I think it is an ideology more than it is a practical decision

based in—or practical suggestion based, in part, on their belief that

the private sector, by definition, does things more efficiently than

the public sector. I think Medicare shows that is not really true.

You authored a paper recently that I would like to insert in the

record that arrives at a different conclusion. Would you share that

with us?

Ms. MOON. We used national health expenditure data over the

last 30 years, essentially said let us start with everyone at a value

of 100, private insurers at 100, Medicare is 100, recognizing that

on a per capita basis Medicare does cost more, but really compare

the rates of growth over time.

And the rates of growth on a per capita basis for Medicare are

better than the per capita rates of the private insurance companies.

That is even after you control for the differences in what is covered,

particularly by taking out prescription drugs, for example, and on

the Medicare side by taking out home health and skilled nursing

care.

Mr. BROWN. Ms. Grealy, you mentioned Medicare’s administered

pricing system. How does this system differ from the way private

health insurers pay providers?

Ms. GREALY. Well, I think this is a nice segue. And when we are

talking about the relative growth in the Medicare program versus

the private sector, it is very easy to control growth when you can

administer prices. I think throughout many of the testimony that

I read in preparation for the hearing today, we see that Medicare

is such a large presence. It is the, you know, 500-pound gorilla. It

establishes a price. Then, everyone has to accept that price. There

is no negotiation.

57

The difference between administered pricing and negotiation in

the private sector is just that word. There is a negotiation that occurs, so that the providers at least have some power in the private

sector that you just don’t find. And that is why we are able to control growth in Medicare through things like the Balanced Budget

Act of 1997, which we are still continuing to do givebacks because

those cuts were so deep at that time.

So I would say the big distinction is administered pricing, no negotiation on behalf of the providers.

Mr. BROWN. Could we do the same kind of negotiation if Medicare would use the 40 million beneficiaries to negotiate prescription

drug prices for beneficiaries?

Ms. GREALY. I am not sure that that is a negotiation. That is establishing the price. I think it would be great if there were some

competition in the——

Mr. BROWN. So it is a negotiation if it is private sector, but it

is price control if it is the public sector?

Ms. GREALY. Well, if there is true competition, and, yes, you do

have an ability to negotiate with the government, that it is not we

are going to establish the price, and you take it or leave it. That

is the distinction.

Mr. BROWN. Thank you.

Mr. BILIRAKIS. Mr. Buyer. Eight minutes, 7 minutes, 71⁄2 minutes.

Mr. BUYER. Thanks. Seven and a half minutes.

Mr. BILIRAKIS. Seven and a half.

Mr. BUYER. First of all, I would like to thank Mr. Brown for placing in the record Figure 1. That helps correct the fiction in his earlier statement.

That is reiterated by testimony presented by Mr. Foster on page

3, the second paragraph, which is also very similar to testimony

provided to the U.S. Senate in year 2001. So I think, Mr. Brown,

what you have done by inference is compliment the Congress in

passing the Balanced Budget Act that would have, in fact, saved

Medicare. So I appreciate that, even though you probably voted

against it.

Let me move and ask—I want to exclude Mr. Foster and Mr.

Buddy. You are out of the political arena, all right? And I am going

to go down and ask a series of questions, and I don’t have the time

to get into a whole bunch of discussion on them.

Some things that are in front of us with regard to proposed

changes come from many different sectors with Medicare, and they

have been discussed before the bipartisan commission and Breaux

and Thomas. One would be increasing the program’s eligibility age.

When Social Security did this in 1983, it moved it to age 67, it excluded Medicare.

Let me go right down the line whether or not you would increase—support increasing the age to 67, and even if we were to

do it on a graduated scale. Dr. Berenson, would you——

Mr. BERENSON. I would oppose it. If anything, one of the

major——

Mr. BUYER. That is all I need to know.

Mr. BERENSON. Okay.

Mr. BUYER. Whether you oppose it or support it.

58

Ms. Rawlings?

Ms. RAWLINGS. Aetna does not have a position either way.

Ms. MOON. I would oppose it, because it doesn’t save much

money.

Mr. BUYER. That is all I need to know.

Ms. Grealy?

Ms. GREALY. Speaking personally, it may be one of the tools we

might have to look at, personally.

Mr. BUYER. Yes. It is on the table.

Ms. KENNELLY. I would oppose it, sir.

Mr. BUYER. Oppose. All right.

Next question is with regards to—Ms. Kennelly had brought this

up earlier about means testing. Someone yesterday used the language ‘‘income relation.’’ Is this a discussion that we should be having? Would you support this concept, for us to look at this, into

Part B on Medicare?

Doctor?

Mr. BERENSON. No, I wouldn’t.

Mr. BUYER. Ms. Rawlings?

Ms. RAWLINGS. We would be willing to discuss it.

Mr. BUYER. Dr. Moon?

Ms. MOON. No.

Ms. GREALY. Should examine it.

Ms. KENNELLY. Not yet.

Mr. BUYER. Not yet. All right.

I understand and respect the universe—making sure that it is

universal, but obviously we also have to examine that there are

people who are lower income brackets that have been paying into

the system for over years and are subsidizing millionaires, and we

need to really self-examine that.

The other question I have is the increased beneficiary cost-sharing. Part B coinsurance, 20 to 25 percent, and Part B deductible,

from 100 to make it comparable to private plans. Is this something

that we should be considering?

Dr. Berenson? May I have order? I can’t hear.

Mr. BERENSON. Yes, I think we should be looking at cost-sharing.

Mr. BUYER. Thank you.

Ms. RAWLINGS. I think we need to consider it. Absolutely.

Mr. BUYER. All right. Thank you.

Ms. MOON. I think particularly the deductible you need to look

at. The other cost-sharing I believe is high enough.

Mr. BUYER. All right. Thank you.

Ms. GREALY. Yes, it should be looked at.

Mr. BUYER. Thank you.

Ms. Kennelly?

Ms. KENNELLY. It should be looked at, but it should be balanced

when you look at the statistics of how many use the 100 and how

many the 840.

Mr. BUYER. That is fair.

With regard to introduction of market-based innovations, into the

current key for service—fee for service program, such as case management programs for heart disease, diabetes, chronic pain,

etcetera, is this an innovation that we should be considering into

the present model?

59

Mr. BERENSON. Absolutely.

Mr. BUYER. Thank you.

Ms. RAWLINGS. Absolutely.

Ms. MOON. Absolutely.

Mr. BUYER. Thank you.

Ms. GREALY. Yes.

Ms. KENNELLY. Yes.

Mr. BUYER. All right. With regard to the issues on major structural reforms, Senators Breaux and Thomas had introduced to the

bipartisan commission the idea of combining Parts A and B in the

programs into a single $400 deductible. Is this something that we

should be considering?

Mr. BERENSON. I don’t have an opinion.

Ms. RAWLINGS. We believe it is worthy of consideration.

Mr. BUYER. Thank you.

Ms. MOON. I think it should be looked at as well.

Mr. BUYER. Thanks.

Ms. GREALY. I agree.

Ms. KENNELLY. I still believe in trust funds, and I think Part A

is a trust fund. And if you put it into Part B, you lose it.

Mr. BUYER. Put it in Part B. All right.

The other comment I have—Ms. Kennelly, you had made a comment on the issue on means testing, and you cited the difficulty in

determining seniors’ income was your statement. The only currently operational system to identify income is the IRS, that I know

of.

The Senate version of the DBA had a proposed means testing

that went to conference, and it used a parallel system of the IRS

to be created through CMS to identify levels of income. If we end

up in that approach, should we turn to the IRS to be the operator

of that system, or should we create a separate parallel system

within CMS, or is that too bureaucratic? Your opinion.

Ms. KENNELLY. Well, Congressman, having seen the news last

night at how much we are now collecting through the IRS because

of, really, the changes that have happened over the last few years,

I don’t want to put any more burden on them. But I am afraid if

we just rely on the IRS, we won’t find out an awful lot because so

many seniors don’t have an income high enough to pay taxes. And

that is one of the reasons it is so hard to find out what the income

is.

So if we ended up in this path, you would advocate not having

the IRS, but to create a parallel system within CMS that turns to

the IRS for the shared data, but it really should be run through

CMS.

Ms. KENNELLY. I think my point was when I saw how Bruce

Vladeck explained how hard it was to find these income numbers,

the administration cost could go up because we were looking for

those numbers.

Mr. BUYER. Right.

Ms. KENNELLY. And we won’t get anything out of it.

Mr. BUYER. Well, I recognize that as a point. Sometimes I have

to decipher, is that a point or an argument? And I have—no, I am

just trying to say if we have this in front of us, how do we work

through it? And that is the point of my question.

60

Ms. KENNELLY. I think that is my concern about income related,

because I think it is a slippery slope. You cut it off at a certain

point, and then later when things aren’t good you cut it off lower.

And where does it start and——

Mr. BUYER. But when things are great, you increase it even higher.

Ms. KENNELLY. Well, you know, it was not that many years ago

that things were pretty great.

Mr. BUYER. Well, and that is the challenges that we have in

Medicaid——

Ms. KENNELLY. Yes. Yes.

Mr. BUYER. [continuing] for example. States saw this money coming and increased the percentage above poverty and eligibility, and

now they come to us to pay the bill.

All right. Thank you for your testimony.

Ms. KENNELLY. Thank you, Congressman.

Mr. BUYER. Appreciate your service here.

Mr. BILIRAKIS. I thank the gentleman.

Mr. BUYER. I yield back.

Mr. BILIRAKIS. Let us see, Mr. Pallone.

Mr. PALLONE. Thank you, Mr. Chairman.

I wanted to talk about the lack of a defined benefit. In other

words, if you change Medicare into a voucher system, which is

what I believe that the Republican leadership is proposing, it

would mean that seniors in different parts of the country would

pay different premiums and receive different benefits.

For example, under the President’s vision for reform, which I

think, again, is a voucher, Medicare would operate very differently

than it does today. Each senior would receive a contribution from

the government that can be used to help pay the premium of the

plan of their choice. In the Federal employees’ program, the government’s contribution is equal to 72 percent of the average premium.

I guess what I am saying is that this geographic variation in

price could create equity problems if we restructured Medicare into

a voucher model. And I just wanted—I would ask initially Barbara

Kennelly, and then Mr. Berenson, what are some of the problems

that could result from a system where seniors in different parts of

the country pay different premiums and receive different benefits?

That is a concern, and if you would comment. We will start with

Barbara.

Ms. KENNELLY. Well, I think we already know, Congressman,

that that is exactly what has happened and will continue to happen, because of geography, because of all sorts of different things.

So I think that is one of the reasons that so many seniors—you

know, I listened to Mr. Buddy talk, and, you know, his thing was

perfect. It all worked out.

And, really, you know, many of the people that are in the private

plans like them. But I still have to come back to the question of

if it is so good across the—you know, across the surface, why are

only right now something like 11 or 12 percent of the people in

these plans? Why do we get these frantic calls, people willing to

spend out-of-pocket one-third to stay in Medicare?

61

So I think that not being able—you know, I know that the chairman said that, you know, was leading into that seniors can make

decisions and can understand choice, but what I——

Mr. BILIRAKIS. I didn’t say that. Mr. Buddy said it.

Ms. KENNELLY. Okay. And let me tell you, he could have sold me

my policy, just the few minutes we talked this morning. But I just

think consistency is what seniors are looking for. They want to be

able to rely on something, and that is why when they do the polls

that you people mention that they say they are satisfied.

And they are willing to pay more because they want to be sure

that they have what they want. What they want in choice, Congressman, is they want choice of their doctors. And we saw that so

dramatically when that—two sentences in the State of the Union.

Just our phones rang off the hook, so we know they want choice

of doctor. But I am not so sure they are asking for choice of plan.

I think they like their Medicare.

Mr. PALLONE. Let me ask Mr. Berenson, and then we will go

back to Mr. Buddy.

Mr. BERENSON. Very briefly, I came to HCFA in April 1998, and

by June plans started withdrawing from the Medicare+Choice program. I didn’t attribute that to my coming necessarily.

But what we faced in Medicare+Choice was dramatic geographic

variation in how much plans would get because of this artifact of

paying them based on how much private—I mean, how much traditional Medicare was paying on the fee for service side. It is still a

problem. There are some parts of the country where plans can provide very generous benefits and do a good job, although the trust

fund is losing money, and in other places plans can’t get in there

at all and can’t offer benefits.

If you are trying to define a government contribution based on

these local variations in fee for service spending, you would then

formalize this kind of geographic inequity, and I think you would

have increased problems over what you have today in trying to justify that kind of horizontal inequity across the country.

Mr. PALLONE. I know that Mr. Buddy had his hand up. I just

wanted to say one thing, though, and I hope nobody takes offense

at this, but I have to use my free lobster dinner analogy.

When I—because I know Mr. Bilirakis raised the issue about,

you know, can seniors make choices? I mean, obviously, seniors are

able to make choices. Nobody suggests that they are not. But there

is just a lot of misinformation that is out there.

I mean, I have said before the committee before, we had the case

where, you know, there was an ad in the paper, a free lobster dinner if you came down and listened to the HMO. And I had all of

these seniors going down there and signing up, and there is just

a lot of misinformation and incentives that are used. So even

though people are, you know, intelligent, they may not get the

right information in terms of making those choices.

If you want—you wanted to say something.

Mr. BUDDY. Yes. I don’t want to encroach too much on your time.

No. 1——

Mr. PALLONE. Well, there is almost no time left.

62

Mr. BUDDY. First of all, lobster dinners can be a lot of fun, and

I don’t know if that alone is going to influence their decision. I hope

not. If I am right, that won’t, but that is not necessarily true.

Second, I would love to have Ms. Kennelly as a client. She would

make, I am sure, a very good——

Third, I would like——

Ms. KENNELLY. I have Medicare.

Mr. BUDDY. Okay. We need to talk. At any rate, the second thing

I would like to say is I perhaps spoke too quickly when I responded

to the chairman’s first request for information as to whether seniors are able to make rational decisions. I, too, read that editorial

since it, by pure coincidence, happened to appear in The Houston

Chronicle just as I was leaving.

I did write to the editor. I have never written a letter to the editor before and probably never will again, but it was—my ran five

pages. And my wife says that now probably we will be desubscribed

from The Houston Chronicle. There were a number of

misstatements, and I think there have been some misstatements.

Your point is absolutely correct. Seniors do become confused by

misstatements, and there were a number of things in that editorial—I am not trying to pillory The Houston Chronicle, but I

think unfortunately created a misperception that—there are a

number of them. I identified 4 or 5 in my rebuttal, and I don’t want

that necessarily to be entered into the minutes of this proceeding.

But one of the things that I think caused seniors to have tremendous inhibitions about the Medicare+Choice program was I don’t

think we can really necessarily fault the Medicare carriers that

have made a valiant effort on—you are well aware of the 2 percent

cap and the fact that Medicare expenses are going at 10 percent.

They have made a valiant effort to stay the course and to make—

become a viable option.

Unfortunately, that has proved to be very difficult, and as a result there has been a steady deterioration of their financial situation to the point where they had to evacuate the market. And one

of the principal reasons was not competition or it wasn’t a lot of

other things. It was simply the fact that the money wasn’t there.

And I think seniors have become very apprehensive. There is one

HMO carrier that left the market. There are about 20,000 seniors

who were in that program who now aren’t, because they simply

have refused to believe anymore. And I think you are probably——

Mr. BILIRAKIS. We have all had plans in our districts that

have——

Mr. BUDDY. The same thing.

Mr. BILIRAKIS. [continuing] canceled out.

Mr. BUDDY. And I think really——

Mr. BILIRAKIS. No question about that. If we were to do anything

like that, by gosh, we would have to make sure that there are safeguards in some way or other. I will be darned if I—that is why we

hold those hearings, so we can learn.

Mr. BUDDY. I do have a possible solution on that. Wellness is

bipartisan——

Mr. BILIRAKIS. Well, why don’t you write it down for us and furnish it, or possibly respond to maybe one of the other inquiries.

Mr. Deal to inquire.

63

Mr. DEAL. Thank you, Mr. Chairman.

Dr. Berenson, I would like to follow up on your last comments

about the disparaging—disparity between regional plans that were

offered. Would you elaborate on why you think that exists, and how

does it exist in a competitive environment?

Mr. BERENSON. The regional variations in payments to the

health plans in Medicare?

Mr. DEAL. I was thinking you were talking about the availability

of services.

Mr. BERENSON. Well, they run together. Basically, ever since the

TAFRA Act was passed in the early 1980’s to set up private plans,

risk plans in Medicare, the basis for payment to them has been

based on how much the traditional program pays in fee for service

at the county level.

There are huge geographic variations in how much we pay. In

fact, to me, that is one of the unexamined questions, is how the fee

for service program can get some control over those variations. But

basically——

Mr. DEAL. I agree with that, too.

Mr. BERENSON. [continuing] if you are in a part of the country

where the traditional program has a lot of spending per capita, if

you are an HMO, you can come into that market, get a pretty generous payment, although it is obviously decreasing as rates have

gone up only at 2 percent, and be able to, one, come in and offer

a product, and, two, offer pretty good benefits such that somebody

would leave traditional Medicare. And so that is sort of basically

a function of those payment levels.

Mr. DEAL. I see. So you are saying that that is precipitated by

the variability in the fee for service schedule by regions as it exists

now.

Mr. BERENSON. Yes. And then one of the problems, then, for—

on the financial side is plans will go into the generous payment

areas, not go into the other areas, and so, therefore, we lose money.

We are paying plans more in the one area, and without an effective

risk adjuster are paying even more, but aren’t getting the commensurate savings on the other side. So the net is that the—we lose

money on the Medicare+Choice program.

Mr. DEAL. Of course, you could make the same argument in the

fee for service, that that is the reason some physicians are withdrawing from the program is because of those inadequate reimbursements as well. So——

Mr. BERENSON. Well, you know, and, in fact, I think it has—that

has gotten everybody’s attention recently, which to me is one of the

countervailing pressures on administrative prices. Medicare has to

find the balance between paying prices that will get providers to

participate and not deny access to beneficiaries.

And so I actually think that there are some protections. And to

restate what I said earlier, Medicare gets lower rates than private

payers do for the most part.

Mr. DEAL. Dr. Moon, one of the comments that you made was to

take issue with the fact that under the alternate plans that are

available, Medicare+Choice, etcetera, that there were variable premiums from plan to plan. And I presume those variable premiums

64

are in part based on the options that are afforded under those

plans.

Would you agree that that is basically the difference in the fees

that are charged?

Ms. MOON. Well, that is right. At the present time, private plans

can charge additional premiums and offer additional benefits. They

must, if they are providing just the basic Medicare services, live

within that rate. But otherwise——

Mr. DEAL. Well, is that bad, that those who wish to pay more

premiums and get better services shouldn’t be allowed to do that?

Is that your argument?

Ms. MOON. No.

Mr. DEAL. So you favor that.

Ms. MOON. In answering the question about the variation or the

potentially high cost of services, my concern is that that will be the

mechanism that people use to save dollars for Medicare, and that

is have the government underfund the program and then pass the

higher premiums off pretty much universally on to beneficiaries.

Mr. DEAL. Well, I think that assumes quite a bit, to assume that

that would be the case.

Let me ask you about one comment that you had. It is—you were

talking about the fact that fee for service doesn’t let people spend

as much time with the patients. And you say one simple way to

deal with that is to give the beneficiaries a certificate that spells

out the care consultation benefits. Are you talking about just a certificate that will say you can spend X amount more minutes or

hours with your doctor just to talk and feel good about it?

Ms. MOON. No. I am talking about the issue that people have objected to the fact that it is very difficult for physicians to spend the

time with Medicare patients, because there is a bias toward keeping the charges at a relatively low level and not essentially allowing the really high levels to be reimbursed periodically for beneficiaries.

I think that an assessment by a physician is a good idea periodically. I don’t think that you should just do it across the board by

raising fees to physicians, but, rather, think of ways to get beneficiaries themselves to be interested in saying, okay, I can go to you

and have this expectation. It is a contract that the two would

have—would engage in.

Mr. BILIRAKIS. The gentleman’s time has expired.

Ms. Capps for 8 minutes.

Ms. CAPPS. Thank you, Mr. Chairman.

A quick point to follow up on Mr. Buyer’s questions about means

testing Medicare. Almost half—45 percent of the seniors in Indiana, Mr. Buyer, are low income, meaning that they earn less than

$18,000 a year. It doesn’t sound like there is a lot of money to be

saved in that State for means testing. You would have to start

charging people more money pretty low on the income scale to get

much savings.

A question for you, Dr. Moon. Medicare+Choice plans, in much

of my district, have cut benefits, raised cost-sharing, and, in fact,

pulled out entirely. This has happened all over rural America. Do

you believe that private plans can offer current Medicare benefits,

plus a prescription drug benefit, plus preventive care services, to

65

rural America for less than or even the same as traditional Medicare?

Ms. MOON. No, I——

Ms. CAPPS. I know this is a big topic. If you could be brief, because I have a couple more questions.

Ms. MOON. So I should just say no.

Ms. CAPPS. You can say no, but——

Ms. MOON. I believe that private plans can do a very good job

of trying to be efficient in the right circumstances. But I don’t

think even very good private plans can provide prescription drug

benefits that now run in the hundreds of dollars for the amount

that Medicare pays, if they are being paid appropriately.

They were able to do so in the past because the payments were

actually higher than what those plans needed to provide basic

Medicare benefits, and they offered extra benefits. So I believe that

realistically we have to assume that private plans or traditional

Medicare, if we are going to add prescription drug benefits, we

have to add dollars.

Ms. CAPPS. Thank you.

And, Dr. Berenson, this is your topic, too. Could you address the

same point? But also, you know, we are talking about

Medicare+Choice now not just as an option for prescription drug

coverage but as a way to try to update and modernize a hopeless,

outdated Medicare. And I don’t agree with that, but that seems to

be what the administration is doing.

Would you respond to my rural district, and also talk about

how—some of the things you weren’t able to do in your opening

statement.

Mr. BERENSON. Yes.

Ms. CAPPS. Just also briefly, though, because I have one more

question.

Mr. BERENSON. Let me just focus on the rural issue. One of my

jobs in the PPO I worked at was involved with negotiating with

physicians and hospitals, and we wound up paying lower rates to

Georgetown and George Washington than the few rural hospitals

we had, because they were the sole hospital out there.

The only way that a private plan actually goes into rural areas

now in private fee for service plans is being able to use the Medicare fee schedule, because they don’t independently have any negotiating leverage.

They don’t have an infrastructure to do some of the good stuff

that managed care actually does, so my sense is that what we

would be doing is permitting a private plan to put in the same

rules that traditional Medicare has, but they take their 8 or 10 percent of administrative costs off the top. I am not sure what advantage we have provided to anybody.

Ms. CAPPS. And this is rural America. Are there some other parts

of America that would face the same challenges?

Mr. BERENSON. Well, again, this does go somewhat to the issue

of the function of a lot of private plans for private employers is to

negotiate rates. Some private plans only survive—I mean,

Medicare+Choice plans because for out-of-network care they are

able to use the Medicare fee schedule, and on their own wouldn’t

be able to have any mechanism to not be paying charges right now.

66

So it just doesn’t make sense. There are private plans in

Medicare+Choice, like group and staff model HMOs, and certain

kinds of HMOs that truly do provide state-of-the-art disease management which we should have in Medicare. We should figure out

how Medicare+Choice can be redesigned to do that.

But to bring in this whole variety, array of private plans that are

sort of there, would be there to figure out how to create benefit

packages to attract healthy people, serves no useful purpose as far

as I can tell.

Ms. CAPPS. Thank you.

Finally, Barbara Kennelly, from your days of being our colleague

here, I remember you speaking often about women living longer,

earning less, having less retirement security, generally also going

to the doctor more often. If we make changes to Medicare that reduce stability in the program and lead to different benefits and

cost-sharing in different areas, tell me—tell us, now probably not

a lot of time remaining—and this, again, is a big topic. But this is

about women, widows and others who——

Ms. KENNELLY. Congresswoman, even though we have made vast

advances in the——

Mr. BILIRAKIS. Your mike, your mike.

Ms. KENNELLY. Congresswoman, though we have made, you

know, incredible advances in the women—look at the women sitting at this table—advances in who is college educated, women’s

life experience has stayed pretty much the same. They still earn

less than men. They still—you know, they haven’t found any way

for anybody but us to have the children. So we go in and out of

the workforce.

And I have got to tell you, Mr. Chairman, we women live forever.

So it is really important, the universality of the Medicare, because

you can’t live too long for it. It stays right with you until the day

you die, and that is one of the good arguments for staying with the

fee for service.

Often women have much less money. As we know, one out of four

unmarried women only have Social Security, and they live on it,

and they have to take care of their health out of it. So yes, I do

still give those speeches of why it is so important to have a universal program for Medicare and Social Security.

Ms. CAPPS. Thank you.

And I still have a little time left. I bet you, Mr. Buddy, you would

like to make a comment on this as well. And we shouldn’t be restrictive to women, should we?

Mr. BUDDY. The reason she would make an excellent client is

that she——

Ms. CAPPS. Oh, you are not going to use my time to——

Mr. BUDDY. She made a very interesting comment, and I think

it is very relevant. She said illness by seniors is a bipartisan type

of thing. And essentially, whether it is public or private, I think it

is very important that we stress the wellness idea, which is a winwin deal for everyone.

And one of the things I should mention, the THI, the Total

Health Initiative sponsored by the YMCA, they have six pilot

projects that will make it feasible to implement, utilizing their facilities and their staff. They would be receptive to a joint venture

67

with the government in terms of making it feasible to make available to all people, whether private or public, the wellness needs

analysis and specialized treatment.

So I think the main thrust should be a bipartisan approach to

try to deal with things like disease management, which I think can

be beneficial to all segments of the population.

Ms. CAPPS. I know that consumers would wish that we would be

bipartisan as we respond to the needs to modernize Medicare.

I just have a few seconds. Ms. Rawlings, can you address this

issue of your own company’s ability to stay in a rural area?

Ms. RAWLINGS. I am glad you asked me. I think I would agree

with Dr. Berenson. I think there are challenges in the way we contract with physicians and hospitals in those rural areas. It is difficult to negotiate, and we do have abilities around providing—

using the Medicare fee schedule for some cost protection.

I think the more critical issue, though, as you are thinking about

coordination of care is what is required in that is an integrated delivery system. And many times, if your enrollment in rural

California——

Ms. CAPPS. Right.

Ms. RAWLINGS. [continuing] you don’t have those integrated delivery systems available to you. You might have to drive 80 miles

to see a nurse for your, you know, geriatric exam. It makes it very

difficult to deliver comprehensive, coordinated care in those markets. So I think that is a limitation for a coordinated care system.

I think, however, private plans can provide value in working

with the government and finding ways to enhance the fee for service programs in those areas, or maybe looking at hybrid products

that take the best of both worlds.

Ms. CAPPS. Can I get a yes or no from Dr. Berenson? I know I

am over my time.

Mr. BILIRAKIS. The gentlelady’s time has expired. But if it is important for you to get a yes or no, as long as it is not followed

by——

Mr. BERENSON. Very briefly, I basically agree. My point is: why

have 3 or 4 plans trying to work with a physician to coordinate

care instead of a single plan, traditional Medicare, working to do

that, perhaps with private sector contracting.

Mr. BILIRAKIS. Yes or no.

Ms. CAPPS. I got my answer.

Mr. BILIRAKIS. All right. I am sure you liked that answer, yes.

Mr. Strickland, 8 minutes.

Mr. STRICKLAND. Thank you, Mr. Chairman. And I want to

thank the witnesses.

I was in the chamber of the House of Representatives when the

President gave his State of the Union address. And I started to applaud—I applauded several times during that address, but at one

time I started to applaud and then I stopped.

The President said something to the effect that if a senior citizen

likes traditional Medicare and wants to keep it just the way it is,

they should be able to do so. And I stopped my applause, because

I realized that traditional Medicare, just the way it is, is without

a prescription benefit.

68

And then, the President said that the Nation should take control

of our health care away from the bureaucrats, the trial lawyers,

and HMOs, and return it to doctors, nurses, and patients, and I applauded. And then, the President described his plan, and under his

plan, as I understand it, if Medicare or an older person is going to

get comprehensive prescription drug coverage, they are going to be

forced into basically an HMO, because if they stay in traditional

Medicare what is available to them is going to be terribly limited.

I think there were contradictions in what the President said. I

hope they weren’t purposeful contradictions, quite frankly, because

they were basic and fundamental to what we are dealing with.

I have here a publication from the Center on Budget and Policy

Priorities, and I would like to read this statement. ‘‘The 75-year

cost of the administration’s tax cuts is more than three times the

long-term deficit in Social Security and larger than the long-term

deficits in Social Security and Medicare combined.’’ And that leads

me to something that I said yesterday in a hearing on prescription

drug coverage. Our problem is a value problem, not a monetary

problem, because if we truly were determined to make a prescription drug benefit that was affordable to all of America’s senior citizens, if we truly were committed to that, we would do it. And we

would be cost conscious, certainly, but we wouldn’t let the financial

obligations of doing so keep us from proceeding.

So I have a question for you, Ms. Kennelly. The President argues

that we really can’t afford Medicare as it is, and improve it, and

make prescription drug benefit as a part of it, and so on. People

argue that we can’t afford to spend more than $400 billion for a

prescription drug benefit.

However, this argument seems a little disingenuous when you

look at the size of the tax cuts the administration is proposing. And

as I said, according to the Center on Budget and Policy Priorities,

it is disturbing information. It seems that there are—the people

who are saying we can’t afford to improve and keep traditional

Medicare for everyone are the same ones who would divert our existing resources to tax cuts. In fact, these tax cuts, I think, are

going to jeopardize our ability to preserve Medicare, let alone improve it.

If these tax cuts were enacted, we would be running up more

deficits instead of paying down the national debt. The interest on

these deficits would eat up precious revenue.

And my question to you, Ms. Kennelly, is, do you believe that the

administration’s proposed tax cuts could jeopardize the future of

the Medicare program? And do seniors in your organization—do

seniors in your organization think that some of these tax cuts

should be used to add a drug benefit to Medicare instead?

Ms. KENNELLY. Well, Congressman, I have been known to use

that exact quote that you quoted recently, at a large convention of

elderly services in Chicago last week. What you say is the truth.

I had hoped we wouldn’t get into this discussion, because I understand the budget resolution passed by the House. It does have a

very large tax cut in it.

I am sure that I would probably—my organization is bipartisan,

but I am sure I will go back to my roots and say yes, I think the

tax cut is too large. Yes, I think the sustainability of Medicare and

69

Social Security will be challenged if that tax cut passes at the

height that it is right now. There is no doubt about it. You just

have so many dollars, and right now we are in deficit situation,

budget deficit situation, and we will increase that deficit, if, in fact,

those high tax cuts are passed.

I also want to see a democracy, and I understand that the President is the President, and the Republicans have the majority in

both the House and the Senate. So this is a difficult situation.

And, yes, I can tell you, when you look at senior incomes, and when you see that only 19 percent of seniors earn over $40,000 or

even have over $40,000, they are going to get a very small tax cut.

Obviously, that is the fact. And so, of course, they would much

rather have a prescription.

Mr. STRICKLAND. Thank you.

I would like, if we could, just to go down the table, beginning

with Mr. Foster, if you could give me a brief response, yes or no,

or if you want to make it a little longer—the same question.

Mr. FOSTER. I would pass on the desirability of the tax cuts from

offering an opinion either way. I would mention that the primary

source of revenue for the Hospital Insurance Trust Fund is payroll

taxes, which would be unaffected. The real issue is the general revenue financing for Part B of Medicare. The law provides for that

revenue. How you get it is the challenge, and that would be the

real issue.

Mr. STRICKLAND. But it is true that we have a limited amount

of resources. And if we chose, we could use some of those resources

to enrich Medicare beyond even the amount available in the trust

fund. I recall maybe 3, 4 years ago members of both parties were

pledging to use at least part of the deficit to do that.

Yes, Dr. Berenson.

Mr. BERENSON. My priority would be on Medicare and Medicaid

and not—I mean, Medicare, Medicaid, and Social Security, rather

than the tax cut. But my point would be that I think we can find

some savings, significant savings, in the traditional Medicare program if the program had new authorities to do so. And that we

don’t have to just assume that we have to spend what we have to

spend. We can add prescription drugs and find offsetting—not fully

offsetting but some savings.

Mr. STRICKLAND. Thank you.

Ms. RAWLINGS. I would add that Aetna does not actually have a

position on that specifically, but I would comment on that I do believe that whatever program is developed and evolved, we believe

if we can evolve the program and maintain a competitive playing

field that we can make it more effective from a cost perspective and

quality perspective as well.

Mr. STRICKLAND. Thank you.

Ms. MOON. I believe that one of the important things to think

about is that there will be a need for additional revenues. And my

generation of baby boomers will be the folks who are advantaged

by the tax cut, and who should be contributing to our future in

terms of Medicare and Social Security.

Mr. STRICKLAND. My time is up. If just the two of you could

make a quick——

Mr. BILIRAKIS. Very brief, please.

70

Ms. GREALY. Well, I agree with Ms. Rawlings. Regardless of what

happens with the budget resolution, No. 1, there is money in there

for a prescription drug benefit. But more importantly, we need to

look at how we are going to sustain this program over time. We

need to bring competition and more efficiencies into it.

Mr. STRICKLAND. Mr. Buddy?

Mr. BUDDY. I have to agree wholeheartedly. I think there is definite room for improvement in the Medicare system, and so I am enthusiastically in favor of that. The jury is out on the other. I am

not sure what we can afford, but I think that we can all agree

on——

Mr. STRICKLAND. Thank you.

And thank you, Mr. Chairman.

Mr. BILIRAKIS. Mr. Shadegg.

Mr. SHADEGG. Thank you, Mr. Chairman. Thank you for holding

this important hearing. I apologize I have not been here for the entire testimony.

I want to thank our panelists. I appreciate their thoughtful testimony.

Ms. Rawlings, I want to follow up on the questioning of my colleague from Ohio. Have you studied the President’s plan, or looked

at what the President proposed?

Ms. RAWLINGS. We have, yes.

Mr. SHADEGG. Does Aetna offer both an HMO product and a PPO

product?

Ms. RAWLINGS. We do under the Medicare+Choice program

today, yes.

Mr. SHADEGG. And there are substantial differences between the

HMO product and the PPO product, are there not?

Ms. RAWLINGS. Well, there is probably 2 or 3 key differences.

What we have done is, in our PPO—in the PPO demonstration,

which was just launched in January, as you know, we offered in

21 counties and 3 States enhanced benefits, including prescription

drugs. We offered no referrals, out-of-network coverage——

Mr. SHADEGG. I want to stop right there. First of all, no referrals

means no gatekeeper.

Ms. RAWLINGS. That is correct.

Mr. SHADEGG. So when he was talking about the President would

force you into an HMO product, in point of fact, one of the things

that makes HMOs very unattractive is you have to go through a

gatekeeper who decides whether you can go to a second doctor. You

are saying that in your PPO product you can go straight to the doctor of your choice, is that right?

Ms. RAWLINGS. That is correct, yes. I would——

Mr. SHADEGG. And then you were about to say the second distinguishing feature.

Ms. RAWLINGS. Well, the one thing I wanted to add is I think as

we have heard and talked about today, the element of coordination

of care is not lost in the PPO. We still do our health risk assessments. We have our comprehensive case management units that

are looking to work with these patients in this product as well, so

we get the additional benefit of that.

But it is very—it meets the customers’ needs, allows them to

travel, allows them to have direct access. They seem to like it.

71

Mr. SHADEGG. And it also allows them choice of doctors. They

can pick any doctor——

Ms. RAWLINGS. That is correct.

Mr. SHADEGG. [continuing] in the plan, and that is covered. And

then, if they want to go outside the plan, they can do that for a

slight additional fee?

Ms. RAWLINGS. That is correct. It is a slight difference in benefits. That is correct.

Mr. SHADEGG. One of the things that I think is—and I would encourage my colleague from Ohio to study the differences between

HMOs and PPOs. I think one of the things that was underappreciate about the President’s plan is the fact that what he was proposing—enhanced Medicare—was a PPO and not an HMO. And I

think there is a world of difference.

Indeed, across America, more Americans are choosing now PPOs

than HMOs, precisely because of those very important distinctions.

And so I think that is an important part to understand about the

President’s plan.

I also would echo what you said, and that is the PPOs that I talk

to tell me that they can manage care, they can improve care and

improve quality of care, without, for example, having a gatekeeper

that denies people care or some bureaucrat back in an office that

denies them care.

Ms. RAWLINGS. I think that is true, but I think the critical thing

to remember, too, is, you know, we are talking about an aged and

disabled population. You know, you mentioned—Ms. Capps mentioned the women and aging, and, you know, there is a significant

social change and environmental change when people age. You

know, spouses of 55 years or so die, and one is left alone, children

move away, etcetera.

I think the critical thing to think about is it is different when

you are 25 and when you are 75. And some people say, ‘‘Well, gosh,

I don’t want to have anybody calling me. I don’t want any part of

that.’’ When seniors are sick, they need help. They appreciate it.

They respect it. And we have found that we have—we develop excellent partnerships which really improve quality, and we can get

that on the PPO.

Mr. SHADEGG. Mr. Berenson, I want to focus on this issue of PPO

with you. You indicate in your testimony that the PPOs you dealt

with did not want to work toward quality improvement. Were any

of those non-risk PPOs, or were they all risk PPOs?

Mr. BERENSON. Well, most PPOs were non-risk PPOs that I

talked to. I mean, I——

Mr. SHADEGG. They weren’t insurance-based PPOs?

Mr. BERENSON. Some were insurance-based and some were rental or broker PPOs that did not manage risk. But I think there is

some history here that is illustrative and that——

Mr. SHADEGG. I appreciate that. I would like to hear the history,

but I am going to run out of time, and I want to ask Mr. Foster

a series of questions.

Mr. Foster, we are being asked, or at least my—one of my key

goals is to reform Medicare and to make it more efficient. One of

the things I want to do is I am of the belief that by adding prescription drug coverage to the current Medicare program, you can,

72

in fact, reduce overall cost by reducing both doctor visits and hospitalizations.

Have you studied that question, or do you know of anyone that

has studied that question?

Mr. FOSTER. Yes, we have. Clearly, with the right medications,

people can stay out of the hospital in certain circumstances or have

lower costs than they would otherwise have. The question is whether the availability of a Medicare prescription drug benefit would

generate some partial offsetting savings through such actions?

We have not estimated a significant offsetting amount of that

type, in part because the great majority of beneficiaries already

have some level of drug coverage one way or another, and in part

because in the case of most folks, if you can stay out of the hospital

by getting a certain drug, you are going to try very hard to get

that, even if you don’t have coverage.

Mr. SHADEGG. Assuming that in fact, though, having—the entire

Medicare population have access to drugs would bring down some

costs. That means it would bring it down if it were a benefit added

both to fee for service and if it were a benefit added to other options, for example, a PPO. Would that be correct?

Mr. BERENSON. Yes. The impact that you mention would apply

regardless of the setting.

Mr. SHADEGG. Okay. The second question—and you heard Ms.

Rawlings refer——

Mr. BILIRAKIS. The time has expired.

Mr. SHADEGG. I apologize. Could I ask the one last question,

then?

Mr. BILIRAKIS. Well, ask it, but a very brief answer.

Mr. SHADEGG. Have you also looked at the question of whether,

because there is some element of managed care in a PPO, have you

tried to estimate what could be—what savings could be achieved if

people were encouraged to move from traditional fee for service

into a PPO-type structure?

Mr. FOSTER. Yes, sir. We have estimated both the management

savings directly and the savings potentially you could get from having beneficiaries with a financial incentive to move from a more expensive plan to a less expensive plan.

Mr. SHADEGG. I would like to see that information. Thank you

for your testimony.

And thank you for your indulgence, Mr. Chairman.

Mr. BILIRAKIS. Thank you.

Mr. Stupak.

Mr. STUPAK. Well, thank you, Mr. Chairman. I am sorry I have

been popping in and out, but we had a markup down in T&I Subcommittee.

Mr. BILIRAKIS. Yes, I know we did.

Mr. STUPAK. So I have been in and out, but——

Mr. BILIRAKIS. Have you had any votes down there yet? Because

I am stuck up here.

Mr. STUPAK. No, but we had to do some amendments, so—but

thank you.

Dr. Berenson—and I know Mr. Brown put in The Wall Street

Journal article. I want to ask you just on this one paragraph in

particular where it says, ‘‘The Congressional Budget Office Chief

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tells Republican Senators the Medicare overall plan could add hundreds of billions of dollars in cost. The administration cost-saving

claims for its plan also are belied by early data from a demonstration project. Small savings from encouraging seniors to opt for private plans are offset by high administrative costs.’’ Do you care to

comment on that at all?

Mr. BERENSON. Well, we do know that Medicare+Choice plans

typically have about 8 percent to 10 percent higher administrative

costs than traditional Medicare does. And there is no—the way we

would pay plans under the—the way we pay plans under

Medicare+Choice, again, results in a net loss to the government.

The only way you can restructure this to save money would be

to fix the government contribution at a relatively low level, so that

people are paying out of their pocket for the various choices. And

we haven’t seen the details, but there—I think most people don’t

view that there are inherent inefficiencies in most private sector alternatives to traditional Medicare.

Mr. STUPAK. Well, in these—if you go into a PPO, is that—you

went into a PPO, that is good for a year, right? The contract you

would enter into if you are a beneficiary, you would sign up for the

PPO——

Mr. BERENSON. Well, presumably, if there was a 1-year open season the way we do now—we currently in Medicare Choice have a

non-lock-in situation. We presumably have—that is another issue

that would have to be dealt with is whether we are locking people

in.

Mr. STUPAK. And the benefits could change yearly, then?

Mr. BERENSON. Presumably, it would be done on an annual

basis.

Mr. STUPAK. See, the other problem I have with these PPO and

HMO—and I know Mr. Shadegg dwelled on it, so I want to bring

this up. The State of Michigan just went—used to be—have a defined benefit plan for their retirees who are not in Medicare. So

they went to a PPO. And if your physician is part of that PPO, they

still pay the 80/20. You pay 20 percent out of pocket.

Well, what happens up in my district, which is real northern

Michigan, none of the doctors are in the PPO. So if we want to get

the 80/20, 20 percent payout, we have to drive hundreds of miles

to find a doctor who is in the PPO. The issue is really choice of doctors here. It is not necessarily PPO or HMO. You want to stay with

your doctor.

Since we don’t have PPO physicians up in my neck of the woods,

we have got to pay a 50/50. They will pay 50 percent, and we pay

the other 50 percent. So it costs us more money underneath the

PPO for the beneficiaries, too.

Mr. BERENSON. And that is one reason why the data from recent

years suggests that the differential between what private plans are

paying their network physicians and hospitals are going up in relationship to Medicare, because networks are simply not adequate,

and to have an adequate network you have to pay more.

Very briefly on the history of PPOs, the BBA set up PPOs as a

coordinated care plan and had to do quality improvement and reporting. And the PPO industry said they can’t do that, and they

came to Congress and got relief. So I don’t think we have a good

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track record of seeing that PPOs actually would be doing the kinds

of things we need for Medicare beneficiaries.

Mr. STUPAK. Ms. Grealy, if I can ask you a question. You were—

Mr. Brown was asking you some questions, and he basically said

when the government does it, it is called control. When private industry does it, it is called negotiations. And your answer to Mr.

Brown was, well, that is true competition. That is really what you

are looking for, right, was true competition?

Ms. GREALY. Yes.

Mr. STUPAK. Then, to have true competition, should we not take

away the antitrust exemption enjoyed by the insurance industry?

They are not subject to antitrust laws. Therefore, you can put your

rates anywhere you want.

Ms. GREALY. Highly regulated by the States, and I think that is

sort of the safety net.

Mr. STUPAK. Well, you are really not highly regulated by States,

because you have got 50 different States who have insurance commissioners. And if you look at the laws of insurance commissioners,

some of them are political appointees, others are elected, some

have strong regulations, some have very little, like my State of

Michigan. It is like a paper tiger.

So shouldn’t we really—if you really want to get true competition, shouldn’t we really take that exemption away, make it nationwide, so the regulations are the same through all States, and,

therefore, we could really promote some competition within the insurance industry?

Ms. GREALY. I think if you have that balance of Federal and

State regulation. I mean, what you don’t want to do is withdraw

it in one area and yet leave in place those 50 different mechanisms.

I know on many issues that we work on we are looking for those

single Federal standards, whether it be the HIPPA privacy regulation or whether it be in health care liability reform.

So often times there is something to be said for having one set

of rules, so that we all know that we are competing effectively and

fairly.

Mr. STUPAK. So if we took away that exemption, then it would

be easier because you would just have one set of rules for all

States. So you would be supportive of our legislation?

Ms. GREALY. As I said, if it is balanced with—I am not there. It

would have to look at what else is done in conjunction with that,

so I wouldn’t be willing to put on the record, ‘‘Let us repeal the

antitrust exemption’’ without some of those other qualifiers that I

think are critical.

Mr. BILIRAKIS. The gentleman’s time has expired.

Mr. STUPAK. Thank you.

Mr. BILIRAKIS. Mr. Barton has just joined us.

Mr. BARTON. Thank you, Mr. Chairman. I am not going to ask

any questions, since it is lunchtime. But I would yield to Mr.

Buyer.

Mr. BILIRAKIS. But it is still lunchtime, and yet you are yielding.

Mr. BARTON. This is my lunch.

But I will be happy to yield to Mr. Buyer.

Mr. BUYER. Thank you, Mr. Barton.

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In an attempt to keep the record clear, I went back to see if I

could find the letter in 1995 from the trustees. I was unable to.

What I did find, and that I am going to ask to be placed in the

record, is the 1995 Annual Report from the Board of Trustees of

the Federal Hospital Insurance Trust Fund. The communication to

Congress was from the Board of Trustees of the Federal Hospital

Insurance Trust Fund.

I stand corrected. I used the word ‘‘bankruptcy.’’ They did not. So

I stand corrected. They used the word ‘‘insolvency,’’ and the threatened impending insolvency of the program, which set in course our

action that led to the BBA in 1997.

Referring to the testimony of Mr. Foster, again, on page 3, his

chart shows in 1995, 1996, and 1997, that expenditures exceeded

income. So I ask unanimous consent that the summary of the

Medicare trustees 1995 be placed in the record.

Mr. BILIRAKIS. Okay.

Mr. BARTON. I would announce while we have been holding the

hearing that they are toppling the statues of Saddam Hussein in

Baghdad. At least the press is reporting that it is a liberated city,

so it has been a pretty eventful morning.

And I would yield to the chairman.

Mr. BILIRAKIS. Well, I just have—thank you for yielding.

Mr. Foster, regarding the Part B deductible of $100, that hasn’t

changed in approximately 10 years, approximately, would you say?

Mr. FOSTER. I believe it was 1991 or 1992. Is that right?

Mr. BILIRAKIS. Yes, so approximately 10 years. So would you

know, what would be the impact on Medicare’s finances of simply

indexing that deduction for inflation?

Mr. FOSTER. If you indexed it prospectively, then the existing

amount, the $100 today, would keep pace, depending on your index,

either with something like the CPI or the level of health care costs

and would represent its—it would continue to represent its current

meaning or level, as opposed to gradually being watered down over

time, which would happen otherwise and which has happened over

the last 10 years.

If you would like we could estimate for you a specific proposal,

the financial——

Mr. BILIRAKIS. I guess if you have—do you have any dollars in

mind? What would be the impact in terms of additional revenue

coming into the program?

Mr. FOSTER. I can provide that for the record, sir.

Mr. BILIRAKIS. Okay. You don’t know off the top of your head?

Mr. FOSTER. Well, it is non-trivial, but it depends a whole lot on

the specific proposal. If you just index it, you don’t get a lot of savings because it takes considerable time for the amount to vary from

what it would have been. If you raise it and index it simultaneously, that saves quite a bit more.

Just for comparison, if you took the original $50 amount from

way back when, and said what would that amount be today if you

had indexed it all the way along, if you had used the CPI, then the

amount is somewhere in the range of $250 to $300 today. If you

had used per beneficiary Part B cost growth, the answer is fairly

staggering. It would be $1,500 today.

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Mr. BILIRAKIS. Okay. I am not sure that I wanted to hear that

answer. Never ask a question you don’t want to hear the answer

to.

Well, I think that completes our hearing. We will have questions

in writing to you. We would appreciate a timely response to them.

Dr. Berenson, you talked about—you wanted to get into savings

that you think can be realized by reforming the traditional Medicare fee for service system. You know, any ideas like that are only

helpful, and I raise that point to all of you, any ideas you may

have.

Mr. Buddy was chomping at the bit to go into something, too,

and, you know, I want you all to feel free to write us as soon as

you can. Help us out here, because you would be surprised. Sometimes some of the information we get can be helpful.

That having been said, thank you so very much. It was a good

hearing, and you made it so.

[Whereupon, at 12:10 p.m., the subcommittee was adjourned.]

[Additional material submitted for the record follows:]

PREPARED STATEMENT OF THE ALLIANCE TO IMPROVE MEDICARE

The Alliance to Improve Medicare (AIM) is pleased to submit this statement to

the hearing record to the Energy & Commerce Health Subcommittee. We applaud

the Subcommittee and Chairman Bilirakis for their continued attention to this

issue. AIM has identified six principles to guide Medicare modernization efforts and

we are pleased to share these with the Subcommittee. These principles seek to improve both the administration of the Medicare program and the benefits provided

to program beneficiaries.

KEY PRINCIPLES TO STRENGTHEN AND IMPROVE MEDICARE

First, Congress should enact comprehensive, market-based Medicare modernization as a mechanism for providing access to prescription drug coverage. Prescription

drug benefits should be offered to all Medicare beneficiaries as an integral part of

Medicare health coverage and the benefit should be added as part of broader efforts

to strengthen and improve both the fee-for-service program and Medicare+Choice.

Expanding Medicare to include prescription drug coverage should be a stepping

stone toward comprehensive program reform with prescription drug coverage as

part of an integrated benefit package. Finally, a Medicare prescription drug benefit

program should ensure that private health plans have flexibility in designing prescription drug benefits to include proven, private-sector management tools to improve quality of care and to better manage costs.

Second, Congress should ensure the long-term financial integrity and solvency of

the Medicare program when considering program reforms and additional benefits.

A stand-alone drug program should not be simply layered onto Medicare. The program’s financial and structural systems must be strengthened to ensure adequate

long-term financial stability to meet the challenges presented by the retirement of

the baby boom generation and the projected doubling of the Medicare population.

Congress should address these problems first, or at least concurrent with, adding

a prescription drug benefit.

Third, Congress should address the financial crisis facing health plans and providers in order to establish a solid foundation upon which to build a better Medicare. Patient care has been adversely affected by inadequate reimbursements to

health plans, hospitals, doctors and other providers. Further, these inadequate provider reimbursement levels have directly undermined progress toward a modernized

program. Congress should ensure appropriate and timely payments for these providers and plans to ensure appropriate care. Further, prescription drug benefits

should be designed with adequate financial support and effective management tools

to ensure reliable coverage and long-term success.

Fourth, an improved Medicare program should improve coverage options through

increased consumer choice and health plan competition. Medicare beneficiaries

should have the power to choose from a range of coverage options similar to those

available to Members of Congress, federal employees and millions of working Americans under 65 years of age. Options can include both fee-for-service Medicare as

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well as a variety of private plans. The Medicare+Choice program seeks to provide

these types of private coverage options to seniors nationwide. However, inadequate

payments and excessive regulation of private sector providers participating in

Medicare+Choice have seriously constrained the ability to expand coverage areas.

Numerous plans have withdrawn from areas where reimbursement was inadequate

to cover even the costs of basic care.

Fifth, a modernized Medicare program should improve coverage through better coordination of care and the inclusion of health promotion and disease prevention efforts. The traditional Medicare program has not kept pace with private sector benefits and plans offering disease management programs, preventive health care and

screening measures such as annual physicals, hearing and vision tests, and dental

care. Medicare beneficiaries, more so than other age populations, can benefit from

these preventive measures which help reduce long-term costs and ensure appropriate, early treatment of health problems. Medicare+Choice plans have the flexibility to provide these measures as part of basic health care services whereas an

act of Congress has been required to provide routine screening tests under the Medicare fee-for-service program.

Finally, an improved and strengthened Medicare program would replace the current rigid and outdated benefit structure and bureaucracy and ensure flexibility to

make new health care innovations more accessible. An example of efforts to ensure

flexibility in the program is H.R. 810, the ‘‘Medicare Contracting and Regulatory Reform Act,’’ recently approved by the full Energy & Commerce Committee. AIM members support this effort to create a more collaborative relationship between CMS and

the providers who serve Medicare beneficiaries, to address provider concerns, and

to improve beneficiary and provider education. Additionally, the HHS Secretary’s

Advisory Committee on Regulatory Reform has issued a final report and recommendations to streamline regulatory burdens and improve Medicare and other

HHS programs. Congress should encourage the HHS Secretary and CMS officials

to continue to work toward reducing potential obstacles to patient’s access to care

and improve communications with both beneficiaries and providers. This effort

should also seek to ensure that Medicare has the flexibility to make new health care

innovations and technologies more readily accessible to beneficiaries. Quality health

care for Medicare beneficiaries requires these new technologies to be available for

all patients.

CONCLUSION

We appreciate the opportunity to submit this statement and we look forward to

working with the Subcommittee and other members to ensure passage of Medicare

prescription drug and reform legislation in the 108th Congress.

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