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75–783 PDF 2012

GAO REPORT: THE OBAMA ADMINISTRATION’S $8 

BILLION EXTRALEGAL HEALTHCARE SPENDING 

PROJECT 

HEARING 

BEFORE THE

COMMITTEE ON OVERSIGHT 

AND GOVERNMENT REFORM 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

JULY 25, 2012 

Serial No. 112–175 

Printed for the use of the Committee on Oversight and Government Reform 

( 

Available via the World Wide Web: http://www.fdsys.gov 

http://www.house.gov/reform 

(II) 

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM 

DARRELL E. ISSA, California, Chairman 

DAN BURTON, Indiana 

JOHN L. MICA, Florida 

TODD RUSSELL PLATTS, Pennsylvania 

MICHAEL R. TURNER, Ohio 

PATRICK T. MCHENRY, North Carolina 

JIM JORDAN, Ohio 

JASON CHAFFETZ, Utah 

CONNIE MACK, Florida 

TIM WALBERG, Michigan 

JAMES LANKFORD, Oklahoma 

JUSTIN AMASH, Michigan 

ANN MARIE BUERKLE, New York 

PAUL A. GOSAR, Arizona 

RAU ́ L R. LABRADOR, Idaho 

PATRICK MEEHAN, Pennsylvania 

SCOTT DESJARLAIS, Tennessee 

JOE WALSH, Illinois 

TREY GOWDY, South Carolina 

DENNIS A. ROSS, Florida 

FRANK C. GUINTA, New Hampshire 

BLAKE FARENTHOLD, Texas 

MIKE KELLY, Pennsylvania 

ELIJAH E. CUMMINGS, Maryland, Ranking 

Minority Member 

EDOLPHUS TOWNS, New York 

CAROLYN B. MALONEY, New York 

ELEANOR HOLMES NORTON, District of 

Columbia 

DENNIS J. KUCINICH, Ohio 

JOHN F. TIERNEY, Massachusetts 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

JIM COOPER, Tennessee 

GERALD E. CONNOLLY, Virginia 

MIKE QUIGLEY, Illinois 

DANNY K. DAVIS, Illinois 

BRUCE L. BRALEY, Iowa 

PETER WELCH, Vermont 

JOHN A. YARMUTH, Kentucky 

CHRISTOPHER S. MURPHY, Connecticut 

JACKIE SPEIER, California 

LAWRENCE J. BRADY, Staff Director 

JOHN D. CUADERES, Deputy Staff Director 

ROBERT BORDEN, General Counsel 

LINDA A. GOOD, Chief Clerk 

DAVID RAPALLO, Minority Staff Director 

(III) 

C O N T E N T S 

Page 

Hearing held on July 25, 2012 ............................................................................... 1 

WITNESSES 

Mr. James C. Cosgrove, Director, Health Care, U.S. Government 

Accountablity Office 

Oral Statement ................................................................................................. 4 

Written Statement ............................................................................................ 7 

Ms. Edda Emmanuelli-Perez, Managing Associate General Counsel, U.S. Government Accountability Office 

Oral Statement ................................................................................................. 14 

Mr. Jonathan Blum, Acting Principal Deputy Administrator and Director, 

Centers for Medicare and Medicaid Services 

Oral Statement ................................................................................................. 15 

Written Statement ............................................................................................ 17 

APPENDIX 

The Honorable Chairman Darrell Issa, a Member of Congress from the State 

of California, Preview Statement ........................................................................ 60 

Professor Jeffrey S. Lubbers, Professor of Practice in Administrative Law, 

Washington College of Law, American University, Written Statement .......... 61 

The Honorable Elijah E. Cummings, a Member of Congress from the State 

of Maryland, Opening Statement ....................................................................... 64 

Medicare Waiver Demonstration Application ....................................................... 66 

The Honorable Gerald E. Connolly, a Member of Congress from the State 

of Virginia, Opening Statement .......................................................................... 71 

(1) 

GAO REPORT: THE OBAMA ADMINISTRATION’S $8 BILLION EXTRALEGAL 

HEALTHCARE SPENDING PROJECT 

Wednesday, July 25, 2012 

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM, 

Washington, D.C. 

The committee met, pursuant to call, at 9:30 a.m., in Room 2154, 

Rayburn House Office Building, Hon. Darrell Issa [chairman of the 

committee] presiding. 

Present: Representatives Issa, Platts, Jordan, Chaffetz, Walberg, 

Lankford, Gosar, Labrador, DesJarlais, Gowdy, Ross, Guinta, 

Kelly, Cummings, Norton, Kucinich, Tierney, Clay, Connolly, 

Davis, Murphy and Speier. 

Staff Present: Brian Blase, Majority Professional Staff Member; 

Molly Boyl, Majority Parliamentarian; Lawrence J. Brady, Majority 

Staff Director; Sharon Casey, Majority Senior Assistant Clerk; 

John Cuaderes, Majority Deputy Staff Director, Linda Good, Majority Chief Clerk; Christopher Hixon, Majority Deputy Chief Counsel, 

Oversight; Mark D. Marin, Majority Director of Oversight; Mary 

Pritchau, Majority Professional Staff Member; Jeff Solsby, Majority 

Senior Communications Advisor; Beverly Britton Fraser, Minority 

Counsel; Kevin Corbin, Minority Deputy Clerk; Ashley Etienne, Minority Director of Communications; Susanne Sachsman Grooms, 

Minority Chief Counsel; Carla Hultberg, Minority Chief Clerk; Una 

Lee, Minority Counsel; Suzanne Owen, Minority Health Policy Advisor; Dave Rapallo, Minority Staff Director; Safiya Simmons, Minority Press Secretary. 

Chairman ISSA. The Committee will come to order. 

The Oversight Committee’s mission statement is that we exist to 

secure two fundamental principles. First, Americans have a right 

to know the money Washington takes from them is well spent. And 

second, Americans deserve an efficient, effective government that 

works for them. Our duty on the Oversight and Government Reform Committee is to protect these rights. 

Our solemn responsibility is to hold government accountable to 

taxpayers. Because taxpayers have a right to know what they get 

from their government. Our job is to work tirelessly in partnership 

with citizen watchdogs to deliver the facts to the American people 

and bring genuine reform to the Federal bureaucracy. 

I now recognize myself for an opening statement. 

The Affordable Care Act, often called Obamacare, was brought 

through this Congress in a rushed fashion on a purely partisan 

2 

basis. That doesn’t make everything in it bad, but certainly it 

causes many questions to have been unanswered. The Speaker herself, at the time, Nancy Pelosi, famously said, we have to pass it 

to find out what is in it. 

Many conceded they had not even read the entire contents, 

choosing instead to learn about the bill’s consequences after the 

fact. Sloppy work process produces dire consequences. 

In the case of the Affordable Care Act, or Obamacare, we are 

close to seeing one of those consequences, an $8.3 billion consequence. Today’s hearing will examine how the Administration 

may have politicized the implementation of Obamacare. The 

Obama Administration promised Americans who like their coverage they would be allowed to keep it. We now know that nothing 

could be further from the truth. Whether it is the one out of ten 

employers who plan to drop coverage, and have stated so in numerous non-partisan polls, or in fact, the Obamacare’s forced major 

cuts in a popular program known as Medicare Advantage, which 

serves exclusively seniors. 

Obamacare’s cuts to Medicare mean many seniors will lose their 

coverage they enjoyed under the prior law. These cuts are particularly painful to senior citizens enrolled in Medicare Advantage. 

Medicare Advantage relies on private sector competition to deliver 

greater coverage and planned choices to seniors when compared to 

traditional fee for service under Medicare. 

The program is widely liked by seniors around the Country and 

actually disproportionately well-liked in California. Acknowledging 

the political nature of these cuts, it is very clear that when implementation would have led to massive increases in costs and often 

seniors leaving that program, this demonstration project, which is 

clearly not a demonstration project, one that does not follow the 

rules or the path standards for a demonstration project, one that 

is in fact larger than all 85 so-called demonstration projects before, 

in fact was a thinly veiled attempt to call a demonstration program 

in order to shore up votes that surely would be lost when October 

brought higher costs to a program that in fact was always intended 

to be effectively defunded. 

The $8.3 billion is not being taken by appropriated funds. In fact, 

the system that allows for this demonstration project, never intended to be this high, allows for the funds to be taken around 

Congress’ appropriation process. The funds will essentially be 

taken out of Medicare. 

These funds will have to be backfilled to higher costs in the future. But in an election year, very clearly, this will shore up President Obama’s position on re-election. No ifs, no ands, no buts. 

I have not had to make a statement questioning the sincerity of 

a program like this before. Clearly and simply put, an imperial 

president is using the power of his administration to play politics 

with seniors’ health care. We will hear from the Government Accountability Office, a non-partisan policy expert, who will testify 

about concerns their watchdog agency has on this program. 

Let’s understand, a non-partisan agency has clearly said, this 

may not be legally allowed. This Chairman will say, this should not 

be legally allowed. This clearly does not pass the Washington sniff 

test for legitimate use of funds for demonstration purpose. 

3 

I claim not to be a scientist. But it is pretty clear that when you 

put 90 percent of a group into a subsidized funding system, you are 

not comparing 90 to 10. More importantly, CMS has not demonstrated any control group of any normal size or normal way of 

doing. If someone wanted to do a demonstration project, you could 

do a demonstration project, but it would not shore up the President’s re-election the way this $8.3 billion, unappropriated bailout 

of the President’s flawed Obamacare will do. No question about it, 

this is pure politics, pure politics being played with the taxpayer’s 

money that Congress did not appropriate. 

With that, I recognize the Ranking Member for his opening statement. 

Mr. CUMMINGS. Thank you very much, Mr. Chairman. 

I would like to thank the witnesses for coming here today to testify before the Committee. This is an important topic, and I am 

grateful for the opportunity to hear your views. 

I think we can all agree that we need to continue reforming our 

health care system, so that we are paying for value rather than 

volume, and encourage prevention as well as treatment. 

The Affordable Care Act works toward these goals in a number 

of ways. For example, it provides seniors with free preventive care, 

including wellness visits and cholesterol checks. Last year, more 

than 32 million seniors used at least one preventive service under 

Medicare without paying deductibles or co-pays. This saves lives 

and lower cost to the program. 

The Affordable Care Act also makes reforms to the Medicare payment system to align payments with better performance and outcome. One innovation is the quality bonus payment program that 

provides incentives for Medicare Advantage plans to improve the 

quality of care by establishing bonus payments to plans that 

achieve certain quality standards. 

The Center for Medicare and Medicaid Services, CMS, initiated 

a demonstration program to test an alternative method for these 

bonus payments in order to examine ways to generate quicker and 

more significant quality improvement in the plans. The Government Accountability Office has raised a number of concerns about 

this demonstration program. GAO disagrees with how CMS structured the program, and it has methodological concerns about the 

way CMS will measure the results. 

CMS responded that it believes the program will incentivize 

plans to improve the quality of care and increase efficiency. CMS 

also believes that GAO’s methodological concerns can be addressed. 

As this back and forth demonstrates, there is no scandal here. This 

is legitimate and substantive disagreement about how best to 

structure bonuses to incentivize quality care and how to design a 

demonstration program to achieve its intended results in an effective and efficient manner. In our efforts to research this issue, we 

contacted a legal expert, Professor Jeffrey Lubbers, Professor of Administrative Law at American University. I request unanimous 

consent to enter his statement into the record, Mr. Chair. 

Chairman ISSA. Without objection, so ordered. 

Mr. CUMMINGS. Thank you very much, Mr. Chairman. 

Professor Lubbers reviewed GAO’s concerns as well as the legislative history and case law relating to the Secretary’s authority. He 

4 

concluded that the disagreement between GAO and CMS ‘‘amounts 

to a methodological disagreement, not a legal one.’’ He found that 

‘‘the law gives HHS very broad authority to conduct demonstration 

programs in this area. And in my view, the proposed MA quality 

bonus payment demonstration fits comfortably within the authority.’’ 

In my opinion, today’s hearing title is a little bit misleading. It 

suggests that GAO has accused the Secretary of Health and 

Human Services of doing something illegal. In fact, GAO questioned the authority of HHS to conduct this program based on 

GAO’s underlying policy and methodology concerns about the program design. This type of rhetoric affects the tone and tenor of this 

hearing and makes it more difficult to engage in a reasoned debate 

focused on the merits or flaws of a demonstration program. 

We can do better than that. Let’s focus on the substantive discussion; let’s discuss GAO’s concerns with the program and CMS’ response to those concerns. This is the hearing I hope we will have 

today. 

With that I yield back. 

Chairman ISSA. I thank the gentleman. 

All members will have seven days to submit opening statements 

for the record and extraneous information. 

We now welcome our witnesses. Mr. James Cosgrove is the Director of Health Care at the General Accountability Office. Ms. 

Edda Emmanuelli-Perez is the Managing Associate General Counsel at the GAO. And Mr. Jonathan Blum is the Principal Deputy 

Administrator and Director at the Center for Medicare. 

Pursuant to the Committee rules, would you please rise to take 

the oath, and raise your right hands. Do you solemnly swear or affirm that the testimony you are about to give will be the truth, the 

whole truth and nothing but the truth? 

[Witnesses respond in the affirmative.] 

Chairman ISSA. Let the record indicate all witnesses answered in 

the affirmative. Please be seated. 

Your prepared statement will be placed in the record in their entirety. I welcome your summarizing those and including additional 

comments that you may have. It is not a sin to use less than five 

minutes. It is, however, an offense for which you can be locked in 

the House jail if you go far beyond five. So do everything you can 

to use the five minutes for something other than simply a written 

prepared statement, all of which will be placed in the record. And 

again, we haven’t yet jailed anybody. 

So with that, Ms. Cosgrove, you are recognized for five minutes 

or so. 

WITNESS STATEMENTS 

STATEMENT OF JAMES C. COSGROVE 

Mr. COSGROVE. Chairman Issa, Ranking Member Cummings, 

members of the Committee, I am pleased to be here today as you 

discuss the Medicare Advantage Quality Bonus Payment Demonstration. As you know, back in March of this year, GAO recommended that the Secretary of HHS cancel the demonstration 

5 

and allow the quality bonus payment system established by the 

ACA to take effect. 

This morning, I would like to provide context for that recommendation and explain why we believe this demonstration is not 

a wise use of Medicare funds. 

Seeking to improve the quality of health care for Medicare beneficiaries is a laudable goal. Currently, the quality of MA plans is 

indicated using a star rating system, five stars being the highest 

possible rating. It was established in 2008 to help beneficiaries 

identify high quality plans. The ACA would have added a financial 

incentive for plans to achieve the highest quality by awarding bonuses to plans that receive four or more stars beginning in 2012. 

However, instead of implementing the ACA’s quality bonuses, 

HHS established a three-year demonstration program intended to 

test the effectiveness of a different quality incentive system. This 

demonstration rewards not just the high quality plans, but also extends bonuses to plans of average quality, three and three and a 

half stars. And it dramatically increases the size of those bonus 

payments. 

Thus, the vast majority of plans, which together account for more 

than 90 percent of all plan enrollees, will receive bonuses. And this 

is in sharp contrast to the ACA’s bonus structure, which would 

have awarded bonuses only to the highest quality plans. 

CMS’ actuaries estimate that the demonstration will cost more 

than $8.3 billion every 10 years. And most of the money is expected 

to go to plans of average quality. Bonus payments are expected to 

offset about one-third of the ACA’s payment reductions that were 

designed to achieve savings from the MA program. The largest offset occurs this year, when the bonuses restore about 70 percent of 

the ACA’s reductions. 

The quality bonus payment demonstration dwarfs all other Medicare demonstrations in terms of its budgetary impact. It is larger 

than the combined budgetary impact of approximately 85 demonstrations that have taken place since 1995. In fact, it is seven 

times larger than the largest of those 85 demonstrations. 

Although the cost of this demonstration is unprecedented, that is 

not why GAO recommended it be canceled. We made our recommendation because, at the end of the day, after spending $8.35 

billion, we are unlikely to learn much about the demonstration’s 

impact on quality improvement. 

Several design flaws that preclude a credible evaluation of the 

demonstration’s effectiveness. One flaw is that in the first two 

years, the demonstration bonuses largely reward plans for their 

pre-demonstration performance. Bonuses in 2012 and 2013 are 

completely or mostly based on quality data that were measured before the demonstration’s final specifications were announced. Only 

in the final year of the demonstration will the actions that plans 

have taken in response to the demonstration’s incentives have an 

effect on their bonus payments. 

A second flaw is that there is no natural comparison group 

against which to measure the effect of the demonstration. Because 

all plans are participating in the demonstration. HHS has suggested that Medicare cost contract plans, commercial plans or Medicaid plans may provide a suitable control group. However, none of 

6 

these are eligible for an ACA quality bonus. Thus, there is no opportunity to compare and contrast the quality improvements made 

by plans eligible for the demonstration with the quality improvements made by plans eligible for ACA bonuses. 

Other confounding factors will also make it hard to gauge the 

demonstration’s impact. For example, CMS has announced that 

plans receiving less than three stars for three consecutive years 

may be terminated from the program. Therefore, if we observe 

plans improving from two and a half, three stars, we cannot determine whether it was the demonstration’s bonus payments or the 

threat of termination that was the driving factor. 

And finally, the demonstration’s bonus percentages do not offer 

all plans better incentives than they would receive under the ACA. 

Plans improving from three and a half to four stars, for example, 

would receive a larger bonus under the ACA. HHS has stated that 

one of the principles of the demonstration is to offer financial rewards for quality improvements throughout the ratings continuum. 

But in 2014, the only potentially meaningful year of the demonstration, the bonus is exactly the same, 5 percent for four star, 

four and a half, five star plans. 

In conclusion, although CMS has said that the goal of the demonstration was to test whether a scaled payment structure leads to 

larger and faster quality improvements, the demonstration’s design 

is inadequate to determine whether this is the case. For that reason, we recommended the demonstration be canceled. 

I am happy to answer any questions that you or any of the members may have. 

[Prepared statement of Mr. Cosgrove follows:] 

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Chairman ISSA. Thank you. 

Ms. Perez? 

STATEMENT OF EDDA EMMANUELLI–PEREZ 

Ms. EMMANUELLI-PEREZ. Good morning, Mr. Chairman, Ranking 

Member and members of the Committee. Thank you for the opportunity to discuss GAO’s legal analysis of HHS’s authority to undertake the Medicare Advantage Quality Bonus Payment Demonstration under Section 402 of the Social Security Act Amendments of 

1967. 

As GAO conducted the work described by my colleague, those 

facts also raised concerns about the legal authority to conduct the 

demonstration under Section 402. So we sought additional information and requested HHS’s views on its legal authority. 

GAO has concluded that HHS has not established that the Quality Bonus demonstration is authorized by law, because it has not 

shown how the demonstration satisfies two elements of Section 

402. First, it should provide for the creation of additional incentives 

toward efficiency and economy of Medicare services. And second, 

provide for the agency to determine whether changes in payment 

methods increase the efficiency and economy of such services. 

Under the first element, GAO has concerns about the demonstration’s ability to provide additional incentives to increase efficiency 

and economy of Medicare services. For example, the majority of the 

demonstration relies on data that predates the demonstration. Instead, as CMS has acknowledged, in 2012 and 2013, the payment 

reward plans for their past performance, and thus do not provide 

incentives to increase efficiency or economy. 

According to CMS the increase in payments in those years provide a transition period, during which plans can use additional 

bonus payments to improve quality of care. CMS assumes that 

plans will use these additional monies to increase quality, even 

though there is no requirement that plans use the demonstration’s 

bonus payments to improve or attempt to improve quality. 

In fact, current Medicare regulations preclude plans’ ability to 

use additional bonus payments to improve the quality of care provided to beneficiaries, an issue CMS has not addressed. 

With respect to the only year in which payment changes could 

induce improved quality, 2014, CMS did not revise the payment 

methodology7 for plans with four, four point five or five stars. And 

there are other plans in 2014 that would generally receive a larger 

increase in their bonus under PPACA than under the demonstration, which could actually reduce incentives to improve quality. 

With respect to the second element of Section 402, the demonstration’s shortcomings raise concerns about the agency’s ability 

to determine whether the payment changes resulted in increased 

efficiency and economy. In order to make that determination, the 

agency must compare the effect of the payment methods adopted 

under the demonstration to the effective payment methods in place 

under current law, in this case PPACA. 

Due to the significant time lag between the collection of data 

upon which the plan’s star ratings are based, and the issuance of 

those ratings, the demonstration’s violation appears far more likely 

to enable the agency to compare plan performance during the demVerDate Aug 31 2005 10:44 Sep 12, 2012 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 C:\DOCS\75783.TXT APRIL
15 

onstration to plan performance before PPACA, rather than comparing plan performance under the demonstration to plan performance under PPACA, as contemplate by Section 402. 

In addition, CMS has not explained how the comparison groups 

it has identified would allow it to determine whether the demonstration’s changes in payment increase efficiency and economy 

compared to current law. CMS identified comparison groups as described by Mr. Cosgrove that are outside the Medicare Advantage 

program, ones that may serve different populations, they may follow different regulations and policies, and importantly, they are 

not subject to PPACA quality bonus provisions, but did not explain 

how those groups would yield a useful comparison. 

Nor has the agency accounted for other Medicare Advantage payment and policy changes that may lead to changes in quality. CMS 

did not explain how it would be able to effectively identify whether 

the demonstration payment changes are responsible, and if so, to 

what extent, for any improvements in plan quality, economy and 

efficiency. 

After analyzing these details of the demonstration in light of Section 402, GAO concluded that CMS has not established that the 

Quality Bonus demonstration meets the essential elements of the 

law that require the creation of additional incentives toward efficiency and economy of Medicare services, and that the demonstration allow the agency to determine whether the changes in payment methods increase the efficiency and economy of such services. 

This concludes my statement, and I would be pleased to answer 

any questions that you and the members may have. 

Chairman ISSA. Thank you. 

Mr. Blum? 

STATEMENT OF JONATHAN BLUM 

Mr. BLUM. Mr. Chairman, Mr. Cummings, members of the Committee, I want to thank you for the opportunity to talk about how 

CMS is working to improve the overall Medicare program. 

Currently, 27 to 28 percent of beneficiaries choose to receive the 

Medicare services through a private plan. Over the last 10 years, 

I think it is fair to say the program has gone through dramatic 

changes during the last 10 years. Prior to 2010, and prior to the 

Affordable Care Act, I think there were a lot of questions regarding 

the value that plans provided for beneficiaries and for taxpayers. 

On average, the plans were paid 14 percent more than the traditional fee for service program, without much confidence, without 

much data that taxpayer beneficiaries were getting more value for 

those extra subsidies. CMS had tremendous compliance failures 

with plans and I think it is fair to say that we had both a financial 

challenge for the program, but also a quality and performance challenge for the program. 

In 2010, the program was reformed. The Affordable Care Act 

puts us on a track to phase down those subsidies over the next 10 

years, down on average to the traditional fee for service Medicare 

program. The Affordable Care Act also authorized a quality bonus 

structure to provide higher payments to four star, five star plans 

consistent with the CMS five star system. And the law gives CMS 

16 

more tools to aggressively review plan bids to ensure that we had 

the best possible plans providing services to beneficiaries. 

In our view, the ultimate goal of the program is to ensure that 

every Medicare beneficiary has the opportunity to enroll into a five 

star plan. Today we have very few five star plans. I think roughly 

7 percent of beneficiaries now are in five star plans, and most parts 

of the Country do not have access to a five star plan. 

I think it is important to talk about what a five star plan is. A 

five star plan focuses on prevention, focuses on wellness. A five 

star plan demonstrates that they can proactively manage chronic 

conditions, they can keep beneficiaries well. A five star plan demonstrates that it is best in class in customer service. A five star 

plan demonstrates that they provide more services to beneficiaries 

during their time of need, not less, when they need assistance. I 

think our greatest challenge is two-fold. Number one, to reduced 

dramatically the cost to the Medicare program to keep it sustainable for the long-term for current beneficiaries and for future beneficiaries. 

But I also believe that we have a quality deficit for too long, both 

in the traditional fee for service program and in the private side 

in Medicare. We have paid for volume, not paid for value. 

Our demonstration program is designed to determine the best 

ways both to reduce the overall cost of the program, but also to improve the overall quality, so all beneficiaries, as rapidly as possible, 

have access to the best possible plans, four star, five star plans. To 

date, we see very positive signs that this overall strategy is working. Today we are paying much lower subsidies to the health plans. 

That 14 percent overpayment that was in place prior to the Affordable Care Act being passed now is down to 7 percent. We are on 

track to bring that down over the next 10 years, down on average 

to 100 percent of fee for service rates. 

We are seeing the program growing at double digit rates. The 

program continues to be popular, beneficiaries continue to find 

value, and from that perspective, we are pleased. And we are also 

seeing dramatic changes in how plans interact with the program. 

I think prior ro the Affordable Care Act, we didn’t see the commitment to performance, the commitment to quality that has changed. 

I think what the strategy is doing is changing the business model 

for how plans interact with the program from being a program 

where plans were simply paid to pay claims and pay more on average than the traditional fee for service program to a business 

model that works to keep beneficiaries healthier, that works to 

keep beneficiaries well, that works to better manage chronic conditions and provide the best possible value, both to taxpayers and to 

beneficiaries. 

With that, I yield my time and would be happy to answer any 

questions that you may have. 

[Prepared statement of Mr. Blum follows:] 

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Chairman ISSA. Thank you. I recognize myself for a few questions. 

Mr. Cosgrove, are you a career professional at GAO? 

Mr. COSGROVE. Yes, I am. I have been at GAO since 1989. 

Chairman ISSA. Twenty-three years. Congratulations. 

Ms. Perez, are you also a career professional at GAO? 

Ms. EMMANUELLI-PEREZ. Yes. 

Chairman ISSA. How long have you been there? 

Ms. EMMANUELLI-PEREZ. I have been there 25 years, Mr. Chairman. 

Chairman ISSA. So I have nearly half a century of non-partisan 

work at the GAO. 

Mr. Blum, how long have you been on the job? 

Mr. BLUM. I started at CMS in March of 2009. 

Chairman ISSA. Are you a political appointee? 

Mr. BLUM. Yes, I am. 

Chairman ISSA. So when you tell us that this is lowered costs, 

let me run through a couple of quick questions. First of all, put the 

chart up, if you would. 

That is the ratio between the next biggest demonstration plans 

that have happened versus this one, as Mr. Cosgrove said, seven 

times larger than the next largest. What is your demonstration 

project limit? What is Secretary Sebelius’ limit to how much she 

can write on the taxpayers’ back without appropriations? 

Mr. BLUM. From my understanding of the demonstration law, the 

law does not require any set limits to demonstration. 

Chairman ISSA. Okay. So the Secretary has unlimited ability to 

take all the money in the world without appropriations around 

Congress. Is that correct? 

Mr. BLUM. I think what really the demonstration authority is designed to do is to test ways to improve the overall economy and efficiency of the program. But there is no overall limit. 

Chairman ISSA. Okay. So this unlimited authority around Congress must come at some price. In your demonstration application, 

Medicare Waiver Demonstration Application at CMS, budget neutrality, Medicare waiver only demonstrates must be budget-neutral. 

Budget neutrality means that the expected cost under the demonstration cannot be more than the expected cost were the demonstration not to occur. 

In other words, by your own application, you have to save $8.3 

billion. Where are you going to save $8.3 billion when in fact, the 

vast majority of the $8.3 billion is given away for no performance 

change, but retroactively in order to not have, essentially, seniors 

feel the pain of the Not Affordable Care Act? 

Mr. BLUM. I think a couple of points, Mr. Chairman, in response. 

We are reducing, according to CBO’s estimates, over $200 billion 

from the Medicare program. 

Chairman ISSA. No, no, wait a second. CBO has already scored 

and rescored the fact that the Affordable Care Act costs a whole 

lot more than it was scored at before, and it continues to go up. 

You are adding $8.3 billion of new costs, not in ACA, and you are 

changing dramatically the law that said four and five star, and you 

are including, essentially, the mediocre plans in this bonus plan. 

You are doing it to 70 percent subsidy in the first year, which as 

27 

Mr. Cosgrove said and Ms. Emmanuelli-Perez said, is essentially 

paying them for what has already occurred. 

Where are you going to get $8.3 billion to pay back for what you 

are taking? Because by your own application, you have to be able 

to show you get it back. Where is the demonstration that you are 

going to get $8.3 billion back, by this demonstration? 

Mr. BLUM. That really is our goal for the demonstration, to test. 

Chairman ISSA. Okay, so you have no plan to get the money 

back, you have a goal that is the demonstration. But the demonstration, according to Ms. Perez, may not be legal. You may not 

have dotted the Is of the legality, including those first two years 

in which the demonstration proves nothing. The existing ACA 

would have caused you to only give a lesser amount and only to 

better performers. 

And if I understand correctly, logically you would have given that 

money only in year three, or in a year in which the demonstration 

that you paid for, they had an opportunity to achieve. 

Ms. Perez, I am going to go to you. Wouldn’t that have essentially taken care of the legal questions, if they structured it with 

the numbers that would be a smaller portion and thus more appropriate, in which people that are three could become four, in order 

to achieve the bonus? If I understand correctly, the first two years, 

if you are a two, two and a half, you can’t become a three in those 

two years. If you are already a four, a three, a four and a half, you 

are going to get this bonus. Is that all correct? 

Ms. EMMANUELLI-PEREZ. Well, Mr. Chairman, it is true that in 

those first two years, 2012, 2013, the plans are being rewarded for 

past performance. So to that extent, we do not believe that creates 

additional incentive. So in terms of looking at the year in which 

changes could occur that would incentivize this quality improvement, it would be 2014. 

What we found is that in that year, the demonstration actually 

doesn’t change the payment for four, four point five and five point 

programs. And the only ones where there is a change would be the 

three star. So we find that the majority of the demonstration does 

not have this incentive. 

Chairman ISSA. So it doesn’t meet the smell test, as I said in the 

opening. 

Mr. Cosgrove, Ms. Perez, in your nearly combined half a century, 

have you had to come before Congress with a large amount, saying 

it just shouldn’t be done, either legally or functionally like this before? Anything that even becomes close to this amount prospectively. 

Mr. COSGROVE. To my knowledge, no. We have certainly questioned aspects of certain demonstrations. We have never. I have 

never recommended, worked on a study to recommend canceling a 

demonstration. I have never encountered one of this size. 

Chairman ISSA. Thank you. As I recognize the Ranking Member, 

let us understand, it is not the program. We would like Medicare 

Advantage to succeed. It is in fact the President using $8.3 billion 

of unappropriated funds to buy an election. 

The gentleman is recognized. 

Mr. CUMMINGS. Thank you very much, Mr. Chairman. 

28 

There is no one here that wants to see government funds used 

effectively and efficiently more than the Chairman and myself. I 

just had a lady, about a month ago, I ran into in front of my house, 

ask me to save her life. She has colon cancer and has no way to 

get insurance. So I see it every day. I live in the inner city of Baltimore. 

And I must say to you, Mr. Blum, it is extremely important that 

programs run effectively and efficiently and that they do what they 

are supposed to do. To you, Mr. Cosgrove and Ms. EmmanuelliPerez, I want to thank you for your service. I thought your report 

was thorough and well done, and I thank you. 

You wrote, Ms. Perez, on July 11th, a letter to GAO Secretary 

Sebelius, is that right? 

Ms. EMMANUELLI-PEREZ. That is correct, Mr. Cummings. 

Mr. CUMMINGS. And just to be clear, this letter was not in any 

way binding on the Secretary, was it? 

Ms. EMMANUELLI-PEREZ. It constitutes our views regarding the 

legal elements of the demonstration, but it is not binding on the 

Secretary. 

Mr. CUMMINGS. Did you or your letter conclude that Secretary 

Sebelius acted illegally by implementing the demonstration program? 

Ms. EMMANUELLI-PEREZ. No. We didn’t conclude that it was illegal. What we found was that as presented to us by CMS during 

the course of our work, the details of the demonstration did not 

meet the elements of the statute. Therefore, we wrote to the Secretary to better inform the judgment regarding the violation of this 

demonstration, as well as to inform Congress in its oversight. 

Mr. CUMMINGS. And did you get a response to that? 

Ms. EMMANUELLI-PEREZ. No, we did not receive a response. 

Mr. CUMMINGS. And Mr. Cosgrove, is it fair to say that GAO’s 

main concern is you believe that the demonstration program is unlikely to produce meaningful results because of the way it was designed, is that right? 

Mr. COSGROVE. Well, I suspect that there will be quality improvements. What we are concerned about is that we won’t be able 

to attribute it to the demonstration, we won’t be able to determine 

the effectiveness of the demonstration. That is why our recommendation was not only to cancel the demonstration, but to implement the bonus structure that the ACA provided for, and then 

if that proved inadequate at a future time, design and implement 

a better design demonstration. 

Mr. CUMMINGS. Mr. Blum, you heard the testimony, you also 

heard the Chairman accuse the President, I guess he said, and I 

don’t want to put words in his mouth, but of buying an election. 

Chairman ISSA. Good words. 

Mr. CUMMINGS. Yes, of buying an election. Do you agree with 

that? 

Mr. BLUM. I think this demonstration is designed to rapidly test 

ways to improve, to how we can improve the overall elements of 

plans participating in the program. We have reviewed very carefully the findings of the GAO. But we also believe very strongly 

that this demonstration can be evaluated. 

29 

I think to the concern regarding the cost contracts, whether or 

not they provide an adequate control test, they do not, they are not 

eligible for the bonus payments per the Affordable Care Act. But 

I think the point is, they have to report the same quality information, the same quality data, so we can see in a comparison group 

the rise in quality compared to the plans participating in the demonstration. 

I think the ultimate goal is for us to really figure out a way 

quickly, given the fact that we are adding 10,000 new Medicare 

beneficiaries to the program every business day, how we can best 

both lower the cost of the program, and I think—— 

Mr. CUMMINGS. Mr. Blum, let me say this. This is a program 

that has been under fierce attack. It was fought every inch of the 

way. And it seems as if we would be extra careful to try to make 

sure that it is done properly and that we try to get the results that 

we need. I know in my district, whenever there is any kind of program, we usually go to Johns Hopkins, and there is a study of the 

program as it goes along to make sure it is accomplishing what it 

is supposed to accomplish. 

What these folks are saying is that they don’t believe that you 

had the type of study that was appropriate to even measure the 

kind of results, so that you could even determine whether it was 

effective, and second, questioning whether or not it was effective at 

all. They are saying it is kind of hard to tell. 

So how do you answer that? 

Mr. BLUM. I think we have to wait for the evaluation to make 

definitive statements whether or not the demonstration has 

worked. The demonstration is three years. 

But what I can say is based upon every interaction the agency 

has had with the health plans participating in the program, that 

they have changed their business models. They have changed the 

way they interact with the program. They are investing in new infrastructure to measure up to the assessed quality. They have 

changed their business plans, in my judgment, from a program of 

simply paying for claims, for health claims, to a program that 

keeps beneficiaries well, that manages chronic conditions. 

I think at the end of the day, what our ultimate success factor 

will be is every Medicare beneficiary that wishes to sign up in a 

private plan has access or has the opportunity to sign up in the 

four star, five star plan. To me, as the overseer of the program, 

having beneficiaries enroll in low-performing plans, average quality 

plans, should not be sufficient and should not honor the promise 

that we have for Medicare beneficiaries. 

To our view, every Medicare beneficiary should have the opportunity to enroll in a five star plan. Our challenge is, how do we 

make it possible quickly, rapidly, given the demographic shift, 

given how much beneficiaries want to be in the program, to have 

that opportunity. 

So I can say, based on anecdotes, we have seen a dramatic 

change to how plans participate in the program, and their overall 

commitment to beneficiaries. Obviously, we will have to wait until 

the demonstration is complete to make definitive statements, did it 

work. But so far we are seeing very positive signs. 

Mr. CUMMINGS. Thank you, Mr. Chairman. 

30 

Chairman ISSA. Thank you. 

I would now recognize the gentleman from Utah for his statement. Would you yield me 10 seconds? 

Mr. CHAFFETZ. Yes, I yield to the Chairman. 

Chairman ISSA. I think what I heard you say, Mr. Blum, I am 

sure what I heard you say is we have to spend $8.3 billion to find 

out if it is going to work, after GAO said it is a bad plan that was 

unlikely to bear any positive fruit. I am positive I heard you say 

that. 

I thank the gentleman. 

Mr. CHAFFETZ. Following up on the Chairman’s comments, I remember the Speaker of the House, Nancy Pelosi, saying, we are 

going to have to pass this bill in order to find out what is in it. 

Now you are saying, even though we have experts who say it can’t 

demonstrate any tangible results, that we are actually going to 

have to spend $8 billion in order to test it to see if it would actually 

work, even though we don’t believe that there is any objective way 

to come to conclusions, based on the way that this is set up. 

Mr. Blum, do you have any non-partisan third party group or 

person or whatever that has gone on the record to claim that this 

demonstration research project is designed to actually demonstrate 

something? 

Mr. BLUM. When CMS developed this demonstration, we worked 

very closely with our program staff, who are all career civil servants. We worked with our—— 

Mr. CHAFFETZ. Do you have any outside, third party person that 

has gone on the record to say that this is set up properly? 

Mr. BLUM. What I have heard from—— 

Mr. CHAFFETZ. Pretty much a yes or no question. 

Mr. BLUM. I am not aware of any outside. But I think that CMS 

will go through that rigorous review. 

Mr. CHAFFETZ. Go through that rigorous review. Well, part of 

that rigorous review is going through the GAO. 

Mr. Cosgrove, you have been at the GAO for 23 years, but your 

academic background, could you review for me quickly what your 

academic background is? 

Mr. COSGROVE. Certainly. My Ph.D. is in economics, microeconomics. Before I came to GAO, I was teaching economics at 

Marquette University in Wisconsin. 

Mr. CHAFFETZ. And based on what you have seen, in your expertise here, have you seen anything as fundamentally flawed or set 

up like this? You mentioned earlier when Chairman Issa was asking you that you, in your 23 years, actually never recommended the 

cancellation, is that correct? 

Mr. COSGROVE. That is correct. 

Mr. CHAFFETZ. So if this was presented in an academic setting, 

how do you think people would react to how this is structured? 

Mr. COSGROVE. I think the concerns would be the same ones that 

I raised. In addition, we don’t think there is a good control group. 

And we may see increases in quality among health plans, but we 

may have seen them under the ACA’s bonus provision, but we will 

never know, because that was set aside to implement this nationwide demonstration program. 

31 

Mr. CHAFFETZ. Aren’t these normally set up on a county basis, 

and if so, why is that? 

Mr. COSGROVE. It is specifically so you can see what difference 

a new payment system makes. So for the durable medical equipment, for example, there are demonstrations that test competitive 

bidding for that, a new way of purchasing that. So that was done 

first in one county, expanded to two counties, and then it rolled our 

more slowly. 

That allows you to see what actually the difference in going to 

competitive bidding rather than a fee schedule makes. That is not 

what happened here. 

Mr. CHAFFETZ. My understanding is that generally these demonstration projects are at budget neutrality or at least close to 

budget neutrality. Is that the history of what you have seen in the 

past? 

Mr. COSGROVE. My understanding is that Section 402 does not 

require budget neutrality, but that has been OMB’s policy. We 

didn’t look at individual demonstrations to determine whether they 

were budget neutral or not. 

Mr. CHAFFETZ. And is it your understanding that a demonstration project has to actually be able to demonstrate something in 

order to qualify under Section 402(a)? 

Mr. COSGROVE. My understanding is a demonstration is supposed 

to test the economy and efficiency of a new payment system to 

achieve something. And that is where we think it falls short. 

Mr. CHAFFETZ. All right, Mr. Chairman, I will yield back. Thank 

you. 

Chairman ISSA. Would the gentleman yield? 

Mr. CHAFFETZ. Yes, I yield. 

Chairman ISSA. I understand that there is no requirement. Let 

me rephrase, let me ask it a different way. Mr. Blum, if you were 

to follow ACA’s mandate of four, four and a half, five, wouldn’t that 

by definition cost less, yes or no? 

Mr. BLUM. There would be less overall program spending. 

Chairman ISSA. There would be a lot less, because this would be 

less than half of the size of the group. Wouldn’t you by definition 

then encourage in year three entities to become fours in order to 

qualify, assuming that you restructured it back to where being a 

four benefitted you versus being a three? 

Mr. BLUM. My understanding of the Affordable Care Act, and I 

probably don’t have every detail straight in my head, but my understanding is the bonus payments are phased in over a five-year 

period. I think again, going back to our—— 

Chairman ISSA. Okay, so let me go back through, final question. 

By definition, if you followed the Affordable Care Act, it would cost 

less. You are choosing something that costs more, even though 

Congress scored this as essentially budget neutral when it passed 

it. So you are essentially changing something that was scored one 

way into something that is going to cost $8.3 billion more. Isn’t 

that correct? 

Mr. BLUM. I think the real goal of the demonstration is, I think 

an important point—— 

Chairman ISSA. No, no, I am only concerned with the money you 

are spending without appropriation. So isn’t it true that what you 

32 

have done is add substantially $8.3 billion to the Affordable Care 

Act years after it was passed? 

Mr. BLUM. I think the key point is that plans are paid based up 

on their bids. So our hope, the demonstration’s goal is—— 

Chairman ISSA. Mr. Blum, I did not vote for the man that talked 

about hope. And I am here asking you a question I would expect 

you to answer. Isn’t it true you are adding $8.3 billion to the Affordable Care Act with this demonstration project, outside of that, 

the program scoring, and you are doing so without coming back to 

Congress? 

Mr. BLUM. According to our actuaries, the 10-year estimate is $8 

billion over the next 10 years. But I think we are on track to reduce the subsidies down to the fee for service level over that same 

period. 

Chairman ISSA. Right. After the election. 

With that, we recognize the gentleman from Virginia, Mr. 

Connolly, for five minutes. 

Mr. CONNOLLY. Mr. Blum, I proudly did vote for the man who 

talked about hope, and I intend to do it again. And I am very glad 

to have voted for the Affordable Care Act, and I am very glad you 

are here helping us illuminate the intricacies of its implementation 

and the benefits of its implementation. 

We were reminded just yesterday by a CBO report that the numbers actually are better even than we predicted when originally 

passing the bill. 

Mr. Cosgrove, let me ask you, you are the GAO, the reckless 

charge has been made that this demonstration project is nothing 

more than an attempt to buy an election. You are the GAO. Did 

you find any evidence of that? 

Mr. COSGROVE. We did not look at the motive behind what was 

driving the demonstration. We looked at the structure of the demonstration. 

Mr. CONNOLLY. And in looking at anything, find anything suspicious we ought to be worried about politically? And the mis-use 

of these funds or this program for undue political influence? 

Mr. COSGROVE. Again, I am sorry, we were just looking at the 

structure of the demonstration itself. 

Mr. CONNOLLY. Mr. Blum, you guys engaged in nothing more 

than a political campaign on behalf of the President? 

Mr. BLUM. Again, our goal is to make sure that we can find ways 

quickly, rapidly, given the demographic shift, to ensure that every 

Medicare beneficiary, as rapidly as possible, has access to the best 

quality of care. Our demonstration is designed to test that premise; 

how can we reduce plan subsidies on average down to the fee for 

service level, at the same time dramatically improve the overall 

quality performance of our health plans and also keep the program 

growing. 

So far, we have seen that strategy working. We have cut the subsidies to the health plans in half. We are now paying 107 percent 

of fee for service with the demonstration, today. We are on track 

to bring those overpayments down to 100 percent of fee for service 

on average. 

We have seen dramatic changes to how plans interact with the 

program. We have seen dramatic focuses on compliance, on quality 

33 

improvements. And so there has been a fundamental shift in the 

overall psychology to how plans interact with the program. 

Mr. CONNOLLY. Mr. Blum, if I could just clarify. You said you 

brought it down to 107 percent of fee for service and you hope to 

get to 100 percent, versus what in normal Medicare? 

Mr. BLUM. Prior to the Affordable Care Act, the program was 

paying plans 14 percent more than the traditional fee for service 

program on average, without any solid evidence or measures that 

plans were providing 14 percent more value than the traditional 

fee for service program. 

That framework has now changed. We are bringing the payments 

down over time to 100 percent of fee for service. We are changing 

how plans interact with the program, focus on the program, to encourage every plan to be a five star plan. 

Mr. CONNOLLY. And far from being something extraneous to the 

Affordable Care Act, it sounds to me like this demonstration project 

is perfectly consistent with the Affordable Care Act, one of whose 

goals, primary goals, was to bring down the cost of health care long 

term, is that not correct? 

Mr. BLUM. I think the Affordable Care Act’s premise throughout 

the Medicare program, both in the traditional fee for service program and in the private side of Medicare, the MA program, is to 

reduce costs dramatically through improvement. We are doing the 

same strategies on the fee for service side, for hospitals, physicians, 

all health care providers to reduce the cost through straight programmatic changes, but also to provide very strong incentives for 

hospitals, physicians to improve the quality of care, to improve the 

performance. 

We are confident at the end of the day that we can prove the 

premise that we can lower Medicare costs dramatically while improving the overall quality of the services. That is our fundamental 

challenge. 

Mr. CONNOLLY. Mr. Blum, how important is it, given the complexity of a program like Medicare, to in fact test an alternative reimbursement program such as the one you are describing? 

Mr. BLUM. I think in my experience, my judgment, CMS over the 

past 10, 15 years has not innovated rapidly enough. While it is true 

that the program in the past had very smaller demonstrations, I 

think most people would conclude that the program has failed on 

many measures. There are solvency deficits, there are quality of 

care deficits. I think our goal is to lower the overall costs and to 

improve the overall quality, given the fact that we have 10,000 new 

Medicare beneficiaries coming onto the program now every business day the program is open. 

I believe the strategy so far seems to be working, showing very 

positive signs. Overall Medicare costs have fallen dramatically 

since passage of the Affordable Care Act. Yet we have seen no compromises in the quality of care and very strong indications the 

quality is improving. 

Mr. CONNOLLY. If the Chairman would allow me a simple question with a simple answer. 

Chairman ISSA. Without objection, the gentleman is recognized 

for an additional minute. 

Mr. CONNOLLY. I thank the Chair. 

34 

Did Medicare premiums go up or down this year? 

Mr. BLUM. For the Part C plans, premiums have fallen. 

Mr. CONNOLLY. Mr. Blum, I promised the Chairman a simple 

question with a simple answer. And Medicare Advantage premiums 

in the last two years, did they go up or down? 

Mr. BLUM. Down, on average. 

Mr. CONNOLLY. Is there any evidence that that might be related 

to the provisions of the Affordable Care Act? 

Mr. BLUM. We see very strong commitments from the health 

plans that participate in the program. To our analysis, they are 

making long-term commitments to this program, and we have 

every confidence this program will remain strong today and well 

into the future. 

Mr. CONNOLLY. Thank you, Mr. Blum. 

Chairman ISSA. Would the gentleman yield for a question? 

Mr. CONNOLLY. It is actually the Chairman’s time, I am done. 

But thank you, Mr. Chairman. 

Chairman ISSA. Is the gentleman concerned, you only asked Mr. 

Blum questions, are you concerned that the other two witnesses 

stated unequivocally that this $8.3 billion will not yield any usable 

data? 

Mr. CONNOLLY. Mr. Chairman, I actually began by asking Mr. 

Cosgrove a question. 

Chairman ISSA. But are you concerned about that? 

Mr. CONNOLLY. About his answer? 

Chairman ISSA. About the fact that Mr. Blum says that everything is rosy, but the non-partisan witnesses make it clear that 

this $8.3 billion will yield no usable data? 

Mr. CONNOLLY. I would be certainly concerned about testimony 

that would say that. But I have heard charges thrown around here, 

Mr. Chairman, that this is nothing but a political utilization of a 

program. Mr. Blum is here to give us technical expertise and testimony that actually contradicts that assertion. 

And when I asked Mr. Cosgrove, that was my first question, he 

indicated they didn’t look at that issue. They found no evidence, 

but they didn’t look for it. So I necessarily then turned to Mr. Blum 

as the expert witness to talk about the actual aspects of the program and whether they were efficacious. And the testimony I think 

we have just heard from Mr. Blum would suggest that the answer 

to those questions is yes. 

Chairman ISSA. Mr. Cosgrove, the gentleman mentioned your 

name. Did you in fact say that there is no evidence that this won’t 

yield good, usable information as a demonstration? 

Mr. COSGROVE. That is—— 

Mr. CONNOLLY. Would the Chairman yield? 

Chairman ISSA. I was just allowing the gentleman to characterize what you characterized. 

Mr. CONNOLLY. But I think that the Chairman perhaps 

mischaracterized. I didn’t assert that. What I asserted was that 

Mr. Cosgrove in answer to my question said, we didn’t look at 

whether this program was somehow being used to buy an election, 

which is the charge some have apparently leveled, and therefore 

found no such evidence. When I realized that Mr. Cosgrove didn’t 

look at it, I ceased asking him questions in that line. 

35 

Chairman ISSA. So you didn’t ask him if in fact this was simply a waste of $8.3 billion. 

Mr. CONNOLLY. If the Chairman wants to give this member more 

time, I would be glad to ask him that question and pursue it. 

Chairman ISSA. Oh, I don’t think we would ever get to those 

questions. 

With that, we now recognize the gentleman from Oklahoma, Mr. 

Lankford. 

Mr. LANKFORD. Thank you, Mr. Chairman. 

Ms. Perez, I do want to follow up on a letter that GAO did send 

to the Secretary, Kathleen Sebelius. It stated, the demonstration’s 

reliance on pre-demonstration performance data, the absence of an 

appropriate comparison group of Medicare Advantage plans and 

the demonstration’s design make it unlikely that the demonstration 

will produce meaningful results. In other words, we are going to 

spend $8.3 billion on something we are calling a demonstration, 

but it is very unlikely it is going to produce any results that will 

help us as a demonstration at all. 

The second thing I found very interesting which I want to ask 

you about are findings during the course of the evaluation of the 

demonstration also raised concerns about whether the demonstration falls within HHS’ Section 402 authority. You mentioned this, 

you said there are two things: the demonstration must provide additional incentives to increase efficiency, and the second thing, the 

demonstration must enable the agency to determine whether the 

demonstration in fact demonstrates increased efficiency. 

So let me ask you about this. How can a demonstration based on 

data collected before the finalized rule was issued create incentives 

for 2012 and 2013? We have 70 percent of the money being spent 

on this $8.3 billion right now to prove the efficiency of the changes 

but the changes haven’t happened yet. How can that occur? 

Ms. EMMANUELLI-PEREZ. Well, sir, those are exactly the concerns 

and questions that we have with the demonstration as designed. 

Both for 2012 and 2013, it is based on pre-demonstration data, performance that has already occurred. So therefore, those plans 

would not be able to take any action. 

Mr. LANKFORD. So we are doing a demonstration and pouring $8.3 billion in to demonstrate effectiveness of something that it is 

not possible this year or next year. Do we have the criteria established for 2014? 

Ms. EMMANUELLI-PEREZ. For 2014, what we found was that for 

the majority of the demonstration, there still would not be additional incentives. 

Mr. LANKFORD. Has the quality rating, the star quality rating, 

has that been established for 2014? 

Ms. EMMANUELLI-PEREZ. For 2014, the data being collected 

would be collected between January of 2011 and June of 2012. 

Mr. LANKFORD. The Medicare Advantage plans, do they know 

what the star rating will be for 2014? 

Ms. EMMANUELLI-PEREZ. No, they will be receiving the star ratings in the fall of 2012. 

Mr. LANKFORD. Okay, so let me try to evaluate this. Currently we are evaluating, we have an $8.3 billion demonstration program 

that we are pouring the majority of the money into this year. But 

36 

we are not evaluating criteria on change, because it is from previous data. And then there is another chunk of it for the next year, 

and then we are trying to evaluate their effectiveness of changing 

into data they don’t even know what that is yet. So no one even 

knows what 2014 data is yet. 

So how do we evaluate the effectiveness of this demonstration toward data they don’t even know what they are directing toward? 

Ms. EMMANUELLI-PEREZ. That is what our concern is, sir. The 

problem is that in this situation, the plans would not have the information at a time when they could make changes. So therefore, 

we believe that because of that, they are not actually creating additional incentives. 

Furthermore, even in those plans, like three start plans for 2014 

where there are some changes, CMS still has not shown how they 

would be able to compare whether those changes had an effect to 

increase efficiency and economy. So we see flaws in that design. 

Mr. LANKFORD. Okay, so a demonstration program is to demonstrate increased effectiveness. But we are pouring the bulk of 

this money into the first year of it when it is impossible to demonstrative effectiveness because there is no comparison, another large 

chunk of it into next year. And in trying to evaluate the effectiveness on three years out from now when the criteria is not even set 

yet and how they are going to manipulate toward that and change 

toward that. 

My quandary in this is, the law requires those two things to be 

fulfilled for it to be a legal use of funds, for it to be a demonstration 

process and be legal. You were asked the question earlier, and you 

made the statement, it is not illegal but it is outside of the statute. 

Can you help me understand the difference between spending $8.3 

billion and it is not an illegal use of funds but it is outside of the 

statute? What is the difference? 

Ms. EMMANUELLI-PEREZ. Yes. The reason that we reached our 

conclusion where we looked at those elements and said that they 

do not appear to meet the criteria of the statute, is there are several factors we had to take into account. First, we do recognize that 

the Section 402 authority does give the Secretary broad authority 

to make changes in payments for the efficiency and economy of 

services. So we recognized it was broad. 

We looked at the legislative history and case law. And those 

sources were very limited. There was very little there that we could 

use where we could apply then the law to facts as presented in this 

demonstration. So we had that limitation as well. 

And finally, we of course recognize that the Secretary does have 

discretion and that we did need to give some deference to that discretion. 

Mr. LANKFORD. So basically you are saying that the Secretary 

has broad authority, no one has done this ever before, to this size, 

to this scale, this type. So it is hard to say it is illegal because it 

has never been done. 

Ms. EMMANUELLI-PEREZ. Well, it is hard for us to say it is illegal, 

because the usual sources that we would have to apply the law 

would be legislative history and case law. And that is virtually nonexistent in this case. There is very little on those points. 

37 

Therefore, what we were able to look at was, really compare the 

facts that CMS presented, the rationale they presented for their 

demonstration, and then compared that to the plain language of 

the statute, which does require the creation of additional incentives 

as well as for the agency to be able to determine whether those 

changes did increase the efficiency and economy of services. 

Mr. LANKFORD. So HHS is spending $8.3 billion with no prior 

pathway to this in the past, and not sure they are going to be able 

to accomplish it in the future, and drop a lot of dollars into this 

particular year in the Medicare Advantage. And we don’t know 

why, we are just left to guess at that point. 

Ms. EMMANUELLI-PEREZ. Well, for our purposes, and looking at 

the work that we did as a legal matter, as well as Mr. Cosgrove, 

in looking at the demonstration, we cannot find how this demonstration is going to either test what it says it is testing, and from 

the legal standpoint, we cannot find that it meets the criteria as 

based on the plain language of that statute. 

Mr. LANKFORD. Thank you. With that, I yield back. 

Chairman ISSA. I thank the gentleman. I guess that is the question of a compelling legal authority, we once popularly heard from 

Vice President Gore. 

We now recognize the gentleman from Illinois, Mr. Davis, for five 

minutes. 

Mr. DAVIS. Thank you very much, Mr. Chairman. I want to 

thank you for calling this hearing. Because understanding health 

care costs is a very difficult and complex item. I think it requires 

and needs as much discussion as we can possibly have. 

Mr. Blum, let me ask you, the quality bonus program has drawn 

attention for both its size and for its cost. The CMS Office of the 

Actuary has estimated that the quality bonus program would have 

a ten-year cost of $8 billion above and beyond the cost of the bonus 

program included in the Affordable Care Act. Can you help us understand how this $8 billion will be distributed, and does the entire 

amount represent bonus payments to the qualifying plans? 

Mr. BLUM. I think, Congressman, it is important to have some 

overall context. Over the next 10 years, our actuaries project that 

we will spend more than $1.3 trillion on private plans participating 

in the program. So I think from my perspective, this demonstration 

represents a very small portion, a very small proportion than what 

the program will spend on health plans going forward. 

These are bonus payments designed to provide progressive payment incentives for plans to move up the payment scale. I think 

there is a longstanding principle, when we structure these payments, structure within the Medicare program, that we want to 

both reward the attainment, those plans that get to the five star 

level, for example, but also the improvement. 

I think one of the things that I think the General Accountability 

Office did not look at is how have plans changed their operations, 

how have plans changed how they structure their programs since 

CMS put forward this demonstration program. I am convinced that 

we have seen fundamental changes in behavior. I am convinced 

that we have plans that have recognized that their service to beneficiaries is not just to pay claims but to improve the overall quality 

and value of services being provided to those beneficiaries. 

38 

So I think at the end of the day, when the demonstration is complete, we will see dramatic improvement without compromising 

what we mean to be a five star plan in quality and overall performance. I do believe also that because payments to plans are based 

upon their bids. We are demonstrating that with a focus on quality, 

with a focus on improvement, will we get more efficiency and economy in the program. I think that our demonstration will meet 

those tests. 

Mr. DAVIS. So $3 billion of the cost attributed to the program is 

due to higher enrolment in the demonstration period and the years 

that will follow, is that accurate? 

Mr. BLUM. Well, these are 10-year estimates. So when our actuaries look at the cost, they look at it over a 10-year window. I think 

when you break down the $8 billion, part of that is the fact that 

plans are improving. I think our actuaries believe that we have created strong incentives for improvement and to pay our more bonus 

payments because we have more four and five star plans. I think 

despite predictions that the Affordable Care Act was going to decimate the MA program, the opposite has occurred. I think both the 

actuaries and the Congressional Budget Office have substantially 

changed their projections for the future of this program. I am very 

confident that it is going to be a strong program today, tomorrow 

and well into the future. 

Mr. DAVIS. Does this estimate suggest that the bonus program 

could result in improvements to benefits and services that would 

attract more seniors to the Medicare Advantage program? 

Mr. BLUM. I think that is a key point, Congressman. These bonus 

payments don’t go to health plans, they go to beneficiaries. So as 

plans improve, they are able to provide more services, they are able 

to invest those monies and provide better quality care. I think also 

not only trying to change health plans’ perspectives and operations, 

we are also changing how beneficiaries think about the program. 

We want beneficiaries to seek out the best possible plans. We are 

confident that plans that achieve four star, five star status, they 

represent best in class. 

My mother that lives in Illinois, in the Chicago area, does not 

have access to a five star plan. From my perspective, as the senior 

policy official, every Medicare beneficiary in every part of the Country should have the opportunity to enroll as quickly as possible in 

a five-star plan. I want my mother to be in that five star plan. That 

should be our ultimate goal. 

Mr. DAVIS. Thank you very much. Thank you, Mr. Chairman. 

Chairman ISSA. Thank you. 

Mr. Cosgrove, would you also try to answer on that question? 

Mr. COSGROVE. Well, I guess what I would like to add is, I would 

hope that if we paid plans $8.35 billion more that they would enrich their benefit packages, and if they did so, that it would increase enrollment. That is not my understanding, though, of what 

the purpose of the demonstration was for. 

Chairman ISSA. Thank you. 

With that, we recognize the distinguished gentleman from Tennessee, Dr. DesJarlais. 

Mr. DESJARLAIS. Thank you, Mr. Chairman, and thank you all 

for being here today. 

39 

Let’s just step back for a minute and look at why we are here 

today. We have an awful lot of seniors out there that are very concerned about their Medicare, and they want to make sure that we 

preserve and protect it. So we are here today to make sure that is 

what we are doing, that we are spending our tax dollars well. 

Mr. Cosgrove, if Medicare were your company and this $8 billion 

were yours and your child’s future depended on it, would you invest 

this $8 billion on this demonstration? 

Mr. COSGROVE. If my child’s life were at stake, I would invest 

anything that I had. 

Mr. DESJARLAIS. I am just saying, if your children’s future depended on your financial welfare, if this were your $8 billion, would 

you invest it in this particular demonstration? 

Mr. COSGROVE. I would not have undertaken this demonstration. 

I would have done the way traditional demonstrations are done, 

you roll them out slowly, you test to see if it works, you make 

modifications, you expand the demonstration. 

Mr. DESJARLAIS. Ms. Perez, would you spend $8 billion on this 

demonstration if it were your money, not the taxpayers’? 

Ms. EMMANUELLI-PEREZ. Based on the legal criteria we looked at, 

I would not spend those funds, because we don’t feel that it meets 

the criteria of Section 402. 

Mr. DESJARLAIS. Mr. Blum, you would make that investment if 

it were your money, yes or no? 

Mr. BLUM. I think our challenge is to reduce overall Medicare 

costs. 

Mr. DESJARLAIS. Would you spend it if it was your money, not 

the taxpayers’, coming out of your pocket, would you spend it on 

this demonstration? 

Mr. BLUM. I think the point is that all of us pay—— 

Mr. DESJARLAIS. It was just a yes or no. If you can’t answer it, 

that is fine. 

Let’s look at what would happen if this demonstration didn’t 

occur. If this demonstration project were not implemented, what 

would happen, Mr. Cosgrove? What would happen to our seniors’ 

Medicare Advantage plans? 

Mr. COSGROVE. If this demonstration didn’t occur, then the bonus 

incentive system under the ACA would have been put in place, 

which would have meant that plans that got four, four and a half, 

five stars, would have received bonuses. 

Mr. DESJARLAIS. Okay. What would happen to their costs, to the 

costs of their plans if this demonstration didn’t occur when it is set 

to occur? Is their cost going to go up or down? 

Mr. COSGROVE. Because of the demonstration? 

Mr. DESJARLAIS. Right. Does the demonstration delay a cost increase in their plans, in their Medicare Advantage plans? 

Mr. COSGROVE. Well, the demonstration, I am not sure it affects 

their costs. But it does affect the revenue stream that comes to 

them. If this demonstration didn’t exist, then more of the ACA’s 

payment reductions would have gone into place. 

Mr. DESJARLAIS. Okay, so the payment reductions would have 

gone into place, it would occur in October, is that correct? In October of this year, the payment reductions, the Medicare Advantage 

40 

plans would cost more in October if this demonstration were not 

implemented, is that correct? 

Mr. COSGROVE. It would have started January 1st of 2012, this 

year. 

Mr. DESJARLAIS. So at any rate, their costs, the seniors’ cost for 

their health care plans are going to go up if this demonstration is 

not implemented? 

Mr. COSGROVE. It is likely, yes. 

Mr. DESJARLAIS. Okay. 

Mr. Blum, what percentage did you say of our seniors participate 

in Medicare Advantage? 

Mr. BLUM. Today about 27 to 28 percent. 

Mr. DESJARLAIS. Okay, so 27, 28 percent. How many million voters is that? 

Mr. BLUM. That translates to about 13 million beneficiaries. 

Mr. DESJARLAIS. Thirteen million beneficiaries, I am sorry, I said 

voters, excuse me. 

So now, this study, this study that is going in, it was initially 

designed as a demonstration, was to be for four and five star plans. 

But for some reason now, you are going to do three star plans. Can 

we put up that slide that shows the number, the percentage? Okay. 

You can look at that slide. What percentage there is three star 

plans, or mediocre plans? 

Mr. BLUM. I can’t do the math fast. 

Mr. DESJARLAIS. It looks like at least two-thirds, right? Would 

you agree with that? About two-thirds. So all of a sudden, this $8 

billion is not going to go to four and five star plans any more, like 

it was supposed to. But prior to this election, we are going to go 

ahead and include a much larger group of seniors in this study. We 

are going to reward mediocre plans with this $8 billion, is that 

what you are telling us? 

Mr. BLUM. I think my argument before the Committee is that we 

are creating a much stronger payment structure, an incentive 

structure, for plans to rise up the quality scale. 

Mr. DESJARLAIS. You think. That is what you are hoping, that 

is what you are gambling the taxpayers’ money on. You are taking 

an $8 billion gamble with taxpayers’ money in hopes that it will 

do this. 

Mr. BLUM. Well, I think this was a demonstration. So we were 

coming into this demonstration hoping to learn more about ways 

to improve the Medicare program. That is consistent with the authority. I think the key point here is that we are paying today substantially less to our health plans across the board—— 

Mr. DESJARLAIS. Do doctors get more payment out of this? Will 

physicians? Because right now seniors are telling me they are having a hard time finding doctors. When I was practicing just two 

short years ago, I know that for a fact, that it was hard to find a 

doctor if you were on Medicare. Does this in any way incentivize 

physicians? Will they get higher pay? Or does this go to these 

plans? Do the plans get the money? 

Mr. BLUM. What this incentivizes is plans to build much stronger 

relationships with their physicians, to build much stronger linkages, to encourage physicians to improve the overall quality of care. 

41 

Plans negotiate their own payment rates separately from Medicare 

for physician payments. So I can’t speak to the actual rates. 

Mr. DESJARLAIS. Well, there is a problem with access to care 

right now. The SGR formula is broken. That is still an issue we 

have to deal with. Physicians right now have not received any kind 

of pay increase for over a decade. Is there anything in this that is 

going to improve physician incentive on care? Because right now, 

I can tell you, if a Medicare patient comes in, and they are going 

to have an hour-long physical exam, and I was there when the 

Medicare Advantage came in, there were a lot of new criteria that 

we were supposed do, EKGs and more screening tests, and it takes 

a lot longer time. As a physician, I might get $50 to $60, whether 

that takes a half hour, or hour, or hour and a half. You are asking 

for more and more from physicians. Is there going to be any more 

incentive? Because I can tell you, the overhead, when I started 20 

years ago, was 50 percent. Now it is about 75 percent in a solo 

practice. So what are you going to do to improve access to care? 

You are wanting quality of care, but you are not wanting to pay 

for it. You are wanting to give it to plans, but not providers, is that 

correct? 

Chairman ISSA. The gentleman’s time is expired, but the gentleman may answer. 

Mr. BLUM. I think I agree that the SGR is a challenge that we 

all have to face together. That is true for the private plan side of 

Medicare but also the traditional fee for service side of Medicare. 

What I hear from health plans who are now participating within 

the Medicare program is they are changing their payment structure with physicians to reward that extra time that is being spent 

with beneficiaries to provide wellness, to provide preventive care. 

I think what is most exciting about the reaction to this demonstration is that it helps to build much stronger relationship links 

with health plans and the physicians they contract. Physicians 

don’t have to contract with the MA plans. That is a private negotiation that CMS never interferes with. At the same time, what I believe this payment demonstration has created is a focus on how 

well beneficiaries receive services from their physicians, how much 

time do they have, do they focus on managing chronic conditions 

much better? I think from a physician perspective, and I am not 

a physician, so I can’t speak from first-hand knowledge, but I believe that this structure, and a long-term strategy for both the fee 

for service program and the MA program, is to build much stronger 

relationships with patients and their doctors. Because that is how 

it will demonstrate better quality care. 

Mr. DESJARLAIS. Mr. Chairman, can I have a few seconds to respond? 

Chairman ISSA. I ask unanimous consent the gentleman have an 

additional 30 seconds. 

Mr. DESJARLAIS. I thought just a few minutes ago you were essentially bragging on how you were going to bring the payment cost 

down, you are going to lower that. So how are you going to 

incentivize physicians, if you are bringing that down from 114 to 

100 percent? 

42 

Mr. BLUM. I believe that our best ways to reduce Medicare cost 

is better chronic care management, better care coordination to reduce re-hospitalizations. 

Mr. DESJARLAIS. And you are going to learn this from a study 

that Mr. Cosgrove and Ms. Perez say will not demonstrate anything. I yield back. 

Chairman ISSA. I thank the gentleman. 

We now recognize the distinguished gentleman from Missouri for 

five minutes, Mr. Clay. 

Mr. CLAY. Thank you, Mr. Chairman. 

To Mr. Blum, on the legal question, we reached out to an outside 

attorney, a professor of administrative law at American University, 

Jeffrey Lubbers. Professor Lubbers described the Secretary’s authority as very broad. And he said he believed this demonstration 

program fits comfortably within that authority. Mr. Blum, do you 

agree with Professor Lubbers? 

Mr. BLUM. When designing and constructing the demonstration, 

we worked very closely with our general counsel colleagues. We believe that we are operating consistent with the 402(b) authority. I 

haven’t read the analysis, but my answer is yes. 

Mr. CLAY. And then Professor Lubbers also explained that he 

considered this disagreement between CMS and GAO to be a methodological disagreement, not a legal one. Mr. Blum, do you agree 

with Professor Lubbers in that analysis? 

Mr. BLUM. We have responded to the General Accountability Office’s concerns. We believe that we have a program that can be 

demonstrated and that we have a plan for evaluation to compare 

the demonstration plans with other plans not part of the demonstration. So we are confident that when this demonstration is 

complete we will have very valuable information to determine how 

we can both accomplish the dual goal of reducing overall Medicare 

costs while substantially improving the overall quality and performance. 

I am confident that our demonstration, when complete, will provide this thorough evaluation that we are concerned about. 

Mr. CLAY. Yes. Thank you for that. 

Mr. Blum, I think we can all agree that we need to continue to 

improve Medicare to ensure that these plans are providing quality, 

value service to seniors and to encourage the use of preventive 

services. 

Mr. Blum, can you tell us about the status of your efforts under 

the Affordable Care Act to encourage the use of preventive care 

services in the Medicare program? 

Mr. BLUM. I think overall, both in the traditional fee for service 

program and the Medicare Advantage program, one of our key 

strategies to make the program work better for beneficiaries but 

also to reduce long-term costs is a greater emphasis and a greater 

focus on prevention and wellness. The Affordable Care Act has 

waived cost-sharing for certain preventive benefits, provided beneficiaries the opportunity for the first time for free wellness visits 

with their physician of choice. That is the same is true in the fee 

for service side, as in the private side of Medicare, the private plan 

side. 

43 

So beneficiaries have reacted very strongly to these new benefits. 

We have been monitoring on a month to month basis the take-up 

rates and doing everything we can to make sure beneficiaries know 

that while we are reducing the overall cost of the program to keep 

it affordable for current beneficiaries and also future generations, 

there are more benefits being added overall to the program so 

beneficiaries are getting more services than they got before the Affordable Care Act was passed. And premiums have stayed very affordable as well. 

Mr. CLAY. And I guess that goes into my next question, which 

is, about your efforts to incentivize improvements in the quality of 

care amongst both providers and insurance plans, can you talk a 

little about that? 

Mr. BLUM. I think these new strategies are just going into place, 

but across our payment systems, be it in the inpatient hospital or 

in the physician payment side or in our health plan payment systems, we are creating structures that changes fundamentally our 

payment systems from being one that pays on a service or pays on 

kind of monthly capitated to a payment structure that pays based 

upon the overall value and quality that providers provide to their 

beneficiaries. We assess quality in a whole range of measures, from 

the processes of care measures to the outcome measures to the 

overall patient satisfaction. So we have sophisticated ways, and I 

think ways like never before to assess and to measure quality. But 

I think from the Medicare program’s perspective, we are very proud 

in the fact that we have fundamentally changed how we pay providers to reward the best possible care, highest possible performance. I think without the strategy that the program will not live 

up to its promise to its beneficiaries. 

Mr. CLAY. Thank you for that response. 

Mr. Blum, can you explain the concept of risk selection? 

Mr. BLUM. I think whenever you pay a capitated entity a fixed 

amount, they have incentives to market to and to encourage beneficiaries that will lose, that will spend the least amount of services 

in order to maximize profit. I think the long history of the private 

plan side of Medicare, that was the fundamental strategy, was to 

get paid a capitated rate and to find the healthiest beneficiaries 

that would have the least amount of services. 

What I think the quality bonus payment structure does is 

changes that fundamental business model from a model that used 

to reward plans to avoid services to a model where plans are rewarded for providing services. I talked about what the goals of a 

five star plan are. But what a five star plan to me really is is a 

plan that provides more services, more help during beneficiaries’ 

time of need, that works to keep beneficiaries out of the hospital, 

focuses on prevention, focuses on wellness. 

I think this demonstration at the end of the day will demonstrate 

that we can fundamentally change the business model to the program to be one where we pay plans on average the traditional fee 

for service program, we see dramatic improvements in quality and 

performance and beneficiaries are more satisfied with the program. 

Mr. CLAY. Mr. Chairman, I know my time is up, but let me 

thank the witness for his detailed responses on explaining the benefits of the ACA to all of us. 

44 

Chairman ISSA. I appreciate the gentleman clarifying that. I think if this hearing was only on the ACA and not on wasting $8.3 

billion, I would have appreciated his answer too. 

Mr. CLAY. Well, but it is also an educational process here to let 

the American people know what the benefits are. 

Chairman ISSA. No question at all. Clearly that story has not 

been told, Mr. Clay. 

Mr. CLAY. But it is in the process of being told. 

Chairman ISSA. It clearly is. So is the process of $8.3 billion 

about to be wasted. 

With that, we recognize the distinguished gentleman and former 

car dealer from Pennsylvania, Mr. Kelly. And by the way, you are 

a former car dealer. I don’t want to hear that you are currently 

one, because you are a great Congressman. 

Mr. KELLY. Still own the dealership, don’t run it. 

Thank you, Chairman. And I am, I agree with Mr. Clay, there 

is an evolving truth as we see in this Administration, as we continue to look at programs that are put into effect and we start to 

wonder, why did we really do this. 

Let me ask you, Mr. Blum, if I could. Medicare waiver-only demonstrations must be budget neutral. And the applicants must supply information and assumptions supporting budget neutrality that 

CMS will use in preparing a waiver package for submission to the 

President’s Office of Management and Budget. So OMB must approve the Medicare waivers before implementing the demonstration. 

Who at OMB approved this obviously not budget neutral program? 

Mr. BLUM. I think a couple of points, Mr. Congressman. 

Mr. KELLY. I just need to know who at OMB. 

Mr. BLUM. This program was implemented in the normal course 

of—— 

Mr. KELLY. So who at OMB? My question is, who at OMB? Do 

you know that? If you don’t know, it is okay. 

Mr. BLUM. Just follow the normal course—— 

Mr. KELLY. I am going to take, if you can’t tell me who it is, that 

you don’t know the answer. 

So generally the Office of Management and Budget sends an approval packet for demonstration programs implemented by the 

Center for Medicare and Medicaid Services. Can we get a copy of 

the approval packet for the Medicare Advantage bonus demonstration by the end of the week? Is that possible? 

Mr. BLUM. We are happy to work with you on that. 

Mr. KELLY. Thank you. So that is a yes? 

Mr. BLUM. We are happy to work with you, Congressman. 

Mr. KELLY. That is a yes? 

Mr. BLUM. We are happy to work with you. 

[Laughter.] 

Mr. KELLY. I love the way you guys don’t answer. Mr. Cosgrove, because the idea behind this is, there was $8.3 billion spent on a program that has no control group, right? So if we 

are trying to prove something that is going to work, but then we 

don’t really go after to find out if it is going to work, we just spend 

$8.3 billion, what did the bonus distributions do to these programs, 

45 

or these plans that were working so well? Because I am looking at, 

it offset the effect of Medicare Advantage cuts by 71 percent in 

2012. There must be some significance in why it is heavily loaded 

front. 

Mr. COSGROVE. Let me talk about the timing of that and what 

it can show. This is certainly one of our concerns. 

The bonus payments that are paid to plans this year were based 

on data that were collected from the period starting in January 

2009 through June of 2010. So those data, which will determine 

payments this year, were collected before the demonstration was 

even announced by CMS in November of 2010 and well before the 

final version of the demonstration was announced in April of 2011. 

So it is hard for us to understand how this can act as an incentive payment for plans. 

Mr. KELLY. In my world, we call that bass ackwards. 

I am just trying to find out. Because we spend a lot of taxpayer 

money. We know it is not budget neutral. So what was the purpose 

of running this demonstration program? What is the relevance of 

it? 

Mr. COSGROVE. We asked CMS what the purpose of it was. We 

were told that in part, it was to test a scaled bonus incentive system where the plans that moved up the quality rating continuum 

would get larger bonuses and that they also wanted to make sure 

that they expanded the bonuses down to average quality plans to 

get the lowest quality plans they thought was more incentive to increase. 

It is not clear to us that that was implemented consistently, 

since in 2014, the only year that really makes a difference, four, 

four and a half and five star plans receive the same bonus percentage. And under the ACA, the lower quality plans would have had 

a greater incentive to increase to become four star plans. 

Mr. KELLY. I was just reading through some of the testimony. If 

Medicare Advantage plans don’t change benefit packages, the 

Medicare Advantage cuts are going to result in higher premiums 

by about $1,800 per beneficiary, voters, by 2017. So if I can game 

that, if I can make it look good today, if I can soften, if I can sugarcoat it today, but once that sugar-coating wears off, I am going to 

find out that I am probably not going to be able to do a Medicare 

Advantage in the future, because the cost is just rising in such a 

fast rate, it is going to put it off the market. 

Mr. COSGROVE. According to CMS regulations, these bonus payments that plans receive are to go to both enhance the benefit 

package that beneficiaries get or reduce cost-sharing or reduce 

their premiums. 

Mr. KELLY. Okay. 

Chairman ISSA. Would the gentleman yield? Mr. Blum, you 

didn’t answer the gentleman’s question on who approved waiving 

the budget neutral. When you come here representing the Administration, and it is a question I am sure you already knew could be 

asked, would you please answer it? 

Mr. BLUM. We operated the payment notice to announce the 

demonstration through the normal courses, through a full comment 

period. I signed the payment notice, that authority is delegated to 

46 

me. But there is a major review and clearance process through the 

office and budget clearance process. 

Chairman ISSA. I understand. The question had been, who at 

OMB approved the obvious non-budget neutral aspect of this program. Who at OMB. 

Mr. BLUM. I work at CMS, and I can’t speak to that. 

Chairman ISSA. Do you know who at OMB approved it? 

Mr. BLUM. No, I do not, sir. 

Chairman ISSA. Do you know who in your organization above you 

approved it? 

Mr. BLUM. The, I made a recommendation to the administrator 

at the time. And the administrator at the time was the approving 

official for CMS. 

Chairman ISSA. And who was that? 

Mr. BLUM. Dr. Don Berwick. 

Chairman ISSA. Thank you. 

We now go to the gentlelady from California, Ms. Speier. 

Ms. SPEIER. Mr. Chairman, thank you. 

Mr. Blum, tell us about your experience, your resume, your background before coming to CMS. 

Mr. BLUM. I spent three and a half years working for the Office 

of Management and Budget, spent three and a half years working 

for the professional staff of the Senate Finance Committee, working 

about four and a half years in the private sector and have been at 

CMS for about three and a half years. 

Ms. SPEIER. And certainly you know, as do the members of the 

House of Representatives, that the cost of Medicare is out of control 

and that we have to look at new ways of providing quality service 

and reducing the cost. One of the examples used by Togawandy 

was looking at McCallum, Texas, and El Paso, Texas, where we 

were spending twice as much money in McCallum, Texas for Medicare recipients, something like $14,000 a year and $7,000 a year 

in El Paso per Medicare recipient. And the quality of care, the demographics of the Medicare recipient were about the same. But yet 

it was about twice as expensive in McCallum. We found out it was 

because doctors were churning, that they were spending more 

money on services. And it so happened that the services were services they owned, home health care, MRIs, and that churning was 

having an effect. So isn’t this particular pilot project an effort to 

see if we can get better quality of care by not necessarily using 

more services, and then incentivize the physicians who do provide 

that quality at lesser cost? 

Mr. BLUM. I think our ultimate challenge with the Medicare program is to reduce overall cost, to ensure the program is stable and 

strong for current beneficiaries and future beneficiaries, while ensuring that beneficiaries have strong access to care and to ensure 

that the overall quality is improving. I think prior to the Affordable 

Care Act, the program had many vulnerabilities. Some of those 

vulnerabilities were that providers were paid for providing on a 

service by service basis. And oftentimes there was little value for 

those extra services. I think what we are doing right now in our 

overall strategy that was set forth by the Affordable Care Act is to 

change the fundamental business model for how providers interact 

with the health care program to focus on prevention, focus on getVerDate Aug 31 2005 10:44 Sep 12, 2012 Jkt 000000 PO 00000 Frm 00050 Fmt 6633 Sfmt 6633 C:\DOCS\75783.TXT APRIL
47 

ting waste out of the system, focus on better coordinating care to 

ensure beneficiaries get better care and to reduce unnecessary hospitalizations, for example. This is the same goals, the same model 

that we are promoting and trying to encourage and trying to test 

how to do so as rapidly as possible. The program will add 10,000 

new beneficiaries each business day. So we have a tremendous 

challenge, all of us together, to reduce the cost dramatically but at 

the same time figure out ways to incent better quality of care. Because I believe over the long term, that will be our only strategy 

to reduce the fiscal challenge that we face in the Medicare program. 

Ms. SPEIER. The GAO has suggested that you don’t have a control group or a comparison. How do you plan on making that kind 

of an evaluation if you don’t have a control group? What are you 

going to use instead? 

Mr. BLUM. I think we do have a control group. And we have identified in our response that we can assess those plans that are eligible for the bonus payments. I think the key point is that those 

plans have to submit the same quality information as the MA 

plans do to be eligible for the bonus payments. So really, I think 

the key measure is how has quality improved, how have patients 

experienced our care. And our demonstration is designed to test, as 

rapidly as possible, ways to dramatically improve the Medicare program. And I agree that the history of the demonstration program 

was to start small then expand and expand? And I don’t personally 

believe that strategy has served the Medicare program or beneficiaries very well. Today we face a fiscal challenge, we face a quality of care challenge. And the old way of operating the Medicare 

program, in my view, won’t be sustainable to both address the longterm fiscal challenge the program faces and the quality care chasm 

that has been in the program for too long. So while I respect the 

viewpoint that this demonstration is different from the past, in my 

own personal view, the past didn’t serve taxpayers or beneficiaries 

very well. 

Ms. SPEIER. I yield back. Thank you. 

Chairman ISSA. I thank the gentlelady. We now go to the gentleman from Arizona, Mr. Gosar, for five minutes. 

Mr. GOSAR. Thank you, Chairman. Mr. Cosgrove, is the $8.3 billion being spent on this program coming from the general tax revenue or from the Medicare trust fund? 

Mr. COSGROVE. It is coming from the Medicare trust funds. 

Mr. GOSAR. So will any seniors face higher premiums for Medicare Part B because of the demonstration project? 

Mr. COSGROVE. Yes. All seniors, those in the traditional fee for 

service program as well as those who are in the Medicare Advantage plans, will face slightly higher premiums because of this. 

Mr. GOSAR. Well. Ms. Perez, my colleague here asked a question 

in regard to the jurisdiction of the Secretary. Isn’t it true that the 

Secretary has to use prudent use of scientific method and mathematical statistical evaluations of proper studies when they do that 

role? 

Ms. EMMANUELLI-PEREZ. Yes. Under Section 402 there is a requirement that the Secretary consult with experts with respect to 

those demonstrations. 

48 

Mr. GOSAR. So use a prudent method. So it was very misleading. 

Mr. Blum, are you a mathematician? 

Mr. BLUM. No, sir. 

Mr. GOSAR. A statistician? 

Mr. BLUM. No, sir. 

Mr. GOSAR. And do you see any variance, you said, it hasn’t 

worked very good. Do you believe that by the scientific method and 

by mathematics that we have achieved living longer today? 

Mr. BLUM. My understanding is there is longer life span. 

Mr. GOSAR. There is a longer life span. And it has to do with scientific method. It is about proven scientific process. It is a control 

group that works. That is what that man right there is talking to 

you about. We just don’t throw that out, because it is proven over 

and over again. I am a science guy. You just don’t manipulate data. 

That is the problem. So Mr. Cosgrove, you use mathematics and 

sound scientific method to do your methodology, do you not? 

Mr. COSGROVE. Yes, we do. 

Mr. GOSAR. So in your professional opinion, this does not satisfy 

that scientific method, does it? 

Mr. COSGROVE. It does not, which is why we recommended canceling the demonstration. 

Mr. GOSAR. I know my colleague over here was talking about if 

this program wasn’t going into effect we would see some substantial cuts, would we not? 

Mr. COSGROVE. Yes, we would. The ACA would have phased in 

over time, reduced payments to Medicare Advantage plans, and the 

demonstration, in this year, offsets 70 percent of those over the life 

of the demonstration. It offsets about a third. 

Mr. GOSAR. So truth and consequences comes in what time this 

year? Open enrollment starts in October, is that true? 

Mr. COSGROVE. That is correct. 

Mr. GOSAR. So we would see this vast number getting this unexpected news about that time, would we not? 

Mr. COSGROVE. Yes. 

Mr. GOSAR. So it goes to my colleagues talking about that this 

does have political consequences, very interestingly done. 

Mr. Blum, you said that CMS really doesn’t have anything to do 

with compensation methods. Let me ask you a quick question. Isn’t 

it true that all Medicare, Medicaid and all insurance rates are 

based off of Medicaid reimbursement rates set by CMS? 

Mr. BLUM. For the traditional fee for service program, that is 

true. 

Mr. GOSAR. For all of them. It is all of them. They are all based 

off of them. Actuarials are all based off of CMS’ reimbursement 

rate. 

Mr. BLUM. For our private plan payments, they are based upon 

plan bids. Plans submit bids. 

Mr. GOSAR. Plan bids can be only accepted by what CMS actually 

does. So it is up to them independently, but it is set off CMS rates. 

Mr. BLUM. Our actuaries review the bids. 

Mr. GOSAR. Please go back and review insurance regulations. 

Who is to benefit from this, the plans or the physicians? 

Mr. BLUM. Benefit? I am sorry? 

49 

Mr. GOSAR. With these types of benefits that you are giving the 

subsidies to, who benefits? Is it the physicians or is it the plans? 

Mr. BLUM. Plans—— 

Mr. GOSAR. Plans. Very simple answer. Plans, right? 

Mr. BLUM. Plans contracts separately with physicians that CMS 

does not oversee. So I can’t speak to how plans change their compensation to physicians or hospitals based upon changes. 

Mr. GOSAR. But they are also established by a rate that you establish, is that not true? Yes, it is. 

Mr. BLUM. Sometimes plans follow our rate structure, but they 

are not required to do so. 

Mr. GOSAR. They cannot be higher than that plan. 

Mr. BLUM. They can be higher, they can be lower. Plans negotiate contracts separately with hospitals, physicians—— 

Mr. GOSAR. Let me ask another question, Mr. Blum. Is the private insurance marketplace being cost-shifted and is it going up? 

Mr. BLUM. I can speak to the—— 

Mr. GOSAR. Is it going up? It is very easy. Come on, sir. You are 

not that naive. You know, and I don’t carry government insurance, 

so I am very aware, has it gone up? Double digits every year? 

Mr. BLUM. I track Medicare spending, so I can’t speak to private 

sector. But I can say for Medicare—— 

Mr. GOSAR. You have to understand that. Because what you do 

is manipulating data. And if you don’t see the bigger picture here, 

you are manipulating a small segment here to your benefit. And 

that is not to the benefit of the seniors or to the process, is that 

right? 

Mr. BLUM. I believe that we are changing how we pay providers, 

and that is having tangible—— 

Mr. GOSAR. You are also changing the scientific method and 

methodology of how you conduct process that has proven over and 

over again to benefit not only statistical data, but also the scientific 

method, sir. Shame on you. 

Chairman ISSA. The gentleman yields back. We now recognize 

the gentlelady from the District of Columbia, Ms. Norton, for five 

minutes. 

Ms. NORTON. Thank you, Mr. Chairman. I wanted to be here in 

time to ask some questions. I have just come out of another hearing. 

I am interested in the star rating system and its application. We 

know that, let’s take Medicare Advantage, of course, that this program serves 12 million of our seniors. I think it would be important 

to understand how the star rating system has, how it is used to 

help determine the quality of the plans that are offered. How is it 

derived? 

Mr. BLUM. CMS collects a variety of measures from health plans 

that participate in the Medicare program. Those measures go 

through consensus based organizations to ensure that they represent fair and accurate ways to assess health plan quality. 

We collect a mix of measures, of process measures, for example, 

how well is the plan providing customer service to their members. 

We collect outcome measures, our plan is doing a relative better job 

to manage, for example, blood levels for diabetes patients. 

50 

We also collect data on how satisfied beneficiaries are with their 

health plan. Then all these measures together get compiled to a 

star rating, with one star being the lowest quality and five star 

being the highest quality plans. Most of the plans today operate 

within the three and the three and a half range. To us, that is not 

acceptable for the long term. Our goal and our mission is to ensure 

that every beneficiary that wants to enroll in a private health plan 

has the opportunity to be in a four star, five star plan. 

Based upon our measures that represents—— 

Ms. NORTON. Has the star rating affected enrollment in these 

plans? 

Mr. BLUM. I believe that we are seeing positive movement from 

beneficiaries to plans that have higher star ratings. In addition to 

establishment payment incentives, we are trying to educate, best 

we can, to the beneficiary community what it means to be in a four 

star, five star plan. So I believe that our demonstration will change 

the business model. 

But I think as important, possibly more important, that it will 

change how beneficiaries think about the program and choose 

which health plan to enroll in. Four star, five star plans, particularly five star plans, represent best in class and represent to us 

what every MEDICARE beneficiary should have the ability to sign 

up for. 

Ms. NORTON. Let’s look again at Medicare Advantage. I am looking now at a report from the Association of Health Insurance 

Plans. It says that there has been an 8 percent increase in the 

Medicare Advantage plan star rating. It also says that CMS has 

seen a 29 percent, that 29 percent of Medicare Advantage enrollees 

are indeed enrolled in the plans with four or more stars. That is 

up from, I believe it was 19 percent. So 19 percent to 29 percent. 

How do you account for these fairly significant increases? 

Mr. BLUM. I think my perception and perspective from studying 

the data is that we have sent a clear signal and a clear message 

that for plans that want to participate in the program for the long 

term, will have to dramatically increase their quality that they provide to their members and also their overall performance in the 

program. And this is a clear signal that that signal is sent both 

through payment incentives but also through our work in compliance to oversee the plans and our work to market or to educate 

beneficiaries on their plan options. 

Ms. NORTON. Mr. Blum, the GAO criticism was that the bonus 

demonstration program extends bonuses to three star plans. And 

those of course are the plans that are only average under the rating system. Isn’t that where the improvement is needed? 

Mr. BLUM. I think that our payment policy should be, and this 

is a consistent principle throughout the Medicare program, is that 

we reward plans that both achieve the desired goal, but we also reward plans for steps in improvement. I think for us to dramatically 

change the program, we have to reward and incentivize not just the 

attainment but also to the improvement and send a clear signal 

throughout the plan community that they will do better, their 

beneficiaries will do better, if they rise up the quality scale. 

I think a lot of folks have argued to CMS, well, why don’t you 

just lower your standards. And this year, last year, we have 

51 

worked to improve the star rating to make it even a stronger 

standard what it means to be a four star, five star plan. 

So we are setting our goals high, setting our values to be that 

every Medicare beneficiary should have access to best in class care, 

and creating the payment structure and figuring out the best way 

to do it as quickly as possible to ensure that every beneficiary in 

all parts of the Country have access to best in class care. 

Chairman ISSA. I thank the gentleman. 

Ms. NORTON. Thank you, Mr. Chairman. 

Chairman ISSA. We now recognize the gentleman from Idaho, 

Mr. Labrador. 

Mr. LABRADOR. Mr. Chairman, I yield back my time. 

Chairman ISSA. Would you yield me the time? 

Mr. LABRADOR. Yes. 

Chairman ISSA. I thank the gentleman for yielding. 

Mr. Blum, during CMS’s comment period, well before the GAO 

study, you had 29 comments. If I understand correctly, 28 of them 

were from recipients, people who would get the money, isn’t that 

true? 

Mr. BLUM. The typical practice that our comment period, the majority of comments come from the plan community. 

Chairman ISSA. Okay, so the people who would get the money, 

28 out of 29, they kind of like getting the money, especially if you 

give it for Cs. 

The one group that was not, in fact, a partisan in this was 

MedPAC. Isn’t it true they reached a similar conclusion the GAO, 

opposing this plan, particularly as to scale? 

Mr. BLUM. I think it is fair to say that consistent with other 

demonstrations that have been done, kind of a national basis, they 

raised concerns about can CMS—— 

Chairman ISSA. Right. And isn’t it true that you didn’t take any 

of their recommendations? 

Mr. BLUM. I think we worked hard to develop that—— 

Chairman ISSA. Please, Mr. Blum. I don’t want to hear about 

worked hard. Did you take their recommendations? You are under 

oath? 

Mr. BLUM. CMS decided to finalize the demonstration. 

Chairman ISSA. Okay. You didn’t take their recommendations, is 

the answer. 

Mr. Cosgrove, are you an only child? 

Mr. COSGROVE. No, I am the youngest of three. 

Chairman ISSA. Okay. I am one of six. And my family couldn’t 

afford to give me grades, money for As and Bs and Cs. But I have 

an only child son. So we set up a program and we paid him extra 

bonuses when he got As, a little bit less when he got Bs. 

He asked me for money for Cs and something for Ds. And we 

gave him something for Ds, we took away the money he would 

have gotten for Bs. 

Isn’t it true that this plan essentially rewards 90 percent of all 

participants, effectively neutralizing the real benefit in years one 

and two and three of moving up and getting better? 

Mr. COSGROVE. It certainly does reward plans that enroll about 

90 percent of beneficiaries. In that sense, it also lessens the incentives for plans to move up, that is correct. 

52 

Chairman ISSA. So years one and two, moving up doesn’t accomplish anything, because those years are already in our tail lights. 

Year three, threes, fours, four and a half, fives, all get paid the 

same, so no incentive for moving up, correct? 

Mr. COSGROVE. Yes. 

Chairman ISSA. So the aspirations and the hope of Mr. Blum are 

not in this study. 

Based on science, based on experience of past demonstration 

projects, is there any reason that this plan couldn’t be done on a 

much smaller scale, and thus be as effective for less money? 

Mr. COSGROVE. No. That is what we think a well designed demonstration would be, would be to start off small without spending 

over $8 billion. 

Chairman ISSA. So any amount greater than the amount necessary to reach the conclusion that the demonstration project hopes 

to reach any amount greater than that is by definition waste, because it is unnecessary? 

Mr. COSGROVE. We recommended that the provisions of the ACA 

be put into place, and that those incentives and the effect of those 

incentives be studied. That would have cost $8.3 billion less than 

what we are spending now. 

Chairman ISSA. Mr. Blum, earlier you were asked about an approval packet on the demonstration programs from OMB, and 

whether you would deliver that package to this Committee. Would 

you deliver the approval packet for demonstration programs to this 

Committee? 

Mr. BLUM. We will be happy to work with you. 

Chairman ISSA. No. Will you deliver it? 

Mr. BLUM. I will be happy to check into the answer. I personally 

can’t commit to that, but I will be happy to check into it for you. 

Chairman ISSA. You will check into it. Are you aware that that 

packet has already been requested by Senator Hatch? 

Mr. BLUM. I am not aware personally, but I can definitely check 

into it. 

Chairman ISSA. Okay. Understand that that packet will be the 

subject of this Committee’s formal request, if it not granted by the 

end of the week through this request. So please take that back 

with you. 

Mr. BLUM. Will do. 

Chairman ISSA. Now, at the beginning of this hearing, I made 

some fairly strong statements, statements about $8.3 billion basically buying favors in an election. None of you are here to comment 

on that, that is a conclusion I reached. 

But Mr. Cosgrove, I want to ask you, because you have been at 

GAO for a long time, were you in a similar role when Republicans 

promised to ratchet down the cost of Medicare in the past and 

scored it some years ago through savings? Did you look at those? 

Mr. COSGROVE. I have been working on Medicare issues, Medicare payment issues, for more than 15 years. 

Chairman ISSA. So isn’t there a tendency under Republicans and 

Democrats, not this $8.3 billion that clearly is designed to ward off 

an event that would occur this year otherwise, but in Affordable 

Care, something Mr. Clay talked about it, it promised to get reducVerDate Aug 31 2005 10:44 Sep 12, 2012 Jkt 000000 PO 00000 Frm 00056 Fmt 6633 Sfmt 6633 C:\DOCS\75783.TXT APRIL
53 

tions through spending less. And it in fact set forward to pay less, 

so it is scored to pay less. 

Isn’t it true that the history in your experience of all these plans 

to pay less ultimately end up being shored up by Congress later because the savings, for the most part, doesn’t occur over the long 

run? Isn’t that the general history of health care under Medicare 

that says, we will pay less, including what Dr. Gosar talked about, 

how we have been paying doctors less and seeing the effect? 

Mr. COSGROVE. Congress, over time, from both sides, from both 

kinds of Administrations, recognized that Medicare spending is 

unsustainable and has taken steps to try to reign it in. There is 

always pushback from providers. 

Chairman ISSA. Right. So the history has been, like the Affordable Health Care Act, they score in the out year savings, claim 

they are going to pay less, tell people, like in this case, Medicare 

Advantage, that they are going to take you from 14 percent premium down to 7 percent and eventually to flat-lining you with a 

fee for service. But historically, there is a tendency to then backfill 

it for political reasons. 

Mr. COSGROVE. Historically when cuts have been enacted, then 

some subsequent legislation has often restored at least some of the 

payments, that is true. 

Chairman ISSA. So when we look at what is being called a demonstration project, and Ms. Perez made it clear that it doesn’t fit 

402 requirements under the legal authority for that, is this effectively backfilling by an executive fiat the monies that otherwise 

would be taken under the Affordable Care Act? 

Mr. COSGROVE. It is replacing, in this year, in 2012, it is replacing 70 percent of the payments that otherwise would have been reduced, would have been recovered from plans. 

Chairman ISSA. Last number, if you know it. If you take away the retroactivity of this year, how much of that $8.3 billion would 

not be spent? In other words, if you say, we are not going to touch 

this year because this year, these plans can’t do anything about it, 

how much of this $8.3 billion would be saved? 

Mr. COSGROVE. That is a number that we haven’t estimated. 

Chairman ISSA. But it is more than a third, because the bonuses 

are front-end loaded to this year, right? 

Mr. COSGROVE. The bonuses are front-end loaded. There is some 

tail effect in the out years, and so having to do with enrollment. 

But yes. 

Chairman ISSA. So it is safe to say it is more than a third, probably more than $3 billion that will be given away this year for no 

performance change possible since it is retrospective analysis? 

Mr. COSGROVE. That is correct. 

Chairman ISSA. Thank you. 

Mr. Cummings, do you have any final questions? The gentleman 

is recognized. 

Mr. CUMMINGS. Mr. Blum, I have sat here and listened very 

carefully. I want you to address this whole issue of the, I know you 

have talked a lot about your objectives and things you have seen. 

You believe that we are providing more services as opposed to 

avoiding services. You said that, right? Is that right? Is that what 

you are seeing or is it? 

54 

Mr. BLUM. We are seeing a fundamental change in how health 

care services are provided to be one where we are paying for value 

rather than volume, and to create much more stronger structures 

to better coordinate care, better manage care, to best serve beneficiaries for the long term. 

Mr. CUMMINGS. The folks from the GAO, I think, are saying, I 

don’t think they are denying that what you just said is true. Denying or admitting it. But the question seems to be, what in this process says that what you are doing is resulting, is the causal effect 

of the results you just talked about? To me, that is the key. I have 

listened to all this, and that seems to be the key here. 

Help me with that. 

Mr. BLUM. I agree. That is our fundamental challenge to how we 

manage this program for the long term. I think for too long the program has simply paid for services without any measures of quality, 

without any measures—— 

Mr. CUMMINGS. Answer my question. Give me the causal connection between this program, what you are doing, and the results you 

are seeing. Do you follow what I am saying? Because to me, that 

is the key. I think that is what these folks are concerned about, 

too. It is not that, nobody is saying it is not happening. The question is, what is the causal connection. The question then becomes, 

would it have happened anyway? Do you follow what I am saying? 

Mr. BLUM. Sure. Well, I think the causal connection is that when 

you reward and incent improvements that you change how businesses and how plans invest in their beneficiaries, and structures 

their health plans. Rather than providing fewer services when 

beneficiaries are in their time of need, the causal relationship is 

providing more services, better services during their time of need 

that I believe will lead to higher quality ratings but also will lead 

to lower bids, because plans now can better manage services, beneficiaries will be healthier, beneficiaries will require fewer services 

over the long term. 

So it is a self-reinforcing proposition. 

Mr. CUMMINGS. But to go back to what Mr. Cosgrove said, if you 

are giving awards before you get the, before you even the effect is 

supposed to be felt, how does that measure? Do you follow me? You 

have to get to that, because that is what they are talking about. 

Mr. BLUM. I think we have to look at a whole host of different 

measures and outcomes. Clearly, we want to see changes in the 

performance measures as being collected by CMS. I think at the 

end of the demonstration, what we really want to see is has there 

been a fundamental change in those quality measures. I think a 

key point is that the demonstration was announced in 2010. That 

already has changed behavior. 

Mr. CUMMINGS. Right there, I think you are helping me now. 

How so? What you just said, I want to understand that. You announced it, you are saying it had an effect. How do you conclude 

that? 

Mr. BLUM. I think it sent a very strong message from the agency 

to every health plan that, your mission and your challenge and 

your opportunity is to serve your beneficiaries better. That is not 

just maximizing profit by serving your beneficiaries less, but it is 

55 

better service, better quality, better outcomes, will create the business model to sustain this program over the long term. 

We believe this will also yield savings to taxpayers over the long 

term. We are on track to bring the overall payments down to 100 

percent of fee for service over the next 10 years. But I believe that 

we are going to see the program continue to grow and more important, that quality of care will be improved. 

Mr. CUMMINGS. Would it have been better to say, we are going 

to do that, as opposed to we are doing it? I think that goes back 

to what they are saying. It is one thing to say, we are going to 

make a payment, when you do these things. It is another thing to 

say, we are going to pay you all along. Go ahead. I really need the 

answer to that. 

Mr. BLUM. Really, the payment structure is, once the plan can 

demonstrate that it has improved, it has increased, and this is designed to provide a higher payment as planned to move up that 

quality scale. We believe this is going to produce faster results and 

better care in a much quicker time frame than the Affordable Care 

Act’s policies than what this demonstration. 

I just want to respond to the Chairman that we are happy to provide the OMB package today. I want to clarify my answer to you. 

Chairman ISSA. Thank you. 

Mr. BLUM. We are happy to provide that to you. 

Mr. CUMMINGS. Thank you very much. You have been very helpful. 

That last piece, what you just explained, helps me tremendously. 

Thanks. 

Chairman ISSA. Thank you. 

We now go to the gentleman from South Carolina for five minutes. 

Mr. GOWDY. Mr. Chairman, thank you. I want to apologize to the 

Chairman and the witnesses for being detained in Judiciary longer 

than I had hoped or expected to be. And with that, and in light of 

the Chairman’s most recent line of questioning, I would be thrilled 

to yield my time to the Chairman. 

Chairman ISSA. I thank the gentleman for yielding. 

Mr. Blum, I appreciate the packet being delivered. The Ranking 

Member asked you if, in light of the fact that all of this money for 

the first two years will be retrospective, whether you thought it 

had any effect. You said that in fact, you thought it already had 

an effect. 

Do you have any scientific data, or any data that you can deliver 

to us to show that effect? 

Mr. BLUM. Not scientific, quantifiable effect. But I can give you 

my impressions. 

Chairman ISSA. But you are not a scientist, you are not a physician. 

Mr. Cosgrove, have you, do you have any numbers to indicate 

that they have, A, already had an effect that is positive, or B, that 

the majority of this $8.3 billion being spent for what has already 

occurred and can’t be changed is going to have an effect, in contrast 

to putting the money into a later period in which it could have an 

effect? 

56 

Mr. COSGROVE. There is no way for me to determine that. We 

don’t know what would have occurred had CMS allowed the ACA 

provisions to go into place in the first place. 

Chairman ISSA. Right. But you are a microeconomist. And 

whether you are taking macro or micro, there is always this supply 

and demand really works because people move toward the reward 

and away from the punishment, if you will. 

In this case, the majority of these dollars are being provided for 

something in which no action changes. Let’s just focus quickly on 

year three. In year three, the year in which there is an opportunity 

to change, isn’t it true that as designed, CMS is in fact providing 

no incentive to be different than you are today? In other words, if 

you are a three today and you are a three in year three, you are 

going to end up with exactly the same amount of money, aren’t 

you? 

Mr. COSGROVE. CMS does extend the bonus payments down to 

three star plans. Under ACA, only four star plans and above would 

receive a bonus. 

Chairman ISSA. So under what Congress passed, which would 

cost less, three star programs would be working to become four 

star, not just because they are going to track clients and because 

they are going to be probably better, which the rating would imply, 

but because they would then be eligible for a bonus, is that right? 

Mr. COSGROVE. Yes, that is the incentive. 

Chairman ISSA. But under the President’s plan, or Secretary 

Sebelius’ plan, that won’t be the case. The fact is, you will be paid 

to be mediocre, you will be paid for Cs. 

Mr. COSGROVE. You will be paid for being an average plan, yes. 

Chairman ISSA. So Mr. Blum, you repeatedly used the words four 

and five star. If Mr. Cosgrove is correct, isn’t it true you are paying 

for Cs? You are paying for not improving under this $8.3 billion 

utilization? 

Mr. BLUM. I would characterize the payment philosophy as to 

they are paying for improvement. 

Chairman ISSA. Wait a second. Charcterize? What in your plan 

gives me, look, I am an old businessman. Tell me where I get one 

dollar more for improving if I am today a four, if I am today a 

three. Just assume I am a B student or a C student. What is the 

differential if I go from being a three to a three and a half in your 

plan? 

Mr. BLUM. I forget the specific parameters. There are higher payments as plans move up the scale. And again, our test is by creating that ladder, by creating that pathway, do we get faster performance, faster improvements than had we not created that scale. 

Chairman ISSA. Okay. Since you came here to testify on this $8.3 

billion, I am assuming that if people improve, and you pay them 

more, it will go beyond the $8.3 billion? The bonus structure is 

such that the $8.35 billion can’t be a static number, that there is 

actual improvement, you are going to pay more. 

Mr. Cosgrove, you have looked at this. If the threes today, which 

are going to be paid based on being threes today for that first year, 

and the second year, but in the third year, if they become three 

and a halfs or four, doesn’t that mean that the $8.3 billion is higher? 

57 

Mr. COSGROVE. If plans improve more than the actuaries expected, yes, absolutely. The payments would be higher. 

Chairman ISSA. Okay. In your reviewing this, how much of this $8.3 billion was scored for actual improvement versus, if you will, 

the static amount paid out based on their current performance over 

the next three years? 

Mr. COSGROVE. I don’t think I have it broken down year by year. 

But the first two years, where the bulk of the payments are made, 

are not for improvement, but they are for past performance. 

Chairman ISSA. So the majority of it will be paid for no performance of the remaining, that tail end, let’s call it, 20 percent or less. 

Mr. COSGROVE. Right. 

Chairman ISSA. The majority of it would be paid for just being 

a three or above. So it would be a fraction of that 20 percent, no 

more than 5 or 10 percent that could possibly be available for the 

improvement portion? 

Mr. COSGROVE. I don’t know what the percentages are, but that 

is in the right direction. 

Chairman ISSA. Okay. So again, we are paying for the static, we 

are paying for what you have already done. I still reach the same 

conclusion that in fact this is politics. Or it is wanting to cover up 

the sins of the Affordable Care Act. 

I thank the gentleman for yielding, I will now recognize myself 

for my final second round. I don’t want to go beyond that. 

Mr. Blum, you have talked a lot about improvement, improvement. And you have talked about the 10 years. The 10 years you 

are talking about of getting to 100 percent. 

Let me ask you a question. I know you are not a scientist, I know 

you are not a statistician, I know you are not a doctor. But having 

been a business man, what is it that would take an insurance company and their working with doctors who presumably in many 

cases are working with conventional Medicare payments and so on, 

what takes 10 years? Why in the world wouldn’t you have a target 

of getting to it in three years, if you know? 

Mr. BLUM. I believe that we should have a goal to pay as low as 

possible price to our health plans as possible. 

Chairman ISSA. No, no, that is not the question. Right now you 

are looking for performance change where Medicare Advantage 

under ACA is going to get to getting no premium. That is what 

many of us who voted against the Affordable Care Act really 

latched onto, the whole idea that you are not going to pay any more 

for these private ones. And that was in ACA. In other words, you 

scored, you were going to get down to flat payments. 

So one of my questions is, you keep talking about 10 years. But 

the first three years you are effectively un-ringing the bell, you are 

undoing the cuts that were in the Affordable Care Act through this 

demonstration project. Isn’t that essentially for 90 percent, maybe 

Mr. Cosgrove can be analytical in this, this funding, this demonstration project essentially undoes for this coming year most of 

the cuts that would have occurred under the Affordable Care Act. 

Isn’t that true? Seventy percent of them. 

Mr. COSGROVE. That is absolutely correct, yes. 

Chairman ISSA. Okay. So the very first year we have a chance 

to get savings, something that people did know about since 2010, 

58 

we are undoing it and all 28 companies who commented favorably 

were recipients of essentially a bailout against ACA, probably because it wasn’t realistic. 

Now, Mr. Blum, the Affordable Care Act, passed by your party 

and your party alone, mandated certain things, although it gave 

authority for certain things to be done, and you believe you are asserting the authority. If you wanted to throw out something that 

President Obama, your boss, and Secretary Sebelius, put into the 

Affordable Care Act, if you wanted to change it, why didn’t you 

come back to Congress? In other words, if you wanted to go off of 

the plan you actually wanted, this new one, why wouldn’t you come 

to Congress for it? 

Mr. BLUM. I think there is a long history within the Medicare 

program to test and to pilot through demonstrations—— 

Chairman ISSA. No, no, look. We are long past the facade that 

this is a demonstration program. You are flat changing what ACA 

said and you are changing it by billions and billions of dollars in 

an election year. Why didn’t you consider coming back to Congress, 

or did you consider coming back to Congress and basically asking 

for the authority to change ACA to this $8.3 billion election year 

bailout? 

Mr. BLUM. Our goals, again, was to figure out ways to demonstrate to ourselves, to the Congress, how to create this rapid improvement. I think part of the reason the Congress gave—— 

Chairman ISSA. Oh, please, stop. You have just heard the nonpartisan part of this group say you are not paying for improvement, that the vast majority of this $8.3 billion is for non-improvement. As a matter of fact, it is for periods of time in which no improvement is possible. 

One of the amazing things, and I will close, one of the amazing 

things is you can come with your prepared statement and you can 

say that which is not true. Now, an honest way to come to the Congress is, look, we screwed up. We would destroy Medicare Advantage if we didn’t bail it out. So we came up with a scheme to bail 

it out. That is what you did. You came up with an $8.3 billion 

scheme, and particularly about $4 billion of it for this year, to keep 

Medicare Advantage from imploding. You probably had many of 

these companies come to you and say what the catastrophic effects 

of legislation passed in haste on a partisan basis would do. 

So instead of honestly saying, look, we need to backfill it the way 

Republicans and Democrats have backfilled estimates that didn’t 

turn out to be right, what this imperial Administration is doing is 

simply saying, we will ignore what the 402 provision is, we will 

simply say it means what we think it means and you can’t stop us. 

We will take money, steal it effectively from future payments, steal 

it from seniors both in and out of Medicare Advantage, so that you 

can have a good year this year. 

That is what you have done. I am really distraught that Congress probably doesn’t have the authority or the ability to stop you 

from raiding the Medicare trust fund. 

But seniors need to understand: the $8.3 billion you are taking, 

because ACA was screwed up, because Obamacare was screwed up 

when it came to what it was going to do to Medicare Advantage, 

the $8.3 billion you are taking is going to be paid by seniors both 

59 

in and out of Medicare Advantage. The 75 percent of seniors that 

aren’t in Medicare Advantage are going to have to pay for it in the 

years to come. 

You are going to do that, and at least you could be honest and 

tell the truth here. I don’t want to shoot the messenger, but quite 

frankly, you came with a message that the non-partisan witnesses 

here say simply isn’t true, not even in Washington. 

With that, I would like to thank you for your testimony. We 

stand adjourned. 

[Whereupon, at 11:50 a.m., the committee was adjourned.] 

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