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88–256 PDF 2003

S. HRG. 108–145

MEDICARE REFORM AND COMPETITION

SEPARATING FACT FROM FICTION

HEARING

BEFORE THE

SPECIAL COMMITTEE ON AGING 

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

WASHINGTON, DC

MAY 6, 2003

Serial No. 108–9

Printed for the use of the Special Committee on Aging

(

SPECIAL COMMITTEE ON AGING 

LARRY CRAIG, Idaho, Chairman 

RICHARD SHELBY, Alabama 

SUSAN COLLINS, Maine 

MIKE ENZI, Wyoming 

GORDON SMITH, Oregon 

JAMES M. TALENT, Missouri 

PETER G. FITZGERALD, Illinois 

ORRIN G. HATCH, Utah 

ELIZABETH DOLE, North Carolina 

TED STEVENS, Alaska 

RICK SANTORUM, Pennsylvania 

JOHN B. BREAUX, Louisiana, Ranking 

Member 

HARRY REID, Nevada 

HERB KOHL, Wisconsin 

JAMES M. JEFFORDS, Vermont 

RUSSELL D. FEINGOLD, Wisconsin 

RON WYDEN, Oregon 

BLANCHE L. LINCOLN, Arkansas 

EVAN BAYH, Indiana 

THOMAS R. CARPER, Delaware 

DEBBIE STABENOW, Michigan 

LUPE WISSEL, Staff Director 

MICHELLE EASTON, Ranking Member Staff Director 

(II) 

C O N T E N T S 

Page 

Opening Statement of Senator Larry E. Craig ..................................................... 1

Statement of Senator Debbie Stabenow ................................................................ 2

PANEL I 

Abby L. Block, Senior Advisor for Employee and Family Support Policy, 

Strategic Human Resources Policy Division, U.S. Office of Personnel Management, Washington, DC ................................................................................... 3

Walton Francis, Federal Employee Health Benefits Program Expert Consultant and Author, Fairfax, VA ............................................................................... 11

Robert E. Moffit, Director, Center for Health Policy Studies, The Heritage 

Foundation, Washington, DC .............................................................................. 24

PANEL II 

Marilyn Moon, Senior Health Policy Fellow, The Urban Institute, Washington, DC ............................................................................................................. 47

Joseph R. Antos, Wilson H. Taylor Scholar in Health Care and Retirement 

Policy, American Enterprise Institute, Washington, DC .................................. 72

Jeff Lemieux, Senior Economist, Progressive Policy Institute, Washington, 

DC .......................................................................................................................... 91

(III) 

(1)

MEDICARE REFORM AND COMPETITION: 

SEPARATING FACT FROM FICTION 

TUESDAY, MAY 6, 2003 

U.S. SENATE, SPECIAL COMMITTEE ON AGING, Washington, DC. 

The committee met, pursuant to notice, at 10:05 a.m., in room 

SD–628, Dirksen Senate Office Building, Hon. Larry E. Craig 

(chairman of the committee) presiding. 

Present: Senators Craig, Carper, and Stabenow. 

OPENING STATEMENT OF SENATOR LARRY E. CRAIG, 

CHAIRMAN 

The CHAIRMAN. Good morning, and thank all of you for joining 

us. As Congress’ Medicare discussion enters what may be its critical final weeks, we are here today to examine one of the central 

issues in that debate, namely proposals to offer seniors a new array 

of competing health plans offering prescription drugs and other 

benefits not currently available under Medicare. 

These approaches, variations of which have been advanced by 

President Bush, Majority Leader Frist, and others on both sides of 

the aisle, would offer all of America’s seniors the same kind of firstclass, high-quality health coverage now enjoyed by the members of 

Congress and over 8 million other Federal employees. 

Today’s hearing assembles several of the nation’s foremost experts on this issue, including the administrator of the Federal Employees Health Benefits Program (FEHB). There has been much 

confusion and indeed disinformation about the implications of adding a competitive dimension to Medicare. It is time to sit down and 

hear candidly from both sides, ask some hard questions, and get to 

the bottom of what this approach will mean in terms of access, 

quality, value, cost, and member satisfaction. 

The Medicare Program in place today is a creaky, inflexible, and 

increasingly unmanageable system that micromanages the tiniest 

details of medical payment and procedure—including the pricing 

and regulation of more than 7,000 medical procedures and over 500 

hospital procedures. 

Of course, traditional Medicare can and should remain as an option for those seniors who want to keep it, but I believe that America’s retirees also deserve access to the better benefits, the greater 

innovation, and the superior coordination of care that a competitive 

insurance environment offers. Members of Congress enjoy all of 

these advantages. Why not our parents? Why not our grandparents? That is our purpose today, to examine those issues and 

2

build a record for the Finance Committee here in the Senate and 

others directly involved in this as we craft this legislation to review. 

Before I do that, let me turn to a member of this committee, the 

Senator from Michigan. 

Senator Stabenow. 

STATEMENT OF SENATOR DEBBIE A. STABENOW 

Senator STABENOW. Thank you, Mr. Chairman. 

I am pleased to be here today. This is an extremely important 

topic, and I appreciate those who are joining us today. 

I have a slightly different perspective, but I am very interested 

in listening to what our witnesses have to say today. I, at home in 

Michigan, do not hear people asking for more insurance companies 

to choose from; I hear them asking to have Medicare work in terms 

of prescription drug coverage, to be updated, but overwhelmingly, 

Medicare, which is the only part of our health care system that is 

universal, available to everyone at the age of retirement or for the 

disabled, has been a success in providing a guaranteed level of 

care—defined benefit; people know what they are getting; it is stable. 

It is interesting, because as we debate the question of choice, we 

actually set up a number of years ago an option on choice—private 

sector HMOs through Medicare+Choice. I believe that those under 

Medicare have predominantly chosen to stay in traditional Medicare overwhelmingly. 

Interestingly, my mother chose Medicare+Choice and went into 

a private sector HMO and had a very good experience except that 

the HMO, the insurance company, dropped Medicare. They dropped 

Medicare because of funding issues. So that choice was then no 

longer available to her. 

So when I look at the issues of Medicare as we go along in this 

extremely important debate, I intend to raise another set of questions, and that is whether we think health care is important 

enough to really fund Medicare and to provide resources for our 

hospitals and doctors and home health care agencies and so on, and 

private choices—if people want to go into Medicare+Choice, fine. 

But what I see in Michigan is that overwhelmingly, people are saying we want traditional Medicare, and we just want it to be updated to cover prescription drugs, and we want it to work. I am all 

for doing away with some of that bureaucracy and paperwork so it 

is more efficient and less onerous in terms of the paperwork, but 

I come from a perspective of saying that Medicare has been a great 

American success story and has saved a lot of lives, and I am hopeful that we can continue to strengthen it in a way that will continue to do that. 

Thank you. 

The CHAIRMAN. Senator, thank you. 

We certainly agree that probably one of the most important 

issues that we will tackle this session of Congress is this issue, not 

only for the current recipients but for the long-term effect it will 

have on our society in quality health care coverage—both that 

which is realistic in the modern-day health care system and affordable in relation to the overall costs. 

3

So that is what we are about today, and now let me introduce 

our first panel. 

The CHAIRMAN. Our first panel this morning will focus specifically on the Federal Employees Health Benefits Program and how 

it compares to Medicare. Starting us off this morning will be the 

person most directly responsible for direction of the Federal employees program, Abby Block, Senior Advisor for Employee and 

Family Support Policy at the Office of Personnel Management. 

Also testifying—if he arrives—will be Walton Francis, expert consultant and author of ‘‘Checkbook’s Guide to Health Insurance for 

Federal Employees.’’ Finally, we are joined—and he has arrived—on our first panel by 

Bob Moffit, Director of the Center for Health Policy Studies at The 

Heritage Foundation. Bob and his staff have studied and written 

extensively on the Federal employees’ health program as a possible 

model for Medicare reform. 

We look forward to your testimony, and Ms. Block, if you would 

start, please, we would appreciate it. 

STATEMENT OF ABBY L. BLOCK, SENIOR ADVISOR FOR EMPLOYEE AND FAMILY SUPPORT POLICY, STRATEGIC HUMAN 

RESOURCES POLICY DIVISION, U.S. OFFICE OF PERSONNEL 

MANAGEMENT, WASHINGTON, DC 

Ms. BLOCK. Thank you, Mr. Chairman. 

May I request that I be allowed to submit my entire statement 

for the record, and I will make an abbreviated statement now? 

The CHAIRMAN. Thank you very much. All of your testimonies 

will be made a part of our record. 

Thank you. 

Ms. BLOCK. I am pleased to be here today to discuss the Federal 

Employees Health Benefits Program. Our Health Benefits Program 

has been in operation for more than 40 years. It is an employerbased program and forms an important part of the compensation 

package offered by the Federal Government. 

The Office of Personnel Management has developed widely recognized expertise in the complexities of arranging health care coverage for more than 100 private sector health plans with a covered 

population of about 8.5 million people. In 2002, the program accounted for $24 billion in annual premium revenue. 

The program relies heavily on market competition and consumer 

choice to provide our members with comprehensive, affordable 

health care. In 2003, 188 discrete options are being offered by 133 

different health plans. 

An important and distinctive feature is nationwide availability. 

About 3 million enrollees are in fee-for-service/PPO-type plans, and 

one million in HMOs. There is an opportunity to enroll in the program, change health plans, or change enrollment status at least 

once a year during the 4-week annual open season that begins in 

November. 

All of the FEHBP national plans except for the Blue Cross and 

Blue Shield Basic Option offer their members access to all of the 

covered providers in their community. But for those providers that 

have not agreed to participate in a preferred provider network, the 

member does not get the advantage of reduced out-of-pocket costs. 

4

It is clear in our informational materials that the preferred provider benefit is an enhancement over the standard non-network 

benefit. In a typical network arrangement, the provider agrees to 

accept a rate of payment lower than billed charges in exchange for 

advantages such as more potential patients, expedited reimbursements, and other services provided by the plan. 

Often, plans monitor the services provide in network to ensure 

that their providers are well-informed about current practice patterns and new developments in health care delivery. The plan in 

turn can pass on the benefits it derives from provider participation 

in the network to members in the form of lower out-of-pocket costs 

when they use a preferred provider. Those lower costs are offered 

as an incentive to members to choose in-network services when 

they are available. 

However, since the Blue Cross/Blue Shield Basic Option provides 

no coverage for out-of-network services, we negotiated special provisions for that option to ensure that coverage would be available 

everywhere in the country. 

While all participating plans offer a core set of benefits broadly 

outlined in statute, benefits vary among plans because there is no 

standard benefits package. Even where coverage is nearly identical, 

cost-sharing provisions may differ significantly among plans. 

Benefits and rates are negotiated annually, but OPM does not 

issue a request for bids. Instead, we issue a call letter to participating carriers in the spring that provides them guidance for the 

upcoming negotiations. Plans remain in the program from year to 

year unless they choose to terminate their contracts, typically for 

business reasons. 

Under current law, the window for new plans to enter the program is essentially limited to HMOs. Unlike the 1980’s, when we 

were flooded with HMO applications, in the current market, we average about six new plans a year. 

Rates are negotiated with the national plans primarily on their 

claims experience. About 93 percent of premium, or 93 cents out of 

every dollar, reflects benefit costs. The remaining 7 percent covers 

the plans’ administrative costs. 

For community-rated plans, rate negotiations are based on permember, per-month community rate, and adjustments can be made 

to that rate based on demographic factors or utilization factors of 

our particular group. 

Our oversight focuses on key areas of plan performance, including attention to quality, customer services, and financial accountability. All of our contracts include mechanisms through which premiums can be adjusted based on performance. In addition, all carriers are subject to audit by the independent OPM inspector general. As a result of our collaboration with the IG, the program recovers on average more than $100 million a year. 

While the program has a statutory and regulatory framework, 

key aspects of plan design such as coverage or exclusion of certain 

services and benefit levels are in neither law nor regulation. Within broad parameters set by OPM, plans have the flexibility to determine both their benefits package and their delivery system. 

Because policy guidance is developed by OPM and provided to 

the plans annually, prior to the start of negotiations, policy 

5

changes can be made quickly in response to market factors. For example, this past year, we accepted a proposal from one of our plans 

for a consumer-driven option that reflects the development of new 

products in a fluid market. 

The FEHB Program uses a hybrid approach that shares practices 

with both public sector and private employer health insurance programs. While we believe the program has been very successful over 

its long history, we are always looking for ways to ensure that it 

continues to reflect the current health care environment, meet the 

needs of its members, and service the government in its recruitment and retention efforts. 

Our survey results are good. About 80 percent of those enrolled 

in our national plans are satisfied. Our work with the participating 

plans, however, on quality improvement is ongoing. We think that 

the FEHB Program is an excellent example of effective public-private partnership. 

Thank you for inviting me to be here today. I am pleased to answer your questions. 

The CHAIRMAN. Ms. Block, thank you very much. 

[The prepared statement of Ms. Block follows:]

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The CHAIRMAN. Mr. Francis, we are pleased to see that you have 

arrived, frustrated, I trust, by the traffic of Washington. Let me 

again reintroduce you to the committee. 

Walton Francis is an expert consultant and author of ‘‘Checkbook’s Guide to Health Insurance for Federal Employees.’’ I think 

I have seen your work on an annual basis. 

Please proceed. 

STATEMENT OF WALTON FRANCIS, FEDERAL EMPLOYEE 

HEALTH BENEFITS PROGRAM EXPERT CONSULTANT AND 

AUTHOR, FAIRFAX, VA 

Mr. FRANCIS. I hope so, Senator. Thank you very much. 

I want to report to all concerned that there is a disaster in the 

North Capitol Street tunnel. It is blocked and not moving and 

backed up for miles in every direction. So I apologize for my late 

arrival. 

The CHAIRMAN. I am glad you finally found a way to avoid it or 

get around it. 

Mr. FRANCIS. I would like with your permission to abbreviate my 

written testimony. 

The CHAIRMAN. Yes. All of your written testimonies are part of 

the record. 

Thank you. 

Mr. FRANCIS. Thank you. 

I decided not to talk about the FEHBP as such, but to talk about 

how it compares to Medicare from the point of view of both the enrollee and the sponsor, if you will, the U.S. Government in both 

cases. Although the programs are very different in some respects 

the FEHBP as a fringe benefit of employment, and Medicare as a 

guarantee to older Americans that they will not be impoverished by 

their health care costs—the programs nonetheless are the two largest Federal Government insurance programs in terms of lives covered and are very instructive in the lessons they teach. 

It is also the case that there seems to be an increasing set of 

criticisms of the FEHBP, mostly dead wrong, some uninformed, 

some just using phony statistics or whatever, and I thought I 

would lay some of those to rest. 

Let me just review very briefly the key point of my testimony. 

Retirement health care benefits are better in the FEHBP than in 

Medicare, substantially better. This is obvious to everybody who 

has looked at both programs, but it always warrants saying. I estimated for this hearing what Medicare would provide if it were a 

plan offered under the FEHBP as an option for retirees and how 

that would compare to what retirees actually get, and not surprisingly, I found that the out-of-pocket costs under Medicare are 

roughly twice as high on average as those under the FEHBP for 

that elderly population. 

The components of this better coverage are obvious and wellknown—catastrophic coverage, prescription drug coverage, and a 

minor benefit to which I will return, coverage when traveling 

abroad or living abroad, for that matter. 

On access, 99 percent of physicians accept fee-for-service and 

PPO patients. That means that 99 percent of physicians accept 

FEHBP enrollees. Only 96 percent of doctors accept Medicare paVerDate 0ct 09 2002 12:22 Oct 14, 2003 Jkt 000000 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 C:\DOCS\88256.TXT SAGING1 PsN: JOYCE
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tients. So access is better—sure, 99 versus 96 is not a huge difference, but it suggests that in rural areas and other places where 

physician availability is quite constrained, FEHBP is superior. 

Furthermore, FEHBP is everywhere. In every county in America, 

there are no fewer than 12 plans available to Federal retirees and 

employees. In most of the places where Federal employees reside 

in large numbers—not just Washington, DC, although that is obvious, but most of the larger cities around the country—there are 

from 15 to 20 plans available. 

Over time, in sharp contrast to Medicare, the FEHBP painlessly 

adapts to changes in the health care marketplace. Both of these 

programs, by the way, started vintage 1960. It is not just that 

FEHBP has painlessly adopted prescription drug benefits—in fact, 

they were in the program from the get-go because nobody would 

voluntarily enroll in a program that did not have prescription drug 

benefits even back in 1960—but that those benefits and many others have adapted over time to reflect the realities of the health care 

market place. For example, 10 or 15 years ago, most of the fee-forservice plans paid roughly 75 percent of your prescription drug 

costs, whatever they were; that was the model. The model today is 

typically a six-tier system in which there are three price levels for 

mail-order drugs and three price levels for local pharmacy drugs, 

with generics being the cheapest, approved or formulary name 

brand drugs the medium-priced spread in terms of copayments, 

and you pay most of all if you take a non-formulary name brand 

drug. 

The point of this is that had such a benefit been enacted in Medicare 15 years ago, it would have been that 25 percent option because that is what was common on those days. It would never have 

gotten changed. I estimate that the six-tier drug benefit system 

used in most of the plans in this program saves the program roughly $500 million a year. That is a very significant savings, based on 

academic research out there that demonstrates that those kinds of 

benefit structures save a lot of money by inducing frugal choices. 

Enrollee satisfaction in this program is very high. There is no direct comparison with Medicare possible, but OPM, to its credit, was 

a pioneer in developing surveys of enrollee satisfaction to assist enrollees with information on how to better choose plans. They find 

that in these fee-for-service plans, 79 percent of participants rate 

the plans 8, 9, or 10 on a scale of 1 to 10. 

On guaranteed benefits, this program is often criticized because 

the benefits are not written into law—my gosh, you cannot be sure 

you are going to get them or something. Well, that is absurd. They 

are guaranteed. They are guaranteed indirectly, and they are guaranteed in a way that gets the government out of micromanaging 

benefit-by-benefit details. 

Let me stop there and conclude. This is a very successful program. It contains many lessons for Medicare reform, and I hope 

those can be incorporated as you deliberate this year. 

Thank you. 

The CHAIRMAN. Mr. Francis, thank you very much. 

[The prepared statement of Mr. Francis follows:]

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The CHAIRMAN. Now let us turn to Bob Moffit, Director of the 

Center for Health Policy Studies at The Heritage Foundation. 

Bob, welcome to the committee. 

STATEMENT OF ROBERT E. MOFFIT, DIRECTOR, CENTER FOR 

HEALTH POLICY STUDIES, THE HERITAGE FOUNDATION, 

WASHINGTON, DC 

Mr. MOFFIT. Thank you very much, Mr. Chairman and Senator 

Stabenow. 

I am the Director of the Health Policy Studies Center at The 

Heritage Foundation, but the testimony I give today is my own and 

does not represent the views of The Heritage Foundation or its officers or its trustees. 

First of all, I want to say how deeply appreciative I am for the 

opportunity to appear before this committee and talk about this 

issue. Let me also say that for me, this is not merely an academic 

exercise. I was a Federal employee. I was involved in the Federal 

employee system. I was a deputy assistant secretary at the Department of Health and Human Services during the Reagan Administration, and I also served as an assistant director at the Office of 

Personnel Management, the agency that Abby Block represents 

today. I am very familiar with that agency and worked there for 

several years. 

But it was not until 1992 that my colleagues at The Heritage 

Foundation persuaded me—‘‘persuaded’’ is the appropriate word, I 

suppose—to write about the Federal Employees Health Benefits 

Program and its potential for policy guidance for broader health 

care reform, including reform of the Medicare Program. 

The central policy question facing the Congress and the Nation 

is whether the Medicare Program as it is today can absorb the demographic shock of the baby boom generation and continue to deliver high-quality medical care in an economically efficient fashion. 

That is the real nature of this debate. I do not think that it can. 

Having said that, that does not mean—I repeat, it does not 

mean—that we should rely on a private sector model of health care 

delivery, nor does it mean that we should rely upon the Medicare 

Choice experience for delivery of medical services. 

The best serviceable model is in fact a public-private partnership, 

and that means both elements, both the public sector and the private sector working together. As Abby Block has said to the committee, the best serviceable model we have of this kind of publicprivate partnership is the Federal Employees Health Benefits Program. It is a program with which we have 43 years of experience. 

It is characterized by choice, patient choice, market competition, 

and very solid consumer information and satisfaction. 

As Mr. Francis has pointed out, every Federal employee, whether 

they are retirees or active employees, whether they live in urban 

areas or rural areas, has a choice of at least 12 plans nationally. 

Most of these plans are fee-for-service plans and PPO plans. They 

are not HMOs. You can enroll in an HMO; if you want to enroll 

in an HMO, that is your choice. Thirty percent of all enrollees do 

so. 

There is no reason why Congress could not establish a similar 

structure of national plan choice for future Medicare enrollees. I 

25

would suggest two things in transition to a new Medicare Program, 

two areas where Congress could actually improve on the program 

more effectively. 

First, it could integrate private retiree health insurance into the 

new system, creating a seamless continuity of coverage and care. 

If individuals have had a good experience all of their working lives 

with a private plan, and they want to carry that private plan into 

retirement with them as their primary coverage and keep the doctors and specialists they already have, they should be able to do 

so and get a government contribution to offset the cost of that plan. 

Another recommendation I would make is that Congress could 

also make sure that new consumer-driven options similar to what 

Abby Block has mentioned in the FEHBP are also easily accessible 

to retirees who want them, including medical savings accounts, 

health reimbursement accounts, or other forms of health accounts. 

Right now, Mr. Chairman, there are 1.5 million Americans with 

such options, and there are prospects for significant growth in that 

market, and people should be able to take advantage of that in 

their retirement. 

As Mr. Francis has pointed out, the FEHB provides a benefits 

package which is clearly superior to Medicare in every conceivable 

way. It has a reasonable record of administrative cost—one percent 

for OPM in administrative costs and roughly 7 percent for the carriers. It allows and encourages innovation in health care delivery. 

It provides a regulatory system that focuses primarily on consumer 

protection rather than provider regulation. Under its statutory authority, OPM is to contract with health plans that are licensed in 

the States, that guarantee basic benefits, that charge rates that are 

reasonably and equitably reflecting the costs and the benefits. 

The FEHB model provides for a regulatory environment that is 

light and flexible and does not demoralize doctors or other medical 

professionals. 

Under Section 8902 of Title V of the U.S. Code, OPM is authorized to prescribe ‘‘reasonable minimum standards’’ for health care 

benefits for plans and carriers. The FEHB regulatory system provides a level playing field for competing health care plans. The 

FEHB model also gives enrollees the ability to act on solid information in selecting plans as well as doctors, hospitals, and medical 

treatments. 

I think that for the baby boomer generation in particular, this is 

critically important. In the 21st century, information technology 

will accelerate and become an instrument for increasingly sophisticated personal decisionmaking. Right now, about 70 percent of all 

Americans in the work force during their prime years from their 

twenties to their fifties use computers and have access to the internet. According to the Department of Commerce, Americans who use 

computers and the internet when they are younger are likely to 

continue to do so as they age. 

There is no reason why 21st century retirees, particularly the 

baby boom generation, should not be able to take advantage of rapidly advancing information technology for periodic health care comparisons and even more detailed comparative information on quality, on service, on outcomes, on the availability of evidence-based 

medicine among providers. 

26

Mr. Chairman, the other important point here is that the FEHB 

model provides for a financially stable program. The FEHB trust 

fund is unified. Its administration is comparatively simple. The 

premium income and disbursements in the trust fund are easily 

tracked; the fund’s income is routinely subjected to congressional 

action and oversight. If for any reason there is a need for a supplemental appropriation for the FEHB trust fund, Congress can and 

does provide it. In this respect, the FEHB trust fund model is superior as a mechanism for monitoring the solvency and ensuring the 

financial stability of a modernized Medicare system. 

Mr. Chairman, that concludes my remark. My only point is that 

we have 43 years of experience with this program—43 years of experience. We know its strengths, we know its weaknesses, we know 

where it can be improved, and we know how to make it better. The 

important point is that with this record of success, we have a tremendous opportunity to build a superior health care system for the 

retirees now and in the future, particularly the baby boom generation that is going to retire in just 8 years. 

Thank you. 

[The prepared statement of Mr. Moffit follows:]

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The CHAIRMAN. Bob, thank you very much for that testimony. 

Now let us turn to some questions, and we will do 5-minute 

rounds. As I ask a question of one of you, if any of the others of 

you wish to join in and make comment to that question, please do 

so. 

Ms. Block, let me first start with you. If Tom Scully were to walk 

into your office today and offer the current Medicare fee-for-service 

program for inclusion in FEHB, would it qualify? 

Ms. BLOCK. I do not think it would for several reasons. For one 

thing, as I have pointed out and as the other members of the panel 

have pointed out, we have moved away from fee-for-service per se 

to a PPO type of arrangement, which is very different from traditional Medicare. With that arrangement, we are certainly able to 

offer a broader benefit package, obviously, including a prescription 

drug benefit, in all of our plans. So there would be a huge difference in terms of our floor benefit levels and what traditional 

Medicare offers. 

There would be such differences as well in the way the plan is 

administered. We of course have nothing resembling the kind of administration that Medicare undergoes. It would not be a good fit, 

as far as I can see. 

The CHAIRMAN. Largely because of the standard benefit features 

required? 

Ms. BLOCK. Well, the benefit features are clearly a major difference between our program and Medicare, as has been pointed 

out, and it extends beyond just the prescription drug benefit, although that clearly is a key feature of all the FEHB plans that is 

missing from traditional Medicare. But the delivery system is also 

an issue. We are basically at this point in time PPO-based, we are 

network-based, and that makes a huge difference. 

The networks when they started out in the early 1980’s were primarily discount arrangements with providers. They have become so 

much more than that now, and we work very closely with the plans 

to ensure that they are more than just discount docs. There is a 

level of plan oversight; there is a level of provider education; there 

is a level of looking at and making sure that the providers in the 

network are current on medical practices, that they are using the 

best practices, that our customers are getting the right care at the 

right time. So there is a great deal more involved in running PPO 

networks today than just getting discounts from providers, and traditional Medicare just does not do that. 

The CHAIRMAN. Mr. Francis, you are nodding your head. 

Mr. FRANCIS. Yes, Senator, I agree 100 percent with what Abby 

said. If we could somehow wave a magic wand and make Medicare 

participate in the FEHB plan—and OPM would not approve it if 

they had a choice, because it would not meet their standards in 

many respects—and it were offered to Federal retirees as an option—you know, you can join Blue Cross Standard or you can join 

Medicare; pick one or the other—forget for the moment that the 

programs have some coordination, treating them as separate 

plans—no one would join it. It would rank last in our ratings of 

health plans for retirees. 

The CHAIRMAN. So it would make the bottom of the list in your 

book. 

40

Mr. FRANCIS. It would make the bottom of the list. 

The CHAIRMAN. Mr. Moffit, any comment? 

Mr. MOFFIT. Well, I think that on the basis of the facts, there 

is no debate. The FEHB system provides a superior quality of 

health care and delivery for retirees, and that is true. I do not 

think there is any question about it—including retirees who are no 

longer covered by Medicare. You have access to prescription drug 

coverage, you have access to coordinated care, you have access to 

catastrophic coverage. You do not have this kind of bizarre incentive system where you have very, very high deductibles to get into 

the hospital, but you have very, very low deductibles in Medicare 

Part B, which drive up health care costs. You do not have a situation where people have to go out and buy two sets of plans in order 

to make sure they cover gaps in coverage and pay two premiums. 

And you do not incur all the excessive administrative costs in that, 

and you do not have a situation where every, single major decision 

about the benefit, the treatment, or the procedure that you will get 

is subjected to a detailed regulatory intervention by the CMS. You 

do not have anything quite like that. 

The CHAIRMAN. Then, maybe you have answered my follow-up 

question to you. OPM employs about 160 employees to manage the 

FEHB, compared to about 4,500 at CMS to regulate Medicare. 

Then, to what exactly do you attribute this very huge difference in 

employment? 

Mr. MOFFIT. First of all, it is not just Medicare. CMS has awesome managerial responsibilities beyond Medicare. 

The CHAIRMAN. Oh, yes. 

Mr. MOFFIT. It has the Medicaid responsibility, it has the State 

Children’s Health Insurance responsibility, it just has more than 

Medicare. But in fact my argument is that actually, CMS is in a 

managerial crisis largely because Congress has done two things. 

One, it has given CMS much too much to do, and second, Congress 

micromanages the Medicare Program in particular. The most recent reports that have been documented by the General Accounting 

Office and by independent analysts, both conservatives and liberals, indicate that the Medicare Program, no matter how you feel 

about it, is extremely micromanaged. This, however, imposes enormous costs on the health care system. 

It is true that the administrative costs of the Medicare Program 

are between one and two percent, formally, but none of those administrative costs count the costs of doctors, hospitals, clinics, and 

home health care agencies complying with at least tens of thousands of pages of rules, regulations, guidelines, and regulatory paperwork. They have to do it. 

Now, Senator Stabenow said she does not want to have all this 

bureaucracy. Senator, I agree with you—but if you are going to 

have a system where every benefit is carefully defined by the Congress and is going to be priced by the Congress, you are going to 

have to regulate that system. You are going to have to make sure 

that those prices are correct and that there is going to be monitoring of those prices to make sure that the doctors, all 800,000 of 

them, in the country are agreeing to charge those prices and are 

keeping within the regulatory guidelines. 

41

It seems to me, with the kind of structure you have in Medicare, 

you cannot avoid a massive expansion of bureaucracy and red tape. 

But that expansion is costing the health care system. My point, Mr. 

Chairman, is that every dollar that goes into the compliance with 

this regulatory system on the part of doctors and hospitals and 

health clinics is a dollar that is lost to patient care in the system. 

We have to start to count that as well in terms of when we start 

talking about the additional costs of Medicare. 

The CHAIRMAN. Thank you. 

Let me turn to Senator Stabenow. Senator? 

Senator STABENOW. Thank you, Mr. Chairman. 

I would go back and again say that I believe there is much we 

can do in terms of the bureaucracy. There is much more micromanaging that happened even after 1997, with the changes that were 

made at that time, that I believe were very much micromanaging. 

This has been very informative, and I appreciate the information 

that all of you have provided. When I look first at comparing Medicare and FEHBP, in the Federal system, the prescription drug benefit is available in every option; isn’t that correct? 

Ms. BLOCK. Yes. 

Mr. FRANCIS. Yes. 

Senator STABENOW. What has been at least put forward to 

date—and we have not yet put our mark on it in the Senate at this 

point—but what has been proposed by the administration is not 

that. They have said that if you stay in traditional Medicare, you 

would get a discount card, possibly some catastrophic help, but you 

would only get full comprehensive prescription drug benefit if you 

went into a private plan. So it is different than what you are suggesting, and I would certainly support more of a model of what you 

are saying, that regardless of the plan you pick, you receive comprehensive prescription drug coverage. 

This goes back, though, to the experience that my mother had 

with Medicare+Choice that was not funded appropriately, and the 

private sector dropped Medicare. This goes back to what I believe 

is the larger question of are we trying to upgrade Medicare in quality because we want better health care, and we want prescription 

drug coverage, and we want it to be, as you all talked about, the 

best quality we can have, or are we trying to save dollars—because 

those are not necessarily the same thing. 

Today in The New York Times in fact, there is a major article 

that talks about this very question and comparing private plans, 

the rates that are paid to doctors and hospitals and home health 

providers and so on to what is paid under Medicare, because we 

have taken the approach under Medicare of saving costs by just reducing provider reimbursements. 

I would welcome anyone’s information regarding cost, because I 

think this is important. We have been given at this point—I want 

to read you just a little bit from the article. There has been $400 

billion set aside in the budget resolution for some proposal which 

in my mind does not begin, from the numbers that we are seeing, 

to do what you are talking about if you are really going to provide 

the same kind of care regardless of plan. But in The New York 

Times today, just to quote a paragraph, ‘‘The Medicare Payment 

Advisory Commission, a nonpartisan Federal advisory panel, reVerDate 0ct 09 2002 12:22 Oct 14, 2003 Jkt 000000 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 C:\DOCS\88256.TXT SAGING1 PsN: JOYCE
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cently had a study done comparing fees paid by Medicare and private health plans. Zachary Deichman, the economist who did the 

study, collected data from 33 health plans of 31 million people. In 

an interview today, Mr. Deichman said he had found that private 

health plan fees are about 15 percent higher than Medicare fees’’—

and then they go on to show various categories. It is 26 percent 

higher for surgery fees in the private plans such as we have; radiology is 19 percent higher; other diagnostic services are 23 percent 

higher. 

So as we look at these two issues—on the one hand, those saying 

that reform is about saving dollars versus reform is about improving quality and choice—how do you reconcile that? 

Mr. FRANCIS. If I may comment, Senator Stabenow, that is a 

great question, and there was one point in my testimony that I forgot to cover that is very important. I updated a study for you, for 

this committee,that I had done a few years back comparing change 

in cost over time of the Medicare and FEHBP programs. It turns 

out that if you go back almost 30 years, the two programs have tied 

in cost containment. That is, the annual rate of growth measured 

in the way I detail in my testimony has been identical over time 

in the two programs. Yet on the one hand, we have a Medicare Program that pays providers less, that is micromanaged, that ceaselessly seeks—the Congress every year is forced to go through legislative contortions to come up with some dollar savings. 

Your best efforts have barely tied the efforts of Abby Block and 

the system over which she presides, which painlessly obtains identical cost containment over time. 

I will go beyond that. We have already talked about the benefits 

are better in FEHBP. They have improved over time. Medicare’s 

have not. 

So we have a program that has contained costs while improving 

benefits to a level that is far superior to Medicare. 

Point No. 3—and this again picks up on something that Abby 

said—the managed care features in the plans in this program save 

lives. They are not just there to hold patients’ hands. There are 

reasons why networks are set up, why certain kinds of reviews are 

undertaken. 

For example, here is a benefit in this program that does not exist 

in Medicare—large-scale case management. If you have a serious 

problem that requires, either going into a nursing home or staying 

at home while you recover from open heart surgery—or go back 

into the hospital—and it is going to cost the plan tens of thousands 

of dollars, they can give you a benefit that is not even in their legal 

contract—for example, a home health care benefit to keep you out 

of the hospital—saving them money and saving you the trauma of 

that hospitalization. 

The point is that Medicare could never pass the quality standards that the FEHBP plans pass, and OPM is working hard on improving those systems, working with the private accreditation bodies. I could go on and on, but let me just stop there—it controls 

costs better, provides better care, and provides better benefits. 

Senator STABENOW. Just as a quick follow-up, are you suggesting, then, that it would cost no additional dollars in Medicare 

to have an average 15 percent increase in fees for providers and 

43

increase—that it would not cost additional dollars under Medicare 

to get to this system? 

Mr. FRANCIS. I cannot give you a guarantee. I would answer you 

in a slightly different way. The FEHBP uses a dynamic, competitive, market-driven, consumer-driven system over time, where consumers are always making choices—in open season, you face a 

choice of benefits, premium costs, out-of-pocket costs, quality of the 

network, is your physician in it, for example, and so on—and consumers make those choices. Only 5 or 10 percent switch every year. 

But that keeps the plans honest, if you will. It keeps immense 

pressure on the plans to keep costs down and quality up. And over 

time, there is no reason to think that that system could not outperform Medicare in cost containment. 

Senator STABENOW. I would be happy, Mr. Chairman, to follow 

up further, but I would love to see some studies that compare people of all ages in all health conditions in one system right now that 

has better payouts in all areas to a system that is covering older 

people in the country and the disabled and compare both of those 

right now and say that somehow, for the current dollars going into 

Medicare and the current very low reimbursements to our providers, we could switch to that and it would not cost any more dollars. You are hired if we can do that. 

The CHAIRMAN. Thank you. 

Let me ask a couple more questions before we turn to our next 

panel. 

I think that both you, Senator, and Mr. Francis, Mr. Moffit and 

Ms. Block—we have all touched on the same things in part here. 

While there is a cost component to this that we will debate, I do 

not want my seniors denied service, and yet they are being denied 

service by primary care providers today because they will not take 

them because they can no longer afford to take Medicare. In part, 

that is our fault; it is part of that micromanagement that we do 

around here. I cannot even believe that we sit here in Congress 

and debate the tiniest specifics of Medicare benefits, and services, 

but we do, and we have for 30 years. We add a few every year or 

we take away a few, and then we crunch down the costs by allocating a certain fixed amount of resources and expect all those 

services to comply into it. 

What is unique—I think you have just said it, Mr. Francis—is 

that in this dynamic, the private sector has arrived at the same 

cost containment success that we have in Medicare, with its huge 

bureaucracy and a phenomenal layout of resource and less service 

as it relates to the total care package offered—and no options. 

In designing flexibility and adding the component that I think 

both the Senator and I want, and that is prescription drugs, the 

question is how do you allow the market forces to deal with cost 

as it relates to innovation or additional services? 

I am increasingly getting—as I suspect your office is—a bit of a 

panicked phone call on occasion from a senior who has just been 

told that his or her primary care physician is retiring, and now 

they are out shopping for one and cannot find one who will take 

new Medicare patients. We are getting that limiting factor, so I 

guess my question is as it relates to access through the private system versus access through Medicare and the denial of service. Is 

44

there a growing disparity there, or are we simply getting physicians who will transfer costs over, if you will, to those who can afford to pay in relation to the less than comparable system that 

Medicare serves? 

Can you react to that, any of you? 

Mr. FRANCIS. One quick comment, and Abby might want to say 

more—I do not want to put her on the spot. I think that central 

to the FEHBP as it has evolved—this was not true 15 years ago, 

but it is true today—the fee-for-service plans basically have two 

sets of benefits—one for going to any doctor in the country—that 

is the traditional fee-for-service component—and one if you use preferred providers. You get a much better deal if you use preferred 

providers, and preferred provider panels are huge. We are not talking about little, teeny-weeny HMO groups; we are talking about 50 

to 60 percent of physicians typically in these plans. But that is not 

100 percent. 

The difference is that if you go out of plan, out of the preferred 

panel, you will have to pay more. Your reimbursement share will 

be higher, and the physician may charge you a little more than he 

would have charged if you were preferred, although you do not see 

that on the preferred side. 

So I do not want to claim that it is perfect for everybody—there 

is no guaranteed satisfaction of all problems in the world in any 

program. But because you have this double tier of benefits, for in 

and out of network, the plans are much more flexible and the 

choices that consumers face are much wider. 

Mr. Chairman, and in that, you are arguing or at least believe 

that over time—we will go back to the New York Times article that 

I found fascinating this morning also—and it is a debate that we 

will get into; some will argue that we are going to get great cost 

savings benefits, that over time, it is a factor of competition that 

creates innovation within the system and has the potential for 

some cost containment—or, more than potential—it has proven to 

contain costs. 

I think you mentioned the premium increase in the last year or 

two—and this program has been very high—you cannot look at one 

or two years. You have to look over long periods of time. My comparisons are sort of 10-year rolling averages, because the FEHBP 

had some very good years in the early nineties when Medicare was 

struggling with some very bad years. So if you were clever and you 

picked the right base year in a short period, you could prove almost 

anything. But if you are honest about it, over time, on average, this 

program saves money as well if not better than Medicare. 

Senator STABENOW. Mr. Chairman, if I might. 

The CHAIRMAN. Yes, Senator. 

Senator STABENOW. Thank you. 

First, let me go back and say that we do agree that these are different systems in the sense of one covering people of all ages, 

healthy people, sick people, and so on, and that with Medicare, it 

is older individuals by definition who are going to need more health 

care on average, have more health concerns, and the disabled. So 

they are different systems, and as we analyze this, we need to look 

at who the pool is that is being covered. 

45

But I guess I would go back again and say that while I think private-public sector partnerships work, and I am very intrigued 

about doing this, the idea that somehow we could do this and bring 

everyone up to where government employees are without additional 

dollars I think is a rather naive or foolish kind of thought. 

In the beginning—and I am not criticizing a panel member; I am 

saying as colleagues, as all of us—at this point, this has been argued as a way to save dollars, yet I would argue that if we increased the fees at least in Michigan by 15 percent for every health 

care provider, we would have no problem with access, whether it 

is up in the Upper Peninsula or in lower Michigan, if we increase 

fees—if we just went to the fees that are paid by Blue Cross, we 

would not have a problem right now. 

So the problem has been that we have been cutting service, we 

have been cutting fees, and I am very much willing to look at different ways to gain cost savings and competition and the kinds of 

things—as long as we understand that in the end, this is a system 

that every plan has prescription drug coverage, it is a system that 

pays out more than so far we have been willing to do as a Congress. 

The first step is to stop cutting if we want to stop losing access 

to care. That is the first step. Do not institute the next round of 

15 percent cuts to home health; do not institute the next 5 percent 

cut to physicians; do not institute the next round for hospitals 

while we are figuring this out, if we care in fact about not losing 

access to care, which I know we all do. 

So I would like, Mr. Chairman, to see us really analyze what we 

are talking about in terms of the dollars that are put aside versus 

what we are talking about here in the budget, and I feel very 

strongly that we have not decided that health care is important 

enough right now to really make sure that this works when we put 

a plan in place. I go back to Medicare+Choice, where there was an 

option put out there, not adequately funded, and it failed. 

So we can put forward a structure, and if we are not willing to 

fund it, it does not matter what the structure is—it will fail. I hope 

that part of this is going to be a debate about how much we are 

willing to invest in health care for older Americans. 

The CHAIRMAN. I thank you very much. 

Yes, Ms. Block? 

Ms. BLOCK. I would like to talk a little bit about the kinds of 

things that we can do very easily in the FEHB program that the 

Medicare Program as currently structured cannot do. 

In the past several years, we have become very aware of programs that fall under the umbrella of what we call ‘‘care management’’—and Walt mentioned earlier case management, which is 

one piece of care management; another important piece is disease 

management programs—because we started to believe that they 

had an enormous potential, first of all in keeping people with 

chronic illnesses healthy longer and also being able to avoid unnecessary costs that come about because people were not getting the 

right care for chronic diseases and so ended up with very costly 

hospitalizations, in the case of diabetics, amputations, blindness—

consequences that can be avoided if people get the right care and 

46

get it early enough and with enough continuity to ensure that they 

are under treatment and under appropriate treatment all the time. 

We have worked very closely with our health plans. Blue Cross 

and Blue Shield and the Mail Handlers Plan which is underwritten 

by First Health have developed and are in the process of implementing and evaluating excellent care management programs that 

we think will have the dual benefit of keeping people healthier 

longer and also saving money, and that is one of the fiscal offsets 

that we can arrange by working in collaboration with our private 

health plans for the benefit of all. 

So we do that very easily because we are so non-hierarchical. 

Our director, Kay James, has been extremely supportive of care 

management programs. We have talked about it in our call letter 

for the last couple of years. We just do that very easily. We look 

at it, we say this looks like a good idea, let us move in this direction, let us work with the plans, and let us see what we can implement. That is the kind of flexibility we have, and I think it is both 

beneficial to people, and there are also financial benefits. 

The CHAIRMAN. Thank you. 

Mr. FRANCIS. Just an amusing comment if I may, Mr. Chairman. 

When I was at HHS, one of my main functions was as regulatory 

review czar, and I did a study once that showed that it took what 

was HCFA, now CMS, on average 4 years to issue a regulation 

from the day that the idea was thought of until the final rules were 

set in place. 

What Abby is talking about is night and day faster and more responsive and more workable than doing this kind of thing by regulation and trying to nail down every dot and cross every ‘‘t,’’ and 

you get it wrong—end of speech. 

The CHAIRMAN. We will let you have the last word on the panel, 

Mr. Moffit, and then we will move to our second panel. Go ahead. 

Mr. MOFFIT. All right. I just want to say one thing. Our debate 

has been constantly in terms of the current demographic framework. The problem is not now. The problem is the future. The problem is 8 years from now. The important thing to understand is that 

8 years from now, we are going to have an unprecedented demand 

for medical services unlike anything in human history or anything 

we have ever seen before. 

The point here is—and that is why the structural issue is important—the only way that you can control cost in the current structure of Medicare is ultimately to reduce reimbursement—but reducing reimbursement ultimately means you are going to control 

costs by reducing the supply of services, the quality and the quantity of services. That is not an unintended consequence of price controls. That is an intended consequence of price controls—to make 

sure that we spend less in that sector of the economy. That has got 

to be understood. 

The most important thing, and one argument that I hope myself 

and my colleagues here have made, is that within a structure that 

relies on a market, you can have fairly ruthless control of cost on 

the basis of an interaction of supply and demand, but in a system 

that is governed by price controls and central planning in effect, 

the only way you are ultimately going to control cost is to reduce 

the supply of services—and that is the problem. 

47

Thank you. 

The CHAIRMAN. That is a very important point in the whole issue 

of this debate, and we thank you very much for being with us this 

morning. 

Now let us turn to our second panel, and if our colleague Senator 

Carper would wish to join us, we are pleased to have you with us. 

He is a back-bencher this morning—but rarely that. 

The CHAIRMAN. Our second panel this morning will discuss a 

somewhat broader set of issues involving comparisons between 

Medicare and private insurance generally, looking at questions of 

comparative cost, the very issues that Senator Stabenow brought 

up a few minutes ago, quality, and value. 

Marilyn Moon is a Senior Health Policy Fellow at The Urban Institute and a distinguished expert on Medicare and health care policy. 

Joe Antos is currently a Scholar at the American Enterprise Institute but has had a long career in government work involving 

both CBO and the old HCFA. 

Jeff Lemieux is a Senior Economist at The Progressive Policy Institute and was previously a senior staff member in the 1999 Presidential Medicare Commission and a CBO economist. 

We look forward to your testimony, and I think your testimony 

follows well with the discussion just had with the last panel as it 

relates to costs and benefits as we deal with this important policy 

issue and debate. 

So, Ms. Moon, if you would start, please proceed. 

STATEMENT OF MARILYN MOON, SENIOR HEALTH POLICY 

FELLOW, THE URBAN INSTITUTE, WASHINGTON, DC 

Ms. MOON. Thank you, Mr. Chairman. 

It is my pleasure to be here today, and I appreciate the invitation. 

I am going to be the skeptic on the panel today and argue essentially that private plans are not a magic bullet for Medicare, and 

that there are a lot of pros and cons that need to be assessed in 

analyzing whether or not we should rely on private plans and to 

what extent. 

I do not think anyone any longer is saying there should be no 

participation of private plans, nor is anyone saying there should be 

no traditional Medicare—or at least I hope that is not the case. I 

think it is better to think about this issue in terms of the right balance between public and private shares. 

But it is important to ask whether the benefits from greater participation of private plans be worth the additional problems and 

costs that could arise in some cases. 

There are likely to be big negative impacts from a plan that relies extensively on private plans, particularly if it does damage to 

the traditional Medicare Program, in return for little positive reward. First of all, it is important, as Senator Stabenow did, to separate out the issue of the structure of the program from the benefits covered by the program. No one is going to argue that Medicare 

has a wonderful benefit package and therefore that we should stick 

with traditional Medicare because of its stunning benefit package. 

But adding additional benefits is not necessarily inherently someVerDate 0ct 09 2002 12:22 Oct 14, 2003 Jkt 000000 PO 00000 Frm 00051 Fmt 6633 Sfmt 6633 C:\DOCS\88256.TXT SAGING1 PsN: JOYCE
48

thing that can only be done in a private plan structure. In fact, 

people have estimated that it would cost in the range of $850 to 

$900 billion to add prescription drugs of the type that are available 

to Federal employees in a Medicare Program, and I believe that 

would be true whether we were talking about private plans or basic 

Medicare plans. 

The simple fact of the matter is that drugs are expensive, seniors 

and persons with disabilities use extensive numbers of drugs, and 

if we make them more available to them, we will see costs go up 

over time. 

I also argue in my testimony that Medicare rates of growth on 

a per capita basis are less than the private sector, and that claim 

has gotten me into some hot water. We agree that the data we use 

are not very good and we would like to have better data, but it simply does not exist. The additional dimensions that I have seen people add to tweak our study, are unconvincing. I still believe that 

our work indicates that Medicare does a little better than the private insurance sector over a long period of time. Over 30 years, on 

a cumulative basis, the difference amounts to about 19 percent. 

Actually, looking at Mr. Francis’ testimony, I think that he and 

I are actually pretty much on the same page. He argues that there 

is a 1-percentage point difference in Medicare over a long period of 

time, on an annual basis. That actually translates close to the 19 

percent, because the 1 percentage point is on a basis of 5 percent 

versus 6 percent. That is a big difference over a very long period 

of time. I would like to have that compounding difference in the 

Medicare Program, for example, that you would get. 

I think our study is consistent with the information today in The 

New York Times. 

The other question I think is a relevant one to ask, and that is 

whether competition adds to this in terms of private plans competing, and that is an important issue and question. I will let others talk about the many advantages to competition, and I will mention just a couple of potential problems. 

First is the issue of risk selection. This is a serious issue that 

needs to be taken into account. It cannot be simply said that there 

will be risk adjustments. Let us assume there will be a risk adjuster. Over 20 years of study and effort have gone into this, and 

we have not come very far as yet. Risk selection is going to be an 

issue, particularly to the extent to which benefits vary substantially. Younger, healthier folks will quite naturally be attracted to 

plans that have benefits that they like and not home health coverage, for example, which will appeal to a sicker population. 

I do not see, again, very much advantage here from that perspective. In addition, the complexity that arises from competition is 

something that should not be understated. I would be happy to 

compare my experiences with choice and a PPO that pays essentially half of what Medicare pays my physician when I go to her. 

I will be better off when I go on to traditional Medicare from the 

PPO that I am in, Care First, and I would also be happy to discuss 

some of the other complexities and problems with that plan. 

What we need to keep in place in Medicare is the universality 

and redistribution that occurs in the program that is an essential 

part of social insurance. The pooling of risks, also needs to be 

49

maintained or a way found to adjust for the loss of risk pooling 

when relying on private plans. Finally, an important role for government in protecting the program over time also needs to be retained. 

I would like to make two final comments. One is that the administrative costs of Medicare are often misunderstood and misinterpreted, because remember—Medicare is running an insurance program. If anything, it needs more dollars to run it well. Adding another layer of private plans will add to administrative costs. 

I am all in favor of many changes in the traditional program, not 

the least of which would be coordination of care. But I see very little innovation in a lot of the private plans out there today to suggest they are already better than traditional Medicare. 

The CHAIRMAN. Ms. Moon, thank you very much. 

[The prepared statement of Ms. Moon follows:]

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The CHAIRMAN. Now let us turn to Joe Antos, who is currently 

a scholar at the American Enterprise Institute. 

Thank you, Joe. 

STATEMENT OF JOSEPH R. ANTOS, WILSON H. TAYLOR 

SCHOLAR IN HEALTH CARE AND RETIREMENT POLICY, 

AMERICAN ENTERPRISE INSTITUTE, WASHINGTON, DC 

Mr. ANTOS. Thank you, Mr. Chairman and members of the committee. 

As I think the first panel pointed out quite well, the Medicare 

Program faces unprecedented challenges, challenges that simply 

cannot be avoided, and I think the first panel was correct in 

observing that the Federal Employees Health Benefits Program is 

a very, very capable program that is an excellent model for the 

Medicare Program. 

However, as we know, people have raised concerns about whether competitive market reform would actually work in Medicare, and 

I want to address four of those concerns. 

First, on the assertion that Medicare controls costs better than 

the private sector, it is true—I looked at Marilyn Moon’s paper, 

and I am one of the people she was referring to, no doubt—it is 

true that, measured the way Marilyn measures it, Medicare’s costs 

did grow somewhat less rapidly than private insurance. 

However, let us keep in mind that over the last three decades, 

the nature of private coverage has changed dramatically. Private 

insurance has grown and now covers substantially more of the cost 

of services than it did in 1970. I am not talking now about adding 

benefits. I am talking about how much of your cost for a given service is covered by insurance. 

So we need to be careful when we do our comparison shopping. 

Private insurance has become a bigger benefit in that sense, in 

that fair sense, and Medicare has not. It is not surprising that the 

larger product is more expensive. The big box of Rice Krispies in 

the supermarket costs you $3.69—I imagine; I have not been to the 

supermarket lately—while the regular-size box costs $2.99. The big 

box costs more, but the cost per ounce of cereal is lower if you buy 

the big box. For a fixed level of financial protection, private insurance costs may have grown less rapidly than Medicare. 

You can look at other programs. You can look at the Federal Employees Health Benefits Program. You can look at the California 

Public Employees’ Retirement System. The Medicare Payment Advisory Commission looked at those two programs, and what did 

they find? They found, according to their numbers, that FEHBP’s 

costs grew slightly faster than Medicare’s over the past 10 years; 

CalPERS’ growth was somewhat lower than Medicare—again, no 

clear win for Medicare. 

It is unreasonable to think that Medicare’s administrative pricing could ultimately control spending better than a competitive 

market situation. Price controls have typically caused providers to 

find ways to deliver more services. We can talk about that more 

later. Tighter controls that also restrict the use of services could 

prevent that, but such restrictions would have adverse consequences for the health of beneficiaries, consequences that I do not 

think anybody would countenance. 

73

The second criticism—Medicare beneficiaries would be forced to 

change doctors. It is not true under an FEHB-style reform, anyway. 

Beneficiaries in fee-for-service Medicare can select almost any provider in the country. They could have that same ability to choose 

providers under an FEHB-style reform through preferred provider 

organizations, for example, organizations that allow beneficiaries to 

go outside the panel of providers. 

Of course, the Federal Employees Health Benefits Program offers 

a wide range of choices. You would expect the Medicare Program 

to do the same thing, including, I think, HMOs and the traditional 

fee-for-service plan for those who want to make those choices. 

I think the argument is about giving people the option—not forcing them to do something that they do not want to do. 

Now, it is true, as Marilyn says, that PPOs charge more if the 

beneficiary goes to an out-of-network provider. I am in Blue Cross 

Standard Option FEHB—I am still in the program—and that requires that I pay $15 for a standard office visit if I stay in network 

or 25 percent of the charge if I go out. That can add up to a lot 

of money if I got all of my health care out of network. 

What should a Medicare beneficiary do about this situation? 

Well, that beneficiary would do what millions of Federal employees 

do every year—look in the book, look for the plans that include 

your doctors in the network. 

Let us not forget that the flexibility that Medicare brings comes 

at a considerable cost. There are gaps in coverage, complicated and 

inequitable cost-sharing structures, and an exposure of beneficiaries to potentially unlimited financial risk. Nearly everyone 

wants different benefits than the traditional program offers. Nearly 

everyone buys some kind of supplemental coverage, and many pay 

a high price to do so. In the year 2000, for example, about 10 million people bought Medigap policies with a premium averaging 

$1,700. 

My third point is Marilyn’s point as well about risk selection. 

The concern is that private plans might not accept sicker beneficiaries. I think that is a concern. When we implement a choicebased system, we absolutely must be vigilant on this point. I share 

her concern. 

It is comforting that the FEHB Program does not appear to have 

any significant risk selection problem. It is related to the design of 

that program; we could learn some lessons there. 

The fourth criticism—competition cannot work in Medicare. As 

we all know, the experience with Medicare+Choice has been very 

sobering. Over the past 5 years, nearly 200 plans have dropped out 

of the program. Is that proof that competition cannot work? Well, 

it is proof that the plans cannot operate under Medicare+Choice, 

as Senator Stabenow pointed out. Plans will not be able to compete 

in Medicare unless we change the government’s approach to managing the program. 

Medicare+Choice did not break away from Medicare’s history of 

top-down price-setting and complex regulations. The program is administratively inflexible; the payments were unrealistically low and 

did not reflect conditions in the local markets that you know about 

very well. It is not surprising that plans dropped out. 

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Let me conclude. Congress has an opportunity to help Medicare 

fulfill its promise to millions of seniors and people with disabilities. 

We can build on Medicare’s successes, but we need not repeat its 

mistakes. The program must expand to cover prescription drugs, 

preventive benefits, and protection against uncapped medical costs. 

The program must be made financially sustainable if the taxpayers 

of today are to receive their Medicare benefits tomorrow. 

I think the Federal Employees Health Benefits Program is a 

great place to start, but we cannot just stop there. We need to tailor it to the needs of the Medicare Program. I believe that all Medicare beneficiaries should be given solid drug benefits, but we 

should not make it a one-size-fits-all benefit. I believe that Medicare beneficiaries should have the choice to stay with the traditional program if they choose to do so. 

There are certainly risks in attempting to reform a program as 

important as Medicare. But there are risks from failing to take the 

prudent actions necessary to make Medicare a better and more sustainable program. I think that effective competition can make a 

lasting and meaningful improvement in this essential public program. 

Thank you. 

The CHAIRMAN. Joe, thank you. 

[The prepared statement of Mr. Antos follows:]

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The CHAIRMAN. Our final panelist is Jeff Lemieux, a Senior 

Economist at Progressive Policy Institute and previously senior 

staff with the 1999 Presidential Medicare Commission and a CBO 

economist. 

Jeff, welcome to the committee. 

STATEMENT OF JEFF LEMIEUX, SENIOR ECONOMIST, 

PROGRESSIVE POLICY INSTITUTE, WASHINGTON, DC 

Mr. LEMIEUX. Thank you, Mr. Chairman. 

Mr. Chairman, your staff asked me to comment very specifically 

on the cost studies that Dr. Antos and Dr. Moon have done recently. 

The CHAIRMAN. We know that that is an important part of this 

debate, and as Senator Stabenow point out, it is current within the 

discussion this morning with the New York Times article, so it is 

front and center to all considerations, I suspect. 

Mr. LEMIEUX. Let me get right to that, but first let me make just 

three quick assertions in response to the discussion that we have 

heard in both panels. 

I think that there are three conditions that are necessary to 

make an FEHB-style system workable in Medicare. First, the government-run plan needs added flexibility to shape its benefits and 

payment systems more along the lines that Abby Block told us are 

possible in FEHB. 

Second, the private health plans in Medicare clearly need a stable, predictable, and fair platform from which to make business decisions, and that also is lacking. 

The third thing that I think is lacking that we need to work on 

is that both Congress and the public will need a very thorough understanding of how a competitive choice system in Medicare would 

work. We need to create a win-win situation here for beneficiaries 

and taxpayers, and we need to know how an FEHB system would 

play out over time before policy decisions can be made, and we 

have not made that analytic effort yet in Congress. 

To these comparisons, in my opinion, Dr. Moon and Dr. Antos essentially say the same thing. They say that if you look at Medicare 

and private insurance spending trends over 30 years, it looks like 

Medicare’s are slightly better. I believe Dr. Antos is also correct 

when he says that when you fold in benefit generosity, the costbenefit comparison, it looks like private plans are a little better. 

So my analogy to this—and I am not trying to be funny, but I 

think this is appropriate—is that Dr. Moon is arguing that McDonald’s is better than Burger King because its burger prices have increased by a few pennies less over 30 years, and that Dr. Antos is 

saying no, Burger King is actually a better value than McDonald’s 

because Burger King’s food is improving at a faster rate. 

This is the sort of data that policy wonks on both sides of the 

political aisle are going to use for ideological ammunition. Backers 

of the government-run fee-for-service program will argue that 

McDonald’s is better than Burger King, and backers of private plan 

options in Medicare will say that Burger King is better than 

McDonald’s. But the larger point is that policymakers should not 

have to choose Burger King or McDonald’s. Beneficiaries should be 

able to choose from Burger King, McDonald’s, Popeye’s, the gourVerDate 0ct 09 2002 12:22 Oct 14, 2003 Jkt 000000 PO 00000 Frm 00095 Fmt 6633 Sfmt 6633 C:\DOCS\88256.TXT SAGING1 PsN: JOYCE
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met shop—you name it—and that our esteemed foundations and 

policy think tanks could do the most accurate and subtle computations possible, and we would never be able to determine a correct 

answer on something that is really a point of preference. 

So in my opinion, comparisons of long-term spending cannot really possibly settle a debate over which sector is a better value because Medicare and private health insurance spending are interrelated. When Medicare finds ways to save money, private insurers 

face pressure, mostly from employers, to mimic those savings or to 

come up with alternative savings. 

Likewise, when private health insurers find a way to save money 

or add value and benefits to their packages, then Congress faces 

pressure to improve Medicare, to find similar savings or similar 

benefit enhancements. The spending trends on both sides reflect 

these pressures, they tell us nothing intrinsic to government-run 

programs or private health insurance. 

The first major move toward cost containment in the entire 

United States health sector was in the early 1980’s when Medicare 

took the lead on cost containment and implemented a prospective 

payment system for inpatient hospital care. This was a payment 

control method that worked. Hospitals changed their behavior, and 

Medicare’s costs slowed down from the double-digit rates to single 

digits, which was unheard of at the time. 

That is why Medicare’s cost performance moved better than private insurance for several years. After about 1993, private health 

insurance and Medicare have gone back to increasing at about the 

same rates. What happened was that private insurers became 

aware that Medicare was paying less for hospitalization, so they 

had to do something about it. Employers put pressure on them. Of 

course, they could not implement a massive payment control system of their own; they could not collude to gain market power to 

do that, and the market would not allow them to just impose payment restraints. But by the early 1990’s, they found a solution. 

That solution was managed care. By targeting their enrollees to 

specific hospitals and doctors, they could gain leverage to get better 

deals with health care providers. 

That sudden cost saving success in managed care then led to political actions that turned around and helped to reduce Medicare 

spending again, first in 1996 with the anti-fraud provisions, in 

1997 with payment cuts. Also, it sparked a political debate on 

Medicare’s benefits. If these private plans through managed care 

were able to save money and offer better benefits, that really pointed out how Medicare benefits had fallen behind. 

Of course, some of those early managed care savings have proved 

fleeting, but there has been one durable item of cost saving that 

many people on this panel and the previous panel have mentioned, 

and that is care management—the ability to take care of people 

with one or more chronic diseases in a much better way. I think 

this is the new potential win-win in Medicare. PPI’s health plan is 

focused on care management and healthy aging, and it goes 

through several different ways to do it—a way to do a drug benefit 

that would improve that sort of thing and would also help improve 

risk adjustment; an accountability system so the fee-for-service 

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plan can keep up with these sorts of innovations; and the new sorts 

of choices that we have talked about on the panel. 

With that, I mention in my written statement a fair bit more 

about the PPI health plan, and I encourage you to take a look at 

it if you have a chance. Thank you very much. 

[The prepared statement of Mr. Lemieux follows:]

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The CHAIRMAN. Thank you all very much for your testimony this 

morning. 

Let me ask questions that all three of you may respond to if you 

wish. The first one, I would suggest, is taking everything into consideration—cost growth, benefit packages, and flexibility—who is 

getting greater value for each dollar spent on his or her health care 

at this time—a Medicare beneficiary or a person covered under a 

typical private insurance plan, and why is this the case? 

Ms. MOON. I will go first and say I think it would be Medicare, 

because Medicare has remained truer to a benefit package with access to providers of services over time. It is much easier to stay 

with the same physician. 

Joe Antos tells us, for example, that you can change doctors in 

a PPO. But to see the doctor that I have seen for 10 years under 

my PPO, I pay a 65 percent copay, not because of the stated copayment but because of what the PPO determines is usual, customary 

and reasonable. You cannot find out this amount before the fact. 

I know; as a good consumer, I have tried—from Care First, because 

that is proprietary. 

That is one of the reasons. I also believe that over time, there 

are probably a lot of counterbalancing influences. The managed 

care reaction and then reaction against in terms of many people rejecting the very tight controls that some managed care plans put 

on individuals, often in arbitrary fashion, meant that there was a 

deterioration in some of the benefits that people received. 

The reason that I undertook the study to show that there is not 

a lot to assume that the private insurance market will just instantly solve Medicare’s financing problems. This was to counter 

the argument that some people have made that you can just put 

Medicare beneficiaries into private plans, and poof—everything will 

be wonderful. I think both sides have a struggle to hold down costs, 

as Jeff Lemieux said. 

The CHAIRMAN. Joe. 

Mr. ANTOS. Mr. Chairman, believe it or not, I agree with Marilyn 

but not for the reasons she gives. Marilyn is actually, I think, probably typical of most people in private employer-sponsored plans 

today. They do not have any choices. That is not the kind of reform——

Ms. MOON. Actually, I have a choice of 14 plans; all of them are 

crappy. [Laughter.] 

Mr. ANTOS. OK. 

The CHAIRMAN. You are not in that high rate of general approval. 

Ms. MOON. Satisfaction—no, I am not. 

The CHAIRMAN. All right. 

Mr. ANTOS. You have a choice of 14 plans, and you do not like 

any of them. There is a considerably wide range of choice in the 

Federal Employees Health Benefits Program, and as Walt Francis 

said, ‘‘The level of satisfaction is very high.’’ But my point is let us not talk about ourselves—let us talk about 

the average American worker. The average American worker does 

not have a choice of plans. The average American worker has the 

plan that is settled upon by the employer. Typically, if there appears to be a choice, it is three flavors of the same kind of plan. 

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That is not a good situation. Medicare beneficiaries would do better 

under a Federal Employees Health Benefits type of system where 

there is a much wider range of choices and where there is, frankly, 

the kind of Federal oversight that is going to be necessary for this 

population. Many of these people are frail and have difficulties generally with their health and may need some greater protection. 

That is why we have the Medicare Program in the first place. That 

is how it could work under a FEHB style of reform. 

On balance, however, people walk with their feet, and they talk 

with their money. Over 90 percent of Medicare beneficiaries get 

some kind of supplemental coverage. More than 25 percent of them 

have to buy some form of coverage, and 10 million of them spend 

an average of $1,700 a year to make up for the inadequacies as 

they see it in the Medicare Program. 

The CHAIRMAN. Jeff. 

Mr. LEMIEUX. Well, Mr. Chairman, I think Marilyn is going to 

say that Medicare is a better value, and Joe is going to say that 

choices are good and that private options are a better value, and 

I am going to say that there is no way that any committee of Congress could determine which sector has the better benefits and values intrinsically and that therefore, choice is probably the best approach; allow people to choose. 

What we need to do in Congress is set up the oversight structures, set up the consumer information to make sure that the consumer protections are there so that whatever choices people make 

will be decent ones, sort of like what Federal employees make. 

The CHAIRMAN. In other words, you are suggesting that all will 

be served better in the health care environment if there is a clear 

competitive market between Burger King and McDonald’s? 

Mr. LEMIEUX. In general, yes, that sort of competition and choice 

tends to lead to innovation and progress that is probably a less 

error-prone and awkward way of making progress than we have 

made it in Medicare over the last years with responses to private 

innovations and back and forth in a political way. 

The CHAIRMAN. Thank you. 

Senator Carper. 

Senator CARPER. Thanks, Mr. Chairman. I enjoyed being a backbencher earlier for a brief while. 

The CHAIRMAN. Well, we appreciate you attending this morning. 

Senator CARPER. My pleasure. Thanks for holding the hearing. 

By the way, was a very good panel. I missed most of the first panel, 

but I know some of these people pretty well and am very grateful 

to you and our staff for bringing them all together. They have 

given us a nice menu of ideas. 

I am going to start with Jeff Lemieux and ask him if he will to 

just talk a little bit about what the Progressive Policy Institute believes we should do with respect to Medicare reform. 

Mr. LEMIEUX. We have a three-point plan, perhaps not too cleverly labeled the ‘‘ABC Plan.’’ The ‘‘A’’ part of the plan is an attempt 

to create in the fee-for-service program the sort of accountability—

‘‘A’’ stands for accountability—system that would allow the fee-forservice plan to modify its benefits and its payment systems in a 

way so that it could compete and evolve and innovate within the 

fee-for-service plan. 

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Senator CARPER. If you could hold for just a second, for our other 

witnesses, Dr. Moon and Dr. Antos, I am going to ask you to critique this for us, so if you do not mind, I just want to give you a 

heads-up. 

Thanks. Go ahead, Jeff. 

Mr. LEMIEUX. So point No. 1, accountability, is making within 

the fee-for-service program and within Medicare as a whole a way 

to allow the Medicare administrators to evolve more quickly without congressional directive and to improve things. ‘‘B’’ is a benefit package. We are advocating that the most practical form of a Medicare prescription drug benefit would be a zero 

premium catastrophic benefit available to all Medicare beneficiaries under Part B, that this would be universal—everyone 

would get some sort of Medicare catastrophic benefit card, either 

through a supplemental insurer or as a discount card—and there 

would also be an extra program for low-income beneficiaries who 

have incomes too high to qualify them for Medicaid but too low to 

really benefit much from a catastrophic benefit. 

The third element is choices. We think that the sorts of choices 

that have been put forward in terms of additional PPO options and 

expanding that demonstration nationwide and to fix up the HMO 

program so that Senator Stabenow’s mother has a choice back 

there in Michigan or wherever she lives, that these are good things 

and that they should ultimately lead in the direction of an FEHBstyle competitive system over time. 

So it is accountability, benefits, and choices. 

Senator CARPER. Thanks. 

Mr. Antos. 

Mr. ANTOS. I think those are great principles. The details matter. 

The details matter a great deal. I have got to say that I am not 

as familiar with the ABC Plan as Jeff is, so correct me, Jeff, if I 

get something wrong here. But I guess the thing that I would focus 

on, the thing that I at least know a little bit about, is the idea of 

having a universal zero premium drug benefit type of plan. I think 

there are some aspects of that that are very good, but ultimately, 

there are concerns that I would have especially about the way that 

that might run. 

As I say, this is my interpretation, and I am not sure I am getting it right, but the concern that I would have is that, as I understand the proposal, there would be the appearance of competition. 

I think this has been characterized as that virtually any kind of organization could offer this drug benefit to Medicare beneficiaries, 

including current Medicare carriers, Medicare HMOs in the M Plus 

C program, or employer groups, or you name it—presumably association health plans, something like that. 

That sounds good, but this is a program, as I understand it, 

where the government would take all of the financial risk, and I 

think that ultimately, this is of great concern. One of the principles 

of market competition is that the plans have to have skin in the 

game; otherwise, they cannot get very interested about trying to 

control costs if all of their costs are covered ultimately by the Federal Government, by whom I mean the taxpayer. 

There is a great risk if we have a drug benefit program where 

100 percent of the risk is borne by the taxpayer. There is a great 

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risk that Congress in its due diligence to assure that the taxpayer 

is not paying too much decides that we have to have some kind of 

a national drug pricing scheme to make sure that everything is fair 

and to make sure that all beneficiaries are treated fairly and they 

reach their catastrophic cap, the uniform national cap, at the same 

time as anybody else. 

It sounds like equity, but it has the seeds, I think, of potential 

disaster. I think this is part of the plan that I would hope that Jeff 

and others would work on much more carefully to try to preserve 

the kinds of market incentives that now exist, especially in the 

drug benefits business, to encourage drug benefit organizations to 

aggressively manage the benefits, aggressively seek out discounts 

and rebates from pharmaceutical manufacturers and to tailor their 

benefit to best meet the needs of the beneficiaries. 

Senator CARPER. Thank you, Dr. Antos. 

Mr. Lemieux, would you like to respond to any of the comments 

that Dr. Antos has made? 

Mr. LEMIEUX. Yes. I believe that his concerns are greatly overwrought. Some of them are valid, but they are generally greatly 

overwrought. 

Senator CARPER. Dr. Antos, have you ever had that accusation 

leveled at you before? 

Mr. ANTOS. No. I am considered a very calm guy. 

Mr. LEMIEUX. I do not know, Senator, if you want us to debate 

each point by point, but I think that in general—— Senator CARPER. As a matter of fact, I would, but we do not have 

time for that—just a couple of points, if you would. 

Mr. LEMIEUX. I think in general that beneficiaries would still be 

responsible for copayment even after they have hit the catastrophic 

cap, so that should help restrain costs. All such plans would have 

to be approved by CMS to make sure that they are doing a fair job, 

a good job, by getting discounts for their beneficiaries and therefore 

also for the taxpayer. Employers certainly would not be anxious to 

suddenly go lax when their retirees suddenly got to a point where 

the government was reimbursing. We also favor risk corridors, 

other sorts of performance based approaches with the government, 

to make sure that all these plans would have a good incentive to 

save money. 

On the equity issue, I really think that that is a very, very small 

issue and that any sort of pluralistic health care program run by 

government is going to have some people having slightly better 

benefits than others in certain different ways, but I think that that 

sort of diversity and plurality is generally a good thing that will 

not cause mischief. 

Senator CARPER. Thank you. 

Dr. Moon, your reaction to what Mr. Lemieux has just laid out, 

please. 

Ms. MOON. I would say first of all that a number of the principles 

that he is talking about are desirable ones. But I am not sure that 

I would go the direction that he would in all cases. 

Medicare does need considerably more flexibility in terms of running and managing the basic program, the traditional part of the 

program, but I would be very cautious about——

Senator CARPER. Does that mean you endorse the ‘‘A’’ in ABC? 

104

Ms. MOON. Well, I would be very cautious, though, about doing 

it differentially at the local level. We have a lot of concerns around 

the country already about differential treatment of Medicare beneficiaries, and that is something that needs to be looked at very 

closely. But I do think that finding ways to be more flexible and 

to have less micromanagement is definitely a good idea. 

On the benefits side, certainly my preference would be a well-run 

drug benefit program that is an integral part of the rest of the benefits. I think it is a mistake to try to pull it out. That is true for 

whether the drug benefit is in a private plan or in the traditional 

Medicare Program. 

For one thing, the risks that occur in terms of the costs of insurance are much better blended together, because high users of drugs 

are not necessarily high users of the rest of health care, and you 

can pool the risks better that way. 

You would also have to be very careful to have better protections 

for those with low incomes than it is my understanding that his 

plan has. You need to recognize that if you go as far up the income 

scale in order to cover people in need, you are going to be talking 

about perhaps half of the population being covered. It may be difficult to be that generous. 

Finally, in terms of the choice issue, I think that he is on the 

right track. We should encourage more private participation, but 

focus it in areas where there is supposed to be innovation, and that 

is in disease management and coordination of care. We have seen 

too little of such innovation in Medicare+Choice and in many of the 

commercial HMOs and PPOs. That is where I think you would 

need to challenge them to do more. 

Senator CARPER. My time has expired; otherwise, I would ask 

Mr. Lemieux to respond if he wanted to. 

The CHAIRMAN. Please go ahead. 

Senator CARPER. Do you have any response to what Dr. Moon 

has said? 

Mr. LEMIEUX. I am pleased that that sounded like a partial bit 

of endorsement that I appreciate a great deal. I think I agree 

greatly that benefits to the extent possible should be linked and coordinated if possible under one plan, and if not possible, they 

should be linked with information systems that allow people running these sorts of benefit programs to evaluate tradeoffs. If I have 

a little bit better drug benefit over here, will I save money in hospitalization over here? 

The only other point I wanted to mention—we have spoken a lot 

about the New York Times article this morning and how it says 

that private fees are higher—I think there more to it than just 

fees, and that is a trap we fall into when we are congressional estimators and policy wonks around town, that there is price and then 

there is quantity, and then there is quality, and these things all 

go together to form how much we actually spend on something, and 

just because a fee is higher or lower may not be indicative of the 

whole mix of spending that goes on behind that. I just wanted to 

point that out. 

Senator CARPER. Thank you. 

Mr. Chairman, I will finish up where I started off. This is a good 

panel, and I do not think it would be possible to get the three of 

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them to agree on what we ought to do, but if we could, I would endorse it. 

Thanks very much, and my thanks to all of you. 

The CHAIRMAN. Tom, thank you. 

I have a couple more questions of you, and all three can respond. 

Critics of any form of competitive model seem to worry that health 

plans will pick and choose the healthiest patients. 

We have also heard FEHB say this does not really happen, or it 

happens very little. What do you think of this adverse selection 

problem, and can you address it? 

Is this a red herring in the arguments, or is that a legitimate 

concern, the issue of adverse selection? 

Ms. MOON. I think you raise a very good point. I would say that 

one of the things that makes FEHBP work relatively well is that 

a large number of individuals are willing to shift plans. But studies 

of seniors have shown they are much less willing to do so. In fact, 

in the FEHBP a few years ago, when there was a high-option Blue 

Cross/Blue Shield, plan people stayed in those plans even though 

when Medicare was primary they did, they got not one penny more 

in benefits by paying the substantial additional premiums. People 

did not want to shift because they were comfortable, as you said, 

with what they have. Since choice to make bad decision is also a 

function of the market; then you let people be in those situations. 

Similarly, if there is risk selection, it means that the people who 

are reluctant to leave are going to stay in the plans that get to be 

higher and higher cost over time, which is exactly what happened. 

So there has been some risk selection in FEHBP. 

It is also the case that FEHBP has less risk selection, because 

over time, the plans tend to eliminate things that attract high 

risks. We have seen that in terms of some of the mental health 

benefits, for example, in the past. In 1990, for example, OPM told 

everyone they had to have drug benefits. 

So it is not as if not intervention is needed. I agree with Joe that 

there are some things that you can do. But one of the problems 

with competition is how much control you want to place on it. In 

a purely competitive market where you are going to get the best 

price competition, you do not want much variation in benefits, because you want people to choose only on the basis of price. If you 

are going to allow them to choose on the basis of benefits, you are 

going to have a lot more variation and a lot less lower potential for 

savings. 

So there are a lot of decisions that need to be made, in terms of 

thinking about this. 

The CHAIRMAN. Mr. Antos. 

Mr. ANTOS. This is a very complicated issue. Your point is absolutely correct that we have to distinguish between the normal functioning of people making choices, just as they do when they go to 

the supermarket or when they buy automobiles, from the adverse 

consequences of a poorly designed health program. We ought to 

keep those distinctions very separate and very clear. 

What we do want to do is prevent a system from causing big 

problems for our seniors, but we also do not want to prevent our 

seniors from exercising their judgment about how they want to 

handle their health care. 

106

The FEHB story is a complicated story, but I think there are several clear bottom lines to it. One is that it is a government program; Medicare will always be a government program; government 

oversight is very important. 

Second, FEHB provides a very generous premium subsidy just 

like Medicare. 

Third, FEHB exercises considerable oversight over the program, 

as Marilyn pointed out, but they do it at considerably less administrative cost than Medicare does. 

Fourth—and this is the question that you were alluding to about 

if people do not move and how does this work out—FEHB actually 

takes advantage of the competitive market incentives that are in 

place for that program that are fundamentally not in place in 

Medicare. An operating competitive market does not require 

masses of people to bolt from their health plans every year. In fact, 

that would be disruptive. If that happened, that would not be a 

well-functioning competitive market. 

In other markets, there is plenty of brand loyalty. I have my favorite brand of cereal—I guess it is Rice Krispies. I buy that every 

time. I am very loyal to Rice Krispies, but that does not mean there 

are not 20 other varieties of cereal out there. 

Why are there other varieties of cereal? Because there are people 

who are closer to the edge on how they feel about Rice Krispies, 

and maybe they want sugar in their cereal without having to add 

a spoonful. 

The CHAIRMAN. It is the noise. 

Mr. ANTOS. Yes, exactly right. 

That is the point. Of course, we can stay with government controls. We have done that for 30 some-odd years now. The question 

is does that mean that Medicare beneficiaries will really be able to 

make their preferences known in an effective way. I think the prescription drug debate demonstrates that that is not the case, and 

it cannot be the case. 

The CHAIRMAN. Jeff. 

Mr. LEMIEUX. To your point on adverse selection, I do think it 

is a serious issue. I think it goes both ways. In the past, we always 

used to say that private health plans were always going to seek out 

the cheaper people, and I think that as the Medicare HMO experiment has played out, they have ended up with some very, very sick 

people from low-income neighborhoods especially in the Medicare 

HMO program. 

So I think that adverse selection problems go both ways. It is a 

way to protect the fee-for-service plan from getting too many sick 

beneficiaries. It is also a way to protect private plans from getting 

too many sick beneficiaries without due compensation. 

I do believe that the sorts of risk adjusters that have been 

worked on for the last 20 years are gradually getting better, and 

I also believe that if we had a universal catastrophic drug benefit 

so that the risk adjusters would know which sorts of medications 

patients are on—anonymously, of course—but for the purposes of 

risk adjustment, that would be a very powerful, instantaneous sort 

of real-time tool for adjusting payments to health plans based on 

the diagnoses and illnesses of the beneficiaries they serve. 

107

The CHAIRMAN. Time is going to demand that this be my last 

question, but let me ask this of all of you. 

Assuming for a moment that Congress does decide to incorporate 

a competitive component in the Medicare reform legislation, are 

there particular features that you think we should include to maximize effective cost restraints while still fostering quality and full 

access? 

Ms. MOON. First of all, I believe you have to have a good basic 

benefit package that every plan must adhere to, including traditional Medicare. Prescription drugs’ absence is one of the things 

that really caused problems to Medicare+Choice plans. They were 

being paid enough to provide Medicare-services, but they were not 

being paid enough to provide a good benefit package. So that is an 

essential piece, and it could even be a first piece before you move 

to expand private plans. 

I think there will need to be a considerable amount of accountability, and I think people who think that you can operate with the 

140 people that OPM does are fooling themselves, because for one 

thing, these choices are going to be individually offered to people 

all over the country without the mechanism that the Federal employees now have to work with their own benefits offices to sort 

through their choices. So there will need to be a lot more oversight 

and considerably more effort and information efforts to help people 

make wise choices. 

Finally, I think there needs to be a lot better appeals process and 

information for people than we have under the current M Plus C 

program. For example, today a problem can be resolved for a beneficiary who is being denied care inappropriately by an M Plus C 

plan, but there is no follow-up to make sure that every other beneficiary gets that same treatment by the same managed care plan. 

People who do this kind of counseling will tell you that they will 

get the same problem from the same HMO at the same location six 

and seven and ten times and not get it resolved except on a patient-by-patient basis. 

There are a number of things that ought to be put in place that 

will not get government out of the business, and in fact those in 

Congress who think that folks will stop beating down your door if 

you turn Medicare over to the private sector would have a rude 

awakening in the not-too-distant future. 

The CHAIRMAN. Thank you. 

Joe. 

Mr. ANTOS. I think the issue is not just cost, but also one of 

value, and I do not think we want to lose that important theme. 

So that, yes, it is important to include many of the features that 

I think Marilyn is talking about—to try to maximize the ability of 

the entire system to slow down the growth in cost; however, that 

is where the private competitive market really comes into play. 

I think the real emphasis that I would place is to look carefully 

at what needs to be done to have prudent and appropriate competition. That does not mean that the government can let its guard 

down. After all, the health market is far from a purely competitive 

market, so there are some real issues there related, for example, 

to antitrust. There are all sorts of very complicated policies that 

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are probably not normally considered when people think about 

Medicare reform that have to be dealt with. 

Nonetheless there are some important things. I think the most 

important thing is to assure that beyond those basic safeguard, we 

modernize the program. Medicare beneficiaries in the fee-for-service program should be exposed to reasonable incentives even in 

their program to use services wisely. That does not mean an $840 

first day payment for a hospital visit. People do not go to the hospital because it is a voluntary act. It probably does mean a larger 

combined deductible, larger than the $100 Part deductible. It almost certainly means more reasonable cost-sharing arrangements 

across all of the services. 

Those sorts of things can enlist the individual beneficiary in both 

seeking better care for themselves and being on the side of the taxpayers—they are taxpayers, too—being on the side of the taxpayers 

to use those resources prudently. 

The CHAIRMAN. Joe, thank you very much. 

Jeff. 

Mr. LEMIEUX. Mr. Chairman, I think if you do decide to go with 

stepping stones toward an FEHB system in a Medicare reform 

package this year, you will have to do some communication with 

people, because the way the current baselines are set up by the 

Congressional Budget Office and the Joint Committee on Taxation 

is that we fundamentally understate the amount of spending that 

we are likely to do in our current baseline, including on Medicare, 

because we presume that rules that require us to cut physician 

payments for years on end and so on actually go into place. 

Then, we overstate the revenue we are likely to receive because 

we assume that various sunset provisions actually occur, when we 

all know that drafters of tax law do not intend for sunset provisions to occur. 

So from a baseline perspective, it looks like anything you do to 

fix Medicare is going to cost a lot of money; the baseline is already 

too low. However, we will have to explain to people that we are 

going to spend some money according to these budget accounts in 

the short run in an attempt to create a situation that, 10 or 20 

years down the road, will give us a slightly lower rate of growth 

to the program and help provide better value. 

So I think that when you come back with cost estimates saying 

that we are improving our private plan options in Medicare, and 

it is costing us a fair amount of money in the short run, that that 

has to be balanced with a 10- or 20-year analysis of how that could 

gradually save money in the longer period. 

That is my only comment about putting an FEHB plan in this 

year and what it might mean. 

The CHAIRMAN. To all three of you, thank you very much for your 

time this morning, your testimony, your commitment to the issue, 

and serving as a resource for this committee and for Congress as 

we work our way through this issue. 

Thank you very much, and the committee will stand adjourned. 

[Whereupon, at 11:56 a.m., the committee was adjourned.]

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