```

[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]

 
             MEDICARE+CHOICE: AN EVALUATION OF THE PROGRAM

=======================================================================

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                         HEALTH AND ENVIRONMENT

                                 of the

                         COMMITTEE ON COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                             AUGUST 4, 1999

                               __________

                           Serial No. 106-52

                               __________

            Printed for the use of the Committee on Commerce

                               

                      U.S. GOVERNMENT PRINTING OFFICE
58-504CC                      WASHINGTON : 1999

                    ------------------------------  

                         COMMITTEE ON COMMERCE

                     TOM BLILEY, Virginia, Chairman

W.J. ``BILLY'' TAUZIN, Louisiana     JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio               HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida           EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas                    RALPH M. HALL, Texas
FRED UPTON, Michigan                 RICK BOUCHER, Virginia
CLIFF STEARNS, Florida               EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio                FRANK PALLONE, Jr., New Jersey
  Vice Chairman                      SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania     BART GORDON, Tennessee
CHRISTOPHER COX, California          PETER DEUTSCH, Florida
NATHAN DEAL, Georgia                 BOBBY L. RUSH, Illinois
STEVE LARGENT, Oklahoma              ANNA G. ESHOO, California
RICHARD BURR, North Carolina         RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California         BART STUPAK, Michigan
ED WHITFIELD, Kentucky               ELIOT L. ENGEL, New York
GREG GANSKE, Iowa                    THOMAS C. SAWYER, Ohio
CHARLIE NORWOOD, Georgia             ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma              GENE GREEN, Texas
RICK LAZIO, New York                 KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming               TED STRICKLAND, Ohio
JAMES E. ROGAN, California           DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois               THOMAS M. BARRETT, Wisconsin
HEATHER WILSON, New Mexico           BILL LUTHER, Minnesota
JOHN B. SHADEGG, Arizona             LOIS CAPPS, California
CHARLES W. ``CHIP'' PICKERING, 
Mississippi
VITO FOSSELLA, New York
ROY BLUNT, Missouri
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland

                   James E. Derderian, Chief of Staff

                   James D. Barnette, General Counsel

      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

                 Subcommittee on Health and Environment

                  MICHAEL BILIRAKIS, Florida, Chairman

FRED UPTON, Michigan                 SHERROD BROWN, Ohio
CLIFF STEARNS, Florida               HENRY A. WAXMAN, California
JAMES C. GREENWOOD, Pennsylvania     FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia                 PETER DEUTSCH, Florida
RICHARD BURR, North Carolina         BART STUPAK, Michigan
BRIAN P. BILBRAY, California         GENE GREEN, Texas
ED WHITFIELD, Kentucky               TED STRICKLAND, Ohio
GREG GANSKE, Iowa                    DIANA DeGETTE, Colorado
CHARLIE NORWOOD, Georgia             THOMAS M. BARRETT, Wisconsin
TOM A. COBURN, Oklahoma              LOIS CAPPS, California
  Vice Chairman                      RALPH M. HALL, Texas
RICK LAZIO, New York                 EDOLPHUS TOWNS, New York
BARBARA CUBIN, Wyoming               ANNA G. ESHOO, California
JOHN B. SHADEGG, Arizona             JOHN D. DINGELL, Michigan,
CHARLES W. ``CHIP'' PICKERING,         (Ex Officio)
Mississippi
ED BRYANT, Tennessee
TOM BLILEY, Virginia,
  (Ex Officio)

                                  (ii)

                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Berenson, Robert A., Director, Center for Health Plans and 
      Providers, Health Care Financing Administration............    15
    Canja, Esther, President-Elect, American Association of 
      Retired Persons............................................    62
    Ignagni, Karen, President and Chief Executive Officer, 
      American Association of Health Plans.......................    48
    Malavsky, Rabbi Morton.......................................    72
    Moon, Marilyn, Senior Fellow, The Urban Institute............    67
    Powell, John, Vice President of Government Relations, The 
      Seniors Coalition..........................................    59
Material submitted for the record by:
    Berenson, Robert A., Director, Center for Health Plans and 
      Providers, Health Care Financing Administration, responses 
      for the record.............................................   135
    Margulis, Heidi, Vice President, Government Affairs, Humana, 
      Inc., letter dated August 2, 1999, to Hon. Michael 
      Bilirakis, enclosing material for the record...............   133

                                 (iii)

             MEDICARE+CHOICE: AN EVALUATION OF THE PROGRAM

                              ----------                              

                       WEDNESDAY, AUGUST 4, 1999

                  House of Representatives,
                             Committee on Commerce,
                    Subcommittee on Health and Environment,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10:10 a.m. in 
room 2322, Rayburn House Office Building, Hon. Michael 
Bilirakis (chairman) presiding.
    Members present: Representatives Bilirakis, Stearns, 
Greenwood, Burr, Ganske, Bryant, Brown, Pallone, Deutsch, 
Green, Barrett, Capps, Hall, and Eshoo.
    Staff present: Tom Giles, majority counsel; Jason Lee, 
majority counsel; Bridgett Taylor, professional staff; Amy 
Droskoski, professional staff; and Robert Simison, legislative 
clerk.
    Mr. Bilirakis. The hearing will come to order.
    In February, this subcommittee focused on efforts by the 
Health Care Financing Administration to implement a risk 
adjustment model for the Medicare+Choice program. Today we will 
reexamine the impact of HCFA's planned risk adjustor and its 
effect on the continued viability of this important program.
    Two years ago Congress established the Medicare+Choice 
program as part of the 1997 Balanced Budget Act. The 
legislation was enacted with strong bipartisan support to 
increase the health care options available to America's senior 
citizens.
    Today, about 17 percent of Medicare beneficiaries 
participate in a Medicare+Choice plan. Many of these plans 
provide benefits such as prescription drug coverage, which are 
not available through traditional fee-for-service Medicare.
    Since our last hearing, the July 1st deadline has passed 
for plans to inform HCFA of their intent to alter or terminate 
their contracts. Nearly 100 plans have decided to withdraw from 
the Medicare+Choice program, reduce those service areas, or 
scale back their benefit packages. Many of these plans cited 
cuts in funding proposed by HCFA as a major factor in their 
decisions.
    As a result, 327,000 beneficiaries will lose their current 
health coverage next year. For 79,000 of these beneficiaries, 
no other Medicare managed care plan will be available in their 
area. In Florida, alone, 29,000 beneficiaries will be affected 
by plan withdrawals, and 10,000 will have no alternative but to 
return to fee-for-service Medicare.
    The 1997 Balanced Budget Act required HCFA to establish a 
process for adjusting Medicare+Choice payments based on the 
likelihood or risk that enrollees will use health care 
services. The risk adjustment process was intended to 
distribute funds based on the health status of Medicare+Choice 
enrollees. Neither Congress nor the Congressional Budget Office 
assumed that implementation of the risk adjustor would result 
in funding cuts. It was intended to redistribute moneys based 
on the health status of beneficiaries, without reducing overall 
funding for the program.
    Unfortunately, HCFA has proposed a risk adjustment model 
that would impose deep spending cuts in the Medicare+Choice 
program. Estimates indicate over $11 billion may be drained 
from the program under HCFA's proposed risk adjustor, and I 
believe that estimate came from HCFA. We'll get into that.
    In response, my colleague, Peter Deutsch of Florida, joined 
me in introducing H.R. 2419, the Medicare+Choice Risk 
Adjustment Amendments of 1999. Our bill will ensure that the 
risk adjustor is implemented on a budget-neutral basis, 
consistent with Congressional intent.
    I am deeply concerned about the impact of any instability 
in the Medicare+Choice program and our most vulnerable seniors. 
Choosing a health care plan can be a difficult task for all of 
us, and it is particularly hard for the frail elderly. They 
deserve the health care options we promised them when we 
created the Medicare+Choice program.
    If HCFA is allowed to go forward with its ill-advised 
proposal, Medicare beneficiaries will face devastating 
consequences, particularly low-income seniors.
    In addition to increased costs and reductions in benefits, 
many beneficiaries will lose the option of participating in a 
Medicare managed care plan altogether.
    For many seniors, Medicare+Choice is an important source of 
prescription drug coverage. Clearly, we must preserve this 
option for beneficiaries who choose to participate in a 
Medicare managed care plan. However, we must do more to 
increase access to prescription drugs for seniors who need 
them.
    No senior should be forced to choose between buying 
groceries and filling a prescription. A nation is judged by how 
it treats its most vulnerable citizens, and we must help our 
neediest seniors obtain prescription drugs.
    Over the past several months, I have been working to 
develop a plan that meets this objective, and specifically this 
proposal would assist States in establishing and expanding 
programs to help low-income beneficiaries obtain prescription 
drugs, preserve seniors' health options, including prescription 
drug coverage available through the Medicare+Choice program, 
and create incentives for plans to expand prescription drug 
coverage at no additional premium for seniors, and establish a 
Federal stop loss program to protect beneficiaries who have 
high annual prescription drug costs.
    By contrast, the President's plan is overly broad and 
spreads resources too thin. As a result, it provides only a 
limited benefit to individuals. By targeting assistance to 
beneficiaries who are low income or have high drug costs, we 
can more effectively, I think, help seniors in need.
    Furthermore, the President's plan would not even take 
effect until 2002 and it would not be fully implemented until 
2008 because of the time needed to create the new bureaucracy 
of a Medicare Part B. It would do nothing for the poorest and 
sickest seniors who need help right now. And even after it is 
fully implemented in 2008, the plan will force seniors who have 
high annual drug costs to fend for themselves.
    I was proud to serve with the National Bipartisan Medicare 
Commission, and I remain committed to enacting comprehensive 
reforms to protect the program for the future. I believe we can 
help the neediest seniors while preserving and strengthening 
Medicare for current beneficiaries and future generations. We 
can accomplish both goals without increasing--and I emphasize 
without increasing--beneficiaries' premiums or jeopardizing the 
fiscal stability of Medicare.
    I look forward to working with my colleagues on both sides 
of the aisle to further refine this plan. I hope it can serve 
as a vehicle for a bipartisan effort to help seniors obtain the 
prescription drugs they need.
    I want to thank all of our witnesses, certainly 
particularly Dr. Berenson and all of the others for joining us 
today to discuss the important role of Medicare+Choice program 
in providing health care options for seniors.
    I now yield to the ranking member from Ohio, Mr. Brown.
    Mr. Brown. I thank you, Mr. Chairman.
    I'd especially like to thank Dr. Berenson and Marilyn Moon 
and Karen Ignagni and other distinguished witnesses for joining 
us.
    As many of you know, I am not a strong proponent of the 
plus-Choice program. I think, in fact, we made a mistake when 
we passed the program as part of the Balanced Budget Act. The 
plus-Choice program segments the Medicare risk pool.
    Traditional Medicare program provides equal access to 
benefits for every senior. Plus-Choice introduces different 
levels of benefits into the program--benefits such as 
prescription drug coverage that all seniors need but only some 
seniors get.
    The plus-Choice program diverts money toward profits that 
otherwise could be invested in improved benefits for every 
senior, and it generates a huge amount of uncertainty for 
seniors.
    Can they depend on their health plan to stick with them? 
No. Can they depend on promised benefits? No. Can they depend 
on consistent coverage decisions? No.
    That volatility is why we are here today. There are 13,031 
seniors in Ohio, alone, in my State, that will be dropped by 
their health plans effective January 1, 2000. I've heard from 
several seniors who are going through this for the second time.
    When traditional Medicare is being demonized because it 
costs a lot to provide health care coverage, it doesn't have 
the luxury of blaming it on big government. It can't reduce 
cost. It can't make a statement by dropping Medicare 
beneficiaries or wiping out promised benefits.
    It would be easier and cheaper if the Medicare program 
could take those steps, but it wouldn't be the right thing to 
do. The public wouldn't stand for it, nor should they. That's 
the nature of a public program.
    But being locked into less-profitable markets is anathema 
to the private market. The success of plus-Choice relies on the 
faulty premise that private sector incentives will produce the 
right amount of the right health care delivered in a reliable 
way.
    Realistically, what private sector incentives may produce 
is cheaper health care. Unfortunately, cheap is not a proxy for 
right or reliable, nor does cheap care necessarily lead to 
lower Federal cost.
    We're losing money in managed care today, and with a lobby 
as strong as the insurance industry, payment rates won't go 
anywhere but up. It is unrealistic to expect private health 
plans to ignore profitability, when profitability is being 
pitted against individual well-being or the public good. Health 
plans will try to squeeze as much money from the Federal 
Government as they can. That doesn't make them evil. It makes 
them good businessmen and good businesswomen.
    Consistent with profit motives that are not, in themselves, 
bad or good--they are inherent in the market--health plans 
enroll seniors 1 year, promising them all kinds of benefits, 
and desert them the next year. They attract seniors by offering 
supplemental benefits, but when costs exceed projections, 
benefits are taken away.
    Where does that leave the Federal Government? Between a 
rock and a hard place. If we don't pay health plans more, 
additional seniors will lose prescription drug and other 
supplemental benefits. But when a senior joins a health plan 
based on the premise of supplemental benefits, the term 
``supplemental'' no longer really fits. Seniors come to depend 
on these benefits, and it is a true loss when health plans drop 
them.
    If we do pay health plans more, the money has to come from 
somewhere. Dollars that could be devoted to providing 
prescription drug coverage for all Medicare beneficiaries 
would, instead, be channeled into prescription drug coverage 
for some Medicare beneficiaries. It is a catch 22, pure and 
simple.
    Finally, giving over Medicare to the insurance industry 
allows the Federal Government to pass the buck on the hard 
health care decisions. It takes the pressure off us when the 
pressure should be on us. Health care costs are increasing, the 
elderly population is increasing. We need to acknowledge the 
implications and figure out what to do next.
    There is one potential advantage to promoting private 
managed care plans--shifting seniors' health care coverage to 
the private market would stifle the power of multiple special 
interest groups to play havoc on Federal Medicare legislation. 
Unfortunately, all we would be doing, though, is trading 
multiple special interest groups for one big one, the insurance 
industry.
    But, regardless of the broader issues around plus-Choice, 
the reality is that 6.2 million seniors are enrolled in plus-
Choice and we have to deal with the situation at hand. Congress 
has a responsibility to pay plus-Choice plans adequately. Plus-
Choice plans have a responsibility to prove that current rates 
are inadequate.
    The American Association of Health Plans says there is a 
fairness gap between managed care and fee-for-service payments, 
but, as far as I know, they have not shared supporting data or 
the methodology they used to reach this conclusion.
    AAHP is concerned about a fairness gap. I'm concerned about 
a data gap. Some health plans are clearly losing money in some 
counties, but what does this mean? Does it mean that large 
health plans like Aetna and Cigna cannot cross-subsidize from 
more-profitable to less-profitable counties? Show us the cost 
data. Are plans being under-paid in every county? Show us the 
cost data. Do some health plans underestimate the cost of 
supplemental benefits? Show us the cost data. Did Congress 
underestimate how much it would cost health plans to cover 
basic benefits, or did health plans over-estimate their ability 
to cut cost? Can we see how they spend the money that we pay 
them? Is the problem that we removed GME funding from managed 
care rates? Ostensibly, that reduction would have an impact 
only in GME spending. It should be a wash.
    I don't think managed care plans are sinister and I do 
think that, along with the Medicare program, they've led the 
way in eliminating unnecessary costs from the practice of 
medicine, but I do not think that Congress or taxpayers we 
represent should be asked to pay managed care plans more until 
they provide the answers and the data we need to pay them 
correctly.
    Thank you, Mr. Chairman.
    Mr. Bilirakis. I thank the gentlemen.
    Dr. Ganske, for an opening statement.
    Mr. Ganske. Thank you, Mr. Chairman. I'll be brief.
    I need to tell you, Mr. Chairman, that I won't be able to 
stay for the whole hearing because I have work to do on managed 
care reform.
    Mr. Chairman, I don't consider HCFA's risk adjustor to be 
ill-considered. With all due respect, senior citizens in 
Florida already have a richer HMO benefit package than anything 
we will ever see in Iowa.
    Some people talk about a fairness gap. Well, Mr. Chairman, 
I don't think it is fair that seniors in Florida get 
prescription drugs and those in Iowa never will.
    We do need risk adjustment.
    Let me tell you about a T-shirt that I received about 2 
years ago. It was from a Medicare HMO in one of the southern 
States, southwest States. It was an inducement for seniors to 
join a Medicare HMO and join the Silver Sneaker Club.
    The benefit touted was a health fitness club. On the 
surface, that may seem like, gee, that's a neat thing. That 
would help keep people healthy, right? It also serves as a risk 
selector, because which Medicare recipient is going to be 
interested in joining a health fitness club except somebody who 
is healthy? So you've got a very subtle inducement there to 
select out the healthier patient.
    We've had GAO reports, one after another, pointing out how 
HMO Medicare beneficiaries, on the average, cost something like 
$0.65, compared to $1 for fee-for-service, until they 
disenroll, and at that time they end up costing Medicare fee-
for-service $1.65. I mean, there clearly is a need for risk 
adjustment, and I applaud HCFA's attempts to do this. It's not 
easy.
    Now, do we need more money? Do we need to do some 
adjustment for Medicare for the 1997 Balanced Budget Act? You 
bet we do. I've got rural hospitals that are on the cusp. We've 
got teaching hospitals around the country that need an 
adjustment.
    And part of my frustration with this entire budgetary 
process and the tax cut process has been that, instead of 
handling these needed expenditures first and then figuring out 
what you're going to have left for a tax cut, we've got the 
cart before the horse. It is that simple.
    Well, Mr. Chairman, if it is going to come down to passing 
a large tax cut and then also passing emergency spending for 
such emergencies as the census, and then also doing emergency 
funding for true emergencies, like the farm crisis that we 
have, there isn't going to be much left over. So maybe, Mr. 
Chairman, I should make a suggestion. If we are going to have 
to go back into the 1997 BBA and do an adjustment for Medicare, 
maybe we ought to go back and start looking at some revenues 
from tobacco. Maybe we ought to go back and look at the Federal 
Government recovering some of the moneys that the tobacco 
companies have given to the States and utilize that for 
Medicare.
    Mr. Chairman, this is the Health and Environment 
Subcommittee. We have jurisdiction over this. Maybe we ought to 
start looking at a tobacco tax bill, or maybe we ought to start 
looking at recovering some of those tobacco moneys so that we 
can utilize them in health care. We have reports from around 
the country right now, Mr. Chairman, where those tobacco moneys 
are being used by States for non-health-care items. I don't 
think that's right. I suspect most of the people on this 
subcommittee would feel the same way.
    But we have a lot to talk about, Mr. Chairman, and I'm glad 
you are holding this hearing. I'll be very interested in the 
testimony that we are about to receive.
    Thank you.
    Mr. Bilirakis. I thank the gentleman.
    The gentlewoman from California, Ms. Eshoo.
    Ms. Eshoo. First, Mr. Chairman, thanks to you for your 
leadership in holding this hearing today. It is the second this 
year to monitor the progress of Medicare+Choice, the program 
Medicare+Choice.
    I'd like to ask for unanimous consent to submit my formal 
statement into the record.
    Mr. Bilirakis. Without objection, the written statement of 
all members of the subcommittee will be made a part of the 
record.
    Ms. Eshoo. Thank you.
    I look forward to hearing the testimony of those that are 
here today to give it. Obviously, there will be conflicting 
testimony. From the industry, itself, I suspect they will be 
saying that there's not enough in the program, that the 
reimbursements are not fair enough, they're not high enough, 
and that's why they are withdrawing from so many markets, 
including some parts of my Congressional District, where 
seniors are absolutely outraged. And we are going to hear 
something else from HCFA.
    So I'm going to withhold at least some of my judgment until 
I hear from them, and thank you again for holding the hearing. 
It is an important one.
    What I might add is that my colleague, Dr. Ganske, I think 
really characterized the very large picture in terms of what 
the Congress is taking on right now, and that is our overall 
budget and the tax cuts. I think the cart is really coming 
before the horse, because we don't see, at least in one of the 
major plans, anything that will address the shortcomings of 
Medicare, and here we are having probably one of the most 
important hearings on the entire Hill, with discrepancies 
between what HCFA views and what the private sector views this 
issue, and yet, in the major republican plan, there's not a 
dime--not a dime. You can reform Medicare as much as you want, 
but there isn't anything that shows that if you don't add some 
more resources that it really is going to work.
    So today should be interesting. Thank you, Mr. Chairman, 
for holding the hearing again.
    [The prepared statement of Hon. Anna G. Eshoo follows:]
Prepared Statement of Hon. Anna G. Eshoo, a Representative in Congress 
                      from the State of California
    Thank you, Mr. Chairman. I'm very happy that we are having this 
hearing today, the second this year to monitor the progress of the 
Medicare+Choice program.
    There are few programs that are as critical to our Nation's senior 
citizens as Medicare.
    As the primary health care provider for the over-65 population, 
Medicare is ultimately responsible for the well-being of our parents, 
our grandparents, and ultimately ourselves.
    That is why it is so critical that we, in Congress, do everything 
in our power to ensure its long-term solvency.
    I am an avid supporter of the President's plan to dedicate 15% of 
the budget surplus to Medicare, ensuring its solvency until the year 
2020.
    When we passed the Balanced Budget Act in 1997, we recognized that 
the way we reimburse health plans for Medicare is inefficient and 
results in a glut of overpayment.
    According to GAO, Medicare overpaid health plans $1.3 billion in 
1998 alone.
    Implementation of the new payment methodology will save the federal 
government billions of dollars in overpayments by providing us with the 
necessary information to ensure that reimbursements reflect costs.
    More importantly, the new methodology will remove the present 
incentive on the part of some plans to focus on enrolling healthier 
seniors and avoid the sicker, most needy ones.
    While this new system promises to cut the fat out of Medicare, 
there are some who say it has gone too far.
    Last year, nearly 100 managed care companies pulled out of the 
Medicare program, or significantly scaled back their services. And they 
say it is because the reimbursement rates are too low to make a profit.
    I question the validity of this argument but, nonetheless, I am 
concerned that something needs to be done to prevent further pullouts.
    Seniors need quality, reliable health care. They should not be 
forced to pay for health insurance today that may not be there for them 
tomorrow.
    So, thank you Mr. Chairman for providing us with this opportunity 
to take another look at this important program. I look forward to 
hearing from the witnesses.

    Mr. Bilirakis. I thank the gentlelady.
    Mr. Bryant, an opening statement?
    Mr. Bryant. Thank you, Mr. Chairman.
    Today, nearly 40 million Americans rely on Medicare for 
their health care, and approximately 6.2 million beneficiaries 
are enrolled in the Medicare+Choice program. Congress created 
this new program with the BBA in 1997 to offer Medicare 
beneficiaries new private health plan options--in other words, 
to give seniors a choice among plans. Most of these private 
plans offer the beneficiaries a more generous benefit package 
with fewer out-of-pocket expenses.
    I am concerned, however, that last year 99 private health 
plan Medicare contracts were either terminated or reduced their 
service areas. This year, the same number of contracts will 
either not be renewed or will serve a smaller geographic area. 
It would appear that the choices Congress intended to provide 
are now eroding.
    We will hear a statistic today that 95 percent of the 
current enrollees in Medicare+Choice program will be able to 
continue with their current plan in the year 2000. While that 
statistic may sound acceptable, I doubt it will give much 
comfort to the nearly 700 beneficiaries affected by plan 
withdrawals in my home State of Tennessee. The majority of 
these seniors will have no other Medicare+Choice plan to turn 
to.
    I was contacted recently--my office in Memphis was--by a 
woman from that city. She said that she had been very pleased 
with her Medicare HMO, which, in her case, happens to be United 
Health Care of Tennessee. She said--and I quote--``I have never 
felt more secure about my health insurance.''
    She goes on to say that she used to have traditional fee-
for-service, Medicare with supplemental insurance with that, 
but the cost of this supplemental insurance got so high that 
she could no longer afford it.
    The Medicare+Choice plan provided her with a choice, and it 
was a very attractive choice. However, her plan is terminating 
its contract this year and there will be zero remaining 
Medicare+Choice options for her in Shelby County.
    Now, we were contacted by United Health Care, and they gave 
us an explanation as to why they were, in effect, pulling out 
of these plans, and I'll read just a part of this letter from 
United Health Care dated July of this year.
    It says, ``This difficult decision was made following a 
thorough analysis of our health plans. Changes brought to 
health plan reimbursement under the 1997 Balanced Budget Act 
continue to create operational challenges. Payments to plans 
are being held to minimum increases, while medical cost trends 
are increasing at a much higher rate. The untested risk 
adjustor creates uncertainty regarding future payment adequacy.
    ``Additionally, there is an increasing inequity between 
payments to Medicare health plans and the traditional Medicare 
program, which makes it difficult to offer benefits over and 
above Medicare's basic benefit package in a number of markets.
    ``These program changes also hinder our ability to maintain 
competitive reimbursement contracts with physicians, hospitals, 
and other providers.''
    As has been said earlier this morning, there are those in 
Congress who really aren't for this plan, the ability to offer 
health care options, and I sometimes wonder if this is not one 
way that we can squeeze that out of the market and simply go 
back to the full fee-for-service arrangement with Medicare. I 
hope that's not the case, because I hope we continue to have 
choices available for our senior citizens.
    For that reason, I think it is important that we on this 
panel examine the reasons behind all these withdrawals, and I 
think we ought to do that today if we can do that. I think it 
is necessary for us to consider payment rates, the risk 
adjustor administrative and regulatory burdens on the plans, 
and other possible disincentives for public health or for 
private health plans to contract with Medicare and to remain in 
the program.
    I also think we should look at how many plans that did not 
renew their contracts had to increase premiums or reduce their 
benefits. We also need to remember that these decisions affect 
Medicare beneficiaries enrolled in the Medicare+Choice program.
    To conclude, I look forward to examining these issues this 
morning and to hearing from our distinguished panel of 
witnesses. I want to welcome you all and thank you for taking 
time to be with us today.
    Mr. Chairman, I thank you and yield back just on time.
    Mr. Bilirakis. I thank the gentleman.
    Mr. Deutsch for an opening statement?
    Mr. Deutsch. Thank you, Mr. Chairman. Thank you for this 
hearing. I think it is very important for our constituents, and 
really for the whole country.
    Before I begin with a statement, I just want to respond a 
little bit to what Congressman Ganske said in his opening 
statement, because I think it is important to dialog a little, 
just so that we at least hear how different people, you know, 
have really 180-degree different perspectives on a lot of 
things to do with Medicare-plus.
    I happened to have visited Iowa, and I happen to like Iowa. 
My roommate from law school was from Colfax, Iowa. But Iowa is 
not south Florida, and, for that matter, not Florida, and I 
think it is totally missing the whole point of how the system 
is set up to honestly think that the reimbursement level in 
Colfax, Iowa, should be the same as Miami, Florida. It doesn't 
deal with reality and cost, and cost of living and cost of 
everything--cost of rent, cost of insurance, cost of literally 
every factor that was built in.
    So I think that premise which drives some of this issue is 
a bad premise and a false premise, for that matter, and I think 
the other--and, going back to where we are, I think it is 
really important for us, as we are having this debate, to sort 
of focus in a little bit historically of where we were, where 
we are, and where we are going to be going if we continue in 
the direction that we are without changing.
    Where we were were some pretty bad old days under Medicare 
before this option existed. I mean, I think universally we view 
our job as trying to make America and the world a better place, 
and universally I think all of us care about our constituents. 
And if we look at what Medicare beneficiaries had as benefits 
prior to this option, it wasn't as good. I mean, people were 
suffering in so many ways in terms of out-of-pocket costs, and 
Congressman Bryant's letter from a constituent is multiplied by 
millions in terms of real people and the benefits that they've 
seen.
    Congress ought to be patting ourselves on the back in terms 
of what we did in terms of cost savings and adjusting it. 
Nothing we do is perfect. It's a dynamic process. But I guess 
sort of where we are going--you know, one of the other premises 
of my colleagues which I really think needs to focus on is many 
of the HMOs--not all, but majority--are for-profit 
institutions, which, by definition, is not a bad thing. I think 
as a society, as a Congress, we understand that.
    But to say that they are dropping 327,000 people for 
manipulative reasons or for other reasons, you know, again, I 
just think totally defies logic. If they could make it work, 
they wouldn't be dropping people.
    That's the number of people that have been dropped. We also 
have 70,000 people who had that option who literally do not 
have that option today.
    I think tied into that is--really talking to some of the 
frustration--and I actually, in terms of my District, have, I 
guess, the luxury or the--just in my District I both have an 
urban area, a suburban area in terms of Broward and Dade 
Counties, but Monroe County is technically a rural health 
system. If you think about it, it is 120 miles long. In terms 
of hospitals, where are the hospitals? So technically it is a 
rural health system. In terms of HMO access, it's not much 
different than rural farm areas in Iowa--much warmer, much more 
pleasant, much more colorful.
    But I will tell you that, you know, one of the things we 
ought to be doing and talking about is really how to get 
service into those areas. I mean, you know, when my colleagues 
from rural areas talk--I have a statement that I'd be happy to 
submit for the record.
    Mr. Ganske. Mr. Chairman, I'd ask unanimous consent for 1 
additional minute.
    Mr. Bilirakis. Does the gentleman want an additional 
minute?
    Mr Deutsch. I'd be happy to an additional minute and yield 
to my colleague from the great State of Iowa.
    Mr. Bilirakis. Well, all right. Let's not overdo this.
    Mr. Ganske. Iowa is 24th in the country in terms of average 
overhead for providing medical services. It is 48th in the 
country in terms of reimbursement. And if you look at the 
average HMO reimbursement per county in my District and compare 
it to yours, you are receiving more than twice the AAPCC than 
what my constituents are, and because of that your constituents 
are able to get a package of benefits that are simply not and 
never will be available to those in large parts of the country.
    And so when we look at how do we fund Medicare HMOs, I 
think we need to address that issue and come to at least a 
closer national average than a double difference, and we do 
need to look at the evidence that we've seen before this 
committee on why we need a risk adjustor.
    Mr. Deutsch. Just reclaiming my time very quickly----
    Mr. Bilirakis. Very quickly, if you could.
    Mr. Deutsch. And I think the chairman and I and other 
people from both urban and rural areas have been supportive of 
trying to make the system more equitable, but, you know, that's 
where we can get into details. And I think Congress is 
particularly ill-equipped in some ways to get at that micro-
management level of HCFA. We can get policy bases in terms of 
working with them, and working with them both substantively and 
administratively to try to correct some of those changes, as we 
have--as both you and I have in terms of our work on this 
subcommittee and on the committee.
    Mr. Bilirakis. The gentleman's time has expired. Of course, 
I think we should remind the gentleman from Iowa that he played 
a very large part in these exact discussions regarding the 
adjusting of the AAPCC and, consequently, there were 
adjustments made which are very favorable to the rural areas, 
and much of that was a result of his efforts.
    Ms. Capps for an opening statement?
    Ms. Capps. Thank you, Mr. Chairman, for holding this 
hearing.
    Medicare is a critically important program for seniors. It 
has resulted in a measure of security for retirees and the 
disabled that was unthinkable in the years before it was 
enacted.
    I am so appreciative that we are having this hearing today 
to look at how the latest major change to Medicare, the 
Medicare+Choice program, has been working.
    For me, someone who represents one of the areas where 
Medicare HMO pullouts were widespread last year, 
Medicare+Choice has been a mixed bag.
    I represent all of San Luis Obispo County and nearly all of 
Santa Barbara County on California's central coast. Last year 
all but two HMOs pulled out of San Luis Obispo County, and all 
but one from the most rural part of that county. The other 
county, Santa Barbara, was more lucky. None of the HMOs pulled 
out, but they are threatening to.
    In both counties, the providers have complained of low 
reimbursement rates from HCFA to the HMOs and from the HMOs to 
the providers. In fact, one of the reasons the HMOs pulled out 
of northern San Luis Obispo County was because the health care 
major provider would no longer accept Medicare HMO patients.
    So I have some sympathy with the argument that at least in 
some rural areas the reimbursement rates for HMOs need to be 
looked at again, and we made that clear, I believe, with the 
differing testimonies here today.
    In my request to HCFA and HHS asking for a review of 
reimbursement rates for my two counties, I have noted huge 
disparity of payments to the adjoining jurisdictions. This 
disparity is not lost on the seniors who receive the benefits.
    That said, I am very concerned about the GAO study that 
claims that Medicare HMOs were paid some $1.3 billion in excess 
payments in 1998. I find this hard to reconcile with what is 
happening in my Congressional District.
    The issue about HCFA payments apparently is very complex. 
It is too simple to say that too much money or too little money 
is going to the plans, but I think there is even a more 
important lesson we should learn from our experience so far 
with Medicare+Choice, and we must apply this lesson as we 
consider any changes to the program, and certainly as any major 
Medicare reforms are being discussed. That lesson is that 
Medicare must be a stable program for our seniors.
    The upheavals from the HMO pullouts last year really shook 
up thousands of seniors in my District. I don't want to see 
this happen again.
    It may not be a big deal if my insurance company decides it 
won't be offering me coverage next year. I'll pick another plan 
from the list and be slightly inconvenienced. But if I am an 
84-year-old senior living on my own, caring for my health is a 
constant concern, and my HMO dropping me is a life-altering 
event.
    I'm bothered by the cavalier attitude of some who say that 
these are just routine shake-outs, that things will settle down 
soon. In the lives of seniors in my District and across this 
country, that is a blatant disregard for their lives.
    It is not good enough. Seniors in my District felt extreme 
disruption in their lives of HMO pullouts and they don't want 
to go through this again.
    Finally, I agree with the written testimony of Dr. 
Berenson, who points out that these disruptions actually 
underscore the importance of the need for a Medicare reform 
plan, and particularly including prescription drug coverage as 
a part of Medicare. That is the reason overwhelmingly that 
seniors in my District chose the Medicare+Choice.
    So let's keep this in mind. Medicare today is an incomplete 
program without drug coverage. Seniors know that and that is 
why, as I said, many have chosen Medicare HMOs.
    So as we consider how Medicare+Choice is doing, or major 
reforms to the program like switching to a voucher or premium 
support plan, let's keep in mind our seniors' need for a 
stability in the programs that we choose.
    Thank you. I'll yield back the balance of my time.
    Mr. Bilirakis. I thank the gentlelady.
    Mr. Pallone for an opening statement?
    Mr. Pallone. Thank you, Mr. Chairman. Again, I want to 
thank you, also, for holding this hearing.
    It is very important that this subcommittee continue to 
monitor the implementation of the Medicare+Choice program. 
Although the vast majority of Medicare beneficiaries still 
receive their care through the traditional fee-for-service 
option, more and more Medicare beneficiaries are turning to 
managed care for their health needs and Congress must make sure 
this program functions as it was intended to function.
    I wanted to say, despite the highly publicized decision of 
99 HMOs to pull out of their markets or reduce their service 
area, the evidence to date suggests the program is working. Of 
the seniors enrolled in Medicare+Choice plans, 95 percent will 
be able to continue with their plan in the year 2000.
    The managed care industry, however, would have us believe 
something very different. The industry claims its ability to 
continue providing such benefits is in deep jeopardy because 
the Federal Government is underpaying Medicare+Choice plans, a 
phenomena it has dubbed ``the fairness gap.'' The fairness gap 
seems to me to be nothing more than an attempt the obtain more 
money from the Federal Government by scaring seniors into 
believing they are going to lose their benefits.
    Let's be clear about one thing: nobody is questioning the 
ability of Medicare+Choice plans to provide the core benefits 
package. It is the extra benefits, the ones that are most 
attractive to seniors, such as prescription drug coverage, that 
we're talking about. Unfortunately, this distinction is not 
always clear to seniors, nor is it adequately explained to them 
by the industry.
    An April GAO report of this year found that many factors, 
not

just price considerations, were responsible for the recent 
withdraw-

als of managed care plans from the Medicare program. The fact 
is,

this is a good time for the managed care industry. Next year, 
every

managed care plan that serves Medicare beneficiaries will be 
paid more than they were this year by an average of 5 percent.
    The President's Medicare reform plan, moreover, would 
provide an incentive for the industry to continue to provide a 
drug benefit at the same time such a benefit becomes available 
in the traditional fee-for-service program. Under that plan, 
HMOs would be reimbursed for about two-thirds of the cost for 
providing Medicare beneficiaries with a prescription drug 
benefit.
    I'm looking forward today to hearing the industry's views 
of the President's Medicare reform plan, as well as the White 
House recently released report on Medicare beneficiaries' 
access to prescription drugs. That report found that nearly 
three-fifths of managed care plans are reporting that they will 
cap prescription drug benefits below $1,000 in the year 2000. 
It also found that the proportion of plans with $500 or lower 
benefit caps will increase by over 50 percent between 1998 and 
2000.
    In sum, the report found that about 75 percent of Medicare 
beneficiaries lack decent, dependable, private sector coverage 
for prescription drugs, with one-third having no coverage at 
all.
    In light of these facts, as well as the industry's claim 
that it is being underpaid by the Federal Government, I would 
think the industry would be eager to support the President's 
proposal.
    In addition to providing seniors with the prescription drug 
coverage they need, the net effect of that plan would be an 
increase in Medicare funding for the industry. If the industry 
doesn't support this plan, I would be interested to know why.
    It seems to me if an HMO is already providing a 
prescription drug benefit, it could use the money it would get 
under the President's plan to provide the extra benefits the 
industry is claiming are in such jeopardy today due to 
underpayments from the Federal Government.
    So, in addition to discussing the status of the 
Medicare+Choice program, I look forward to also discussing the 
President's prescription drug proposal. I think elements of 
that program could help fix some shortcomings that everyone 
agrees exist and hope we can make some progress in possible 
solutions to those shortcomings today.
    Thank you again, Mr. Chairman.
    Mr. Bilirakis. I thank the gentleman.
    I think that completes the opening statements.
    [Additional statements submitted for the record follow:]
 Prepared Statement of Hon. Tom Bliley, Chairman, Committee on Commerce
    Thank you, Mr. Chairman.
    I am pleased that the Health and Environment Subcommittee is 
holding this hearing today. I believe the Medicare+Choice program 
stands as one of this Committee's most significant achievements. It is 
a success because it creates health care options for seniors, while at 
the same time creating savings to help maintain the solvency of the 
Medicare program.
    Prior to the Balanced Budget Act of 1997, America's seniors were 
faced with an ailing Medicare program. Just as troubling, Medicare 
offered its beneficiaries little or no freedom to obtain good, 
effective coverage.
    The Medicare+Choice program changed all that. This program gives 
seniors access to more choices than ever before, so that they can get 
better coverage than ever before.
    Last year, 99 contracts between health plans and the federal 
government to participate in the Medicare+Choice program were either 
terminated or modified to service a smaller area. Based on the recent 
Adjusted Community Rate filings by health plans, it appears once again, 
there will be 99 contracts terminated or modified for the year 2000. 
This instability in the program is alarming to me. In 1999, over 
400,000 seniors were affected by plan pullouts, over 50,000 were left 
with no other health plan option. For next year, it is estimated that 
327,000 seniors will be affected, with nearly 80,000 seniors left 
without a health plan option. The real life numbers are even more 
staggering. Whole families feel the disruption if even one member of 
that family is affected.
    Providing health care to the most vulnerable of our citizens--our 
seniors--is a serious matter and we must do all we can to ensure 
stability in their care. If payment levels are the problem, we must 
look at that. If the cost of bureaucracy is the problem, we must 
address that. The program must be stable. That is why I am pleased the 
Subcommittee Chairman called this hearing today--to find out what is 
happening and to determine what can be done to stabilize the 
Medicare+Choice program for seniors.
    I am also pleased that HCFA is showing some interest in helping 
plans meet many of the new BBA'97 compliance standards. For instance, 
their willingness to move the ACR date for this year from May 1 to July 
1, and the changes they announced about quality measures is 
encouraging. It is good for both the plans and the beneficiaries.
    I want to reiterate what I said in February that this Committee 
takes a dim view of regulations that exceed their statutory basis. That 
is why we will continue formal inquiries by this Committee into this 
important program and its implementation.
    Again, Mr. Chairman, thank you for convening this hearing today. I 
yield back the balance of my time.
                                 ______
                                 
Prepared Statement of Hon. Cliff Stearns, a Representative in Congress 
                       from the State of Florida
    Thank you, Chairman Bilirakis, for holding this important hearing 
today. I look forward to hearing from our witnesses about why they 
believe managed care plans are withdrawing from the Medicare+Choice 
program in certain regions of the country and what can be done to 
prevent further defections from the program.
    As you know firsthand, Mr. Chairman, the state of Florida is one of 
the states that will be most impacted by these pull outs--29,000 
beneficiaries will be affected. In Lake County, Florida, which is in my 
district, more than 2,000 beneficiaries participating in 
Medicare+Choice have been told that the HMO in which they are enrolled 
has decided to pull out by the end of the year and there is nothing to 
replace it.
    Last year 400,000 beneficiaries nationwide were affected by plans 
that either altered or terminated their contracts with HCFA. Plans 
pulled out in large part because of the new requirements for filing 
adjusted community rates (ACRs) and the uncertainty about the new risk 
adjustment methodology being proposed by HCFA.
    Last February we held a hearing to review the risk-adjuster 
mandated by Congress to be implemented by the Health Care Financing 
Administration which was intended to measure the true cost of patient 
care.
    At that same hearing in February several witnesses expressed 
reservations about HCFA's intent to design a risk adjustment 
methodology based solely on hospital utilization data because it was 
felt that it could result in increased and inappropriate hospital use. 
This would bring with it increased avoidable costs and could harm 
beneficiaries in plans with enrollees who receive care for expensive 
chronic illnesses outside the hospital setting.
    In addition to implementing its risk adjuster, HCFA has also 
decided to cut payments to Medicare by $11.2 billion over the next five 
years. This would be disastrous and it is not what Congress intended. I 
want to applaud Chairman Bilirakis for introducing H.R. 2419, the 
Medicare+Choice Risk Adjustment Amendments of 1999, which would require 
HCFA to implement its risk adjustment process on a budget neutral basis 
as Congress intended in the 1997 BBA. It would also repeal current law 
that automatically requires the annual increase in Medicare+Choice 
payments to be lower than the annual increase in Medicare fee-for-
service payments, which has caused HMOs to reduce services. I am 
pleased to be a cosponsor of this much needed fix to a very misguided 
policy being pursued by HCFA officials.
    Although affected Medicare beneficiaries can switch to the fee-for-
service program, I want to work with this Administration to provide 
these individuals the option of retaining their HMO coverage under 
Medicare. Offering a choice in health care plans is essential to 
providing quality care at a reasonable cost.
    I believe that most of here in this room do not want to see 
payments to this program reduced by an additional $11 billion as HCFA 
seems to be advocating. What we must ensure is that future payments are 
not ratcheted down by a faulty risk adjustment methodology using skewed 
data.
    Thank you, Mr. Chairman.
                                 ______
                                 
    Prepared Statement of Hon. John D. Dingell, a Representative in 
                  Congress from the State of Michigan
    Today the Health and Environment Subcommittee will discuss this 
country's most popular social insurance program, Medicare. I thank 
Chairman Bliley and Subcommittee Chairman Bilirakis for scheduling a 
hearing on such a crucial topic.
    Since its inception, the Medicare program has provided high-quality 
health care to our nation's senior citizens and people with 
disabilities. Once the age group with highest uninsurance rates, 
seniors today are the only population in our country with nearly 
universal coverage.
    Recently, we made a number of changes to the Medicare program which 
have introduced new challenges. For example, we must now determine how 
to provide continuity and stability for seniors when plan participation 
in Medicare is based on a variety of factors, some of which are beyond 
the control of the program. Another challenge will be modernizing the 
program to keep pace with the rapidly changing health care system.
    One way to accomplish this goal is to focus our efforts on 
modernizing the Medicare benefit package for all seniors and people 
with disabilities. The President's Medicare plan would include a 
prescription drug benefit for all seniors who chose to enroll, 
modernize the Medicare fee-for-service program, and extend the life of 
the Medicare trust fund until 2027 by setting aside nearly 800 billion 
dollars of the federal surplus. This responsible and equitable proposal 
would strengthen Medicare well into the next century, so that the 30 
million baby boomers who will become beneficiaries over the next few 
decades can depend on the same program that their parents do today.
    I look forward to working with the Committee to ensure that 
Medicare remains a guaranteed benefit for all seniors and people with 
disabilities.

    Mr. Bilirakis. Dr. Robert Berenson is director for the 
Center for Health Plans and Providers with Health Care 
Financing Administration.
    Dr. Berenson, obviously your written statement is made a 
part of the record. I will set the clock at 10 minutes. I may 
have to interrupt you halfway through your presentation 
because, as you know, we have a series of votes on the floor.
    Dr. Berenson?

 STATEMENT OF ROBERT A. BERENSON, DIRECTOR, CENTER FOR HEALTH 
   PLANS AND PROVIDERS, HEALTH CARE FINANCING ADMINISTRATION

    Mr. Berenson. I'll try to do my opening statement as 
quickly as possible to get into the questions.
    Chairman Bilirakis, Congressman Brown, distinguished 
subcommittee members, thank you for inviting me to discuss the 
Medicare+Choice program.
    Despite challenges facing this program, it continues to 
grow. There are now more enrollees in the Medicare+Choice 
program than there were before. Some plans made business 
decisions last year to trim their participation in the program, 
and I would point to the one chart that I have, which shows 
that there was, indeed, a drop off representing the withdrawals 
from last year, but that, indeed, by July there were, in fact, 
200,000 more beneficiaries in Medicare+Choice plans than there 
were before the pull-outs, and hopefully that will happen again 
in the future.
    What doesn't get as much attention is that we are reviewing 
new applications and service area expansions--and I'll get into 
more details about that in the Qs and As--but the program does 
continue to grow.
    The vast majority of enrollees are not affected by these 
plans' decisions to leave Medicare+Choice; nevertheless, we are 
concerned about the disruption to beneficiaries and have taken 
steps to ensure that those being forced to change their health 
insurance coverage are informed of their rights to obtain 
certain Medigap plans, regardless of preexisting conditions. We 
also are ensuring that they receive clear information about 
their health care options.
    Many factors affect plan decisions to trim participation in 
M+C, as the GAO documented in the report released this past 
April. For instance, plans may have trouble establishing 
adequate provider networks, enrolling enough beneficiaries to 
support fixed costs, or otherwise competing in a given market.
    Plans withdrawing from Medicare in specific markets often 
are withdrawing from those same markets in their commercial 
FEHBP or other business.
    Reimbursement to plans does not explain their decisions to 
trim participation. Payment is rising in all counties by an 
average of 5 percent for next year, and will rise by as much as 
18 percent in some areas.
    BBA reforms were designed to increase payment in counties 
that had the lowest rates, yet counties receiving the largest 
increases under the BBA payment system are experiencing the 
most disruption.
    In fact, despite BBA reforms, aggregate payments to plans 
continues to be excessive, according to another GAO report 
issued in June.
    BBA reforms may, however, mean that payments in some 
counties no longer include enough excess to cover losses in 
other areas or to subsidize extra benefits that fee-for-service 
Medicare does not currently cover, especially prescription 
drugs.
    As such, plans are less likely to provide extras like drug 
coverage without charging premiums. In plans that do offer a 
drug benefit, its value is declining. Drug coverage by plans is 
available mostly in high-paid urban areas, which is unfair to 
rural beneficiaries, who also have the least access to private 
retiree drug coverage.
    Private retiree coverage, itself, is unstable and 
declining, with now less than a third of the firms offering it, 
and at least a third of all beneficiaries have no drug coverage 
at all.
    Clearly, all beneficiaries need a more stable and reliable 
source of prescription drug coverage, and if a plan's primary 
problem is paying for benefits beyond the Medicare benefit 
package, the best solution is to provide all beneficiaries with 
access to an affordable prescription drug benefit and pay plans 
explicitly for what most now offer in areas where payments are 
excessive.
    That is why it is essential to enact the President's 
Medicare reform plan. It gives all beneficiaries the option to 
pay a modest premium for prescription drug benefit. 
Medicare+Choice plans would be explicitly paid for providing a 
drug benefit and would no longer have to depend on what the 
payment rate is in a given area to determine whether they can 
afford to offer a drug benefit.
    The President's plan also would modernize the way Medicare 
pays managed care plans, overall. Rates would be set through 
competition among plans, rather than through a complicated 
statutory formula which causes the kinds of discussions that 
we've had here so far today.
    All plans will be paid their full price through a 
combination of government and beneficiary payments. The lower 
the price, the less beneficiaries pay, since the beneficiary 
contribution rate declines relative to the price of the plan, 
as in the Federal Employees Health Benefits Program.
    The President's plan also will preserve beneficiary options 
and strengthen protections from plans' withdrawal from 
Medicare. It will give beneficiaries access to all Medigap 
plans, regardless of preexisting conditions, including those 
with prescription drug coverage. It expands the Medigap 6-month 
open enrollment period to newly disabled beneficiaries and 
those with end-stage renal disease. It allows beneficiaries 
with ESRD to enroll in another plan.
    These and other changes will strengthen and stabilize the 
Medicare managed care market. While market volatility must be 
expected in the private sector, we can and should take steps to 
stabilize the Medicare+Choice market.
    Mr. Bilirakis. Doctor, forgive me. I don't think we should 
be rushing you. What you have to share with us is very 
important and we're kind of shooting right through it. So we 
probably only have four votes----
    Mr. Berenson. I'm just finishing up.
    Mr. Bilirakis. You're finishing up?
    Mr. Berenson. Yes. I'm in my last paragraph.
    Mr. Bilirakis. Go ahead. Finish it.
    Mr. Berenson. We remain committed to working with plans to 
facilitate participation in the program, and we look forward to 
working with Congress to enact the President's Medicare reform 
proposals.
    I thank you again for holding this hearing, and I'm 
available to answer questions.
    [The prepared statement of Robert A. Berenson follows:]
 Prepared Statement of Robert A. Berenson, Director, Center for Health 
        Plans & Providers, Health Care Financing Administration
    Chairman Bilirakis, Congressman Brown, distinguished Subcommittee 
members, thank you for inviting us to discuss the Medicare+Choice 
program. Despite challenges facing this program, it continues to grow. 
About 50,000 beneficiaries have enrolled in Medicare+Choice plans each 
month since January. There are now more enrollees in the program than 
there were before some plans made business decisions last year to trim 
their participation in the program. We expect to see continued program 
growth despite similar decisions by some plans this year.
    The vast majority--95%--of Medicare+Choice enrollees are not 
affected by pending changes in plan participation. Nevertheless, we are 
concerned about the disruption in service to beneficiaries, 
particularly to disabled beneficiaries and those who have relied on 
prescription drug benefits that they may no longer be able to receive. 
Because of the recent actions by health plans, we have taken steps to 
ensure that beneficiaries being forced to change their health insurance 
coverage are informed of their rights to obtain certain Medigap plans 
regardless of preexisting conditions. We also are ensuring that they 
receive clear information about their health care options.
    Still, the disruptions underscore the importance of the President's 
Medicare reform plan. It will stabilize the Medicare managed care 
market by:

 setting plan payment rates through market competition rather 
        than a statutory formula;
 ensuring that all beneficiaries have access to affordable drug 
        coverage;
 paying plans directly for providing drug coverage;
 dedicating a significant portion of the budget surplus to 
        Medicare to help ensure that payment rates will be adequate 
        well into the future; and,
 strengthening protections for beneficiaries when plans 
        withdraw.
                               background
    Medicare+Choice allows private plans to offer beneficiaries a wide 
range of options, similar to what is available in the private sector 
today. It requires a massive new beneficiary education campaign to 
inform beneficiaries about these options. It includes important new 
protections for patients and providers, as well as statutory 
requirements for quality assessment and improvement. And it initiates a 
5-year transition to a fairer and more accurate payment system.
    Medicare+Choice success is a high priority for us. We believe very 
strongly that private plans are important voluntary options next to 
original Medicare. Medicare managed care enrollment has tripled under 
the Clinton Administration, and there are now 6.48 million 
beneficiaries enrolled in Medicare+Choice plans. We meet regularly with 
beneficiary advocates, industry representatives, and others to discuss 
ways to improve the program. We launched a national education campaign 
and participated in more than 1,000 events around the country to help 
beneficiaries understand their health plan options. And we are 
establishing a federal advisory committee to help us better inform 
beneficiaries about Medicare.
Reductions in Service
    Plans make business decisions each year about the extent to which 
they will continue participation in Medicare+Choice. As of the July 1 
deadline for plans to notify us about their participation next year, 99 
Medicare+Choice plans will reduce the services they provide as of 
January 1, 2000. This includes withdrawals from the program by 41 
specific plans and cuts in the geographic regions served by another 58 
plans. These changes affect about 327,000 beneficiaries in 329 counties 
in 33 States, or about 5% of all Medicare+Choice enrollees. The total 
is less than the 407,000 beneficiaries in 407 counties in 29 States who 
were affected last year. An even smaller number, 79,000 (1.3%), will 
return to traditional Medicare because the only managed care plan 
available in their county is leaving. This is more than the 51,000 
abandoned enrollees left without access to another managed care plan 
last year.
    As directed by President Clinton in 1998, we will continue to 
expedite review and approval of plans seeking to enter markets that 
have been left without a plan. We have approved 41 plans for 
participation or expansion in the program since last July, and we are 
reviewing applications to start or expand participation by another 22 
plans. Total managed care enrollment this year returned to pre-
withdrawal levels within just two months.
    Many factors affect plan decisions to trim participation in 
Medicare+Choice, as was documented in a report released by the General 
Accounting Office (GAO) in April. For instance, plans may have trouble 
establishing adequate provider networks, enrolling enough beneficiaries 
to support fixed costs, or otherwise competing in a given market. Plans 
withdrawing from Medicare in specific markets often are withdrawing 
from those same markets in their commercial and other business. For 
example, Pacificare is withdrawing both Medicare and commercial service 
in several Washington State counties. And the Federal Employee Health 
Benefit Plan expects about about 13 percent of plans to withdraw from 
its program this year, affecting about 1% of its enrollees. There are a 
disproportionate number of withdrawals this year in rural areas where 
it is more difficult to maintain provider networks and enrollment 
level.
Payment Increases
    Inadequate reimbursement to plans does not explain plan decisions 
to trim participation in the program. Payment is rising in all counties 
this coming year by an average of 5%, and will rise by as much as 18% 
in some areas. Balanced Budget Act (BBA) payment reforms were designed 
to increase payment in counties that had the lowest rates and therefore 
the fewest number of plans. Yet counties receiving the largest 
increases under the BBA payment system are experiencing the most 
disruption. Plan withdrawals are affecting 11.1% of enrollees in 
counties where rates are rising by 10%, but affecting only 2.3% of 
enrollees where rates are rising by just 2%.
    In fact, despite BBA reforms, aggregate payment to plans continues 
to be excessive, according to another GAO report issued in June. BBA 
reforms may, however, mean that payments in some counties no longer 
include enough excess to cover losses in other areas or to subsidize 
extra benefits that fee-for-service Medicare does not currently cover, 
such as prescription drugs.
    As such, plans are less likely to provide extras like drug coverage 
without charging premiums. In plans that do offer a drug benefit, its 
value is declining. In 1998 only a third of plans capped drug coverage 
below $1000, but next year nearly three fifths will, and more than one 
fourth will cap coverage below $500. Drug coverage by plans is 
available mostly in high-paid urban areas, which is unfair to rural 
beneficiaries who also have the least access to private retiree drug 
coverage. Private retiree coverage itself is unstable and declining, 
with now less than a third of firms offering it. And at least a third 
of all beneficiaries have no drug coverage at all.
    Clearly all beneficiaries need a more stable and reliable source of 
prescription drug coverage. And, if plans' primary problem is paying 
for benefits beyond the Medicare benefit package, the best solution is 
to improve the benefit package by providing all beneficiaries with 
access to an affordable prescription drug benefit, and paying plans 
explicitly for what most now offer only in areas where payments are 
excessive.
The President's Reform Plan
    That is why it is essential to enact the President's Medicare 
reform plan. It gives all beneficiaries the option to pay a modest 
premium for a prescription drug benefit. This benefit will cover half 
of all prescription drug costs up to $5,000 when fully phased in, with 
no deductible--all for a modest premium that will be less than half the 
price of the average private Medigap policy.
    Medicare+Choice plans would be explicitly paid for providing a drug 
benefit under the President's plan. They would no longer have to depend 
on what the rate is in a given area to determine whether they can offer 
to do so.
    The President's plan also will modernize the way Medicare pays 
managed care plans. Rates would be set through competition among plans 
rather than through a complicated statutory formula, as they are today. 
All plans would be paid their full price through a combination of 
government and beneficiary payments. The lower the price, the less 
beneficiaries pay since the beneficiary contribution rate declines 
relative to the price of the plan, as in the Federal Employees' Health 
Benefits Program. Beneficiaries choosing plans that cost approximately 
80% of traditional fee-for-service will pay no Part B premium.
    The President's plan also will preserve beneficiary options and 
strengthen protections when plans withdraw from Medicare by:

 giving beneficiaries access to all Medigap plans regardless of 
        preexisting conditions, including those with prescription drug 
        coverage;
 expanding the Medigap 6-month open enrollment period to newly 
        disabled beneficiaries and those with end stage renal disease;
 allowing beneficiaries with end stage renal disease to enroll 
        in another plan;
 mandating a special one-time additional Medigap open 
        enrollment period for beneficiaries who were affected by a plan 
        termination last fall; and
 increasing civil monetary penalties of up to $50,000 per 
        violation plus $5,000 per day per violation of the Medigap open 
        enrollment requirements.
    All these changes will strengthen and stabilize the Medicare 
managed care market.
    The President's plan also dedicates 15 percent of the budget 
surplus to Medicare for the next 15 years. This will assure the 
financial health of the Medicare Trust Fund through at least 2027, and 
help ensure that Medicare+Choice plan payment rates will be adequate 
well into the future.
Encouraging Plan Participation
    To assist plans, we worked with Congress to give plans two more 
months to file the information used to approve benefit and premium 
structures. We allowed plans to submit this ``Adjusted Community Rate'' 
data on July 1, rather than May 1, so plans were able to use more 
current experience when designing benefit packages and setting cost 
sharing levels. July 1 is the latest we can accept, process, and 
approve premium and benefit package data, have the data validated, and 
still mail beneficiaries information about available plans in time for 
the November open enrollment.
    To further encourage plan participation, we have worked with plans 
to minimize the administrative workload associated with participating 
in Medicare+Choice. In February, we published initial refinements to 
the Medicare+Choice regulation that improve beneficiary protections and 
access to information while making it easier for health plans to offer 
more options to beneficiaries. The new rule:

 clarifies that beneficiaries in a plan that leaves the program 
        are entitled to enroll in remaining locally available plans;
 specifies that changes in plan rules must be made by October 
        15 so beneficiaries have information they need to make an 
        informed choice during the November open enrollment;
 allows plans to choose how to conduct the initial health 
        assessment;
 waives the mandatory health assessment within 90 days of 
        enrollment for commercial enrollees who choose the same 
        insurer's Medicare+Choice plan when they turn 65, and for 
        enrollees who keep the same primary care provider when 
        switching plans;
 stipulates that the coordination of care function can be 
        performed by a range of qualified health care professionals, 
        and is not limited to primary care providers;
 limits the applicability of provider participation 
        requirements to physicians; and,
 allows plans to terminate specialists with the same process 
        for terminating other providers.
    We intend to publish a comprehensive final rule with further 
refinements this fall.
BBA Payment Reforms
    While the President's reform plan will use competition to set plan 
payment rates, the BBA initiated other important payment reforms that 
are already underway. The BBA begins to break the link between managed 
care and fee-for-service rates. And, starting in January, the BBA 
mandates that we ``risk adjust'' payments to account for the health 
status of each enrollee.
    Under the BBA system, a rate for a particular county is the greater 
of three possible rates: a new minimum or ``floor'' payment; a minimum 
2% increase over the previous year's rate, or a blend of the county 
rate and an input price adjusted national rate. The new system is 
phased in over five years, and therefore has several different moving 
parts. Medical education costs, which had been included in HMO payments 
under the old system, are paid instead directly to teaching hospitals. 
The blend of county and national rates phases up to a 50/50 balance. 
The national rate, local rates and minimum payment amount are annually 
updated based on per capita Medicare cost growth. As mentioned above, 
payments will increase an average of 5% for next year.
    The BBA also established a competitive pricing demonstration in 
which plan payment rates will be set through a bidding process, similar 
to what most employers and unions use to decide how much to pay plans. 
To ensure broad community involvement in this project, a Medicare 
Competitive Pricing Advisory Commission, chaired by General Motors 
Health Care Initiative Executive Director James Cubbin, has made 
recommendations regarding key design features. It also has selected the 
markets of Phoenix, Arizona and Kansas City, Kansas and Missouri, as 
initial demonstration sites. We established local advisory committees 
in these communities and, at their request, the national advisory 
commission agreed to delay implementation for one year in order to 
ensure adequate time for all parties to prepare for this essential 
project.
    There is considerable evidence that we have overpaid and continue 
to overpay plans. That is because payments are linked to local fee-for-
service spending and not adjusted for risk, according to studies by the 
Congressional Budget Office, Physician Payment Review Commission, 
Mathematica Policy Research, and many others. As mentioned previously, 
a GAO report released this June documents that, despite BBA reforms, 
plans are still being paid more than it costs them to provide the 
Medicare covered services that they are required to provide. The GAO 
says excess payments to plans totaled $1.3 billion in 1998, and will 
increase each year because of a forecasting error that the BBA locked 
in the statutory payment formula.
    Payment to plans will be more accurate with risk adjustment. Data 
on each individual beneficiary use of health care services in a given 
year will be used to adjust payment for that beneficiary the following 
year. Risk adjustment helps assure that payments are more appropriate, 
and curtails the disincentive to enroll sicker beneficiaries.
    The law does not call for a transition to risk adjustment, but we 
believe incremental implementation will prevent disruptions to 
beneficiaries or the Medicare+Choice program. We are therefore using 
flexibility afforded to us in the law to phase in risk adjustment over 
five years. In the first year, only 10% of payment to plans for each 
beneficiary will be based on the new risk adjustment method, which for 
the time being is based only on inpatient data. By 2004, we will be 
able to use data from all sites of care for risk adjustment. Then, and 
only then, will payment to plans be 100% based on risk adjustment. In 
the meantime, even with its limitations, the initial risk adjustment 
system based on inpatient data alone will increase payment accuracy 5-
fold.
    It is essential to stress that risk adjustment will not and cannot 
be budget neutral. The whole reason for proceeding with risk adjustment 
is that Medicare has not been paying plans accurately. Congress also 
recognized that plans have been paid too little for enrollees with 
costly conditions, and too much for those with minimal care needs. The 
vast majority of beneficiaries enrolled in Medicare+Choice cost far 
less than what Medicare pays plans for each enrollee.
    Medicare fee-for-service statistics make clear why risk adjustment 
should not be budget neutral. More than half of all Medicare fee-for-
service beneficiaries cost less than $500 per year, while less than 5% 
of fee-for-service beneficiaries cost more than $25,000 per year, 
according to the latest available statistics for calendar year 1996. 
The most costly 5% account for more than half of all Medicare fee-for-
service spending.
    Since Medicare+Choice enrollees tend to be healthier than fee-for-
service Medicare beneficiaries, the ratio of high to low cost 
beneficiaries in health plans is even more stark. Clearly, care for the 
overwhelming majority of Medicare enrollees cost plans much less than 
what Medicare pays because our payments are predicated on the average 
beneficiary cost of care, calculated by county. This average includes 
the most expensive beneficiaries in fee-for-service, who generally do 
not enroll in managed care.
    Budget neutral risk adjustment would mean Medicare and the 
taxpayers who fund it would continue to lose billions of dollars each 
year on Medicare+Choice. Budget neutral risk adjustment would cost 
taxpayers an estimated $200 million in the first year of the phase-in, 
and $11.2 billion over five years if health plans maintained their 
current, mostly healthy beneficiary mix. Actual savings to taxpayers 
from risk adjustment will vary to the extent that less healthy 
beneficiaries enroll in Medicare+Choice plans, resulting in higher 
payments than health plans receive today.
    The amount of payment change will vary among plans and depend on 
each plan's individual enrollees. Overall, we project that payment on 
average will change by less than 1% in the first year. How it will 
change over time depends on the mix of beneficiaries in each plan. Risk 
adjustment significantly changes incentives for plans and could well 
lead to enrollment of beneficiaries with greater care needs who could 
benefit most from managed care. That could result in plans receiving 
higher payments. Phasing in risk adjustment also substantially buffers 
the financial impact. Taxpayers are forgoing $1.4 billion in the first 
year and up to $4.5 billion over the full five years because of the 
phase in.
Beneficiary Education
    We are working to help beneficiaries affected by plan withdrawals 
move to other plans or back to traditional Medicare. We are working 
diligently to make sure beneficiaries affected by plan terminations and 
service area reductions know about their rights and options. We are 
providing plans with a model letter that meets the requirement that 
they send all affected beneficiaries an information package by 
September 15, 1999. This information should explain options to return 
to fee-for-service Medicare with supplemental coverage or to enroll in 
another Medicare HMO. We review and approve all materials sent by plans 
to beneficiaries to ensure that they are accurate.
    All beneficiaries have the option of returning to original fee-for-
service Medicare. Most beneficiaries also have the option of enrolling 
in another Medicare HMO where they live. If beneficiaries take no 
action, they will automatically return to original fee-for-service 
Medicare on Jan. 1, 2000. If they return to fee-for-service Medicare 
before December 31, they may lose important rights to supplemental 
Medigap coverage.
    For example, beneficiaries who remain in a withdrawing plan until 
December 31 are guaranteed the right to buy any Medigap plan designated 
A, B, C, or F available in their state until March 3, 2000. If they 
apply for one of these Medigap policies no later than March 3, 
companies selling the policies cannot place limits or discriminate in 
price because of beneficiary preexisting conditions. These protections 
are not guaranteed if beneficiaries disenroll before December 31, 1999 
which, as mentioned above, is a policy that the President's Medicare 
reform plan will change.
    Help in understanding such rights and options, as well as up-to-
date information about other Medicare+Choice plans available in a given 
county, is available at 1-800-MEDICARE (1-800-633-4227), at 1-877-486-
2048 for the hearing impaired, and on the Medicare Compare web page at 
www.medicare.gov. Many libraries and senior centers can help 
beneficiaries obtain Medicare information from the Internet. 
Beneficiaries also can contact their State Health Insurance Assistance 
Program for assistance. And many other groups provide information about 
Medicare, including the AARP, local Area Agency on Aging offices, 
National Rural Health Association, Social Security Administration and 
HCFA regional offices.
    We are also working diligently to educate all beneficiaries about 
the Medicare+Choice program. We launched the National Medicare 
Education Program to make sure beneficiaries receive accurate, unbiased 
information about their benefits, rights, and options. The campaign 
includes:

 mailing a Medicare & You handbook to explain health plan 
        options;
 a toll-free ``1-800-MEDICARE'' [1-800-633-4227] call center 
        with live operators to answer questions, and provide detailed 
        plan-level information;
 a consumer-friendly Internet site, www.medicare.gov, which 
        includes comparisons of benefits, costs, quality, and 
        satisfaction ratings for plans available in each zip code;
 working with more than 120 national aging, consumer, provider, 
        employer, union, and other organizations who help disseminate 
        information to their constituencies;
 beneficiary counseling from State Health Insurance Assistance 
        Programs;
 a national publicity campaign;
 a Regional Education About Choices in Healthcare (REACH) 
        campaign that will conduct State and local outreach activities 
        nationwide; and,
 a comprehensive assessment of these efforts.
    We tested the system in five States in 1998 and learned how to 
improve efforts for this November's open enrollment period. For 
example, we have made the Medicare & You handbook easier to use and 
improve the accuracy of information about plans that are withdrawing. 
We have added new links on our Medicare Compare website at 
www.medicare.gov to help users find information faster. We are 
standardizing plan marketing materials that summarize benefits so 
beneficiaries can more easily make apples-to-apples comparisons among 
plans in this November's open enrollment period. And we have added 
information on managed care plan withdrawals to the Important Notes 
section of the 1999 plan information on our Medicare Compare website.
    To help us continually improve our education efforts, we are 
establishing the Citizens' Advisory Panel on Medicare Education, under 
the Federal Advisory Committee Act. The panel will help enhance our 
effectiveness in informing beneficiaries through use of public-private 
partnerships, expand outreach to vulnerable and underserved 
communities, and assemble an information base of ``best practices'' for 
helping beneficiaries evaluate plan options and strengthening community 
assistance infrastructure. Panel members will include representatives 
from the general public, older Americans, specific disease and 
disability groups, minority communities, health communicators, 
researchers, plans, providers, and other groups.
                               conclusion
    While market volatility must be expected in the private sector, we 
are concerned about the message being sent to beneficiaries about the 
reliability of Medicare+Choice plans. In fact, among beneficiaries 
affected by plan service reductions last year, half of those who could 
have chosen another managed care plan instead chose to return to the 
original fee-for-service Medicare program. Nonetheless, we remain 
committed to working with plans to facilitate participation in the 
program. And we look forward to working with Congress to enact the 
President's Medicare reform proposals that will increase protections 
for beneficiaries when plans withdraw from the program, ensure that 
plans receive full payment of market-based rates, and guarantee that 
all beneficiaries have access to affordable prescription drug coverage. 
I thank you again for holding this hearing, and I am happy to answer 
your questions.

[GRAPHIC] [TIFF OMITTED] T8504.001

    Mr. Bilirakis. Thank you very much, Doctor.
    We will break. We have at least two votes. Just as soon as 
we are able to get back, we'll continue.
    Mr. Berenson. Thank you.
    [Brief recess.]
    Mr. Bilirakis. The committee will come to order.
    Thank you, Dr. Berenson, for your testimony, and also for 
your patience and understanding.
    Dr. Berenson, I think--and I would hope that you agree--
that the intent of the legislature, the intent of Congress is 
to be taken very seriously.
    As far as you know, was there any doubt in the minds of 
HCFA as to what was intended by the Congress in BBA in 1997 in 
terms of the risk adjustor and remaining neutral?
    Mr. Berenson. Yes, I think we actually do have a different 
view of what was intended. In fact, just recently this issue 
came up about the intent of Congress regarding risk adjustment 
and budget neutrality--I wasn't around at the time, but people 
went back into the files and into the record and we found a 
report from the CBO dated November 12, 1997, entitled, 
``Medicare+Choice Provisions in the Balanced Budget Act,'' and 
on page 13 it says, ``Adding a health status adjustor can 
further reduce capitation rates relative to per capita fee-for-
service cost. The size of the additional reduction would depend 
on the extent of the selection bias and the risk sector when 
the new adjustor is put in place how effectively the adjustor 
accounts for the selection.''
    We think that's a CBO analysis that at that time understood 
that the risk adjustor might result in decreased payments to 
the plans.
    Our understanding was that it wasn't scored as a savings 
because there was some question about our ability to implement 
the risk adjustor on time and they weren't sure what the 
details would be.
    But I think we don't agree that the intent was for budget 
neutrality in risk adjustment.
    Mr. Bilirakis. Well, Congress now needs to share with HCFA 
its intent and clarify that--and I agree with you that maybe it 
wasn't all that clear. Although CBO has testified in a hearing 
before the Senate Committee on Finance on June 9 of this year--
a statement by Steve Lieberman, Executive Associate Director of 
the Office of Director of CBO--I would ask unanimous consent 
this might be put in the record and, without objection, that 
will be the case--they have stated on page 6 of that, ``Until 
1999, CBO had assumed that Medicare+Choice payments would be 
adjusted for risk without changing total outlays.'' And the 
total outlays that are envisioned by HCFA, as I understand it, 
are in the category of $11 billion in savings.
    [The prepared statement by Steven M. Lieberman follows:]
    Prepared Statement of Steven M. Lieberman, Executive Associate 
     Director, Office of the Director, Congressional Budget Office
    Mr. Chairman, Senator Moynihan, and Members of the Committee, it's 
a pleasure

to appear before you today to discuss the enrollment and payment issues 
confront-

ing the Medicare+Choice program. The growth in that program's 
enrollment is close-

ly linked to the adequacy and appropriateness of Medicare's capitaled 
payments.

The recent withdrawal of plans from Medicare+Choice, coupled with 
reduced growth in payments, has prompted some observers to worry about 
the future of the Medicare+Choice program.
    My testimony discusses the Congressional Budget Office's (CBO's) 
projection of enrollment in Medicare+Choice plans over the next 10 
years and the factors influencing growth in that enrollment. Financial 
incentives play a critical role in determining whether plans 
participate in Medicare+Choice, whether beneficiaries enroll, and 
whether providers deliver appropriate services in an efficient manner.
    For Medicare+Choice to be a viable program, beneficiaries must have 
incentives to relinquish traditional fee-for-service and enroll instead 
in competing health plans. The challenge is to have a system that 
yields greater returns when it efficiently provides necessary, high-
quality services and smaller returns when it provides inefficient, low-
quality, or unnecessary services. Meeting that challenge requires that 
plans, providers, and beneficiaries each bear some degree of financial 
risk. Serious problems can result if Medicare payments do not bear a 
reasonable relationship to the costs of care for each group of 
beneficiaries for which plans and providers accept risk. Payments to 
providers must be fair and, ideally, give incentives to control costs 
while rewarding quality.
    If consumers have a choice of health plans offering various 
combinations of benefits and premiums, they can select the plan that 
best meets their needs. Enrollment in Medicare+Choice plans would grow 
if those plans offered better benefits or lower costs than traditional 
Medicare. If consumers have no choice of plans or if those plans offer 
unattractive benefits, high costs, or poor quality, beneficiaries will 
remain in fee-for-service Medicare.
               enrollment in the medicare+choice program
    CBO projects that growth in Medicare+Choice enrollment will average 
9 percent annually between 1999 and 2009. Though quite rapid, that rate 
of increase represents a sharp reduction from earlier trends.
    The Balanced Budget Act of 1997 (BBA) established Medicare+Choice 
and changed payment provisions for both health maintenance 
organizations (HMOs) and fee-for-service providers. CBO had assumed 
that Medicare+Choice enrollment would continue to grow at the dramatic 
rates of the program it replaced. The annual rate of growth in 
enrollment in Medicare's risk-based plans peaked at 36 percent in 
fiscal year 1996, however, and slowed in subsequent years. CBO projects 
that 31 percent of all Medicare beneficiaries will join Medicare+Choice 
plans in 2009, up from 16 percent this year (see Table 1).

  TABLE 1. ACTUAL AND PROJECTED ENROLLMENT IN RISK-BASED HMO PLANS AND
                             MEDICARE+CHOICE
------------------------------------------------------------------------
                                                Enrollees
                                ----------------------------------------
                                                                Annual
          Fiscal Year               Number    Percentage of   Growth in
                                  (Millions)     Medicare    (Enrollment
                                              Beneficiaries    Percent)
------------------------------------------------------------------------
                                 Actual
1992...........................          1.4           4.0          n.a.
1993...........................          1.6           4.5          13.8
1994...........................          1.9           5.2          18.9
1995...........................          2.5           6.7          29.7
1996...........................          3.4           8.9          36.0
1997...........................          4.5          11.7          32.4
1998...........................          5.5          14.1          22.2
1999...........................          6.2          15.7          12.7
                                Projected
2000...........................          6.6          16.6           6.5
2001...........................          7.1          17.7           7.6
2002...........................          7.6          18.7           7.0
2003...........................          8.4          20.4          10.5
2004...........................          9.2          22.0           9.5
2005...........................         10.1          23.8           9.8
2006...........................         11.1          25.6           8.9
2007...........................         12.0          27.4           9.1
2008...........................         13.1          29.3           9.2

2009...........................         14.1          30.9           7.6
------------------------------------------------------------------------
SOURCE: Congresional Budget Office.
NOTE: HMO=health maintenance organization; n.a.=not applicable.

HMO Withdrawals
    Last year, 99 HMOs announced they were either terminating or, far 
more commonly, scaling back their Medicare+Choice operations in certain 
counties. The potential disruption involved 407,000 enrollees, 
accounting for 7 percent of all Medicare+Choice enrollment. Plan 
withdrawals occurred in 406 counties--42 percent of the counties 
covered by Medicare managed care. Nonetheless, the overwhelming 
majority of the affected beneficiaries had the option to switch to a 
competing Medicare+Choice plan.
    The unanticipated withdrawal of plans from the Medicare market has 
heightened awareness that plans can leave the market. That perception 
is likely to reduce the willingness of some Medicare beneficiaries to 
enroll in plans in the next few years. Although the effects of plans' 
withdrawal on Medicare+Choice enrollment seem relatively clear, 
explaining why plans withdrew appears more controversial.
    In a recent report, the General Accounting Office concluded that 
most likely more than one factor was responsible for the withdrawals.
          No one factor can explain why plans choose to participate in 
        particular counties. Although plans obviously consider payment 
        rates, many other factors also influence their business 
        decisions.
          The current movement of plans in and out of Medicare may be 
        primarily the normal reaction of plans to market competition 
        and conditions . . . Other factors associated with plan 
        withdrawals--recent entry in the county, low enrollment, and 
        higher levels of competition--suggest that a number of Medicare 
        plans withdrew from markets in which they had difficulty 
        competing.
    By contrast, the HMO trade group, the American Association of 
Health Plans (AAHP), attributes the withdrawals to inadequate payment 
rates, exacerbated by the administrative burdens imposed by the Health 
Care Financing Administration's (HCFA's) ``MegaReg'' for implementing 
the BBA's provisions. AAHP believes that without substantial revisions 
to Medicare+Choice, additional plans will withdraw from the program.
    Adverse publicity associated with the health plans' withdrawal from 
Medicare+Choice is likely to temporarily slow growth in enrollment. But 
over the longer term, that growth depends critically on the size of 
payment increases and the ability of plans to offer attractive 
additional benefits, such as prescription drugs.
Constraining Medicare+Choice Payments
    Health plans, as businesses, will participate in Medicare+Choice 
markets only if they have an expectation of an adequate return--at a 
minimum, if they can reasonably expect at least to cover costs. If 
payments are perceived as being inadequate, health plans will tend not 
to participate in Medicare+Choice, especially if they foresee little 
prospect of Medicare payments becoming adequate.
    A similar dynamic applies to providers. Regardless of mission or 
not-for-profit status, physicians and other providers cannot afford to 
participate indefinitely when their enterprises are losing money.
    In addition to causing plans to withdraw, inadequate 
Medicare+Choice payments have another, compounding effect on enrollment 
growth. Reducing payment increases to Medicare+Choice plans will impede 
their ability to offer extra benefits or limit beneficiary cost 
sharing. Taking steps such as eliminating prescription drug benefits or 
requiring hefty monthly premiums instead of ``zero premiums'' will make 
Medicare+Choice plans less attractive to consumers. As a result, fewer 
beneficiaries will choose to join those plans.
    Are Medicare+Choice payments inadequate? The adequacy of payments 
can be evaluated from five often-competing perspectives.

 Are plans able to provide appropriate services while remaining 
        financially stable?
 Are payments fair, permitting (if not encouraging) plans and 
        providers to serve sicker patients?
 Is there an adequate choice of health plans in both urban and 
        rural parts of the country?
 Do the payments offered by Medicare+Choice plans attract 
        physicians, hospitals, and other providers to participate in 
        their networks?
 Do the payments help keep Medicare affordable for both 
        beneficiaries and taxpayers?
    Having well-established plans ``vote with their feet'' and withdraw 
from their key Medicare+Choice markets is an indication that payment 
and other conditions of participating in Medicare+Choice may be too 
stringent. But health plans have powerful incentives to convince 
policymakers that Medicare+Choice payments need to be increased without 
having to withdraw from the program.
   changes to medicare+choice payments under the balanced budget act
    The BBA enacted six policies that affected Medicare+Choice 
payments.

 The BBA significantly reduces fee-for-service spending, which 
        also slows the growth of payments to health plans because 
        annual updates to Medicare+Choice payment rates are tied to the 
        growth in per-enrollee spending in the traditional Medicare 
        program.
 The BBA sets the annual increases in Medicare+Choice payment 
        rates below the growth in fee-for-service spending from 1998 
        through 2002.
 The portion of Medicare+Choice payment rates that is 
        attributable to fee-for-service spending for graduate medical 
        education will be gradually eliminated.
 HCFA will withhold about 0.2 percent of payments to 
        Medicare+Choice plans to pay for dissemination of information 
        to beneficiaries about their coverage options.
 A blend of local and national payment rates will be phased in 
        for Medicare+Choice plans. That blending provision 
        redistributes money from areas with high payment rates to those 
        with low payment rates.
 New payment risk adjusters will be implemented in two stages. 
        Those adjusters are intended to more accurately reflect the 
        expected costs of providing health care to enrollees in 
        Medicare+Choice plans.
    The first four policies were enacted with the expectation that they 
would slow the growth of Medicare spending. Those policies reduce the 
cumulative growth in Medicare+Choice payment rates relative to fee-for-
service payments by 6 percent. The blending of local and national 
payment rates is purely redistributive, but particular counties will 
see substantial changes in payment rates. The new risk adjusters were 
not necessarily expected to lower average payments to Medicare+Choice 
plans but, as discussed below, they could yield substantial program 
savings when they are implemented.
Impact of the Payment Blend
    Because of the blending of national and local payment rates, 
payment increases are projected to vary enormously from county to 
county. For example, some counties would experience such large 
increases in payment rates from 1997 to 2000 that the theoretically 
available Medicare+Choice payment rates--if any plans operated in the 
areas--would exceed 180 percent of the 1997 (pre-BBA) payment rates. In 
contrast, some counties with high payment rates would see only a 6.1 
percent increase in their rates over the same period.
    Historically, both the level of and increase in Medicare spending 
per beneficiary varied dramatically in different counties. HCFA, 
however, no longer produces those data on county-specific spending 
trends. If past trends continue, some Medicare+Choice plans will face 
payment rates that are projected to be substantially below both per 
capita fee-for-service spending and 1997 (pre-BBA) amounts.
    Over half (52) of the 100 counties with the most Medicare+Choice 
enrollees are projected to have payment rates fall by 5 percent or more 
using as the standard of comparison the rates that Medicare would have 
paid if 1997 payments were increased by the national average growth in 
per capita fee-for-service spending and the BBA payment provisions were 
fully in effect. Using that methodology, the steepest reduction is 
estimated to be 12 percent. In the top 100 counties, 88--home to 78 
percent of the enrollees--would experience declines in payment rates, 
compared with 1997 rates. These estimates do not include the lower 
payments resulting from HCFA's implementation of risk adjustment.
Impact of Risk Adjustment
    Until 1999, CBO had assumed that Medicare+Choice payments would be 
adjusted for risk without changing total outlays. In January, the 
Administration published plans to phase in risk adjustment in a manner 
that would reduce payment rates for enrollees in Medicare+Choice plans. 
The first stage of risk adjustment would be based on the use of 
impatient hospital services by individual enrollees. That change would 
reduce payments for existing enrollees by 7.6 percent when fully phased 
in--by 2004. The Administration also announced a second stage of risk 
adjustment that would be based on use of services in all settings. The 
Administration expects that such an adjustment would reduce payments by 
another 7.5 percent, beginning in 2004. If both plans are implemented 
as announced, the combined effect could reduce payments by about 15 
percent.
    Payment reductions related to risk adjustment on the order of 15 
percent would be likely to cause plans to drop out of the program and 
enrollment in Medicare+Choice to drop sharply. Because of the magnitude 
of the planned reduction and the discretion retained by the 
Administration in implementing the adjusters, the CBO baseline does not 
assume the full savings from risk adjustment. For the same reason, the 
projections of Medicare+Choice enrollment discussed in my testimony 
today explicitly do not reflect the full savings. Instead, CBO assumes 
that risk adjustments will ultimately reduce payments by lesser 
amounts.
                   risk selection and risk adjustment
    Risk selection occurs when groups of beneficiaries, such as those 
who enroll in a Medicare+Choice plan, have average costs that are 
systematically different from the average costs of beneficiaries who 
are treated as similar by the risk adjuster. When monthly payments are 
made on a fixed, prospective (or capitaled) basis, those groups of 
enrollees are referred to as ``risk pools.'' If Medicare+Choice 
enrollees tend to have lower costs than comparable fee-for-service 
beneficiaries, the result is known as ``favorable'' risk selection. 
Conversely, ``adverse'' risk selection occurs when groups or risk pools 
have costs that are higher than those of comparable fee-for-service 
beneficiaries.
    Risk selection is incompletely understood and imperfectly measured. 
It can arise from many different sources. If unchecked, risk selection 
can destroy an insurance system. Systematically selecting people who 
are healthier than average pays off handsomely: the returns on 
favorable selection can overwhelm any potential savings from operating 
an efficient system for managing care. Health insurance systems in 
which biased selection segments the risk pool are said to enter a 
``death spiral'' if the problem is not fixed.
    One goal of risk adjustment is to pay more fairly. In a fair 
system, the amounts paid for different risk pools would closely 
approximate the average cost of providing services to their members. 
Under that framework, a good risk adjuster would pay groups with 
sicker, more expensive people proportionately more and groups with 
healthier, less expensive beneficiaries proportionately less.
Medicare+Choice Risk Adjuster
    There are a wide variety of potential approaches to mitigating the 
effects of risk selection. HCFA has adopted a mechanism for risk 
adjustment that relies on impatient hospital admissions for specific 
diagnoses to trigger higher capitaled payments in the following year. 
That mechanism, which is known as the principal in-patient/diagnostic 
cost group (or PIP/DCG), attempts to adjust payments statistically to 
account for individuals with persistently high costs. On average, PIP/
DCGs would reduce payments somewhat for most beneficiaries but increase 
them significantly for the minority of beneficiaries who were 
hospitalized in the prior year for specific conditions (such as 
congestive heart failure).
    HCFA has had to overcome significant analytical and operational 
obstacles in setting up the PIP/DCG system. The agency appears to be 
successfully implementing that complex system, for which it deserves 
recognition. But it is important to understand the limitations of that 
system for adjusting payments.
Developing a Medicare Risk Adjuster
    Although the PIP/DCG system is a significant improvement over 
demographic adjusters, it has had limited success in achieving the goal 
of ``fair'' payments--payments that are closely related to the 
costliness of beneficiaries (based on their health status). Two factors 
contribute to the difficulty of developing an adequate Medicare risk 
adjuster.
    First, the health care costs for individuals are enormously 
difficult to predict. That difficulty is compounded when the 
predictions are based on the administrative data available from 
processing claims.
    Second, Medicare spending is extremely skewed--that is, the sickest 
beneficiaries are extraordinarily costly. The most expensive 5 percent 
of Medicare beneficiaries cost almost as much as the remaining 95 
percent of all Medicare beneficiaries. On average, those in the top 5 
percent cost over $70,000 annually--more than 10 times the average 
annual cost for all Medicare beneficiaries.
    The variation in cost per beneficiary has two critically important 
implications. On the one hand, it highlights the potential financial 
consequences associated with both risk selection and inadequate risk 
adjustment. On the other hand, assuming neutral risk selection--that a 
risk pool has an ``average'' population--the skewness of the 
distribution of costs may require relatively large numbers of 
participants for a risk pool to be stable. Very large risk pools are 
unlikely to be undermined by having one too many--or too few--million-
dollar cases in a year. Small risk pools, however, could be seriously 
disrupted by having just one person who incurs catastrophic health care 
costs.
    Large health plans may be able to assume full financial risk for 
their enrollees. Even without risk selection, small plans may not be 
well positioned to assume full financial risk. In many large 
Medicare+Choice markets, health plans base payments to physicians or 
other providers on a percentage of premiums, thereby passing risk on to 
the providers.
    These compensation arrangements do not directly connect HCFA to 
provider payments. Yet HCFA remains vitally involved for two reasons. 
First, HCFA regulates the terms and conditions under which physicians 
may be placed at substantial financial risk, approving their contracts 
with Medicare+Choice plans. Second, HCFA has a vital interest in and 
regulatory responsibility for assuring that beneficiaries have adequate 
access to sufficient providers and receive high-quality care.
    The numerous Medicare+Choice providers who are paid on a capitaled, 
percentage-of-premium basis subdivide a health plan's risk pool. As a 
result, even relatively large risk pools at the health plan level may 
become too small at the provider level. PIP/DCGs may not be a desirable 
system for adjusting payments to small risk pools.
Problems with Using an Inpatient Risk Adjuster
    The first phase of the PIP/DCG relies solely on impatient hospital 
admissions and excludes care delivered in other settings. One can argue 
that the reliance on impatient hospital admissions hurts managed care 
plans, many of which have reduced their use of impatient hospital 
services. Some plans have implemented effective disease management and 
other protocols that may alter the pattern of care, possibly minimizing 
the specific admissions that are rewarded by the PIP/DCG methodology.
    What are the implications of the impatient PIP/DCG payment system 
for a Medicare+Choice plan that has invested in developing 
sophisticated disease management systems for chronic conditions? Unlike 
acute episodes of care, chronic conditions, such as congestive heart 
failure, can frequently have high and recurring costs. Paradoxically, 
that makes such conditions ideal for both disease management 
interventions and for creating a PIP/DCG payment adjustment.
    With chronic conditions, an HMO can identify who is at risk and 
develop intervention strategies to improve outcomes. Typically, 
successful interventions stress prevention, investing in patients' 
education, and gaining their compliance with protocols. Although such 
strategies do not ``cure'' chronic conditions, they improve patients' 
outcomes and frequently save money by avoiding hospitalizations. 
Success in avoiding hospitalizations, however, means that the 
Medicare+Choice payment rate is never increased to compensate for the 
beneficiary with high-cost, chronic conditions. Without a 
hospitalization for congestive heart failure, for example, the PIP/DCG 
system does not recognize that the beneficiary has the condition.
    Is this ``Catch 22'' real? Preliminary findings from an analysis 
being conducted by John Bertko, a principal in the actuarial consulting 
inn of Redden & Anders, provide some guidance. A highly sophisticated 
Medicare+Choice plan appears to have implemented effective disease 
management protocols for several conditions, including congestive heart 
failure. By investing about $3,000 annually in each patient, that HMO 
has apparently managed to avoid about half the expected hospital 
impatient admissions for congestive heart failure. Such an HMO could 
become the victim of its own success in managing care. In cases in 
which a beneficiary with congestive heart failure avoids 
hospitalization because of better medical management, for example, the 
HMO would forgo over $12,000 in higher PIP/DCG payments in the 
subsequent year if the system was fully phased in. Not only would the 
HMO's success in avoiding hospitalization preclude its receiving the 
higher revenues, but the plan would also have incurred higher expenses 
to finance the disease management program.
    These findings are preliminary. But even if the completed analysis 
confirms the initial findings, it is unclear how many Medicare+Choice 
plans have the sophistication to implement comparable programs. It is 
also unclear how many conditions would be susceptible to disease 
management interventions that avoided hospitalizations that trigger 
higher PIP/DCG payments. However, sophisticated disease management 
programs for conditions such as diabetes with complications or chronic 
obstructive pulmonary disease might generate similar ``Catch 22s.''
Problems with Refining PIP/DCGs
    The successful development of the second stage of PIP/DCG risk 
adjusters faces formidable obstacles. Relying on hospital impatient 
data means that the data sets are, compared with the total volume of 
Medicare claims, relatively manageable. Expanding the adjustment system 
to include outpatient procedures markedly increases the number of 
claims to be analyzed. Including all Medicare services could further 
increase the number of claims by an order of magnitude. Simply 
manipulating the data will pose significant challenges.
    Hospitals have long had strong incentives to precisely code 
impatient admissions, making the claims and diagnostic information 
relatively reliable. HCFA may encounter significant problems with the 
reliability and validity of some of the data that would be used in the 
second stage of PIP/DCGs. The accuracy of hospital outpatient data, for 
example, might prove problematic for use in the more comprehensive 
risk-adjustment system.
               alternative approaches to risk adjustment
    The discussion earlier in my testimony highlighted some of the 
problems associated with devising and improving an adequate mechanism 
for adjusting payments for risk. HCFA and others have funded extensive 
research in efforts to develop viable mechanisms. The inability to 
devise more effective tools underscores how difficult the challenge 
actually is.
    An alternative to using a statistical approach to adjust payments 
is to alter the level of risk borne in the payment pool. Some payers, 
such as state Medicaid agencies, are using a variety of approaches 
that, in effect, adjust the risk pool, not the payments.
    Under fee-for-service, physicians and other providers can be viewed 
as revenue centers: the more services they provide and bill, the more 
they get paid. That arrangement provides strong incentives to use more, 
rather than fewer, services. In stark contrast, under capitaled payment 
arrangements, providers are cost centers: their revenue is fixed, so 
that providing services adds only to costs, not to payments. One 
explanation for the differing utilization patterns between fee-for-
service and (capitated) managed care is that providers are converted 
from ``revenue centers'' to ``cost centers.''
    In a Health Affairs article, Joseph Newhouse and colleagues have 
argued in favor of partial capitation. They raise concerns about 
stinting on needed care when a provider must bear 100 percent of the 
marginal cost of providing services. That concern may be strongest 
where providers' risk pools are too small to be stable or where 
providers are thinly capitalized.
    Payment systems that combine attributes of fee-for-service and 
capitation create incentives to avoid unnecessary services but not 
stint on needed care. Many such approaches are possible.
    I will describe four generic types of hybrid payment systems that 
combine some capitation with additional payments as services or costs 
increase. Those approaches are currently used in commercial markets, 
Medicaid, or Medicare demonstrations. They all limit the amount of risk 
assumed by a risk pool by paying extra for high-cost cases; that 
permits smaller risk pools to be more stable, lessening their 
volatility and susceptibility to big financial swings. To keep such 
systems budget neutral, the average capitation payments must be reduced 
by the amount being ``carved out'' for separate payment.
    First-Dollar Partial Capitation. HCFA is experimenting with partial 
capitation payments in a demonstration project with an academic health 
center at the University of California at San Diego (UCSD). For 
impatient hospital services, HCFA pays the UCSD health plan half of the 
Medicare fee-for-service payment plus a capitaled amount. In part 
because of the reduced risk associated with this payment system, UCSD 
chose to offer a managed care plan that permitted direct access to the 
specialists on its medical school faculty.
    Condition-Specific Carve-Outs. Pregnancy, acquired immunodeficiency 
syndrome (AIDS), solid organ transplants, and end-stage renal disease 
(ESRD) are all examples of disease or condition-specific carve-outs 
being employed by Medicaid agencies, HMOs, or Medicare. Some Medicaid 
agencies remove AIDS or other high-cost conditions from their 
capitation rates. Others exclude pregnancy-related costs from their 
normal capitaled payments. Instead, special payments are made for each 
case or each delivery.
    Such payment systems can easily be adjusted to promote specific 
objectives. For example, if a goal was to promote prenatal care and 
limit caesarian deliveries, a flat ``bundled'' payment could be made 
for all hospital and physician services. In contrast, paying separate, 
higher rates for C-sections and lower rates for vaginal deliveries 
would instill fewer incentives to avoid C-sections.
    For decades, Medicare has separated individuals with ESRD into a 
distinct risk pool. Now, Medicare is experimenting with paying for ESRD 
beneficiaries on a capitaled basis. Similarly, some HMOs carve out 
solid organ transplants from their capitation payments to providers, 
retaining the risk (and payment responsibility) at the plan level.
    Individual (Specific) Stop-Loss Coverage. Many providers and health 
plans purchase private reinsurance to limit the costs of specific 
individuals or cases, which is often referred to as ``specific stop-
loss'' coverage. Coverage thresholds, known as ``attachment points,'' 
vary considerably. Some entities choose very high reinsurance 
thresholds, seeking to handle only catastrophically expensive cases. 
Others choose lower attachment points, seeking to reduce their 
financial exposure. The lower the attachment point, the higher the 
reinsurance premium--the amount carved out of the capitation rates--
necessary to finance the costs.
    Like the attachment points, the amount of excess costs reimbursed 
can also vary. In some cases, reinsurance pays 50 percent of costs in 
excess of the first threshold and 80 percent of costs above a second, 
higher threshold. Other policies pay I 00 percent of costs in excess of 
a threshold. By varying both the attachment point(s) and the share of 
costs paid, specific stop-loss policies can significantly moderate 
risk. At the extreme, certain stop-loss policies approach first-dollar 
partial capitation. (That occurs if the initial payment threshold is 
the first dollar.)
    Aggregate Stop-Loss Coverage. Aggregate stop-loss coverage is also 
a commercially available product. Typically, that coverage presupposes 
the existence of an underlying specific stop-loss policy. If the cost 
of services for all members of the risk pool exceeded a specific level, 
the aggregate reinsurance policy could reimburse those excessive costs.
    For example, assume that a physician has 300 capitaled Medicare 
beneficiaries in his or her risk pool and buys both specific and 
aggregate reinsurance. Any costs of physician services for an 
individual in excess of $7,500 would be paid by specific reinsurance. 
None of the amounts above the attachment point would be counted when 
calculating aggregate costs. However, all costs up to $7,500 would be 
included in calculating whether aggregate reinsurance payments would be 
triggered. In this example, two individuals might require extensive 
cardiac services and open-heart surgery, generating physician fees in 
excess of $10,000 each. The specific reinsurance policy would pay the 
costs over $7,500 in each case. Assume further that the average cost of 
physician services for each member of this physician's Medicare risk 
pool equals $1,800 (after excluding the catastrophic costs over the 
threshold) but that the physician only averaged a capitation payment of 
$1,440 per patient per year. Any costs averaging in excess of $1,728 
per patient per year, which is 120 percent of the annual capitation 
payment, would qualify for aggregate reinsurance.
                               conclusion
    The success of Medicare+Choice is tied to how much, and how, 
Medicare pays. Low rates of increase in payments will tend to cause 
health plans to withdraw from or limit their presence in the 
Medicare+Choice market. Constrained payment rates will make benefit 
offerings less attractive to consumers, which will further slow growth 
in enrollment. Even though it is an improvement over the prior 
demographic adjuster, the PIP/DCG is a flawed mechanism for adjusting 
for risk selection. HCFA is working to develop an improved method for 
implementing stage two that would take account of service use in all 
settings. Because of the difficulty in markedly improving mechanisms 
that adjust payments, however, the Congress may wish to consider other 
approaches that would limit the risk borne by a pool.

    Mr. Bilirakis. Now, if HCFA is made aware of--and they have 
been made aware of, because I know that we have been 
communicating back and forth--what the intent of the Congress 
is, and was at that time, and still is, are they prepared to 
adjust their thinking?
    Mr. Berenson. If there is a clear consensus in the Congress 
about that now, I think now deciding that it should be budget 
neutral, then HCFA can--we can technically do it in a budget-
neutral way and would obviously follow the will of the 
Congress.
    Again, I think there is some rewriting of history here 
about what the original intent was, and we followed what we 
thought the bill called for.
    Mr. Bilirakis. So you are referring then to the piece of 
legislation that would clear that up; is that correct?
    Mr. Berenson. I think that's right. And, again, we are also 
very concerned about disruption to beneficiaries, about 
stability in the program, and that's why we carefully phased in 
risk adjustment over a 5-year period. In the first year, only 
10 percent of the payment is based on the risk adjustor. Those 
assumptions about savings or reductions in payment to the plans 
assume stable case mix--that the plans won't respond to the 
incentives of risk adjustment by attracting sicker patients.
    I'm not sure that assumption really should hold, either. 
When I drive to work, I hear ads all the time from hospitals 
about chest pain centers and an ability to take care of people 
who have acute, severe illnesses. With risk adjustment, one of 
the goals is for health plans to develop expertise in cancer 
management and heart management and to be able to change the 
case mix of their beneficiaries so that these kinds of impacts, 
in fact, won't happen.
    We phased it in over 5 years so that the plans would have 
an opportunity to respond to the new program and be able to 
change their program.
    So we, I think, share with the Congress the concern about 
disruption, the concern about plans pulling out because of risk 
adjustment, and feel that the phase-in schedule we've come up 
with is a response to that concern.
    Mr. Bilirakis. Well, now, you were in the audience when Mr. 
Bryant made a comment about hoping that HCFA was not basically 
using its risk adjustor concept to squeeze out Medicare+Choice. 
You've heard that comment. How would you respond to that?
    Mr. Berenson. Again, we are approving right now--since the 
program, the Medicare+Choice program, has come in last July, 
officially, when we put out the regulations, we've approved 41 
either new applicants or service area expansions. There are 
another 22 pending. We are very eager to promote the program. 
There is a private fee-for-service application in that we're 
reviewing. And we've tried to----
    Mr. Bilirakis. So your answer is that you're not doing this 
because you want to squeeze out Medicare+Choice?
    Mr. Berenson. That's not our intent at all, and that's why 
we're phasing in risk adjustment.
    Mr. Bilirakis. Let me ask you, then--and my time is almost 
up--you've estimated approximately $11 billion, I believe it is 
$11.2 billion, in savings as a result of the risk adjustment 
concept you've put into place. Where would that savings go? I 
mean, what's the intent there?
    Mr. Berenson. That savings goes back to taxpayers, 
basically, if----
    Mr. Bilirakis. Where? Goes back to the Treasury?
    Mr. Berenson. Part A would go back to the trust fund, and I 
assume part B would go back to the Treasury.
    But, again, I'm not sure that--I mean, that's an impact 
analysis assuming there is no change in the case mix and plans, 
and, again, I would wonder whether that is, in fact, going to 
happen. I mean, risk adjustment should produce the kinds of 
change such that that doesn't, in fact, occur.
    Mr. Bilirakis. All right. Thank you.
    Mr. Brown?
    Mr. Brown. Thank you, Mr. Chairman.
    Dr. Berenson, thank you, again, for your patience and for 
joining us.
    It seems self-evident that managed care plans enroll 
healthier-than-average seniors. I mean, anecdotally it seems 
like it is true. It seems like it is true when I go home and 
talk to people. And from a business standpoint it seems like it 
should be true that managed care companies want to attract the 
healthiest seniors, as insurance companies would want to do. 
It's good business practice.
    Tell us about any evidence or studies that confirm the 
belief that most of us, I think, hold that there is some sort 
of cream skimming in the system like that.
    Mr. Berenson. Well, there have been a series of studies 
over the years. The most comprehensive was Mathematica's study, 
which looked at favorable selection and determined slightly 
more than 10 percent favorable selection. In other words, we 
were overpaying the plans by about 10 percent, or slightly more 
than that.
    Now, that's getting somewhat dated. That was in the early 
1990's. But there was a recent survey in 1996 of individuals, 
and it asked them about their ADLs, their disabilities, and 
found that beneficiaries in plans had lower levels of 
Activities of Daily Living (ADLs) than those who were in fee-
for-service, and it was based on that information that PPRC 
made an estimate of overpayment to plans.
    I think the risk adjustor, itself, is the most recent 
evidence. The risk adjustor determines whether favorable 
selection is taking place. Again, using the current model for 
risk adjustment suggests that there is favorable selection in 
plans such that they are getting about 7 percent more than they 
would be if they had average selection.
    So there are a series of studies, and, again, it is not 
surprising. I've talked to medical directors of plans who 
basically say, ``We do not want to have the reputation of being 
the best AIDS program around. We'd like to be second-or third-
best. We don't want to attract people who have those kinds of 
high-cost illnesses.''
    And so it is natural, and so with risk adjustment they get 
rewarded for attracting those people, rather than the other way 
around.
    Mr. Brown. And so, in a sense, conversely, if the point of 
risk adjustment, which I think is to ensure that plans get more 
money for sicker seniors, then, conversely, plans get less 
money if they are particularly good at cream skimming, correct?
    Mr. Berenson. Whether it is intentional cream skimming or 
it is just that people who don't have multiple medical problems 
are more attracted to managed care, to HMOs, it could either be 
intentional or just how beneficiaries behave, but there should 
be an adjustment for that factor, and I think virtually 
everybody that is recommending a competitive health system 
identifies the need for risk adjustment to make the competition 
fair.
    Mr. Brown. Can we keep up in this institution? If the 
sophistication of the actuaries in an insurance company 
understand the sophisticated way of marketing and cream 
skimming, if you will, Congress responds by good risk adjustor 
language to really try to do managed care in the right way, pay 
more for sicker people, pay less for the least-expensive, 
healthiest, youngest, perhaps most affluent Medicare 
beneficiaries, can we keep up? Can we--because the next step 
after we pass good risk adjustor language is the sophistication 
of insurance companies will figure another way to sort of keep 
ahead and ensure good business practice, assure and ensure the 
least-expensive people.
    Is this sort of a treadmill that we're on that we can't 
quite keep up with their pursuit of profits this way in for-
profit medicine?
    Mr. Berenson. Well, risk adjustment can't be the only 
answer. I mean, most people agree that risk adjustment will 
never be able to fully predict somebody's risk, and that's not 
our goal. There will still need to be other routine oversight 
that we do of marketing materials that we do right now so that 
plans don't really overtly abuse their trust, essentially, to 
just market to healthy people.
    I mean, the example that has been used for many years is to 
offer an enrollment sign-up place on the third floor of a walk-
up, and so anybody who can make it up there gets to sign up. 
That doesn't essentially happen, but we have a responsibility--
--
    Mr. Brown. It's not illegal, is it?
    Mr. Berenson. [continuing] to oversee the program so that 
that kind of thing doesn't happen.
    Risk adjustment is one tool, but we have an obligation to 
also assure that other practices don't go on.
    Mr. Brown. And you do that well?
    Mr. Berenson. We take it seriously and are improving our 
capabilities in that area.
    Mr. Brown. Do you do it well?
    Mr. Berenson. We do it well.
    Mr. Brown. Okay.
    Mr. Bilirakis. Mr. Ganske?
    Mr. Ganske. Thank you, Mr. Chairman.
    Dr. Berenson, I want to read to you from the summary from 
this 2-month-old GAO report. ``Medicare+Choice reforms have 
reduced but not likely eliminated excess plan payments,'' and 
then elicit your response.
    It says, ``Health plans have not, however, produced the 
expected savings for the Medicare program. Until 1997, Medicare 
plans were paid 95 percent of the expected fee-for-service cost 
for beneficiaries. The 5 percent discount was established to 
allow the program to benefit from the efficiencies commonly 
associated with managed care. However, numerous studies 
conducted by us, the PPRC, which has been incorporated into the 
Medicare Payment Advisory Commission, HCFA, and others 
demonstrated that Medicare programs spent more on beneficiaries 
enrolled in health plans than it would have if the same 
individuals had been in fee-for-service.
    ``This unexpected result occurred because Medicare payments 
were based on the estimated cost of fee-for-service 
beneficiaries in average health and were not adequately 
adjusted to reflect the fact that plans tended to enroll 
beneficiaries with better-than-average health who had lower 
health care costs, a phenomenon known as `favorable selection.' 
''
    And this is the paragraph that I think is important and the 
subject of today's hearing: ``PBA's new formula for paying 
health plans implemented in 1998 takes steps to lower but 
probably does not eliminate excess plan payments.
    ``Among other changes, the new formula slows the growth of 
plan payment rates relative to fee-for-service spending growth 
for 5 years. More importantly, BBA mandates the implementation 
of health-based risk adjustment system intended to better match 
payments to beneficiaries' expected health care costs and 
reduce the excess payments caused by favorable selection.''
    This is important right here. ``The effect of these changes 
is reduced, however, because BBA locked into place the 
excessive payment rates that existed in 1997. For example, when 
HCFA actuaries set 1997 payment rates, they based those rates 
on a forecast of 1997 fee-for-service spending. The actuaries 
now know that those rates were too high, because the forecast 
overestimated fee-for-service spending by 4.2 percent. However, 
BBA specified that 1997 rates be used as the basis for 1998 
rates.
    ``This implicit inclusion of the forecast error resulted in 
excess payments of $1.3 billion in 1998. Furthermore, the 
annual excess payments associated with the forecast error will 
increase each year as more beneficiaries join health plans.''
    Would you comment on this summary? Do you think that this 
is an accurate summary?
    Mr. Berenson. Yes, we think that is an accurate summary, 
and I've spent a lot of time working to understand the AAHP's 
argument about a ``Fairness Gap'' that we are under-paying the 
plans.
    They've identified a number of areas where they think they 
are being underpaid, and a significant piece of it is risk 
adjustment. They've ignored in their analysis, really, that 4.2 
percent.
    When we do all the overpayments and the underpayments--and 
I could go through it if you're interested--we actually come 
out at about 96 percent, is what we're paying the plans, in 
fact, 1 percentage point more than the 95 percent, which we 
sort of understand, going back 20 years. That is, in fact, the 
basis for the President's proposal on how the structured 
pricing, competitive pricing, is determined.
    So we, in fact, did overpay the plans in 1997 and don't 
have an opportunity to recoup that because the BBA did not 
permit that, and it is one of the items that goes into the 
overpayment category and where ultimately we're paying the 
plans about where we think we should be paying the plans, in 
aggregate.
    That doesn't mean that there might not be a plan in a 
certain geographic area, like Tennessee, that might be getting 
underpaid, but in aggregate we think we're pretty much where we 
are supposed to be.
    Mr. Ganske. I appreciate that.
    Mr. Bilirakis. The gentleman's time has expired.
    Ms. Eshoo?
    Ms. Eshoo. Thank you, Mr. Chairman.
    Thank you, Dr. Berenson, for your testimony to the 
committee.
    My question is about adequate payment. Adequate payment, 
obviously, can mean different things to different people. When 
Medicare+Choice plans say ``adequate payment,'' it seems that 
they mean compensation large enough to cover not only the 
Medicare benefits package, but also supplemental benefits such 
as prescription drugs and zero co-pays.
    Is that an accurate perception of adequate payment? If it's 
not, I'd really like you to correct it, but if you think it 
is----
    Mr. Berenson. I think that is one of the confusions in the 
discussion that people have about adequate payment.
    The statute requires we make a payment to the plans based 
on this complicated formula, and if the plans are able to 
provide the services, the mandated Medicare Part A and Part B 
services, for less than that payment, they're able to provide 
additional--they're required to provide additional benefits, 
essentially, and that tends to be prescription drugs, it tends 
to be at a zero premium in many, many markets. It can be 
preventive medicine services, it can be hearing aids. It can be 
a series of additional benefits.
    And we've calculated that overall, again, on a national 
basis, that as much--well, about $54 per member per month, or 
about 10 percent or so, of the payments that the plans receive 
are in this additional benefit category. They are actually able 
to provide the Medicare benefits and have 10 percent more to 
provide additional benefits. That's what some beneficiaries are 
taking advantage of.
    What we've observed with some of the pull-outs is that the 
plans that pulled out, in fact, were offering additional 
benefits along these lines and, for whatever reason, decided 
that they could not cut back on those benefits and still 
attract beneficiaries, or maybe there were other factors going 
on.
    So when we talk about paying adequately, I think we are 
quite confident that we pay adequately to provide the Medicare 
benefit package. We've been paying more than that in many 
geographic areas so that plans can provide additional benefits, 
and what is happening is the plans really are not able--we're 
finding plans are not able to attract beneficiaries with other 
than very generous additional benefits. They're not going there 
because the quality is better or because there is more emphasis 
on coordination and prevention. It really is relying on their 
ability to provide these additional benefits.
    Ms. Eshoo. Does HCFA have the ability to do any essentially 
exit interviews?
    Mr. Berenson. That actually came up very recently in a 
discussion we had with MedPac. We're looking into that and 
trying to see if it does require OMB sign off, whether it is a 
formal survey or not, but we and MedPac, I think, have 
determined that we would like to understand the plans' 
perception of why they are pulling out. We would like to know 
the reasons, in a more structured way than we have now, which 
is more anecdotal. We'd like to do that.
    Ms. Eshoo. Thank you. I think that that could prove to be 
instructive, if you can get rid of some of the weeds around the 
administrative or how you actually implement that.
    If you were to make a check list relative to 
Medicare+Choice and the pluses and the minuses, on the plus 
side and the minus side what would you list? Does one outweigh 
the other? Is this a worthy experiment?
    In some ways I think that we are being held hostage by the 
groups coming in and saying--and I don't know where the 
legitimacy of this lies. It is always easy to say that a 
federally funded program is not paying enough to make it work, 
and so, you know, we hear from our constituents. They come 
flying to us and saying, ``This is an outrage that my insurance 
carrier is pulling out of the market. Do something about it.''
    Is there a legitimacy to that? Is this working well? Did we 
fund this fairly and adequately?
    Of course, that's pitched up against the large picture that 
I mentioned--the much larger picture that we are struggling 
with this in the, you know, waning hours.
    Mr. Berenson. I'm not going to sort of give you a total 
answer, sort of on the spur of the moment. Two things 
immediately come to mind.
    One, it is more than an experiment--17 percent of 
beneficiaries are now getting their care----
    Ms. Eshoo. How many have dropped out, out of that 17 
percent? How many have pulled out of the market?
    Mr. Berenson. How many beneficiaries have lost the plan?
    Ms. Eshoo. Yes.
    Mr. Berenson. Well, last year it was about 400,000 and this 
year a little over 300,000, so that's 700,000. It's about 10 
percent, or a little more than that, have been affected, 
although, again, as the graph showed, more are in now than were 
in, even with the pull-outs.
    Ms. Eshoo. Yes.
    Mr. Berenson. So one is a serious program. Many 
beneficiaries like the option of being in an HMO, and that 
should be provided to them, and we hope that we'll have other 
options like that.
    On the other hand, what we've also learned from the 
pullouts is that a beneficiary cannot be assured that their 
prescription drug benefit or other additional benefits, but 
particularly prescription drugs, will be there. It sort of 
depends on the vagaries of the market.
    There's about a third of the beneficiaries who do not have 
access to a plan that offers prescription drugs in the first 
place, and we've seen a number who are not able to stay in a 
plan because the plan has pulled out, they're not able to have 
easy access into a Medigap plan that offers prescription drugs, 
so I think that points out, although it is an important, 
necessary program, Medicare+Choice, I think having a 
prescription drug benefit in the basic Medicare benefit package 
will produce some equity in the program and not have it be 
based on where somebody lives.
    Ms. Eshoo. Yes. Thank you.
    Mr. Bilirakis. The gentlelady's time has expired.
    Ms. Eshoo. Thank you.
    Mr. Bilirakis. Mr. Bryant?
    Mr. Bryant. Thank you, Mr. Chairman.
    Thank you, Dr. Berenson, for your testimony today.
    Just to follow very quickly the comment from the gentlelady 
from California about are we adequately funding health care, 
not only in this area of the Medicare+Choice but in the fee-
for-service, I know providers in my District are complaining 
across the board that we're not paying enough.
    Let me also say that, as you've mentioned, the vast 
majority of Medicare+Choice enrollees, I think you've said that 
they aren't affected, but you just indicated that some 700,000 
enrollees over the last 2 years of the 6 million people in the 
program have had their coverage disrupted. Certainly, that is a 
significant problem in my view, together with the fact that 
we've had 99 plan withdrawals this year, which is, again, the 
same number from last year total, two together of 99 years in a 
row [sic] that we've had withdrawals.
    Dr. Berenson, I would like, if you would, to late file with 
your testimony some answers to some questions.
    Very quickly, you've mentioned the 41 new plans you've 
approved. I need to know, are these expansions in markets that 
already have plans? And how many of these are in counties that 
previously had no choice plans? And how many are plans that are 
new to Medicare+Choice? And how many cover areas where there--
well, scratch that question there.
    [The following information was received for the record:]

    The 42 plan approvals since July 1998 are providing service 
in a total of 171 counties, including 46 counties that 
previously had no Medicare+Choice plan and 125 counties that 
already had a Medicare+Choice plan. Of the 42 approvals, 22 are 
new Medicare+Choice contractors and 20 are current 
Medicare+Choice contractors that have expanded their service 
areas.

    One other question that, again, I'll ask you to late file 
your answer on, is that on page 6 of your statement you note 
that you've listed the--you've made a few changes in the 
program's regulatory framework, and I need to know, in your 
answers, how many of the more than 800 pages of regulations did 
you retract, and did you scale back from any of your 42 
operational policy letters?
    [The following information was received for the record:]

    The June 26, 1998, Medicare+Choice (M+C) interim final rule 
implementing the program consists of 148 pages, 51 pages of regulation 
text and 97 pages of ``preamble'' text explaining the legal and policy 
justifications for the regulation.
    The February 17, 1999, ``mini-rule'' made important refinements to 
the original regulation that increased protections for beneficiaries 
while minimizing the administrative workload for plans. For example, 
the new rule:
 clarifies that beneficiaries enrolled in a M+C plan that 
        withdraws or is terminated from Medicare are entitled to enroll 
        in other remaining, locally available M+C plans;
 specifies that any changes in plan rules must be made by 
        October 15 to ensure beneficiaries have all the information 
        they need to make an informed choice during the November annual 
        open enrollment period;
 waives the requirement for an initial health assessment within 
        90 days of enrollment for commecial health plan enrollees who 
        remain in the same managed care organization's Medicare+Choice 
        plan when they become eligible for Medicare at age 65, and for 
        enrollees who switch plans but remain under the care of the 
        same primary care provider;
 allows plans to choose the form of the initial health 
        assessment;
 stipulates that the coordination of care function can be 
        performed by a range of qualified health care professionals, 
        and is not limited to primary care providers;
 limits the applicability of provider participation 
        requirements to physicians rather than all health care 
        professionals; and,
 aligns requirements for terminating specialists with the 
        process for other providers.
    These refinements were based on public comments regarding the 
interim final rule. We are committed to continuing open dialogue with 
all interested parties on how to strengthen, streamline, and improve 
the Medicare+Choice program. We intend to publish a comprehensive final 
rule with further refinements this fall. However, we have not and are 
not retracting regulations.
    We have, in fact, now issued 100 operational policy letters, 
frequently in response to requests for guidance from managed care plans 
and industry associations. These letters are an effective and efficient 
way to make further refinements and communicate clear policy guidance 
to a wide variety of M+C stakeholders in a timely manner.

    Mr. Bryant. Now, Doctor, let me ask you, for your testimony 
today, do physicians in the fee-for-service have to do the same 
amount of quality reporting as they do in Medicare+Choice? And 
what would be your answer there?
    Mr. Berenson. We're very actively working with the PRO 
program. The focus initially is on hospitals, and we will be 
doing quality improvement projects very similar to what we're 
asking the health plans to do, and the physicians who are on 
staff at the hospitals will be involved with that.
    We've also made a commitment, because beneficiary choice 
between plans and fee-for-service is so important, to put up 
the same quality measures, the HEDIS indicators, that we have 
from plans. We want to put up equivalent information about the 
fee-for-service sector, as well.
    In a couple of areas, plans do better than fee-for-service, 
and we want the beneficiaries to see that to help them make 
their decisions.
    So we are trying very hard to apply an equal yardstick 
here, to have the same requirements on fee-for-service and 
Medicare+Choice because there are quality problems in fee-for-
service.
    Mr. Bryant. So as of now, though, the choice providers have 
to report the quality reports more than the fee-for-service 
have to at this point? You're trying to----
    Mr. Berenson. That's right. I would say yes. In our 
regulations and the so-called ``QISMC'' requirements, we do 
have specific reporting requirements for plans. Yes.
    Mr. Bryant. Okay. On page 8 of your statement, you indicate 
that you assume that people taking prescription drugs on 
average are less healthy than others.
    Ms. Moon, in her testimony--who will be on the second 
panel--suggests this perhaps. And I would ask you that, if 
people are joining the Medicare+Choice plans for the 
prescription drug coverage, perhaps they actually are sicker 
than you think. Would that be----
    Mr. Berenson. Well, I've actually seen some writing. I saw 
a ``Consumer Reports'' analysis that said that plans were 
providing prescription drugs to get favorable selection. That 
made no sense to me, because people with prescription drug 
needs actually may be sicker.
    What is happening, at the same time, is that a number of 
the plans are reducing their drug caps down to a very low 
level, so that the sickest of the Medicare beneficiaries would 
not get a lot of benefit.
    But I agree with the thrust of your question, that, in 
fact, prescription drugs do not favorably select.
    Mr. Bryant. Thank you.
    Mr. Bilirakis. The gentleman's time has expired.
    Mr. Deutsch?
    Mr. Deutsch. Thank you, Mr. Chairman.
    I have a couple of questions specifically related to south 
Florida, if you can answer them. I mean, they're general enough 
that hopefully you can.
    In Dade and Broward Counties, increases for Medicare+Choice 
payments have been held to 2 percent per year for the last 2 
years. Does this increase bear any relationship to the cost of 
providing health care in south Florida?
    Mr. Berenson. I am quite confident that the plans in Dade 
County--which is one of the highest payment counties in the 
country--are able to provide the Medicare benefits for 
substantially less than the payment.
    The GAO, in one of their very recent reports, looked at Los 
Angeles County, which is similar in many ways to Dade County, 
and found that the plans in L.A. County were providing the 
statutory benefits at 79 percent of the payments. I don't have 
a specific number for Dade County.
    But I also would point out that, of the new plans that we 
are reviewing and are pending, we have already approved two new 
plans in Dade and Broward County, and there are two more who 
have applied to go into Dade and Broward County, so, to the 
extent that they view the reimbursement levels as a problem, I 
don't think they'd be going in.
    At some point, 2 percent year after year would start to 
become a problem, but at this point, you know, the competition 
is very active in Dade County and the beneficiaries are getting 
substantial additional benefits.
    Mr. Deutsch. All right. Let me just mention this Dade and 
Broward. I mean, there's many beneficiaries in Broward, maybe 
even more than Dade, as well.
    I guess one of the things related to your sort of answer, 
the overall increases of health care--which I guess are over or 
about 5 percent at this point, so, in terms of what the plans 
are paying for the services that they're getting, you would 
assume that those services are close to that average cost of 5 
percent, so their reimbursement is going up at 2 percent. By 
definition, are we then saying that the benefits that they are 
going to be able to provide are going to be decreased? Is that 
the policy decision that effectively we're making?
    Mr. Berenson. Well, obviously, the plans have a lot to say 
about it. If they are able to provide the services at less than 
5 percent, they'd be able to be in a better situation.
    On the discussion of whether fee-for-service payments and 
our payments should somehow bear a relationship to each other, 
I would simply point out that it is often in areas where fee-
for-service Medicare is at the highest, which have over-
capacity or other reasons, where plans do pretty well. They are 
able to negotiate better contracts, get better discounts, be 
able to do very useful utilization management precisely in the 
areas where Medicare fee-for-service costs are high. So I would 
hope that there are some things that are new. Prescription drug 
costs are going up and the plans haven't really gotten a hold 
of those costs, but the whole goal of providing the 5 percent 
discount off of fee-for-service to the plans and the hope for 
managed care is that they would be able to provide services at 
a lower cost than fee-for-service.
    Now, obviously, if they can't and they're only getting 2 
percent, at some point those lines cross and the plans can't 
provide the additional benefits.
    Mr. Deutsch. I just want to follow up on a couple of things 
you've mentioned regarding prescription drugs.
    Obviously, traditional Medicare doesn't provide 
prescription drugs, so you mentioned the figure of two-thirds 
of the plans providing some type of prescription drug coverage 
for Medicare HMO beneficiaries. I mean, would you view it as a 
good thing if they didn't provide it?
    Mr. Berenson. In the plan, we put a basic prescription drug 
benefit into the basic benefit package that the plans--we pass 
through the subsidy to the plans, and they are able to provide 
prescription drugs----
    Mr. Deutsch. Right, but let's--you and I are both 
optimistic that something like that is going to pass. Let's say 
it doesn't pass. We're still in the world we are today, where 
normal fee-for-service Medicare doesn't provide prescriptions.
    I guess I'm just trying to get a sense from the policy 
perspective what you are articulating. It talks of 79 percent, 
85 percent, whatever percent, 90 percent of providing the 
traditional coverage that Medicare covered, and for that 
additional money that they have, hopefully in some markets they 
are competing with each other for clients.
    I mean, I'm trying to get a sense from you. Is it a good 
thing that they're cutting back on benefits? Are you looking to 
basically manipulate the reimbursement level, where it is 
closer to what it should be costing them to provide 
traditional, or isn't that the whole point of an incentive--to 
get them in the plan, so that theoretically it does save 
Medicare money, as well, it saves the Federal Government and 
provides additional service at the same time?
    Mr. Berenson. I get your point.
    Mr. Bilirakis. Be brief with your response please.
    Mr. Berenson. Basically, the plans are providing 
prescription drugs. They are not cutting back their commitment 
to providing prescription drugs. They are reducing some of the 
caps, changing formularies, doing some things to make it 
manageable. That's in response to cost pressures.
    It is better that they are staying in the program providing 
somewhat reduced benefits than the plans that are pulling out 
and really giving beneficiaries no choice.
    Mr. Bilirakis. Mr. Burr to inquire.
    Mr. Burr. Thank you, Mr. Chairman.
    Welcome, Doctor. Let me ask you, why did 700,000 people 
over the last 2 years drop out of Medicare+Choice?
    Mr. Berenson. Well, it's the plans that dropped out, 
leaving 700,000 beneficiaries without their plan, so it is--the 
plans actually--the beneficiaries, over half of them, went back 
into a plan where they had an option to, so----
    Mr. Burr. Let me read you the testimony in the Senate from 
the director of CBO in June. He said, ``Having well-established 
plans vote with their feet and withdraw from their key 
Medicare+Choice markets is an indication that payment and other 
conditions of participating in Medicare+Choice may be too 
stringent.''
    Do you agree or disagree with that?
    Mr. Berenson. They are obviously making business decisions, 
and in some cases they related----
    Mr. Burr. Do you believe what the CBO's conclusion was, 
that the reimbursements or the policies are too stringent?
    Mr. Berenson. No. I mean, I think the aggregate payment 
level for the M+C plans is adequate. There are some geographic 
areas where probably it is not adequate, and I don't believe 
that the regulatory structure is overly burdensome.
    Mr. Burr. Is the fact that, even with these hurdles in the 
way, that seniors are striving to go to Medicare+Choice, what 
does that say about traditional Medicare? Does it meet their 
needs?
    Mr. Berenson. Many beneficiaries see a positive value in 
Medicare+Choice because of the additional benefits, and that's 
why we want to modernize the benefit package for traditional 
Medicare.
    Mr. Burr. Would HCFA like to see 100 percent of the 
beneficiaries in the Medicare+Choice plan?
    Mr. Berenson. I think we want to create a level playing 
field so beneficiaries can pick the approach that is most 
appropriate for them. Some like managed care a lot. Others feel 
much more comfortable with the freedom of choice in traditional 
Medicare, and we want to make it possible for them to have that 
choice.
    Mr. Burr. What is that choice in traditional Medicare?
    Mr. Berenson. The choice in traditional Medicare is to be 
able to go to essentially any doctor or any hospital without 
some of what managed care brings with it, whether you like it 
or--there's more coordination, there's more direction, there's 
more selection of providers in managed care. In traditional 
Medicare we have a much broader----
    Mr. Burr. But less in the way of coverage?
    Mr. Berenson. Less in the way of coverage.
    Mr. Burr. Less in the way of coverage.
    Let me ask you about your comment about structured, 
competitive pricing. Can you tell me what that is? What is 
structured competitive pricing?
    Mr. Berenson. I don't remember the specific reference, but 
I think I was referring to the President's plan.
    Mr. Burr. You were talking about the President's plan. Yes.
    Mr. Berenson. Basically, under the President's plan, the 
plans--instead of having the system that we have right now, 
which is based on a complex formula that results in payment 
levels in Tennessee that I think make it very difficult for a 
plan to stay in, we would have the plans determine, in 
relationship to the fee-for-service payments that Medicare 
makes, what the plan's price is, and the plan gets that price. 
The plans get it either from the government or from the 
beneficiary.
    To the extent that they are able to provide those services 
at a lower cost, they are able to give rebates to beneficiaries 
and attract those beneficiaries who then are in a position to 
either keep the savings or to purchase additional benefits.
    Mr. Burr. Are you familiar with the Progress Policy 
Institute?
    Mr. Berenson. Progressive Policy Institute?
    Mr. Burr. Progressive Policy Institute. Let me read you 
their quote on the President's plan. ``The President's proposal 
of Medicare spending would continue to be determined by the 
cost of traditional fee-for-service plan, which is determined 
by the prices Congress sets for payments to providers.''
    Is that accurate?
    Mr. Berenson. That's part of how the traditional fee-for-
service total payments are----
    Mr. Burr. We determine what price we're going to reimburse, 
and, consequently, you use that as a gauge to determine what 
the reimbursement of Medicare+Choice is, right?
    Mr. Berenson. No. Under the new proposal, the plans would 
determine, and if, in fact, we're paying too much or paying 
inappropriately, they would be in a position to charge a lower 
price to the beneficiary.
    Mr. Burr. Let me ask you about the benefits in the 
President's proposal, since you brought it up.
    If a beneficiary in the first year had $2,000 worth of 
annual drug costs, anything over the $2,000, who would be 
responsible to pick that up?
    Mr. Berenson. The beneficiary would.
    Mr. Burr. There's no stop-loss for the beneficiary?
    Mr. Berenson. There is no stop loss. What the beneficiary 
benefits from is the discounts that the PBM is able to----
    Mr. Burr. Is there any other health insurance policy out 
there today where you would pay for an annual premium where, 
when you got to a certain amount, you, as the beneficiary, were 
responsible for 100 percent of it?
    Mr. Bilirakis. A brief response please, Mr. Berenson.
    Mr. Berenson. I honestly don't know.
    Mr. Burr. Let me just read in closing, Mr. Chairman, just 
one statement again from the Progressive Policy Institute.
    ``The President's proposal advances the debate, but it also 
could be improved in several areas. It would inject strong 
competitive forces in Medicare, but it fails to capture the 
potential savings on behalf of taxpayers. It adds a drug 
benefit, but in a way that is poorly targeted to help those 
most in need. It contains some helpful limits on Medicare 
spending, but its cost containment is not sufficient to cover 
the cost of new drug benefits, let alone reduce Medicare 
spending for the long run. It would prolong the solvency of 
Medicare, but only through accounting gimmicks which could 
actually delay more-aggressive action to restrain long-run 
cost.''
    I yield back.
    Mr. Bilirakis. I thank the gentleman.
    Mr. Green to inquire.
    Mr. Green. Thank you, Mr. Chairman.
    Let me follow up with that. The President's plan on 
prescription medicine, granted, may not go as far, but I also 
don't agree always with what that institute says.
    Dr. Berenson, let me revisit a little bit what Dr. Ganske 
was talking about with the difference in data that AAHP is 
talking about.
    You said that HCFA estimates that plans are getting paid 96 
percent of the fee-for-service rates, not the 82 percent that 
the Association or the HMOs are saying?
    Mr. Berenson. Yes.
    Mr. Green. Okay. And this is because of a mistake in the 
Balanced Budget Act base rate for payment plans which are 
resulting in overpayments to the plans?
    Mr. Berenson. Well, that represents 4.2 percent of an 
overpayment. I think a fundamental disagreement we have with 
AAHP--and they'll be up next--is that we think risk adjustment 
is a fair adjustment and they use that as a deduction from 
their fee-for-service equivalent payment. We think it is an 
appropriate modification because of healthier selection. So we 
have a disagreement there.
    We do view a 4.2 percent overpayment that I don't think has 
been in their calculations.
    We agree that the BBA did reduce 2.8 percent of--each year 
there is a reduction. And I think we have a disagreement over 
the GME carve-out as to whether that should be viewed as a 
reduction to the plans or not. We actually make those payments 
to the teaching hospitals.
    So we do have some disagreements on interpretation of the 
data.
    Mr. Green. In the Balanced Budget Act, wasn't the HMO 
payment deleted from or de-linked from the fee-for-service 
rate?
    Mr. Berenson. That was, I thought, one of the goals.
    Again, I would point out that the withdrawals that are 
occurring this year are tending to take place in lower payment 
areas, not the higher payment areas that is part of the 
analysis, and again there is, in my view, not a connection 
between what we would pay fee-for-service and what we would pay 
plans, because plans are often in the best position to save 
costs in high-payment areas and in a relatively weak position, 
say, in some rural areas where there are few doctors and one 
hospital. They're not in as good a position to get discounts.
    So the link to fee-for-service is one that I think the BBA 
tried to limit and de-linking makes some sense.
    Now, in the President's plan, however, we want to preserve 
what the blend in the floor county payment increases have to 
the low payment areas and recognize that the plans need to 
compete in a geographic area.
    So we, in fact, provide an opportunity for plans to compete 
with an equivalent fee-for-service payment level.
    Mr. Green. It seems like, again, under the BBA--and I know 
there were lots of questions that I have in things that were 
done in 1997 that maybe we wouldn't do today because of our 
economy, but HMOs are supposed to save Medicare money by 
managing care better, so it seems like wouldn't it be logical 
that the payments be less than the average fee-for-service 
beneficiary in a geographic area?
    Mr. Berenson. There still is a 5 percent reduction which is 
supposed to be for managed care efficiencies.
    You know, I partly don't know how to react to some of the 
plans I've met with who say, ``Our costs are going up 6 or 8 
percent,'' as if that means we should pass through that 6 or 8 
percent because their costs are going up 6 or 8 percent.
    The promise of managed care is that they can actually hold 
costs down, and so I don't think we should be in a position 
where we are simply passing through the cost increases.
    I think it is difficult at this point for plans. They're 
raising premiums in the commercial side 10 percent or so. They 
are withdrawing from FEHBP. This is not a Medicare only 
problem, at all. Plans are having difficulties at this point 
managing costs, and I think that should be generally 
recognized.
    Mr. Green. Lots of other reasons go into it other than 
reimbursement. For example, maybe you didn't sign up enough 
enrollees to really make an HMO possible, whether it be a rural 
area predominantly or even an urban, and we see a lot of 
volatility in the market where plans are merging with other 
plans and everything else.
    Mr. Chairman, let me just follow up on the question that 
one of our colleagues asked about the quality control 
requirements for HMOs----
    Mr. Bilirakis. Make it brief, please.
    Mr. Green. [continuing] and not fee-for-service, and if Dr. 
Berenson can talk about it.
    Over the next few years Balanced Budget Act, seniors, and 
HMOs will no longer have the freedom to go back to fee-for-
service, so there is quality control on HMOs and not fee-for-
service, simply because fee-for-service you can always go down 
the street to another doctor or different hospital or something 
like that, whereas with HMOs shortly there will not be that 
ability for seniors to shop around. Is that correct?
    Mr. Berenson. That is correct, and I think there is concern 
about a plan that is capitated that has to work within a 
capitated budget about whether they are, in fact, taking 
shortcuts.
    Having said that, we do want to provide beneficiaries 
information about fee-for-service. They should know how 
hospitals compare to each other with some objective data. 
Ideally we'd even get that information about physicians.
    So we are committed to doing that. We would agree with your 
point about it being especially important for locked-in 
beneficiaries before they make that kind of a decision, they 
really should have some quality information.
    Mr. Green. Thank you.
    Thank you, Mr. Chairman, for understanding.
    Mr. Bilirakis. Mr. Barrett to inquire.
    Mr. Barrett. Thank you, Mr. Chairman.
    Dr. Berenson, you said in your testimony that there is 
considerable evidence that we have overpaid and continue to 
overpay plans.
    The GAO study or your analysis, is that across the board, 
or are there different degrees of error in different parts of 
the country?
    Mr. Berenson. Well, the BBA attempted to sort of decrease 
the disparity. I guess it was Dr. Ganske who pointed out that 
in Iowa we pay much less than we pay----
    Mr. Barrett. I understand. My question----
    Mr. Berenson. [continuing] in Florida.
    Mr. Barrett. My question is, Has the GAO or has your 
analysis shown that that overpayment is different in different 
areas?
    Mr. Berenson. The GAO focused in on L.A. County and 
emphasized a high payment area and actually quantified what the 
difference was. I think it is clear that the areas that are 
limited to a 2 percent increase at this point probably are in a 
better financial situation than the low-payment areas.
    Unfortunately, however, many of the pullouts this year were 
in areas where the plans got 8 or 10 or 12 percent increases, 
which was the intent of the blend in the BBA, and we have to 
assume that the pull-outs were for other reasons because the 
payment levels were beginning to get to a reasonable level.
    Mr. Barrett. So evidence has shown this year that the 
withdrawals are occurring more often in what have historically 
been the low-payment areas?
    Mr. Berenson. That's right. Essentially, the plans who have 
a--in fact, I have some data here. For plans who have a per 
capita payment between $450 and $500, which is a low-end 
payment level, 12 percent of the enrollees lost their plan. For 
plans that had greater than $600 of payment as a result of the 
formula, only 1.3 percent of enrollees lost their plan.
    So it was clear that the withdrawals tended to occur in 
low-payment areas, which is what one would probably expect.
    Mr. Barrett. So when I see the headline that says that the 
GAO report says that these plans are still over-paid, I should 
infer that they are talking about in higher reimbursement 
areas?
    Mr. Berenson. I think in aggregate.
    Mr. Barrett. I live in a District that says they are under-
paid, so when I come to my HMOs and say, ``Don't worry. In the 
aggregate you are overpaid,'' they say, ``Well, the aggregate--
--''
    Mr. Berenson. I understand.
    Mr. Barrett. ``Don't talk to me about that.'' So I'm still 
not getting what I consider to be an adequate answer.
    If we have a problem in lower-paid areas where HMOs 
continue to drop out, we have a two-tired health care system in 
Medicare+Choice, don't we?
    Mr. Berenson. Yes, and that's why, again, I think we need a 
reform there, and why a competitive model--competitive 
pricing--would be better than thinking you can get a national 
formula to work well in every county or in every district, 
which I think is a real problem.
    Under the President's proposal, the plans will determine 
what their costs are, and that's what they're going to get 
paid. They're not going to get paid based on an arbitrary 
formula. As well-intentioned as the formula is, and it has 
accomplished a number of things by bringing up the low-payment 
areas, it can't get it right in every area.
    Mr. Barrett. I don't represent North Dakota, but let's talk 
about North Dakota for a second. My understanding is that there 
is really little HMO penetration there. How is it going to work 
in North Dakota?
    Mr. Berenson. Well, first, in North Dakota, the basic 
problem--we've raised the floor for--I assume the counties in 
North Dakota are now protected by the new floor payment. The 
difficulty of getting managed care into a very rural area 
relates to factors other than the absolute payment rate. The 
plans have to get a network, and often they have to contract 
with what may be a sole community hospital with a limited 
number of physicians or nurse practitioners, and they really 
don't have the negotiating ability or relationships with those 
providers to accomplish that network.
    I think there are factors like that which are really more 
related to the ability of HMOs to get into rural areas than to 
the payment levels.
    Mr. Barrett. Let's talk about the demonstration projects. 
How are the demonstration projects going?
    Mr. Berenson. Well, we have an important--the BBA set up an 
important competitive pricing demonstration. The Competitive 
Pricing Advisory Committee selected two sites. We've worked 
with the local advisory committee and have extended the start 
date to January 1 of 2001.
    The problem now is that there is at least some 
Congressional interest in exempting Kansas City and Phoenix as 
demonstration sites, and, if that happened, I think it would be 
very hard for us to proceed with the demonstration.
    This is exactly the kind of demonstration we need to have 
to know how an alternative to the current administered pricing 
model would work, and we really think it needs to go forward.
    Mr. Barrett. And why is there opposition to that?
    Mr. Berenson. Well, everybody is for competition until it 
is in their own backyard, that is what I assume.
    The Competitive Pricing Committee spent a lot of time and 
carefully selected those sites. Many of the members of the 
advisory committee think these demonstrations should go 
forward, but obviously some think it is better if the 
demonstrations are somewhere else.
    I think that's an issue here.
    Mr. Bilirakis. The gentleman's time has expired.
    Mr. Bilirakis. All right. I think that probably takes care 
of the inquiries.
    Dr. Berenson, as per usual, we would ask you if you would 
be amenable to getting written questions and responding in a 
timely fashion.
    We are very grateful you have taken time to be here. Thank 
you, again, for your patience.
    Mr. Berenson. My pleasure. Thank you.
    Mr. Bilirakis. The second panel will please come forward: 
Ms. Karen Ignagni, president and chief executive officer of the 
American Association of Health Plans; Mr. John Powell, vice 
president of government relations for the Seniors Coalition; 
Ms. Esther Canja, president-elect of the American Association 
of Retired Persons; Dr. Marilyn Moon, senior fellow with The 
Urban Institute; and Rabbi Morton Malavsky from Hollywood, 
Florida.
    Welcome, ladies and gentlemen. As you may know, your 
written testimony is made a part of the record, and we will 
turn the clock to 5 minutes for your vocal testimony, which I 
would hope would complement or supplement your written 
testimony.
    Ms. Ignagni, we'll start with you.

  STATEMENTS OF KAREN IGNAGNI, PRESIDENT AND CHIEF EXECUTIVE 
  OFFICER, AMERICAN ASSOCIATION OF HEALTH PLANS; JOHN POWELL, 
VICE PRESIDENT OF GOVERNMENT RELATIONS, THE SENIORS COALITION; 
ESTHER CANJA, PRESIDENT-ELECT, AMERICAN ASSOCIATION OF RETIRED 
PERSONS; MARILYN MOON, SENIOR FELLOW, THE URBAN INSTITUTE; AND 
                     RABBI MORTON MALAVSKY

    Ms. Ignagni. Thank you, Mr. Chairman, members of the 
subcommittee, we're delighted to have this opportunity to 
testify this morning.
    I'd ask that my full statement be submitted to the record.
    Mr. Bilirakis. It is a part of the record.
    Ms. Ignagni. Thank you very much, sir.
    I'd like to make six points this morning. I know that you 
are being asked to evaluate this issue at a time when we are 
having a very heated debate surrounding managed care, and, 
wherever you stand on this political question, we hope that you 
will keep an open mind on Medicare and how much, in particular, 
beneficiaries stand to lose if they lose their choice.
    We are in crisis in this program and we are at a 
crossroads. What you do this year will determine whether the 
Medicare beneficiaries continue to have the choice of 
purchasing affordable comprehensive alternatives to traditional 
Medicare. Behind all the numbers and all the rhetoric, that's 
what is at risk.
    Our beneficiaries are getting older. They don't go back to 
fee-for-service. We have a very high proportion of poor and 
near-poor individuals. For them, if you end Medicare+Choice it 
means unaffordable Medicare.
    There has been a great deal of discussion about the impact 
of the 400,000 individuals affected by withdrawals last October 
1, in addition to the 327,000 that will be affected beginning 
next year.
    I don't want to add to that discussion, since it has been 
very well treated thus far, but I do hope that you will 
understand and really will give emphasis to the fact that we 
are at a net reduction.
    The idea that everything is fine and that we don't have to 
act this year couldn't be further from the truth. The new 
approvals are generally in existing areas or in service area 
expansions. Fewer beneficiaries now have more than a choice of 
one plan versus where we were simply last year, and we've 
endeavored through our numbers--and I know there has been a 
great deal of discussion about that this morning--to provide a 
comprehensive picture of what is occurring and why.
    Mr. Brown, you made the point early in your opening 
statement that you would like more briefing, and we would be 
delighted to do that. My staff briefed the minority and the 
majority staff of this committee prior to Memorial Day. We have 
had three briefings with HCFA, numerous phone calls back and 
forth with HCFA. We've briefed CBO. We've briefed the White 
House. We've briefed Medpac on numerous occasions and we'd be 
happy to come back.
    You've had quite a great deal of discussion about this 
infamous 4 percent. We have, in the numbers before you, 
included the 4 percent, so all of the estimates that we are 
talking about in our numbers include the 4 percent.
    My staff was at HCFA last week having a discussion with all 
of their technical folks looking over the numbers, trying to 
understand what the real impact was across the country. We were 
asked this question. We were very, very clear that the numbers 
before you include the 4 percent.
    Now, we don't agree with the 4 percent assumption, but I 
remember very clearly several months ago sitting before the 
administrator and telling her that we understood this was going 
to be a great matter of controversy. We wanted our numbers to 
be helpful, to be useful, and we didn't want that to be a 
distraction. So we would be pleased to work with anyone on this 
committee to get their hands around what the impact is in this 
endeavor in this area.
    And I'd also like to go to the matter that has been the 
subject of much discussion about whether or not plans are 
making routine business decisions here or whether we really are 
in crisis.
    Remember that payment and regulatory decisions dictate the 
environment that health plans operate in, and any efforts to 
suggest that these are not responsible for the current crisis 
is really aimed at diverting attention from it.
    There has been a suggestion that there is a 5 percent 
growth factor. I think one could construe that remark as if to 
say that most plans in most areas would receive a 5 percent 
growth, and we know what is going on in the area of inflation.
    In fact, 78 percent of Medicare+Choice beneficiaries live 
in areas where the rate of increase would be under 4 percent. A 
full 38 percent live in areas--many of yours on this 
committee--where the increase would be under 2 percent.
    So with fee-for-service rising an average rate of 5.8 
percent, when you look at the compounding effects of two and 
two, and anywhere between two and four, and where you see most 
of the beneficiaries are living, you can see why we have termed 
this a ``fairness gap.'' We are urging you to pass the 
legislation before you, H.R. 2419. While it will not solve the 
entire program and problem, it begins to stabilize the 
situation. In many of your areas, the percent of government 
contributions to Medicare+Choice relative to fee-for-service 
will decline below 80 percent. You can't run a program that 
way. You can't possibly fulfill the promises that you have made 
to beneficiaries, and I urge you to look very carefully at 
that.
    I also urge you to reexamine the entire regulatory 
environment. Before me, I have these regulations that came out, 
the mini reg and the operational policy letters. This is all in 
the last year. Here are our comments. We've commented on 
everything. There is virtually an operational policy letter 
every week.
    In every one of our comments, we have not once taken issue 
with patient protection matters. We have taken serious issue 
with administrative issues.
    I would conclude, Mr. Chairman--and there is so much to 
say--I would conclude by saying the following. There are three 
factors that plans report are problematic in proceeding forward 
in this program, and I hope that you will take a very serious 
look at them. The first is a relationship between 
Medicare+Choice payments and fee-for-service payments, and 
there is a problem.
    The second is the broad regulatory environment. We no 
longer have a level playing field. Our providers are telling us 
daily that the amount of regulation here simply makes it 
impossible for them to continue to participate in this program 
relative to the traditional program.
    And, finally, we find that many of our plans around the 
country are raising the very serious issue that I think will be 
a major topic for discussion in this committee about the wisdom 
of continuing on a path where, in fact, the regulator is the 
competitor.
    We have a serious issue with that. There are very good 
people over at HCFA. We work with them very closely, despite 
our disagreements on many of the technical issues we're here to 
talk to you today. But the fact is you can't run a railroad 
this way, and the beneficiaries stand to lose a great deal.
    I hope that won't happen, and we would like to work with 
you on a bipartisan basis to fix it, to address it. We think 
the window is now, and if you don't act this year we look 
forward to far more beneficiaries being affected, and no one 
wants that.
    Thank you, Mr. Chairman.
    [The prepared statement of Karen Ignagni follows:]
   Prepared Statement of Karen Ignagni, President and CEO, American 
                      Association of Health Plans
                            i. introduction
    The members of the American Association of Health Plans (AAHP) 
appreciate the opportunity to submit testimony to assist in the 
Subcommittee's evaluation of the Medicare+Choice program. AAHP 
represents more than 1,000 HMOs, PPOs, and similar network health 
plans; our membership includes the majority of Medicare+Choice 
organizations, which collectively serve more than 75 percent of 
beneficiaries in the Medicare+Choice program. Together, AAHP member 
plans provide care for more than 150 million Americans nationwide and 
have strongly supported efforts to modernize Medicare and give 
beneficiaries the same health care choices that are available to 
working Americans.
    Our plans have had a longstanding commitment to Medicare and to the 
mission of providing high-quality, comprehensive, cost-effective 
services to beneficiaries. Today, more than 17 percent--or 6.2 million 
beneficiaries--are enrolled in health plans, up from only six percent 
just five years ago. Recent research indicates that health plans are 
attracting an increasing number of older Medicare beneficiaries, and 
that Medicare beneficiaries are remaining in health plans longer. In 
addition, near-poor Medicare beneficiaries are more likely to enroll in 
health plans than higher-income beneficiaries. These health plans offer 
Medicare beneficiaries many benefits that are not covered under fee-
for-service Medicare, such as full year's hospitalization, lower 
copayments and deductibles, and prescription drug coverage (Figure 1).

------------------------------------------------------------------------
                                        Medicare+Choice  Fee-for-Service
------------------------------------------------------------------------
Outpatient Prescription Drug Coverage.             Yes               No
Deductible for Physician Visits.......              No              Yes
Nominal Copayment for Physician Visit.             Yes               No
Hospital Inpatient Cost-Sharing.......   Typically, No              Yes
Annual Day Limit on Hospital Coverage.   Typically, No              Yes
------------------------------------------------------------------------

    With passage of the Balanced Budget Act (BBA) two years ago, 
Congress took significant steps toward the goal of providing Medicare 
beneficiaries with expanded coverage choices similar to those available 
in the private sector and toward ensuring the solvency of the Medicare 
trust fund. The establishment of the Medicare+Choice program was 
supported by AAHP and regarded as the foundation for moving forward 
with a program design that can be sustained for future generations of 
Medicare beneficiaries. Unanticipated events, however, have endangered 
this foundation and created structural issues that must be resolved 
quickly.
            ii. current state of the medicare+choice program
    As members of the Subcommittee know, the first public sign of 
trouble in the Medicare+Choice program surfaced last fall when nearly 
one hundred health plans were forced to reduce or end their 
participation in the program, resulting in more than 400,000 
beneficiaries losing their health plan choice. Fifty thousand of these 
beneficiaries were left with no other health plan option. At that time, 
AAHP and others urged the Administration and Congress to make mid-
course corrections, arguing that if program problems were left 
unaddressed, more health plans, many of which have participated in the 
program for years, would face the same difficult decisions in 1999 and 
beyond. The unfortunate reality is that we were right. Just two weeks 
ago, the Health Care Financing Administration (HCFA) announced that 
327,000 beneficiaries in another ninety-nine health plans would lose 
their health plan on January 1, 2000. Of the 327,000 affected 
beneficiaries, 70,000 will have no choice but to return to the fee-for-
service program because there is no other Medicare+Choice plan in their 
area.
    In addition to these sobering events, an AAHP survey of its 26 
largest members that participate in the Medicare+Choice program showed 
that among responding organizations, a substantial number of 
beneficiaries who will be able keep their plan next year will face 
increased out-of-pocket costs and reductions in benefit levels. Survey 
results, which were independently collected and tabulated by Peter D. 
Hart Research for AAHP, showed that premium changes to be instituted by 
18 companies will affect nearly 1.5 million of the 3.86 million 
beneficiaries covered by the survey whose plans will remain in the 
program next year. Among these individuals, monthly premiums will 
increase by $20 or more for 926,009 persons and $40 or more for 400,757 
of the 926,009 persons. Monthly premiums will decrease for just fewer 
than 12,000 individuals; in all instances, these decreases will be less 
than $20. More than 1.3 million enrollees will face an increase in 
prescription drug copayments, while just 10,000 enrollees will have 
decreased prescription drug copayments next year. Additionally, about 
600,000 individuals covered by the survey will face hospital inpatient 
copayments averaging $275 next year.1
---------------------------------------------------------------------------
    \1\ In responding to the survey, plans were asked to provide 
information on the benefit arrangement that presently applies to the 
largest share of their Medicare+Choice enrollees. Plans were asked to 
describe the 1999 benefit, any change in the benefit to become 
effective on January 1, 2000, and the number of enrollees covered under 
the benefit. Using this information, Peter D. Hart Research estimated 
the number of enrollees affected by benefit changes and the magnitude 
of these changes among the subset of enrollees covered by the most 
common benefit arrangement. Not all companies responded to each 
question.
---------------------------------------------------------------------------
          iii. sources of medicare+choice program instability
    The health plans that announced their decisions to leave the 
Medicare+Choice program or to reduce benefits did not make their 
decisions lightly. Many of these plans worked up to the July 1st 
deadline to devise strategies that would enable them to maintain their 
current service area, to stay in the program next year, or to minimize 
benefit reductions. But for many of these plans, current problems with 
the Medicare+Choice payments and increased regulatory burdens were too 
overwhelming, and they were forced to reduce their participation, to 
withdraw from the program or to scale-back benefits.
Medicare+Choice Payment
    The BBA limited the annual rate of growth in payments to health 
plans, producing $22.5 billion in savings from the Medicare+Choice 
program. In addition, the BBA reduced geographic variation in payments 
to encourage the development of coverage choices in areas of the 
country with lower payments.
    We supported the passage of payment reforms in the BBA and 
understood the need to contribute our fair share toward the savings 
necessary to stabilize the Medicare Trust Fund. We are deeply 
concerned, however, that unintended consequences of higher than 
anticipated inflation, the growing gap in funding between the 
Medicare+Choice and fee-for-service sides of the program, and 
administrative actions taken by HCFA affecting Medicare+Choice payments 
do not serve the best interests of beneficiaries and were not 
anticipated by Congress.
    In 1998 and 1999, because of the low national growth percentage and 
the inability to achieve budget neutrality, no counties received 
blended payment rates. Spending on medical services furnished to 
Medicare-eligible military retirees by Department of Veterans Affairs 
(VA) and Department of Defense (DoD) hospitals continues to be omitted 
from the calculation of Medicare+Choice rates. A few years ago, the 
Prospective Payment Advisory Commission (ProPAC) estimated that health 
care provided in DoD and VA facilities to Medicare beneficiaries 
accounts for 3.1 percent of the total resource costs of treating 
Medicare beneficiaries. ProPAC concludes from its findings that the 
omission of the cost of care provided in DoD and VA facilities to 
Medicare beneficiaries leads to systematic errors in both the level and 
distribution of Medicare managed care payments. H.R. 2447, introduced 
by Congressman McDermott, would help address this problem by including 
these amounts in Medicare+Choice rate calculations.
    In addition, the BBA sought to begin tackling some of the issues 
related to Graduate Medical Education (GME) reform by limiting the 
number of residents supported by the Medicare program and by providing 
incentives to hospitals to reduce the size of their training programs. 
However, a central BBA provision, the removal of GME funds from the 
calculation of payments to Medicare+Choice organizations, does not 
appear to address GME reform goals. AAHP opposed the removal of GME 
funds from the calculation of Medicare+Choice payments, particularly in 
the absence of broader, structural reforms to GME financing. AAHP 
voiced concern that removal of GME funds could result in premium 
increases and/or benefit reductions for beneficiaries enrolled with 
plans already participating in the program, inhibit enrollment growth, 
and at worst could force some plans to leave the program.
    This provision was intended to assure that beneficiaries have 
access to services at these facilities and that these facilities are 
compensated for their teaching costs. Studies show that health plan 
members do use teaching facilities and that plan payments for a given 
case in a teaching hospital greatly exceed payments for the same case 
in a non-teaching hospital. Although GME payments are being removed 
from Medicare+Choice payments, in many markets, the dominance of 
teaching hospitals limits health plans' ability to reflect the carve-
out by making commensurate reductions in payments to teaching 
hospitals. Consequently, teaching hospitals are receiving GME payments 
from the Medicare program as well as higher payments from health plans. 
Ultimately, it is the Medicare beneficiary who bears the burden of 
these higher payments due to reductions in additional benefits that 
they otherwise would receive.
    Furthermore, HCFA has chosen to implement its new risk-adjustment 
methodology in a manner that will cut aggregate payments to 
Medicare+Choice organizations by an estimated additional $11.2 billion 
over a five-year period beginning in 2000. This is an administratively 
imposed increase in the $22.5 billion savings Congress expected from 
the payment methodology as enacted in the BBA. In fact, at the time of 
the BBA's approval, the Congressional Budget Office (CBO) did not score 
the new risk-adjuster as saving money. More recently, CBO stated that 
it had ``previously assumed'' that the health status-based risk-
adjustment in the Medicare+Choice program would be budget 
neutral.2
---------------------------------------------------------------------------
    \2\ ``An Analysis of the President's Budgetary Proposals for FY 
2000,'' Congressional Budget Office.
---------------------------------------------------------------------------
    AAHP analysis of PricewaterhouseCoopers projections of 
Medicare+Choice rates in each county over the next five years shows 
that a significant gap opens up between reimbursement under the fee-
for-service program and reimbursement under the Medicare+Choice 
program.3 This Medicare+Choice Fairness Gap will be at least 
$1,000 for two-thirds of Medicare+Choice enrollees living in the top 
100 counties, as ranked by Medicare+Choice enrollment (Figure 2). This 
same Fairness Gap will exceed $1,500 per enrollee in major 
Medicare+Choice markets, including Chicago, Los Angeles, Miami, New 
York, Boston, Pittsburgh, Cleveland, St. Louis City, Dallas, and 
Philadelphia. In Miami, the Fairness Gap will be $3,500 per enrollee in 
2004 and in Houston the gap will exceed $2,500 per enrollee in 2004. In 
New Orleans, the Fairness Gap will exceed $2,600 per enrollee in 2004.
---------------------------------------------------------------------------
    \3\ AAHP calculation from PricewaterhouseCoopers (PWC) analysis 
prepared for AAHP, March 1999. AAHP's analysis produces conservative 
estimates of the Fairness Gap by assuming that county-level 
Medicare+Choice and FFS payments were equal in 1997, even though 
Medicare+Choice payments were actually lower than FFS per capita 
payments in 1997. PWC analysis based on first stage of risk adjustment. 
PWC analysis does not reflect second stage of risk adjustment, which 
HCFA expects to reduce payments by an additional 7.5 percent in 2004. 
The Fairness Gap represents growth between 1997 and 2004 in the 
projected difference between county-level aged Medicare+Choice risk-
adjusted per capita payments and FFS per capita payments. Top 100 
counties by enrollment account for 72 percent of enrollment.
---------------------------------------------------------------------------
    For nearly half of Medicare+Choice enrollees living in the top 100 
counties, government payments to health plans on behalf of 
beneficiaries will be 85 percent or less of fee-for-service Medicare 
payments in 2004, significantly exceeding estimates of so-called 
overpayment due to favorable selection by plans (Figure 3). When AAHP 
examined the top 101 to 200 counties as ranked by enrollment, we 
continued to find a large Fairness Gap in the smaller markets that 
plans were expected to expand into under the policy changes implemented 
by the BBA. In these counties, nearly half of Medicare+Choice enrollees 
live in areas where the Fairness Gap will be $1,000 or more in 2004.
    A large percentage of the Fairness Gap is attributable to HCFA's 
new risk-adjuster, the design of which is severely flawed. Rather than 
measuring health-status, HCFA's risk-adjustment measures inpatient 
hospital utilization. This design penalizes health plans that use 
disease management programs designed to reduce hospitalizations for 
chronically ill patients who would have otherwise been treated in 
inpatient settings. These programs are designed to prevent costly 
hospitalizations by treating patients in alternative settings.
    An AAHP analysis of PricewaterhouseCoopers projections that 
incorporate the effect of the risk-adjustment methodology, when it is 
phased-in at 10 percent, indicate that nearly half of current 
Medicare+Choice enrollees live in areas in which year 2000 payments 
will increase by 2 percent or less over 1999 payments. This situation 
will likely worsen in 2001 when HCFA will base 30 percent of 
Medicare+Choice payments on its risk-adjustment methodology. Contrary 
to ensuring predictability in the new Medicare+Choice program, the 
impact of this risk-adjustment methodology will be to restrict new 
market entrants and leave beneficiaries with fewer options, reduced 
benefits and higher out-of-pocket costs. AAHP has found that the impact 
of HCFA's risk-adjuster on Medicare+Choice payments to rural and urban 
counties is similar--rural areas with Medicare+Choice beneficiaries are 
cut by about 6 percent, while urban areas are cut by about 7 percent.
    AAHP also has significant concerns about the funding of the 
Medicare beneficiary information campaign. While it is reasonable for 
health plans and their enrollees to contribute to funding HCFA's 
education and information dissemination initiatives, their contribution 
should be in proportion to their participation in the Medicare program. 
Last year, Medicare risk HMOs and their enrollees represented 14.3 
percent of the program, but shouldered 100 percent of the cost of the 
information campaign.

[GRAPHIC] [TIFF OMITTED] T8504.002

[GRAPHIC] [TIFF OMITTED] T8504.003

    The FY1999 $95 million funding level represents an annual cost of 
$2.40 per beneficiary if it is spread over the entire Medicare 
population of 39 million beneficiaries. It represents an annual cost of 
$15.43 per beneficiary if it is spread over only those beneficiaries 
who have enrolled in a Medicare+Choice plan. On average, generating the 
$95 million authorized by the BBA will require a tax of $1.90 each 
month for each beneficiary enrolled in a Medicare+Choice plan (the tax 
is collected over only the first nine months of the year). This $1.90 
per month per beneficiary tax represents 18% percent of the average 
monthly 1998 to 1999 payment increase under the new BBA payment 
methodology.
    AAHP supports the goal of providing beneficiaries with accurate 
information that allows them to compare all options and select the one 
that best meets their needs. Last year's campaign did not meet 
Congressional expectations. Many beneficiaries received incorrect or 
confusing information and some plans were left out of the brochure 
altogether. AAHP urges Congress to ask HCFA for an accounting of its 
use of resources for educational purposes. We also urge Congress to 
adopt MedPAC's recommendation to fund this program through HCFA's 
operating funds rather than a tax on Medicare+Choice enrollees. AAHP 
continues to believe that the entire beneficiary information program 
should be reevaluated and streamlined.
    HCFA documents indicate that it has $25 million left from the fees 
collected last year and has indicated that next year's appropriation 
should be offset by this amount. Yet, HCFA is asking for more in new 
user fees than the amount collected last year. Given concerns about the 
effectiveness of this effort and at a time of growing instability in 
the Medicare+Choice program, we strongly urge that the program be 
scaled back and realistic goals set. In addition, we urge that the cost 
of a redesigned effort be distributed proportionately across the entire 
system.
Stabilizing Payment Will Help Stabilize the Medicare+Choice Program
    The present state of the Medicare+Choice program is not what 
Congress expected when the BBA was approved two years ago. Rather than 
having expanded coverage choices, beneficiaries face fewer coverage 
choices. Additional benefits offered by plans that are not available in 
the fee-for-service program are being jeopardized. Some have argued 
that HCFA overpays health plans and that plans withdrawing from the 
market are simply making ``business decisions.'' In response, first let 
me say this: overpaid health plans do not leave a market. Overpaid 
health plans do not reduce benefits. Second, payment and regulatory 
requirements dictate the type of environment in which health plans 
participate in the Medicare+Choice ``business.'' So yes, the current 
payment and regulatory environment is forcing plans to make difficult 
business decisions regarding their participation in the Medicare+Choice 
program.
    The Bilirakis-Deutsch bill, H.R. 2419, would go a long way toward 
stabilizing the payment situation in both urban and rural areas by 
requiring that HCFA implement the new risk-adjuster on a budget-neutral 
basis, which is in keeping with Congressional intent. The bill also 
would ensure that national updates to government payments for 
beneficiaries choosing a Medicare+Choice plan grow at the same rate as 
government payments for beneficiaries choosing fee-for-service 
Medicare. H.R. 2419 represents an equitable restoration of funding by 
increasing the total dollars available in setting Medicare+Choice 
payment rates. This approach will help ensure that the BBA goal of 
expanding coverage choices for all beneficiaries is met.
    Another way that payments could be stabilized is through 
establishment of a true payment floor. As discussed earlier in this 
testimony, Medicare+Choice payments are falling drastically relative to 
fee-for-service Medicare payments--in many areas, payments are falling 
to 80 percent or less of fee-for-service payment. To prevent this, a 
true floor could be set such that Medicare+Choice payments would not 
fall below a specified percentage of fee-for-service per capita 
payments in a county.
Medicare+Choice Regulatory Environment Contributes to Program 
        Volatility
    The challenges facing the Medicare+Choice program do not result 
from payment alone. HCFA's approach to overseeing the program and the 
structure of the Medicare+Choice program are contributing to the 
volatility in the program. Taken together, the issues of payment and 
regulation have challenged plans' abilities to maintain their health 
care networks. In some cases, providers simply have told health plans 
that given low payments and increased regulatory requirements on them, 
that they are better off just seeing beneficiaries under the fee-for-
service program.
    HCFA Roles as Purchaser and Regulator in Conflict. HCFA's dual 
roles as purchaser and regulator are, at times, in conflict. Nowhere 
has this conflict been more evident than in HCFA's implementation of 
the BBA. The situation plans faced in the fall of 1998 serves to 
illustrate the inherent conflict between HCFA's traditional role as a 
regulator and its changing role as a purchaser. HCFA published the 
Medicare+Choice regulation, which was more burdensome than expected, 
nearly a month and a half after the date plans were required to file 
their 1999 adjusted community rate proposals (ACRs) last year.
    This situation and the unrealistic compliance deadlines combined 
with the reduced rate of increase in payments and the uncertainty 
created by the new risk-adjustment model, caused plans across the 
country and across model types to become deeply concerned last fall 
about the viability of the benefits and rates included in their ACRs on 
the originally mandated May 1st deadline. This led our members to make 
an unprecedented request to HCFA to allow plans to resubmit parts of 
their ACRs. In some service areas, the ability to vary copayments--even 
minimally--meant the difference between a plan's ability to stay in the 
Medicare+Choice program or to pull out of a market.
    While this request presented HCFA with a complicated situation, 
AAHP strongly believes that an affirmative decision would have been 
better for beneficiaries. As a purchaser, HCFA had a strong motivation 
to maintain as many options as possible for beneficiaries by responding 
to health plans' concerns and adopting a more flexible approach to 
Medicare+Choice implementation. As a regulator, however, HCFA had 
concerns about criticism that could result from reopening bids, and 
thus chose not to allow any opportunity for adjustment of ACRs. HCFA's 
decision in part contributed to the withdrawal of nearly 100 health 
plans from the program, affecting more than 400,000 beneficiaries. 
These role conflicts remain unresolved, even largely unaddressed. Until 
ways are found to reconcile them, however, they will stand in the way 
of designing and delivering a Medicare+Choice program that really works 
for beneficiaries.
    Need For Fair Regulations. Beneficiaries should have confidence 
that all options, including both Medicare+Choice plans and the Medicare 
fee-for-service program, meet standards of accountability that ensure 
that they will have access to all Medicare benefits and rights 
regardless of the coverage choice they make. All Medicare+Choice 
options offered to Medicare beneficiaries should be required to meet 
comparable standards in such areas as quality of care, access, 
grievance procedures, and solvency.
    These standards should be implemented through regulatory 
requirements that make the best use of plans' resources to ensure that 
beneficiaries receive the maximum value from the program. This means 
that when requirements are established, their benefits must outweigh 
their costs. While we appreciate HCFA's efforts to address concerns 
about certain aspects of the Medicare+Choice regulation over the past 
several months, the fact remains that health plans are having to devote 
substantial human and financial resources toward compliance activities, 
which in turn means fewer resources devoted to additional benefits.
    AAHP renews its request that HCFA undertake an immediate analysis 
to develop a full understanding of the relationship between the costs 
associated with the full array of Medicare+Choice requirements and 
their value to beneficiaries and the Medicare program. We believe 
strongly that more of these resources should be available for benefits 
and patient care.
    Specific Areas of Concern with Medicare+Choice Legislative and 
Regulatory Requirements. Beyond the issues presented above the 
following specific areas are among those that remain problematic:

 Discontinuation of Flexible Benefits Policy. Prior to 
        enactment of the BBA, Medicare HMOs were allowed to vary 
        premiums and supplemental benefits within a contracted service 
        area on a county-by-county basis, and to customize products--or 
        offer ``flexible benefits''--to meet beneficiary and employer 
        needs and the dynamics of individual markets. The BBA and 
        HCFA's Medicare+Choice regulations are both more restrictive 
        than this policy, and require that Medicare+Choice plans offer 
        uniform benefits and uniform premiums across a plan's total 
        service area without regard to different county payment levels. 
        The result is that plans are less likely to continue or begin 
        serving lower-payment counties, just the opposite of expanding 
        coverage choice. HCFA developed a transition policy for 
        existing contractors, which allows Medicare+Choice 
        organizations to segment service areas and offer multiple plans 
        in an effort to mitigate the effect of moving away from the 
        flexible benefits policy. While this transitional relief has 
        alleviated this problem in the short term, a permanent solution 
        is needed. AAHP encourages the Committee to revise the statute 
        so as to revert to the prior policy allowing flexible benefits 
        within plan service areas.
 HCFA's QISMC Standards Disregard Experience of Private Sector. 
        One area of significant concern to AAHP member plans is HCFA's 
        Quality Improvement System for Managed Care (QISMC). QISMC is 
        designed to establish a consistent set of quality oversight 
        standards for health plans for use by HCFA and state Medicaid 
        agencies under the Medicare and Medicaid programs, 
        respectively. AAHP has long advocated coordination of quality 
        standards for health plans in order to maximize the value of 
        plan resources dedicated to quality improvement. While AAHP 
        believes that QISMC could have been designed to contribute to 
        this important goal, our members have a number of serious 
        concerns regarding HCFA implementation of this program. 
        Furthermore, we are also concerned that the Medicare program is 
        not providing equal attention to the overall quality of care 
        furnished under the fee-for-service program.
      One of our primary concerns is that QISMC lacks clear 
        coordination with existing public and private sector 
        accreditation and reporting standards. Rather than coordinate 
        with existing standards, QISMC establishes an entirely new 
        system of requirement that not only are far more stringent, but 
        also are unreasonable in their timeframes. Meeting two 
        competing sets of standards adds to administrative cost while 
        detracting from health care quality improvement.
      iv. solving the problems that undermine the success of the 
                        medicare+choice program
    AAHP and its members applaud the Subcommittee for holding this 
hearing and implore the Subcommittee to move immediately in taking 
measures to restore stability to the Medicare+Choice program. In doing 
so, AAHP members urge the Subcommittee to consider the following four 
principles.
    First, Congress must ensure that Medicare+Choice payments are 
adequate and stable and that they are comparable to those in fee-for-
service Medicare. Federal contributions to Medicare+Choice 
organizations should be adequate and predictable to promote expanded 
coverage choices for beneficiaries in low payment areas, while 
maintaining the availability of affordable options for beneficiaries in 
markets in which health plan options are currently well established.
    The Administration projects that its approach will cut 
Medicare+Choice payments by an additional $11.2 billion over a 5-year 
period and thus endanger the very choices, broader benefits, and out-
of-pocket protections these beneficiaries enjoy. As is now apparent, 
the BBA payment formula, in combination with the Administration's new 
risk-adjuster, will not achieve this goal. Instead, AAHP analysis shows 
a dramatic gap opening up between payments for beneficiaries in the 
Medicare+Choice program and their counterparts in fee-for-service 
Medicare.
    AAHP urges of swift approval of the bipartisan H.R. 2419, the 
Medicare+Choice Risk-Adjustment Amendments of 1999, introduced by 
Congressman Bilirakis and Congressman Deutsch. A budget-neutral risk-
adjuster brings greater equity to payments without penalizing plans or 
destabilizing the program.
    Second, HCFA's beneficiary information and education effort should 
be re-examined and refocused to meet beneficiary interests and needs. 
AAHP supports the goal of providing beneficiaries with accurate 
information that allows them to compare all options and select the one 
that best meets their needs. AAHP urges Congress to ask HCFA for an 
accounting of its use of resources for educational purposes. AAHP 
continues to believe that the entire beneficiary information program 
should be reevaluated and streamlined.
    Third, Congress must promote and enforce a responsive regulatory 
environment. Without a doubt, the present instability has undermined 
beneficiaries' confidence in the Medicare+Choice program. Unless action 
is taken to restore their confidence, it is unlikely that the goals of 
the BBA will be achieved. Beneficiaries deserve a well-run program that 
is responsive to their needs. Unfortunately, the conflict between 
HCFA's roles as a purchaser and regulator often prevent the Agency from 
acting more nimbly in the best interests of beneficiaries.
    HCFA's implementation of the BBA highlights the tension between 
these roles. To increase consumer confidence in all aspects of the 
Medicare program, HCFA should take immediate steps to improve 
administration and regulation of the Medicare+Choice program. During 
the first year of Medicare+Choice implementation, HCFA promulgated more 
than 800 pages of new regulations and issued countless operational 
policy letters. The Medicare+Choice regulation should be re-examined to 
ensure that the value to beneficiaries justifies the resources required 
for compliance.
                             v. conclusion
    For over a decade, health plans have delivered to beneficiaries 
coordinated care, comprehensive benefits, and protection against highly 
unpredictable out-of-pocket costs, but these coverage choices are at 
risk. Congress and the Administration should act immediately to create 
a level playing field between the payments under the Medicare+Choice 
program and the Medicare fee-for-service program, and a regulatory 
environment based on the principles of ensuring that the value to 
beneficiaries justifies the resources required for compliance and equal 
accountability under the Medicare+Choice and Medicare fee-for-service 
programs.
    We urge you to address the Fairness Gap, and the problems we have 
identified with HCFA's implementation of the Medicare+Choice risk-
adjuster, and with regulation of the program. We are in the process of 
conferring with the members of the Subcommittee and your staff about 
AAHP's specific suggestions--some of which we have mentioned today--for 
solving these problems.
    Our concern last year that without action, more beneficiaries would 
lose access to their plan and that others would face reductions in 
benefits has become a dismal reality. Further delay could render the 
Medicare+Choice program beyond repair or salvage. This outcome would be 
a loss not only for the beneficiaries who have chosen a Medicare+Choice 
plan, but also for future beneficiaries who would be denied the 
opportunity to do so.

    Mr. Bilirakis. Thank you very much, Ms. Ignagni.
    Mr. Powell?

                    STATEMENT OF JOHN POWELL

    Mr. Powell. Thank you, Mr. Chairman, for the opportunity to 
testify today.
    The 3 million members and supporters of the Seniors 
Coalition are grateful to you for your excellent leadership of 
this subcommittee and we appreciate the diligent and thoughtful 
work of its members and staff in helping to find solutions to 
the many critical issues that are facing older Americans.
    The enactment of Medicare+Choice was an historic first step 
in giving seniors access to the kinds of health care options 
available to other Americans. Seniors want choice and they want 
freedom from one-size-fits-all program. Thus, the importance of 
the passage of Medicare+Choice legislation cannot be 
overstated, and that's why we are so disappointed that its 
promise has not been fully realized.
    When Medicare was created in the 1960's, the U.S. was 
facing a situation which had no precedent. For the first time, 
large numbers of people were growing old before they died, and 
we were not equipped to address their health care needs.
    Moreover, understanding of the process of aging was 
limited. Most believed that the loss of mental faculties was a 
natural part of aging. We thought Medicare must be based upon a 
structure that would act in a decisionmaking role for 
beneficiaries who could not act on their own behalf.
    We, of course, now know that assumption was incorrect. 
Critical thinking skills do not necessarily diminish with age, 
and the vast majority of older Americans remain sharp of mind 
throughout their lives.
    But, unfortunately, we created a bureaucratic structure, 
the Health Care Financing Administration, which was built upon 
this age's theory and which still operates on that basis today.
    Then there are the changes in the practice of medicine. 
When Medicare began, there had never been a heart transplant. 
There were no medicines for high cholesterol. Patients spent 
weeks in bed recovering from cataract surgery, and the concept 
of an artificial bone joint belonged in the realm of science 
fiction.
    Now, medicine has increasingly been focused upon the 
prevention of disease, not just upon treatment of acute 
illness. Eye surgery is performed in shopping malls, and 
inpatient hospital care is the exception, not the rule, for not 
only the treatment of many illnesses, but even for many types 
of surgery.
    The enactment of Medicare+Choice was a major step in 
helping Medicare accommodate itself to the realities of aging 
and the practice of Medicare in the late 20th century, or so it 
was intended to be, but 2 years later it still has not 
fulfilled its promise. There are not hundreds of new entrants 
into the Medicare marketplace. Why not?
    The answer, we believe, lies in the seemingly endless 
succession of barriers that have prevented full implementation 
of Medicare+Choice.
    First, consider the fact that HCFA took over 1 year from 
the passage of BBA to publish the 833 pages of regulations 
which laid down the ground rules. With barely 2 months left to 
submit proposals, the initial deadline of last August 31st went 
by with barely a nibble.
    Then there is the question of performance standards. Many 
insurers had no structure for collecting the type of data 
required, not to mention the fact that such data collection and 
management would require that some plans rewrite all of their 
existing contracts with providers.
    Now, a year later, the situation is no better. Rather than 
a stampede of plans seeking to enter the market, there are, in 
fact, plans retreating from it, and we now know that is due in 
part to HCFA deciding to squeeze an extra $11 billion from 
those very plans that were supposed to be encouraged to enter 
the market.
    Choice and competition are two sides of the same coin. 
Without competition there is no choice. But neither can survive 
where there is no incentive. HCFA, one might argue, not only 
removed the carrot of incentive, but also added far too many 
sticks.
    Earlier this year the Seniors Coalition had the opportunity 
to testify before this subcommittee on risk adjustment 
methodology for Medicare+Choice payment. We said then that we 
were gravely concerned that HCFA had chosen to base the risk 
adjustment upon an outdated approach to the practice of 
medicine. We were concerned, of course, that plans would not be 
adequately compensated for treating Medicare beneficiaries in 
outpatient settings and that this would result in increased 
incidence of hospitalization or in plans leaving the program.
    And, just like CBO, we did not expect the new risk 
adjustment system to change the overall payment level for such 
plans.
    H.R. 2419, the Medicare+Choice Risk Adjustment Amendments 
of 1999, is a major step toward stemming the tidal wave of 
plans leaving Medicare+Choice, and the Seniors Coalition 
supports it. It restores the original intent of Congress by 
requiring the establishment of a fair method for risk 
adjustment calculation. Finally, and most importantly, it will 
help restore the original intent of Congress in its passage of 
plus-Choice, the empowerment of the Medicare beneficiary as a 
health care consumer.
    [The prepared statement of John Powell follows:]
Prepared Statement of John Powell, Vice President, Government Affairs, 
                         The Seniors Coalition
    Thank you, Mr. Chairman, for the opportunity to testify today. The 
three million members and supporters of The Seniors Coalition are 
grateful to you for your excellent leadership of this subcommittee. We 
appreciate the diligent and thoughtful work of its members and staff in 
helping to find solutions to the many critical issues affecting the 
health of older Americans.
    The Seniors Coalition believes that the enactment of 
Medicare+Choice was an historic first step in giving seniors access to 
the kinds of health care options available to other Americans. Seniors 
want choice, they want freedom from a one-size-fits all program that 
only offers the same benefits to everyone regardless of their needs or 
circumstances. Thus, the importance of the passage of Medicare+Choice 
legislation cannot be overstated, and that is why we are so 
disappointed that its promise has not been fully realized.
    To explain this, I would first like to speak for a moment about the 
history of Medicare. When Medicare was created in the mid-1960s, the 
United States was facing a situation that had no precedent. For the 
first time in the history of the world, large numbers of people were 
growing old before they died, but neither our economy nor our society 
was equipped with programs to address their health care needs. Thus, 
Medicare came into being.
    But it is important to make two more points about the historical 
context in which Medicare was created. First, in the mid-1960s, our 
understanding of the process of aging was very limited. Most believed 
that loss of mental faculties were a natural part of aging and that, to 
be useful and effective, Medicare must be based upon a structure that 
would act in a decision making role for beneficiaries who could not act 
upon their own behalf. Of course, we now know that assumption was wrong 
very wrong. Critical thinking skills do not necessarily diminish with 
age, and the vast majority of older Americans remain sharp of mind 
throughout their life. But, unfortunately, we created a bureaucratic 
structure, the Health Care Financing Administration (HCFA), which was 
built upon this archaic and ageist theory, and which still operates on 
that basis today.
    Second, consider the changes in the practice of medicine that have 
occurred in the last 35 years! When Medicare began, there had never 
been a heart transplant; there were no medications for high 
cholesterol, had we even understood its impact on the cardio-vascular 
system; patients spent weeks in bed, flat on their back, recovering 
from cataract surgery; and the concept of an artificial bone joint 
belonged to the realm of science fiction. Now, medicine is increasingly 
focused upon the prevention of disease not just upon treatment of acute 
illnesses; eye surgery is performed in shopping malls; and inpatient 
hospital care is the exception, not the rule for not only the treatment 
of many illnesses but even for many types of surgery.
    The enactment of Medicare+Choice was a major step in helping 
Medicare accommodate itself to the realities of aging and the practice 
of medicine in the late 20th century--or so it was intended to be. But, 
two years later, it has not fulfilled its promise. There are not 
hundreds of new entrants into the Medicare marketplace; far too many 
beneficiaries do not have the luxury of choosing from among a number of 
options. And why not? The Seniors Coalition does believe that increased 
choice was clearly the intent of the Congress. Thus we need to look 
elsewhere to find the reason.
    The answer, we believe, lies in the seemingly endless succession of 
barriers that have prevented full implementation of the Medicare+Choice 
program. First, consider the fact that HCFA took over a year to publish 
the 833 pages of regulations which laid down the ground rules by which 
insurers could enter the Medicare market. With barely two months to 
submit proposals, the initial deadline of last August 31 went by with 
barely a nibble.
    Then, there was the question of performance standards. Many 
insurers had no structure for collecting the type of data required, not 
to mention the fact that such collection and management would require 
that some types of plans rewrite all of their existing contracts with 
providers.
    And now, a year later, the situation is no better. Rather than 
there being a stampede of plans seeking to enter the market, there are, 
in fact, plans retreating from it. And, we now know, that is in no 
small way related to yet another hurdle, the fact that HCFA has decided 
to squeeze out $11 Billion over the next five years from the very plans 
that Medicare+Choice was created to encourage to enter the senior 
market.
    Choice and competition are two sides of the same coin. Without 
competition there is no choice. But neither can survive where there is 
no incentive. HCFA, one might argue, not only removed the carrot, but 
also added far too many sticks.
    Earlier this year, The Seniors Coalition had the opportunity to 
testify before this subcommittee on the risk adjustment methodology for 
Medicare+Choice payment rates. We said then that we were gravely 
concerned that HCFA had chosen to base them upon an outdated approach 
to the practice of medicine. We were concerned, of course, that plans 
would not be adequately compensated for treating Medicare beneficiaries 
in outpatient settings--and that this would result increased incidences 
of hospitalization of Medicare beneficiaries or in plans leaving the 
program. And, just like CBO, we also did not expect that this new risk 
adjustment system would change the overall payment levels for such 
plans.
    While we still believe that HCFA will take far too long to begin 
using a variety of data for risk calculations, HR 2419 is a major step 
toward stemming the tidal wave of plans leaving Medicare+Choice, and we 
give it our support. It restores the original intent of Congress when 
it required the establishment of a new method for risk adjustment 
calculation. And finally, and most importantly, it will help to restore 
the original intent of the Congress in its passage of Medicare+Choice 
the empowerment of the Medicare beneficiary as a healthcare consumer.

    Mr. Bilirakis. Thank you, Mr. Powell.
    Ms. Canja?

                   STATEMENT OF ESTHER CANJA

    Ms. Canja. Mr. Chairman, I am Tess Canja, president of 
AARP. Thank you for the opportunity to share with you the 
beneficiary perspective on the Medicare+Choice program and the 
future of Medicare.
    In 1997, Congress created and AARP supported 
Medicare+Choice to introduce greater competitiveness into 
Medicare and to offer beneficiaries more health plan options.
    As this legislation passed, we understood that extending 
the short-term solvency of the Medicare program required shared 
sacrifice from all who have a stake in Medicare--providers and 
beneficiaries, alike. We also recognized that Medicare+Choice 
would lay the foundation for essential longer-term reform in 
Medicare.
    But change never comes easy. This year, 99 Medicare+Choice 
plans announced that they will not renew or that they will 
reduce their service areas beginning in January of the year 
2000. This will affect over 300,000 beneficiaries.
    Further, and probably of even greater impact next year will 
be the number of Medicare HMOs that reduce their level of 
benefits and increase cost-sharing by beneficiaries.
    AARP is deeply concerned about the dislocation HMO 
withdrawals will cause beneficiaries. All of these 
beneficiaries have the good fortune of still having Medicare, 
but the departure of Medicare HMOs from their areas means they 
will have fewer choices for their Medicare coverage, and, in 
many cases, higher out-of-pocket costs.
    While only a little over 1 percent of those currently in 
Medicare+Choice will lose the option to enroll in managed care 
entirely, the impact on each beneficiary who is affected is 100 
percent.
    The HMO industry contends that the BBA payment rates are 
the chief reason that plans are pulling out of the Medicare 
market. AARP does not have enough data to evaluate whether the 
payments are adequate or fairly calculated, but such claims 
should be carefully reviewed to ensure that we don't return to 
an era of overpayments to some plans.
    In this connection, Congress must continue to try to 
determine what the proper level of compensation for 
Medicare+Choice plans should be.
    The initial implementation of Medicare+Choice offers 
several lessons. First, while private sector approaches have 
been able to address some glaring gaps in Medicare, namely the 
lack of prescription drug coverage and out-of-pocket costs, 
these are not without their own failings. Beneficiaries 
enrolled in HMOs may be pleased with their lower costs and 
additional benefits; however, as we have seen, these 
beneficiaries will be exposed to the vagaries of the 
marketplace. They may not know from 1 year to the next whether 
their plan will remain a Medicare option.
    Second, the impact of the BBA has been and will continue to 
be significant. It must be evaluated and understood before 
launching additional Medicare reforms.
    I want to emphasize the importance of fully understanding 
the changes that have already been made under Medicare+Choice 
before we layer on new changes.
    If Medicare reform legislation is pushed through too 
quickly before the effect on beneficiaries and the program is 
known, AARP would be compelled to alert our members to the 
dangers in such legislation and why we would oppose it.
    Let me assure you, however, that AARP does not believe the 
status quo in Medicare is acceptable. To this end, my written 
statement identifies the fundamental principles that AARP 
believes should be the basis of any efforts to reform the 
program.
    Mr. Chairman, AARP is committed to making Medicare 
stronger. We look forward to working with the committee and the 
Congress to improve the Medicare+Choice program and to 
carefully explore the best options for securing Medicare's 
future.
    Thank you.
    [The prepared statement of Esther Canja follows:]
   Prepared Statement of Esther ``Tess'' Canja, President-elect, AARP
    Good morning Mr. Chairman and members of the Committee. I am Tess 
Canja, President-elect of AARP. Thank you for this opportunity to share 
with you the beneficiary perspective on the Medicare+Choice program and 
the future of Medicare.
    While this hearing is focused on evaluating the Medicare+Choice 
program and addressing its strengths and weaknesses, let me start by 
underscoring the enormous importance of Medicare. For over thirty years 
Medicare has provided dependable, affordable, quality health insurance 
for millions of older and disabled Americans. My home state of Florida 
has one of the largest beneficiary populations in the nation, and I see 
firsthand what a difference Medicare makes in the lives of older 
Americans. Medicare has been instrumental in improving the health and 
life expectancy of beneficiaries in Florida and across the nation. It 
has also helped to reduce the number of older persons living in 
poverty.
    Medicare's promise of affordable health care extends beyond the 
current generation of retirees. Now, more than ever, Americans of all 
ages are looking to Medicare's guaranteed protections as part of the 
foundation of their retirement planning. AARP believes that in order 
for Medicare to remain strong and viable for beneficiaries today and in 
the future, we must confront the key challenges facing the program. 
Among these challenges are: keeping pace with advances in medicine and 
changes in health care delivery; and securing the necessary long-term 
financial stability for the program in light of the aging of the boomer 
generation.
    To control the growth in Medicare expenditures and offer 
beneficiaries more health plan options, in 1997 Congress passed, and 
AARP supported, the Balanced Budget Act (BBA). The BBA provided 
significant program savings that extended Medicare's solvency until 
2008; the recent report of the Medicare Trustees projected 7 additional 
years of solvency--to 2015. At the same time, the BBA addressed a 
number of problems with the Medicare managed care program. It modified 
the payment methodology for plans to address significant overpayment 
problems. It also made several major changes affecting the program's 
beneficiaries, including: the creation of the Medicare+Choice program 
through which new types of plans could participate in Medicare; 
formulation of new rules for when and how beneficiaries can enroll in 
health plans or Medigap plans; and requirements specifying the content 
of information beneficiaries receive about those choices. In addition, 
as a result of the changes mandated by the BBA, virtually every 
beneficiary will face higher out-of-pocket expenses for health care.
    AARP supported the BBA and its creation of Medicare+Choice in order 
to accomplish the objective of expanding choice in the program while 
also protecting access, affordability, and quality of health care 
services. We understood that extending the short term solvency of the 
Medicare program required shared sacrifice from all who have a stake in 
Medicare, including both providers and beneficiaries. We also 
recognized that Medicare+Choice would lay the foundation for essential 
longer term reform in the Medicare program.
Lessons Learned from Medicare+Choice
    The challenges and successes of Medicare+Choice will have important 
implications for the next phase of Medicare reform. The initial 
implementation of Medicare+Choice offers several valuable lessons:
    First, the significant withdrawals from the program by Medicare 
HMOs both this year and next serve as a wake-up call to all who seek to 
bring private sector solutions to bear on Medicare's problems. While 
some private managed care approaches have been able to help remedy some 
glaring gaps in original Medicare--namely, the lack of prescription 
drug coverage and high out-of-pocket costs--these are not without their 
own failings. When private businesses are given the authority to manage 
a beneficiary's care in exchange for the opportunity to earn a profit, 
several things can happen. On the positive side, the innovations in 
administrative efficiency and improved health care delivery may benefit 
the patient through lower costs, additional benefits, and better 
coordinated care. On the other hand, patients can be exposed to the 
vagaries of the market place. They may force instability in their 
benefits and premium charges, and worse yet, beneficiaries may not know 
from one year to the next whether their plan will remain a Medicare 
option. It is a challenge to separate the positive from the negative 
because the same factors create both results. A private business may be 
more innovative and efficient, yet in the absence of an opportunity to 
earn a profit, will leave (or not enter) the market. This dynamic is 
part of the market place--particularly for publicly traded companies 
who have a responsibility to their investors. The beneficiary who 
gained extra benefits in the short run may lose them in the long run. 
Congress anticipated this problem and provided some protections for 
beneficiaries who move back into original fee-for-service Medicare.
    Second, with every change to Medicare, there are unintended 
consequences. Therefore, it is essential that policy makers and the 
public understand proposed changes to Medicare and their effect on 
beneficiaries, providers, and the Medicare program. This is especially 
important as the Congress moves forward on additional Medicare changes. 
There must be a careful and thorough examination of the full range of 
issues, including how the issues interact, as well as an understanding 
of the trade-offs that will be necessary.
    The Breaux-Thomas premium support plan and the President's recent 
Medicare reform proposal provide opportunities for examining different 
reform options and for stimulating public debate. Genuine debate is 
critical to build public understanding and support for reform. AARP 
believes it would be a serious mistake for anyone to hinder debate or 
for Congress to rush to judgment on any reform option. However, if 
reform legislation is pushed through too quickly, before the effects on 
beneficiaries and the program are known and before there is an emerging 
public judgment, AARP would be compelled to alert our members of the 
dangers of such legislation and why we would oppose it.
    Third, the significant number of Medicare HMO withdrawals has 
highlighted the difficulties older Americans have because outpatient 
prescription drugs are not included in Medicare's benefit package. 
Beneficiaries who seek drug coverage may find Medicare HMOs are not 
available in many locations. Those who do enroll in Medicare HMOs for 
drug coverage are finding that drug benefits are becoming more 
expensive and/or more restrictive, or that they may lose the benefit or 
the option of enrolling in an HMO altogether due to plan withdrawals. 
Once these beneficiaries return to original fee-for-service Medicare, 
it is almost impossible for them to purchase a supplemental policy that 
includes some prescription drug coverage due to cost and medical 
underwriting.
    Fourth, beneficiary education about their Medicare options is 
critical to the success of the Medicare+Choice program. AARP supported 
Medicare+Choice in order to give beneficiaries the full benefit of 
innovations in health care delivery. However, Medicare+Choice can 
realize its potential only if beneficiaries acquire the knowledge that 
will enable them to exercise their leverage as informed consumers in 
the health care market place. We support the Health Care Financing 
Administration's (HCFA) efforts to educate beneficiaries, and AARP has 
joined with the Agency as a partner in its education efforts. We 
believe Congress, too, must do its part by providing sufficient 
resources to enable HCFA to carry out its challenging tasks. In 
addition, we believe it is important that Congress not be overly 
prescriptive in defining HCFA's education initiatives, but rather allow 
HCFA the flexibility to employ a range of education techniques and 
materials for beneficiaries.
Issues Arising from Medicare+Choice Implementation
    Medicare HMO Withdrawals and Benefit Reductions--Beginning late 
last fall, Medicare beneficiaries began to feel the effects of the 
program's transformation when over 400,000 beneficiaries found 
themselves displaced from their current HMOs after multiple plans 
terminated their Medicare contracts or reduced their service areas. 
This year again, more Medicare HMOs have announced that they would not 
renew their Medicare contracts or that they would reduce their service 
areas beginning in 2000. HCFA estimates that these changes will affect 
327,000 beneficiaries.
    AARP is deeply concerned about the dislocation these Medicare 
beneficiaries will face when their current HMO enrollment is terminated 
at the end of this year. All of these Medicare beneficiaries have the 
good fortune of still having Medicare coverage, but the departure of 
Medicare HMOs from their areas means they will have fewer choices for 
their Medicare coverage, and, in many cases, higher out-of-pocket 
costs.
    The majority of affected beneficiaries have the option of joining 
another HMO in their area, but often this will mean changing doctors or 
losing extra benefits that had attracted them to a particular HMO in 
the first place. Beneficiaries are also entitled to return to original 
fee-for-service Medicare, but for many that is not a preferred option. 
Often, these beneficiaries chose managed care because it both relieved 
them of the financial burden of Medigap insurance payments and because 
it offered needed benefits, such as prescription drugs.
    Under the BBA, beneficiaries who lose their HMO coverage and return 
to original Medicare are given certain rights to purchase--or 
repurchase--a Medigap policy. However, these beneficiaries will have to 
bear a the significant expense to do so, generally in excess of $100 a 
month. Even if they can afford Medigap, not all beneficiaries are 
protected by the rules. Disabled beneficiaries may not have the right 
to purchase any Medigap policy. With only very limited exceptions, 
older beneficiaries are not guaranteed the right to purchase a policy 
that includes drug coverage.
    The 1999 Medicare HMO withdrawals will affect approximately five 
percent of all Medicare+Choice enrollees. While only a little over one 
percent of those currently in Medicare+Choice will lose the option to 
enroll in managed care entirely, the impact on each beneficiary 
affected is one hundred percent. In addition, the general disruption in 
the HMO market could make other beneficiaries reluctant to enroll in a 
Medicare HMO in the future.
    Further, and probably of even greater impact next year, will be the 
number of Medicare HMOs that reduce their level of benefits and 
increase cost-sharing by beneficiaries. Many HMOs have announced that 
they will eliminate extra benefits such as prescription drugs and/or 
they will raise the premiums they will charge. Nearly three-fifths of 
plans are reporting they will cap prescription drug benefits below 
$1,000 next year. The proportion of plans with $5000 or lower drug caps 
will increase by 50% between 1998 and 2000. Further, beneficiaries who 
find themselves in this situation are at a serious disadvantage. Their 
HMOs may no longer include the benefits that made them attractive or 
their HMOs may now become much more expensive. Beneficiaries in this 
situation have limited remedies. They can try to find another HMO in 
their area or return to original Medicare, but they do not have the 
same protections for purchasing a Medigap policy as those whose HMOs 
actually have left the program, and even if they are able to find a 
policy, they will likely face considerably higher out-of-pocket costs.
    Payment Methodology--Several reasons have been put forward to 
explain the HMO withdrawals from Medicare. The HMO industry contends 
that plans are pulling out of the Medicare market because the BBA 
Medicare payment rates and methodology are draconian. In contrast, the 
Government Accounting Office (GAO) has reported that the current 
movement of plans in and out of Medicare may be primarily the normal 
reaction of plans to market competition and conditions. In an April, 
1999 report on Medicare managed care plans, GAO concluded that while 
BBA payment rates were undoubtedly considered by the plans in making 
their participation decisions, other factors involving the plans' 
ability to compete were associated with plan withdrawals. These 
included recent entry in the county, low enrollment, and higher levels 
of competition.
    Whether or not the payments are adequate or fairly calculated is an 
issue that AARP cannot evaluate because we do not have enough data to 
do so. While it is tempting to blame the government for this turmoil, 
in actuality, competition in the managed care market place is playing a 
strong role. Aside from the federal payment, Medicare HMOs must 
consider whether they can compete effectively and attract enough 
Medicare patients to be profitable. If their bottom line performance is 
not strong enough in a given area, plans will adjust their benefits or 
pull out of the Medicare market entirely. This must be understood in 
order to determine how to preserve enrollment stability for 
beneficiaries without undermining the fiscal integrity of the program.
    In this connection, Congress must continue to try to determine what 
the proper level of compensation for Medicare+Choice plans should be. 
To do this accurately will require more information about how much it 
actually costs a plan to operate efficiently and effectively. AARP has 
supported testing different payment approaches, including competitive 
pricing. We also have supported implementation of risk adjustment 
because we believe that it will lead to fairer plan compensation.
    Ultimately, the HMO withdrawal situation and the expected benefit 
reductions underscore the importance of original Medicare. Regardless 
of the market decisions of private health plans, beneficiaries need the 
security of knowing original Medicare is there for them. It is not just 
those beneficiaries affected by HMO withdrawals that rely on original 
Medicare being there for them. A quick look at a map of the United 
States clearly illustrates that many areas of the country do not have 
HMOs, and many of these areas are not likely to see HMOs any time soon.
Greater Medicare Reforms
    As we have noted, Medicare+Choice is still in its infancy and many 
of the changes enacted by the Balance Budget Act are still phasing in. 
The overall effects of these changes on beneficiaries, providers, and 
the Medicare program itself are not yet clear and there is much to be 
learned. The challenges and the successes of Medicare+Choice will have 
important implications for broader reform of the Medicare program. The 
amount of ``fine-tuning'' now under discussion for Medicare+Choice 
offers ample reason why larger-scale reforms in Medicare must be made 
slowly and cautiously.
    While we have stated the importance of understanding the impact of 
the changes that have already been made before new changes are layered 
on top, this does not mean that the status quo in Medicare is 
acceptable. More must be done to ensure the program's long-term 
solvency and to modernize Medicare's benefits and delivery system.
    To this end, AARP believes that the fundamental principles that 
have guided Medicare should continue to be the basis of any efforts to 
reform the program:
    Defined Benefits Including Prescription Drugs--All Medicare 
beneficiaries are now guaranteed a defined set of health care benefits 
upon which they depend. A specified benefit package that is set in 
statute assures that Medicare remains a dependable source of health 
coverage over time. It is also an important benchmark upon which the 
adequacy of the government's contribution toward the cost of care can 
be measured. A benefit package set in statute reduces the potential for 
adverse selection by providing an appropriate basis for competition 
among the health plans participating in Medicare, and provides an 
element of certainty around which individuals, employers, and state 
Medicaid programs may plan.
    When Medicare began, the benefit package was consistent with the 
standards for medical care at the time. In any reform, it will be 
important that the benefits be clearly defined and reflect modern 
medical practices. To this end, prescription drugs must become part of 
the standard Medicare benefit package and can be available to all 
beneficiaries in whatever plan they choose.
    Adequate Government Contribution Toward the Cost of the Benefit 
Package--It is essential that the government's contribution or payment 
for the Medicare benefit package keep pace over time with the cost of 
the benefits. Currently, payment for traditional Medicare is roughly 
tied to the cost of the benefit package. If the government's 
contribution were tied to an artificial budget target and not connected 
to the benefit package, there would be a serious risk that both the 
benefits and government payment would diminish over time. In addition, 
a change that results in a flat government payment--regardless of the 
cost of a plan premium--could yield sharp out-of-pocket premium 
differences, both year-to-year and among plans, with resulting 
volatility in enrollments.
    Out-of-Pocket Protection--Changes in Medicare financing and 
benefits should protect all beneficiaries from burdensome out-of-pocket 
costs. The average Medicare beneficiary spends nearly 20 percent of his 
or her income out-of-pocket for health care expenses, excluding the 
costs of long-term care. In addition to items and services not covered 
by Medicare, beneficiaries have significant Medicare cost-sharing 
obligations: a $100 annual Part B deductible, a $768 Part A hospital 
deductible, 20 percent coinsurance for most Part B services, a 
substantially higher coinsurance for hospital outpatient services and 
mental health care, and a significant coinsurance for skilled nursing 
facility care. Currently, there is no coinsurance for Medicare home 
health care.
    Beneficiaries already pay a substantial amount of their health care 
costs--from services not covered by Medicare, to Medicare's cost-
sharing obligations, to their $45.50 monthly Part B premium. Further, 
the Part B premium beneficiaries pay is expected to almost double in 
the next ten years.
    AARP believes that beneficiaries are now paying, and should 
continue to pay their fair share for Medicare. However, if their cost-
sharing became to high, Medicare beneficiaries would face increasingly 
unaffordable barriers to appropriate and necessary services. In 
addition, if cost-sharing varies too greatly across plans, the 
potential for greater risk selection would increase, leaving many 
beneficiaries with coverage options they might consider inadequate or 
unsatisfactory.
    Protecting the Availability and Affordability of Medicare 
Coverage--Medicare should continue to be available to all older and 
disabled Americans regardless of their health status or income. Our 
nation's commitment to a system in which Americans contribute to the 
program through payroll taxes during their working years and then are 
entitled to receive the benefits they have earned, is the linchpin of 
public support for Medicare. Denying Medicare coverage to individuals 
based on income threatens this support. Furthermore, raising the age of 
Medicare eligibility would have the likely affect of leaving more 
Americans uninsured. Thus, in the absence of changes that would protect 
access to affordable coverage, raising the eligibility age for Medicare 
is unacceptable to AARP.
    Administration of Medicare--Effective administration of the program 
remains essential. The agency or organization that oversees Medicare 
must be accountable to Congress and beneficiaries for assuring access, 
affordability, adequacy of coverage, quality of care, and choice. It 
must have the tools and the flexibility it needs to improve the 
program--such as the ability to try new options like competitive 
bidding or expanding centers of excellence. It must ensure that a level 
playing field exists across all options; modernize original Medicare 
fee-for-service so that it remains a viable option for beneficiaries; 
ensure that all health plans meet rigorous standards; and continue to 
rigorously attack waste, fraud and abuse in the program.
    Financing--Medicare must have a stable source of financing that 
keeps pace with enrollment and the costs of the program. Ultimately, 
any financing source will need to be both broadly based and 
progressive. Additionally, AARP supports using an appropriate portion 
of the on-budget surplus to insure Medicare's financial health beyond 
2015.
    Conclusion--The initial implementation of Medicare+Choice is 
teaching us some valuable lessons. It is essential that changes from 
the BBA and their impact on current and future beneficiaries are 
thoroughly analyzed before greater changes take place. AARP looks 
forward to continuing to work with the Commerce Committee and your 
colleagues in the House and Senate to improve upon the Medicare+Choice 
program. We also want to work with you to advance a Medicare reform 
package that includes prescription drug coverage. The status quo in 
Medicare is not acceptable, but together we must ensure that any reform 
package continues Medicare's promise of quality, affordable health 
care.

    Mr. Bilirakis. Thank you, Ms. Canja.
    I was remiss in not congratulating you and also welcoming 
you.
    Ms. Canja. Thank you. It's good to see you.
    Mr. Bilirakis. It's hot down there in Florida. It is good 
to be up here.
    Ms. Canja. Yes.
    Mr. Bilirakis. Dr. Moon?

                    STATEMENT OF MARILYN MOON

    Ms. Moon. Thank you. I appreciate the opportunity, Mr. 
Chairman, to be here today to discuss the issues surrounding 
how private managed care plans are operating under Medicare.
    There is, as we've heard today, a great deal of flux in the 
market that is out there, but not all of it, I believe, is due 
to the Balanced Budget Act. Some of it is due to the natural 
workings of a marketplace, and it is important to sort those 
out.
    As an important option for beneficiaries, the Medicare 
program should, indeed, foster and encourage private plans to 
participate. But, in turn, private plans need to be held 
accountable to the goals that these plans are intended to 
achieve. That is, to achieve savings through the advantages of 
care management for the Federal Government and beneficiaries, 
to allow beneficiaries who like this kind of an environment the 
opportunity to have the opportunity to receive their care from 
such a plan, and to encourage plans to offer innovative 
services and benefits. That's the promise, and hopefully the 
delivery, that will happen in terms of having a managed care 
option or private plan option in the Medicare program.
    A look back over time indicates that Medicare's payments 
were not only generous in the past, they were often 
substantially higher than what was being received by plans 
treating other population groups.
    At the same time that private managed care plans were 
arguing that they are more efficient than fee-for-service and 
offering their services with low annual growth rates for the 
under-65 people, they were getting the fee-for-service growth 
rate increases in Medicare, often in excess of 10 percent a 
year, handed to them each year.
    The changes enacted in the BBA all have strong 
justifications in past research and analysis and should not 
necessarily be thought of as a fairness gap; rather, they are 
an attempt, I believe, to level the playing field between 
private plans and Medicare, which for some time has been tilted 
in favor of private plans.
    Plans do have legitimate claims to fair treatment in terms 
of payment levels, stability over time in those payments, and 
requirements on their behavior, but simply because plans are 
pulling out or reducing their benefits does not necessarily say 
that the changes in the BBA were wrong.
    For preliminary information available on what will happen 
in January, 2000, it appears that the share of beneficiaries 
affected at all will be less than 1 percent of the Medicare 
population. This is certainly comparable to the share of 
persons expected to be affected by the Federal employee's 
health benefits program, for example, and the pullouts that 
will occur there next year, and just half the share of retirees 
in FEHBP who normally change plans each year.
    In a market system, withdrawals should be expected. Indeed, 
they are a natural part of the process by which uncompetitive 
plans that cannot attract enough enrollees leave particular 
markets. Certainly, last year many of the pullouts that 
occurred where the enrollees were in areas where there were 
5,000 or fewer beneficiaries indicate that there are certainly 
issues going on in the flux in the market that is, to some 
extent, a natural process.
    The whole idea of competition is that some plans will do 
well and in the process drive others out of those areas. In 
fact, if no plans ever left, that would likely be a sign that 
competition was not working well. So if we want to have a 
competitive market environment we're going to have to expect 
these kinds of withdrawals.
    That's not to say it is necessarily easy or pleasant for 
the beneficiaries that are involved in this kind of situation, 
but some have suggested also that the scaling back of extra 
benefits signals that payments are too low for these plans. 
However, to the extent that extra benefits were made possible 
by overly generous premium payments from Medicare, as we've 
heard earlier today, these changes may again be viewed as 
leveling the playing field.
    Although it is painful for beneficiaries attracted to these 
private plans for promised extra benefits to lose them in the 
next year, a greater injustice would be done by increasing 
payments to assure that private plan enrollees get extra 
benefits, while those who remain in fee-for-service, either by 
choice or by necessity, do not.
    While withdrawal of plans is both a natural and necessary 
part of a competitive, market-based approach, that does also 
not mean that the transitions will be smooth or painless or 
that we should ignore them.
    For those who are in poor health, for those in the middle 
of a treatment regimen for a problem like cancer, for those who 
are frail or home-bound, having to make major changes in their 
personal health care delivery system will, indeed, be very 
difficult, and it is important to find ways to assure that 
there is as much stability in the system as possible, but I 
don't think we just jump to higher payments to do that.
    I believe we need to have a lot better education for 
individuals so that they understand what the implications are 
of a market system, and I also believe that prescription drugs 
are a particularly key benefit, because it is one that is easy 
to manipulate and one for which people are both attracted and 
at great risk when changes occur.
    Thank you.
    [The prepared statement of Marilyn Moon follows:]
 Prepared Statement of Marilyn Moon, Senior Fellow, The Urban Institute
    I appreciate the opportunity to be here today to discuss issues 
surrounding how private managed care plans are operating under 
Medicare. The flux in the overall health care market and changes 
brought about by the Balanced Budget Act of 1997 have generated 
challenges for the private plans that serve Medicare. It is important 
to attempt to sort out what is happening, why and whether it generates 
problems for the beneficiaries that the program was designed to serve.
    Although private plan options have been around for quite a long 
time, they have recently begun to attract a larger share of the 
Medicare population. This makes them an ever more important feature of 
Medicare. Moreover, since many of the options for reforming Medicare 
now being discussed would either place more reliance on such plans and/
or change the way in which they operate within Medicare, there may also 
be important lessons for reform from studying what is happening today.
    The headline in a recent press release from the American 
Association of Health Plans proclaimed, ``Insufficient Government 
Funding for Beneficiaries Forces Medicare HMO Cutbacks.'' My testimony 
today will contend that announced withdrawals are not particularly 
surprising or unusually large, that the reason offered by AAHP for such 
changes is only one of several possible explanations for changes 
occurring in private plans, and that the real issue is what will happen 
to Medicare beneficiaries as a result of these changes. But first, it 
is important to examine some background on what has been happening to 
Medicare + Choice.
The Role of Private Plans in Medicare
    As an important option for beneficiaries, the Medicare program 
should foster and encourage private plans to participate. But, in turn, 
private plans need to be held accountable to the goals they are 
intended to achieve: 1) to use the advantages of care management to 
achieve savings for the federal government and beneficiaries, 2) to 
allow beneficiaries who like a managed care environment the opportunity 
to receive their care from such a plan, and 3) to encourage plans to 
offer innovative services and benefits. If these plans cannot do better 
than the basic Medicare program in restraining costs and if they do not 
generate ``value added'' in terms of providing alternatives that 
attract beneficiaries, then should alarms be raised if this option does 
do not become a greater share of the Medicare program?
    The BBA sought to both offer additional alternatives to 
beneficiaries and to achieve savings from private plans through various 
payment reforms. Even more than many of the savings achieved from the 
traditional fee-for-service part of the program, the BBA changes in 
payment reflected a strong body of research that had demonstrated that 
payments to private plans were too high on average. Medicare was losing 
money on each beneficiary who signed up for this option. This was 
because beneficiaries opting for managed care were (and according to a 
recent study by the General Accounting Office, still are) healthier 
than others like them in the beneficiary population. The existing risk 
adjustment mechanism failed to capture these differences. Consequently, 
Medicare paid too much for each enrollee, enabling plans to use these 
resources to offer additional benefits that made them attractive to 
potential enrollees. Further, the Medicare program contains a number of 
additional subsidies for certain hospitals in its fee-for-service 
payments to help support medical education and coverage of indigent 
patients. Because of the way in which premium payments to private, 
managed care plans were made prior to BBA, these subsidies were passed 
on to the plans. But plans were not required to then pass on these 
benefits to the hospitals who should be receiving such subsidies. 
Consequently, payments were too high for this reason as well.
    A look back over time indicates that Medicare's payments were not 
only generous, they were often substantially higher than what was being 
received by plans treating other population groups. At the same time 
that private managed care plans were arguing that they were more 
efficient than fee-for-service and were offering their services with 
low annual growth rates, they were getting the fee-for-service growth 
rate increases (often in excess of 10 percent) handed to them each year 
in Medicare.
    The BBA attempted to rectify these issues with three sets of 
changes: 1) addition of an improved risk adjustment mechanism beginning 
next year, 2) short term reductions in payment levels to bring the 
amounts closer to where they should have been if a better risk 
adjustment factor had been in place in the past, and 3) taking out of 
the premium payments for private plans part of the cross-subsidies 
found in Medicare and instead giving them directly to hospitals. These 
changes all have strong justifications and should not be thought of as 
a ``fairness gap.'' Rather, they are an attempt to level the playing 
field between private plans and Medicare which for some time has been 
tilted in favor of private plans. Further, if these changes had been 
fully applied, some plans might actually have seen their payments 
decline; but the BBA placed a safety valve of a guaranteed 2 percent 
increase in payments each year even for plans in very high premium 
areas.
    Plans do have legitimate claims to fair treatment in terms of 
payment levels, stability over time in payments and requirements on 
their behavior. Reporting rules and regulations should be reasonable in 
terms of the costs of complying. And it is important to continue to 
monitor payment levels to assure that they are fair. But just because 
the payment levels have been restricted is no reason to believe there 
is a problem. It is necessary to look further.
    To demonstrate that they are being unfairly treated, plans have 
been pointing to the withdrawals and lower benefit offerings that 
occurred in 1999 and that have been announced for January 1, 2000. But 
here again, it is necessary to ask whether this is just due to Medicare 
payment changes and new regulations or whether other factors are also 
at work.
Putting the Size of Withdrawals into Context
    A large number of plans announced withdrawals from Medicare + 
Choice in 1999. But by June of this year, the number of total 
participants in the program was 6.86 million beneficiaries, up over 
260,000 persons from June of 1998 (when the figure was 6.40 million). 
Further, the number of risk contracts, while smaller, was still over 
400.
    From preliminary information available on what will happen in 
January, 2000 to plans participating in Medicare + Choice, it appears 
that most beneficiaries will be unaffected. That is, 95 percent of 
enrollees in these plans will not have to make changes unless they 
elect to shift. Since enrollees in Medicare + Choice accounted for a 
little over 17 percent of all Medicare beneficiaries, the share of 
beneficiaries affected at all will be less than 1 percent. That is 
comparable to the share of persons expected to be affected by the 
Federal Employees Health Benefits Program (FEHBP) pullouts next year 
and just half the share of retirees in FEHBP who normally change plans 
each year, for example. Further, over three-fourths of those 
beneficiaries affected by withdrawals will still have at least one 
other private plan to choose from in addition to traditional Medicare. 
As this suggests, one major reason why individuals may have to change 
plans has more to do with the nature of a private-sector approach to 
Medicare.
What Are the Implications of Private Plans and Competition in Medicare?
    Choice among competing plans and the discipline that such 
competition can bring to prices and innovation are often stressed as 
potential advantages of relying on private plans for serving the 
Medicare population. But imbedded in those characteristics are also 
some of the responses by plans that are now being heavily criticized. 
That is, if there is to be choice and competition, some plans will not 
do well in a market and as a result they will leave. In a market 
system, withdrawals should be expected; indeed, they are a natural part 
of the process by which uncompetitive plans that cannot attract enough 
enrollees leave particular markets. If HMOs have a hard time working 
with doctors, hospitals and other providers in an area, they may decide 
that this is not a good market. And if they cannot attract enough 
enrollees to justify their overhead and administrative expenses, they 
will also leave an area. The whole idea of competition is that some 
plans will do well--and in the process drive others out of those areas. 
In fact, if no plans ever left, that would likely be a sign that 
competition was not working well.
    No one has raised major objections to the fact that a share of 
FEHBP plans drop out of that program each year, for example, or that 
individuals shift across plans. It seems inconceivable then to 
criticize the Medicare program simply because some plans leave various 
markets. That is the very nature of competition. And, from preliminary 
data, it appears that many of the withdrawals by plans are only in 
certain areas where the affected plans were unable to reach a critical 
mass to continue in operation. This was also a key reason for 
withdrawals in January of 1999.
The Issue of Premium Increases and Benefit Reductions in Medicare + 
        Choice
    Most plans routinely eliminate or reduce Medicare's cost sharing 
requirements and add other benefits as well. Because managed care plans 
seek to oversee the use of care directly rather than relying as much on 
cost sharing as compared to fee-for-service plans, managed care 
organizations do not need to be compensated for this additional 
offering; indeed, beneficiaries should expect this as a tradeoff for 
having less autonomy in the care they receive. But in addition, many 
managed care organizations also offer extra benefits such as 
prescription drug coverage, dental and vision care at either no 
additional premium or a premium substantially below the costs of 
private medigap coverage that many fee-for-service patients purchase.
    The announcement by some plans who are remaining in Medicare that 
next year premiums will be increased or extra benefits cut is likely 
related to Medicare policy changes (as well as to other factors such as 
the increasing costs of prescription drugs). Because premium payment 
levels by the federal government are not increased as fast as in the 
past, it should not be surprising that plans respond by restricting the 
generosity of the additional benefits they offer beyond what Medicare 
requires.
    But some have suggested that the scaling back of extra benefits 
signals that payments are too low for these plans. However, to the 
extent that these extra benefits were made possible by overly-generous 
premium payments from Medicare, these changes again may be viewed as 
leveling the playing field. Beneficiaries who do not or cannot enroll 
in private plans have been at a disadvantage because they do not have 
access to these extra benefits. If payments to plans were raised to 
restore extra benefits, this would thus generate a critical fairness 
issue. Although it is painful for beneficiaries attracted to these 
private plans for promised extra benefits to lose them in the next 
year, a greater injustice would be done by increasing payments to 
assure that private plan enrollees get extra benefits, while those who 
remain in fee-for-service do not.
Beneficiaries at Risk
    While a strong case can be made that many of the changes affecting 
Medicare's private plans are a combination of market forces and 
intended policy changes that require no intervention by the Congress, 
there will be important and painful impacts on beneficiaries. And these 
consequences should be carefully examined for lessons for the future.
    While I have argued above that it is important to recognize that 
withdrawal of plans is both a natural and necessary part of a 
competitive, market-based approach to providing health care, that does 
not mean that transitions will be smooth or painless for beneficiaries. 
For those in poor health, for those in the middle of a treatment 
regimen for a problem like cancer, for those who are frail or 
homebound, having to make major changes in their personal health care 
delivery system will be difficult. Finding ways to assure that there is 
as much stability in the system as possible for these beneficiaries is 
crucial, and somewhat at odds with a market-based approach.
    Even if the benefits that individuals have enjoyed in private plans 
came about because of overly generous federal contributions, that will 
not make beneficiaries content to lose such benefits over time. Many 
older and disabled persons have been attracted to managed care plans 
precisely because of the extra benefits offered. They may have made 
sacrifices to join such plans, including learning a new system of care 
and finding new doctors and other service providers only to discover 
that next year these benefits will be scaled back. How many 
beneficiaries understand that once they join a plan with all its 
promised benefits, that the promise extends for only one year?
    Remedies that sustain these windfall benefits are not fair to other 
beneficiaries who remain in fee for service. Instead, better education 
and information on the issue of what it means to enroll in a private 
plan option is needed. Recent surveys have shown that many 
beneficiaries do not understand the full range of conditions and 
requirements surrounding managed care, suggesting that they may be 
attracted by extra benefits and other promises without understanding 
the full nature of that decision. Advertising for such plans, for 
example, has a tendency to tout in headlines the extra benefits but use 
the small print to caution about restrictions. Managed care plans can 
have a lot to offer Medicare beneficiaries, but the choice should be an 
informed one.
    Another key issue raised by the changes announced by plans this 
year, and a trend that has actually been going on for several years, is 
the nature of the cutbacks in benefits. Many analysts have noted and 
warned that prescription drugs are difficult to offer in a fully 
voluntary environment because they naturally attract a sicker 
population who are likely to be heavier users of health care of all 
sorts. It is thus natural for plans looking for ways to reduce their 
costs to cut back on such benefits. If these benefits are increasingly 
limited over time, it will increase the importance of the debate over 
whether drugs ought to be offered as part of a basic Medicare package.

    Mr. Bilirakis. Thank you so much.
    Rabbi Malavsky?

               STATEMENT OF RABBI MORTON MALAVSKY

    Rabbi Malavsky. Thank you very much. Good morning, Chairman 
Bilirakis, Ranking Member Brown, and other distinguished 
members of the Health Subcommittee. Or, Chairman Bilirakis, 
should I say good morning? Or, no, it is already afternoon.
    Mr. Bilirakis. You do it well.
    Rabbi Malavsky. I am Rabbi Morton Malavsky, and I am 
pleased to be here this morning to talk to you in person about 
some of my experiences with the Medicare+Choice program, 
particularly Humana's health plan, its services, and its 
doctors.
    You know, I feel I must digress a little bit and draw this 
analogy. Science has progressed so much today, when you want to 
call some firm or outfit you dial the telephone and it is push 
one, push two, push three, push five. It's annoying. You sit 
there for the longest time and you're pushing all kinds of 
buttons. When I do that and somebody finally comes on, I say, 
``Thank God there is a live person there that I can talk to.'' 
Well, I'm that live person who is here today to talk to you as 
one of the beneficiaries that you are all talking about but so 
few people get to meet or to see.
    I know that there have been pros and cons about the 
program, but would somebody tell me of any program that they 
know, be it in the health field or otherwise, that there is no 
controversy about? Any program?
    As a matter of fact, in my years of experience I have found 
that the better a program, the more controversy, the more 
people look to find problems with it.
    I am here today to tell you that I am one of the 6 million 
and more, and the overwhelming majority of HMO members who are 
very happy with their plan, and I would very much appreciate 
for Congress not to do anything that would jeopardize what we 
already have.
    Moreover, I would beg that they live up to the commitment 
to the Medicare+Choice program by ensuring its viability 
financially in the future.
    Of course we are grateful. We are grateful to Chairman 
Bilirakis and to Congressman Deutsch for your outstanding work 
in introducing H.R. 2419. It does provide seniors the 
confidence that our Medicare+Choice program is here to stay in 
our communities.
    First of all, let me tell you that I quite regularly 
proudly tell my friends that I am enrolled in an HMO. I haven't 
had problems yet. In fact, I deal with people who have problems 
in their traditional programs, dealing with bureaucracy and 
other situations.
    I have been a member of Humana HMO for the past 5 years. 
Initially, I joined Humana because my doctor, who was then my 
primary physician, recommended I do so and suggested that I 
would benefit from the type of coordinated care, from the 
preventative to the acute services----
    Mr. Bilirakis. Rabbi, forgive me, sir, but we have a vote 
on the floor, and we're probably down to about 2 minutes. I 
don't want you to have to rush through. You're on a roll here.
    Anyhow, I think it is best if, with your forgiveness, we 
break at this point.
    Rabbi Malavsky. Fine.
    Mr. Bilirakis. Because we've got to run, and I know that a 
lot of people probably want to grab a bite to eat, let's break 
until 1:20. That will give you all an opportunity to grab a 
quick bite, too.
    Rabbi, we'll get right back to it, so hold that thought.
    [Brief recess.]
    Mr. Bilirakis. Now, Rabbi, for the sake of continuity, 
you're welcome to back up in your testimony and not necessarily 
start from the beginning, but virtually so.
    Rabbi Malavsky. All right.
    I left off just past where I said that I regularly am 
proudly happy to tell my friends that I am enrolled in an HMO 
and that I've never had problems.
    In fact, it is the people with traditional programs that I 
see on a regular basis lying there and waiting in the emergency 
rooms, waiting for service, and others trying to get 
appointments with doctors and waiting lists, etc., etc.
    I have been a member of Humana HMO for 5 years, since 1994. 
Initially, I joined Humana because my physician, who had been 
my physician at that point for about 24 years, suggested, and 
he said I would benefit from the type of coordinated care, from 
preventative to acute services, as well as prescription drug 
coverage.
    Congress, I hope, will adequately fund the Medicare+Choice 
program. If not, there are many, many thousands of seniors and 
millions of them like me who will have no choice and no access 
to these type of services.
    Every day, Medicare+Choice is making a positive difference 
in the health of seniors and their lives.
    Let me take but a few moments and tell you a little bit 
about the experiences I've had, just one or two, in utilizing--
unfortunately and fortunately--some of the medical assistance 
and experiences that I have gone through.
    It is regularly commented upon that an ounce of prevention 
is worth a pound of cure. My physician would regularly say to 
me, ``You know, your plan or your Medicare or your supplemental 
insurance will not cover procedure A, B, or C, but I think we 
ought to do it anyhow.'' He was more than my primary, he was my 
friend, and so it was done.
    When I came under the plan, there was no question about it. 
And this happened twice, once about 4 years ago and then this 
summer again. My prostatic screening was irregular, and the PSA 
had gone to two or three times the number. I've learned all 
about it, since. And both the physician and the urologist 
immediately thought of one thing--cancer. They needed to go 
beyond that, and going beyond that meant a test, it meant a 
biopsy.
    Well, the test was taken and the biopsy was taken and, had 
I been not under HMO but a supplemental insurance or Medicare 
that I used to have, first, they would not have required it, 
and if I had done it and it came up as it did, there would have 
been quite a bit out-of-pocket expense.
    The results, by the way, were startling because it was 
shocking to both of my physicians, and when they sent me to the 
work-up and the biopsy, thank God--I had to wait for a full 
week, but it came through. My urologist has given me a clean 
bill of health, with the only thing that I need to go back 
every 6 or 8 months or something to check it out.
    Preventative services I honestly believe saves lives and 
saves your mind thinking about it. You can just go to pieces 
worrying about what might happen, and I'm thankful that my 
health plan places such importance on preventative medicine, on 
checking these things out.
    But, you know, the health plan is there not only for 
preventative services; they are there when you need them in an 
emergency, as well.
    It will be 2 years this Yom Kippur that I very sadly think 
back, and yet I am very grateful. After the memorial service in 
the afternoon, I suddenly felt ill on the pulpit. I broke out 
in cold sweat. I had a physician who is not mine, but there are 
several physicians in the congregation all the time--they do 
come to services--and I motioned to one of them. He came up and 
he was very conservative about his approach. He's not my doctor 
and did not know my case, but took me right back, had me lie 
down on the floor, called the 9-1-1 and had the full spiel, 
everything.
    In the meantime, they reached my doctor. He gave them a 
diagnosis over the phone of what he thought it might be, but 
they would take no chances.
    I was rushed to a hospital Yom Kippur afternoon. There was 
a team of doctors and nurses waiting for me.
    I am an HMO patient. I am not a supplemental or just 
Medicare or top-paying patient. They were waiting for me--
didn't take any time getting information. They already had it.
    I was tired of what they did to me with the tests and 
testing and checking. I don't think they left a drop of any 
stone unturned. And then they had a list of things that I had 
to do--this test, that test. I was hospitalized for 3 or 4 
days. My physician came up right away. His diagnosis happened 
to be so. It was hypoglycemia. It was not the heart. But I had 
a stress test and I had a vascular surgeon and a neurological 
surgeon--all of them, people I've never heard of, problems I've 
never had before, but everything was checked out.
    And when I left, and even after that, I said, ``Is there 
any bill?'' ``No, no, it's all taken care of. Everything is 
taken care of. All you have to do is go back to these different 
doctors from time to time.''
    Mr. Bilirakis. Please summarize, Rabbi, if you will.
    Rabbi Malavsky. Yes.
    With a track record like this, it's not surprising that my 
health plan has been recognized for their congestive heart 
disease management program. This program has given so many 
people additional life.
    And medication--I probably save close to $5,000 a year. I 
don't know about the dollars and cents, but I would welcome you 
to compare what HMO gets and what Medicare gets. I think you'll 
find that some of the traditional Medicare payments and fee-
for-service payments are considerably higher.
    So let me say to you we beg of you to see to it. You've 
allowed us to grow older. We, the senior citizens of America, 
owe you, the Congress, a great debt. You have developed 
medicine scientifically to a point that, whereas people were 
dying in the 60's and 70's, it is now 80's and 90's, it will be 
100's and 110's and 120. But now that we grew older, help us 
stay well.
    I cannot think of anything better to describe that but a 
little analogy. It's a little European story that I finish 
with, a story where we are told that the Congress is ready to 
take this away and that away and give us less and less; that a 
man who was a taxi driver in a small town in eastern Europe, he 
was--not a taxi, he had a little wagon and a horse and he would 
take people from town to town. He couldn't make it. It was 
rough. So he decided he's got to cut expenses, so he fed his 
horse a little less 1 day. You know what? He still carried the 
load the next day, so he gave him a little less yet, and again 
a little less.
    On the sixth day the horse died. So he came to his rabbi 
and he said, ``I don't understand. I finally taught my horse 
not to eat and he died on me.''
    You have brought us to a station in life that we never 
dreamed of. We're up there in years, the 70's and 80's and 
90's. Please don't neglect us, whatever it takes, however you 
work it out. Don't fix it if it's not broken, and don't deny us 
this wonderful, wonderful service.
    Thank you very much.
    [The prepared statement of Rabbi Morton Malavsky follows:]
              Prepared Statement of Rabbi Morton Malavsky
Introduction
    Good morning, Chairman Bilirakis, Ranking Member Brown, and other 
distinguished members of the Health Subcommittee, I am Rabbi Morton 
Malavsky and I am pleased to be here this morning to talk to you about 
my experience with the Medicare+Choice program and, particularly, my 
experience with my Humana's health plan and doctors.
    I know HMO quality has been a big issue. I am here today to tell 
you I am one of an overwhelming majority of HMO members who is 
extremely pleased with my plan. And, I don't want Congress to do 
anything that will put my benefits in jeopardy. Moreover, I want the 
Congress to live up to its commitment to the Medicare+Choice program by 
ensuring it remains financially viable. Thank you, Chairman Bilirakis 
and Congressman Deutsch, for your outstanding work in introducing H.R. 
2419--it does provide seniors the confidence that our Medicare+Choice 
program will stay in our communities.
    First of all, let me say, I regularly and proudly tell my friends I 
am enrolled in an HMO. I have never had problems. In fact, it is my 
friends in the traditional Medicare program, dealing with the 
government bureaucracy, who seem to have the problems.
    I have been a Humana member since 1994. Initially, I joined Humana 
because my doctor recommended I do so and suggested that I would 
benefit from the type of coordinated care--from preventive to acute 
services, as well as prescription drug coverage--that Humana offers. 
Congress needs to adequately fund the Medicare+Choice program--
otherwise thousands of seniors, like me, will have no choice and no 
access to these types of services.
    Every day, Medicare+Choice is making a positive difference in 
seniors' health and lives. And, I want to take a few moments to share 
with the Committee members some of my personal experiences.
Preventive Services
    You always hear that an ounce of prevention is worth a pound of 
cure. Early this summer, I underwent a prostate screening assessment 
(PSA). My Humana health plan insisted I get this test I may not have on 
my own. The supplemental insurance I used to have would not have 
covered this.
    Well, the test results were startling. I was shocked when my doctor 
indicated that there was a possibility of cancer because my PSA had 
risen dramatically. My doctor then sent me immediately to an urologist 
for a work-up and a biopsy. I thank God the results were negative.
    My urologist has since given me a clean bill of health and made a 
point to establishing a schedule for my routine check-ups. Preventive 
services do save lives and I am thankful that my health plan places 
such importance on these early detection services.
Acute needs
    But my health plan isn't just there for preventative services; they 
were there when I needed them most. In 1997, while at the pulpit 
delivering a sermon during Yom Kippur, I broke into a cold sweat and 
began to experience chest pains. Within minutes, a physician in the 
congregation came to my aide. I was raced to an emergency room where my 
own personal doctor met me. While my doctor thought I probably 
hypoglycemia, he thought it was important for me to get immediate 
attention anyway. At the hospital emergency room, there were a team of 
physicians and nurses to treat me. I underwent a myriad of tests, 
including a stress test. No stone was left unturned. The quality of 
care that I received in the emergency room was first-rate. And, Humana 
paid the entire bill. Under my old supplemental plan, I would have had 
to pay a deductible and coinsurance--even for this emergency care.
    With a track record like this, it is not surprising that my health 
plan has been recognize for their congestive heart disease management 
program. Seniors like Humana and their team of doctors because, like 
me, they are confident that the quality of care will be the best the 
system has to deliver.
Prescription Drugs Coverage
    Medicare+Choice plans give seniors affordable access to life-
enhancing prescription drugs. More importantly, Medicare+Choice plans 
help protect seniors from catastrophic health care costs of escalating 
drug costs. Prior to joining Humana 1994, I was paying a monthly 
Medigap premium of over a $125 a month and averaged monthly out-of 
pocket costs of $200 per month in out-of-pocket expenses. To seniors, 
this is real money. For me specifically, I save about $5000 per year. 
No press release or political speech can ease the anxiety seniors' feel 
when they are faced with the uncertainty rising prescription drug costs 
or the potential of losing their drug benefit. In Lakeland, Florida, 
Humana is able to offer prescription drug coverage with a $10 co-
payment. It is not difficult to understand that I was attracted to a 
Medicare+Choice option because of two simple factors--lower costs and 
better benefits.
Conclusion
    In closing, I would like to share a story with you. There was a man 
who thought he'd save money on his deliveries if he could just save 
money on the grain it took to feed his horse. So, he decreased the 
amount he fed his horse. Well, he was so impressed with the money he'd 
saved, he fed the horse even less. Finally, he thought he could save a 
lot more money if he didn't feed the horse at all. As you can guess, 
the horse died from starvation.
    My point is this: Medicare+Choice is a program that works. Please 
do not be shortsighted and starve it. You could kill the program--a 
program that provides quality benefits (which for me include 
prescription drugs, eyeglasses, and hearing aids) to a large number of 
seniors who rely on it and believe it is a real choice.
    Again, thank you for the opportunity to appear before you to share 
my experiences with the Medicare+Choice program. I would be pleased to 
answer any questions the Committee members have.

    Mr. Bilirakis. Thank you very much, Rabbi.
    Mr. Burr. Mr. Chairman, clearly HCFA has heard his story 
before about the horse.
    Mr. Bilirakis. Rabbi, you are, of course, a rabbi and a 
leading citizen of the community area, so I would ask you, the 
treatment that you received, is that also available, in your 
opinion, to others, based on your personal knowledge?
    Rabbi Malavsky. Yes. I was just one of the patients. They 
didn't even know who I was.
    Mr. Bilirakis. They didn't even know who you were?
    Rabbi Malavsky. No. It wasn't until a day later that they 
were sort of embarrassed. Did we do all right? Did we take care 
of you?
    Mr. Bilirakis. Thank you.
    Ms. Canja, in your testimony AARP supported the--and I'm 
quoting--``creating of Medicare+Choice in order to accomplish 
the objective of expanding choice.''
    Well, now is there an AARP position regarding HCFA's 
interpretation of BBA 1997 where they have basically taken, or 
are contemplating taking $11.2 billion based on their figures, 
out of the reimbursement picture on Medicare+Choice?
    Ms. Canja. We do support it.
    Mr. Bilirakis. You support?
    Ms. Canja. We support it because we----
    Mr. Bilirakis. You support taking the dollars out?
    Ms. Canja. I can't respond to that part, but we watched 
what they were doing, we observed what they were doing, and 
felt that it was appropriate, felt that risk adjustment was 
very appropriate, and felt that they really did try to meet the 
concerns of all parties. So, on that basis, we did support it. 
We will look carefully at your concerns and at Congress' 
concerns.
    Mr. Bilirakis. Well, we're concerned, of course, that some 
people don't have that choice that AARP feels so strongly 
about; I think all of us feel strongly about choice, in 
general.
    Are there ways to address and take a look at the risk 
adjustment picture and whether or not the way that HCFA is 
going about it is the right way and that sort of thing? I 
suppose there are, but in the meantime you've got an awful lot 
of people--10,000 in Florida, Ohio and we can go on and on, 
that are really basically without choice.
    And so I would hope that you would--to use Mr. Brown's 
term--deal with the situation at hand, and that is basically 
people out there without a choice.
    Ms. Canja. Our staff is here and has met with your staff, 
and I know that they will be very happy to work with you on 
that.
    Mr. Bilirakis. Great. We'd appreciate that.
    Ms. Ignagni, taking a look at the July 1 information we 
received regarding the HMOs dropping from Medicare.
    Ms. Ignagni. Yes.
    Mr. Bilirakis. In Florida, one of them is Florida Health 
Choice, Inc., in the county of Broward, 256,000-plus Medicare 
beneficiaries, 121,000 Medicare-plus enrollees. The number of 
affected enrollees as a result of their dropping out is 1,659. 
Their 1999 rate was $676.64, due to go up--I guess there's a 2 
percent growth--to $690.17.
    Why would they, considering all that, drop out?
    Ms. Ignagni. It is hard to answer in real terms on the 
particular organization you describe and what the dynamic was 
in that market, but, in general, what we have found in talking 
with our plans around the country is that many plans that are 
now in relatively higher payment areas are feeling the crunch 
of many of the aspects of the Balanced Budget Act formula 
working together, so that the effect was, I believe, when you 
enacted BBA 1997, you didn't anticipate all of the 
interactions--no one could have at that time--that are going on 
now.
    So, for plans that are facing fairly high rates of 
increase, when the traditional program this year, for example, 
is at 5.8, and you're down less than 2, because with risk 
adjustor and the user fee taking out in that county it would be 
less than 2, then plans are finding it is very hard to contract 
with providers.
    Mr. Bilirakis. We're trying to work on that subject, as you 
know.
    Ms. Ignagni. Yes.
    Mr. Bilirakis. And your people have been cooperative with 
us. As Ms. Canja has said, we've met with the AARP people, etc.
    Ms. Ignagni. Yes.
    Mr. Bilirakis. So we are trying to solve that problem. I 
received a 2- or 3- or 4-page letter from Blue Cross/Blue 
Shield, for instance--I don't even know if they are in the 
audience--but they basically said, ``Look, we have the same 
problems but we're going to stay in--'' in Florida, at least.
    Ms. Ignagni. Yes.
    Mr. Bilirakis. I'm not really sure. I don't have the letter 
right here, but I don't remember whether it was just in Florida 
or overall. And they're willing to give us the benefit of the 
doubt rather than hurt beneficiaries or put them in fear and 
that sort of thing.
    I'm very disappointed. I mean, you know that. We've talked 
about it before.
    Ms. Ignagni. Yes. And in many cases it depends on your 
contractual relationships with physicians and with hospitals 
whether or not----
    Mr. Bilirakis. Well, I was going to get into that. I think 
it was you who testified to that effect about providers.
    Ms. Ignagni. Yes.
    Mr. Bilirakis. Some of the problems, may be that a lot of 
providers are just not wishing to continue because of the----
    Ms. Ignagni. But they have legitimate concerns, so this 
isn't a case where the health plan arena is saying----
    Mr. Bilirakis. Well, my son is a physician, and he doesn't 
talk very much to me, frankly, about any of these problems, but 
I can sort of see it.
    Ms. Ignagni. Yes. I think that what physicians are telling 
us is that when they look at the sum total of what they are 
being asked to do under this program relative to fee-for-
service, given the financial situation, the decline in 
payments, and the increase in administrative obligations that's 
pushed down from HCFA to health plans to physicians and 
hospitals, that in many cases they don't feel that it is worth 
their while any more, which really does affect choice. It 
affects the entire market.
    And this is not a situation that I think we can ignore. It 
is not just the health plans. We're hearing this daily as we go 
around the country from physicians and hospitals.
    I think they are right. I think these issues are very 
legitimate.
    Mr. Bilirakis. Yes, they are.
    Now, those notebooks consist of, what, approximately 800 
pages, or more, the regulations?
    Ms. Ignagni. Yes. The first reg, then there was a mini reg, 
and there have been operation policy letters. There have been 
42 all told, so it is almost one every week, and they are about 
30 pages each. So plans are reeling from the impact 
administratively, and that is all pushed down to the contract 
level, at the provider level, at the hospital level.
    So what people are saying is not that we don't want to 
participate in a system that is accountable, but let's look 
across the spectrum and begin to think about proportional 
accountability and fee-for-service as well as managed care, 
which has driven down the regulatory impact on one side, only 
one side.
    And HCFA keeps saying that they're going to get to it on 
the other side, but meanwhile the providers are saying that 
just doesn't make sense, looking at the burden and the 
obligation.
    Mr. Bilirakis. All right. Thank you. My time has certain 
expired.
    Mr. Brown?
    Mr. Brown. Thanks, Mr. Chairman.
    I was hoping those notebooks would have been cost data that 
we have been asking you all for.
    First, Mr. Chairman, if I could, I'd like to enter into the 
record GAO study, June, 1999, Medicare+Choice Reforms Have 
Reduced but Likely Not Eliminated----
    Mr. Bilirakis. Without objection.
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    Mr. Brown. Based on this document--and, I mean, it is 
pretty clear that there is a significant body of evidence that 
some HMOs are continuing to be overpaid. As you recall, Dr. 
Moon, prior to the BBA of 1997, the GAO stated that we were 
overpaying managed care plans significantly, but that seems 
perhaps to have gotten better but not significantly better.
    There was a--the document from the SEC, from the Securities 
Exchange Commission, states about one managed care company has 
done particularly well. Their filings as a result of the 
premiums differences, the Secure Horizons program, accounted 
for approximately 59 percent of our--document from the company, 
itself--``59 percent of our consolidated premium revenue for 
the year ended December 31, 1998, an even larger percentage of 
our operating profit, even though it represented only 28 
percent of our total membership.''
    So this company, 59 percent of its revenue profits and 
large percentage of its profits came from 28 percent of its 
total membership, moneys paid by HCFA.
    What does this tell us about overpay? Could you talk about 
how, even with the BBA of 1997, how overpayment has continued?
    Ms. Moon. The issue of overpayment I believe is very 
closely related to the question of who enrolls in managed care 
plans. And, as Karen Ignagni pointed out earlier, plans that 
have, for example, patients that have stayed in for a number of 
years and are older and have more health care problems are 
probably closer to the average Medicare beneficiary population, 
but there are many plans that have a much healthier population. 
It's not just age, it's not just the basic characteristics, it 
really is the question of what are the needs of the people that 
are in those plans.
    That's one of the reasons why I think that risk adjustment 
is an extremely important way of leveling the playing field in 
terms of payments to plans.
    That really has driven a lot of the differential over time, 
as well as some other differences, so I think that one of the 
key questions is, how do you find reasonable ways to deal with 
overpayment, recognizing that it is not uniform? It certainly, 
as other people have pointed out, varies a lot, and in some 
places will be extremely high and other places probably managed 
care plans are being paid correctly, and in some cases they 
probably have a case for some higher payment.
    One of my concerns is an across-the-board remedy that 
ignores, I think, some of these important differences.
    Mr. Brown. Is there any way to pay managed care plans 
appropriately without risk adjusting?
    Ms. Moon. I don't believe there is, and I think it is going 
to be a continued struggle to find a good risk adjustment 
mechanism. We're not there yet. It is going to be clearly a 
problem as long as the incentive is there where, if plans can 
make money by attracting good risks, that's not a healthy 
situation either for plans, for Medicare, or for beneficiaries. 
What you'd really like to do is see a world in which the 
advantages of coordination of care, which I think can be 
substantial for sicker patients, are truly rewarded in the 
Medicare+Choice program.
    Mr. Brown. So you could do that through risk adjusting. And 
can you do it other ways? What other mechanisms do we use to 
match that more appropriately?
    Ms. Moon. There are other issues, I think, that are clearly 
important in terms of a good, balanced structure. One that the 
Medicare program now has is a requirement that managed care 
plans take people who want to enroll in them. You want to have 
everyone have access to the plan and not deny them, and that 
does not seem to be a problem.
    I think standardization of benefits, at least some critical 
benefits like prescription drugs, are also very important. 
Prescription drugs are an interesting dilemma because managed 
care plans I think are kind of caught here.
    Right now, if they offer very generous prescription drug 
benefits, they may attract a sicker population and that may 
cause them to back off from that, as we've seen in terms of 
caps on the prescription drug coverage being very extensively 
used by managed care plans.
    Mr. Brown. The plans are saying--Mr. Chairman, one more 
question--the plans are saying, Dr. Moon, that they are getting 
$11 billion in cuts from risk adjustment. Is that only if they 
keep the same mix of enrollees that is sort of--the mix is 
tilted toward more-healthy beneficiaries?
    Ms. Moon. That's my understanding of how that $11 billion 
works. I have to say I haven't gone and analyzed this in 
detail, and I think it is important to monitor this carefully.
    But if you have an average mix of patients that look like 
the Medicare population, in general, in terms of health status, 
then plans should be budget neutral.
    If plans start out with a much healthier mix of people, 
then it seems to me you don't want to have budget neutrality; 
you would want to make sure that your risk adjustment mechanism 
is ratcheting down.
    So I think it needs careful monitoring, but I think there 
is nothing magic, necessarily, about a budget neutral risk 
adjustor. In fact, it may not be a good way to go.
    Mr. Brown. Thank you.
    I think, Mr. Chairman, that's exactly the point. If risk 
adjustment means major cuts to plans, it means it is because 
those plans, by and large, were cream skimming, were attracting 
healthier beneficiaries.
    If they have more of a cross-section of--as Dr. Moon said, 
if they have more of a cross-section of enrollees, then pretty 
clearly, by definition, it is going to be revenue neutral, 
they're not going to face those cuts.
    Thanks.
    Mr. Bilirakis. I thank you.
    Mr. Bryant?
    Mr. Bryant. Thank you, Mr. Chairman.
    I want to thank our very qualified panel. I appreciated 
your testimony.
    Let me ask, Mr. Powell, on behalf of the Senior Coalition, 
I take it you are supportive of this budget neutral arrangement 
where we don't lose the $11 billion, $11.2 billion?
    Mr. Powell. That's correct. Yes.
    Mr. Bryant. Ms. Canja, the AARP--for which I qualified this 
year and got your very kind invitation--you have a different 
view of that, and I'm not sure I agree with that, but at this 
point you are saying that you are comfortable with the 
potential for the cuts of $11.2 billion?
    Ms. Canja. As I said, we have supported, after observing 
what HCFA was doing, we did support the action. In listening to 
the conversation, it does make sense that those that did not 
have beneficiaries who were sicker or more frail, or whatever, 
and needed more care, they would not benefit from risk 
adjustment.
    But I still say that we have our staff here and they've 
been working with the committee and will do so.
    Mr. Bryant. Thank you.
    Ms. Ignagni, did I understand you correctly that the fee-
for-service, do they get an increase of 5.8 percent----
    Ms. Ignagni. Yes, sir.
    Mr. Bryant. [continuing] per year, or is that 2 years?
    Ms. Ignagni. No, that's per year.
    Mr. Bryant. Per year?
    Ms. Ignagni. For this year coming up.
    Mr. Bryant. As contrasted to the 2 percent that managed 
care----
    Ms. Ignagni. In many communities.
    Mr. Bryant. Right.
    Ms. Ignagni. And in some communities it is below 2.
    Mr. Bryant. And also you industry is subject to those 
regulations.
    Ms. Ignagni. Yes, sir.
    Mr. Bryant. I mentioned those to the first panel, the 800 
pages, the 42 letters, and that the fee-for-service is not 
subject to all that?
    Ms. Ignagni. That's right.
    Mr. Bryant. I know several panelists have mentioned--even 
the first panelist mentioned this playing on a level field, and 
that's a key phrase I've picked up in Washington. Everybody 
wants a level playing field, like don't let the good be the 
enemy of the perfect. That means you're about to get it, I 
think. And the level playing field, I'm not sure what that 
means.
    But, you know, just those two items, alone--the rate of 
increase a year and the amount of regulation--doesn't seem to 
be very level to me.
    I'm concerned about the rural areas of Tennessee. I 
represent a very urban part of Shelby County and Memphis, but I 
also have 14 counties that are less urban, more rural, and the 
fact that some of the people in the Medicare+Choice groups have 
moved out of Tennessee.
    The first panelist mentioned that we're subject to a lower 
rate in Tennessee, and Dr. Ganske mentioned Iowa the same way.
    I want this choice available for my constituents in 
Tennessee, and I'm concerned. How do we get that? Is it by 
cutting $11.2 billion from the program?
    Ms. Ignagni. I think if you proceed forward with risk 
adjustor, what you have done is you've created a hospital 
adjustor. That's all it is. As you get into the issue and you 
look at it, I'm not sure that any economist, as they study 
this--you use the weights in the fee-for-service system to 
develop this risk adjustor, which completely devalues any type 
of care for the chronically ill that has been provided on an 
outpatient basis.
    So, to the extent the rabbi would receive congestive heart 
treatment on an outpatient basis, no credit for that.
    I've just come from a diabetes conference, 500 people in 
Washington in August--no credit for that on an outpatient 
basis--only if you hospitalize, and only if you hospitalize for 
more than 1 day.
    I think there are very legitimate technical issues. We've 
been in long conversations with HCFA. I do believe they agree 
with many of the technical concerns.
    Many individuals have said it was the best they could do. 
It's not adequate. You voted on $22 billion of cuts in this 
sector. It is adding another 11.5--further and further 
developing the problems associated.
    In your area--I have a run of all the members and what the 
situation would be in each of their counties--there is only one 
county in your area which would receive an increase over 100 
percent, and that's a very rural county where you only have two 
enrollees. In every other county you're down in very, very 
significant terms relative to fee-for-service, so it explains 
precisely why there is not the purchasing power adequacy to 
continue to operate this program over time.
    And so you are right to ask the question, you're right to 
be concerned, and I think that that's really what the task of 
this committee is going to be--and it is tough. There's no 
question about it--to look through all these issues, but look 
at the purchasing power adequacy.
    Mr. Bryant. If I might just close quickly with a statement, 
I know whether it is Medicare+Choice or whether it is fee-for-
service, I will reiterate, as I did with the first panel, that 
the health care providers, the doctors, the hospitals in my 
District, are very, very concerned about what they are being 
paid already and how far they have been cut.
    Ms. Ignagni. Yes, I know. Right.
    Mr. Bryant. And they are just--and the amount of paperwork 
they have to go through.
    Ms. Ignagni. Right.
    Mr. Bryant. I yield back the time.
    Mr. Bilirakis. Mr. Deutsch?
    Mr. Deutsch. Thank you, Mr. Chairman.
    Ms. Ignagni, if you could follow up on what you just said, 
and maybe try to be a little bit clearer on it, that the risk 
adjustment, in fact, if we look at what HMOs, in general, are 
trying to do, they're trying to be more efficient and literally 
keep people out of the hospitals, do more operations when it is 
more efficient, do shorter hospital stays when it could be more 
efficient. So just, at a practical--I mean, this concept is a 
wonderful sort of concept, and I agree completely with what Dr. 
Moon said that ultimately that's really how you theoretically 
have to go.
    Ms. Ignagni. Right.
    Mr. Deutsch. I mean, in this perfect world, people are to 
be reimbursed for how much it should theoretically cost you to 
treat them, sort of a DRG-type system. But at the practical 
level, you know, can you elaborate a little bit on what this 
risk adjustor we are actually using does and how, in a sense, 
it unfairly penalizes people who are being efficient.
    Ms. Ignagni. It completely turns on its head all of the 
progress that has been made over the last 10 years to treat the 
chronically ill on an outpatient basis, because plans who are 
doing that would receive no extra payment, so it completely 
devalues what we have accomplished in terms of care management 
and what the literature says is a more-productive way to go 
about treating people.
    I think that many haven't had the opportunity to look into 
the details of this to see that, in fact, what you have here is 
a hospital adjustor. You don't have a risk adjustor. We've gone 
beyond that in our delivery system. The fee-for-service system 
has to catch up. Building a risk adjustment system based on 
fee-for-service makes no sense whatsoever.
    Mr. Deutsch. Dr. Moon, could you follow up, just in terms 
of the status of it, in terms of the incentives and everything 
else?
    Ms. Moon. The goal of a risk adjustment mechanism is to try 
to find a way to adjust for differences in health status, and 
Karen is quite right that this particular system is not an 
ideal system, and I think almost everyone believes it is an 
interim approach.
    There is a certain dilemma here. Part of the problem is 
that it is based on fee-for-service information because we 
don't have a clue what is going on in managed care plans, and 
we need information on that, and that has not been an area that 
has been possible to get information from.
    But it is also the case and my understanding is that, on 
average, this does a better job of adjusting for differences in 
health status, and so it is a step in the right direction.
    The current system we have is totally inadequate. This is a 
little less inadequate. And then the ideal is to move further 
into the direction.
    I don't believe it has an incentive for hospitalization, 
however.
    Mr. Deutsch. Okay. Let me--there are two other areas that I 
want to at least touch on in the 5 minutes. Congressman Brown 
talked about, I guess theoretically, the idea that the $11.2 
billion savings wouldn't be as large if it turns out that HMOs 
are treating sicker people or not-healthier people.
    I mean, is there any indication, you know, the percentage 
of healthy people, the percentage that we have statistical data 
that we can look at in terms of people who are in HMOs today, 
percentage-wise, healthier versus the average Medicare 
population, Ms. Ignagni?
    Ms. Ignagni. No. In fact, all the data that we have are 
very old and reflect what was going on in the delivery system 
in the early 1990's.
    The PPRC data, which is 1995 data published in 1996 that 
was made reference to this morning, actually shows that there 
was quite a great deal of catch-up in the Medicare+Choice 
plan--then it was Medicare risk--relative to the early days of 
the 1990's, and you weren't seeing those broad differences that 
were indicated by the Mathetmatica Corporation when they did 
their original research.
    We don't have data today, and this is the problem. I would 
just urge you to consider what's going on in the market as a 
proxy for what may be totally inadequate with results of this 
formula and its implementation.
    Mr. Deutsch. So, again, we're talking about these risk 
adjustment and the savings really based upon no practical--I 
mean, is that fair?
    Ms. Ignagni. No. HCFA published a table. Here it is, Health 
Care Financing Administration. Virtually no plan receives any 
credit under the risk adjustor analysis that was done in the 
proposal developed by HCFA. This was distributed by HCFA 
several months ago in the spring, and it indicates exactly what 
we're saying--that the entire risk adjustment proposal that was 
developed by HCFA, not written by this Congress but developed 
by HCFA, is totally based on whether or not you hospitalize a 
patient, because you don't get any credit for any of the 
chronically ill programs you're running on an outpatient basis.
    Mr. Deutsch. Which really does seem like a fundamental----
    Ms. Ignagni. It turns the whole thing on its head, and I 
can't imagine that beneficiaries, when they find out about how 
this works, would be supportive of that.
    Mr. Deutsch. Mr. Chairman, if I can just have one last 
question. The last question relates to this whole issue of, you 
know, how much savings or what's the reimbursement level that 
Medicare HMOs are getting relative to the average cost of fee-
for-service beneficiaries?
    We've heard numbers from 95 percent to 80 percent, which, 
you know, if we're talking about billions of dollars, is a huge 
difference--I mean, literally shooting in the middle of 
nowhere.
    And it does seem to be a fundamental issue, that if we're 
talking about, you know, 95 percent reimbursement versus 80 
percent reimbursement, you know, it is a totally different--I 
mean, again, you know, who--Dr. Moon or Ms. Ignagni or Mr. 
Powell, if anyone specifically can get at that, I mean, it just 
seems like such a significant issue that we're all over the map 
in terms of numbers we're hearing.
    Ms. Moon. I think one of the important things to think 
about are what pieces of that differential you believe are 
indications of things that the managed care plans should be 
paid.
    Two of them have been talked about, and I think that they 
are two of the important ones that you need to evaluate. The 
one is the issue of graduate medical education and the 
differential that that is involved there.
    The question is whether or not the payments for graduate 
medical education should go to managed care plans, and then 
whether or not they're finding their way into graduate medical 
education.
    And another difference is this issue of risk adjustment, 
which I think, as has been pointed out here, is highly 
controversial.
    Ms. Ignagni. I don't see it that way. I have long and deep 
respect for Marilyn's work and would be happy to spend some 
time talking about the methodology. Graduate medical education 
was clearly backed out of the payment, No. 1, so health plans 
don't receive that.
    In terms of the risk adjustor, from the CBO, everyone, in 
terms of looking at the legislative history, it was clear that 
that was intended to be budget neutral. Only HCFA seems to 
believe that it wasn't.
    The fact is a cut is a cut.
    Mr. Brown has made the point several times that he hasn't 
felt that we have done well enough in terms of explaining our 
methodology. We have been up here a number of times, but if it 
hasn't been enough I make a personal promise that we will bring 
up the actuaries, we will go through every aspect of the 
methodology.
    What we have intended this is to provide you data that 
would be worthwhile data, would be honest data, and we could 
have a discussion, because from the beginning we thought that 
this was going to be bipartisan consideration and people would 
feel very concerned about the effects on their beneficiaries.
    Mr. Green was probing with Dr. Berenson earlier about what 
was happening in your area. You will be interested to know that 
you are down at 75 percent of fee-for-service by 2004, and you 
have 28 percent of your beneficiaries, Medicare beneficiaries 
in Medicare+Choice. You can't run a program with that level of 
resources. You can't run the traditional program, let alone the 
additional benefits.
    So we would be happy to do whatever it takes to satisfy 
Members that they have a chance to look at these numbers.
    Mr. Bilirakis. Mr. Burr?
    Mr. Burr. Thank you, Mr. Chairman. I don't even know where 
to start.
    Let me just ask the whole panel: does anybody believe we 
will ever get this right?
    [No response.]
    Mr. Burr. I'll take that as a no from everybody. I share 
your answer.
    Let me just make a reference, for purposes of the 
discussion you were just in, part of BBA 1997 was a phase-out 
of graduate medical education.
    Ms. Ignagni. That's right.
    Mr. Burr. And so that, I think, is on schedule. But in that 
set of BBA issues that were addressed in the CBO testimony in 
front of the Senate, it said those policies reduced the 
cumulative growth in Medicare+Choice rates relative to fee-for-
service payments by 6 percent.
    It went on to talk about the risk adjustor, and it 
basically says that the first stage of the risk adjustor would 
be based on the use of inpatient hospital services by 
individual enrollees. That change would reduce payments for 
existing enrollees by 7.6 percent when fully phased in by 2004.
    The administration also announced a second stage of the 
risk adjustment that would be based on the use of services in 
all settings. The administration expects that such an 
adjustment would reduce payments by another 7.5 percent 
beginning in 2004.
    If both plans are implemented as announced, the combined 
effect could reduce payments by 15 percent, plus 6 percent. My 
math tells me that's a 21 percent reduction based upon what is 
already in place.
    So let me, if I could, just ask this question. What would 
entice a healthy person to enter a Medicare+Choice plan?
    Ms. Moon. I believe that one of the things that 
beneficiaries have said over and over again, that the reason 
that they are initially attracted to those plans are the 
additional benefits that are being promised in these plans.
    I think there is fundamentally, however, a misunderstanding 
by beneficiaries of whether or not this is a permanent promise 
in the same sense that the traditional benefits or the basic 
benefit package is promised.
    Mr. Burr. What would be the attraction for a sick person?
    Ms. Ignagni. Broader benefits.
    Mr. Burr. Broader benefits?
    Ms. Ignagni. Lower costs, catastrophic coverage.
    Mr. Burr. No deductibles?
    Ms. Ignagni. No deductibles, very limited co-pays.
    Mr. Burr. Less out-of-pocket expense. I think the rabbi 
covered a number of them.
    Aren't there, in fact, many more benefits----
    Ms. Ignagni. Yes.
    Mr. Burr. [continuing] for somebody who is sick----
    Ms. Ignagni. Yes.
    Mr. Burr. [continuing] than somebody that's well? I mean, 
when we look at private sector insurance, the well ones don't 
want anything to do with the system. They want to pay for it 
out of pocket because they don't feel that they're going to go 
to the doctor, they don't feel that they're going to be sick, 
they don't feel that they'll go to the hospital.
    Seniors who are sick fear that they are going to go to the 
hospital, and they know--is it Canja?
    Ms. Canja. Canja.
    Mr. Burr. [continuing] It is $760 out of pocket up front, 
isn't it? I mean, that's the Medicare deductible for 
hospitalization.
    Ms. Canja. That's the Medicare deductible. If they have 
Medigap, they are paying Medigap and they feel protected.
    Mr. Burr. Do all of them have Medigap?
    Ms. Canja. I don't know the number, but I think many of 
them do.
    Mr. Burr. But there's----
    Ms. Canja. They have fee-for-service.
    Mr. Burr. [continuing] a pretty good share. So, in fact, 
the statement that everybody that is in managed care or 
Medicare+Choice is healthy is wrong. Does anybody dispute that? 
I mean, there are sick people in Medicare+Choice.
    Let me ask you, Ms. Canja, because I think you alluded to 
it earlier, do you think that one of the core benefits of 
Medicare should be drug coverage?
    Ms. Canja. Definitely. We strongly believe that 
prescription drugs are part of modern medicine and really 
should be available to all Medicare beneficiaries.
    Mr. Burr. Do you think it is fair to ask seniors in the 
country to make a premium payment for drug coverage with no 
stop-loss on it? In other words, in the President's proposal it 
says, ``We'll pay 50 cents of every dollar from some point to 
$2,000, but if you have over $2,000 a year in drug costs it is 
100 percent you.'' Have you ever seen an insurance policy where 
at some point it became 100 percent the sick person?
    Ms. Canja. I just know all the people that are out there 
that don't have coverage right now, and it is 100 percent them 
right now, and they are paying.
    You know, we hear the figure that 65 percent have 
prescription drug coverage now, but the truth is that they are 
very vulnerable and they have very little coverage.
    Mr. Burr. I agree. We should supply a drug benefit, but my 
question, I guess to the panel, Should we take those 
individuals who have $2,000-plus in drug coverage and say, 
``After 2,000 you are on your own. It's out of your pocket,'' 
or should we provide them a policy that says, ``At 2,000 we 
pick up 100 percent, not you''? I mean, aren't those the ones 
that are most at risk? Aren't those the ones that would be 
classified in that definition of sick? Wouldn't you agree?
    Ms. Moon. Congressman, I agree with you, and I would much 
prefer to see a drug policy that had the stop-loss kinds of 
protections that you are talking about, but I would point out 
that the vast majority, for example, of drug benefits that are 
now available in managed care plans under Medicare have caps, 
and many of them lower than $2,000.
    Mr. Burr. I think what all of you have made is really an 
impassioned argument about why we can do much better than we 
have today.
    The rabbi is extremely pleased with his managed care 
coverage. I am, too. I've never had a problem with it.
    We may live in exceptional parts of the country, we may 
have exceptional doctors, we may not have what everybody else 
has, but I believe that there are more people that are like you 
and me, and we're not the exceptions.
    Clearly, we can do better in the structure, but there is 
one thing that I know that will stymie this--if we drive 
competition away.
    The challenge for Congress, and I think for what every 
witness has suggested, is not less competition, it's more 
competition. It is to create a field--Mr. Bryant said it best. 
He said everybody is after a level playing field. Well, let me 
suggest to you that we've had a big discussion on risk 
adjustors today. Most of the people who testified to the 
Medicare Commission said risk adjustors are almost impossible 
to find a good one. That's what the Medicare Commission said. 
They suggested possibly a Medicare Board could help.
    I'm hopeful that, as we move forward this calendar year, 
that not only can we solve the current problem but we can also 
address what the solution is to health care for seniors with a 
plan that makes sense, a plan that addresses the needs that are 
out there, a plan where we don't spend every 6 months 
questioning whether somebody is underpaid or overpaid, who 
cheats and who doesn't, but a plan where we have confidence 
that when we need it, it is there, and that we're getting the 
most bang for our buck.
    I thank all of you for your willingness to come testify, 
and I yield back.
    Mr. Bilirakis. I thank the gentleman.
    I would only add to that that we're not going to get the 
job done or do a good job if we are not open-minded, if we have 
preconceived biases, and that has been some of the problems 
that we have had, unfortunately.
    Mr. Green?
    Mr. Green. Thank you, Mr. Chairman.
    Mr. Powell, let me follow up on what my colleague from 
Ohio, Mr. Brown, talked about.
    Do you agree with Dr. Moon's characterization of that $11.2 
billion as not really a cut; it depends on if you treat people 
in your HMO that have an average, much better health than the 
others, than the general population, that 11.2 is not a cut, 
you have to actually earn that 11.2 to lose that money?
    Mr. Powell. No. The Seniors Coalition would not take that 
position. We would consider and we do consider the $11 billion 
a cut, and for precisely some of the reasons that Ms. Ignagni 
has spoken to, and that is the lack of--and this alludes to my 
testimony--the lack of outpatient care, primarily in the risk 
adjustor.
    Mr. Green. Okay. But it is not a cut unless you--and you 
are disagreeing with the formula on outpatient, and I could 
agree that that formula should be in place earlier.
    I know we received a lot of cards in our office, like a lot 
of folks, on the $11.2 billion cut, and we first looked to see 
what we're doing to Medicare and found out that it was a 
formula that HCFA is doing, you know, without that, and there 
is no act of this House that would actually cut 11.2 out of 
Medicare this year or next year or even the year after that. It 
is all in relation to the Balanced Budget Act.
    Mr. Powell. Yes.
    Mr. Green. Okay. Ms. Moon, in your testimony you suggest 
that disruptions created by the plan withdrawal should not only 
be expected by accepted as part of the competitive process, and 
you also imply that Medicare HMO reimbursements have come more 
into line with the actual cost of caring for the enrollees. The 
extra benefits, such as prescription drugs, could likely be 
reduced, as well.
    If this happens, what, if any, incentive will seniors have 
to elect a Medicare HMO? After all, under the current system a 
Medicare HMO appears to be a more-risky selection for a senior 
looking to receive both consistent and uninterrupted care.
    Ms. Moon. I think you ask a very good question, because I 
think that it is a very difficult thing for someone who thinks 
of herself as a supporter of beneficiaries to be sitting in 
front of you and saying, ``Maybe we should think about 
something that is going to eliminate some benefits that they 
receive.''
    My biggest concern is a fairness issue between what is 
available to people in fee-for-service and what is available to 
people in managed care plans and whether it comes out because 
of overpayment.
    If managed care plans could be paid what these folks would 
cost in fee-for-service and achieve other savings, then I 
wouldn't have a problem.
    I think the reason that people might still choose managed 
care is that there are people out there who like that 
arrangement, who find it extremely desirable, as the rabbi 
talked about, and, in exchange, they get and should expect to 
get, I believe, big reductions in deductibles and cost sharing, 
because that's really the tradeoff. The issue is you're 
agreeing to let the managed care plan put some additional 
controls on you in terms of who you visit and how you get care 
in exchange for the lower deductibles and cost sharing, and 
that seems to me that's the most important tradeoff you've got 
to make sure is there.
    The extra benefits are attractions to beneficiaries, and 
the question is whether or not they are being financed by 
overpayments, and I think that's a very hard issue to deal 
with.
    Mr. Green. Thank you.
    For everybody on the panel--and I know, since you mentioned 
Houston area, we have an unusual situation where a lot of our 
HMOs are actually merging in taking market and trading market, 
almost like Time Warner did with TCI. They traded the Houston 
market for the Dallas market so they could consolidate, and 
that's what is happening in Houston. In fact, I think there is 
a question of one of the mergers, the number of mergers now is 
65 percent of Medicare HMOs will be under one company, and 
there was a question about that.
    The 70,000 that we talk about in the testimony that will 
not have access to an HMO, do we have a breakdown on rural/
urban for that 70,000? Do you know off the top of your head? Is 
it equally applied in rural and urban areas? Is it more likely 
in rural areas?
    Ms. Ignagni. I know you're not going to believe this--with 
all of the material that we brought, we didn't bring that 
chart. We looked at so many counties around the country. In 
fact, I was just in Houston on Monday with a group of 
beneficiaries who are very, very concerned about what may 
happen if this problem isn't addressed. But we would be 
delighted to get back to you this afternoon. I'm sorry I didn't 
bring that chart.
    Mr. Green. Thank you, Mr. Chairman.
    Are we going to have a second round?
    Mr. Bilirakis. Preferably not, but, I mean, if the 4 or 5 
of us left here----
    Mr. Green. I have one more question.
    Mr. Bilirakis. One more question.
    Mr. Green. Mr. Chairman, I appreciate the chance to ask 
this, because I know this is--it's related to HMOs, and, in 
fact, I almost wish Dr. Colburn was here.
    Ms. Ignagni, last week I saw an article in the ``Washington 
Post'' that talked about a certain health care provision that--
let's see, Dr. Colburn was quoted in here about he knew of an 
obstetrician in Muskogee who is exposed to--his patient was 
exposed to chicken pox virus, and the doctor prescribed a $700 
injection for anti-serum, but the insurance company refused, 
even though she had obstetric care.
    Your quote in here was that, for example, ``They didn't say 
so directly, they implied that the doctor's personal experience 
had been skewed in views of the industry.'' And you say that 
the real problem is that the employer didn't buy a plan that 
approved of that particular treatment.
    Believe me, you have some sympathetic folks up here who 
realize the press takes one statement out of context, but in my 
experience in my earlier life as a business manager and 
shopping for insurance for a company, I never got into whether 
they gave a shot for something or not. It was obviously we were 
shopping for the best deal for my employees and for the 
company.
    Do you know of anybody that would know you didn't have this 
shot that was medically necessary?
    Ms. Ignagni. Actually, there's a whole range of issues 
subsumed in your question. I'll deal with it as directly as I 
can.
    As you know, employers make decisions about whether they 
are going to buy particular riders, experimental procedures, 
and more increasingly now for particular pharmaceutical and 
prescription therapies that's in the premium or outside, you 
buy it, etc.
    I think that one of the points that I was making to that 
reporter--and I appreciate what you've observed--I think, you 
know, oftentimes people reduce to lowest common denominator a 
particular point. That the issue of medical necessity is far 
more complicated than really the discussions would suggest, and 
I think that we have to back up and look more broadly at where 
first-level decisions about coverage are made, how they are 
made, why they are made, and then where do we go from there in 
terms of medical necessity, and then bringing in information 
with respect to clinical trials and best practice and matching 
that with physician recommendations.
    It was a very long discussion that got distilled to two 
lines, I think.
    Mr. Green. I guess what bothers me in the umbrella debate 
on managed care that Medicare is just a part of, that to say 
that an employer refused to buy a certain benefit for, you 
know, for a chicken pox virus that a child or a mother was 
exposed to, I think that was a bad rap on employers, because I 
have yet to have experience with an employer who had that 
specificity on some type of thing.
    Again, I understand newspaper articles aren't always 
factual, and that's what bothered me in the umbrella debate.
    Ms. Ignagni. And I appreciate what you say and your point 
is very well taken.
    I was just going to say, Mr. Chairman----
    Mr. Bilirakis. Very briefly.
    Ms. Ignagni. [continuing] that we were talking for a good 
deal of time about how first-order decisions are made and where 
they are made. The reporter thought that health plans were 
making all of these decisions, so I was endeavoring to back up 
and talk about what the purchaser does, what that role is, what 
the health plan role is, what the physician role is, and how it 
all comes together.
    I see by your reaction that I probably did a miserable job 
at it, so I appreciate your admonition.
    Mr. Bilirakis. Mr. Barrett?
    Mr. Green. Thank you, Mr. Chairman.
    Mr. Barrett. Thank you, Mr. Chairman.
    One of the disadvantages or advantages of being last is you 
get a lot of time to think about things.
    I'm thinking about what is going on right now in the Ways 
and Means Committee, and the negotiators have just reached this 
agreement on the $792 billion tax cut. We're doing the 
appropriations bills. And, as I just left, the subcommittee 
Chair was talking about how austere it was.
    Mr. Powell, I associate with the Seniors Coalition being 
closely allied, frankly, with the republican party.
    Mr. Powell. We're nonpartisan on----
    Mr. Barrett. I understand. I understand. And AARP is not 
partisan and they're not associated with democrats. I 
understand how both of those work.
    Where is this $11.2 billion coming from again?
    Mr. Powell. From our understanding, the $11.2 billion----
    Mr. Barrett. No. You're saying it is a cut. I'm accepting 
it. How do we make it up?
    Mr. Powell. Well, I think the first thing we do is examine 
the chairman's bill, No. 1, which would bring into budget 
neutrality the risk adjustment.
    Mr. Barrett. Very good, $11.2 billion we just spent. And if 
we pass this bill and there is no longer an $11.2 billion cut, 
it is revenue neutral, we just raised spending $11.2 billion.
    Mr. Powell. We maintain projected spending.
    Mr. Barrett. Okay. But if there is a $11.2 billion cut and 
we get rid of that, that means we're getting $11.2 billion from 
somewhere. I'm just thinking a little mathematically here. Are 
you with me?
    Mr. Powell. Yes.
    Mr. Barrett. Okay. So I'm accepting the cut.
    Mr. Powell. Okay.
    Mr. Barrett. Are you saying we should cut other programs?
    Mr. Powell. I don't think it is an either/or decision.
    Mr. Barrett. What are you talking about? If you're saying 
there's an $11.2 billion cut, we either raise taxes, cut other 
programs, or add to the deficit. Take your pick.
    Mr. Powell. Well, those are three very sad choices, and I--
--
    Mr. Barrett. I know, but you're the one saying there is a 
cut, and I'm just asking you, if we want to address your 
problem, help me. Which one should we do?
    Mr. Powell. If we were to look at what we see as a 
projected cut through the risk adjustor and the Medicare 
program, it is merely that at this point.
    Mr. Barrett. I'm accepting that. You said it was a cut. You 
said to Mr. Green it's a cut. I'm accepting that.
    Mr. Powell. Yes.
    Mr. Barrett. I'm just asking a simple question--deficit 
spending, other cuts in other programs, or tax increase.
    Mr. Powell. Well, we're going to oppose any kind of tax--
point well made.
    Mr. Barrett. Okay. And I have to say, Ms. Ignagni, I 
respect you, I listened to you, and I thought back to a 
conversation I had with a hospital in my District, hospital 
administrator, and, as all of us know, you're not the first 
ones in the line here--nursing homes, occupational therapy, 
physical therapy, home health care, outpatient services, 
inpatient services, you name it.
    And, as I tell all of them, there's more to come. We're 
paying for this beautiful tax cut. There is more to come.
    But, as I was talking to the hospital administrator, he was 
telling me how bad the Medicare reimbursement rates were, and 
he said, ``You know, it's almost getting as low as HMO.'' And I 
nodded my head. And I said, ``Let me make sure I understand 
this. You're saying that Medicare pays more than HMO?'' And he 
said, ``That's right.''
    My question to you: are we overpaying the hospital?
    Ms. Ignagni. I don't know.
    Mr. Barrett. Are we subsidizing--if it is a competition 
market and HMOs are paying less than Medicare, shouldn't 
Medicare be reducing its payments to come in line with HMOs, or 
are we subsidizing you?
    Ms. Ignagni. I think what we've done in our delivery system 
on the fee-for-service side is that fee-for-service hasn't put 
in play the types of forces that managed care has. We've driven 
consolidation in some parts, and if the entire delivery system 
were a competitive one we would have far more and far fewer 
hospitals and hospital beds, particularly unused hospital beds, 
than we have now. We'd have a different distribution of 
physicians, etc.
    So in many ways the traditional program, because of its 
fee-for-service nature, subsidizes inefficiency where there is 
inefficiency.
    But, having said that, that's in the eye of the beholder. 
I've also been in some communities, even though there have been 
three hospitals there, they fought very passionately to keep 
the third hospital, so I understand precisely what you're 
saying.
    I think it is very hard to sort through all of this. We're 
not testifying before you today to say, ``Help us at the 
expense of everyone else.''
    Mr. Barrett. I understand that.
    Ms. Ignagni. Other aspects, other entities within the 
delivery system have made rational and real observations about 
the effects of BBA. What I would say to you is that I think 
that there is compelling reason to ``T'' up this as an issue 
this fall, take action now before we have more of the kinds of 
effects you're----
    Mr. Barrett. But you're also sophisticated enough to know, 
again, that you're not the only one standing in this line.
    Ms. Ignagni. Precisely, and I'm not going to run down the 
other guys, either.
    Mr. Barrett. But my point is that if we're going to throw 
$11.2 billion back into the HMOs and I go back to the hospitals 
and say, ``The money is gone,'' and he's saying, ``Well, wait a 
minute,'' the reality is that--and this was his complaint. His 
complaint was that there's not enough money in Medicare 
reimbursement to continue the subsidy of HMO payments, which 
blew my mind that somehow Medicare is supposed to subsidize HMO 
payments because HMO payments are too low.
    If I could have just a minute, Mr. Chairman, as well--the 
whole issue of drug coverage--I just have to touch on that very 
quickly. Ms. Moon, I'll ask you, because I've heard, again, 
some of my colleagues here in Congress say, ``Well, there's no 
problem here. Two-thirds of the American people have drug 
coverage.'' I think both Mr. Armey and Mr. DeLay I think we've 
seen on television saying, ``We don't have to expand Medicare 
coverage of drugs.''
    From your perspective, how solid is this drug coverage?
    Ms. Moon. From my perspective, I think that we're talking 
much more about a base of about 40 percent of the people having 
pretty good prescription drug coverage, the bulk of those 
people being folks who have good employer-based coverage and 
the folks who have Medicaid. So Medicaid is already a public 
expenditure, and if you replace Medicare with Medicaid, there 
would, to some extent, just be a tradeoff.
    So I think that it is much thinner than people talk about, 
both in terms of the extensiveness of the coverage and what is 
happening in terms of things like affordability of Medigap 
coverage to people who buy prescription drug benefits.
    And, as I indicated before, the caps in HMO plans are often 
substantially tougher than the caps that were in the 
administration's proposal.
    Mr. Barrett. Thank you.
    Mr. Chairman, I would just ask unanimous consent that--I 
have a document here on the President's health care, his 
Medicare plan prescription coverage.
    Mr. Bilirakis. Without objection.
    Mr. Barrett. Thank you.
    [The information referred to follows:]

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    Mr. Bilirakis. Mr. Brown would like to----
    Mr. Brown. Mr. Chairman, I just want to make a comment. I 
was a little confused. I've heard during this hearing that 
managed care companies are only going to experience a 2 percent 
increase next year, and I was looking through Dr. Berenson's 
testimony. He said under the BBA system a rate for a particular 
county is the greater of three possible rates--a new minimum or 
floor payment, a minimum 2 percent increase over the previous 
year's rate, or a blend of the county rate and an input price 
adjusted national rate.
    Now, we had heard that the amount was only going to go up 2 
percent next year. Well, 2 percent is the absolute minimum for 
any managed care plan.
    He then goes on--and I'll conclude quickly, Mr. Chairman--
in his testimony, ``Payment is rising in all counties this 
coming year by an average of 5 percent, and in some areas will 
rise by as much as 18 percent--'' payment to managed care 
companies.
    ``The BBA payment reforms were designed to increase payment 
in counties that had the lowest rates and therefore the fewest 
number of plans, yet counties--'' and this is perhaps the most 
important part ``yet counties receiving the largest increase 
under the BBA system are experiencing the most disruption, 
dropping the most beneficiaries.''
    Plan withdrawals are affecting 11 percent of enrollees in 
counties where rates are rising by 10 percent, the highest, 11 
percent withdrawals there, but affecting only 2 percent of 
enrollees where rates are rising by just 2 percent.
    So it is hard to sort of juxtapose that and understand, 
when some people here have claimed that the increase is only 2 
percent. It's 5 percent average, as much as 18 some places, and 
that's not really what is causing the dropping, the withdrawing 
of plans.
    Mr. Bilirakis. Why don't we finish up with a response from 
Ms. Ignagni regarding that.
    Ms. Ignagni. And I'll be very quick, Mr. Chairman.
    Mr. Brown, HCFA has often observed and made the case this 
isn't a pervasive problem because the rate of increase, on 
average--frequently the qualifier ``on average'' is not 
inserted in either testimony or observations.
    Here's what's wrong with that. Of the beneficiaries, 78 
percent now are in counties that are going to get less than 4 
percent. And I said to you earlier in my oral statement that 38 
percent of the beneficiaries are in counties that are going to 
get 2 percent. There is only one county in the United States 
that would get 18 percent--it's actually 17.8 percent--and 
there are no Medicare risk enrollees living there. In fact, 
there are only 208 beneficiaries overall.
    We have a run of----
    Mr. Bilirakis. Dr. Berenson didn't tell us the truth?
    Ms. Ignagni. I think that Dr. Berenson probably was looking 
at

the broad issue of 5 percent, which is the average of where you

begin. It's 5.8 in the traditional system. It gets down to 5 is 
where the starting point is on the Medicare+Choice side, and 
then all

those things are backed out--GME, all of the issues that we've

talked about come into effect, then you add the risk adjuster, 
you

add the user fee, so in some counties you are down at the 
levels

we talked about, and it may actually be interesting for the 
commit-

tee to note that in some counties now we are going to be down 
below 1 percent in some areas because of the risk adjustor and 
the user fee, etc.
    So we have a real problem here, and I think that it is 
important to look very clearly not just at the gross data but 
where it filters out on a county-by-county basis and where we 
have the individuals grouped in those counties.
    Mr. Brown. Before asking Dr. Moon to also reply to that, I 
think this committee or this subcommittee was led to believe 2 
percent was the average, and now we are acknowledging it isn't, 
it's the absolute floor but the average is 5. So if you're 
talking about averages earlier, now you don't seem too much----
    Ms. Ignagni. I didn't make the observation. I believe I was 
the primary one to talk about numbers, because we seem to be 
one of the few groups that has them. I never made the 
observation that 2 percent was the average. In fact, I remember 
stating in my oral statement that 38 percent was in 2 percent, 
that 78 percent was under 4 percent.
    I apologize if you drew an erroneous conclusion from 
something I said.
    Mr. Brown. Well, I think other people up here----
    Ms. Ignagni. I didn't mean to----
    Mr. Brown. Okay. I accept that. But I think other people up 
here, when we made the contrast between 2 and that fee-for-
service was getting 5----
    Ms. Ignagni. I think that was in response to Mr. Deutsch's 
comment, and, indeed, in his counties many--we were having a 
discussion at that time, and perhaps that was when you perhaps 
drew an erroneous conclusion from something I said. And if it 
was based on something I said, I apologize.
    We have endeavored to work very, very hard to provide fair 
and accurate numbers, and I make you a personal promise that we 
would be happy to talk about these numbers in whatever detail 
you, your staff, or anyone else wants to see.
    Mr. Bilirakis. And, of course, you're all available for any 
questions that may come in writing to you.
    Ms. Ignagni. Yes, sir.
    Mr. Bilirakis. Did you want Dr. Moon----
    Mr. Brown. If Dr. Moon would respond.
    Mr. Bilirakis. Very briefly respond so that we can finish 
up here.
    Ms. Moon. I would just like to reiterate that I think that 
it is very important to look not only at the rates of growth in 
1 year but over a period of time. We had very high rates of 
growth for a long time in which the base was built up, and I 
think that's an important thing to think about, as well as the 
issue that there are a lot of reasons why plans withdraw, and 
only one of them is the issue of payment.
    Mr. Brown. And last, Mr. Chairman, the impression was still 
left with this committee, advertently or inadvertently, from 
comments on both sides of the aisle, from Mr. Burr and Mr. 
Deutsch to me, that managed care was getting squeezed while 
fee-for-service was going to get so much more money. That was 
really the impression left, unless I totally misread it, but 
from several people on this panel today.
    Ms. Ignagni. In fact, though, if you look at where the 
beneficiaries are living and you compare it to what is 
happening on the fee-for-service side for next year, you make a 
very strong observation about the disadvantages, and that's 
what the providers are saying.
    Given the rates of increase, in addition to all of the 
additional administrative obligations--it's not just health 
plans, but providers observing that--I think they're making 
honest and legitimate points.
    Mr. Brown. Should we believe those same providers in their 
observations about the quality of managed care?
    Ms. Ignagni. I think that providers actually have quite a 
lot to offer this discussion about managed care, and I think 
that quite a lot also is talked about in terms of quality that 
are quite appropriate by way of denials, and we just have to 
separate the two.
    I'd be delighted to come back and talk about that.
    Mr. Bilirakis. Again, we need to be objective and open-
minded. Talking about the 2 percent, I wrote a couple letters 
to a couple of the plans that were dropping people in my 
Congressional District, and I received a response from one 
today. It says, ``As you are aware, since the passage of the 
Balanced Budget Act 1997, our reimbursement has increased at an 
approximate rate of only 2 percent per year.'' And then, in 
parenthesis, ``less the user fee, the cost of regulatory 
compliance, and beginning in 2000 risk adjustment. At the same 
time it has seen combined pharmacy, hospital, and physician 
cost trends increase in the range of 5 to 6 percent,'' etc., 
etc. So we are getting that sort of thing, and I don't know 
whether that 2 percent is accurate, but that's basically what 
we're hearing.
    I think Mr. Brown's point is well taken in terms of 
perception.
    Listen, it has been a heck of a hearing. Thanks so very 
much for your contribution. You've helped an awful lot.
    The hearing is adjourned.
    [Whereupon, at 2:48 p.m., the subcommittee was adjourned, 
to reconvene at the call of the Chair.]
    [Additional material submitted for the record follows:]

                                        Humana Inc.
                                             Louisville, KY
                                                     August 2, 1999
The Hon. Michael Bilirakis
Chairman, Health & Environment Subcommittee
House Commerce Committee
2369 Rayburn House Office Building
Washington, D.C. 20515
    Dear Congressman Bilirakis: Thank you for the opportunity to share 
the process Humana used in reaching our decision to reduce our 
Medicare+Choice service areas for the year 2000.
    First, let me assure you that we did not take this process or 
decision lightly. As one of the largest and oldest Medicare+Choice 
plans in the country, we are strongly committed to the program and, 
more importantly, to Medicare beneficiaries. Because of this 
commitment, our bias throughout our evaluation process was to try to 
find a way to remain in a market if at all possible.
    With that background, let me describe the process we used to 
analyze our opportunities in the 89 counties in which we currently 
offer a Medicare+Choice plan. We began by developing a profile of each 
county. That profile included:

 Current and projected HCFA reimbursement. We factored in both 
        HCFA's published payment increases for 2000 and projected risk 
        adjustment reductions based on the limited data HCFA has 
        released to date relative to the payment methodology they will 
        be employing starting in 2000.
 Provider dynamics in each market. We assessed providers' level 
        to provide high quality care while managing costs within the 
        parameters of the available funding.
 Current and projected costs of providing M+C benefit plans in 
        light of medical cost trend. We track medical costs monthly by 
        county. We then projected our costs going forward using current 
        and projected future medical cost trends, including medical 
        inflation and increased utilization of services.
 Competitive dynamics in each county. We assessed the relative 
        strengths and management capabilities of our provider networks; 
        and the likelihood that our competitors would similarly respond 
        in this high, Medicare cost and artificially low reimbursement 
        environment.
    As you are aware, since the passage of the Balanced Budget Act in 
1997, our reimbursement has increased at an approximate rate of only 2% 
per year (less the user fee, the cost of regulatory compliance and 
beginning in 2000, risk adjustment). At the same time, we have seen 
combined pharmacy, hospital, and physician cost trends increase in the 
range of 5%-6%. Using this data, we evaluated certain options: 1) 
offering the same level of benefits at the same or increased out-of-
pocket beneficiary costs (premium and copayments); 2) reducing benefits 
and offering the plan at the same or increased out-of-pocket costs; 3) 
reducing benefits and increasing out-of-pocket costs; and 4) non-
renewing the plan or exiting the county. We then overlaid these changes 
on our ability to retain current members and attract new members. The 
findings of this analysis led us to regretfully discontinue offering 
Medicare+Choice plans in 31 of the 89 counties we serve today.
    Non-renewing our Medicare+Choice contracts in 31 counties was but 
one of the changes we made in our Medicare+Choice program for the year 
2000. We also filed proposed benefit, premium and out-of-pocket cost 
changes in most of the remaining 58 counties. On average, beneficiaries 
will see benefit reductions worth $6.86 per member per month and a 
premium increase of $13.98. On average, these changes may not appear to 
be severe, but at an individual plan level, they will have impact. 
Below is an illustration of the impact of the growing reimbursement 
gap:

 Currently, we offer a total of 25 plans in 20 markets or 89 
        counties.
     18 plans have a zero member premium and pharmacy, 
            preventive care, and ancillary benefits. Currently 89.3% of 
            our membership are enrolled in these ancillary plans.
     7 plans have a member premium ranging from a low of $10 
            per member per month to a high of $75 and, while these 
            plans generally have an enhanced pharmacy benefit, only 
            10.7% of our membership are currently enrolled in these 
            plans.
 In 2000, we will offer 24 total plans in 15 markets or 58 
        counties.
     3 plans, as filed, have a zero member premium and 
            essentially the same benefits as in 1999. These 3 plans are 
            projected to only cover 32.9% of our expected year 2000 
            membership.
     4 plans, as filed, have a zero member premium, but 
            significant benefit reductions ranging from a low of $8.39 
            per member per month to a high of $39.26. These 4 plans are 
            projected to only cover 12.7% of our expected year 2000 
            membership.
     17 plans, as filed, have both a member premium and 
            moderate to significant benefit reductions. The premiums, 
            as filed, range from a low of $10 to a high of $130 per 
            member per month. The benefit reductions, as filed, will 
            range from a low of $2.57 to a high of $46.78. These 17 
            plans are projected to cover 54.4% of our expected year 
            2000 membership.
    It is important to note that despite these major changes for 2000, 
a number of the 58 counties remaining in our service area will produce 
breakeven results at best, provided we meet our expectations on 
enrollment and maintain effective provider contracts.
    Annually, we evaluate each of our plans. Future cost and 
reimbursement trends and/or any new coverage, benefit or access 
mandates enacted by Congress or the states or unnecessary and costly 
government regulatory burdens only increase the likelihood of similar 
action next year.
    Given our long commitment to the Medicare program, we certainly 
would prefer to avoid future exits and are trying to work with Congress 
and the Administration to find a mutually satisfactory solution to the 
current situation. I trust that the above information meets your needs. 
If I can be of further assistance, please do not hesitate to contact 
me.
            Respectfully yours,
                                             Heidi Margulis
                                 Vice President, Government Affairs
                                 ______
                                 
 Responses for the Record of Robert A. Berenson, Director, Center for 
    Health Plans and Providers, Health Care Financing Administration
                      questions of hon. tom bliley
    Question 1. Do physicians have to do the same kind of quality 
reporting under Medicare fee-for-service that they have to report to 
the plans to comply with QISMC? Is it possible this is another 
disincentive for them to participate in Medicare+Choice?
    Answer 1. Our goal is to require physicians to have quality 
reporting in Medicare fee-for-service similar to what is being done for 
Medicare+Choice. We are exploring potential methods for requiring data 
regarding specific performance levels from fee-for-service providers. 
For example, We are currently requiring Medicare home health agencies 
and nursing homes to collect and submit uniform performance measurement 
data. We collect data on hospital performance and are considering 
requiring hospitals to collect and submit such data as part of the new 
conditions of participation. We are also writing performance-based 
contracts with our Peer Review Organizations to improve Statewide 
performance in fee-for-service and managed care. Under all of the 
revised conditions of participation that are now in various stages of 
development for various fee-for-service provider groups (hospitals, 
home health agencies, dialysis facilities, hospices), we will require 
performance improvement activities resulting in measurable improvement. 
With most of these provider groups, either the draft conditions or 
other arrangements require the providers to participate in national 
efforts similar to those required in QISMC.
    Question 2. Doesn't the risk adjuster score as healthy someone with 
a chronic disease who may be getting a lot of outpatient care but who 
hasn't been hospitalized recently? For example, a stage 4 (metastatic) 
breast cancer patient who has gone through two rounds of chemotherapy 
and a round of radiation therapy but who hasn't been hospitalized in 5 
years would be very expensive, but the plan would get much less money 
for that person than it would have if the person had stayed two nights 
in a hospital.
    Answer 2. We assume that plans will do what is in the 
beneficiaries' best interest and not manipulate care simply to ``game 
the system.'' Nevertheless, patients with chronic conditions, such as 
metastatic cancer treated primarily on an outpatient basis, are still 
hospitalized at a higher rate than those who are not chronically ill. 
Plans continue to have incentives to manage care on an outpatient basis 
because of the high direct costs associated with hospitalization and 
the fact that the additional risk adjusted payment will not be made 
until the following year, at which time the beneficiary might not still 
be in the plan. In addition, the PIP-DCG model does not, as alleged, 
reward plans for increased hospital days. Changing medical management 
practices to include hospitalizations would be a financial loser for 
plans. We are committed to moving as soon as possible to a 
comprehensive risk adjuster that fully accounts for patients with 
chronic conditions, rather than the PIP-DCG model which only partly 
accounts for the costs associated with certain chronic conditions. In 
the meantime, we are working with plans to make adjustments to the PIP-
DCG model for conditions that are specifically amenable to 
sophisticated disease management approaches, such as congestive heart 
failure.
                  questions of hon. michael bilirakis
    Question 1. I am concerned not only with the budget implications of 
the risk adjustment mechanism, but also with the methodology involved. 
There are several programs which serve the frail elderly population. 
The purpose of these programs is to keep these at-risk individuals out 
of the hospital. How are these programs treated and effected by the 
proposed risk adjustor?
    Answer 1. We share concerns about how these types of programs, 
which have a special focus on keeping the frail elderly out of 
hospitals, will fare under our initial risk adjustment system based on 
hospitalization diagnoses.
    We therefore will not apply the risk adjustment method in 
determining their payments in 2000. We also are working with these 
organizations to get the encounter data we need to determine how we 
should risk adjust their payments. For example, some kind of special 
frailty adjuster may be in order.
    Question 2. It has been estimated that the risk adjustor proposed 
by HCFA will save roughly $11.2 billion. Can you explain, in detail, 
where these savings would come from and where the savings would go 
(e.g., U.S. Treasury, Medicare Trust Fund, etc.)?
    Answer 2. The new risk adjustment methodology more accurately 
determines payments for managed care enrollees than the current 
methodology, which is based on demographic factors only. The new risk 
adjustment methodology considers health status as well as demographic 
factors in determining payments. Payments will be higher for sicker 
than average enrollees and lower for healthier than average enrollees. 
Many studies have shown that managed care enrollees are healthier than 
average. Therefore, on average, payments to managed care organizations 
will be lower under the new methodology than the current demographic 
only model. Since all benefit payments for Medicare enrollees are made 
from the Medicare trust funds, any savings due to making more accurate 
payments would be savings to the trust funds.
    Question 3. It is my understanding that many seniors participate in 
the Medicare+Choice program to obtain the prescription drug benefits 
available through Medicare managed care plans. However, HCFA's 
methodologies generally assume that Medicare+Choice participants are 
healthier than individuals in traditional, fee-for-service Medicare. Do 
you have any information comparing the prescription drug utilization 
rates for Medicare+Choice participants versus those for beneficiaries 
who do not participate in the program?
    Answer 3. We do not have sufficient information to do such a 
comparison. Because prescription drugs are generally not covered under 
Medicare, we would not have utilization information for Medicare fee-
for-service beneficiaries. For Medicare+Choice enrollees, we do not 
collect information on drug utilization.
                    questions of hon. sherrod brown
Keeping Up with the Private Sector
    Question 1. During the hearing, I asked whether the government fee-
for-service program is able to keep up with private sector health care 
plans. Dr. Berenson, you indicated that risk adjustment helps the fee-
for-service program keep pace with private managed care organizations, 
but you added that there are several other things that we need to do. 
Would you please elaborate on those other steps?
    Answer 1. There are a number of steps proposed in the President's 
Medicare reform proposal to make Medicare a more ``prudent purchaser.'' 
Historically, traditional Medicare generally (except in the context of 
demonstrations) has been barred from engaging in competitive bidding 
and other ``prudent purchasing'' practices that the private sector has 
used to improve patient care quality and costs.
    In the past decade, private purchasers of health care have 
developed effective techniques that target both beneficiaries with 
special health care needs (recognizing that they account for a large 
share of costs and could benefit from care management) and high-
quality, efficient providers (to provide an incentive to improve care 
and reduce costs). Such practices include: reducing beneficiary cost 
sharing in return for using high quality/cost-effective providers; 
improving and coordinating care for beneficiaries through management of 
specific diseases and/or all of beneficiaries' care; and purchasing 
through competition, selective contracting, and negotiated payment 
rates.
    Under the President's plan, traditional Medicare would be able to 
establish preferred provider arrangements, with special rates and 
discounted beneficiary copayments for the highest quality and most 
efficient health care providers. We have had some experience with these 
types of purchasing techniques including the ``Centers of Excellence'' 
demonstration project for coronary artery bypass graft surgery in which 
we recognize exceptional quality providers while at the same time 
reducing costs. The President's plan would allow Medicare to make a 
single payment for certain procedures or conditions, provide incentives 
for qualified integrated delivery arrangements, and develop innovative 
pricing arrangements, for example, through competition, to promote 
quality and savings, as is commonly done in the private sector. In 
addition, similar to successful private sector efforts, fee-for-service 
Medicare should be able to utilize primary care case managers and 
disease management strategies to improve the care for Medicare 
beneficiaries with multiple chronic health conditions and complex 
health care needs to help make sure they get the care they need while 
avoiding unnecessary services.
Overpayments to Medicare+Choice Plans
    Question 2. In the Balanced Budget Act, we made a number of changes 
to the way health plans are compensated in an attempt to correct 
overpayments to Medicare+Choice plans. However, a June 1999 report from 
the General Accounting Office (GAO) found that even with those changes, 
we still may not completely eliminate overpayments to health plans. 
Would you please comment on this study?
    Answer 2. The GAO was asked to assess whether BBA provisions will 
eliminate excess plan payments. The GAO report identified favorable 
selection, that is, enrollment of a healthier population of Medicare 
beneficiaries in managed care plans, as the primary cause of excess 
plan payments. GAO therefore concluded that implementation of risk 
adjustment will be the primary mechanism for reducing the excess. We 
agree with GAO that favorable selection has been the primary cause of 
excess plan payments. We are proceeding with implementation of a risk 
adjustment methodology for payments in 2000 as mandated by the Balanced 
Budget Act of 1997 (BBA).
    However, GAO does not believe that excess payments will be 
completely eliminated without an adjustment of the 1997 base rates, 
which were overestimated by 4.2 percent. The BBA rate methodology does 
not allow for adjustments to overestimates in the previous years. Thus, 
this overstatement can only be corrected by legislation.
    Question 3. Based on this GAO study, do you expect that 
Medicare+Choice plans will continue to be overpaid in the future?
    Answer 3. Once again, we agree with GAO that implementation of risk 
adjustment will correct for favorable selection, the primary cause of 
excess plan payments. The 4.2 percent overstatement of the base rate 
cannot be corrected by HCFA administrative action. As a result, 
payments in FY 2004 will be about $3.0 billion higher than they would 
otherwise have been.
    Question 4. What is the magnitude of the overpayments that have 
been made to Medicare+Choice plans in the past? Will these overpayments 
increase or decrease in future years?
    Answer 4. The most recent analysis we did, to gauge the impact of 
the risk adjustment system we will initially be using for 
Medicare+Choice payments, shows that plans have on average been 
overpaid by about 7 percent. This will decrease steadily as we phase in 
the risk adjustment system over the next five years.
Medicare+Choice Plan Payments for the Beneficiary Information Campaign
    Question 5. In their written testimony, the American Association of 
Health Plans (AAHP) expressed concern over the user fees that plans 
must submit for the Medicare beneficiary information campaign. AAHP 
noted that last year's campaign did not meet Congressional expectations 
because many Medicare beneficiaries did not receive correct or clear 
information. Would you care to comment?
    Answer 5. Last year, we were successful in establishing an 
education program infrastructure to serve beneficiaries and to provide 
them with specific information about their health plan choices. We did 
a pilot test of the most beneficial means of communication with our 
beneficiaries. Activities included:

 distribution of materials to help beneficiaries understand 
        their health plan choices in 5 pilot States (detailed handbook 
        to pilot States and more general information to all other 
        States.);
 establishment of a Medicare Choices Help Line to answer 
        beneficiary questions and provide health plan information upon 
        request which was initially piloted but expanded to all in 
        1999;
 development and implementation of the Internet web site 
        (www.medicare.gov) to provide plan comparison information; and
 expansion of community-based outreach and education efforts; 
        e.g., expansion of the State Health Insurance Assistance 
        Programs to include choice counseling.
    Additionally, we have developed a performance assessment system for 
all elements of the education program to use for continuous quality 
improvement. These assessment activities identify what is working well 
and what needs to be improved for each of the mechanisms for 
communicating information about Medicare+Choice. We are committed to 
improving the education program based on assessment results.
    In forming any new and complex program, issues will arise. We 
conducted a pilot to proof our approaches before going national. In 
conducting the pilot, we did encounter circumstances that affected the 
accuracy of information provided to beneficiaries through the 
Medicare&You Handbook. The print production process for the Handbook 
begins in June. All information included in the Handbook must be 
finalized by that time. When the 1999 Medicare&You handbooks were 
printed, the information was correct. Errors in the handbooks, limited 
to the plan comparison information, were due to plan service area 
changes, such as non-renewals and service area reductions announced in 
October. To address this situation, the handbook for 2000 will contain 
general plan information, such as Medicare+Choice plan names, telephone 
numbers, ranges of premiums for plans available and a note if 
prescription drugs are offered. The handbooks will refer beneficiaries 
to the toll-free 1-800-MEDICARE number and the www.medicare.gov web 
site for up-to-date and detailed information about the plans available 
to them in their area.
    Question 6. HCFA has $25 million in user fees left over from last 
year. Could you please explain why you have extra money left over, and 
why you believe HCFA needs additional appropriations this year?
    Answer 6. The $25 million in user fees left over from FY 1998 are 
from the toll-free line. Our original response rate estimate of 20 
percent, based on analysis of comparable private sector endeavors, were 
too high. Based on current experience, we adjusted our operating 
assumptions to a response rate of 1% during normal workload months and 
up to 6% during peak months; e.g., during the fall when the handbook is 
distributed. We anticipate that these volumes will grow incrementally 
based on increased advertising and focus on the 2001 lock-in. A 10% 
rate for the peak is assumed in FY 2000.
    We estimate a total need of $140 million for FY 2000. After 
allowing for the $25 million carry-over, we have a net need of $115 
million in user fees. Our costs include: increased assessment efforts 
to ensure that the program is meeting beneficiary needs; new 
initiatives targeted to educating vulnerable populations; increased 
counseling services to beneficiaries; implementation of a Knowledge 
Base/Management system to enhance customer service; promotion and 
publicity enhancements; implementation of a long-term Internet strategy 
and enhancements; increased materials/publications development; and 
increased efforts around the Consumer Assessment of Health Plan Survey 
(CAHPS) to ensure that beneficiaries are being provided quality and 
comparison information about plans.
    Question 7. Are managed care plan user fees paying for education 
efforts not solely related to managed care? Why should plans pay for 
unrelated education efforts?
    Answer 7. The Balanced Budget Act of 1997 (BBA) specifies 
educational activities that we must conduct and that the funding source 
for these activities be a user fee collected from health plans. Before 
passage of the BBA, the Administration had proposed a broader fee that 
would be paid by all plans (Medigap), not just Medicare+Choice, to 
assist in financing all of our education efforts. However, what was 
passed under the BBA was an assessment of the user fee on 
Medicare+Choice plans only. Despite this, we have continued to 
supplement the user fee funding of Medicare+Choice education efforts 
with our own funding to support educational activities related to 
original Medicare.
                      questions of hon. ralph hall
Medicare+Choice Plan Withdrawals
    Question 1. An April 1999 study of last year's plan withdrawals by 
the General Accounting Office found that many factors, not just low 
payment rates, contribute to a health plan's decision to leave the 
Medicare market or reduce its service area. Would you please comment on 
the results of this GAO study? Do you believe that similar factors have 
contributed to plan withdrawals this year?
    Answer 1. Our analysis concurs with the GAO's finding that many 
factors contribute to plan business decisions regarding Medicare+Choice 
program participation. Different plans in similar market situations are 
making different decisions based on their own internal issues and 
corporate strategies. And, yes, similar factors did contribute to plan 
business decisions this year. We have conducted an analysis of plans 
that this year are leaving or diminishing participation in the program 
and of plans that are remaining, which is attached.
    Question 2. Where did Medicare+Choice plans pull out of the market? 
Was it mostly in areas with the lowest payment rates?
    Answer 2. Medicare+Choice plan pullouts were not primarily in areas 
with the lowest payment rates. Payment levels in counties affected by 
plan withdrawals range from the base rate of $401 to a high of $772 in 
Plaquemines Parish, Louisiana. In all, 329 counties in 33 states were 
affected. As mentioned above, we have conducted an analysis of plans 
that this year are leaving or diminishing participation in the program 
and of plans that are remaining, which is attached.
    Question 3. In spite of plans complaining about low payment rates, 
I understand that more managed care plans are lining up to participate 
in the Medicare program. Is this correct?
    Answer 3. Yes. Since January 1999, 22 new organizations received 
M+C contracts and 20 current organizations expanded their service 
areas. As of August 31, there are 13 new M+C applications and 9 Service 
Area Expansion applications pending.
Performance Standards
    Question 4. I have heard it said that the performance standards 
that Medicare+Choice plans must comply with are difficult and 
cumbersome. I have two questions for you about performance standards. 
First, aren't many of these health plans required to collect and report 
this data for other programs and other purchasers? Are the 
Medicare+Choice requirements really that much of a burden?
    Answer 4. Yes, many, if not most, other programs and purchasers 
require similar reporting of performance measures. We believe that the 
performance standards required under Medicare+Choice are both 
reasonable and appropriate. Implementing this requirement is consistent 
with our responsibility to promote accountability on the part of 
managed care organizations. The collection, evaluation and reporting of 
performance measures are not new to managed care plans. Many Medicare + 
Choice (M+C) organizations collect and report data which include the 
Health Employer Data and Information Set (HEDIS), measures which are 
sponsored, supported and maintained by the National Committee for 
Quality Assurance (NCQA). HEDIS consists of standardized performance 
measures designed to help ensure that the public has the information it 
needs to reliably compare the performances of managed care plans. They 
are predictive of outcomes, are well-defined and are also well 
established and adopted in the private sector. In addition, an analysis 
of HEDIS measures gives purchasers and consumers the ability to 
evaluate health plan quality using important criteria, and to make plan 
decisions based upon demonstrated value rather than cost alone. The 
Medicare+Choice requirements also incorporate data currently being 
collected as part of voluntary accreditation efforts. Many managed care 
organizations have collected and reported standard measures as a 
requirement of accreditation.
    We have been sensitive to concerns regarding the varying 
differences in health plan resources available to collect quality 
performance data relative to access and effectiveness of care. The 
quality assessment and performance improvement requirements established 
in the M+C regulation build upon a number of public-private efforts. We 
are working diligently to ensure that our requirements are consistent 
with those of private sector accrediting bodies. And we are strongly 
committed to implementing appropriate methods of performance 
measurement in the original Medicare program as well as in managed 
care.
    Question 5. Second, it seems entirely appropriate that a program 
that has spent billions of taxpayer dollars should be held to 
performance standards. Do you agree that Medicare+Choice plans should 
be held accountable for their performance?
    Answer 5. Yes, we certainly agree that Medicare+Choice 
organizations should be held accountable for their performance in 
providing the full range of services contained in their benefit 
packages to their enrolled members as well as providing the services in 
a manner that is in accord with acceptable clinical practice. Thus, in 
the Medicare+Choice regulations and policy, we are strengthening our 
commitment to being a value-based purchaser and requiring 
accountability from the health plans with Medicare contracts through 
the implementation of minimum standards.
    To that end, we will be requiring health plans to meet minimum 
performance levels that will be measured through the collection of data 
such as HEDIS measures. We will be requesting input from all interested 
parties on the implementation of the minimum standards. As previously 
mentioned, we are strongly committed to implementing appropriate 
methods of performance measurement in the original Medicare program as 
well as in managed care.

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