U.S. GOVERNMENT PRINTING OFFICE

60–839 WASHINGTON : 1999

PREPARING THE HEALTH CARE FINANCING

ADMINISTRATION FOR THE 21ST CENTURY

HEARING

BEFORE THE

SUBCOMMITTEE ON HEALTH

OF THE

COMMITTEE ON WAYS AND MEANS

HOUSE OF REPRESENTATIVES

ONE HUNDRED FIFTH CONGRESS

SECOND SESSION

JANUARY 29, 1998

Serial No. 105–86

Printed for the use of the Committee on Ways and Means

(
(II)

COMMITTEE ON WAYS AND MEANS

BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois

BILL THOMAS, California

E. CLAY SHAW, JR., Connecticut

NANCY L. JOHNSON, Connecticut

JIM BUNNING, Kentucky

AMO HOUGHTON, New York

WALLY HERGER, California

JIM McCRERY, Louisiana

DAVE CAMP, Michigan

JIM RAMSTAD, Minnesota

JIM NUSSLE, Iowa

SAM JOHNSON, Texas

JENNIFER DUNN, Washington

MAC COLLINS, Georgia

ROB PORTMAN, Ohio

PHILIP S. ENGLISH, Pennsylvania

JOHN ENSIGN, Nevada

JON CHRISTENSEN, Nebraska

WES WATKINS, Oklahoma

J.D. HAYWORTH, Arizona

JERRY WELLER, Illinois

KENNY HULSHOF, Missouri

CHARLES B. RANGEL, New York

FORTNEY PETE STARK, California

ROBERT T. MATSUI, California

BARBARA B. KENNELLY, Connecticut

WILLIAM J. COYNE, Pennsylvania

SANDER M. LEVIN, Michigan

BENJAMIN L. CARDIN, Maryland

JIM MCDERMOTT, Washington

GERALD D. KLECZKA, Wisconsin

JOHN LEWIS, Georgia

RICHARD E. NEAL, Massachusetts

MICHAEL R. MCNULTY, New York

WILLIAM J. JEFFERSON, Louisiana

JOHN S. TANNER, Tennessee

XAVIER BECERRA, California

KAREN L. THURMAN, Florida

A.L. SINGLETON, Chief of Staff

JANICE MAYS, Minority Chief Counsel

SUBCOMMITTEE ON HEALTH

BILL THOMAS, California, Chairman

NANCY L. JOHNSON, Connecticut

JOHN MCCRERY, Louisiana

JOHN ENSIGN, Nevada

JON CHRISTENSEN, Nebraska

PHILIP M. CRANE, Illinois

AMO HOUGHTON, New York

SAM JOHNSON, Texas

FORTNEY PETE STARK, California

BENJAMIN L. CARDIN, Maryland

GERALD L. KLECZKA, Wisconsin

JOHN LEWIS, Georgia

XAVIER BECERRA, California

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records

of the Committee on Ways and Means are also published in electronic form. The printed

hearing record remains the official version. Because electronic submissions are used to

prepare both printed and electronic versions of the hearing record, the process of converting

between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process

is further refined.
(III)

C O N T E N T S

Page

Advisory of January 21, 1998, announcing the hearing ....................................... 2

WITNESSES

Health Care Financing Administration, Hon. Nancy-Ann Min DeParle, Administrator ............................................................................................................ 7

U.S. General Accounting Office, William J. Scanlon, Ph.D., Director, Health

Financing and Systems Issues, Health, Education, and Human Services

Division; accompanied by Leslie Aronovitz, Associate Director, Health Financing and Systems ........................................................................................... 41

Bulter, Stuart, Heritage Foundation ...................................................................... 64

Center for Studying Health System Change, Paul B. Ginsburg .......................... 77

National Academy of Sciences, Institute of Medicine, Marion Ein Lewin .......... 87

National Academy of Social Insurance:

Paul B. Ginsburg .............................................................................................. 77

Michael E. Gluck .............................................................................................. 77

SUBMISSIONS FOR THE RECORD

Home Care Association of America, Jacksonville, FL, Dwight S. Cenac, statement ...................................................................................................................... 121

National Association of Health Underwriters, Thomas P. Bruderle, statement 131

Oklahoma Association for Home Care, Karen Rogers, statement ....................... 135

Retired Public Employees Association, Inc., Albany, NY, statement .................. 140

(1)

PREPARING THE HEALTH CARE FINANCING

ADMINISTRATION FOR THE 21ST CENTURY

THURSDAY, JANUARY 29, 1998

HOUSE OF REPRESENTATIVES,

COMMITTEE ON WAYS AND MEANS,

SUBCOMMITTEE ON HEALTH,

Washington, DC.

The Subcommittee met, pursuant to notice, at 10:08 a.m., in

room 1100, Longworth House Office Building, Hon. William Thomas (Chairman of the Subcommittee) presiding.

[The advisory announcing the hearing follows:]
2
3
4

Chairman THOMAS. If the Subcommittee would come to order—

I’d like to welcome our guests and witnesses to today’s Health Subcommittee hearing with a rather broad title: Preparing the Health

Care Financing Administration for the 21st Century. And I do

want to welcome the Health Care Financing Administration’s new

Administrator, Nancy-Ann Min DeParle, who is going to take quite

a large role in setting the tone for the underlying theme of the

hearing.

In the past few months, the Health Care Financing Administration has undergone three significant changes. Obviously, a new Administrator. Secondly, the agency recently underwent a comprehensive reorganization affecting virtually every one of the more than

4,000 employees. And third, pretty obviously, the Congress passed

and the President signed the Balanced Budget Act of 1997 which

contains the most comprehensive Medicare reform since the inception of the program.

These reforms have, and will have, a dramatic impact on the

Medicare program. Our seniors will be able to choose from a vast

array of privately run, Medicare-plus-choice plans like Medicare

savings accounts, provided-sponsor organization plans, health

maintenance organizations, private fee-for-service plans, while

maintaining the option of remaining in traditional fee-for-service

Medicare.

The latest Congressional Budget Office estimates predict that

many of our seniors will choose to leave fee-for-service Medicare

and enroll in a privately-run plan. In just four years, one-quarter

of beneficiaries are expected to choose to enroll in a private plan,

and by 2030, it’s projected that perhaps half of all beneficiaries will

make a similar choice.

As a result of the Balanced Budget Act, there will also be significant payment changes, as many of us have heard about, to modernize the fee-for-service part of the program; shifting from a 1960-

style cost-based reimbursement to prospective payment systems.

There will also be several new preventive benefits, like the diabetes

self-management, prostate screenings, and others, that need to be

implemented.

Finally, the agency must ensure that taxpayer dollars are spent

wisely by implementing some of the historic steps Congress has

taken in the past two years. For example, the Health Insurance

Portability and Accountability Act—and the fraud and abuse sections of that act—and the Balanced Budget Act combined offer

about 65 concrete steps to fight waste, fraud, and abuse in Medicare and the American health care system.

Clearly, Ms. DeParle, you have your work cut out for you. In the

short-run, you have to implement these new provisions. However,

you also have to continue those structural changes to the management of the Health Care Financing Administration, some of which

we are only now beginning to appreciate the depth and breadth of

in operating a private-plan-focused environment in the 21st century.

I am concerned that an agency that historically focused on regulation and micro-management and paying the bills may have some

difficulty without a lot of open understanding and positive critiques

in transforming itself into one that protects seniors and fosters in-
5

novations among private plans. It is not easy for bureaucracies to

make these kinds of fundamental shifts which go at the core of the

culture of a particular bureaucracy.

This is the issue that we will begin to explore today with Mrs.

DeParle, Mr. Scanlan from the General Accounting Office, and our

panel of experts who will help us understand the changes that are

needed to prepare the Health Care Financing Administration for

the 21st century. And before we recognize the new Administrator,

I’d ask my colleague from California, Mr. Stark, if he has any remarks.

Mr. STARK. Thank you, Mr. Chairman, I do have remarks. I’m

not sure which you want first—good news or bad news. But I appreciate, on the good news side, I appreciate your holding this oversight hearing on HCFA’s ability to administer the Medicare program and implement the changes required in the Balanced Budget

Act. The bad news is that HCFA’s administrative budget is inadequate to do any of the things that many of us might want. I hope

we can work on a bipartisan basis to urge our colleagues who are

the appropriators to give the agency the resources it needs. We’re

all aware that the best way to end an agency in this town, is to

starve it for funds. If we really don’t want HCFA to do anything,

then we ought to just let the appropriators not give it the money.

If we really want to get them to a program that we can agree on,

we’ve got to see that they get adequate funds. We’ll talk about that

in a little bit.

But basically, the money HCFA gets to review claims, or the pennies per claim, is now 43 percent lower than it was in 1989. And

I don’t care how you slice that, when you cut the per-claim dollars

darn near in half, the agency can’t keep up. We’ve also added the

fight for fraud which gets more sophisticated all the time. Still,

with an ever declining budget, their volume of work goes up. Now,

HCFA must get some volume discounts, but I think we have a responsibility to see that they get the funds to do whatever it is that

this committee charges them to do—or this Congress does.

The administration is proposing a package of antifraud legislation, and I hope we’ll enact it. Included in it is an idea that I’d like

to advocate and that’s doubling the number of audits for cost-based

providers and paying for it with a fee to cover those costs. Many

of those providers—Columbia and it’s private accounting firm,

KPMG in Florida—have proven that there’s more than just smoke

there. Audits there would have saved us a lot of money.

Part of the cost of doing business with Medicare must include the

cost of an independent audit. By charging a fee, we’ll be able to

provide some of the resources it takes to protect the Medicare trust

funds.

Explaining the new Medicare choice programs to seniors will be

a daunting task for HCFA or anybody else. If they don’t have the

money to explain it, they can’t do it. We authorized $200 million

this year, but the appropriators only gave them $95 million. This

fall, HCFA is likely to be flooded with calls from confused beneficiaries about the new array of plans and the wave of advertising

that will come out. We all know that’s going to happen.

Our staff this week just placed calls to HCFA’s 800 number, and

the results were troublesome. There were lengthy delays, and that
6

was the rule not the exception. And as any of you who have tried

to get past 800 numbers to check your credit card know, I’m not

sure whether money will solve all those problems. But I do know

that these plans will be complex they will be confusing. Our own

offices will hear from beneficiaries and we ought to do whatever we

can: one, to encourage HCFA to see that the phones are answered

promptly and there are people who can give you good information,

and secondly, that we see that they get the resources to be able to

do it.

Finally, you asked, Mr. Chairman, whether HCFA’s reorganization produced a structure that is appropriate for the 21st century;

and I’m afraid it isn’t. We’ve got a situation like we’ve had—and

criticized often—within the FAA. HCFA is in the business, or will

be in the business, of promoting managed care at the same time

it is trying to regulate it. And those are conflicting roles. You can’t

order people to promote something on the one hand, and then on

the other hand come back and say you’ve got to investigate them

and tell people when they aren’t working correctly. I think we have

to look at that issue and look for independent patient’s counsel, or

separating, if not explicit, implicit promotion of managed care and

its regulation.

While the Cshairman may not like the ideas for regulations that

are currently being circulated, we do need them. We’ve got to stop

the cheers in the movie ‘‘As Good As It Gets’’ and somehow make

the public convinced that they do have somebody on their side. And

I hope our Subcommittee will look at that important issue.

Thank you for starting out the year with this hearing and I look

forward to hearing from our witnesses.

Chairman THOMAS. I thank the gentleman.

This is a new year and a second session and I believe the spirit

in which the gentleman made his comments is a constructive one

and I did not go into any detail in my opening remarks rather than

to just set the frame. I think you’ll find, and now I guess I’ll

prompt our first witness, that our intention was to make sure that

there was adequate funding for the administrative changes. We

have tried to work in a cooperative way to make sure that if necessary the movement of money within the structure, and indeed

additional money, could be made available. I had no intention

whatsoever of creating new ways to deliver services and then not

make sure they weren’t adequately financed to do that. You and I

could share some time discussing the appropriators and the way in

which all of us have concerns about the appropriators.

Beyond the gentleman’s concern for an organization that’s not

only going to regulate managed care but also supervise and run it,

the same might be true for fee-for-service, and in fact they have almost a monopoly on that. We will have panelists who have looked

at this problem and who have the same concern from adjustment

within the culture of HCFA to eliminating HCFA. And I just think

it’s appropriate at this stage, maybe, to remember that the President has played a relatively significant role in getting us to refocus

on the question of health care delivery in Medicare and in putting

people first.

On page 21, the President said as part of his vision, if he were

to be elected president, quote, ‘‘We will scrap the Health Care Fi-
7

nancing Administration and replace it with the Health Standards

Board made up of consumers, providers, business, labor, and government that will establish annual health budget targets and outline a core benefits package.’’ He didn’t use the phrase, ‘‘whither

away’’; he used the phrase, ‘‘scrap.’’ But what we’re trying to do is

make sure that these bold visions, although the end product might

be something that we would agree with, the hastiness of a phrase

like scrap clearly would not serve the beneficiaries.

What we need is planned change. And Mrs. DeParle is now in

charge of an immense bureaucracy that has major responsibilities,

frankly, significant economic impact if things aren’t done correctly

for the economy, and she’s anxious to tell us about what she’s already done as a new administrator and what she plans to do.

So, if my colleagues have any statement, we’d be willing to put

a written statement in the record, but I’d like to turn now to the

new director of the Health Care Financing Administration, Mrs.

DeParle. The time is yours. Your written statement will be made

a part of the record as always, and you can address us in any way

you see fit.

STATEMENT OF NANCY-ANN MIN DE PARLE, DIRECTOR,

HEALTH CARE FINANCING ADMINISTRATION

Ms. DEPARLE. Thank you, Mr. Chairman.

Mr. Chairman, Mr. Stark, and Members of the Subcommittee,

I’m very pleased to have this opportunity to discuss with you my

priorities as Administrator of the Health Care Financing Administration and their relationship to your theme today in preparing

HCFA for the 21st century. Before getting into my priorities, I

want to begin by describing what HCFA’s recent reorganization is

all about and how it’s helping us meet our goals.

When HCFA was created in 1977, running the Medicare program

primarily meant paying bills on time. After 20 years of significant

changes in the health care environment, it is time to address

whether the agency was organized in the best way to fulfill it’s responsibilities.

Chairman THOMAS. Nancy-Ann.

Can you hear in the back? You need to turn that mic directly towards you and speak directly into it very closely. For some reason,

the sound system, although we didn’t have the best before, has gotten worse and it’s no fun sitting there not hearing because what

you have to say is important. You are going to have to talk directly

into it and get relatively close. I’m sorry, go ahead.

Ms. DEPARLE. Thank you.

After 20 years of significant changes, we felt it was time to address whether we were organized in the best way to fulfill our responsibility. So, in 1996, the agency began a process that included

consultation with a broad spectrum of individuals and groups with

whom we interact: beneficiaries, the States, and health plans and

providers. These are our three core markets.

We looked at private sector health plans and insurance companies. And the primary focus of the reorganization which was implemented last July was to structure the agency in such a way that

these three core markets are at the center of what we do and that

they have a one-stop shopping to address their needs.
8

The processes involved in reorganizing are difficult, as you all

know. Even positive change can be traumatic. But we consider

them to be growing pains; and I consider the reorganization to be

something that was long overdue.

Our ultimate goal is to ensure that changes to the agency are implemented in a manner that makes Medicare and Medicaid stronger and more efficient, not only for today’s beneficiaries, but for future generations.

My priorities as the Administrator of HCFA are simple to state

but much harder to accomplish. I think they are very much consistent, Mr. Chairman, with your theme today, ‘‘Preparing HCFA

for the 21st Century.’’ They are: first, to reform and strengthen

Medicare and Medicaid starting with implementing the Balanced

Budget Act which expands choices for beneficiaries and guarantees

Medicare’s solvency until 2010; second, to implement the new Children’s Health Insurance Program; third, to sharpen our focus

against fraud and abuse; and, fourth, to ensure that HCFA’s information systems are ready for the millennium.

Since the Children’s Health Insurance Program and Medicaid are

not within the oversight of this subcommittee, I’m going to focus

on the other priorities.

My first priority is to ensure that we implement the Medicare reforms in the Balanced Budget Act, and not just that we implement

them, but that we do it right. As you well know, Mr. Chairman,

there were about 300 separate provisions that must be carried out

to fully implement this law. Some of the provisions are simple, but

some of them are extraordinarily complex. Our staff is working

tirelessly to meet the deadlines, and they are working with your

staff here very well. We’re doing everything we can to get the job

done with the resources we have, but as both you and Mr. Stark

have acknowledged, the fact remains that our resources have diminished in real terms while our responsibilities have grown.

Let me put this in perspective. Between 1993 and 1997 Medicare’s administrative spending in real dollars decreased by around

11 percent while the number of claims that we processed has gone

up by about 25 percent. The number of managed care plans with

Medicare contracts has more than doubled and the number of

skilled nursing facilities and home health agencies has increased

by over 30 percent.

Despite the new responsibilities that we received in the Balanced

Budget Act and the Health Insurance Portability and Accessibility

Act, our program management budget for this fiscal year increased

only one-half of 1 percent. Many of our new responsibilities will require additional work in Fiscal Year 1999 and subsequent years.

And I do want to say that I thank the members of this subcommittee for their help with the 1998 budget, because, as the

chairman noted, you and your staffs were helpful in trying to work

with the appropriations committees and express to them the importance of the work that we’re doing.

When the administration’s budget is released next week, I hope

we’ll be able again to work together to ensure that we have adequate resources to do the good job of running these programs that

you want us to do.
9

I’m committed to a smooth implementation of the Balanced

Budget Act. I want to continue to work closely with this subcommittee and its staff.

Mr. Chairman, I am committed to stepping up the crackdown on

fraud and abuse begun by the President in 1993. Since I’ve been

at HCFA, we have taken several new steps to combat fraud and

abuse. Just last week, we published a proposed regulation to tighten standards and strengthen enforcement against unscrupulous durable medical equipment suppliers. We are requiring on-site inspections before these new suppliers are approved. And also this

month, we set tougher requirements for home health agencies and

lifted a moratorium that we imposed last September on new agencies entering Medicare.

Beginning next month, the Inspector General’s toll-free number—1–800–HHS–TIPS—will appear on every statement that we

send to Medicare beneficiaries, so that they will know where to call

to report Medicare fraud. And later this spring, we will host a National conference to bring together our colleagues in the Federal

Government and the private sector as part of a process to develop

a comprehensive anti-fraud and abuse plan.

We’ve made some good progress, but, as you know, the nature of

health care fraud demands that we continuously find new ways to

stay ahead of those who would misuse Medicare trust fund dollars.

I want to thank this committee for its support in the past and

the work that you did last year in the Balanced Budget Act to give

us some tools that we need, and we look forward to continuing to

work with you this year in this effort.

Mr. Chairman, your theme today, ‘‘Preparing HCFA for the 21st

Century,’’ could not be more in tune with my third priority, which

is the year 2000. I view the threat of a major problem with our National information flows and the potential impact that could have

on Medicare with the utmost seriousness. And, I want you to know

that we’re working to do everything we can to ensure that the 74

mission-critical external systems that we have are millennium compliant no later then December 31 of this year. We’re using on-site

inspections and we’re monitoring our contractors to ensure that we

make the transition smoothly and in a timely manner.

In the next few years, HCFA will be challenged as it has never

been before. But I believe we can do the job. The list of HCFA’s

accomplishments and innovations is long and distinguished, as this

subcommittee knows.

I look forward to working with all of you to achieve our mutual

goals of strengthening Medicare, extending the life of Medicare’s

Hospital Insurance Trust Fund, and providing beneficiaries with

the best possible care in the most efficient manner. And I view this

hearing today as good news, because I view this as a sign that

you’ll be working together with us as partners in this effort. Thank

you.

[The prepared statement follows:]
10
11
12
13
14
15
16
17
18
19
20

Chairman THOMAS. Thank you very much. And obviously in your

oral presentation, you could not go into the depth or the breadth

that your written statement provides, and I urge all members to,

if they possibly have time, not just look at but read the written

statement, because it does provide, I think, a clear understanding

of the magnitude of the problem in front of us. And I don’t think

anyone should take lightly the difficulty in one, running this organization, and two, in getting it to change, as I’ve said several times

now, the basic culture.

And my friend from California points out rightly, and I’m pleased

that you indicate, that if we’re going to ask you to do certain things

that we ought to provide you with the wherewithal to do them. We

will continue to try to do that since there are a number of people

who have differing priorities than we might, and we have to get

other people to buy our priorities and change theirs.

So there is, to a certain extent, always going to be tight dollars,

and I’m always willing to fight for sufficient funds to run a program right. But what would concern me is if I fought to try to get

funds to run a program, and then I found out that those funds

were being used for something else. I do not think in the long run

it’s wise to rob Peter to pay Paul. For example, I’ll ask a hypothetical and hopefully elicit a reaction from you.

We obviously had some priorities in making changes and funded

some areas perhaps adequately with a concern that some other

areas that someone else’s priorities would indicate needed more

money were not funded as adequately. And my hope would be that

you would never use, for example, Medicare program integrity dollars to finance fee-for-service contractor training, outreach activities, physician-provider satisfaction surveys; things that really are

more administrative in nature from a program that we had kind

of indicated should go in a particular direction. I would invite a response from you about trying to move money from areas that we’ve

cooperated to put money in to run other areas.

Ms. DEPARLE. Well, sir, the area that you mentioned in particular, Medicare program integrity funding, is one of my top priorities, as I’ve said. And we fought hard together to get that money,

and it is very important that we have it. As Mr. Stark pointed out,

we are not able to review the number of claims and audit the number of providers that we want to do right now, so I would not be

pleased to hear we were using those moneys on other things. I can

understand the chairman’s view on that.

Chairman THOMAS. I understand you would not be pleased to

hear that, but you are, I think, in a position to assert yourself so

that it doesn’t happen, or at least make it clear that it is not your

desire if it is imposed.

Ms. DEPARLE. I would make that clear.

Chairman THOMAS. Thank you very much.

You have not been on board that long, I want to make it clear.

I believe your confirmation was November 10.

Ms. DEPARLE. I believe it was November 8.

Chairman THOMAS. November 8. Good. Because on November 7,

I asked GAO to investigate the Technology Advisory Committee in

terms of the manner in which it was meeting. I believe that the

GAO has provided us with what I thought was the case: that it
21

was, in fact, in violation. And I would invite a brief reaction from

you, on the record, of the GAO’s finding of the manner in which

the Technology Advisory Committee was meeting.

Ms. DEPARLE. Well, sir, as you know, I’m a lawyer, and I’m not

acting as a lawyer in my current job, but I learned a lot about the

Technology Advisory Committee in my first week on the job,

thanks to you, and I think that the GAO is exactly right. It was

not operating in a lawful manner and we won’t operate that way

in the future. And I believe our response from the staff acknowledged that, sir.

Chairman THOMAS. Thank you very much.

Mr. Stark. Do you wish to inquire?

Mr. STARK. Thanks, Mr. Chairman.

Some of these home health agencies are apparently now frightening seniors into calling our offices. They are frightening the seniors with a story that says that their benefits will be cut off and

they’ll no longer be eligible for services. Now, we know that’s not

correct, but is there anything that you can do—when we can identify these scare tactics to end them? Could suggest to these groups

that it doesn’t help their case?

Ms. DEPARLE. It does appear, Mr. Stark, that there is a concerted campaign going on to scare some of our home health beneficiaries on a couple of these provisions that were enacted in the

Balanced Budget Act. I’ve confronted it myself when I was traveling last week and meeting with beneficiaries.

We’re writing a letter to all the home health companies warning

them that if they persist in trying to scare beneficiaries and we

have evidence of that, that we will consider that to be a complaint

that would require an investigation of the agency. And we’re also

doing everything we can to let beneficiaries know that it’s not accurate to say that they’re going to all lose their services. We’ve also

met with the industry representatives here in Washington to let

them know of our view on that.

Mr. STARK. That’s great. And could I ask a favor? I know most

of my colleagues are more adept at understanding these regulations than I am, but could I get from you a letter or a memo with

some short declarative sentences of what these complaints are and

why they are wrong? It would be helpful for me to use either in

a newsletter or in answering my own constituents to be able say

‘‘Here’s what the Government says; you are being unnecessarily

frightened by these people, please report to me if that happens.’’

And it would be helpful to us to put those rumors to rest. I’d appreciate that.

Now we’ve got another problem. There is a fund-raising group

known as the United Seniors Association who are spreading false

information on the issue of private contracting and the Kyl amendment. Could you state for the record, and I’ll clip it out later, as

concisely as you can, what the law is. Do my constituents need a

private contract for something that Medicare doesn’t cover?

Ms. DEPARLE. No, sir, they don’t and they never have.

Mr. STARK. And if it is questionable whether Medicare covers a

particular service or not, can you explain what this advance beneficiaries notice option is, again for the record, so I can tell my constituents?
22

Ms. DEPARLE. I think I can, sir. In a case where Medicare’s coverage is questionable—an example would be a test that might be

for screening purposes instead of diagnostic purposes, where the

physician just isn’t sure—the law provides that the physician

should give the beneficiary an advance beneficiary’s notice. That’s

just a statement that says that they acknowledge that Medicare

might not cover the service and that if Medicare doesn’t cover it,

the beneficiary is responsible. And then the carrier medical directors make the decision about whether it’s actually covered.

So, that’s a simple process in those few instances where there’s

some question about it. And it’s done that way to protect both the

beneficiaries and the physician, because in that way the physician

has notified the beneficiary that they may be responsible for paying

for it. It is not necessary that a private contract be entered into for

a physician to supply a service to a beneficiary in that way.

Mr. STARK. Thanks. Before the light goes, let me just ask you

then to comment on the fact that in 1998, we’re going to spend

$216 billion in benefits. By 2008, almost regardless of what the

various commissions do, we’re scheduled to spend some $450 billion

in benefits. That is almost a 100 percent increase over the next 10

years. The CBO estimates that we’ll spend $3.7 billion for administration in 1998. That will only increase to $5.8 billion in 2008. This

is an increase of maybe 50 percent—55 percent. So the administrative resources will decrease from 1.7 percent to 1.3 percent. At the

same time, all the other private plans spend 20 percent on average

in administrative costs. One of the lowest cost plans is in California—Kaiser. I think they are at 12 percent Administrative costs.

HCFA is running this in single digit. Some people might want to

do the intermediaries’ costs, but you’re still in single digit overhead.

Can you give us some idea of what you think that portends for

our ability to go after fraud and to administer the variety of new

plans that are coming? Are you prepared to give us some idea of

how much more money HCFA will need to handle the increased

volume and the increased complexity?

Ms. DEPARLE. Well, it’s not a very pretty picture. The numbers

that you have cited don’t portend well at all for our ability to do

the job that we need to do. I think we are managing now, but we

are just managing. I don’t think we’re able to do everything that

this subcommittee wants us to be able to do, certainly not in the

area of combating fraud and abuse. And with a ratio like the one

you mentioned, the number of claims that we could review, the

number of audits that we could conduct, will be even less. Now, one

answer to that is doing a better job at the front end, which is what

we’re trying to do with some these new provider enrollment standards.

But, sir, even that, at the order of magnitude that you’ve talked

about and with the growth of claims and growth of the program,

won’t allow us to keep up. So, we have some very serious work

ahead of us. And I think this year’s budget, if we can work with

this committee and your colleagues to get it enacted, is a step in

the right direction. But we certainly need more help there.

Mr. STARK. Will you indulge me for one more request, Mr. Chairman?
23

What I’m leading up to, for my colleague’s sake, is that in the

Medicare plan we probably have fewer employees than most large

insurance companies and we are spending less, or at least the

same. Yet, we’re often criticized for running big bureaucracies. I

think that the HCFA bureaucracy is a reasonable bureaucracy by

any private industry standard. To that end, Nancy-Ann, would you

send me information about how many employees are active in administering Medicare, and include how many employees the fiscal

intermediaries have? We’ll then try to see what we can get from

the private side to see how HCFA compares. I will provide that to

my colleagues to have some measure of how efficient or inefficient

the bureaucracy is. That will come up anyway and we might as

well face it headon. I’d appreciate whatever you could send to the

chairman and myself on that issue.

Thanks very much. Thank you, Mr. Chairman.

[The information was not available at the time of printing.]

Ms. DEPARLE. Thank you.

Chairman THOMAS. That would be useful.

Does the gentleman from Louisiana wish to inquire?

Mr. MCCRERY. Yes, thank you, Mr. Chairman, and welcome Ms.

DeParle.

Ms. DEPARLE. Thank you.

Mr. MCCRERY. We look forward to working with you. Just a brief

follow-on to Mr. Stark’s last line of questioning, though. It would

also be interesting, I think, if we could get reliable data on the

level of fraud and abuse in the Medicare program as opposed to

private sector plans, and also, perhaps, overutilization in Medicare

programs compared to private plans. But, that’s not what I wanted

to ask you about.

Two things, since you brought up the BBA, I’d like for you to address the practice expense relative values for the physician fee

schedule, and payment methodology for EPOGEN under the ESRD

program.

With regard to practice expense, as you probably know, the BBA

outlined two specific mandates on HCFA: No. 1 to require HCFA

to use to the maximum extent possible generally accepted costing

principles and those principles would recognize all staff equipment,

supplies, and expenses, not just those which can be tied to specific

procedures; and, No. 2, it required HCFA to develop actual data on

equipment utilization and other key assumptions for the May rulemaking.

So, if you could comment on those two requirement in the BBA,

I’d appreciate it. And then, when you get through, I’ll follow up

with the EPOGEN question.

Ms. DEPARLE. Yes, sir. Well, as you know, the practice expense

requirement is something that has been in place for some time but

this year Congress asked us to hold up on implementing it to give

more time for the kind of data that you just mentioned to be produced. We published a notice of pre-rulemaking in the Federal Register back in October asking for help from the physician community

and others in obtaining the kind of information on actual resource

use that you’re talking about.

We’ve conducted three major activities involving the physician

community regarding data. On October 6 through October 8, we
24

held 17 medical specialty panels in Baltimore and they were

charged with validating the resource data for the high-volume CPT

codes for each specialty. And all the major medical specialty societies were represented. We held a forum on indirect practice expenses on November 21. And again, all the major medical specialty

societies were there. And we held a cross-specialty panel in December—for two days in December—and the main purpose of that was

to standardize the resource inputs for the direct practice expenses

across specialties.

I’m also aware, sir, of the comments about the accounting principles because we have started getting comments in to our pre-rulemaking. And we will continue to look at that and to work with the

physician community on it. But I do believe we are doing what

Congress asked us to do in terms of meeting with these groups and

making sure that we give them a process and a forum to get their

input into this process.

Mr. MCCRERY. And do you anticipate that you are going to incorporate data—new data—into your May rulemaking?

Ms. DEPARLE. I cannot comment at this time on where that process is. I, in fact, have a briefing on this on Friday. So, I don’t know

where they are after the December meeting, but I’d be happy to get

back with your staff on that.

Mr. MCCRERY. Okay. We would appreciate it if you would give

that some attention. It is of some interest to the physician community.

No. 2, on the question of EPOGEN. And, again, if you’re not prepared to address this specifically, I understand, but I do want to

bring it up because it is important. I’ve heard from a number of

constituents, including a treating nephrologist from the Oschner

clinic in Louisiana, that some patients have to be hospitalized as

a result of this change in policy. I believe the entire provider population is unified behind a position in support of changing this policy

and have offered some specific changes to HCFA. Could you comment on where that is and what your opinion is on it?

Ms. DEPARLE. We’re looking at it, sir, and I have seen, in addition to letters from the provider community, on a bipartisan basis,

letters from you and your colleagues about this which is what

brought it to my attention. There was a program integrity problem

in this area. We want to make sure we have the best procedure

possible to make sure that the patients get what they need, but

also that we don’t create a situation that is subject to abuse. And

if we need to make some changes, then we’ll do that.

Mr. MCCRERY. Well, I would ask you to make sure that in analyzing the potential costs, that you look at overall costs, including

hospitalization and transfusions, as well as just the cost of the

hematocrits, because it could make some difference in your analysis.

Ms. DEPARLE. Yes, sir.

Mr. MCCRERY. Thank you.

Chairman THOMAS. Does the gentleman from New York wish to

inquire?

Mr. HOUGHTON. Thank you very much, Mr. Chairman. Ms.

DeParle, it is nice to see you. Thank you very much for coming

here.
25

I guess I want to hone in for a second on the question of fraud

and abuse. You have it with the fee-for-service; you really don’t

have it for the managed care because the incentive are—there isn’t

any incentive——

Chairman THOMAS. Amo, I apologize, but these mikes aren’t

working. You need to really get close to them, because I can’t even

hear you.

Mr. HOUGHTON. You don’t like my soft, dulcet tone?

Chairman THOMAS. I do, if I knew what it meant. [Laughter.]

Mr. HOUGHTON. Well, anyway, let me start again by saying I’m

delighted you are here; thank you for being with us today.

Ms. DEPARLE. Thank you.

Mr. HOUGHTON. I guess I wanted to concentrate on the issue of

fraud and abuse because as you move more toward managed care,

there is probably less incentive, because of the direct payments to

the government, as contrasted with the fee-for-service. But I guess

the question I’ve got, as you lessen that input, the question is one

of quality and how we’re able to ensure and emphasize the quality

aspects where the money aspects are taken care of in an entirely

different way. You may want to comment about that. And also,

maybe you might talk a little bit about child care expansion in the

limited period of time you have. Thank you.

Ms. DEPARLE. I’m sorry, about what?

Mr. HOUGHTON. Child care expansion, you mentioned that.

Ms. DEPARLE. Child care expansion?

Mr. HOUGHTON. Child care expansion program is one of your

main goals, as I understand it.

Ms. DEPARLE. Oh, I’m sorry; the Children’s Health Insurance

Program.

Mr. HOUGHTON. Yes, right.

Ms. DEPARLE. Yes, sir, I thought you meant day care for a second. I was trying to think about what I knew about that.

Mr. HOUGHTON. No, that’s only for senior citizens like me.

Ms. DEPARLE. I’d be happy to talk about the Children’s Health

Insurance Program.

We are off to a good start. We have 16 plans from States around

the country that are in and being reviewed on a very tight timeframe. And we’re moving along very quickly on that. And, we’ve

also been out meeting with a lot of the States to provide them with

technical assistance. There is a lot of enthusiasm out there, and at

this point, my prediction is that all 50 States will come in some

time before the end of the year with a plan, and I hope we’ll be

able to approve them so they’ll be able to get their funding and we

can begin to cover as many of the 10 million uninsured children as

possible.

I’m not sure sitting here whether New York is one of those plans

or not. Is it? New York has been submitted. And I know we talked

about that when I met with you earlier.

On your other question on quality—that is, of course, one of the

big questions that I didn’t even get to in my opening statement—

we are certainly trying to move in the direction of ensuring that

the new Medicare-plus-choice format for managed care plans in

Medicare will include a focus on quality. And I think this subcommittee supported that effort with some of the provisions in the
26

Balanced Budget Act. We have acquired all of the science to submit

on quality. We’re also going out in the field to our consumers with

the consumer assessment of health plans that will be incorporated

into the kind of data that we provide them when they get their new

Medicare-plus-choice information through the beneficiary campaign

this fall.

So, I believe those kinds of indicators will be available to our

beneficiaries, and then the issue is: how do we focus our resources

on ensuring that quality is occurring. And that is a big problem

and I hope your colleague sitting two down from you, Dr. Cooksey,

can help with that. So we do have efforts underway there but we

will need to continue working with the subcommittee to make sure

we’re going in the right direction.

Mr. HOUGHTON. Thank you very much.

Chairman THOMAS. Does the gentleman from Georgia wish to inquire?

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

First, let me welcome you in your new position and wish you

well.

Ms. DEPARLE. Thank you.

Mr. LEWIS. Your agency is facing many important challenges and

I am very confident, with your background, your talent and skill,

and your smarts, that you will lead the agency very well. And I

also want to add that I think HCFA has done a very good job in

many areas. But I do have one or two questions.

Like many Members of Congress, I have been contacted by individuals who are concerned about the provision in the Balanced

Budget Act regarding venipuncture. They’re concerned that very

needy people will lose their home health benefit. I would like to see

HCFA monitor this situation. In light of your new responsibility,

and in light of GAO testimony, I am concerned that you do not

have enough resources to monitor this situation. Do you feel that

HCFA has enough resources to monitor this situation, or what do

you think you need to do about this?

Ms. DEPARLE. Well, as you know, sir, the venipuncture provision

was designed to reduce unnecessary utilization in the home health

program. And what our Inspector General and our staff were finding was that a number of people were getting the full range of

home health care services—24-hour nursing care and things like

that—simply because they needed their blood drawn. Now if a

Medicare beneficiary needs his or her blood drawn, Medicare will

pay for that; and if they cannot leave their home or don’t want to

leave their home to get it, Medicare will pay for that too. But the

point is that Medicare can’t afford to bear the cost of several hundred dollars—multiples of hundred dollars a day—for them to get

the full array of home health services if they simply need their

blood drawn.

The unfortunate thing is that some of the home health companies are trying to scare many of these beneficiaries, and perhaps

that’s what you’ve been hearing, and other members have been

hearing.

Someone who’s diabetic, someone who is frail and elderly, is likely to qualify for home health. And it’s not fair for the home health

companies—in fact, it’s wrong for them—to go out and tell the
27

beneficiaries in your district that none of you are going to get this

anymore, because that is not the case. If they are qualified, if they

are homebound and they need skilled or intermittent nursing care,

they will be qualified for this benefit. The people who will no longer

be qualified are simply those who only need their blood drawn, and

the actual drawing of the blood of course will continue to be covered by Medicare.

And we do want to work with you, sir, to monitor the situation

and make sure that beneficiaries who need this service are continuing to get it. And I hope once this confusion is cleared up, that

problem will not be as apparent any more.

Mr. LEWIS. Thank you. Let me ask you another question. Nearly

40 percent of the end-stage renal disease population are AfricanAmerican, even though we make up only about 11 percent of the

population. It is my understanding that the outcome for the African-American end-stage renal disease population is not as good as

with other populations. Could you comment on this situation? What

steps could you take that might improve this situation?

Ms. DEPARLE. I’m not as familiar with the situation on end-stage

renal disease, sir, but I do know that in many of the health indicators—health status indicators—that we look at for our population,

we find that African-American beneficiaries don’t get the services

they need as often. Immunizations is an example; flu shots; mammograms. In many of those areas, we find that that community is

not as well served.

We are working in partnership with historically-Black colleges

and universities around the country to try to do some focused campaigns to reach that population. And I might also add that we’ve

been talking today about HCFA’s reorganization, and one aspect of

that that I think is positive for our ability to do a better job here

is that we’ve created for the first time a center for beneficiary services. That center will be the one conducting the beneficiary information campaign. And one of their goals is to try to make sure that

they do things not just for the population as a whole, but that they

try to figure out what the best ways are to reach other populations

that may be particularly needy or vulnerable so that, with the new

preventive benefits that Congress just enacted that are very positive, we can make sure that our African-American beneficiaries receive the full promise of those new benefits.

Mr. LEWIS. I appreciate you responding. I look forward to working with you.

The Surety Association of America has reported that the way

home health agency surety bond regulations have been written,

their members are unwilling to write bonds. Will you describe for

the committee your understanding of the situation and what will

be done to resolve this issue before the bond due date of February

27?

Ms. DEPARLE. Well, as you know, Mr. Lewis, this provision that

we are talking about here is the new surety bond provision that

was enacted in the Balanced Budget Act, and it gives us the ability

to require a home health provider to post a surety bond so that if

Medicare is defrauded that Medicare will have some ability to recover from them. And that is a good step forward. That’s been done

in the State of Florida, and it has had a very good result.
28

There appears to be an issue with the surety companies about

the cumulative liability that they might have and the length of the

liability. And our staff met with the surety companies recently. Our

goal is to have the best regulation possible that protects Medicare.

And we are working with them on it. And if we need to make some

technical changes, we’re willing to do that.

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

Chairman THOMAS. I thank the gentleman from Georgia for his

inquiry in that area. We are working. This is a specific example of

where everyone on all sides, I believe, is honest and willing, it’s

just that the technicalities and the way in which the conditions

have to be set clearly have to be adjusted so that folks can enter

into arrangements with a clear understanding. And I’m convinced

that we’re going to clear this up before any critical date might arrive. I appreciate the gentleman’s question on the matter.

Does the gentleman from Texas wish to inquire?

Mr. SAM JOHNSON of Texas. Thank you, Mr. Chairman.

We’ve been having an argument up here, so I would like to ask

you the question and let you straighten the facts out. Do you have

a board that helps you run this HCFA operation, or are you——

Ms. DEPARLE. No, I don’t.

Mr. SAM JOHNSON of Texas. Okay, but there is a Part A and Part

B board, correct? Advisory board, or trust board?

Ms. DEPARLE. Yes, sir, there are trustees. There is a trust fund

board for Part A and Part B; yes, sir.

I am the Administrator and we have an executive council that

is the leadership of our organization that runs it. But we do not

have an outside board. But we do have trust funds for Part A and

Part B and those have trustees.

Mr. SAM JOHNSON of Texas. Okay, and your internal organization sets the rates for each county. Is that correct?

Ms. DEPARLE. Well, not exactly, sir. Most of the fee-for-service

payments, and for that matter managed care payments, the payment methodology for everything Medicare buys is pretty much set

in statute.

Mr. SAM JOHNSON of Texas. Yes, but you change it every year.

Ms. DEPARLE. According to a formula; yes, sir. Some of those

things are changed every year according to a formula.

Mr. SAM JOHNSON of Texas. Are there any doctors involved in

that change process?

Ms. DEPARLE. There are a number of doctors in our agency, sir.

And we also have a——

Mr. SAM JOHNSON of Texas. Yes, but that didn’t answer the question. Are they involved in the change process?

Ms. DEPARLE. I don’t know. I believe there are some——

Mr. SAM JOHNSON of Texas. You see, you’re a lawyer and you’re

trying to run a medical organization. I’m trying to find out if you’ve

got any medical expertise in your organization to advise you.

Ms. DEPARLE. We do have medical expertise in the agency that

advises me.

Mr. SAM JOHNSON of Texas. And who is your closest medical advisor?

Ms. DEPARLE. Well, each one of the centers has a medical advisor.
29

Mr. SAM JOHNSON of Texas. You’re dodging the question again.

I want to know who advises you personally.

Ms. DEPARLE. Probably the one who I work with the most is Dr.

Jeffrey Kang, who is the medical advisor for the Center for Health

Plans and Providers.

Mr. SAM JOHNSON of Texas. Do you know if he’s ever practiced

medicine, or is he an academic?

Ms. DEPARLE. I believe he has practiced, yes. I believe he practiced in the Boston area.

Mr. SAM JOHNSON of Texas. In Boston?

Ms. DEPARLE. Yes.

Mr. SAM JOHNSON of Texas. Thank you for that.

Let me ask you another question that we’re discussing. I’m getting a lot of complaints from my military retirees about Tri-care.

How does Tri-care interface with Medicare? And when they become

65, does Tri-care still have any jurisdiction over the retired veteran

population?

Ms. DEPARLE. Well, I would like to get you more information for

the record, sir, but I can tell you that Tri-care doesn’t interact with

Medicare very much, except that now, as a result of the Balanced

Budget Act, we are entering into a demonstration with the Department of Defense to enable some of the military retirees who are not

able to take advantage of Tri-care to come to the Medicare system

and use their Medicare dollars to go to Tri-care.

Mr. SAM JOHNSON of Texas. Before 65, or after 65?

Ms. DEPARLE. After 65.

Mr. SAM JOHNSON of Texas. Okay. So what you’re telling me is

Tri-care should continue after 65. I thought it was a law that everybody had to get on Medicare at 65.

Ms. DEPARLE. It has been. But, what I’m saying is there is a

demonstration that will allow a military retiree to take his Medicare coverage and go to a Tri-care facility. And that will be starting, I think, sometime in the next year.

Mr. SAM JOHNSON of Texas. And that means a veterans’ hospital,

does it not?

Ms. DEPARLE. No, it means probably a DOD facility and they

contract in various areas. There is not a provision for veterans at

this time, although I think this subcommittee has been working on

that.

Chairman THOMAS. Will the gentleman yield on that point?

Mr. SAM JOHNSON of Texas. Sure.

Chairman THOMAS. The Department of Defense has been interested in the retired military and its possibility of utilizing Medicare

dollars for military retirees at military hospital facilities or contracting out through the military in an effort to broaden the support structure for military hospitals. That is the program that

you’ve been discussing.

Veterans, in what they call a vision program, worked on by the

Veterans’ Administration, have wanted to have a demonstration

program, similar to the military retirees, for those veterans that

fall into the category of A versus C kind of a veteran; that is those

who have the wherewithal normally. We are—Chairman Stump of

the Veterans’ Committee and I the chairman of this subcommittee

are going to offer—a piece of legislation which will model a vet-
30

erans’ demonstration program for that aspect of the veterans’ hospitals with the upper-income veterans, like the Tri-care demonstration. But we will go beyond that, and in dealing with the low-income Medicaid-eligible-type veterans, we’re going to create a permanent program, rather than a demonstration because there is a

clear need. And Dr. Kizer of the Veterans’ Administration is in full

agreement that we can go to a contracting-out basis so that veterans can get the filled prescription, outpatient medical care that

normally had been delivered by outpatient clinics or veterans’ hospitals closer to home, since we can’t continue to invest in bricks

and mortars for the veterans.

The short answer is: there is a degree of innovation going on

among other government medical programs principally focused on

the DOD and the veterans, to see if, since every World War II veteran is a Medicare-eligible person as well, if we can’t tend to integrate these programs from the senior level back in so that we can

mainstream some of these Government medical programs that

have remained distinct and separate.

Mr. SAM JOHNSON of Texas. Thank you. I appreciate that. That

leads to another question though. If there is private contracting

within the Tri-care or Medicare system, how do you distinguish between what private contracting is and what it isn’t? And how are

you going to stop a doctor from doing a private contract with Veterans’ Administration for a person that’s over 65 and keep him

from it in the Medicare system?

Ms. DEPARLE. Sir, I don’t believe what we’re talking about is private contracting in the way that you——

Mr. SAM JOHNSON of Texas. I know, I just brought it up.

Ms. DEPARLE. I don’t believe the two are the same thing. What

the chairman is talking about is a demonstration to allow certain

veterans to use their Medicare dollars in a veterans’ hospital.

Mr. SAM JOHNSON of Texas. I understand, but you were talking

with Mr. Stark earlier about private contracting and you indicated

that if the Medicare program does not cover something and a person can make that payment on his own it’s not considered private

contracting. The docs don’t know that by the way. You need to get

that word out. I’m getting a lot of complaints in my district over

that—that they’re, in fact, stopping their Medicare service because

of that threat. So when you’re going to authorize them to privately

contract with the Veterans’ Administration for care, I don’t see the

difference.

Ms. DEPARLE. Well, sir, as I understand the demonstration, and

I’d be happy to provide a briefing for you and your staff on it, but

as I understand it, it isn’t private contracting. What we’re saying

is that veterans—it is more like allowing the veterans system to be

one of the new Medicare-plus-choice plans. But it’s on a demonstration basis. So, I don’t believe it’s the same thing as private contracting.

Mr. SAM JOHNSON of Texas. Well, then define private contracting

for me.

Ms. DEPARLE. Well, as I understand private contracting as enacted in the Balanced Budget Act, what that says is that if a physician and a beneficiary want to enter into a private contract to cover

some benefit that Medicare would ordinarily cover, then they can
31

do that. That has not been something that has been allowed in the

past. So that’s what private contracting is. This is different. This

is saying that a Medicare-eligible veteran or military retiree could

chose a health plan that is provided by DOD or VA.

Mr. SAM JOHNSON of Texas. Or a doc.

Chairman THOMAS. No, let me interject again, and I apologize.

But when I used the term ‘‘contracting,’’ it was contracting out its

managed care services. It is a requirement, pretty obviously, in a

military hospital that if you’re going to treat Medicare-eligible patients, you have to be able to offer those services that are part of

the Medicare package. If the military hospital does not have the

ability to deliver all of those aspects of the required Medicare package, they can contract out for those aspects. But it is primarily envisioned as contracting out to those entities in those communities

where there are military retirees that do this on an ongoing basis

with ordinary Medicare beneficiaries. So it would be contracting

out, but it is primarily managed care services. But I’d be willing

to sit down with the gentleman and go over what I consider to be

some relatively positive innovative approaches already underway at

the DOD and the possibility of beginning at the Veterans’ Administration to make sure that his concerns, if at all possible, could be

addressed in the way in which the demonstration is designed.

Mr. SAM JOHNSON of Texas. Thank you, I appreciate that. You

know, I would just like to know your views on that too, because private contracting is private contracting, you know, any way you cut

it.

Chairman THOMAS. I understand that. And given the gentleman’s background and current status, he’s a practitioner and I

want to listen to him.

Mr. SAM JOHNSON of Texas. Well, I tell you what, the guys in

the military complain about the system and the way it’s operating.

And we need to protect them. And that’s part of HCFA’s job, I believe.

Ms. DEPARLE. We’d like to work with you on the demonstration

and with the committee.

Mr. SAM JOHNSON of Texas. Thank you, ma’am. And thank you,

Mr. Chairman.

Chairman THOMAS. Thank you very much.

The gentleman from Maryland.

Mr. CARDIN. Thank you, Mr. Chairman.

And let me welcome you here in your new responsibility. This is

your first appearance, I believe, and we look forward to working

with you, following up on last year’s work of this committee in trying to improve the Medicare system and the other areas that fall

under your responsibility. It is a pleasure to have you here.

I just want to make a comment about one of Mr. Johnson’s statements, and that is I know we got a little bit off on the private contracting, but it is my understanding that you have sent notices to

all physicians indicating that if it’s a non-covered service there is

no need for a private contract. And that notice has gone out.

Ms. DEPARLE. Yes, we did. That went out in November, and we

sent it out to all the physicians in the country.

Mr. CARDIN I want to change gears and talk about the prudent

lay person’s standard for emergency care. And we very much ap-
32

preciate the help of the administration last year in putting that

standard in law for the Medicare and Medicaid programs in requiring that on the renewals that there be that standard adopted. And

I’m just wondering if you could update us as to what steps you’re

taking to make sure that all of the plan administrators and States

are complying with the prudent lay person’s standard in their managed care programs?

Ms. DEPARLE. Let me just say, Mr. Cardin, that we appreciate

your work on that. And that’s been something that I know that you

have championed for many years, and I was glad that we could get

it enacted last year. I think it’s a good step forward.

We are working to make sure that all the State Medicaid directors are aware of the new standard and that they have it in place.

And I believe your staff has made us aware that some of them may

not be where they need to be, so we will take some steps to remedy

that, and I will report back to you on it.

Mr. CARDIN. I appreciate that. It’s been brought to our attention

and we’ve got some material, from the State of Maine and the

State of Georgia, which appears to be out of compliance with Federal law. We understand there may be some confusion, but we

would urge that you give this a high priority to implement the law.

It’s becoming more and more common around the Nation for more

and more managed care plans to adopt the prudent layperson’s

standard, so it should not be as difficult as perhaps it would have

been a few years ago. And I would just urge you to continue your

efforts in that regard.

Ms. DEPARLE. We will do that. Thank you.

Mr. CARDIN. Let me return, if I might, and spend a little more

time on the private contracting issue. There has been a lot of misinformation out on the private contracting issue, and I really do applaud you for getting information out to the physicians. We may

need to take a look at what we did last year in order to clarify the

position, to make it clear that we haven’t impacted the ability of

a Medicare beneficiary to use private services and pay for it if it’s

not under the Medicare program. I would just urge you also to

work with us, if we need to, to clarify that law without removing

the protections that seniors currently have on balance billing protections. Because I don’t think anyone here wants to subject our

seniors to charges beyond what the Medicare system allows for

services that are provided under the Medicare system.

Ms. DEPARLE. We’ll be happy to work with the committee.

Mr. CARDIN. Thank you. Thank you, Mr. Chairman.

Chairman THOMAS. Thank you.

Does the gentlewoman from Connecticut wish to inquire?

Mrs. JOHNSON of Connecticut. Thank you, and welcome.

Ms. DEPARLE. Thank you.

Mrs. JOHNSON of Connecticut. We look forward to working with

you. You certainly have many challenges facing you, as do we as

a legislative body, to make good on our often repeated promise of

making Medicare secure, not only for current retirees, but future

retirees.

There are two little issues I want to raise with you, and then one

larger issue. First of all, during the break I visited a large oncology

office in my district and it is very clear to me that we are not reim-
33

bursing for many of the costs associated with delivering oncology

drugs. And, it’s my understand that HCFA has been reviewing the

RBRBS in this regard and acknowledges that delivery services are

not covered in the RBRBS. They have traditionally been covered

through the drug costs. If that isn’t going to be the case, I mean,

we’re going to have to get this together and look clearly at what’s

covered by the RBRBS and what’s been covered by the drug cost.

And if we’re going to look at drug costs as the Inspector General’s

report does without regard to the cost of delivery, then we need to

reexamine the RBRBS and make sure that it is an honest one and

does cover all the services delivered by the physician. So, I would

hope that you wouldn’t move on the drug costs without a review

of the RBRBS. I understand that the Department is in the process

of that, or has at one time in the not too distant past been involved

in that issue, and is cognizant that the RBRBS has problems. Are

you conscious of that problem?

Ms. DEPARLE. I did hear about this, in fact just yesterday. And

as the representative knows, there has been a problem with Medicare overpaying for some of these drugs, and that is a concern of

ours, that I’m sure is of the committee’s as well. But certainly, we

want to be fair in the way that we provide reimbursement, and I

will take a look at what you are pointing out.

Mrs. JOHNSON of Connecticut. I am very, very concerned about

this, because if we do it wrong, then these services will simple

move from the doctor’s office to the hospital where they will be

more expensive to deliver. Because infusion therapy takes time and

a lot of that is now going on on an out-patient basis, if we do this

wrong, we will simply shift the venue and increase our cost even

though it might look to the public like we are saving. So, I look forward to working on this with you. I think it’s an absolutely solvable problem. We want to be fair to everybody. We want to be sure

that we don’t overpay providers of drugs, or services. But I think

in this situation, we have allowed reimbursement for services to

slip under reimbursement for drugs, and we have to sort that out.

So, I look forward to working on this with you because I’m very

concerned about access to care. If we do it wrong, access will plummet, hospitals will have to gear up, and we’ll have a significant

problem on our hands for very sick patients. And we just have got

to make sure that that doesn’t happen.

Then, a second thing that’s been of concern to me is that there’s

more than two-dozen regulations and reports that are due that

haven’t been completed, and one of them is in regard to the functioning of the Medicare select plans, and some of the other regulations that are so key for home health agencies. I wonder what your

program is to get caught up on some of these?

Ms. DEPARLE. Well, if I can brag a little bit, we have made a lot

of progress. In the month of December, we identified 18 priority

regulations that we needed to get out, and I think we got 16 of

them out in December, which is more than double what we normally do. And of course, that was supposed to be a holiday month.

So our staff is really working hard.

I place a high priority on being as timely as possible. Given our

resources and the priorities that this Congress has set and that I

have to set, sometimes it’s not possible, but, I’m going to do my
34

very best to see that we are timely. And I wasn’t aware that there

were two-dozen reports that were overdue. I am very aware of the

Medicare Select Report, and have personally reviewed it, and I

hope that we will be able to get it to you soon. I believe that one

was due on December 31, so we are behind on that.

Mrs. JOHNSON of Connecticut. Yes, it was. Thank you very much,

I look forward to seeing that move. I assume that’s out of your shop

at this point, since you have reviewed it?

Ms. DEPARLE. I believe it is.

Mrs. JOHNSON of Connecticut. Is it then at OMB?

Ms. DEPARLE. Yes, I believe that’s where it is.

Mrs. JOHNSON of Connecticut. Well, we’ll certainly look forward

to the completion of this work. And any way we can help you, we’re

happy to because I believe timeliness is important. And it’s a big

problem. I chair the Oversight Subcommittee of the IRS. I can tell

you, they are much further behind than you are.

Chairman THOMAS. That’s not a compliment.

Ms. DEPARLE. I know that.

Mrs. JOHNSON of Connecticut. It’s like justice delayed is justice

undone, you know. If we don’t keep the flow of information going

we don’t win. And I see, unfortunately, my time has expired, because I do want to just point out to you the terrible problem we’re

having with dual-eligibles. And I see you are reorganizing in a way

that will create a more one-stop shopping approach to managed

care and fee-for-service policy, but we really have to look at the

dual-eligibles and I think we have to look at what I consider to be

a real rip-off of Medicare: the Medicare maximization program. The

States are spending tons of money on this. They are squandering

their resources and ours on all the legalities. The home health

agencies are really disadvantaged by the problem of going back for

these records, of copying them, of reviewing them. It’s really a tragedy. And when the whole system is under so much pressure to reduce costs, deliver quality services, I think we need to sit down

about that Medicare maximization program and come to terms

with it and settle it out, which we can do and we started doing

three years ago, and it still isn’t completed. Then that folds right

into the dual-eligible project that we’ve got to start piloting in some

of the states in order to give better service to low-income seniors,

but also reduce the cost for federal and state government. So I’d

like to work on that project with you.

Ms. DEPARLE. I’ll look forward to working with you on it.

Mrs. JOHNSON of Connecticut. Thank you very much.

Chairman THOMAS. It’s my pleasure to indicate that a Member

who is not a member of this subcommittee is with us today. He is

a freshman Member of Congress, but I have a hunch that one of

the reasons he’s more interested in this is not in that capacity, but

because he is a medical doctor, doctor of ophthalmology. Gentleman

from Louisiana, Mr. Cooksey, I assume wishes to inquire.

Mr. COOKSEY. Thank you, Mr. Chairman. And Ms. DeParle, welcome to the committee. This is my first committee meeting too.

I’m on the Health Subcommittee of Veterans Affairs, and there’s

a lot of confusion about some of the overlap here.

My question—the question I would like for you to answer—and

I’m going to drive toward that—is, do you ever step back and look
35

at the overall picture? There are a lot of programs that are government paid, that are government financed. There’s Medicare, there’s

Medicaid, there are veterans hospitals. Incidentally, I’ve asked the

same questions in my health subcommittee.

There are many providers, there are many recipients. There

must be some duplication occasionally. I personally think there’s a

lot of duplication, a lot of overlap. And I think there are a lot of

regulators and a lot of regulations, and these solutions have always

been done piecemeal to solve some problem. And it’s been my impression when I was out in the private sector that there’s been a

lot of micromanagement by people in the bureaucracy, like yourself;

a lot of lawyers, a lot of people that are in government, that are

micromanaging the problems as they come up.

But I feel that we do need to eliminate this duplication. We need

to downsize some of the bureaucracies. We definitely need to reduce the cost. And the way to do that is by quality health care.

When you have really quality health care, a patient won’t have to

go back to have the same procedure repeated because it was not

done right the first time, and that will reduce cost.

But my question is, is there anyone that is out there that ever

steps back, and looks at the overall picture, and say, gee, who is

representing the patients?

When the Balanced Budget bill was coming through, there was

a firestorm of activity. You were not here then, I know. But there

was every group being represented, except the patients, I feel.

There were bureaucrats here, there were the managed care people,

there were the insurance companies, there was organized medicine,

there were physicians, there were specialists, home health, and

yes, even the trial lawyers. But they were there ad infinitum. But

nobody really seemed to be representing that patient that is out

there in some rural area or some inner city metropolitan area that

truly needed health care. And you’ve got a lot of special interest

groups that are still micromanaging things for their best interest.

What is your agency doing to look at the big picture, and to really address the number one stakeholder, the patient?

Ms. DEPARLE. Well, I think one thing we’ve done, and I described

it at the beginning of my statement, was, our reorganization was

partly designed to try to get at those questions of, are we serving

beneficiaries, and how do we organize ourselves so that we’re

thinking more about beneficiaries. That is why we created this

Center for Beneficiary Services.

If we had not done that reorganization, the new Medicare Plus

Choice Plan and the information campaign that we’re going to do

this year, those activities of providing the information, and the toll

free lines, and the things that the Congress has asked us to do to

interact with beneficiaries, would have been in five or six different

locations within HCFA. Now we have centered in one place an organization that is designed to look at that.

I also think in respect to your comment about the veterans area,

that’s actually an area about which I think the Congress can feel

good trying to look at what’s best for the beneficiary, as opposed

to how do these structures in Washington work. And the reason I

say that, is because what that demonstration is designed to look at

is, if you are a veteran and you are Medicare eligible, why
36

shouldn’t you be able to go to a veterans hospital if you want to,

and take your Medicare dollars with you? You couldn’t do that before. You could only go there if you were in the high-priority category of veterans. And as you know, even though there are 171 veterans hospitals, not everyone can get to one, and not all veterans

have a high enouogh priority to obtain VA care when needed.

But the beneficiary shouldn’t have to worry about that; the beneficiary should be able to choose where they might want to go. And

that’s what that demonstration is designed to investigate. So, I

agree with you that it is very difficult to get beyond the structures

that we operate in, and I think we need to do a better job at that.

And I think we can do a better job of that, and I think members

like those on this subcommittee are going to help us with that.

Mr. COOKSEY. Good. One other quick question. Where does

HCFA stand on implementing the BBA for telemedicine and for

broader plans for telemedicine?

Ms. DEPARLE. We have some demonstrations that we had already started in telemedicine. I think they are in five states. In the

BBA we got authority for 1 more demonstration, and I believe we

have a rule that is on track, to go out in May that will announce

how that new authority will be used, and how folks can become eligible for the telemedicine programs.

Mr. COOKSEY. Thank you, Ms. DeParle. Thank you, Mr. Chairman.

Chairman THOMAS. Certainly. Thank you.

Apropos the comments by a gentlewoman from Connecticut, what

would your reaction be when we deal with—and hopefully we don’t

have to deal with them in the near future—reports or information

that was required by the statute in terms of getting work product

done? Your initial response is the one that we always get; it’s in

the process.

Given your experience, both being in OMB, and now over at

HCFA, as an example, what does it mean when it’s in clearance?

How many different steps, not micro steps, but major steps, does

a policy like Medicare, for example, have to go through before we

get it, since it was our request in the first place?

Ms. DEPARLE. Well, in that particular instance, we were required

to conduct some studies of Medicare Select, the demonstration, to

see how it worked and whether it met your objectives.

Chairman THOMAS. Is that a good example or do you have a better example that would explain to us how the process works?

Ms. DEPARLE. I think it’s a pretty good example—

Chairman THOMAS. Okay.

Ms. DEPARLE [continuing]. Because it was pretty matter-of-fact.

We have done some studies and done some analysis. And then

there are two processes. Most of these things are not reports from

the HCFA administrator, but they are reports that you have requested from the secretary. And so, the secretary obviously is

briefed, and her staff looks at whatever report it is, and then it

goes from there over to the Office of Management and Budget. And

at the Office of Management and Budget there are two processes.

Chairman THOMAS. Why does it go there?

Ms. DEPARLE. There is I believe an executive order that’s been

in place for 30 years—
37

Chairman THOMAS. A long time.

Ms. DEPARLE [continuing]. that requires that kind of review, and

there are actually two review processes. One of them is the—

Chairman THOMAS. Just as the budget from HHS has to go

over—

Ms. DEPARLE. Right.

Chairman THOMAS [continuing]. And be reviewed by OMB before

its incorporated in the structure, these kinds of things do as well.

Ms. DEPARLE. That’s right. And there are two processes generally. One is the Office of Information and Regulatory Affairs,

which looks at whether something that we’re putting out imposes

a paperwork burden. For example, a regulation or that kind of

thing. And then there is a substantive review of the policy by budget and program policy staff. And it’s generally a fairly quick process.

Having been there, I know that the folks at OMB often feel that

we give them very little time to review things to get them up here

to you. But the purpose of the review is supposed to be to ensure

that the report has been done in an adequate fashion and that it

is consistent with the programs of the President; that’s the general

policy.

Chairman THOMAS. And then does it often times or occasionally

go back for revision, refocus, adjustment, or does the adjustment,

refocus occur at OMB in consultation with folks?

Ms. DEPARLE. It can operate either of those ways. In general, I

think it probably goes back with comments and suggestions, and

we often have meetings with the staff from the agencies to discuss

comments and suggestions.

Chairman THOMAS. All this leads up to my question, from your

experience—and it’s useful because you’ve been in both areas. And

I don’t want to overly complicate the process. But it would be useful for us sometimes to know when, for example, you folks were finished with something. And I don’t know that it needs to be more

structured—if it does, we’ll talk about putting it in legislation—so

that we know that at least from a policy point of view it’s out of

HHS, and that it’s someplace else, almost always OMB.

Or do you believe that that’s a transparent enough process, that

if you ask the right questions you know it anyway? Does it need

to be more formalized in terms of our ability to know when it

moves through stages?

Ms. DEPARLE. I don’t think so, Mr. Chairman. I think that the

process generally works pretty well. I think there’s generally value

added from the process, and it works pretty well. I regret that

we’re behind in scheduling these reports to you, and perhaps we

should have gotten them over there earlier. I think that is maybe

sometimes the reason why they’re late.

Chairman THOMAS. Well, and I’ve discovered that you can eliminate a lot of legislation and a lot of particulars if you have honest

people working together and you get honest answers. When you

don’t get honest answers, it’s very, very difficult to put confidence

in what people have to say.

It pains me a little bit to bring up, earlier in my chairmanship

a time of visiting HCFA in Baltimore, and not getting what I considered to be honest answers about the Medicare transaction sys-
38

tem, which I believe has finally been owned up to. And in your

written testimony, I’ll refer to once again, a clear indication that

you have finalized the contract with that, and that perhaps the

concept at some time may have had a degree of viability, but it is

no longer the case.

Ms. DEPARLE. That’s right.

Chairman THOMAS. You’re looking for another way or perhaps a

fundamental rethink of the way of dealing with the tracking system, is that correct?

Ms. DEPARLE. That’s right.

Chairman THOMAS. Would you consider you’re entering into, fill in the blank, a $50 million, $70 million effort, which has really produced nothing, a kind of a failure, or did we learn something out

of it?

Ms. DEPARLE. Well, I think we learned something; it was painful. I think we learned what a lot of private sector companies have

learned, that a big effort like that was too big and too risky.

Chairman THOMAS. And I guess then, we’re involved with questions of judgment; how things get started, how they get perpetuated, where you make decisions, where you stop. In private sector

when you have failures of that magnitude, usually someone’s out

of a job.

My concern is, that for the last several years you—not you, the

agency—has been run on a kind of a pass/fail basis, and I’m just

wondering if anybody failed on the pass/fail judgment, based upon

this multimillion dollar program that has now been completely terminated, with very little residual benefit?

Ms. DEPARLE. Well, I think, as you know, Mr. Chairman, because you visited us, we have a lot of talented people at the Health

Care Financing Administration, and they’re all committed to trying

to do the best job they can for our beneficiaries. And I think that

everyone who was working there learned a lesson from the Medicare transaction system, and we aren’t going to do it that way

again.

Chairman THOMAS. Has anybody received a failure on any of

those evaluations on a pass/fail basis in terms of the staff at

HCFA?

Ms. DEPARLE. I don’t know the answer to that. I do know that

most of our employees, since that pass/fail system was initiated,

have received a pass. I haven’t looked through the 3,000 or so evaluations to see how many of them got a failure. There have been

some failures. I don’t know if they were connected with that particular program.

Chairman THOMAS. And I don’t want anyone to assume by my

line of questioning that I don’t think that there aren’t a lot of talented hardworking people over there. It’s just that when you’re

dealing with a fundamental change in the direction and culture of

a bureaucracy, you have to look at your ability to be flexible in

dealing with employment, and frankly, to make changes.

My concern is, the manner in which employees are evaluated,

probably doesn’t give you a sufficient ability to make decisions, except that you probably, as is the case when the formal monitoring

structure’s not adequate, you do it in an informal way, which is the

way we want to do it, because then that can be argued to be subjec-
39

tive rather and objective. And I know through GAO examination

that a simple bifurcated pass/fail maybe doesn’t tell you as much

as you’d like to know. You need more categories in which to evaluate folks, so that you can reward people who clearly are superior

and show initiative. Because it’s very difficult when you have people sitting next to each other, and someone’s doing work, and someone else isn’t doing quite as much or even any work at all, and they

both get the same grade. The morale in that kind of an environment is very difficult to deal with.

Let me ask you a question which I don’t consider unfair, some

might, but it’s clearly a hypothetical given the current situation.

And that is, if Congress gave you the authority to examine critically a fixed number of folks, 5 or 10 percent of your entire work

force, and you would make the decision on whether to keep them

or remove them on purely a merit analysis, not constrained by any

contract obligations, union, or otherwise, is that something that’s

desirable, not necessary, you would rather not talk about at this

point?

Ms. DEPARLE. Well, let me just say that your questions are going

to the issue that I think is the most critical one for us over the next

few years, which is how do we manage our human resources. How

do we make sure that people are getting recognized for the work

that they do, which is very difficult in government, frankly.

It’s hard for them, frankly when they continually hear that

they’re not doing a good job. They want to be recognized for improvement that they make and for the effort that they put forth.

And that is a big challenge to me as a manager.

As to whether or not it would be a good idea to change the evaluation process, we discussed that, and it’s certainly something that

I’m willing to look at. I have operated under different evaluation

processes. There have been times in my life when I liked pass/fail,

like when I was in college, but I think in general it probably

doesn’t give us the kind of information that we need. But most of

our problems are problems of managers being able to make those

kinds of decisions, and I want to do everything I can to empower

our managers to do that.

Chairman THOMAS. My interest and concern I want to place very

carefully out front and objectively.

HHS and HCFA have extremely important jobs to do. We are

dealing with a changing environment in the private sector, and obviously now in the government sector. Flexibility in dealing with

the management and the employees who oversee this I think is as

critical as flexibility in the marketplace on product. For us to be

locked into, old-fashioned government and union regulations, which

don’t allow us to do the kind of innovative change that I think is

going to be necessary, will ill serve the agency, and frankly fundamentally the beneficiaries.

I am not interested in busting up anything at all; I am interested

in a viable functioning agency, carrying out a very critical job that’s

going to be more difficult in the near future. And I believe the gentleman from Louisiana wanted me to yield, and I’ll yield to him.

Mr. MCCRERY. Thank you, Mr. Chairman.

Ms. DeParle, just one more question. With regard to the MSA

demonstration project, can you give us an update on how it’s going?
40

And when you answer the question, please tell us whether under

an MSA Medicare product physicians or providers, generally, must

bill according to the Medicare fee schedule or are they allowed to

bill higher than 115 percent of the Medicare fee schedule?

Ms. DEPARLE. Well, I’m happy to report that the MSA demonstration project, our plans for that are on track. And in fact, I

believe we’ve done some briefings of some of the committee staff on

that, and we have been working with the folks at the Treasury Department, who have done a similar demonstration as you know in

the private sector.

With respect to the balance billing limits, I believe that they

would not apply, because the whole concept of an MSA is to have

the beneficiary bearing more of the cost, and the idea is supposed

to be that they will then be more sensitive to cost. And I believe

that in that demonstration they will be, so to speak, on their own.

Mr. MCCRERY. Thank you.

Chairman THOMAS. Gentleman from Maryland, a brief intervention.

Mr. CARDIN. Thank you.

One additional point under BBA that I just want to bring to your

attention, that is the GME payments to quality non-hospital providers gives you an opportunity for the first time to move into a

somewhat different area. What we’re concerned about is that we do

have some public health departments that would be interested in

looking at establishing residencies in public health that could help

us in this area. It’s probably not going to be allowed because they

don’t have contracts under Medicare.

But I would ask that you would take a look and work with us

as to whether it would be worthwhile to look at a demonstration

in this area. And I just really wanted to bring it to your attention,

and hope that we could work in that area.

Thank you, Mr. Chairman.

Mr. STARK. Could I follow up?

Chairman THOMAS. This is a first, not a last. So if anybody’s got

anything—she’s going to be back. Go ahead.

Mr. STARK. Well, I just wanted to follow up on the question that

Mr. McCrery asked regarding Medicare MSAs. I understand how

that works when beneficiaries are spending their own deductible—

let’s say it’s a $2,000 deductible. But after that, would Physicians

not then be required to, bill Medicare under the standard procedure? Would the balance billing limits apply? Would the Medicare

DRGS be applicable?

Maybe you could enlighten me there? After the out-of-pocket-deductible is spent.

Ms. DEPARLE. I understand your question, Mr. Stark, and I know

that this came up a month or so ago, and our Office of General

Counsel was looking at it. And if I could, I’d like to get back to you

for the record on it, because I don’t want to say the wrong thing

here. But I do understand the subtlety of your question.

Mr. MCCRERY. Could you copy me on that?

Ms. DEPARLE. Oh, certainly.

Mr. STARK. Yes. I mean, I——

Chairman THOMAS. Would you submit it to the subcommittee?

Mr. STARK. Yeah, that is——
41

Ms. DEPARLE. I would submit it for the record.

Mr. STARK. I don’t know how else you would pay.

If it were my Medicare MSA and I’d paid the $2,000 deductible

how would my physician collect after I paid my personal check for

any future treatment? Wouldn’t he bill Medicare in the standard

way that he or she does now?

Mr. MCCRERY. Well, the way I understand it—and this is why

we need to have this clarified. The way I understand is that under

the MSA product, that government would give the patient, the beneficiary, a lump sum to cover the cost of the insurance product;

therefore the doctor would bill the insurance company, not Medicare, for amounts above the deductible, but I could be wrong on

that.

Chairman THOMAS. Yes, basically——

Ms. DEPARLE. I think I need to get back to the committee with

a fuller answer. I understand the question. Thank you.

Chairman THOMAS. And let me for all the members of the subcommittee, thank you. I personally want to thank you for your

availability, prior to be being formally I may had and since, and

I look forward to working with you. You have an extremely difficult

job that’s challenging. I’ll know you’ll be up to the task, but in anyway that we can help, especially with fine tuning what was, as I

said at the beginning, the most comprehensive change in Medicare.

People vote and move on, and people don’t realize that after you’ve

voted we have a lot of work to do. And I look forward to working

with you. Congratulations.

Ms. DEPARLE. Thank you. I will need the support and the constructive criticism of this committee, in doing what you want us to

get done, as well as of all of our employees. So I appreciate this

opportunity.

Chairman THOMAS. Thank you very much.

The next panel will be, once again, a panel of one, or one and

a half, or two perhaps.

Dr. Scanlon, who is the director of the Health Financing Systems, part of the General Accounting Office, who has done some recent work for us at our request, and they have had an ongoing program as well. And with him is Leslie Aronovitz, who is the associate director in the same area of the Health Care Financing Systems of the GAO.

Dr. Scanlon, thank you. Your written testimony, as always, will

be made a part of the record, and you can address us as you see

fit.

STATEMENT OF WILLIAM J. SCANLON, PH.D., DIRECTOR,

HEALTH FINANCING SYSTEMS, U.S. GENERAL ACCOUNTING

OFFICE

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

We are very pleased to be here today as you discuss HCFA’s

readiness to manage Medicare for the 21st century.

Chairman THOMAS. And let me indicate to you as well, although

normally that distance would be appropriate, you’re probably going

to have to get a little closer to the mic, so people can hear you.

Thank you.
42

Mr. SCANLON. Okay. All right, I’d be happy to.

The Congress and this subcommittee in particular has heard

from GAO and others regularly about Medicare’s vulnerabilities,

including program management weaknesses, excessive spending,

and trust fund deficiencies. You also heard from us in October that

the Health Insurance Portability and Accountability Act and the

Balanced Budget Act provided HCFA excellent new tools to fight

fraud and to fix broken payment methods. However, substantial

agency effort, as you indicated, will be required to implement the

new provisions promptly and effectively.

In addition, the agency has undergone a major reorganization. In

that context you asked us to comment on HCFA’s capacity; that is,

the ability of its work force to meet its newer challenges, while responding to the chronic problems of the past.

To provide a quick response, we spent the past month reviewing

agency documents, conducting focus groups, and interviewing individuals. We heard from more than 60 senior level and mid-level

managers at HCFA’s Washington and Baltimore headquarter offices.

We want to thank Ms. DeParle and the HCFA staff for being so

cooperative and congenial as we imposed our demands upon their

already existing daunting workload. On the basis of the information we gathered, as well as the information that we have gathered

over the years of working on different elements of the Medicare

program, we make the following observations.

To begin, HCFA clearly has a lot on its plate. Under the Balanced Budget Act it must implement the new Medicare Plus Choice

Program. It must develop multiple prospective payment systems,

and improve Medicare’s pricing of goods and services consistent

with the concept of inherent reasonableness.

For each there’s a considerable volume of choices about design

details that must be formulated, evaluated, selected, and implemented. There’s been a long-standing consensus that implementing

changes, such as prospective payment or improved risk adjustment

for managed care, are essential steps. What we have lacked is consensus and confidence in how to do these effectively and fairly.

Now HCFA must seek to do so within tight timeframes.

HCFA’s attention is also required to effectively implement the

new contracting authority provided by the Health Insurance Portability and Accountability Act, the Medicare Integrity Program, the

anti-fraud program under that act. The Inspector General’s estimate of $23 billion in inappropriate payments dramatically underscores the urgency of this task.

At the same time the agency must solve its year 2000 computer

problems, and start from scratch to develop a comprehensive information management strategy that will deal more effectively with

identifying problems with inappropriate fee-for-service claims, and

support the information requirements of the expanded Medicare

Plus Choice Program.

Concurrent with these implementation challenges, HCFA is

handicapped in a number of ways. Managers are feeling pinched by

the Balanced Budget Act’s command of existing resources. They express fears that because of the agency’s concentrated efforts on the

Balanced Budget Act, the quality of other work might be com-
43

promised or tasks might be neglected altogether. They also felt disadvantaged by HCFA’s limited expertise to carry out certain new

Balanced Budget Act initiatives, such as the upcoming nationwide

comparative information campaign for the Medicare Plus Choice

plans, or the Balanced Budget Act related work that was already

underway, such as new prospective payment systems for home

health and skilled nursing facility services.

Some of this work involves the need for new skills and expertise

that HCFA did not require previously; however, managers also felt

the agency’s capacity has been compromised by the loss of experienced staff resulting from a work force turnover of nearly 40 percent over the last 5 years.

Regardless of the benefits that may ultimately accrue from

HCFA’s reconfigured structure, the reorganization also compounds

the challenges for the agency. The normal stresses people experience with organizational restructuring have been accentuated by

the full agendas and the tight deadlines of HCFA’s new workload.

Managers feel that during this transitional period the situation

is particularly acute in light of the fact that people have not yet

even moved to the actual location of their new units. Physical proximity would help forge the new working relationships among individual staff essential to achieving the objectives within the new

structure.

From some perspectives HCFA’s substantial and growing responsibilities appear to be outstripping its capacity. Before such a conclusion about the extent to which the tasks are exceeding its capacity are made, it must be noted that the agency lacks a comprehensive plan, one that senior decision-makers could use to strategically

handle the agency’s workload and resource management. As a result, it appears that senior management is not in a position to assess fully the adequacy of its resources, whether they are properly

distributed, or which activities could be at risk of being neglected.

In contrast, top management’s expectations for completing Balanced Budget Act-related activities are very explicit. HCFA has a

tracking system for the Balanced Budget Act mandates that enumerates activities, identifies responsible agency units, and specifies

completion dates. It is also requiring lead units to prepare detailed

project plans, outlining tasks, time periods, and resource needs. We

did not find similar plans for other mission—critical functions.

In conclusion, while the Health Insurance and Portability and

Accountability Act and the Balanced Budget Act have given HCFA

many tools to tame and police excessive spending and abusive billing, HCFA appears to be struggling for various reasons to get them

all assembled.

The concern is that while HCFA’s responding to implement the

Balanced Budget Act, other parts of Medicare may get only back

burner attention—which they can ill afford. We believe that a detailed strategy that involves not just a planning document, but an

approach that encompasses an ongoing process of focusing on objectives and priorities similar to what the agency has undertaken

with respect to the Balanced Budget Act is a key first step in preparing for the next century.

Mr. Chairman, that concludes my statement, and I’ll be happy to

answer any questions you or members of the subcommittee have.

[The prepared statement follows:]
44
45
46
47
48
49
50
51
52
53
54

Chairman THOMAS. Thank you very much. And I would once

again refer members to the written statement. Although the oral

one clearly covered key areas, there’s still some very valuable information in the written statement.

Just to put in context, your statement that the work force has

turned over 40 percent in the last 5 years, I have another hat I

wear around here, which is the Joint Committee on the Library,

and we’re working with the Library of Congress because of the inordinate number of staff that will be retiring. And it’s just one of

those anomalies of when you were hired, and how long you worked,

and who was leaving at the same time.

Is this 40 percent turnover in the last five years similar anomaly? That is people who have been there for a period of time, the

agency was created, they started, they’ve reached the end of their

employment. You used the phrase ‘‘turnover,’’ which could mean

disgruntled employees, lack of morale, uninteresting work, failure

to recognize achievement. Or it could be that folks started in the

program and are leaving because they’re retiring.

Mr. SCANLON. It’s a combination of factors. One is the problem

that the agency in some respects is graying. The Medicare program, as you know, is 33 years old, and many people who began

their careers at HCFA or its predecessor working with the Medicare program have reached the point of retirement. Managers expressed to us the concern that that’s going to even become a more

pronounced problem in the near future; more senior experience personnel will be leaving the agency because they’ve reached retirement age.

In addition, there are concerns about morale. How much that

contributed to turnover, we could not assess. But there are concerns that the workload is considerable, the ability to reward employees and to recognize employees has some limitations, and that

in that context you rely upon the dedication of employees to ensure

that work is completed in a timely and effective way.

Chairman THOMAS. Well, your operation is none like that. You’ve

got to make sure that quality work is produced, and there’s always

a deadline, which creates difficulties, and you have management

problems.

What do you do in terms of rating folks? Do you have a pass/fail

system?

Mr. SCANLON. We don’t have a pass/fail system. We still have a

system that maintains different categories of performance, and we

also do not look at a person overall, we——

Chairman THOMAS. How am I suppose to take the context ‘‘you

still have’’? Does that mean that you’re——

Mr. SCANLON. Well, I’m sorry.

Chairman THOMAS [continuing]. You’re going to change?

Mr. SCANLON. No.

Chairman THOMAS. Okay.

Mr. SCANLON. Though I would say that in looking at personnel

practices, our General Government Division group has identified

that a number of private sector firms have switched to pass/fail

systems. But I think there’s an issue of how your appraisal system

fits into your overall reward and incentive structure.
55

GAO has a system where we do have categories of performance,

and we look at different dimensions of performance, so there’s not

a summary judgment, but there’s some sense of a report card for

performing. There’s also a very careful examination of individuals’

contributions to the work of the agency. And both of those things

play a major role in determining the rewards that individuals receive because of their performance. And I think that’s the key, is

that you have to take the overall picture into account.

Chairman THOMAS. Well, let’s go back then to your general statements about HCFA, and then the overall picture. Does their ability

to recognize extraordinary work or excellent work, and reward for

that—does that system tend to allow them to do that or does it inhibit their ability to do that?

Mr. SCANLON. We heard from a number of managers that there

was difficulty in terms of recognizing outstanding work in a very

visible, tangible way. While managers may reinforce the fact that

individuals are excellent producers, the system doesn’t necessarily

make it easy to reinforce that.

HCFA does provide bonuses, but the bonus system—the amount

of money in the bonus system is relatively limited, and the process

for awarding bonuses involves a relatively deliberate process that

interferes, in many managers’ minds, with their flexibility of being

able to respond quickly, and to identify that someone’s performance

was really outstanding.

Chairman THOMAS. What about peer group recognition or awareness? Is there a general understanding among people who would be

considered peers, that people who do good work get recognized and

move forward, or is there an understanding that there are people

who don’t do much at all still get moved forward as well, either in

remuneration or otherwise?

Mr. SCANLON. Within HCFA’s career ladder, which you have

grades 5 through 12, there was concern that with the pass/fail system and the other personnel rules, there was considerable amount

of sort of movement forward on a regular basis. And while most of

that movement——

Chairman THOMAS. Regardless of performance?

Mr. SCANLON. Well, we couldn’t assess how much might be regardless of performance. The concern was expressed that some may

be regardless of performance, which would impact on the morale of

others.

Chairman THOMAS. You heard the discussion between the doctor

and myself about Congress’ ability to track where inside the executive branch approval of various materials that Congress has requested are approved, and there is a multifaceted approval structure.

Is that because they don’t have an internal tracking system?

Should we try to make it more transparent? Her indication was

maybe we should try to get it to OMB sooner. That creates a whole

series of questions about how do they track stuff inside; what is the

procedure.

What did you find about the ability to, at any time, no where

they are, where they need to be? Tracking programs, deadline management, that sort of thing. What do they look like inside?
56

Mr. SCANLON. Knowing your interest specifically in congressional

reports, we sought information about both what reports they had

to provide you, and their status as well as their systems for tracking such reports. And what we found is that the information is not

systematically available. And despite our efforts to get that information from various parts of the agency, we were not successful in

doing that.

We do understand that there may be some information of that

type in some offices, but it’s not known at a senior management

level where you would like it to be known widely, so that senior

management could accept responsibility for ensuring reports get to

you in a timely way.

Chairman THOMAS. Well, since your job is to critique others, my

assumption is you have a tracking program in place, and it would

be used as a model for others?

Mr. SCANLON. Well, we have a tracking program, and we think

that it does an effective job. There is a great deal of accountability

within the General Accounting Office, in the sense that every piece

of correspondence or request that comes from the Congress is

tracked. It’s immediately logged in and assigned to a unit within

GAO, and then that unit is responsible for ensuring that the request is dealt with appropriately, and the tracking system is updated to reflect that we have taken appropriate actions.

And I can tell you that management above me is constantly asking about what is happening in terms of anything that is out of

place with respect to jobs that are assigned to us.

Chairman THOMAS. As we continue to request various agencies

and departments to make change, although your model may not be

the appropriate one because of size, or scale, or content, if we’re

going to critique, we’ve got to provide options or clear real world

options available to these folk. And frankly, this is an area that I’m

going to ask you to continue to look at.

It’s one thing to simply say you don’t have a good system; it’s another to try to provide them with some guidelines as to where they

can go, or at least some options. And if they don’t follow the options, they should have a good reason as to why they don’t.

So I appreciate very much what you’ve done for us in a relatively

brief period of time, and look forward to visiting with you once

again.

Mr. SCANLON. Thank you, Mr. Chairman. We’ll be happy to follow up on that as well.

Chairman THOMAS. Does the gentleman from California wish to

inquire?

Mr. STARK. What’s your turnover rate in recent years at GAO?

Mr. SCANLON. Right. GAO’s turnover is really not something that

would be useful to compare at this point in time, because GAO has

undergone a significant downsizing over the last five years. And so

we have had a number of buyouts and early outs, and we have not

done any hiring for about a six-year period.

So, I don’t know the answer in numerical terms, but if I did, I’m

not sure it would be a useful comparison.

Mr. STARK. Twenty-five, 30 percent, maybe?

Mr. SCANLON. Well——
57

Mr. STARK. It’s not relevant. As you say, it may not be

relevant——

Mr. SCANLON. If you deal with it in terms of people leaving, it’s

much harder than that, because we’ve gone from an agency that

was 5,300 people to an agency that’s 3,200 people.

Mr. STARK. Let me go over some math with you, and see if I can

get you to start an audit.

We used to have AAPCCs average county payments. It would be

within your province to audit how we calculate those county payments, right?

Mr. SCANLON. Right.

Mr. STARK. Try this. Somebody has suggested that there’s around

14 percent incorrect payments; some of it’s fraud, some of it’s just

mistakes. But we are overpaying in the whole Medicare system by

14 percent, right? Have you heard that? So, take a county where we’re paying $3,000 as the county payment, what we used to call the AAPCC. The government pays 95

percent of that rate which would be a payment of $2850, right? If

my math is right.

Mr. SCANLON. That’s correct.

Mr. STARK. Wait a minute. If you all were doing your job, you’d knock 14 percent out of that $3,000. Because why should we pay

the HMO 95 percent of that 14 percent that’s fraudulent payment?

You follow where I’m going? And therefore, my contention is that

we are overpaying the managed care plans in each of these areas,

regardless of what you think about the 95 percent. By my

cakulation, the payment would be reduced to $2,550. We’d be saving about $300 a patient if we just took out the fraud and abuse.

Could you review that for me in terms of what the law says we

ought to pay, and what do we account in there for this fraud and

abuse? It may be that a simple reinterpretation of the present law,

based on whatever you can certify is fraudulent overpayment,

would reduce our managed care payments substantially.

Mr. SCANLON. We’d be happy to look into that, both from a legal

perspective, and I think there’s also a question of the potential impact. Because fraud and abuse, at a 13 or 14 percent rate, which

was identified in the Inspector General study, represents a national rate. And we know from our prior work that there are very

great differences in the incidence of fraud and abuse in different

areas of the country.

So in terms of the equity that one would want do in adjusting

payments, we need to think about how to take that into account.

Mr. STARK. Oh, I have no quarrel with how you take it into account, but it’s a big enough chunk that it ought not to be ignored.

Mr. SCANLON. It certainly—I’m sorry.

Mr. STARK. Yes. And so to the extent that you could shed some

light on that, it would be helpful. I’d like a comparison among

counties. For instances, in Minneapolis the AAPCS is $3,000. In

Miami, it’s $8,000. If you reduce 14 percent of $8,000, you’re getting up to thousands of dollars that we’ve overcalculated for the

payment of managed care. It is arguable that in a capitated system

there isn’t any room for fraud and abuse. We just pay them that

fee, and it’s up to the managed care plan to do as best they can.

If they have fraud and abuse, it’s their worry. The Government
58

shouldn’t be financially compensating them that. It certainly is

something I hope you’ll look into.

Mr. SCANLON. We can look into it. The other thing I would notice, that in the 14 percent it’s important also to remember that the

basis for that is really inappropriate payments, not just fraud and

abuse.

Mr. STARK. No. I said that at the beginning, Doctor.

Mr. SCANLON. Right.

Mr. STARK. I’m not suggesting it’s all theft, but even if it’s an inappropriate payment, that doesn’t happen in managed care. It’s a

monthly capitated rate, and if we calculate that rate, knowing that

there are inappropriate payments in the fee-for-service community,

we are overpaying the capitated rate. You’re right on target.

Mr. SCANLON. I was just going to add though that a significant

number of the inappropriate payments were due to a lack of documentation documentation that might be provided if there were

greater effort.

Mr. STARK. Again, no quarrel as to why. I’m not finding fault

here, I’m just trying to deal with the fact that, if you and I agree

that there is overpayment, for whatever reason—sun spots, the

tooth fairy, that is creating an overpayment in the capitated payment, we shouldn’t be paying it. We calculated the payment on the

idea that they should collect a reasonable percentage of what we

spend on health care in a community for managed care. But that

phantom amount for fraud, whatever it is—and let’s say it’s 14 percent just for argument—whether it’s theft or whether it’s just entropy, we ought not to be including that.

Please——

Mr. SCANLON. We will look into it.

Mr. STARK [continuing]. Please give me some background on how

those things are calculated, it would be helpful to the committee.

[The information was not available at the time of printing].

Mr. STARK. Thank you, Mr. Chairman.

Chairman THOMAS. Certainly. Does the gentleman from Louisiana wish to inquire?

Mr. MCCRERY. Thank you, Mr. Chairman. Just a note about Mr.

Stark’s line of questioning. The law does require, I believe, onethird of the managed care plans to be audited, if you will, every

year; and if they are found to be charging more than the cost plus

a reasonable amount, they are required to give more benefits. We

don’t cut the premiums that we pay, we require them to give more

benefits. So we are looking at that already in the law.

Dr. Scanlon, have you had an opportunity to examine the workat-home policies of HCFA? And if so, I have been told that HCFA

management is currently considering expanding their work-athome policy to a much greater number of employees.

Are you aware of that, and can you give us any opinion on that?

Mr. SCANLON. We are aware that the agency is in the process

now of considering the inclusion of central office staff under the arrangement of flexi-place or kind of a telecommunicating, where

there would be some work allowed at home. Within the regional offices this has been true in the past, but there’s been great differences in the share of employees in those offices that have been

participating in these kinds of arrangements, from a very, very
59

small number in some regions, to a more significant number, but

still a much modest fraction in other areas.

We’ve also heard from managers about the flexi-time arrangements, which allow individuals to adjust their work schedule in

terms of time of reporting: for example, whether they would work

five days within a week, four 10-hour days within a week, or over

a two-week period arrange their days differently than doing 10

days and two weeks.

There were some concerns expressed on the part of managers

about the potential interference with needed work that the flexitime arrangement may introduce, in that there was not an opportunity for people to have critical meetings because of certain individuals not being available.

In looking at this at other agencies and as well within GAO, the

issue is one where these policies by themselves may be fine. The

issue is managerial use of these policies. In both cases, flexi-place

and flexi-time, there is a requirement for managerial approval of

an arrangement. And a manager needs to consider the needs of the

agency in terms of what arrangements can be approved or should

be approved.

Mr. MCCRERY. But right now, I think in GAO and HCFA as well,

the work-at-home policies apply to very few of the staff, mainly

professional employees, Ph.D.s that might need to do a lot of reading at home, you know, things like that. And as I understand the

proposal at HCFA, it’s going to be much broader than that. It will

apply to just general staff in HCFA. Is that correct?

Mr. SCANLON. Let me ask Ms. Aronovitz, who did more of the

interviewing—or who did all of the interviewing up in Baltimore,

to respond to this.

Mr. MCCRERY. Please.

Ms. ARONOVITZ. We heard that this is a provision that’s under

negotiation with the union right now. We don’t know specifically

how the provision will read. One of the concerns that the managers

said, was that if in fact they had final judgment about whether

somebody could work at home, then they wouldn’t be quite as concerned, because there are occasions when, as you say, if there are

proposals that need to be read, there are certain occasions when

it’s very conducive to working outside of the office.

The managers were concerned that they would not have the ultimate control in approving these, and that is a concern that is still

unsettled in the negotiation process. So we’re not sure yet how

that’s going to work out.

Mr. MCCRERY. What’s your opinion of such a policy?

Ms. ARONOVITZ. We really support flexi-place, to the extent that

it furthers the goals of the organization. But it’s very important

that there’s a very strong balance between the individual’s needs

and the needs of the organization, and the organization absolutely

has to be considered. And where it’s not, then we would have concerns.

Mr. MCCRERY. So what does that mean? Does that mean managers ought to have the final say or——

Ms. ARONOVITZ. The policies are set up in a way to make sure

that when people work at home it’s only to further the needs of the
60

organization, that is, in instances where, if they couldn’t work at

home, they wouldn’t be able to be doing work at all.

Mr. MCCRERY. Yes, that makes sense. But are you telling me

that managers then within the organization ought to have the say

so on who gets work at home, or flex time, or whatever, and make

sure that they do have work that they can do at home, and that

the work that they do complements the overall goal of the agency?

Ms. ARONOVITZ. Yes.

Mr. MCCRERY. Thank you.

Chairman THOMAS. No other member of the subcommittee wishes to inquire?

The gentleman from Louisiana, Mr. Cooksey.

Mr. COOKSEY. Thank you, Mr. Chairman.

The direction of my questions is about information systems. And

my concern is that yours may be inadequate and can it be improved.

Prior to my joining this august body, I understand that there

was a time when the people on the other side of the aisle were running Congress; they ran Congress with—the business of Congress

with pen and paper, and a ledger book, presumably because that’s

the way it’d been done the previous 200 years. If my memory is

correct, there were even some fraud and abuse in the banking—

Congress’ bank and their post office, but I can’t really remember

that in detail. But they had no information system. It was only

after 1995 and eight-month transition, that they put Congress’

business on an information system, on computers.

I have the feeling that probably HCFA’s information systems

could be modernized, updated to eliminate some fraud and abuse.

What have your plans been? What would the cost be? And what

would the timeline be?

Mr. SCANLON. We would agree with you wholeheartedly. In looking in the past, one of the real tragedies of the Medicare transaction system effort was that there was a real need for improving

the management of information produced by HCFA’s claims processing systems. Because a share of the fraud and abuse—the share

of the dollars that we lose to fraud and abuse—comes about because we are not able to process information as effectively as we

might, given today’s technology.

The concern that we’ve expressed when the Medicare transaction

system effort was underway was that there had not been a comprehensive plan, dealing with the kinds of objectives that you just

stated, in terms of identifying the goals for this system, identifying

the essential features that such a system would need in order to

accomplish those goals, setting up a timeline, and identifying the

cost of sort of putting that kind of system in place. Those were not

done well, or at all, with respect to the Medicare transaction system. They need to be done with a system that HCFA needs for the

21st century.

At this point in time, our understanding is that HCFA is starting

this process over, though given all the other things that they’re

doing, it’s not receiving the highest attention; it does not have the

highest priority. But it is something that they are fully aware of,

and that they really need—that they recognize they need to address this quickly because it is critical.
61

The year 2000 problem is something that is of the highest priority, and is something that is related to the information systems,

but I think that they will have to probably do this in two steps.

One is deal with the year 2000, and then, secondly, design an information system that really is the system for the 21st century.

Mr. COOKSEY. Well, I’m not worried about the 2000 problem. I

am convinced that some 18- or 23-year-old entrepreneur will come

up with that problem, and will become a billionaire overnight. But

the experience with the IRS has not been very good in developing

an information system. They spent—I forget what—several billion

dollars, and said, we give up.

The magnitude, the complexity of your problem I would think

would be equal, or your responsibility. Do you think that you could

do a better job in coming up with a system? Or would you do it

yourself, or would you go to the private sector, or what would your

plan be to come up with a better state-of-the-art information system?

Mr. SCANLON. Well, this will be HCFA’s responsibility, and we

will do the best we can in terms of providing constructive oversight

of how they undertake this.

It’s been a task of GAO for a number of years to monitor, not

just for HCFA, but for the agencies of government, the movement

towards improved information systems. And we’ve done a considerable number of reports on those. We can share some of that information with you about the principles that we’ve identified that are

critical to this task.

In some respects there’s no one solution, and HCFA’s challenge

is certainly unique. There’s an estimate that by—or in—their early

21st century they will be paying over a billion claims every year.

In addition to the challenge of dealing with the Medicare Plus

Choice plans, where we would anticipate there will be more than

500 plans, we’ll have a quarter of the beneficiaries in those plans,

and have the freedom to change plans. And the net result will be

that there will be considerable amount of work in tracking enrollments, disenrollments, and payments.

So the challenge isn’t perhaps as daunting as the one facing the

IRS. We have established some guidelines as to how agencies may

proceed in pursuing this, and will be happy to share them with

you; but at the same time we do need to wait for HCFA to take

the lead in terms of laying out their initial plans, and then we can

work with them to refine them.

Mr. COOKSEY. I would like to see where you are, if I could have

that information.

One closing question, yes or no answer. Do you think you’re

doing a better job of managing your information system and your

business than Congress did before 1995? You’re not doing it on pen

and paper, are you?

Mr. SCANLON. Beg your pardon?

Mr. COOKSEY. You’re not managing it with pen and paper?

Mr. SCANLON. We are not managing with pen and paper. So I

guess then the answer is yes.

Mr. COOKSEY. You can get out without answering it.

Thank you, Mr. Chairman.
62

Chairman THOMAS. Thank you very much. Thank you very much

Dr. Scanlon, Ms. Aronovitz. No additional questions. We’ll be calling on your expertise and your organization in the near future.

Last panel for today: Stuart Butler, who’s obviously been before

us in the past—we look forward to his testimony—the Heritage

Foundation. Dr. Paul Ginsburg. And it’s pleasant to find out that

other folk who’ve been studying the concerns that we have as well,

if not in direct context, at least in a general context, that Dr. Michael Gluck, National Academy of Social Insurance, and Marion

Lewin, who was the study director of a Committee on Choice and

Managed Care, Institute of Medicine.

I want to thank all of you for coming. Your written testimony

will be made a part of the record, and you can address us in your

timeframe as you see fit. And we’ll start with Dr. Butler. Thank

you.

STATEMENT OF STUART BUTLER, VICE PRESIDENT, DOMESTIC AND ECONOMIC POLICY STUDIES, THE HERITAGE FOUNDATION

Mr. BUTLER. Thank you, Mr. Chairman.

Congress last year enacted a series of reforms that modernized

Medicare, as you mentioned in your opening statement. If HCFA

is to carry out its new role under these reforms, it must respond

to two challenges. It must be able to organize a market of competing health plans and provide the information necessary for

beneficiaries to make wise choices within that market; and it must

make the traditional fee-for-service system a more effective competitor to managed care and other private plans that are available

now to beneficiaries.

Broad economic and managerial principles would suggest two key

strategies are needed to respond to these challenges. First, the

management of the market of competing plans and the provisions

of information to consumers must be completely separate from the

operation of any particular plan. That is a very basic principle of

economic organization in a market. Those responsible for setting

the rules of competition, and for providing consumers with dispassionate information on rival products, should have neither an

interest in promoting any particular product, nor even the close relationship with one of the competitors. That is why umpires in

baseball do not own baseball teams. But HCFA today carries out

both of these conflicting functions.

Second, the managers of an in-house government plan in a competitive market should be given wide latitude to introduce innovations in organization and marketing. But today, as I note in my

testimony, there are several obstacles that frustrate efforts by

HCFA managers and staff to make the traditional fee-for-service

plan more competitive and better attuned to the customer needs

and desires.

With this in mind, I believe Congress should make two major organizational changes in Medicare. One, Congress should create a

Medicare Board responsible directly to the secretary of HHS. In effect, Congress should create within HHS a body that is the functional equivalent of the Office of Personnel Management within the

FEHBP. The function of this body and the focus of the staff within
63

it should be to organize and operate the market of competing plans,

including the traditional fee-for-service plan; and to provide Medicare beneficiaries with the information they need to make the

wisest choice possible. The board and its personnel should be separated completely from the personnel running the fee-for-service

plan.

This step would effectively split HCFA into two separate agencies within HHS. One agency would set the rules of competition in

Medicare, act as an umpire, and help beneficiaries make choices.

The other, among other tasks, would run the fee-for-service plan,

competing in that market. I suggest in my testimony how such a

board should be structured.

The second step: Congress should give managers of the fee-forservice program greater discretion to be innovative and to modify

benefits. It will continue to be difficult for HCFA to modify the feefor-service benefits gradually in order to make them more competitive and modern, as long as Congress micromanages virtually all

organizational and benefits decisions. On the other hand, as long

as the fee-for-service plan is to be a benchmark standard plan

available everywhere, Congress must have the ultimate control

over the benefits package.

I would suggest that Congress resolve this dilemma by requiring

HCFA to propose annual modifications in the fee-for-service benefits package, and that Congress restricts itself to an up-or-down

date vote on the proposed benefit changes as a whole.

To improve this process further, Congress could designate a

standard benefits commission within HCFA, with commission

members selected for fixed terms by Congress. This commission

would make the detailed benefit proposals to be considered by Congress.

Structural changes of the kind I’ve suggested should of course be

considered very carefully and enacted slowly. In the meantime, I

believe Congress should make some changes now to improve the organization of Medicare that will also help evaluate the probable effects of larger changes. And I mentioned those in my testimony,

Mr. Chairman.

[The prepared statement follows:]
64
65
66
67
68
69
70
71
72
73
74
75

Chairman THOMAS. Thank you very much, Stuart.

Dr. Ginsburg.

STATEMENT OF PAUL GINSBURG, PH.D., CHAIR, STUDY PANEL

ON FEE-FOR-SERVICE MEDICARE, NATIONAL ACADEMY OF

SOCIAL INSURANCE AND PRESIDENT, CENTER FOR STUDYING HEALTH SYSTEM CHANGE.

Mr. GINSBURG. Thank you, Mr. Chairman.

I am appearing as chair of an expert panel convened by the National Academy of Social Insurance, and am accompanied by Academy staff director, Michael Gluck. This panel’s outstanding member have depth of experience in Medicare, private health plans, and

health care delivery. And many have extensive experience in both

government and the private sector.

The panel’s report, ‘‘From a Generation Behind to a Generation

Ahead: Transforming Traditional Medicare,’’ is being released

today, and my testimony is drawn from that report.

Even if Medicare+Choice develops rapidly, large numbers of

beneficiaries will continue in the fee-for-service Medicare program

for the foreseeable future. The structure of this program has

changed little since 1965; its essence is to pay bills. While the Congress has accomplished a great deal in the 1980s in mechanisms

for setting payment rates, little has happened to encourage more

effective delivery of services to beneficiaries.

There are opportunities to improve quality and reduce program

costs, especially for those beneficiaries with chronic illness. Leading

private insurance plans have increased their activities to manage

care over the past ten years, but Medicare has not followed.

A number of management tools used in the private sector hold

promise for Medicare; these include disease and case management,

incentives to use selected providers and competitive procurements.

We cannot say at this point precisely which tools will be most effective in fee-for-service Medicare. HCFA needs to test the potential of such tools and to encourage broader use of those that are

successful. The limited progress in this area is not because of lack

of interest by the leadership of HCFA, but rather, the substantial

barriers to HCFA performing this role; the Congress tends to allow

little latitude to innovate; and HCFA does not have the authority

to integrate successful demonstrations into the regular Medicare

program.

The Congress has begun to reduce barriers. Provisions in the

Balanced Budget Act and in the Health Insurance Portability and

Accountability Act move in this direction, but I would characterize

these steps as reflecting innovation by exception. A more comprehensive approach is needed. HCFA needs a broad mandate to

pursue ongoing improvement in fee-for-service Medicare by incorporating effective care management tools.

The Panel made specific recommendations. First, the Congress

should mandate fee-for-service Medicare to move beyond its traditional role as a billpayer and take responsibility for quality and

cost of care. Second, the Congress should direct HCFA to promote

innovations in Medicare fee-for-service by adapting the best practices of private health plans to this program environment. These

innovations should be targeted toward those geographic areas and
76

populations where they could be most effective. Third, to carry out

these innovations, HCFA should have the authority to waive some

statutory requirements and should be able to contract with a variety of qualified private organizations that specialize in particular

services, such as patient education, case management, or utilization review.

Along with this additional authority, accountability should be demanded. The Secretary of HHS should report annually to Congress

on how HCFA has used its authority to innovate, and what the results are. Congress should designate an advisory body, such as the

Medicare Payment Advisory Commission, to review this report.

In conclusion, to advance the quality of care for Medicare’s feefor-service beneficiaries and to ensure that taxpayers’ money is

well spent, HCFA must have modern management tools at its disposal. In managing fee-for-service Medicare, HCFA should have the

capacity to apply new knowledge from research and the private sector about how best to manage health benefits for older Americans

and those with disabilities, especially as the number of beneficiaries living with chronic conditions continues to grow.

Thank you, Mr. Chairman.

[The prepared statement follows:]
77
78
79
80
81
82
83
84
85

Chairman THOMAS. Thank you, Dr. Ginsburg.

Ms. Lewin.

STATEMENT OF MARION E. LEWIN, M.A., STUDY DIRECTOR,

COMMITTEE ON CHOICE AND MANAGED CARE, INSTITUTE

OF MEDICINE

Ms. LEWIN. Mr. Chairman, Mr. Stark, and members of the committee, I’m very pleased to be here today, on behalf of the IOM

Committee on Choice and Managed Care, and my remarks are

based on their report. The list of the members of that committee

and their recommendations are attached to the testimony.

Before I provide my few comments on this very important topic

of today’s discussion, I want to provide some important clarifying

information. One is that the report that we did came out in August

1996, before the passage of the Balanced Budget Act of 1997. Second, the committee was mandated to look primarily at how to make

the Medicare Choice system more accountable, and to improve informed purchasing by and on behalf of beneficiaries. It was not

given a specific mandate to look at the organization of HCFA, but

clearly as we went through our work, the organization of HCFA

and the role of HCFA did become an important topic. But only one

of the study’s seven recommendations pertains to HCFA, and regarding that recommendation the committee made the following

points.

It said that, if we want to make the Medicare market more accountable, trustworthy, and assuring for Medicare beneficiaries,

there were some concerns about HCFA; that administration of a

market-oriented multiple choice program and the management of

the traditional Medicare program involved very different corporate

culture and missions; that the two functions require different types

of management, staff expertise, orientation, and knowledge. And

the committee spoke to the benefit of HCFA recruiting staff and

senior managers with extensive experience in managing the various aspects of multiple choice in the private sector. Then also that

a flexible response mode to changing conditions and opportunities

is required for the effective management of a multiple choice market in order to provide the best options for beneficiaries. Such responsiveness may be hard to achieve with the regulatory constraints of HCFA.

As part of its recommendation, the committee suggested an entity for study, which we call the Medicare Market Board, which has

taken on a life of its own. As the committee was envisioning this

Medicare Market Board, they looked at a model at something like

the Federal Reserve Board. The committee didn’t investigate it further. We didn’t have specific experts on the committee on public

administration and organizational management. But they felt that

a Medicare Market Board should have the stature, leadership and

resources to hold plans accountable, and to be a dispassionate developer of the rules of the game.

Since the publication of our report, I think the committee believes and the committee is now doing some continuing activities,

that HCFA has made some impressive strides to more capably and

effectively administer this complex and challenging world of choice.

The committee is especially heartened by HCFA’s new center for
86

beneficiary services because they are undertaking or implementing

many of the other recommendations we made in the report, and is

also applauding the establishment of the Center for Health Plans

and Providers, which does include many, if not all of the elements

and responsibilities that we have envisioned under the Medicare

Market Board.

I think that the major difference is that as some of the other witnesses have said, that the committee felt that there really needs

to be a fire wall between the choice plans and the fee-for-service.

Even on our committee, we had representatives from the fee-forservice world and representatives from the new managed care

world. There was a tension. The people from the managed care

world really didn’t want fee-for-service to succeed. They didn’t really want it to be improved because it would compete with them.

So I think there is a feeling that if in a large self insurance plan,

which you could really think of as Medicare, you do need a fire wall

between people who are managing and administering the competitive choice plan and the ones that are managing the fee-for-service.

As part of our committee’s work, we heard a lot of testimony

from model purchasers, the people that we feel are doing it right,

that are the leaders in this arena. I do want to share with you that

certain themes and cautions from these purchasers, from these

plans, from these States, from these organizations, were heard

again and again, both in the commission papers and in our hearings. That is, that doing it right requires a real commitment of

staff, talent, time, technology, and resources in order for these kind

of strategies to have a real payoff. It can not be done on the cheap.

I think the lack of resources is a real detriment and a problem for

HCFA as it has been given these major, major new responsibilities.

Why don’t I end here so that we can allow time for discussion.

Thank you.

[The prepared statement follows:]
87
88
89
90
91
92
93
94
95
96
97
98
99
100
101
102
103
104
105
106
107
108
109
110

Chairman THOMAS. Thank you very much, Ms. Lewin. I understand that your study and book came out prior to the BBA being

passed, but HCFA reorganized itself prior to the BBA passing as

well. I read with note on page 107 of your book, and you indicated

in your testimony, that the ‘‘administration of multiple choice programs and the management of the traditional Medicare programs

evolved very different missions and orientations.’’ But in your testimony, you indicated that you believe HCFA has made impressive

strides to deal with this.

Was the reorganization of HCFA, notwithstanding it occurred

prior to the BBA, the direction that you think they should be

going? Or should it be more in the direction of I think probably to

use Butler’s position as a kind of a guidepost, that in fact bringing

the two together, the fee-for-service and managed care, may not be

the right direction. You indicated they clearly deal with things differently. Where are you on the fire wall? I don’t think you contradict yourself, but I am a little concerned about your praise of

HCFA and the point you made in the book.

Ms. LEWIN. Okay. Let me try to clarify that. First of all, in terms

of HCFA’s reorganization, we do feel that the Center for Beneficiary Services is certainly a step in the right direction. Our other

recommendations about how to develop an infrastructure for information for Medicare beneficiaries and what is needed, many of

these are now the priorities for the Center for Beneficiary Services,

whether they can truly implement that ambitious agenda with limited resources of course——

Chairman THOMAS. But we were very concerned about that. We

are going to monitor the resources. But that is more of an informational, relational. I am concerned about the structural change of in

essence taking the whole managed care program that was outside

the house or maybe in the garage, and bringing it, integrating it

into the overall structure. Not the end work product of some areas

that are beginning to understand belatedly the beneficiary is a customer and they need information.

Ms. LEWIN. Well, let me just say that the Medicare Market

Board, we were clear that we felt that there should be a dispassionate group that would set the rules for the game for both

managed care and fee-for-service. Then the second level is how you

actually contract with plans. We felt that it even could be under

the Medicare Market Board, but at some level, there had to be a

fire wall between the people who administer the one part of Medicare and the other. The committee stopped short in terms of making a final recommendation, because we really didn’t feel that we

had the expertise and the time, this was a very short-term report,

to actually develop the details of how that should be done.

There is a potential of a Medicare Market Board building some

kind of a fire wall even in one organization. I mean it certainly has

been done. But we are not able to supply the details.

Chairman THOMAS. Stuart, obviously your approach is that with

your number of analogies, that you really shouldn’t be doing two

in the same shop. What is your assessment of the reorganization

that HCFA carried out, a help or hindrance to moving in the direction that——
111

Mr. BUTLER. Well, as Marion Lewin pointed out, some of the

functions that would have to be under some kind of marketing

board have been developed. There is an intent at HCFA to try to

do this. However, no reorganization within the current structure

can achieve what you really want to achieve because it’s an issue

of a culture. It’s an issue of the skills that are involved. It is also

an issue of keeping people apart from each other. Keep the umpires

away from the players. This is absolutely crucial for Medicare to

be successful. As Ms. Lewin pointed out, within her committee, the

whole world can be divided into fee-for-service people and managed

care people, as far as I can see. There is this dichotomy. So I think

that ultimately there must be a revision of the HCFA reorganization to separate these functions out, if we are going to see Medicare

work effectively for everybody.

Chairman THOMAS. One of my concerns is that I think in fact

failure to innovate was reinforced by the fact that the fee-for-service was structured as the way to operate. One of the reasons we

are lagging behind now is that it’s the Government’s structure and

not a flexible one that can change with the marketplace. I think

maybe skilled nursing facilities were invented by Government payment structures. My very real concern is that what we are talking

about a fire wall between fee-for-service and managed care, and we

are beginning to think that there’s this bifurcated world or that

this is the way things are, I am worried that we are going to stifle

innovation in that regard and that we have got to create the maximum opportunity for innovation. Those were the various programs

we had. To the degree that bureaucracy locks itself into a certain

pattern now, it inhibits the change that I think needs to take place.

So I am very much concerned about anybody saying that there is

this bipolar world in terms of an approach. I am trying to figure

out a way to deal with it in multiple ways.

The other concern I have, both in terms of Dr. Ginsburg and I’m

sorry to say, Dr. Butler, you as well, if we are going to run a defined benefits world, I can assure you, we ain’t going to let those

folk make the decisions in the general sense or for Congress to

judge on a pass/fail basis an overall program.

Now, if you want to talk about shifting to a defined contribution,

where Congress’ obligation is to pony-up ‘‘X’’ number of dollars,

then I am more willing to talk about letting the professionals manage the packaging and delivery of those dollars to maximize the

benefit both to the beneficiaries, and get the maximum distance out

of your dollars. Now that is a different approach to the way that

you have offered it.

So what is your reaction to moving to a defined contribution

which would maximize HCFA’s ability to package and reorganize

and create a comfort level on the part of Congress, because that is

what they are supposed to be doing? We are doing what we’re

doing. But in a defined benefits world, there is no way you are

going to.

Mr. BUTLER. I agree, as you know, about moving towards a defined contributions system. I think that is ultimately the way to go.

But even if you don’t complete that task, I would just make two

observations about the point you made.
112

First, I would totally agree that we need to have increased flexibility in the way in which the fee-for-service in the system operates. But second, I think you would also accept that there is clearly

a dilemma in the process we have of trying to set benefits within

a defined benefits system. Because in reality, all kinds of political

pressures come to bear on Congress regarding what services are

provided. Provider organizations are highly influential and pressing their cases. One of the problems we have with the Medicare

system is that effect.

Somehow we have got to find a midway position between allowing orderly evolution and yet also having effective Congressional

control over the benefit structure. That’s really what I was getting

at. I don’t have a simple answer to it. I just think that somehow

we have got to get away from either complete control by a bureaucracy over benefits or by a political process constantly trying to determine how long people should be in hospital and what services

they should be provided in their every circumstance.

Chairman THOMAS. My concern is that to the degree you would

move to your halfway house of an all-or-nothing approach still dealing with defined benefits, the way in which Congress would express

itself unfortunately, Ms. Lewin, would be back to cutting funding

for the support of, the administration of, and then you kind of create a built-in guaranteed failure of the halfway house, because the

only way you can get at it is to control the mechanism of delivery

or of review or the rest.

So at some point we have to engage in a fairly fundamental debate about more fundamental changes, not just in the management, but in the program itself. We have to be aware of one clearly

affects the other, and not think that we can just play with the

management structure inside HCFA and solve a lot of problems. I

guess what I am saying is this is an ongoing changing process. We

have only begun. Some people think we have finished. I know you

do not. But we will be looking to people like you to give us some

models. I especially have difficulty with a quality group of folk coming together who could provide answers and then say well, we have

decided we can’t come up with something. Somebody has got to

walk the plank. I don’t think it’s Congress that should walk the

plank on coming up with specific changed suggestions. We need

you folk as well. But I appreciate what you have done.

The gentleman from California?

Mr. STARK. Thank you, Mr. Chairman.

Dr. Butler, on page 3, you talk about the separation of the management of the market from the management of any plan. I mentioned that in my opening statement. You can’t have somebody promoting a product and regulating it. It’s like the problems with the

FAA who promote airline travel and at the same time tell airlines

how to operate. It’s an inherent conflict of interest.

I would like to bring up another issue. I think you make a strong

case for a problem that I have complained about for some time.

That problem is the National Committee for Quality Assurance and

the Joint Accreditation Committee for Hospitals. Both of those

groups have their boards stacked with people who either operate

or own the very entities that these people are supposed to investigate on behalf of the Federal Government. My sense has been
113

that we have got to separate that. We cannot have the fox in the

hen house. Does that comport with your concerns? If we are going

to contract with outside groups, basically private groups, to do

quality investigations for us, there should just be an absolute prohibition between any contact with that company and the people

that are investigating.

Mr. BUTLER. I’m not an authority on the structure NCQA, so I

would hesitate to talk in detail about that. I would say that your

general principle is one I would agree with as a general matter,

namely that for those who set the rules of the game that will affect

any particular player should, at the very least, any involvement

should be very explicit and clear and taken into account. Ideally,

the people involved should not have a direct interest in the outcome of any of those decisions, I think as a general principle.

Now there is also of course the issue of an advisory role. It

makes a lot of sense to have people who are practical players in

a field to give advice and to make recommendations and so on. But

that can be separated from the ultimate authority of who makes

the decision.

Mr. STARK. Thank you. I, by the way, just as a sidebar, like your

idea of a board to manage the Medicare managed care plan. I

would love to discuss that with you further at some other time. I

think we have to do something in that area.

Either Dr. Gluck, or Paul Ginsburg, could respond to this. We

now reimburse virtually any hospital that wants to conduct a

transplant operation, even though common wisdom would suggest

that those centers which do many more procedures have far better

outcomes.

Would you all support giving HCFA the authority to narrow the

number of facilities for certain complex procedures so that we concentrate experience? I hate to use the words ‘‘centers of excellence’’,

because I’m not sure how you define that. But, these centers that

have more experience, would we not be doing a service by giving

HCFA the authority to direct patients to them?

Mr. GLUCK. The study panel spent a fair amount of time looking

at the examples from private health insurance, in which patients

are steered toward those providers that do better in cost and quality outcomes. The panel was struck by that, and it certainly informs their recommendations. They didn’t get into a lot of the specifics about exactly how that would be done.

Mr. GINSBURG. Clearly, one of the innovations that we can imagine would be HCFA identifying for beneficiaries the best transplant

providers and we’re contracting with them. We did not discuss

whether the ones that do not make that cut should not be in the

program or they shall just hold non-preferred status. But it clearly

is in the program’s interest to steer beneficiaries toward more effective providers.

Mr. STARK. You also talk about the practice patterns that are

identified in the Dartmouth Atlas. Somebody recently indicated—

I think it was Uwe Reinhardt in his Christmas card—that a procedure that costs $8,000 fees in Miami is only $3,000 in Minneapolis.

Now I have a plan to contract with Northwest Airlines. We could

do a lot of flying people back and forth from Miami to Minneapolis

and save a lot of money, it seems to me, in between. But all I have
114

been able to find is that these huge differences in the cost of care—

where the outcomes don’t reflect—the cost, is tradition. These differences are habit. They are a whole host of things which I’m not

sure Congress can control.

But I would hope that you could help us in finding some way

that we could begin to move toward some national standards. With

two and a half and three times a difference for the same procedures with equally highly qualified and well-trained providers, we

are going to have a problem that is just going to intensify if we

can’t figure out a way to—level that out.

Mr. GINSBURG. Yes, these variations demonstrate the potential

for saving money and improving quality by moving beneficiaries towards where the best care is delivered. A number of implications

for the Pand’s ideas come up. One is that if a certain procedure

costs $8,000 in Miami and $3,000 in Minneapolis, we should concentrate our efforts improving its delivery in Miami, but not in

Minneapolis, because I wouldn’t rule out a Medicare program to

provide an option for beneficiaries to travel to a facility that has

a contract with HCFA to provide these services on the basis of its

quality and cost.

Mr. STARK. The airlines will be after us. Thank you, Mr. Chairman.

Chairman THOMAS. Just briefly along that line, I think it’s fairly

easy to talk about the best move to quality and the rest. The difficulty I have is coming up with a really objective way to measure

some of that. The best way I know is to collect the data statistically, create outcomes, compare outcomes for dollar spent, and

begin to structure it in a way that allows you to at least define

quality in a relative sense. Especially to determine what you get

for your dollar. And then create some positive guidelines.

I have a very real concern, this is slightly off the mark, but clearly an issue we have to deal with is the ability to gather that information, the question of confidentiality, the ability to produce with

clear protections for folk where it’s appropriate, the material necessary to produce the outcomes research to provide the positive

guidelines given the potential of some legislation which will limit

us. Minnesota has been mentioned several times. Over the break,

I spent some time at the Mayo Clinic talking with them. Their real

concern, for example, the new Minnesota State law in the ability

to collect information. The whole question of information collection

as a matrix for making decisions, both of cost effective and of ‘‘quality’’ will be absolutely critical to us to be able to do the kinds of

things you have been discussing. It’s an area that all of us have

to deal with because a very simple bill passing will eliminate our

ability to move in a number of directions that would produce quality medical care at a reasonable cost to taxpayers.

The gentleman from Louisiana?

Mr. MCCRERY. Thank you, Mr. Chairman. Actually, you asked

most of the questions that I was going to ask.

Dr. Butler, if the title of this hearing had been preparing Medicare for the 21st century rather than preparing HCFA for the 21st

century, would you have submitted different testimony?

Mr. BUTLER. Well, I would have commented probably on the defined contribution issue, as I have done before. But I think the
115

structural changes I suggested, whether or not one goes further in

terms of Medicare reform as a whole, are still sound organizational

principles for where we are in the structure of Medicare, which has

been to move from a kind of a one type of benefit structure and operation to a much wider choice. When you have a range of choices

and people have to evaluate them, and plans are in competition

with each other, it forces I think you to look at a structure that

makes sure that people have information; and it’s honest and dispassionate information, which is not possible under the present arrangement.

Mr. MCCRERY. I thought Mr. Thomas’ criticism of your proposal

was a little unfair, given the constraints of the topic of the hearing.

I wanted to make sure you had the opportunity to say that if you

prepared testimony on the future of Medicare, it might be different

from the 21st century for HCFA.

I happen to agree with the criticisms that Mr. Thomas leveled

at your proposals, as well as some of the others. Even though we

could have a dispassionate board, if that’s possible, I don’t think by

any stretch of the imagination that Congress, as long as we have

a defined benefit program, is going to hand over to some dispassionate board the power to describe and define the benefits.

Even if it’s on an up or down vote, any time you start taking away

benefits from people, we are going to vote down. That’s just the nature of this beast. Now if you want to add benefits, we’ll vote up.

So I just don’t think your proposal is practical from a political

standpoint. I understand where you are trying to go. You are trying

to form some kind of midway stop along the way from where we

are now to a defined contribution. I hope that’s what you have in

mind. But I don’t think we can do that. I think we have finally

faced the question of whether we have a defined benefit program

or a defined contribution program. We can’t go halfway. We have

tried. I mean we have done these little piddling things with choice

and Medicare Plus and all this stuff. It’s going to fail, in my view.

We are going to continue to have costs go through the roof and

we’re going to continue to be the arbiters of what benefits those

managed care plans must provide. So I just don’t think that your

proposal is going to get us to where we need to go.

We really ought to just face the question and debate it honestly

and have it out. Then maybe we’ll win and get a defined contribution system and let the market work. Maybe we should just fold

Medicare into the private healthcare marketplace all together, do

away with Medicare as it exists today and have some sort of Government assistance to everybody for healthcare, from children all

the way up to the most elderly, but let the market be the manager

of the system and not the Government.

Mr. BUTLER. I don’t fundamentally disagree with that characterization of where we need to go.

Mr. MCCRERY. I would hope not.

Mr. BUTLER. I am doing my best today to look at the current situation of how to improve it. I think you would agree, I suspect,

that a large group of legislators trying to figure out a comprehensive package of benefits and to make sure that it’s improved every

year on the basis of best knowledge is not a very good way of doing

it.
116

Mr. MCCRERY. It’s nuts.

Mr. BUTLER. It may be the only way right now. However, I would

suggest that you look at one of the short-term proposals I made,

which was simply to say let us set up at least an advisory body of

some kind to suggest to Congress.

Mr. MCCRERY. I think that’s a swell idea. I hope we do it, but

I don’t have high hopes for solving the problems with it.

Does anybody else want to comment?

Ms. LEWIN. I guess I did want to comment in this discussion between a defined contribution or a defined benefit. I mean that is

a whole different debate. But when this committee did its work, I

think one of the underlying issues, and I know it’s been overplayed,

is trust in the system. There is now a lack of trust on behalf of

beneficiaries because they feel that the information they get is inadequate, it’s not trustworthy, it’s not understandable. When we

looked at best practices, like CalPERS, or Pacific Business Group

on Health, and some of the large corporations, when consumers or

patients trust the information and feel that their employer is on

their side but also is interested in providing more cost effective appropriate healthcare, then you can move to a more value-based system. But I think when you tell the elderly we’re going to go to a

defined-contribution without that inherent trust, I think that is a

problem.

Mr. MCCRERY [presiding]. That’s a good point. Obviously if we

went to a defined contribution system, we would have to have some

Government-imposed information availability program so that seniors and everybody else in the healthcare system could make good

choices. Thank you.

I guess I’ll assume the chair and call on Mr. Houghton.

Mr. HOUGHTON. I guess I’m next. Thank you very much, Mr.

Chairman.

Thank you very much for being our last panel. You have been

very patient. I really would like to ask sort of a broader question

about responsibility here. One of the problems which exists here in

Congress is that we have responsibility and we’re clearly interested. There is an enormous amount of money involved. Yet we sort

of dabble in the organizational bit rather than being sort of the

board of directors. One of the questions I would like to ask you, do

you think that the management of HCFA really understands what

we are asking them to do?

Mr. GINSBURG. I can comment on the board of directors’ role

versus getting into details. I saw this firsthand in my experience

with Medicare physician payment reform, which was very detailed

and technical—for example, setting relative values and geographic

factors. Congress, as far as I am aware, never engaged in that level

of detail. They set up the overall principle, and HCFA implemented

it and reported how they did it. I believe that Congress didn’t get

into the details because the leaders knew if one relative value wa

changed, the members would hear from lobbyists forever to change

the relative value that affects their group. The down side of getting

involved in the details was very clear to them. I think it’s not as

clear with things like the benefit structure of Medicare.

I can envision Congress learning from the experienceof dealing

with detailsconcluding that there are certain areas that it just
117

should not get into because of the consequences. The Congress

should act more like a board of directors and delegate more to

HCFA. Over the years that I have watched HCFA, it has been very

responsive to the Congress. Some of the biggest problems have

come with interest groups that are narrow focused. They tend to

do do better in Congress than they do in approaching the Executive

Branch. This has caused a lot of the turmoil.

Mr. HOUGHTON. Does anybody else have any comments on that?

Because I think the thrust of my question is really this is an organizational issue. Obviously, you want to look over the next hill and

see whether HCFA is prepared for some of the dynamics of the

next century. However, the question is, will they really understand

what Congress wants. If they don’t, we should tell them. If they do,

I don’t know why we have a board of directors, advisory commissions, and things like that. That is up to them. They ought to decide that. I don’t know how you feel about this. Maybe Dr. Butler

or Ms. Lewin?

Ms. LEWIN. I think part of it is this whole new world is challenging for all organizations. When I even think of being employed

at the Institute of Medicine, how many things have changed for us.

I mean the whole world is more market oriented and competitive,

et cetera, et cetera. I think that HCFA is trying very valiantly to

respond, and very responsibly. I mean when you go there, you really do have a sense that people are working very very hard. I mean

clearly this is a whole different orientation. I think it is a challenge. I think that is why hearings like this are very good because

you put people on notice that you are watching.

Just to divert a little bit, but I think it’s relevant, and actually

I’m now kind of going in a different direction to what we were discussing earlier between fee-for-service and managed care. But we

had a lecture at the Institute of Medicine last night which I

thought was very telling, by someone by the name of Arnie

Millstein, on purchasing quality on behalf of purchasers. He cautioned the audience in saying you know, we have gotten too much

in this polarization of fee-for-service versus managed care. What

we really should be looking at is the average American healthcare

and the best healthcare that America has to offer. Whether it’s feefor-service or managed care, that should be our goal.

My feeling is that sometimes we’re looking at this as fee-for-service versus managed care. Whereas both sides, that really should be

their goal, to purchase the best care that America has available.

Mr. BUTLER. Congressman, I think it’s not only a question of giving clear direction to an agency and making sure that its senior

management understand that. I think as many of us have said in

different circumstances, that there is a culture of an agency to consider too. It is very difficult to take an agency or a group of people

in the private sector, let alone the public sector, who are very used

to seeing their role in one way and being trained in that way, to

then try to get them to do something else. Divorce lawyers don’t

tend to make very good marriage counselors. There are reasons for

that.

Mr. HOUGHTON. I understand that. I’ll just interrupt a minute,

and then I’ll cut off, Mr. Chairman. But I mean I think sure, conditions change, market changes, demands change, the money
118

changes. That’s to keep a monitoring eye on it, not to direct whether to establish this board or that board or have advisory committees. I mean that’s the operations that have got to do that. Thank

you.

Chairman THOMAS. [presiding] Just let me say, very briefly, because I know we want to move on, this business about best I just

think has to always be qualified. That is, we are dealing with a

program that at least in the Part B portion is 75 cents subsidized

by the taxpayers. Given the advances of medical science, you have

got to somehow reconcile the public treasury with the medicine

available. People will consume—and this is my friend from Louisiana’s statement that I’ve stolen a long time ago, I figure another

six months and I’ll just quit giving you attribution unless you are

here—People will consume as much healthcare as the people are

willing to pay for. The reason I like moving more toward a defined

contribution, and frankly, discussing as a matter of public policy,

not just for Medicare but a number of other areas, how much we

should be putting in there is that that is what Congress should be

doing, setting the policy and the overall structure. The professionals ought to be determining how we maximize the return on

that dollar in healthcare we should provide them with the tools to

be able to measure between them far better than we do now. It is

a legitimate and appropriate role for Government, including the

education of the consumer, woefully ignorant now, about their options and what they have available.

But the innovation, the specifics and the way in which that product is delivered should only remain in the private sector because

that is where you get the rapid innovation and the turnaround and

the change. That kind of a blend I think ultimately will bring some

folk who now apparently are on opposite sides but don’t realize

that there is an area of common ground.

Obviously, there are a lot of vested interests and sacred cows

that were just shot or slaughtered by that statement that we have

to overcome to go forward, but it’s something I think we have to

do.

The gentleman from Louisiana for a final question?

Mr. COOKSEY. I am looking here at an earlier edition of National

Journal. There are four Presidents with big ideas and four Presidents with small ideas. I just happened to be in Washington the

summer when I was in medical school, the summer that Medicare

was signed into the law. Lyndon Johnson is not on either side.

My question is, can we step back and look at the big picture?

Can we come up with a plan that is a defined contribution and consider three categories, the people that get their payment from the

Government, the indigent, the Medicare or the Medicaid, the old

veterans like me when I get a little older. Then the people that get

their insurance or their health insurance from their employers. The

third group are individuals who are not in either category, but are

out there maybe as small business women, men, individuals that

don’t have any real tie, but have to pay for their insurance. Can

we step back and look at a plan that would be defined contribution,

let the Government pay where they are going to pay, and then let

all the others have full deductibility for their health insurance, and

the employer get out of the health insurance business, and the em-
119

ployer have no deductibility? Would that be feasible? Do you think

that can be done? Then this would put us back in the marketplace.

I deal with these veterans on my Veterans Affairs Health Subcommittee. He would have a card and he would go in and pay for

it, but he has got a defined contribution.

Mr. BUTLER. I strongly feel it can be done. I am more than happy

to share with you some of the material that we prepared in the

past suggesting exactly that. You are talking about a combination

of things. First looking at Medicare, at defined contributions to people. And second, you are looking at changing the way the tax system operates to do two things, to enable people to obtain the means

they need through some kind of refundable credit, and ending this

bias in the current system towards one type of organization for

healthcare for the working population, which is through the place

of employment. This also means looking at the role of other intermediaries to help to pool people together so that you don’t have to

go through the employment system. I think that a number of ideas

along these lines should be looked at. It is a continuum.

I think it’s very important that we have a healthcare system in

this country which is a continuum, whether one is elderly, working

population, or unemployed.

Mr. COOKSEY. Dr. Ginsburg, do you have an opinion?

Mr. GINSBURG. Yes. The major contribution that employers have

made in their provision of health insurance is forming a group in

which everyone or almost everyone is going to be buying insurance.

Of course our tax system has distorted things because there’s an

additional incentive to get insurance through employers.

I could see a lot of advantages over the long-term to phasing employers out of the health insurance area. But what we need to replace them with is a strong mechanism to create and govern the

health insurance market. I wouldn’t want to have a situation

where everyone bought their health insurance in the individual

market with tax credits because that market has long failed. It has

not well served people who can’t get insurance through employers.

So I think that there is an important need, whether you call it

a purchasing coalition or a purchasing cooperative, to have another

entity that people go with their tax credits to find out what qualified plans are available, what the choices are, and what it costs.

I think that would work, but if we don’t set that up, then we could

lose a great deal.

Mr. COOKSEY. Ms. Lewin, I liked your term ‘‘fire wall.’’ I understand that analogy. Do you think it can be done?

Ms. LEWIN. I agree with Paul. First of all, I think everything is

possible. I think a key thing with the defined contribution is of

course where do you set the contribution. If people feel that they

can seek valuable and essential healthcare services, it’s going to be

more politically acceptable. But I think the problem with the

voucher idea is first of all, at what rate do you set the voucher. But

then also, what is the purchasing capability of people with that

chit. I mean there are some people that will be much more disadvantaged.

So I do agree with Paul. I think if you set in and develop also

at the same time an infrastructure, where people can be well-informed about their options and also that they can join various
120

groups that will help them purchase more effectively, I mean I

think clearly we’re moving in that direction, even if we don’t say

it. Many of the employers now basically give a defined contribution.

They say this is the rate to buy our standard managed care package. If you want to buy something else, it’s out of pocket. So that

I think that defined contribution is a trend that we’re seeing more

and more. Whether we can make it the major way that we pay for

healthcare services, I think remains an open question.

Mr. GINSBURG. We very much are going toward the defined contribution. In the employer market it’s getting to that point where

a lot of employees have confidence in their employer that their defined contribution will be enough to enroll in a plan that is adequate. The challenge for making a Medicare-defined contribution

acceptable is to convince the beneficiaries that the contribution will

be set high enough so that a plan that is called acceptable, whatever that means, will be available, as opposed to allowing it to

shrivel over time so that more and more personal resources are

going to have to be used to getting a ‘‘adequate’’ plan.

Mr. BUTLER. If I could just add too, however, that that issue with

the defined contribution is real, but it’s not unique to the defined

contribution approach. It’s also true of a defined benefit. If you say

we’re going to give you all these benefits, but then you say we’re

not actually going to pay physicians and hospitals adequately to

provide them, you are in fact reducing the value of the benefit.

So while I agree with that point about the defined contribution,

it’s not unique to the defined contribution.

Chairman THOMAS. The fundamental problem has been that we

started out with a program rooted in the historical structure of the

cost plus defined benefits. It never ever had the built-in flexibility

to make the kinds of adjustments because your argument is that

people are going to worry about whether or not the plan can adequately cover the benefits that were presented. Had it had enough

flexibility for changing management delivery structures, you could

have maintained a number of benefits at a savings. So it’s just a

big chicken and egg problem that we have begun to address.

I think, Stuart, you are absolutely right. We can ratchet down

payments to doctors and hospitals and say we have maintained a

defined benefit program. It’s just that we have a hollow shell for

benefits and the rest of it.

The concern to me goes back to the basics, how can the taxpayer

get maximum value for the dollar? To me it is in setting a structure which gets us more out of it, more into a policy, and create

a degree of flexibility that whatever it is that we are able to deliver, it’s the best that we can deliver for the dollar amounts, rather than talking about everybody in the U.S. gets the best medicine

available. Frankly, there are not enough bucks in the system to deliver that in terms of what the private sector can do for people who

have open-ended dollar amounts. That may be the subject of another hearing.

I appreciate all of you coming. Without any further questions,

the Subcommittee stands adjourned.

[Whereupon, at 1:13 p.m., the hearing was adjourned subject to

the call of the Chair.]

[Submissions for the record follow:]
121
122
123
124
125
126
127
128
129
130
131
132
133
134
135
136
137
138
139
140