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STRENGTHENING AND IMPROVING

THE MEDICARE PROGRAM

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

JUNE 6, 2003

(

Printed for the use of the Committee on Finance
COMMITTEE ON FINANCE

CHARLES E. GRASSLEY, Iowa, Chairman

ORRIN G. HATCH, Utah

DON NICKLES, Oklahoma

TRENT LOTT, Mississippi

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

CRAIG THOMAS, Wyoming

RICK SANTORUM, Pennsylvania

BILL FRIST, Tennessee

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MAX BAUCUS, Montana

JOHN D. ROCKEFELLER IV, West Virginia

TOM DASCHLE, South Dakota

JOHN BREAUX, Louisiana

KENT CONRAD, North Dakota

BOB GRAHAM, Florida

JAMES M. JEFFORDS (I), Vermont

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

KOLAN DAVIS, Staff Director and Chief Counsel

JEFF FORBES, Democratic Staff Director

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(III)

C O N T E N T S

OPENING STATEMENTS

Page

Grassley, Hon. Charles E., a U.S. Senator from Iowa, chairman, Committee

on Finance ............................................................................................................ 1

Baucus, Hon. Max, a U.S. Senator from Montana ................................................ 2

Rockefeller, Hon. John D., IV, a U.S. Senator from West Virginia ..................... 34

ADMINISTRATION WITNESSES

Scully, Hon. Thomas A., Administrator, Centers for Medicare and Medicaid

Services, Washington, DC ................................................................................... 4

PUBLIC WITNESSES

Francis, Walton, Author and independent consultant, Fairfax, Virginia ........... 40

Moon, Marilyn, senior fellow—Health Policy Center, Urban Institute, Washington, DC ............................................................................................................. 43

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:

Opening statement ........................................................................................... 2

Prepared statement .......................................................................................... 57

Bunning, Hon. Jim:

Prepared statement .......................................................................................... 58

Francis, Walton:

Testimony .......................................................................................................... 40

Prepared statement .......................................................................................... 58

Responses to questions from Senator Frist .................................................... 73

Grassley, Hon. Charles E.:

Opening statement ........................................................................................... 1

Prepared statement .......................................................................................... 75

Moon, Marilyn:

Testimony .......................................................................................................... 43

Prepared statement .......................................................................................... 75

Responses to questions from Senator Grassley .............................................. 84

Rockefeller, Hon. John D., IV:

Opening statement ........................................................................................... 34

Scully, Hon. Thomas A.:

Testimony .......................................................................................................... 4

Prepared statement w/charts ........................................................................... 85

Responses to questions from Senator Grassley .............................................. 88

COMMUNICATIONS

American Pharmacists Association ........................................................................ 91

Long Term Care Pharmacy Alliance ...................................................................... 92

Pharmacist Provider Coalition ............................................................................... 93

Preferred Provider Organizations (PPOs) .............................................................. 94

Peck, Ben, legislative representative, Public Citizen’s Congress Watch ............. 105

Szemersky, Kathy .................................................................................................... 105

The White House, Office of the Press Secretary ................................................... 108

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STRENGTHENING AND IMPROVING THE

MEDICARE PROGRAM

FRIDAY, JUNE 6, 2003

U.S. SENATE,

COMMITTEE ON FINANCE,

Washington, DC.

The hearing was convened, pursuant to notice, at 10:03 a.m., in

room 215, Dirksen Senate Office Building, Hon. Charles E. Grassley (chairman of the committee) presiding.

Also present: Senators Hatch, Nickles, Snowe, Thomas,

Santorum, Frist, Bunning, Baucus, Rockefeller, Daschle, Breaux,

Conrad, Jeffords, Bingaman, and Lincoln.

OPENING STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S.

SENATOR FROM IOWA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. Good morning, everybody. I welcome everybody

to this hearing on one of the most major changes in any social program that the Federal Government has had. This would be the first

major change in Medicare since 1965 when the program was instituted.

Obviously, at a hearing like this, we are exploring ways to improve Medicare. This is an issue that is very familiar to this committee. In fact, since 1999, the Finance Committee has held 29

hearings on the Medicare subject generally, and 7 of those have

dealt specifically with the Medicare prescription drug programs.

So we ask the question, why do we then have yet another hearing? Next week, this committee will do the historic steps that I

have described. We will be marking up legislation to create a prescription drug benefit within Medicare.

Last year, the committee process was bypassed. We debated prescription drugs on the floor of the Senate without the due consideration of the Finance Committee, and that was beyond the control

of the Chairman of the committee at that time.

But this is a different year. We have an eye towards mark-up

next week. In the tradition of this committee’s bipartisanship, several members requested today’s hearing to further examine various

policy questions and options.

Many look to the Federal Employees Health Benefit Program as

a model for Medicare. Federal employees all over the country, even

in rural States like mine, have a choice of private health plans.

Many of these plans are preferred provider organizations, or what

we call PPOs. With the quality and innovation that PPOs offer,

many believe that the Medicare program could be strengthened
2

and improved by developing such an option for Medicare beneficiaries.

The health policy experts that we have here today are able to

shed some light on what these PPOs are all about, how they work,

and how they could be used to deliver better health care for our

seniors.

Our first witness will be Mr. Tom Scully, Administrator for the

Centers for Medicare and Medicaid Services. He is going to be followed by our second panel, which includes Walton Francis, an author and independent consultant, and Ms. Marilyn Moon from the

Urban Institute, who I first met, I guess, in the decades of the

1980’s when she attended a hearing in Iowa that I had.

All three of these people have been deeply involved in health policy analysis, research, and administration for many years and we

are fortunate that they can join us.

Senator Baucus?

OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR

FROM MONTANA

Senator BAUCUS. Thank you, Mr. Chairman.

First, I want to thank you for your willingness to work with me,

and not only your willingness, but your inclination just to work

with Senators to get results and get solutions. This is another example of how you have done that, Mr. Chairman, and I deeply appreciate it.

The CHAIRMAN. I thank you.

Senator BAUCUS. You are welcome.

I would also like to thank other members of the committee who

also have worked very hard on Medicare for a good number of

years. I see Senator Breaux on my immediate right, who is probably at the forefront of Medicare reform and has been for many,

many years.

We are here in significant respect because of his early work in

Medicare. In addition, Senators Snowe, Hatch, and Jeffords for

their work over the years. They have spent a lot of time helping

us get where we are.

Now, some may take issue with the speed of these deliberations.

While I do not agree with them in all respects, I will say this. I

firmly believe that we should not proceed until we have a cost estimate of the plan from the Congressional Budget Office.

My understanding, Mr. Chairman, is that perhaps Sunday is the

date that CBO has said they will give us a final estimate. It is very

important to me personally that we get that estimate before we

proceed to a mark-up. If we do not have those numbers, Mr. Chairman, we are going to have to have a discussion as to where we proceed from there.

We are at an important point. Sometimes there comes a time

when you have to fish or cut bait. We have $400 billion on the

table specifically earmarked for Medicare reform and prescription

drug benefits. We have been at this point before. We had a passby in the past. Now is the time to act.

Yes, it would be nice to have more funds available for this policy,

and yes, a richer benefit would be more desirable. But the question
3

is, will we let the opportunity to use these funds pass us by again?

I do not think so.

This time it is going to be different. This year I believe the stars

are much more closely aligned. Chairman Grassley and I have

worked together to put a solid framework on the table that I believe will help seniors.

The President is interested in finding a solution here. I think

most seniors are interested in finding a solution. There are just

more people that want to work together this year, I find, than in

past years.

This is not a perfect package; nothing ever is. Sure, there are

provisions that I would like to see in the bill and others I might

not have included. But I think it is a good bill and a good start toward helping seniors get the prescription drug coverage that they

need.

Getting everything you want is not what Congress is about. None

of us can pass a bill by ourselves. The bill we pass will be a product

of many different opinions, many different points of view. Too

often, it feels as though people do not want to even try to work together.

But by not working together, the only people we would be hurting would be the ones we are elected to serve. The framework that

Senator Grassley and I have outlined publicly yesterday would establish a voluntary drug benefit under a new Part D of Medicare.

If a senior decides to join a private managed care or preferred

provider plan, then the prescription drug benefit would be rolled

into that plan. If a senior decides to stay in traditional fee-for-service Medicare, then the senior would receive drug benefits through

a stand-alone plan. But the value of, and the subsidy toward, the

prescription drug benefit would be equal for seniors who move into

private plans or who stay in fee-for-service.

Unlike the President’s plan, this proposal does not force seniors,

90 percent of whom are in traditional Medicare, into a private plan

that they neither want or need. This is especially important to

rural areas like my State of Montana, where most seniors do not

have the option of moving into a private plan, because those plans

just do not exist.

That leads me to my next point. Under our proposal, Chairman

Grassley and I included a strong government fall-back. Seniors

must have access to at least two private plans for a prescription

drug benefit or the government will provide a fall-back plan. If

there is not true competition, then traditional Medicare will provide the fall-back.

We have also focused on making sure that the drug program is

accessible and affordable for our low-income seniors. Low-income

seniors would pay more than the minimal cost sharing at all levels

of spending. We have done much to eliminate what people called

a ‘‘donut’’ of high co-payments for low-income seniors.

I have a good feeling about the progress we have made. We are

on the right track. The proposal Chairman Grassley and I are

working on is still very much dependent on the CBO score which

we expect to receive Sunday. I anticipate that changes may need

to be made, but we are in a good position.
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I would like to thank the Chairman for seizing this opportunity

to work together. I would like to extend an invitation to all of my

Finance Committee colleagues and ask them to join us to work together to develop this historic Medicare prescription drug bill.

I believe that it is time, time to take advantage of the opportunity that is available to us and pass a good bill, and time, more

importantly, to help our seniors. Thank you. Thank you, Mr. Chairman.

The CHAIRMAN. Thank you.

Our first witness is Tom Scully. Would you proceed? I have already introduced everybody, so would you proceed with your statement? We would like to have it be fairly short so we can have time

for questioning. I hope that does not bother you too much. I mean,

like 5 minutes. Is that all right?

Mr. SCULLY. As fast as I can, Mr. Chairman.

The CHAIRMAN. All right. Go ahead.

STATEMENT OF HON. THOMAS SCULLY, ADMINISTRATOR,

CENTERS FOR MEDICARE AND MEDICAID SERVICES, WASHINGTON, DC

Mr. SCULLY. Thank you, Mr. Chairman and Senator Baucus, for

inviting me to speak today.

Medicare is a terrific program. No one over the age of 65 is uninsured. It is a community-rated social insurance program and seniors love it, with good reason. Seniors and the disabled depend on

it and it has been a very trusted part of the social fabric for many

years.

However, it is based on a 1965 Blue Cross model, as you mentioned, and we really firmly believe it is a great step forward to

make Medicare look like a 2003 Blue Cross model, and to modernize the Medicare program to make it more responsive for seniors and disabled.

Medicare, which as you mentioned I run, has great provider participation. But by statute, we fix prices. We do not negotiate with

providers. We make no distinction for price, volume or quality.

Again, while it is a wonderful program that covers everyone, we

think it is a very inefficient model.

For example, inpatient prices for hospitals went up almost 10

percent last year; physician spending, Part B of Medicare, went up

almost 9 percent last year; home health about 8 percent; durable

medical equipment over 20 percent.

A couple of other examples illustrate how our program is quasinon-functional, such as average wholesale price for drugs. As you

all know, we consistently pay about 25 percent too much for the

outpatient drugs that we pay for, and we have a 30 percent inflation in Medicare drugs last year.

Additionally, in one of the greater loopholes in the Medicare program last year, we paid $2.1 billion in hospital outlier payments

to the wrong hospitals for the wrong services, and did not even

know it. We had done that 4 years in a row. That is 2 percent of

total hospital spending.

In our centrally-run system, it went out the door with us understanding it. We do not believe that would happen in a modern insurance system where we understood the dynamics of what was
5

going on. I think those are just some small examples of why we

think the Medicare program needs to be fixed.

The President and the administration started out over a year ago

trying to figure out how we could come back and get over the hurdles that had slowed down and prevented a compromise in the bipartisan Medicare Commission that Senator Breaux was so involved in a few years ago.

We sat down and tried to spend a lot of time talking to Senator

Breaux, Senator Rockefeller, Bruce Laddock, one of my predecessors, Stu Altman, and many others to figure out how we could

come up with a compromise that would move the ball forward.

The two things that seem to hold up the Medicare Commission

above all, were raising the retirement age to 67, which we did not

do in the President’s framework, and the premium support model,

which, while we strongly support it, obviously was controversial

and some people thought would push the traditional Medicare program into competition with private sector health plans that might

drive up premiums.

We also affirmatively decided not to do that. So we really set out

to get over this and try to come up with a kind of bipartisan framework for compromise that you and Senator Baucus have moved forward today.

We set out to address this so that, in 15 years—I can tell you

that President Bush for sure feels that when he comes back in 15

years, he wants to see the Medicare program be better and improved and provide better services.

I worked with many of you since the beginning of the first Bush

administration in 1989 when I worked at OMB, and I can tell you

that when I came in to run the program 2 years ago, it is basically

the same program it was in 1989. I think we all feel very frustrated with that and we do not want to come back in a decade and

a half and find out it has not changed again.

Let me just briefly outline some of the strongly-held views in our

framework that we wanted to accomplish. One, was a viable PPO

option. We believe that over 70 percent of the people under the age

of 65 have chosen that option in the last decade.

We have more than 130 million people in the commercial sector

and PPOs. When people are given the options, they tend to choose

that one and we think it one that is very viable in Medicare. We

think we should have a PPO structure that will promote competition.

We believe that traditional Medicare has to continue to be available as it is for all seniors. The President feels very strongly about

that. We believe there need to be reforms in both the traditional

Medicare program and the new Medicare programs to provide more

efficient and cost-conscious behavior.

The President personally very strongly, I can tell you, believes

that low-income seniors need extra protection for prescription

drugs. I can assure that in our debates over this in the last 12

months, the number one thing he has consistently said is, make

sure we provide prescription drug coverage, especially for the lowest income.

We also believe that this can be done within a $400 billion scoring. We believe that is the appropriate amount and it is in the
6

House and Senate Budget Resolutions. We also are very anxious to

see what the scores of these various packages work out to be.

I have attached two charts to my testimony that I think show

why we feel strongly that the PPO option, while all seniors should

get to keep the traditional Medicare option, is a very viable one.

When seniors now choose Medicare, the bulk of seniors choose the

Medicare plan and the average is a $7,000 per-senior benefit; they

pay $700, the government pays $6,300.

On top of that, they generally go out and buy Medigap insurance

if they are not on a retiree health are plan. The average of the

AARP Medigap plans this year—there are 10 of them—is $2,200

for an individual. That is a lot of money. That is all out of the seniors’ pockets.

On top of that, if you look at the mid-range of what we think the

actual value of the House and Senate plans would be and what we

know from our own deliberations in the administration, a drug benefit is going to be about a $1,200 actuarial value in additional insurance for a drug benefit. Conceptually, the senior would pay a

third, about $400, and the government would pay two-thirds, about

$800. These are all kind of very generalized numbers. But when

you look at that, the average senior that chooses traditional Medicare gets a community-rated, well-structured Medicare program

that covers about 60 percent of their costs.

On top of that, they buy a Medigap plan, which generally is not

community-rated, is generally a very poorly structured insurance

plan, does not create great value, and on top of that they are going

to buy another individual, frequently not community rated drug

package. That certainly is a viable option for seniors. It is one that

we think we should provide as an option in the traditional Medicare.

But we believe that what most people under 65 get, and what we

think many seniors would prefer, is the second chart, which is an

integrated benefit where you get your hospital coverage, your physician coverage, your supplemental coverage, your drug coverage in

one package through a Blue Cross plan or a CIGNA as a PPO. It

may not be for all seniors, but it is what 70 percent of the people

who are under the age of 65 choose.

We think that if seniors have that option, they will get a much

more efficient insurance package with much better benefits in a

much better structure that is a lot easier for people to provide in

an efficient model. So, that is why we feel strongly, and we appreciate very much that your bipartisan agreement has PPOs as an

essential function of that.

Let me just say in conclusion, Mr. Chairman, based on a quick

review of your agreement, which we only looked at in the last 24

hours, we have a lot of questions, I think, as you still do.

But the President sent up a framework to Congress with good

reason. We did not send up a 200-page legislation, we sent up a

framework. The President feels, you legislate.

We have tried to work in partnership with people on both sides

of the aisle to get this done. We have a lot of concerns. As you

know, we did have some changes and different ways we provided

a drug benefit.
7

We would like to ensure that people move into what we consider

more efficient plans as fast as possible. We think that is better for

seniors in the long run. We may have some disagreements on how

that is done, but I think the administration feels that your agreement is clearly a step in the right direction.

Again, we have not seen the details in the bills, so we would like

to at least reserve the ability to look at scoring and look at other

details and move forward.

But, clearly, the President wanted to get something done this

year. He has said that repeatedly all winter. He said that when he

set up this framework. Our goal is to get this done. It is long overdue.

We have tried to make sure this worked in a bipartisan way all

year. We are very happy that the committee has started off in a

bipartisan way. We are very interested in working with the committee this year to get this done.

We are sure there will some differences in the House and some

differences in the Senate, but our view is that the real goal here

is to get this done before the end of the year. Many of us have

worked on this for decades and it has not happened, and we believe

that this is the year to do it.

Thank you, Mr. Chairman.

[The prepared statement of Mr. Scully appears in the appendix.]

The CHAIRMAN. Thank you, Mr. Scully.

We will take five-minute rounds, and they will be in this order:

Grassley, Baucus, Bunning, Breaux, Conrad, Bingaman, Kerry,

Thomas, Snowe, Santorum, Nickles.

I will just have two very broad questions for you and I will ask

them separately. You said that the centerpiece of the administration’s Medicare reform plan is more private choices, more competition.

Now, it has been said that the administration really wants to

just—I suppose different people have different meanings of the

word ‘‘privatize’’—privatize Medicare. Is it correct to see the administration’s proposal as attempting to privatize?

What would be the role of CMS relative to the private plans in

the administration’s proposal? What protections would consumers

have if something along the lines the administration proposed

would be enacted? I ask that question, and obviously Senator Baucus and I have deviated to some extent from what the administration has wanted.

Mr. SCULLY. Mr. Chairman, I think the basic goal, as we have

noted, is to privatize Medicare. It is basically, the most optimistic

assumptions for having people move into private plans, we are

probably talking about less than half the people.

So as far as the eye can see, you are going to have more than

50 percent of the people in traditional Medicare. We think we can

give them a more efficient option.

The Federal Employees Health Benefit Plan is a government-run

program that covers eight million seniors and beneficiaries, and it

is done through private insurance companies, but run by the Federal Government. Likewise, Tricare, which is another one of our

models, which is the Defense Department’s program that also uses
8

private insurance companies, but is run by the Federal Government.

We think the great benefit of Medicare is that it is a communityrated insurance plan that everybody is in, that is run by the Federal Government, that provides a social insurance benefit at the

same cost to everybody. That does not mean that the most efficient

way to run it is to have my employees set prices in Baltimore,

which is what we do. We believe there are more efficient ways to

go. Clearly, the President’s plan envisions having any senior and

anybody who is even 25 years old now, if they want to stay in traditional Medicare forever, they can.

We also think that people under 65 who move to these hybrid

PPO plans that have been very successful, very popular, right now

if you are 64 years old and you turn 65 and you are in a Blue Cross

of Iowa plan, you have to drop out of Blue Cross of Iowa’s plan,

enroll in Medicare, and buy a more expensive, less efficient

Medigap plan.

We think many people would greatly prefer as an option to stay

in the plans they are happy with and probably get better benefits

for less cost, but it is purely optional.

The CHAIRMAN. And consumer protection. You did not address

that.

Mr. SCULLY. On consumer protection, again, Mr. Chairman, the

President’s plan was a framework. We spent a lot of time thinking

about consumer protections. There would be a separate—under

both your proposal and the President’s—agency broken out of my

agency under HHS, Center for Beneficiary Choices, I believe is the

label you had.

We are very supportive of that. We are very concerned about

making sure that we have a separate agency that officially oversees

these new programs, and we would be very supportive of any consumer protections that we could put in.

The CHAIRMAN. All right. Then my next question comes from

something you hear me and Senator Baucus talk about quite a bit,

representing rural States: the President’s plan would rely on private preferred provider organizations, a type of health plan that

can provide more integrated care and in which many Americans

are currently enrolled.

But what assurances can you provide us that these PPO plans

will be willing to serve Medicare beneficiaries in rural communities? I use as a basis for my question working so hard to increase

reimbursement for Medicare+Choice for rural America, and we had

less than $3,000 reimbursement in 1997, and we have that up to

about $490 per month as a national floor.

We still only have one county in my State that is served by

Medicare+Choice, and that county was being served even before we

raised the floor. So, we need to be sure that these organizations

serve rural America.

Mr. SCULLY. Mr. Chairman, I think they already do.One of the

reasons we came up with the Medicare+Choice plan is that HMOs

generally do not exist out of urban areas, or certainly larger populations.

Despite our best efforts to have Medicare+Choice plans go to

rural areas, that has not happened. PPOs generally exist in rural
9

areas, and 92 percent of the doctors in the United States are involved in a PPO network.

Last night, I called Senator Baucus’ and my mutual friend, Dan

Muniack—I did not get ahold of him—out in Jordan, Montana,

where we spent a lot of time working last year where there is one

physician’s assistant and one hospital, and nobody within 100

miles in any direction. He is a member of Montana Blue Cross and

is enrolled in their system.

I was in North Dakota a couple of weeks ago with Congressman

Pomeroy, and virtually everybody in the State of North Dakota

under the age of 65 is in the Blue Cross of North Dakota PPO.

So I think the fact is, when you look around the country, the difference between HMOs and PPOs is that PPOs effectively are feefor-service that are broadly, broadly available in rural areas.

The CHAIRMAN. Thank you.

Senator Baucus?

Senator BAUCUS. Yes. Tom, as you very well know, having

worked at OMB and now at CMS, and are very involved in actuary’s estimates that say how efficient these PPOs will be or not be,

that is, will they be more costly in delivering, let us say, service

or not?

Actuaries at CMS have found them to be pretty cost-efficient,

whereas CBO, which is the organization that we have got to go by

here, does not think they are going to be very efficient and actually

are going to cost more.

What is the basis of that? Clearly, there are differences of opinion, but in some sense that is irrelevant because we go by CBO.

That is the organization that decides what these costs are or are

not. What do you think explains the difference between the two estimates?

Mr. SCULLY. Unlike in some tax scoring, generally CBO, and

CMS, and the former HCFA, actually, generally agree within half

of a percent. I think traditionally, over many years, the CMS actuaries have been perceived to be extremely nonpartisan and objective. So, I do not think there is any political difference. I think it

is purely a substantive difference in judgment.

I have great respect for CBO. The top two health people at CBO

used to work with me at OMB. They believe that, by their information, because Medicare can set prices, and obviously we can set

prices wherever we can set them, that Medicare pays 10 to 12 percent less per procedure on average, in some cases, than private

health plans. Our actuaries do not necessarily agree with that.

The other thing is, our actuaries really believe that there is a lot

more utilization control and management. Although it is very loosely managed, the PPOs do manage utilization.

I think CBO will probably—and they will have to give you their

score—find that the PPOs cost more than fee-for-service. Our actuaries believe that the PPOs cost—it is not a huge savings—about

1 percent less than Medicare fee-for-service.

Senator BAUCUS. What accounts for the difference?

Mr. SCULLY. The difference is that our actuaries have looked extensively—obviously I am biased towards my actuaries—at Tricare

and the FEHBP model. Also, for the last year we have had 34 PPO

demonstration programs going around the country, and we have ac-
10

tually had people coming in and telling us what they would pay for

the services.

Our experience has been that the better PPOs are coming in at

below fee-for-service just a little bit. This is not going to make up

for the cost of a new drug benefit, but we do believe that they are

going to provide better benefits.

To simplify it, and just to personalize it, my mother, for instance,

has been in the hospital for seven weeks on Medicare. I think she

probably has a $400,000 hospital bill, is my guess. She has had

four MRIs and two CAT scans in three different hospitals, and

there is no utilization management. It is a wonderful program, but

if a doctor certifies it, Medicare does the test.

HMOs probably push people too much in utilization, but PPOs,

at least somebody at Blue Cross of North Dakota would be calling

up saying, how many tests do we need, what is the best setting,

how long she should be in a certain setting.

Medicare has no utilization controls at all. It is basically a feefor-service/check-the-box system. I think most Blue Cross plans and

most private insurers, obviously they cost more to administer,

which is one of the other differences. But you actually have some

administrative oversight and they actually try to talk to physicians,

hospitals, and doctors and help them put people in the right place.

Senator BAUCUS. Right. But one of the provisions in this bill, at

the behest from the Senator from Arkansas, is more incentives for

disease management and coordinated care in fee-for-service.

I think it is widely recognized, as you have stated, that that is

a deficiency. That is a problem. But to say it is a problem, is not

to say we cannot find a solution. We are attempting to try to find

the beginnings of a solution to that problem.

Given CBO’s concern about that private plans are actually going

to cost more, not less, do you think we should maybe place a limit

on payments to private plans so we do not simply just allow plans

to have an unlimited tap on government spending?

Mr. SCULLY. Well, certainly we have no desire to pay private

plans more than Medicare. I mean, it is a philosophical difference

and a technical scoring difference. Obviously, we believe in competition between health plans and we have limited it to three per

region, which we believe will drive down prices and be more efficient.

So, philosophically we do not like the idea of tying prices to a

fixed cost because we think it is going to save money, but if that

is what it takes with CBO to have them get the bill through at the

right amount, because we do not agree with them, I think we are

willing to talk about that and work with you on that and we understand it. But I think we actually believe we are going to save

money on the PPOs; they do not. I understand you have to live

with their scoring.

Senator BAUCUS. Yes. They are the ones we go by. Thanks.

Thank you very much.

Mr. SCULLY. Thank you.

The CHAIRMAN. Next on the list would be Senator Bunning.

Senator BUNNING. Thank you, Mr. Chairman.

Tom, I would like for you to clear up for the people in this room

and for anybody that happens to be watching exactly who we are
11

talking about and the different ratings and eligibilities of the people in certain little boxes of seniors.

Dual eligibles. Who are dual eligibles?

Mr. SCULLY. Truly dual eligibles are people generally between

about 74 and 100 percent of the poverty level that qualify for Medicare.

Senator BUNNING. The poverty level being what?

Mr. SCULLY. I should know that. But I think——

Senator BUNNING. It is $6,555 for an individual, $8,848 for a couple.

Mr. SCULLY. Thank you. Yes. And the States pick up the cost.

Medicare has significant co-payments and deductibles. Medigap

covers those costs as well, $2,200 per individual, per year, on average. States pick up that cost for low-income people who cannot afford it and they pay the deductibles and co-payments for Medicare.

Senator BUNNING. They would be in this benefit we are talking

about?

Mr. SCULLY. This drug benefit?

Senator BUNNING. This drug benefit that we are discussing adding to Medicare.

Mr. SCULLY. Significant help for low-income seniors. Very significant.

Senator BUNNING. All right. I just want to clarify because I do

not think anybody knows who we are talking about here. Qualified

medical beneficiaries. Who are they?

Mr. SCULLY. Those are our slightly higher income category, and

they split up in a whole bunch of subcategories between 100 and

135 percent of poverty for a whole bunch of different categories of

different levels of subsidy for Medicaid.

Senator BUNNING. That number, exactly, is $8,980 for an individual and $12,120 for a couple. So, we are loading this, or trying

to load, to make sure that these lower income seniors get a better

benefit than they presently have under this program.

Mr. SCULLY. Low-income seniors will by far be the biggest beneficiary of any of these bills.

Senator BUNNING. Specific low-income beneficiaries, or SLIMBs,

as they are called. There are approximately 500,000 to 1 million of

those. Who are they?

Mr. SCULLY. Once again, a slightly higher income category of

low-income people who get slightly lesser subsidies in the States

for Medicare.

Senator BUNNING. That is a $10,760 individual and a $14,500

couple.

Mr. SCULLY. Yes.

Senator BUNNING. And qualified QI–1’s, or qualified individuals,

are another 500 to 1 million people. Who are they?

Mr. SCULLY. All right. Once again, you have the slightly higher

income category. As you go up, they get even lesser of a subsidy

from the States.

Senator BUNNING. So the people that I talk about are, if we go

from qualified medical beneficiary to the QI–1’s, we are talking

about less than 3 million people?

Mr. SCULLY. That is probably right.
12

Senator BUNNING. Three million seniors. And this benefit would

be more advantageous for them than the current Medicare Part B

and/or a supplemental, and/or Medigap, or whatever else they

have?

Mr. SCULLY. Many of them have no drug coverage now. It depends on the State.

Senator BUNNING. Well, I know that. But they would under our

new program that we are discussing.

Mr. SCULLY. I have not seen the Senate’s, but I am assuming,

from talking to staff, that the Senators’ proposal is similar to what

we did. They would all get a very extensive drug benefit that I

would assume would be between $2,500 and $3,500 per person, per

year.

Senator BUNNING. What about people that are under Medicaid?

What are we talking about doing for them, or are we talking about

doing anything for seniors?

Mr. SCULLY. Most of the seniors in Medicaid, depending on the

State, have waivers, like Illinois, up to 200 percent of poverty. But

most States, the Medicaid coverage is the dual eligibles, the

SLIMBs, and the QI–1’s you discussed.

Senator BUNNING. Well, that is what I mean. Are we going to do

something in the new benefit or are we going to keep them in Medicaid?

Mr. SCULLY. The new benefit essentially covers all of them

through Medicare. Some States, it depends on how it is structured.

I am not certain how the Chairman and Senator Baucus have

structured theirs, but under the President’s proposal they would all

be covered under the new drug benefit, with a very significant drug

package.

They could potentially stay in some of the existing programs, like

PACE in Pennsylvania, and others, depending on how it is structured. But they will all get a very, very significantly increased subsidy for drugs.

Senator BUNNING. The reason I brought that up, is that there are

a lot of people that are senior citizens that do not understand that

this benefit is going to take care of the extremely needy in our

country, the extremely needy seniors, that they are prioritized in

this benefit.

We are also going to have the benefit for those who I do not

think we should, the Warren Buffetts of the world, and everybody,

almost, sitting around this table here at the committee level who

does not need a prescription drug benefit on their Medicare. They

all can afford to buy one.

Mr. Chairman, my time is up, but I had a lot more questions.

But, thank you.

The CHAIRMAN. Thank you.

Our next person is Mr. Breaux, but our practice has always been,

if the Democratic and Republican leaders are here and they are

under time constraints——

Senator BREAUX. I would be happy to yield. It is no problem.

The CHAIRMAN. I would call on, in order of arrival, Senator Frist,

then Senator Daschle, if you want to have us take you out of order.

Senator FRIST. Thank you, Mr. Chairman. I will be very brief.
13

Let me just say thank you, both of you, the Chairman and Ranking Member, for today’s hearing. We have set aside 2 weeks on the

floor and really backed that out starting a couple of months ago.

Although people recognize it as an ambitious timeline, it is built

upon a lot of the discussions and debate this committee has had

with the 28, 29 hearings we have had in the past. So, I am very

comfortable with the timeline that is on the table and we will adhere to that timeline.

I want to thank both you and the committee for making that possible, putting this hearing together so that we can continue to engage in the discussion of the issues that are so important to this

program, to the seniors, and to the future of the practice of delivering quality health care and health care security for our seniors.

So, I appreciate that.

Let me just jump straight in with one question that has to do

with the paperwork regulatory burden that faces the caregiver, the

physician, the nurse, in hospitals and in the outpatient setting

today.

It is well-known that Medicare today, because of the evolution of

the program without major modernization, has an increased regulatory burden that gets translated down to the patient care level.

We all recognize that we need better value for the investment of

whatever dollars that are ultimately put into the Medicare program today and into the future as we go through this major expansion of benefits and this new investment.

A recent Price Waterhouse Coopers report found that caregivers

spend, on average, at least 30 minutes on paperwork for every hour

of patient care provided for a typical Medicare patient in certain

settings. Thirty minutes of paperwork for an hour of patient care.

Part of this is due to Congressional mandates that we come

through as we attempt—because that is our handle in micromanaging and telling you or Medicare what to do in terms of the regulatory burden.

You, as the administrator, have tried to correct some of this. Yet

we had the Office of Personnel Management, at least, tell us that

they have a great deal more flexibility in administering the program that is not a model for what we are doing, but one that we

need to draw upon with 40 years of experience with the Federal

Employees Health Benefit program. You understand it, and are in

the middle of administering Medicare in terms of this regulatory

burden.

What advantages will we see in this new, enhanced Medicare Advantage option? The purpose of it, I understand, is to have an upto-date delivery system that includes preventive care, catastrophic

care, chronic disease management, all the sorts of things that are

so lacking in traditional Medicare today.

Not that we cannot improve traditional Medicare as well, but in

terms of the regulatory burden, increased flexibility so that we can

adapt with the times as we figure out even a better way to deliver

care, it is not locked in stone like traditional Medicare has been.

Mr. SCULLY. Well, if I can use an example. I was in North Dakota a couple of weeks ago with Congressman Pomeroy and Congressman Moran who chaired the rural caucus in the House. I explained to them, because there is a lot of fear in rural areas of how
14

this is going to change things, that if you are 64, you are, in North

Dakota, almost always a member of Blue Cross of North Dakota,

and you negotiate, as a hospital or doctor, with the local insurance

company that you know and they have a very good relationship

with, and things work out pretty well.

If you are 66, Blue Cross of North Dakota, who is my contractor,

still pays you, but they pay you off of a rate schedule that is fixed

in Baltimore by my staff, with lots of rules, and you basically the

same people who are paying out of the Federal pot if you are 66

as out of the local Blue Cross if you are 64.

I think the providers in North Dakota, and every other State in

the country, in Tennessee, would find that—doctors and hospitals

never love insurance companies, but they generally have a much

more rational local relationship in working out care and payment

than they do when they get national prices fixed in Baltimore and

Washington.

I guess one of my frustrations is, and I think it is all around the

country, is that we pay every doctor the exact same amount,

whether they are the best doctor in Nashville or the worst, and

every hospital the same whether they are the best one in Pittsburgh or the worst. I think local flexibility with local ability to

adapt to local practice patterns and local care is the best thing that

will come out of this.

Senator FRIST. Thank you.

Thank you, Mr. Chairman.

The CHAIRMAN. Senator Frist, Senator Baucus and I are going to

try to meet the deadlines that you have set to have this ready for

the floor. But Senator Baucus has made a very important point

several times, and I want to emphasize along with him, that a lot

of this depends upon CBO getting us scores.

Now, they have promised to get us scores by Sunday night, and

we will need a little time to adjust according to what they score

various things. But we need to keep that in the back of our mind.

Senator FRIST. Mr. Chairman, let me just add, it is absolutely

critical. The reason for setting aside, months ago, when we were

going to do this, is to allow us, CMS, as well as CBO, to prepare

and to be available during that period of time.

So I will personally, and I think the message from this committee is, tell CBO we need them to focus, and focus almost exclusively, hopefully, on this. Because even in the amendment process

as it goes forward, it is going to be very important that we get feedback on an online, ongoing basis as we go through to accomplish

what is ambitious, but is a goal that we will meet. We will complete this before the July recess.

The CHAIRMAN. Senator Daschle?

Senator DASCHLE. Thank you, Mr. Chairman. I would share your

concern about CBO, not only for the bill itself, but the opportunity

to offer amendments. Obviously, at times if a CBO score is not

available and an amendment is not provided the opportunity to be

offered, and I would hope that we could offer amendments even if

CBO has not scored it just because of the time constraints under

which we are working.

Let me begin by complimenting our Chair and Ranking Member

on the rural provisions in this bill. I think that it is one of the best
15

sets of rural provisions we have seen. Rural providers are addressed here in ways that we have wanted for some time, and I am

grateful to both of you for your advocacy of the attention to rural

needs.

I want to welcome Tom Scully. We appreciate his counsel on

many of these issues as well.

I want to focus, in the time that I have, on just two issues. One

has to do with the model, the other has to do with the design, of

the package. I would like to ask a question in regard to both because I have concerns about both.

Insurance companies generally have always been reluctant to get

into this, in part, because insuring seniors’ prescription drugs is a

little bit like insuring a haircut: you know it is inevitable, and because of that you cannot make the actuarial tables work well.

So what we are, in essence, doing, is we are paying the insurance

companies to provide the coverage, to go into areas of the country

that they would not normally go in, and maybe to the whole country, getting into a business that they normally would not do because, actuarially, it is not sound. So we are incenting them, we

are paying them.

The question I have, I guess, is is that the best use of those resources, to pay the companies rather than to provide the benefits?

Because it is a trade-off. It is either more benefits or more incentives to the companies to provide the benefits. But that money is

going to go in one of the two pots.

I guess it is for that reason fundamentally, as we have considered the models, that we have said, why not put the money in the

benefit side rather than in the incentive side for the private sector

to do something they otherwise would not do, especially if you are

an advocate of the free enterprise system? So, I would love your

comment on that, if I could.

But the second one has to do with the concern for certainty.

When I go home and talk to my mother, talk to seniors in South

Dakota, the one thing they all tell me, is that they do not want

something confusing.

I would not want to admit publicly my mother is a certain age,

so I do not want anyone to make this connection here. But if you

are in your 80’s, let us say hypothetically, I think what you desire

is to be able to make decisions, not with the advantage of a lot of

professional help like we get with FEHB or that we are able to do

as professionals, but they want the certainty, they want the simplicity.

I have four concerns in regard to the complexity of this system

that I hope we could address quickly. Not each one, necessarily, but

to address this issue.

The first, is the volatility of the system. The volatility is what

concerns me the most. Under the bill, we are going to require that

two PPOs, two managed care organizations, come into an area, let

us say South Dakota, and we give them a time frame within which

to do that.

If they do not, then we say, well, Medicare has to kick in. But

even if they do, even if we find two, they only have to stay there

a year and then they can leave. If they leave, then Medicare kicks

in for a year and it can leave. So I see a scenario where the PPOs
16

come in, they leave. They say they cannot do it, even with the incentives. Medicare comes in, then somebody else says, no, I am

going to try it.

With each new organization in and out of the system, you are

going to have a senior out there saying, I cannot keep all this

straight. First it is this, then it is that.

I think, in the process, there is going to be a tremendous amount

of anxiety and concern about the benefits, about the premiums,

about the coverage, about the delivery model, about all of this at

the very time when seniors are feeling extremely vulnerable.

That goes to the second and third concerns, that is, a lack of

standard premium. If you are in South Dakota, as I understand it,

there could be a different premium than if you are in New York.

There is going to be a different benefit package. So that lack of

certainty with regard to premiums and benefits, too, are very serious concerns. The final concern, in the time I have, is this one. It

is the coverage gap.

You can put it in terms of dollars or days, but it is the same concept either way. Because of the deductible, you have no coverage

initially in any new calendar year. Then the coverage kicks in after

you have paid the deductible and you have coverage for a while.

But then because of the threshold—as I understand it in the bill

it is $3,450—it kicks out. You are still paying the premiums every

month regardless of whether you have the benefits, but then the

benefits kick in later on when you reach $5,300.

In this case, it would be, assuming you have a $400 per-month

drug expense, it would kick in in roughly the end of September. So

you pay premiums the whole year, you get benefits for a block of

time, you start with no benefits, and then you get benefits at the

end of the year.

Again, it goes to this lack of certainty, the volatility of the issue

that I think is a serious concern that I wish somehow our committee and this Senate could address before we send this bill out

to be implemented by you, Tom.

So could you, in the short time we have left—and I realize I have

taken most of my time and I do not want to abuse it—share some

thoughts about those concerns.

Mr. SCULLY. I hope I will get to all of them, Mr. Leader. But let

me say, first, just to start with the standard premium—and again,

I do not know how Chairman Grassley and Senator Baucus designed theirs—the President’s proposal had a standard premium,

so the premiums for the PPO would be identical across the country.

Now, the cost to the government might vary, just as they do in

Medicare right now and just as they do in HMOs right now. But

at least in our design, the premium was flat across the country and

it was slightly below the Part B premium. So, I understand that

concern. We were very concerned about that and spent a lot of time

on it.

Second, we understand seniors are nervous. That is one of the

reasons that we went to great lengths in our plan—even though

philosophically we agree with a lot of things in the Medicare Commission—to remove any uncertainty about changing the existing

Medicare program.
17

In the President’s proposal, I believe in the committee’s outline,

traditional Medicare never changes. If you like traditional Medicare, it stays exactly as it is. The premiums are built on the existing population and nothing changes.

So anybody that wants to stay in traditional Medicare as it is

can stay in it indefinitely. In fact, at least under our proposal, and

I believe under the committee’s, everyone in the country gets more.

So, even under our proposal every senior would get exactly what

they have now, plus a catastrophic drug benefit with no additional

cost.

So to the second point. I do not understand the details of your

chart, but would be happy to get into it further. But I think one

of our frustrations is, I started working in 1989 to try to save catastrophic from being repealed, as many other people in the Senate

did. We have been flailing away, trying to get a drug benefit passed

for 15 years. I know that every single senior will do better and get

more drug coverage under these plans.

Our frustration is, nothing has happened in 15 years. If this plan

passes, it may not be perfect. We probably will tinker with it for

many more years. But every single senior will be doing better than

they are today. There may be some gaps in coverage, but $400 billion is a lot to spend. We think is the right way to start. I am confident that everyone will do better.

Let me just quickly mention a couple of other things on the

PPOs. I understand the great concern, and we also looked at the

package with HMOs. The HMO structure has been flawed. I will

not get into the details on that. There are many places where

HMOs have not shown up and have not worked.

PPOs are much more flexible and they exist every place in the

country. We have a lot of experience with them in Tricare, which

is a Defense Department program, and the Federal Employees

Health Benefit Program, where plans have shown up and have

stayed.

I have personally talked to the chairmen of the top 10 insurance

companies of the United States. They are all nervous about the experience with HMOs. But under this structure, I have had great

assurance, as has the President and Secretary Thompson, that they

will participate, as they have in the Defense Department programs

and as they have in the Federal Employees Health Benefit Programs, and we believe it is going to work.

But the key thing is, anybody that likes what they have can keep

it and they will get more as well. I have no doubt that there is

some accuracy in the fact that there are some gaps in our plan and

in the Finance Committee’s plan, but I think everybody will be better off there today.

The CHAIRMAN. I thank Senator Daschle for highlighting the

rural parts of this bill, the provider parts of this bill that he mentioned that Senator Baucus and I have been working on for a long

time. I would take this opportunity to explain that I think that we

do not have a realization of the importance of this for quality

health care delivery in rural America on the part of the House of

Representatives.

I would hope that we would have a united, bipartisan front in

the Senate, that this is a very important part of this legislation and
18

no bill is going to go to the President until we get this rural equity

issue taken care of.

I thank you very much. I know you are very interested and probably know more about the issue than I do, and have been very concerned about it. But, because of your leadership position, that is

the reason I am pleading with you, not because you are not concerned. Thank you.

Senator Breaux?

Senator BREAUX. Thank you very much, Mr. Chairman. Let me

be one of many to congratulate you and Senator Baucus for the

great effort that you all have been able to put together to ultimately end the long debate that we have had on this subject of

somehow allowing the perfect to be the enemy of the good.

Where some have argued that the government should do everything and that the private sector should not do anything with regard to Medicare, others have taken the position that the government should not do anything and the private sector should do everything.

What we have before the committee and the testimony today is

on a package that combines the best of what government can do

with the best of what the private sector can do.

As Tom Scully has said, this is a government-run program,

whether you stay in traditional Medicare or whether you go into

the new Medicare Advantage. Just like our health insurance for

every one of us in the Senate, it is government-run program that

merely utilizes the private sector to deliver the benefits.

And whether you are a Federal employee in New York City or

whether you are a Federal employee in the most rural county in

the most rural State of America, you get quality health care because we have combined the best of what both segments can do.

On the point that CBO has said that, well, the private sector actually pays more for health delivery services than the Medicare

program, I met with CBO. It is interesting.

They assume in their assumptions that the Federal Government

and Congress is never going to increase, in the next 10 years, the

reimbursement rates for doctors and hospitals. I will bet anybody

who believes that lunch in the city and country of their choice.

We will probably do it this month, we will do it next year, we

will do it every year. In election years we do it, and we cut in offelection years. So they assume that, well, the private sector pays

more.

They cannot—and I am not faulting them—assume that Congress is going to do this in the future. Everybody knows we are.

That is one of the reasons the numbers come back differently. The

arguments have principally been, well, this cannot work in rural

areas. I think you have talked about how rural areas will be very

well protected.

The second argument is, well, it is a different population. Medicare recipients are older than Federal employees. The truth is, the

average Federal employee under our system is about 47 years of

age. When you include the retirees, it goes up to 61. So there is

not a huge difference in the age. Obviously, Medicare recipients are

older. But if you look at the retirees in the Federal program that
19

are served, there is a great deal of similarity. So I think that if you

look at those questions, I mean, I think there is a clear answer.

The third argument, is that somehow you are going to force seniors into HMOs to get prescription drugs. I think that argument

has been taken away because, if you stay in traditional Medicare,

you are going to have the same health care drug benefits as if you

go into Medicare Advantage.

I was one who argued you ought to have a better plan if you go

to Medicare Advantage, but that decision has been made. You will

get identical plans if you are in the traditional Medicare for prescription drugs as if you go into Medicare Advantage.

The final argument that I think is made, and I understand the

argument, is the question that you have a gap. You have a gap in

the plan that, after a senior reaches approximately $3,450 in drug

costs, that we are not going to cover them until they get up to

$5,300 in drug costs.

Well, the average senior in this country spends about $2,300 on

drugs a year, so the average senior does not even come very close

to reaching the gap where the coverage does not exist. We will find

out from CBO how many people actually fall in that gap.

My estimates say it is only about 7 to 8 percent of the seniors,

because many of them do not reach that number. Others have

Medigap coverage, others have coverage from their former employers that takes care of that. So, there is a very small number, I

would argue, that happen to fall within the gap.

CBO will give us a number; others will say more. But we will

have a number from CBO before we go to a mark-up in this committee. So I think the fact is, no low-income senior ever has the

gap. If you are under 150 percent of poverty, we will pay for the

drugs throughout the gap. There will be no gap for low-income people.

Now, if we have a trillion dollars, there would be no gap, but we

do not. If we did not do catastrophic protection for seniors, we could

use the money and eliminate the gap.

But we happen to think that catastrophic protection for Medicare

recipients, which they do not get today, is extremely important. So

I thank you. I think you have touched on the issues that are important. This is a healthy debate.

Last year, we did not have a walk-through. I am not blaming

anyone. The situation was such that we did not have a walkthrough in this committee. We did not have a hearing in this committee, and we went to the floor with a bill.

This time, we have had innumerable meetings, bipartisan meetings, private meetings with Republicans and private meetings with

Democrats. We have had a walk-through with the staff, we had a

walk-through with members, and we have a hearing today. The

mark-up is not until next week.

So, I think we have gone through a procedural process of which

we all can be proud, and I think it is going to produce a product

that ultimately we can also be proud of. Thank you.

The CHAIRMAN. The next person is Senator Conrad.

Senator CONRAD. I thank the Chairman, and thank the Ranking

Member as well.
20

It is always good to have you, Tom, here. Let me go to something

you said on May 6. In the New York Times, you are quoted as saying, ‘‘Stand-alone drug coverage does not exist in nature and would

probably not work in practice.’’

As you know, the proposal we are discussing here today is precisely that. I am interested to know, what has changed since May

6 to make you believe that somehow it now works?

Mr. SCULLY. I am glad it was in the New York Times. [Laughter.] Sorry.

Senator CONRAD. Did you not say it?

Mr. SCULLY. No, I did say that. I am sure I said that.

There has been a debate on this for years. The fundamental issue

is, I think you can make it work—and I think the Minority Leader

alluded to this—in the way the bill is structured, if it does not

work, we would keep coming up with risk quarters until people

came into the stand-alone drug benefit.

The President’s package does not have a stand-alone drug benefit, for a variety of reasons. That is one of them. As you know, we

still feel strongly about a differential drug benefit. We think it is,

policy-wise, the right way to go. It is one of our major concerns

about this bill. We do think you can make a stand-alone drug benefit work.

But one of the primary reasons we like PPOs, it is hard to come

up with—and I just came up with an estimate in the mid-range.

If you have a $1,200 drug-only benefit that is voluntary, you are

going to get sicker people drawn into it and it is going to be harder

to insure.

But if you take a $1,200 drug benefit and put it on top of the

$7,000 Medicare package and you have an $8,200 benefit that includes hospitals, doctors, home health, drugs, in one communityrated package, it is a much more insurance event and it is much

easier to insure people for drugs and much easier to come up with

an insurance plan that works.

One of the primary reasons we like the PPO model, is that the

same model I have as a Blue Cross beneficiaries, on the bottom of

my card, it says, ‘‘Advance PCS.’’ Two hundred million Americans,

on the bottom of their cards, it has ‘‘Advance PCS for express

scripts.’’ Insurance companies can, in fact, deliver a drug benefit efficiently, and do for over 200 million people through the PPO

model.

Senator CONRAD. Let me just say, that is your plan. That is not

the plan that is here. I have heard discussion from some that this

is a good process. This is not a good process. I mean, I am on this

committee, I am the Ranking Member of the Budget Committee. I

have not seen any serious description of this plan yet.

I do not have legislative language, I have got no scoring of this

plan. I do not know whether this plan has any guarantees that if

there are not drug-only plans offered, that there really is a guarantee that a PBM would come in to provide that coverage.

We were told in a briefing, well, that is the intent. But if they

are only guaranteed 1 year, why would you set up all the systems

to provide coverage when you may be kicked out the next year

when drug-only plans come into the market?
21

I would say to my colleagues, I have great respect for the need

to, as the Leader says, get this done this year. But I believe we are

rushing in a way that people really do not know what they are

doing at this point. This is the only hearing we are going to have.

I heard Mr. Scully say he did not know how the premium was

designed in this plan. Well, he is not the only one. I do not know

how it is designed. In fact, it is advertised to be a $35 premium.

I find nothing that assures that it is $35. It could be $50, as long

as there are two drug-only plans that are offering it in a State.

That would lock out and prevent somebody from going somewhere

else.

Mr. Scully, the Administrator, who I have high regard for, testified dual eligibles are here. Dual eligibles are not in this plan. How

can a mistake like that be made? I would submit to you, I do not

think you got anything until last night or yesterday. Can you tell

me on what basis you are testifying today? What do you have? Do

you have legislative language before you on this plan?

Mr. SCULLY. Senator, I have a two-page summary. I have, in the

last 24 hours, had pretty extensive discussions with staff about

what is in it.

Senator CONRAD. Well, that is the problem, to me, what is happening here. We have got a two-page summary on something that

is the most profound change in one of the biggest programs of the

Federal Government that has been made in 40 years.

There is no question, changes need to be made. But we are here

with one hearing, with a two-page summary and the most basic

kind of questions, to me, not being able to be answered.

I just want to say, since last night, since we first got any kind

of significant description of what this is, we have tried to do a couple of examples. Beneficiary 1: $500 of annual drug spending.

Twenty-five percent of the people are in that category. They are actually spending, under this plan, $300 more than they get.

Beneficiary 2: $1,000. Thirty-five percent are in this category.

They are spending more than they get. As you go up, Beneficiary

3, $2,000, 52 percent of the people in this category, they get 22 percent assistance. On it goes.

My time has expired. I would just say, number one, I think there

are real questions how attractive this is, and number two, what the

details really are. I think if most of us were given a quiz, we could

not answer. I think it is because, frankly, we have not had time

to give sufficiently serious consideration to what is an enormously

important set of decisions.

Finally, we are going to build a system using drug-only plans

when the people that offer those plans say they have no interest

in doing it, strikes me as a risky approach.

Mr. SCULLY. I do not want to leave the impression—I hope we

are still old friends after this. I have spent thousands of hours over

15 years, but thousands of hours in the last year, meeting with

many, many people. I think we spent an hour and a half talking

about this a couple of weeks ago in your office. I spent a couple of

hours in Senator Rockefeller’s office, also an old friend.

The details may not be spelled out in this document, but the options we have known for years. I know you do not like a lot of the
22

President’s proposals, but I have made an effort to try to explain

them all to you.

I think the committee’s draft, from what I have seen, while we

have a significant disagreement about the level of differential drug

subsidies and the PPO structure, it is fairly consistent.

I really, with all due respect, think that most people do understand the issues. At least, the administration feels like we have

had very thorough access to the staff on both sides and are comfortable that we substantively know where we are going.

The CHAIRMAN. Senator Bingaman?

Senator BINGAMAN. Thank you very much.

Thank you, Tom, for being here. Do you have this table called

‘‘The Impact of Potential Prescription Drug Bill on Beneficiary

Spending’’ that the Urban Institute did that Marilyn is going to

talk about? Could someone hand that down to him, please?

Let me explain why I am going to ask you a couple of questions

about this chart.

Senator BAUCUS. Can we get a copy of that chart so that we all

have it?

Senator BINGAMAN. Well, it was on my desk here when I walked

in.

Senator BAUCUS. All right.

Senator BINGAMAN. It was in a pile of materials that was here.

I assume it was on yours, too.

Senator BAUCUS. Yes, this is it. I found it. Thank you. Thank

you. ‘‘Table 1,’’ it says on top?

Senator BINGAMAN. ‘‘Table 1.’’ Right.

Senator BAUCUS. Thank you.

Senator BINGAMAN. I have heard the President speak. In fact, I

think he gave a speech in my State a couple of weeks ago where

he talked about how, in his view, he wanted to see everyone have

a prescription drug benefit like the one members of Congress have.

There is no reason why they should be denied the same kind of

prescription drug benefit.

If this chart is right, we are misrepresenting to the American

people, and he is misrepresenting, what we are talking about

doing. As I understand what we in Congress have, through the

FEHBP, what all Federal employees have, we essentially pay 25 to

28 percent of the cost of drugs. That is the normal range.

This chart would lead me to believe that, even if we enact this

plan, we are going to have seniors pay a much, much higher percentage of their drug cost than any of us are paying, or that any

Federal employee is paying.

As I read this chart, if you are at 175 percent of poverty, if you

spend $1,000 on drugs in a year, you are going to be paying, the

beneficiary share of that, $1,058. I am not exactly sure how that

works out, that you are paying more than, in fact, the $1,000, but

I am just alarmed at the figures.

If you are spending $4,000 on prescription drugs, you are paying

$2,800 of that $4,000 out of pocket, so the government is picking

up, what, 30 percent. If it goes up to $6,000, essentially the government is picking up $1,800 of it, so 30 percent.
23

So instead of the individual patient having to pick up 25 to 28

percent, we are saying the government is going to pick up 30 percent and the patient is going to have to pick up the rest.

Am I misreading this situation? This is all new to me, as to exactly how generous this plan is. But I am very much concerned

that we are going to have a lot of seniors in this country feeling

that they have had this plan misrepresented to them and that we

are essentially promising to provide a drug benefit comparable to

what Federal employees get, when the truth is we are not even

going to come near to that.

Do you have a thought on this?

Mr. SCULLY. Well, I do not know the details of what is in the

Senate package, and we did not put out, intentionally, all the details of the President’s framework. But I know, conceptually, how

the money would work.

It is probably correct to say it is not for everybody equal to a

Senator’s or my drug package. Generally, if you are low-income,

below 140 percent of poverty, I would say that poor people are

going to get a much better package than Federal employees and

have much higher subsidy levels and much more thorough coverage, at least under what we had designed.

As you go further up in the income stream, you get less. Generally, I can assure you that every single senior will get more than

they get today. The general subsidy mix to what the Federal Government has in most of these plans, and I believe the Senate is designed similarly, roughly, the Federal Government picks up 66 percent, or roughly two-thirds, of what the new insurance costs are

and the beneficiary pays one-third.

So, as you go further up in the income stream they do, in fact,

get less, but I believe that low-income seniors will get significantly

more than Federal employees.

As you get further up in the income stream, they will definitely

not do as well. So, I clearly do not think we should mislead people

who are further up in the income stream.

Senator BINGAMAN. Let me ask one other question. Senator

Daschle asked you about this problem of a one-year requirement

for these companies that want to participate. I noticed part of the

legislation talks about a 6-year cycle, or contracting authority that

allows you to enter into contracts with various companies to provide these benefits for up to 6 years, for CMS to do that. Why can

we not require, or why should we not require in this, that companies that want to participate in this stay with it for 3 years, or 4

years so we do not have the same kind of volatility we have had

with Medicare+Choice?

It has been a real problem in my State, just as it has in Senator

Daschle’s, where companies come in, they have advertised. This

one company came in and had this great motto which I remember.

It said, ‘‘Health Care for Life.’’ Everyone signs up. They want

health care for life.

That sounds like a good plan, so they join their Medicare+Choice

plan. Six months later, they send out a letter saying, we are pulling out of New Mexico, you are on your own. That caused a lot of

consternation among seniors. It seems to me we are setting up sen-
24

iors for the same kind of situation with regard to prescription

drugs.

Mr. SCULLY. Well, I think there are a couple of answers to that,

Senator. We did not send up the details of our plan, but I will say

that during the development of it—and I do not think this is in the

plan. I cannot remember—we had envisioned actually 2-year contracts. We are happy to talk about that.

The committee has one, and I think that that can be discussed.

We think this is fundamentally different than Medicare+Choice.

Medicare+Choice, which is the HMOs, is county by county.

Plans frequently popped into one county, or left, or came in depending on the Federal reimbursement rates, which have been not

working very well, and I think are poorly designed.

In this case, you have to take one-tenth of the country. One of

the reasons we think there is going to be intense competition, is

the average hospital gets 40 to 45 percent of revenue from seniors.

So if you are in New England, for instance in Senator Jeffords’

State of Vermont, if you want to take Vermont, you have got to

take all of Massachusetts, all of New Hampshire, all of Maine, all

of Rhode Island, you have got to take Connecticut, the entire area.

You have got to take everybody.

So, we believe there is going to be intense competition, because

for a big insurance company, a Blue Cross, a CIGNA, or an Oxford,

where I was on the board for years, to take the risk of not getting

that bulk of seniors when they are negotiating the next set of rates

with doctors and hospitals is very dangerous.

So, we believe that the design that makes these 10 regions—if

you are in New Mexico, you have got to bid on New Mexico, Arizona, California, and Nevada, I believe. I may be wrong. You have

to take everybody in all those States. You cannot cherry-pick counties. So we think it would be much more attractive.

We think the plans are going to get in and stay. In fact, we think

the plan’s number-one complaint—and I can tell you the insurance

companies’ number-one complaint, is the people are very afraid

that, if they are not one of the top three, they are going to get very

hurt in the market.

But that is precisely why we designed it that way, to make the

competitive bidding very intense for people to get in, get a piece of

the Medicare, what is effectively a fee-for-service Medicare program.

Senator BINGAMAN. Can I just do a short follow-up? If we think

it is this attractive to these companies, why do we not require them

to stay in for three or 4 years instead of 1 year?

Mr. SCULLY. That is certainly something we would be willing to

discuss. As I said, we had envisioned two, potentially. We would be

happy to talk to the committee about that. I think that generally

insurance conditions change. Also, the nature of competitive bidding is, if you re-bid it every one or 2 years, you are probably going

to drive down prices.

If you lock on the same price for three or four years, we actually

believe—and our actuaries believe—that the competitive bidding

will drive down prices and I think three or 4 years might be too

long. I think one to 2 years, we believe, might be right. But that

is something we are certainly open to discussing.
25

Senator BINGAMAN. Thank you.

The CHAIRMAN. Senator Thomas?

Senator THOMAS. Thank you, Mr. Chairman.

I, too, want to comment on the rural health aspect of it. I am

Chairman of the Caucus on Rural Health in the Senate, and we are

very supportive of that and want to work with the House to cause

that to happen.

Mr. Scully, I do want to say that there is a difference in the way

the so-called PPOs operate in rural, as opposed to urban, areas. It

seems like all we talk about is PPOs, but really they are not structured as PPOs in the rural areas. Is that not correct?

Mr. SCULLY. Absolutely.

Senator THOMAS. So this idea that they are not there, therefore

you do not get service, just is not true. You go with your Federal

employees’ thing. They get service. So, I would just like to say that

that is not going to keep people from being served.

I guess many of us have gone into this with sort of a vision that,

over time at least, giving choice to all those that are now in Medicare, that there be a second option open, and that it really become

a better service.

Do you think there is enough incentive in this proposal in terms

of the private delivery system to make a change over time?

Mr. SCULLY. I have not been able to examine the details. Obviously, the administration’s proposal, we have a strong preference

for that, it has a differential drug benefit, for a variety of reasons.

One of them is, we believe that seniors will be happier with the

new option, that they are going to get a better-structured benefit

that is more efficient, and providing an incentive to get them in

there.

Part of the way it is going to work, is you have to have enough

people in there in bulk to make the competitive bidding work. So

we have to get enough people in the new Medicare system to have

enough in each of the 10 regions to work. So we have some disagreements with this proposal.

We are very happy with the bipartisan cooperation and the momentum that is building, but I can say that we still have concerns.

I hope that is a reasonable position to be in.

But let me just add one thing on the rural issue. One hundred

percent of the hospitals in Wyoming and Maine are in the Blue

Cross plan, so when you get outside of urban areas, PPOs essentially are fee-for-service.

Every hospital in Wyoming is in the Blue Cross plan, every hospital in Maine is in the Blue Cross plan, and I think over 90 percent of the physicians in both States. So, really, PPOs only really

function as PPOs in urban areas. Once you get outside of urban

areas, they are fee-for-service.

Senator THOMAS. That has been my point. I think we ought not

to emphasize PPOs as much as we are delivering service in the private sector.

But I understand what you would like, you and the administration, and I join you in that. So you have not had enough opportunity to look at the details of this to see if you think there is a

satisfactory amount of incentive to cause to happen what you hope

will happen?
26

Mr. SCULLY. It is very complicated. We prefer to have a differential drug benefit, clearly. There are other ways to do it, to provide

incentives to move behaviorally to get people to go into these plans.

There is a very complicated calculation in the way you set the

benchmarks for what the Federal Government pays, but we just

have not had time to examine it yet and figure out whether it will

work or not.

Senator THOMAS. Some believe that there ought to be a deeming

or there ought to be some sort of an arbitrary level set on the payments. How do you determine the payments then in these rural, let

us call them, Medicare Advantage programs?

Mr. SCULLY. Well, generally, as you know, Blue Cross of Wyoming, or CIGNA, those plans already have contracts with all these

doctors and physicians. They are already basically going to be set

up in the market, which is the way they should be set. Better doctors, better hospitals may get paid a little more and the lower performing may get a little less, which is one of the problems with

Medicare.

The deeming issue really was an issue with CBO to try to keep

the scoring down. We would like, obviously, to have the market establish the prices, not the government. There are some markets

where consolidation has been maybe too high among providers.

Senator Santorum left. We discussed one of his markets in Pennsylvania, where arguably the hospitals have consolidated so much

that they could artificially drive up prices. There are some places

where deeming might be appropriate, but generally we would prefer to have the prices set by the market.

Senator THOMAS. I see. That is the so-called benchmark that

there have been some arguments on here on the floor.

I think CBO’s numbers looked at the alternative, the Medicare

Advantage, and indicated a very low percentage, 10 or 11 percent,

that they thought would go into that. You do not agree with that?

Mr SCULLY. It all depends on the structure of the plan. If you

set it up where you have the same drug benefit in the new Medicare Advantage as in the old plan and there are no other incentives, I think CBO probably—and we would probably agree—would

say Medicare HMOs would grow a little bit back towards where

they were, about 15 percent, and the PPOs would only draw about

11 percent. Under the President’s proposal, the way we designed it,

would probably have about 35 percent of the population.

Senator THOMAS. I know it is a little unfair because you have not

had the time. But my question really is, do you think then that

there ought to be something done differently in the proposal to

reach the effort that you want to to get more people into that voluntary plan?

Mr. SCULLY. Well, again, our clear view in the President’s proposal was, and we knew it was going to be controversial and we

knew it might be difficult, and we did it consciously, we thought

it was the right policy. We thought the right thing to do in the traditional program was a catastrophic-only benefit for free.

Every senior would have gotten catastrophic stop-loss in the old

program with no additional costs. If they went into the HMO or the

fee-for-service PPO, they would get an additional subsidy that was
27

roughly twice the value, but they would also have to put their own

money in as well.

In the ballpark of this chart, we did not put up numbers, but

since this is the mid-range of the House and Senate, theoretically,

if you had a $1,200 drug benefit, the senior would pay $400 and

the government would put in $800 under the construct of the midrange of what these bills are and we give a bigger drug benefit, in

addition to additional beneficiary payment in the new programs,

and that would be enough to incentivize more people to go in. That

is clearly our preference, but we are trying to work within the process.

Senator THOMAS. All right. Thank you.

The CHAIRMAN. Senator Snowe?

Senator SNOWE. Thank you, Mr. Chairman. I want to thank you

and Senator Baucus for your Herculean efforts in bringing us to

this point to provide a long overdue benefit for seniors.

I would like to continue to follow-up on the issue of PPOs as an

option in delivering an integrated benefit, including prescription

drugs.

Now, you have said that PPOs are in rural communities, and

that doctors in rural communities all participate in the network.

But there was a report that was released yesterday by Public Citizen that indicated that is not the case, that not all doctors are in

PPO networks. They reviewed five States. It is interesting to look

at, including the State of Maine, where a number of doctors do not

participate in a private network.

They participate in Medicare, but they do not participate in a

private network. I think the issue here is, obviously, it should be

an option I think we ought to explore. But, obviously, it is also important to ensure that we preserve the integrity of the traditional

fee-for-service, and also gets to the issue of having an equal or unequal benefit in terms of prescription drugs available and all the

options.

I know you have said that there is a benefit with an unequal

benefit. Now, if that is the case, and you are saying, for example,

that under your options that CMS actuaries had said that 30 percent of seniors would choose the PPO option, another 14 percent

would choose the HMO option, so there are 54 percent that obviously would stay in the traditional fee-for-service.

Obviously, that would have an impact on those seniors because

if they have a less attractive prescription drug benefit, that obviously is going to affect their well-being, when seniors that have five

or more chronic illnesses account for more than 65 percent of Medicare costs.

So if the incentive is to draw them into the PPO model for the

prescription drug benefit because it is a better benefit than exists

under the traditional fee-for-service, then obviously it could result

in having the sicker people going into that option and the healthier

one staying in the traditional fee-for-service.

Mr. SCULLY. Well, I cannot speak to the committee’s specific design, but I will say that in the administration’s design we based the

premiums from the old Medicare program on the 2004 population

and froze it there, so that if it turned out that older people stayed
28

in the old Medicare program and younger people in the new one,

traditional Medicare would be preserved as it is indefinitely.

So, we try to make up for that potential for what is called risk

selection. We just basically believe, and as I have tried to show in

these charts, that seniors will be much better off because they will

have more integrated benefit.

Having three separate plans, Medicare, a non-community-rated

Medigap, and a non-community-rated drug benefit is not going to

be as efficient a package as a combined package. I believe the actuaries may differ. I think people are going to find this to be much

more attractive.

But we clearly want to preserve traditional Medicare. If somebody in rural Maine wants to have traditional Medicare forever, we

are all for that. Again, as I said in our proposal, and I know you

do not agree with us on the drug differential, we would give, again,

let us just say in the range of a $300 to $500 free catastrophic benefit over what they have now. So everyone, including people in traditional Medicare, would get substantially more benefits than they

have today.

Senator SNOWE. But the risk is from not only the standpoint of

providing a less attractive option in the traditional fee-for-service.

I mean, if you pursued that approach, then it ultimately could run

the risk of denying people the kind of coverage that they deserve

if they go to a PPO option, and that is an attractive option in terms

of the underlying integrated health benefit. I mean, that is a big

difference here.

I am concerned, obviously, about the availability of the PPO networks in my State, which is essentially a rural State. It has no

Medicare+Choice option. I think it is a good idea to explore a private dimension, but to do so exclusively in some way or to make

the prescription drug benefit more attractive in that option as opposed to the traditional fee-for-service runs the risk of putting people in a plan where the network might not be available and might

not be as attractive.

I am concerned with this report that indicates that a lot of doctors do not participate currently in the private networks, so they

will not be available.

Mr. SCULLY. The information I have—and I occasionally agree

with Public Citizen. I cannot remember the last time I did, but I

must have at some point.

Senator SNOWE. Are you aware of the report?

Mr. SCULLY. I did not see it. I saw the press release yesterday.

But 90 percent of doctors in this country participate in Medicare

are Medicare-participating physicians, and 92 percent participate

in some type of PPO. So there is always going to be a certain number of doctors. I mean, I understand the issue and I totally agree

with you.

For instance, my deputy medical director, I hope you will be

happy to know, I just hired from Bangor.

Senator SNOWE. Good judgment.

Mr. SCULLY. Very good judgment. We have talked about this

with a lot of physicians on my staff and in other places in rural

areas. We clearly are going to preserve the existing Medicare op-
29

tion. But I really believe that in most areas, in most rural States,

this coverage is widely available.

Senator SNOWE. Well, I would love to have your data to show exactly how PPOs would be available in rural areas specifically.

Mr. SCULLY. I would be happy to.

Senator SNOWE. Because I think we need to have access to that

data to highlight that issue. But I do think it does run the risk,

without preserving the traditional fee-for-service, including having

the same benefit.

Mr. SCULLY. In most States, the Blue Cross plans—and there are

the CIGNAs and other plans, too, but Blue Cross is the biggest—

in rural areas it is basically a fee-for-service system. There is no

PPO. Everybody is a contractor.

Senator SNOWE. Right. Thank you.

The CHAIRMAN. Senator Nickles?

Senator NICKLES. Mr. Chairman, thank you very much. I want

to thank you for having this hearing. I appreciate the information

we are getting. I wish that we would have had Heritage participate

in the hearing. I think I asked for them. Maybe I should have

asked more forcefully. But I think the hearing is helpful.

Let me ask you, Mr. Scully, and Mr. Chairman, so you will know,

I am very interested in passing a bill, but I also want to make very

sure that we pass a bill that accomplishes every objective that I

have heard, but also is going to be affordable and sustainable for

future generations. I am worried about that. I am very worried

about it.

Mr. Scully, what is the unfunded liability that we have right now

on Medicare? Is it about $13.3 trillion?

Mr. SCULLY. I think it is a little above that, yes. Close.

Senator NICKLES. And is that not about two or three times the

unfunded liability we have in Social Security?

Mr. SCULLY. Yes.

Senator NICKLES. I think OMB, where you used to work, did

analysis of the budget and said that the plans that were proposed

last year and actually passed the House, and the House Ways and

Means would have increased that by $4.6 trillion, and Senator Graham’s proposal would have increased that by $6.9 trillion—not billion, trillion—is that not correct?

Mr. SCULLY. I am sure that is correct.

Senator NICKLES. And the $4.6 trillion that passed the House

happens to be the same unfunded liability in Social Security. We

are talking about trillions of dollars, and that is over a 75-year period of time. So, most of the drug proposals we are talking about

add significantly.

Would you and/or your actuaries give us an estimate on how

much this would increase the unfunded liability on Medicare as

well?

Mr. SCULLY. Yes, we will, Senator.

Senator NICKLES. I would appreciate that.

Mr. Chairman, that means a lot to me. I have mentioned before,

just to our colleagues, I found it interesting, Senator Bingaman’s

comments, and the Urban Institute is testifying they can justify

their own chart.
30

Mr. Scully’s comment was, well, I am sure that we are subsidizing low-income a lot, and we are. We are providing new benefits, correct me if I am wrong, but I believe for about 40-some percent of Medicare recipients that would have anywhere from 80 percent to 97.5 percent of their drug costs covered, period. Correct me

if I am wrong. Mr. Chairman, you and/or staff correct me if I am

wrong.

Let me ask you, what is the percentage of Medicare recipients

that are less than 150 percent of poverty?

Mr. SCULLY. About 25 percent, I believe.

Senator NICKLES. I believe it is much higher than that. I would

like for you to answer that for the record.

Mr. SCULLY. I will.

Senator NICKLES. I think it is closer to 48 percent, if the chart

I am looking at is accurate. If it is not, I would love to know.

Senator BREAUX. It is not anywhere close to that.

Senator NICKLES. I am looking at a chart that has it broken out

by group and I am adding up those groups. Again, I would love to

be corrected.

Mr. SCULLY. I will check for you, Senator. I think it is about 11

million people, but that is just my memory.

Senator NICKLES. Well, I would like to know each bracket, the

number of people. Because we are talking about subsidizing these,

anywhere from 97.5 percent to 80 percent, all the way up to 150

percent of poverty.

Those are enormous subsidies, new subsidies, brand-new subsidies that I will almost venture to say, and I will guess, that CBO

is going to underestimate how much it is going to cost, because I

think utilization, if you are paying anywhere near that kind of a

subsidy rate, will skyrocket.

Let me ask you another question. You mentioned that the advisability of having an integrated drug benefit with the entire plan,

such as we have in health care plans that are in the private sector,

in Federal employees, and so on, if you have a drug-only benefit

under Medicare as proposed as a separate benefit for fee-for-service

under existing Medicare, is there any mechanism to where that

would be coordinated? You mentioned possibly having a relative

that might have numerous tests done by different doctors, or seniors that are beneficiaries going to different doctors.

Is there any coordination of that care to prevent a lot of duplicating, maybe even a dangerous combination of prescriptions?

Mr. SCULLY. Well, I think that is one of the benefits. Some people

have problems with PBMs, but there are pharmacy benefit managers and they cover 200 million Americans through commercial insurance.

Senator NICKLES. I am not talking about commercial. I am talking about, in the first place, is there a drug-only benefit insurance

now? Has that product been offered?

Mr. SCULLY. In Medicare? Very limited. Pacific Care has started

to talk about doing one. They are the only ones I am aware of.

Senator NICKLES. No one is doing it. My point being, if you have

fee-for-service Medicare, and basically you drop by the doctor and

you check the box nd you are paid, that doctor can order prescriptions, and they can go into another doctor, a different specialist,
31

and they can order prescriptions, and there is no real coordination.

I am concerned about that under this proposal. I think that could

happen. I also think it would be dangerous.

I think you could have seniors that have a lot of different prescriptions. I frankly think it may be happening to some extent

today, but it could happen even more so if Uncle Sam is going to

be picking up anywhere from 97 percent, to 80 percent, to 50 percent, depending on which income level a beneficiary might be in.

So, anyway, if you could give me estimates on the number of people, the total subsidies, the breakdowns, and is there any coordination or cost containment over utilization on the drug benefit, I

think I would appreciate it.

The CHAIRMAN. Well, if you want to respond, then I will call on

Senator Lincoln.

Mr. SCULLY. Just briefly. I would say one of the benefits we

think of the fee-for-service PPO model, is that most of the people

who participate in that, as they with our own plans in the Federal

employees’ plan, would be PBMs. They do manage benefits. They

do generally provide formularies to decide how to negotiate prices,

and they are relatively efficient.

The other alternative, which scares me to death, to be honest

with you, is to have my agency fix prices for Lipitor and Celebrex,

and all these other prices, and have the Federal Government try

to determine, in a very political system, what those prices are. We

already have a model for that. On the outpatient side of Medicare,

I spend $8 billion a year on drugs.

By virtually all accounts, we pay 25 percent more than we should

be because we do it in a very inefficient, very politicized price-fixed

mechanism which we do not think is a good model for the rest of

Medicare.

The CHAIRMAN. Senator Lincoln?

Senator LINCOLN. Thank you, Mr. Chairman. Certainly, I would

like to thank you for starting us in on this issue and this journey,

because we do know it is a very important one for the people we

represent. It is a journey we have been on for quite some time.

I know that we have got some lofty goals in terms of trying to

get all of this done in the next couple of weeks, and I hope that

we can all dig in and try to do that. But I hope we will not miss

any of the details.

Mr. Scully, we are glad to have you. We appreciate your availability, and certainly your willingness to work with us, and I look

forward to working with you in the next couple of weeks.

I guess some of my concerns come from experiences we have had,

as well as trying to put together some of these images of where we

might be going. I guess I start with the disagreement of the difference of opinion that both CMS and CBO have on what private

plans will save or will not save Medicare.

I guess we look, in Arkansas, at what has happened for us in

terms of the private sector, particularly Medicare+Choice. Those

payments are already 104 percent of the fee-for-service cost. Whatever we had in Arkansas left 2 years ago, and what we had then

did not even provide a prescription drug package.

I guess, based on the study that the Center for Studying Health

Systems Change shows that most of the areas across our country,
32

the private plans pay higher rates than Medicare, and that is certainly true in Little Rock, where I live, where private payment

ranges from 120 to 180 percent of Medicare physician payments.

So I guess if that is the case, if health plans will not be able to

buy health care for seniors at a lower price, why should we really

be paying health plans to come in?

Mr. SCULLY. Senator, really, we do not think we should pay

health plans more to come in, and we do not think we will be.

Senator LINCOLN. This plan calls for a 2 percent extra bonus payment.

Mr. SCULLY. I am not totally familiar with the structure of the

Senate plan yet, but our structure did not. In the long run, we obviously believe that we are going to save money with PPOs. HMOs

are significantly different.

I believe, personally, with the best of intentions, trying to push

private health plans out in the rural areas of 1997, we changed the

Medicare structure. HMOs generally work in urban areas, they do

not work in rural areas, or even mid-sized areas. We have changed

the structure, and I personally believe that it backfired in 1997,

and that is the reason the formula has not worked.

Senator LINCOLN. PPOs can contract in Medicare right now,

right?

Mr. SCULLY. They can, but they have to do it county by county.

It is a totally different design than this. When you have to go and

cherry-pick counties, it is much tougher.

In this particular case, which I think is much more modeled like

the Federal Employees Health Benefit Plan, which has worked,

and Tricare, the Defense program which has worked, you have to

pick an entire region, and you cannot cherry-pick just Little Rock

or other counties in Arkansas, you have to take the whole State.

HMOs are fundamentally different than the fee-for-service plan.

This is basically a PPO. It is a much looser form of coverage. It is

a totally different design.

I personally think that, in the mid-1990’s, HMOs were growing

in urban areas and doing well. With all the best intentions, on a

bipartisan basis, people redesigned that in the hopes of pushing

them out to rural areas, and that model does not work in rural

areas and I think it backfired. But I think PPOs and the fee-forservice model we are talking about are fundamentally different.

Senator LINCOLN. So you think the reason that PPOs do not play

in Medicare right now is because?

Mr. SCULLY. Because if you are a PPO, or HMO, you have to be

able to go into a market county-by-county and develop a strong

enough network to actually deliver in that county. People can cherry-pick counties and move around.

In this particular mechanism you are going to get one-tenth of

the country, and you will be one of three insurers, and you will get

huge bulk, which does scare a lot of insurance companies.

If you are not one of the three winners in your region, you are

out of luck. I spoke to some insurance companies yesterday who are

panicked about that, but that is precisely why we designed it that

way.

That is one of the reasons we are worried about having enough

people come in and incentivize a big enough population to come in,
33

is in a tenth of the country you are in, once you get a big enough

chunk of the population of seniors to have enough market share to

be able to go in and design a good plan. PPOs, in a very fragmented market, if you are going to come into the current system,

really cannot make it.

Senator LINCOLN. But you think that this is going to provide

them enough incentive to come into these markets, particularly like

rural Arkansas? Not necessarily Little Rock, but about DuQueen or

Laura?

Mr. SCULLY. I think if you talk to the Blue Cross plans, they

have also been very disappointed with Medicare+Choice. They are

nervous about the past experience, too.

But I have talked to the CEOs of all of the top 10 companies and

a lot of the Blue Cross plans. I believe in Arkansas, I checked, 100

percent of the hospitals in Arkansas are in the Blue Cross network,

they have a PPO also in the State of Arkansas.

I believe it is the primary source of insurance in Arkansas, and

it works for people under 65. We think we are going to piggyback

on that. There are four or five other fairly large carriers in Arkansas.

I think if you do it State-wide and you make sure everybody is

in at a community rate, it is much more likely to work. The current

system is much more fragmented.

Senator LINCOLN. So do you think we should have an extra

bonus payment of 2 percent in order to get them in there?

Mr. SCULLY. That really comes down to the fundamental difference, which is very arcane, and I will explain it if you like, between CBO and OMB. We believe that you are not going to need

that and it will save money. CBO’s estimate is they will cost more,

and you want to cap that spending.

The committee made the decision that if CBO is right and that

it will cost more, that they are not willing to spend more than 2

percent more. We actually believe that they are going to cost less

and be 1 percent less.

So, we are happy to go without that, but the committee has to

live with CBO scores. CBO says it will cost more and they have basically put a lid on how much more it will cost.

We would be more than happy to take that off, but unfortunately

the committee does not get to live with our scoring, they get to live

with CBO’s.

Senator LINCOLN. If I could just tag onto what Senator Daschle

said, and that is, quickly, when you talk about these fall-back

plans, the government fall-back plan, for instance, if we have the

same scenario we had with Medicare+Choice and you have got two

private plans, then all of a sudden they leave, you have got the

government fall-back plan that comes in and then others come in,

and then the government fall-back plan has to come back out, you

have got seniors that are making decisions year to year with total

confusion, which means that more than likely, if they are going to

have all of these different plans coming in and out, that their prescription drug package is going to change, what is covered is going

to change, and probably their premiums are going to change, the

doctors they can see are going to change. All of that is going to
34

change on a year-to-year basis for our seniors, it sounds like. It

sounds like a lot of confusion for our elderly.

Mr. SCULLY. Well, actually, believe it or not, Senator, with all

due respect, it will be less confusing, and I think for a couple of

reasons. One, is we will always have the ultimate fall-back, which

is the Medicare traditional program. As far as we are concerned,

it will always be there and never change, so any senior in Arkansas

who wants to have that forever can have it.

But, second, if you look at what seniors in your State look at,

they get Medicare, which converse 60 percent of their benefit costs.

Then they go out and buy Medigap on top of that, which is usually

a very poorly structured plan.

The only one I know that is community-rated is the AARP, the

rest are not. They are very poorly-structured, not community-rated

plans. They are not very efficient. On top of that, they are going

to buy another private drug plan.

We are happy to go with that, but we think that when your seniors look at it, many of them are going to have a much simpler

choice: I want to buy the Arkansas PPO from Blue Cross, or the

CIGNA PPO. They are not going to be forced to, but we think they

are going to get a much more efficient, consolidated benefit, much

less confusing. I think most people, if you ask them, that are 64

and in an Arkansas Blue Cross plan, find it far less confusing than

the Medicare plan plus their Medigap plan.

Most seniors, including my parents, I can tell you, are incredibly

confused by their existing hybrid of not-particularly-well-structured

Medicare plans. They love it because Medicare covers everybody

and it is a social insurance program that is community-rated and

covers everybody, and that is the magic of it. But Medicare itself

is incredibly confusing to most seniors now.

Senator LINCOLN. Thank you, Mr. Chairman.

Senator NICKLES. Mr. Chairman, could I just make a comment?

The CHAIRMAN. Senator Rockefeller, Senator Nickles would like

to correct something before you ask your questions.

Senator Nickles?

Senator NICKLES. Mr. Chairman, thank you.

I have got some information from HHS, Mr. Scully, and I used

48 percent. That included people in the category of 150 to 175, that

is, 8 percent. But it does mean that there is 40 percent who are

at 150 percent or below.

Just so everyone knows, the subsidies for this group are very

large. They go all the way from 97.5 percent to the maximum copay, which would be 10 percent for the 135 percent, and 20 percent. Still, that is enormous. That is enormous. It means the most

anybody would pay in that category would be 20 percent of their

drug costs.

The CHAIRMAN. All right.

Senator Rockefeller?

OPENING STATEMENT OF HON. JOHN D. ROCKEFELLER IV, A

U.S. SENATOR FROM WEST VIRGINIA

Senator ROCKEFELLER. Thank you, Mr. Chairman.

I am going to save most of my questions for Marilyn Moon. One

of the reasons is, I have discovered that over the years, in my
35

friendship with Tom Scully, that he can talk himself in and out of

any situation, regardless of what the facts are.

That is made more complicated this morning by the fact that he

does not know what the facts and the program are, so there is sort

of a double jeopardy in even attempting to do that.

Second, I need to just say for the record—and I recognize I was

late in coming in—that I have never really quite been through a

process as bad as this, as Kent Conrad indicated, in the 17 years

that I have been on this committee on a program which is so important.

It has been said, I am sure, before, but it needs to be said again

because it is what is affecting me as I think what is going to happen to my seniors in West Virginia.

This was not really a bipartisan situation. I am Ranking Member

of the Health Subcommittee, and I never was in on a single meeting where substance was discussed, only when the Chairman of the

committee was asking, what are people’s views, which is a technique which we have used a lot around here, what are your views,

what would you like to see.

But then, even during that conversation, there was a lot of discussion from both sides about, nobody really had any idea that

there were anything more than concepts, there were no facts, there

were no plans, there was no paper. The staff met afterwards and

there was even less then.

So we are passing a plan which you indicate that we sort of all

know what the basic facts are, but in fact we really do not. We

really do not. For example, my guess is, we are putting probably

between $20 and $25 billion into inducements, or bribery, or whatever you want to try to get private plans into States like West Virginia where they do not exist at all now, and where they will not

exist with the bribery.

That happens to equal the entire amount of money that we put

in for fiscal aid to the States. My guess is, if we did not do that

and if we did not try to bribe or induce private plans to come into

West Virginia where they will not come in any event, that we could

probably lower the premium for Medicare beneficiaries by about $5.

Now, are we at $35, $25, $50, as Kent Conrad said? Nobody

seems to really know. But my guess is, we could probably do it by

about $5, and that is one of the questions I am going to ask

Marilyn Moon.

I am really stunned by this and I am profoundly hurt and worried for the future of the seniors of my State. Our average income

is not, as is talked about in FEHPB, an average of $41,000 with

relatively healthy people who are still, many of them, working. But

the average income in my State, gross income for Medicare beneficiaries, is around $10,800.

That creates a very different set of expectations, much greater

dependency, much greater dependency on constancy, much more

worry there about the thing that Senator Lincoln was worried

about, and that is people sort of coming in, getting out, coming in,

getting out as plans either do or do not arrive.

I do not think you can guarantee me. I think you can give me

the words that there will be equal benefits for California, West Vir-
36

ginia, or throughout the country, but I do not really believe that.

I do not believe that is going to be the case.

I am not sure that you know. I am not sure that either the

Chairman or the Ranking Member of this committee knows the answer to that. So the FEHBP model is one that really has never

turned me on, I have said it a hundred times in this committee,

because it is not relevant to the State that I represent.

I basically think that people, as they get older, they get worried,

they get scared, and many of them are isolated. There are nine million Americans who live all by themselves and are either looked

after or called upon by their neighbors, or not. I think that a sense

of confidence in the system is often as important as the system

itself.

I think what we are doing is taking a system which is very efficient and, for the sake of edging towards the privatizing of Medicare—and I believe that is what this is.

I mean, I think it is a free enterprise effort to enter into the

Medicare market, regardless of what the effects on the beneficiaries

are. I am not against the private sector, but I care very much about

what the effects are on the beneficiaries in my State.

My fear is that they are going to end up as they are now, with

Medicare+Choice, which represents less than 2 percent of the people in my State, not one single plan. So a lot of money is being

spent to put plans into, let us say, Eastern Massachusetts, where

they will work very well. They certainly will not in Western Massachusetts, but others have decided that that is all right.

But in my State, it is not. I am very angry about this process.

I am very angry about what I perceive or guess to be this product,

on behalf of the people that I represent. I think that they are not

going to know what it is. In that case, they will be entirely similar

to us: they do not know what it is.

We are having a hearing. The hearing was called two days ago,

I guess, for today. We will mark it up next week. We will not really

have any idea what we are marking up. It is the most extraordinarily bad way of doing business that I can think of, and I am

embarrassed by it, I am ashamed by it.

I worry tremendously for the people of my State who depend

upon Medicare, which costs 2 or 3 percent to run, which is not

over-paid, as the Senator from Arkansas indicated by private plans,

which is not subject to inducements, which is a public program

which people do understand.

I have always felt that what you do if you want to reform Medicare and make it work better, is you take Medicare as it is and you

add on a prescription drug benefit.

I had a very good solution to that which I gave to the AARP executive board, and then I will finish, Mr. Chairman. That is, you

take the double taxation of dividends, which was scored at about

$397 billion, and you add it on to the $400 billion which was put

in for Medicare, and then you could call it the George W. Bush prescription drug program and I would be entirely happy with that.

That is fine, and he should take full credit for that. But we did

not do that because people here wanted to have that deduction,

which does not affect the people of my State very much. So, we

passed up that opportunity.
37

I have a high regard for you, Tom Scully. As you know, you have

done many things to help my State. You had a different approach,

I think, than this committee came out with, whatever this committee is coming out with.

But I want to express just a very profound sense of sadness and

dissatisfaction and worry on behalf of the people I represent.

The CHAIRMAN. Senator Hatch?

Senator HATCH. I have been interested in these comments, because we just heard from the Budget Committee Chairman who

says that we are going to be spending an awful lot of money helping the poor. There are also dual eligible people who will be helped,

regardless.

Second, last year I was a member of the five-Senator tripartisan

group who put together the tripartisan bill. We had scoring on

that. We knew where we were going and I think could have put

it through last year.

In contrast to the Graham-Rockefeller bill, which had no hearings, had no scoring and was brought to the floor, in all honesty,

this process is far superior to what we went through last year with

regard to prescription drug benefits.

So I want to personally congratulate and compliment the Chairman and the Ranking Member, Senators Grassley and Baucus, for

being able to bring this together. There is no simple, easy way to

do this. As much as I was strongly for the tripartisan bill last year,

I think this bill is an improvement on that.

I want to compliment the administration for being willing to

force us into doing this. We can always say that this bill could be

improved if we had trillions of dollars with which to do it.

We could improve anything if we had unlimited funds. But this

is going to be a costly bill. It is going to be a worthwhile bill. I hope

that the private sector part of this works well, and I believe that

it will.

Let me just ask you a question on that. Senator Frist mentioned

the administrative costs and inefficiencies associated with traditional Medicare. Now, could you tell us more about how Medicare

Advantage will decrease these costs and thereby improve the care

for the various beneficiaries who receive the care?

Mr. SCULLY. Well, we think this is tied into the whole gradual

improvement of the health care system. The great thing about

Medicare is it is a universal coverage plan that covers everybody.

I think the problem we have with it is, it pays every provider,

every doctor, every hospital in the country at exactly the same rate

and it does not incentivize quality.

As you know, we have started measuring nursing home quality

in the last year, measuring home health quality in the last year,

putting ads in every newspaper in the country.

We believe giving consumers a lot more information and having

a more information about providers and paying them at some point

relatively based on quality, which the private sector tends to do a

lot more of, is going to improve health care across the country.

The great thing about Medicare, is it covers everybody and does

not leave anybody out over the age of 65 or who is disabled. The

danger of it is, we have basically a centrally managed system that

is inefficient.
38

As I mentioned earlier, we do things like hospital outlier payments where we paid $2 billion a year for four years in a row that

we did not really understand that went out the door.

That is 2 percent of all hospital spending that we did not even

know existed 4 years in a row that we did not catch because we

have a very centrally run system out of Baltimore that is wonderful, but it is not particularly efficient.

We believe that having local Blue Cross plans, local insurance

companies that are more sensitive to local markets and have a better understanding of what is going on, who are the better providers, who are the lesser providers, and more of an understanding

of the utilization of health care is going to be much more efficient.

Can I just add, quickly, because Senator Rockefeller is an old

friend of mine and I know he is not very happy with it, but I really

do think we have worked on this, as we have, Senator Hatch, since

1989. I think we spent time trying to avoid having a drug benefit

repealed then.

This really is the best opportunity we have had to fix Medicare

and add a drug benefit in 15 years, at least. I really do think, and

I hope we can convince Senator Rockefeller, as unhappy as he is

with us today, that I really do think this is the right thing to do,

and I hope we can work with all of you going forward on a bipartisan basis to get this done.

Senator HATCH. Thank you. Could you please talk about the dual

eligible low-income component of this bill? For instance, does this

legislation not take into account the serious budget issues that

States are facing? And could you please talk about this in a little

more detail?

My State of Utah contacted me last night and wanted to know

just how this is going to affect them. If you could just give us a

little more knowledge on that, I would appreciate it.

Mr. SCULLY. Obviously, I do not know the details of how the Senate plan works. Obviously, we are concerned, as Senator Nickles

said, about the scoring and what it costs.

But I will say that under the structure of the administration’s

framework, and when we looked at it, the money is heavily, heavily

weighted towards low-income people and we probably help people

in States like West Virginia that are lower income enormously.

The average low-income beneficiaries under most of these plans

is looking at about a $3,000 per year very thorough drug package.

The people who may not be as happy as you get into the details

is as you go further down the income stream because they do not

get covered as much. But every package I have looked at, the administration’s framework, the Senate, is very heavily weighted towards low-income beneficiaries.

Senator HATCH. Thank you.

Just one last question. I am also interested in hearing more

about how we are reaching out to the employer community. I know

that the Finance staff has worked very carefully on the employer

issues and we have made pretty good progress, I think. Could you

talk about how an ideal policy would encourage employers to continue providing drug benefits for their retirees? Because I am concerned about that.
39

Mr. SCULLY. Senator, I cannot tell you. I do not know how the

Senate did it. It is a very delicate balance. Obviously, if you are

in a retiree health plan and you are at ALCOA or something and

you are already in a plan where ALCOA is paying for your drug

benefits, it is not in our interests to go buy out what companies are

spending on their retirees already.

On the other hand, it is voluntary and they can dump them on

the Federal Government anytime they like. So the transition of

subsidizing companies’ existing plans enough to keep them in without having to take scare resources and buy out large corporate retiree plans is a delicate balance that we have spent a lot of time

worrying about, and I am assuming the committee is also looking

at the same thing.

So, we want to maximize the drug coverage, the new spending,

on new people, not people that are already covered. How you do

that is pretty dicey. It is doable, but it is a very sensitive policy

and we are very interested in working with the committee to make

sure we do that the right way.

Senator HATCH. Thank you.

The CHAIRMAN. Thank you, Senator Hatch. Thank you, Mr.

Scully.

Senator BAUCUS. Mr. Chairman?

The CHAIRMAN. Yes, Senator Baucus?

Senator BAUCUS. Mr. Chairman, thank you very much. There

have been some very legitimate concerns here about the amount of

information and timing and process and so forth, and I very much

understand that.

It is almost always a concern around here. I might just point out

though that there have been many hearings on this subject, maybe

20-some hearings, I think. But unfortunately, a lot of Senators just

do not come to the hearings. We call hearings and not many people

attend.

But, more importantly, I have insisted that we get the CBO

scores in advance of putting out any mark, and insisted we get a

process where CBO scores amendments, too. I am not quite certain

how we are going to do all that with a bit of a time constraint.

This process, frankly, is much better than some other times

when this committee has considered other legislation. Sometimes a

tax bill is rushed through. We have the Joint Tax revenue tables

that are just suddenly thrust upon us just before a mark-up. That

has sometimes happened, I think, probably on both sides of the

aisle. Maybe you did not have a distribution table for the tax bill

that left the Senate floor. Usually this committee has a distribution

table, or at least it has in prior years.

So, I appreciate those that have some concerns, but I think that

this is very orderly. I might also point out that it would probably

be a little bit misleading to put out precise provisions and numbers

before we get CBO scores, because CBO is going to probably cause

us to make an adjustment, a change here and there, or we may see

some more opportunities that we did not earlier see.

So, we are trying, the Chairman and I, to be very orderly and

very respectful of everyone, members of the committee, the public,

and I just think the procedure we have set up here at least is an
40

attempt to be very fair to everybody. I think, compared to other instances, it is quite fair.

Senator HATCH. Mr. Chairman, could I just ask one short question that I do not think has been asked, but might be very important?

The CHAIRMAN. If we can have a short answer, because we promised our other panel that we would be very quick. Go ahead.

Senator HATCH. All right. Thank you.

We have heard concerns that PPOs will not be available in rural

areas. These concerns have been expressed here today.

Now, does this plan that we are proposing here not combine

rural areas with urban areas, and does this not help to ensure that

rural areas will have PPOs?

Mr. SCULLY. To be one of the winning three bidders, at least

under our construct—it may be slightly different in the committee’s—in any of the 10 regions we have broken the country up into,

you have to take every place. So if you want to get Salt Lake City,

you have to take the entire State of Utah.

Senator HATCH. That is my understanding. That is why I wanted

to clarify that for the record. Thank you.

Mr. SCULLY. Yes.

The CHAIRMAN. Thank you. Thank you, Mr. Scully.

Mr. SCULLY. Thank you, Mr. Chairman.

The CHAIRMAN. Now, I have already introduced the second panel.

Would you please come, Mr. Francis and Ms. Moon? I do not think

Ms. Moon heard me say that I had an opportunity to meet her several years ago when she appeared at a forum that I had in the

State of Iowa, and I welcome you back again.

I think the way I introduced, was Mr. Francis, then Ms. Moon,

and I think we will go in that order.

So would you start out, Mr. Francis? For both of you, I know you

have longer statements. They will be included in the record without

your asking. Then we, of course, ask you to summarize.

Proceed, Mr. Francis.

STATEMENT OF WALTON FRANCIS, AUTHOR AND

INDEPENDENT CONSULTANT, FAIRFAX, VA

Mr. FRANCIS. Thank you very much, Mr. Chairman. It is something of a hard act to follow Tom Scully, then to have as distinguished an analyst as Marilyn Moon behind me, but I will try to

focus on the issues and questions that I think are of most concern

to this committee as it finishes drafting the legislation.

I also want to commend and congratulate you for doing this. I

think you are building on work that Senator Breaux so ably began

several years ago, and we all hope that you will succeed.

But the danger here is that, while we do not want to let the good

be the enemy of the best, we do not want something worse than

merely good.

I am going to suggest some issues that I think you ought to focus

on as you make final decisions, first in your committee product,

later on the floor of the Senate, and finally in working with the

House in producing final legislation.

I would like to talk about a few aspects of the comparison between FEHBP and Medicare performance that are most salient to
41

what you are addressing. I will not, for example, talk about the

benefit superiority of the Federal Employees Health Benefit Program. It is obvious and does not warrant discussion, really.

I want to talk, first, about evolution of change in that program.

You are talking today about enacting something that will include

a catastrophic coverage benefit, prescription drug benefit, and add

preferred provider networks to the Medicare program.

All three of those innovations occurred painlessly, without political fuss or furor, over a period of decades in the FEHBP. That is

sort of a sharp contrast in models.

Fifteen years ago, there were virtually no PPOs in the FEHBP.

Today, almost every national plan operates a dual structure: feefor-service if you go out of the network, and you will have to pay

more, and a preferred provider network.

They have developed that way to save money, improve service,

preserve availability of provider choice, and attract customers in a

consumer-driven, market-driven model. It is a near total absence of

top-down legislation or management.

The basic FEHBP statute has not been substantively modified in

40 years, whereas, as you know, your committee produces a near

telephone book of changes to the Medicare statute just about every

year.

So, there is a danger here. The danger is to over-design. We have

a program which, while ably managed in some respects by the Office of Personnel Management, at its core, all the important decisions are made by consumers and by health plans trying to attract

consumers, and it works.

Cost. This is a significant issue and I think it is particularly unfortunate that CBO is apparently going to be quite, conservative is

hardly the right word, in its scoring of PPO performance.

Marilyn has worked on this subject in a more general way, and

I am sure she will talk about it. I have made specific comparisons—they are in my testimony, I will not go into the details—

showing how FEHBP and Medicare cost controls compare over

time.

The short answer is, they are virtually in a dead heat if you just

look at costs. FEHBP has maybe outperformed Medicare slightly.

It all depends on what period you pick, though. In the last few

years, Medicare has done better.

Based on what we have all heard about what is happening right

now, probably by the next year or two FEHBP will be back in the

lead. But if you take into account benefit improvements in these

programs and the fact that the FEHBP has had to deal with controlling the costs of prescription drugs, an issue that Medicare has

not had to face, I think there is no question that the FEHBP has

outperformed Medicare.

That is despite the fact that its administrative costs are higher,

et cetera, et cetera. In fact, it is in part because its administrative

costs are higher, because these plans manage care in a way that

Medicare simply does not.

Finally, there is the whole issue of access. That is obviously

weighing heavily in your minds and I discuss it at some length in

my written testimony. There is no question that the preferred pro-
42

vider networks and the FEHBP provide excellent access in rural

areas throughout the country today.

I learned yesterday of a new Public Citizen study, and thinking

it might come up today, got ahold of a draft copy. I spent a little

time on the Internet last night. I want to tell you that, until last

night, I had never heard of Franklin County in Maine, with perhaps the largest town being a hamlet called Gardiner.

So I pulled out this Public Citizen study and it says basically

there are not any doctors participating in preferred provider networks under the FEHBP in the county. That is basically their conclusion. They do that for a number of counties, including one in

West Virginia, which I will discuss in a second.

Well, I simply got on one of the preferred provider networks on

the Internet. By the way, this is a homework assignment I urge on

all Senators and all staff here today. Just go to any FEHBP plan

web site, poke in your hometown, or your grandmother’s hometown, or wherever you like, and ask, how many participating providers are there within five miles? The answer will probably be

zero, or close to zero.

Then you click the next button and say, how about 20 miles?

Now the number will start getting bigger. Then you say 50 miles,

and you have got a big number. The answer happens to be, in

Franklin County, that there are 100 participating preferred providers within 20 miles of that town, and over 300 within 50 miles.

Similarly, Pendleton County, West Virginia, the town of Franklin. There’s nobody nearby.

Senator ROCKEFELLER. What was the county that you mentioned?

Mr. FRANCIS. Pendleton County.

Senator ROCKEFELLER. Oh, you got it right.

Mr. FRANCIS. It is in Southeast West Virginia. It turns out that

within 36 miles of Pendleton is the city of Harrisonburg, Virginia,

and that is where, obviously, the people from Pendleton go to get

their health care, because that is where all the doctors are. So you

cannot do a study that just simply stops at county lines and ignores health care markets and where people go for their care.

I will just pass over that. I do not want to talk more about that

issue. I am happy to answer more questions about it.

Turning to Medicare reform, in the FEHBP program, the government is a good business partner. We need merely look at

Medicare+Choice to know that Medicare does not have a good track

record as being a good business partner.

Stability, hands-off, not regulating, not micromanaging. Those

are the kinds of design issues you have to face. You have to set up

a system that will operate itself, if you will, with minimal government interference, or you are not going to match the kind of performance the FEHBP has.

Reasonable and predictable levels of financing, letting plans design the benefits, including the core Medicare benefit. They should

not have to follow those Medicare drug pricing rules, or outlier payments, or any of that stuff that you foisted on the HMOs.

Let plans define service areas. This is a big problem. It can be

done. You can require them to cover large areas. But if you constrain them, you will distort their ability to deal with health care
43

markets. You cannot avoid the problem that wherever you draw a

geographic boundary line, someone is always on the wrong side.

If Iowa and Nebraska are not in the same region, to pick an example from your State, Senator Grassley, then the Iowa people are

not going to be able, some of them in the western part of the State,

to slip across the Missouri River into Omaha, which is a major

medical center.

Similarly, you could just imagine what could happen around New

York or Washington. There are dozens of areas in the country

where boundaries could create big problems. We have a lot of experience with those problems and there are no solutions to them except to avoid constraining the plans. As another example, exempt

these plans from State mandates.

Finally, and this is really my main message here, do not let the

budget constraints ruin your program design. Keep it clean and

simple. It will evolve over time, but let it evolve over time. Make

sure the program does not fail from day one. Thank you very much.

Those are my prepared comments.

The CHAIRMAN. Thank you, Mr. Francis.

[The prepared statement of Mr. Francis appears in the appendix.]

The CHAIRMAN. Now, Ms. Moon?

STATEMENT OF MARILYN MOON, SENIOR FELLOW—HEALTH

POLICY CENTER, URBAN INSTITUTE, WASHINGTON, DC

Ms. MOON. Thank you, Mr. Chairman, Mr. Baucus, and other

members of the committee. I am very glad to be here today.

I would like to start out on a very positive note. I am glad to see

some important improvements in this package over some of the

earlier proposals that have been discussed.

The equal drug benefit between traditional Medicare and the

PPO offering, is extremely important, although I have some caveats

that I will mention in a few moments.

Second, I am very glad to see the generous coverage for those

with low incomes. People with low incomes need substantial benefits because they are, after all, folks who have very little income

with which to pay for drug costs. And the costs of even a 2.5 percent co-pay, if you are spending $4,000 or $5,000 a year, mounts

up very quickly.

It is very important that those benefits are comprehensive and

that asset tests, for example, are minimized in this program. But

there are many issues that remain that could be improved within

this framework, although some of them would be very challenging

to do.

First, it is important to improve low-income protections beyond

what is here. There should not be even the perception that dual eligibles, that is, people who get both Medicare and traditional Medicaid, the full Medicaid package, are not part of Medicare.

To have them be given drug benefits, for example, exclusively

through the Medicaid program, is a problem because it sets up the

perception that they are second-class citizens and not part of the

universal coverage that Medicare provides. These folks should be

at the head of the line, not at the back of the line.
44

Second, it is important to expand protections to people above 150

percent of poverty. Those folks still have modest incomes and can

pay a large share of their incomes on prescription medication.

Let me mention the table that people have talked about and say

a couple of things about it. First of all, the calculation includes premiums, and that is how you can end up paying more than you get

from the program.

Second, the example of a person at 175 percent of poverty was

meant to illustrate that at $4,000 of total spending, the individual

would pay $2,833, which would amount to 17 percent of that person’s income. This leaves a substantial burden on those individuals

even after accounting for new benefit.

I understand about the problems of budget constraints, but this

is just an example of the penalty it leaves on individuals when the

protections do not rise high enough up the income scale.

The drug benefit also needs improvement for the across-theboard plan as well. A $400 billion limit causes a lot of problems.

The main one is the donut hole that people talk about, or the big

gap that exists in this program.

This gap represents policy driven not by good ideas, but by the

dollars that are available. I do not know any analyst who would

say a gap is a good idea. It gets a lot of legitimate criticism.

Someone with $5,000 in expenditures gets the minimum amount

of protection once you get a little bit above the deductible. That

person will only have about 31 percent of her expenditures protected as compared to a higher percentage for someone who is

spending $1,000 or $2,000, for example. That is simply not good

policy.

It would be better to have a lower, flat percentage if you are

going to have minimal amounts of money to spend than to penalize

people who spend in the range of $3,000, to $5,000, to $6,000,

which is the level of spending for the chronically ill who are taking

medications every day for the rest of their lives. And it is not just

a case of high spending for 1 year. These people will have those expenses every year for the rest of their lives.

Also, I have some concerns about the stand-alone drug plan and

whether or not it will turn out to be a valuable plan for beneficiaries. I totally agree with Mr. Scully when he said that what he

would really like to have is a drug plan that would be integrated

with the rest of the benefits. It makes it a lot easier to run, it

makes it probably more efficient, and therefore the individuals will

get more.

But the problem is, the stand-alone plan is aimed only at traditional Medicare enrollees, putting them at a disadvantage compared to those who choose private plans. Further, if the fall-back

protection comes in and out, as people have already discussed, the

plan will be even worse.

I see my time is about to run out, so I will simply mention a couple of additional points and hope that someone will ask me about

them.

We should not over-sell PPOs. PPOs have a place. They do some

good things. But they are particularly a problem for low- and moderate-income seniors because of the out-of-network benefits.
45

It is not true that everyone in PPOs has access to all hospitals

and doctors, because if you have to go out of network, I can do it,

I can pay the 70 percent co-pay that effectively I face, but many

seniors will not be able to do so. Therefore, it has been over-sold

as full access.

It puts people in the dilemma then of having to decide whether

they will have to change their physicians, in many cases, in order

to get the other benefits, and that is a choice that beneficiaries

should not be asked to make.

There is also very little utilization control in PPOs. The main

way in which they do it these days is to toss doctors off the program if they do not like the fact that the doctor is ordering too

many tests, et cetera. This is not exactly what I think of as ideal

control.

Finally, I would say, improve the basic Medicare program. If

these ideas of stop-loss and chronic care coordination are good

ideas, and I believe they are, we should work hard to get them into

the basic Medicare program as well because that is where the majority of seniors will be, by everyone’s admission, for as long as possible.

Level the playing field. Do not pay more to private plans. Let

them prove themselves in the marketplace, which is what, presumably, they are asking to do.

Thank you.

[The prepared statement of Ms. Moon appears in the appendix.]

The CHAIRMAN. Ms. Moon and Mr. Francis, let me thank you

both in advance for your testimony.

I want to thank Senator Baucus, because when I am done asking

my questions, he has agreed to finish the meeting for me so I can

be at a Waterloo, Iowa Economic Development Task Force meeting

in the morning and I will have to leave fairly shortly. But it is very

important to have the different points of view that you have expressed.

I am going to start with Mr. Francis and ask about the steps

that the Federal health benefit plans take to protect patients’

rights, particularly access to specialists, to women’s health care,

emergency services. It seems to me like many critics of PPOs and

Medicare say that seniors will be kind of thrown to the wolves, and

with these new options, that that will not be a concern.

But, in fact, FEHBP, which we are modeling our program after,

has some of the strongest patient protections, or at least that is

what I believe. Senator Baucus and I intend to replicate those

wherever we can.

So I would like you, Mr. Francis, if you would, to expound on a

few of those key protections to emphasize the protection that patients have, or at least as I see it.

Mr. FRANCIS. Yes, sir. First, built into the program are two

things that are just huge protections. Number one, let us be clear.

There are 12 plans that are national in scope that serve every

hamlet, every rural area, every city in the country.

In all those plans, you can go to any doctor in the country who

is accepting patients, period, and pay the fee-for-service component.

You will pay out of pocket.
46

It is typically 25 or 30 percent, assuming your doctor charges a

reasonably low fee. It can be higher. I think Marilyn’s experience

has been a little unusual. So you always can go to see any doctor

you want, period. That is point A. If he exists, you can see him.

Point B, if you do not like your plan’s selection of preferred providers, you can change plans each year in the open season. So that

is your second major protection.

Third, we have built into the program all kinds of quality controls and appeals rights, the details of which I will not bore you

with. But it turns out, half of the OPM staff who administer this

program do nothing but hear final appeals to coverage disputes, for

example, though normally, the plans resolve these.

There is just a huge level of satisfaction, so there is not a problem that anyone can point their finger at that suggests that people,

in any consequential numbers, are having coverage or access problems. Obviously, the networks are not equally thick everywhere on

the ground.

One of the other important protections is multiple plans. One

concern I have with what I am hearing about this as yet

unrevealed proposal, is there may be only three plans per region.

I think that could be a mistake. Sometimes it takes that full

dozen plans for a Federal employee in a rural area to get just the

preferred provider panel he needs. But those are the main protections, sir.

The CHAIRMAN. Thank you. Another point to you is to make sure

that we are not throwing people that might go into the new plan

to the wolves, and as we have tried to replicate maybe some experience in the Federal program, and the role of the Office of Personnel

Management to referee those, to discuss that, because obviously we

are going to make sure that we have similar protections for our

seniors.

What does an employee do if there is a dispute with a plan in

which he or she is enrolled? Can they appeal to OPM, and how critical is this function in the working of the Federal Employees

Health Benefit Program?

Mr. FRANCIS. Obviously, these issues arise from time to time. All

the contracts say the plans must pay for all medically reasonable

services. So you are starting with, if you go to a doctor and you

think you need a particular service that doctor provides, you are

extremely likely to prevail just automatically, just because no one

is even going to question it.

Obviously, there are exceptions, such as cosmetic surgery, unless

you were disfigured in an accident or something. But, basically,

medically necessary care, you are going to get. If you do not get it

to your satisfaction, you can appeal within the plan.

OPM requires the plans to hear those appeals, to let you go to

several levels within the plan if you do not like the first answer

you heard, and if necessary, you could appeal to OPM. It is a process that seems to work extremely well.

I have counseled a lot of people, hundreds, thousands of people

in this program, and I have just never heard a complaint about

being unable to get needed care. I have heard complaints about,

gee, I wish the plan covered something that it does not cover, but

that is a different issue. Typically, it is not a medically necessary
47

kind of service. So it works very well. The proof of the pudding is

in the eating, in this case.

The CHAIRMAN. Dr. Moon, you point out that Medicare has a better track record than private insurance in controlling growth of

costs. But it seems that you admit that the Federal Employee plan,

and CALPERS as another example, have had better success in controlling costs. Mr. Francis seems to have made the same point.

Given that the reforms we are considering are closer to Federal

Employee, CALPERS, and other private insurance, is that not a

more appropriate comparison, and not over just the last five or 6

years, which have been Medicare’s best, but over a longer period

of time, like 10 to 20 years?

Ms. MOON. My sense of the comparison with CALPERS and

FEHBP is that they have done a little bit better than the private

sector, not necessarily that they have done better than Medicare.

The differences are hard to sort out.

But my concern is that many people often start with the assumption that the private sector will instantly solve all of the problems

of Medicare and lower costs over what Medicare’s costs are, and I

do not see any evidence of that.

In fact, I often point out when I talk about this that these programs do track each other. Medicare adjusts and makes changes

over time when it gets out of synch with the private market, and

so forth. But I think it is important to stress that Medicare is not

a problem in terms of having been out of control in terms of its

growth.

The comparisons we did across the board controled for prescription drug prices, for example. And when we looked at PPOs recently, we learned that the deductibles in PPOs are rising very rapidly, as are the premiums that employers have individuals pay.

They have gone up by more than twice as much as the premiums

for Medicare, for example, since 1988. Again, that is not FEHBP.

But I think the point is, it is not the case that Medicare is a terribly troubled program and doing much worse than the private sector.

The CHAIRMAN. And I have one further question that I am going

to submit for answer in writing to you, Dr. Moon.

Ms. MOON. All right.

The CHAIRMAN. Thank you, Senator Baucus.

[The question appears in the appendix.]

Senator BAUCUS. Thank you, Mr. Chairman.

Ms. Moon, several people have pointed out, I think quite a legitimate concern, namely, seniors, because it is a 1-year contract period, will be, perhaps, very confused. That is, a private plan may

be in in a year or two, or out, and fall back. Just, what is next?

Ms. MOON. Yes.

Senator BAUCUS. That problem. It is a concern I have, too. Given

the basic framework of what we are talking about here, I am just

curious what suggestions you might have as to how to address

that, and your comments on Mr. Scully’s response to Senator Lincoln’s concern in that regard. He mentioned right off the top, as

soon as she completed her question, that actually he thought that

this would be less confusing to seniors.
48

A, it is a problem. B, what ideas do you have, or where do we

begin to try to minimize some of the confusion that might occur?

I do not know it is going to occur. It may be that there are some

areas of the country that there are no plans, so it is always the fallback. Still, I think it is a very legitimate concern.

Ms. MOON. Well, I think a couple of things, right off the bat,

could help. One would be a longer period of time in which prescription drug plans make a commitment to stay in the market and

then you might allow additional ones to come in and let people voluntarily change if they wanted to if the prices were lower. But people should be able to stick with a plan that they find attractive.

Another would be to have a fall-back available to people in all

cases. In that case, the government might experiment with using

medical information to try to provide a more limited drug benefit,

that for example covers only drugs that have shown to be effective

and appropriate. These decisions need to come from a source that

is objective. You are not going to see this approach coming from

formularies designed by PBMs.

The best way that PBMs have to save money, is to use a formulary that is very restrictive because then they can go to the prescription drug company and say, what price will you give us if we

promise to send everybody to you to get their anti-cholesterol medication?

The real problem causing confusion is that presumably Express

Scripts will get something different than Advance PCS in their

deals. So if you have to change plans from year to year, you may

have to switch drugs. We know in many cases that is not a good

thing for people to do.

Both the side effects that arise from drugs can be considerable

in many cases, and it is also confusing to patients to tell them that,

yes, we told you Lipitor was the very best thing to take last year,

but now it is Pravachol that is the very best thing to take. I know

myself, when I take numerous medications, I keep track by the

color, size, and all of that. I think it is no different for seniors.

Senator BAUCUS. So one would be to allow more seniors to have

more options and to be able to choose so they are not locked in.

Also, to maybe provide for a fall-back for a greater period of time.

Ms. MOON. I think the fall-back needs to be there longer, if not

all the time. Certainly once a fall-back is triggered, it should stay

in place for a number of years. That is also a way to test whether

or not the government can do a better job at offering prescription

drug benefits than the private sector. I am not sure which consumers will prefer. If the Federal Government did a good job and

took a slightly different tack and said, let us do it on the basis of

good medical information, not just who is offering the best possible

price at that moment.

Senator BAUCUS. What do you think about that, Mr. Francis?

What if the fall-back were there for a longer period of time?

Mr. FRANCIS. I cannot think of a greater political disaster for this

country than to have the Congress of the United States decide. Because that is who will decide, not some expert panel. The expert

panel is going to say Lipitor is better than Pravachol, or vice versa.

The fact is, one of them is better for some people, the other is

better for others, and you often have to try them to find which one
49

is better for you. I have had to switch my medication for cholesterol, actually, between those and yet another one.

The notion that there exists some Oracle at Delphi in the government who can pick the best pills and then the losing drug company

and clients that want that pill paid for are not going to come to

the Congress to complain, I just cannot see that.

You know the experience you have in adjusting Medicare payment levels because of the differences between urban and rural levels and so on, and you are always tinkering with those boundaries

and those differential levels. It just would be a nightmare.

The whole advantage of the Federal Employees Health Benefit

Program is it takes all of those decisions out of the political process. If I am a Federal employee and a plan I am in this year decides to have a formulary next year that is going to leave out

Lipitor, I can change plans. By the way, they never leave one out,

because they would lose too many customers.

They are trying to keep customers, not lose them. The worst they

are going to do to me, is say, well, we have some preferred drugs,

and so for the preferred ones you will have to pay $20 a prescription instead of the regular $10 that we otherwise would charge you.

That is how they handle those kinds of issues. No muss, no fuss,

no controversy.

Senator BAUCUS. I appreciate that. My time is expired. If you

could just, for 15 seconds, maybe, how do we minimize the potential confusion that I addressed to Ms. Moon?

Mr. FRANCIS. There is an awful lot of confusion, including, as

Tom Scully mentioned, just within the traditional Medicare program. It confuses people in all kinds of ways.

Some author recently, a health researcher, said he did not realize

until he turned 65 that he was not even eligible for Medicare because he had been in State-exempt employment. There are just all

kinds of levels of confusion, and you are never going to prevent

them totally.

One of the nice things about the FEHBP as a program, is people

tend to stay with the same plan. I think it is very important, the

stability aspect that Marilyn was emphasizing.

If you can stay in the same plan and with the same providers

over a period of time, this greatly helps. That is the reality of the

program. Even though people do have this open season and it puts

pressure on the plans, most people wind up in a very comfortable

groove.

Senator BAUCUS. Senator Bingaman?

Senator BINGAMAN. Thank you, both, for being here.

Let me just indicate a concern that I have got. We are talking

about enacting a bill that will cost $400 billion over 10 years and

where there will be a requirement that people pay premiums to get

this prescription drug benefit.

But for this group, which are relatively low-income and also

chronically ill, and I think, Ms. Moon, you referred to these folks,

for example, you take a couple with an income of $21,200 annually

and that same couple has $6,000 worth of drug costs during the

year, that is chronically ill, we are essentially saying that the government, through this program, is going to pick up about 30 percent of the cost.
50

That does not seem to be an adequate prescription drug benefit

for this group. I do not know. It may be adequate for a much higher income group, but for that group it seems we ought to be able

to do better than that. That is 175 percent of poverty. It just does

not seem to me we are doing what we ought to be doing.

Is that your basic view, Ms. Moon?

Ms. MOON. Yes. As I indicated, I think people between 150 and

200 percent of poverty are particularly vulnerable in this plan, and

the gap creates problems for folks who have chronic conditions.

There are ways in which you could tinker even within the budget numbers you are talking about, but $400 billion is a limit that

makes it very difficult to find the magic bullet.

I have looked and it is very hard to find a way to improve the benefit structure, in part because $400 billion, which is a lot of

money, is only 25 percent of what people will spend who are Medicare beneficiaries over the 8 years starting in 2006.

Senator BINGAMAN. I guess if I were chronically ill and had a

substantial prescription drug bill each year, I would probably, even

if this proposal becomes law, be anxious to go out and buy some

kind of Medigap coverage to cover the rest, or do something.

I mean, if this plan is going to cover 30 percent of my $6,000 prescription drug bill each year, then I would probably want to see if

I could not get someone else to help me with some of the rest of

it.

As I understand it, this proposal is going to repeal the legislation

that provides for Medigap plans. That seems unwise to me. We

ought to be permitting the existence of Medigap plans, even if this

becomes law. Is that a crazy idea, either one of you?

Mr. FRANCIS. I will take a shot. I think the concern you are raising is extraordinarily important, Senator. I agree very much with

Marilyn. The danger here is, you have got to strike, with a very

tight budget total, a right balance.

You want the drug benefit to be generous enough so that people

will find it basically meets their needs for drugs. Again, it is a matter of details and I do not know them anyway, but we may need

to charge a higher premium, and give a higher subsidy to the poorer groups.

There are adjustments you could make, trade-offs you can make.

You do not want to wind up in a situation where people have to

buy a supplemental plan because the one they are getting from the

government is so lousy.

That is the situation, of course, people are in now. Ninety percent plus of all Medicare recipients have some form of supplemental coverage, either from a former employer, or through

Medigap, or through Medicaid.

That whole system can be greatly improved. Indeed, one of my

concerns is, I do not want to let the employers fully off the hook,

either. They have a lot of money. They have skin in this game already. You would like somehow to recoup more of that money, and

your design details can make a difference on that point. So, that

is part of the answer, but I will defer to Marilyn on more details.

Ms. MOON. The issue of Medigap is a complicated one. Medigap

is not a good deal now for anyone to buy prescription drug coverage

because of the risk selection that occurs.
51

In fact, if you were counseling any of your relatives, tell them to

buy the cheapest Medigap plan that covers the least, because it

will not have the problem of risk selection.

But the issue of filling in the gaps is a really tough one because

it is my understanding that there are two different ways in which

people have talked about these plans. I do not know what way this

bill goes.

One, is what people call true out-of-pocket and the other is regular out-of-pocket. As I understand it, true out-of-pocket means

that only what you actually pay will count towards getting you to,

for example, the stop loss.

If that is the case, then the message that you send to both individuals and to employers is that every dollar that is contributed

from some other source goes to reducing what the government

pays, not what consumers would have to pay.

If it is the regular out-of-pocket that most of us think about, as long as you can demonstrate someone has paid $4,000 on your behalf, then you get the extra benefits. That allows extra supplemental coverage. But it makes a big difference in terms of what the

cost scores are, as I understand, as well.

Senator BINGAMAN. All right. Thank you very much. Thank you.

Senator BAUCUS. Thank you, Senator.

Senator Snowe?

Senator SNOWE. Mr. Francis, I wanted to refer to something that

you mentioned earlier with respect to the Public Citizen report,

and I would like to have your response to the report. You mentioned Gardiner. Did you mention Gardiner?

Mr. FRANCIS. Yes, ma’am.

Senator SNOWE. That is not in Franklin County, it is in Kennebec County.

Mr. FRANCIS. Then I may have written this down wrong. But I

pulled a zip code from Franklin County.

[For the record, I used Farmington, zip code 04938.]

Senator SNOWE. All right. I just wanted to clarify that. That is

what I thought you said, and Gardiner is in another county.

So I would like to have you respond to some of those issues concerning PPOs, because obviously the essence of this report is that

many of the providers who currently participate in the Medicare

program are not part of a PPO network. Obviously, that is an issue

for rural areas.

You have mentioned the fact that you believe that the Federal

Employees Health Benefit Plan is a model on which to predicate

providing access in rural areas. It is my understanding, for example, Blue Cross and Blue Shield, said today they had an option of

not participating in a national plan, and they would not because

it is too complicated and too onerous. So how would you address

this issue in making this an attractive option in rural communities?

Mr. FRANCIS. There are a couple of things. First, it is important

to have a multiplicity of plan, because Plan A may have a good provider network in your community and Plan B does not. So, you

would like people to have an ability to get into a plan that has good

preferred providers that they want to use, so multiplicity of plans

helps.
52

Stability helps. We sure do not want to recreate the errors of the

Medicare+Choice program, which we do not need to dwell on here,

but these are lessons we have learned, I hope.

Again, I do not know the details of what you are proposing. In

the FEHBP, it is extremely important you always have the safety

valve of the fee-for-service. While I am in Blue Cross I am normally

crazy not to use a preferred provider because I get such a cheap

physician visit.

Sometimes you really want to use a particular physician and he

is not preferred. You can go and talk to that physician. You can

usually make sure you are not charged an outlandish rate, and

then the plan will pay 75 percent of that cost.

It is not perfect. It does not solve every problem. I mean, there

are no universal, 100 percent, I-can-guarantee-everybody-everything-they-need ways to approach this. The point I think here, is

that we have a real, live, in-action model that says people have a

multiple set of plans to choose from, and by golly, in the rural

counties of America it works. There was another study done by an

outfit called RUPRI, Rural Public Policy Research Institute, or

something like that, where they actually counted the number of

Federal employees and annuitants, who are about a third of the

total here, who signed up for how many health plans in every county in America. They found that only 2 percent of the rural counties

had fewer than two different health plans signed up for it.

In most of these counties, and these are the rural counties all

over, five, six, or seven different plans were being signed up for by

Federal employees and retirees.

Well, people are not signing up for plans without good provider

networks. I mean, they are not stupid. They learn these things. So

what we can observe, and there are a lot of ways to try to measure

all this, is ready access to rural areas.

I would just say, Public Citizen simply bombed out and did not

do it right. We are observing a reality here, which is that Federal

annuitants—Senator Rockefeller earlier said he has not heard constituents say much about the FEHBP. He made this a disparaging

comment.

But I took it in a different way, Senator. I thought, gee, I think

maybe you are not hearing a lot of complaints about this program,

because you would have mentioned those if you would have heard

them. The fact that we do not hear complaints about coverage from

rural areas, I think, is extremely important.

Recently here in D.C. there was this big issue over the Care First

plan not paying for Children’s Hospital, and it blew up and was

front-page news, and all that. Well, those are very rare problems

in this program. You would be hearing from your constituents if

they were not rare.

Senator SNOWE. And you think that it is important to preserve

the traditional fee-for-service program?

Mr. FRANCIS. Absolutely. I guess sometimes you get to talking

about your specific points. The starting point in all this is, we have

a working, functioning program which is a financial lifeline to 40

million Americans.

Well, they do not all have to have it, but the majority of them

certainly do. We do not want to jeopardize that structure. The
53

question is, can we not build something better and let people voluntarily, over time, move into that structure and let it evolve over

time?

Senator SNOWE. Ms. Moon, obviously you do not agree with Mr.

Francis with respect to providing an option with a PPO.

Ms. MOON. I do not have a problem if you want to provide an

option with a PPO. But I think the important thing is that the

PPO should not be given extra money to make it look better than

Medicare just because you are subsidizing it.

There are a number of protections that would be needed. I also

think that the PPOs have been over-sold in terms of how well they

can work, in some cases. The program does need to have options

for people who want to move out of traditional Medicare, but I

want to see the traditional Medicare program preserved and

strengthened as well.

Senator SNOWE. Thank you.

Senator BAUCUS. Thank you, Senator.

Senator Rockefeller?

Senator ROCKEFELLER. Thank you, Mr. Chairman.

Just continuing on that, Marilyn.

Ms. MOON. All right.

Senator ROCKEFELLER. I am worried about seniors who are going

to be paying premiums for many months and getting no drug coverage at all. It is what we call the donut. It requires seniors to pay

over $1,000 out of pocket on their prescriptions before they receive

any benefit.

My question is, even though we do not really have a full plan

that we will be voting on, do you have some sense in rough terms

of what percentage of seniors will end up in this donut, and also

what percentage of seniors will pay more benefit than they receive?

Ms. MOON. I have not looked at who would pay more benefit

than they received. But if you look at the distribution of spending—

and my projections only go out to 2005 about a quarter of all beneficiaries would be in the range where they would be affected by the

donut.

This includes not only the people whose spending is in that range

and never get out of it, but also the folks with higher expenses because they are affected as well. If you have to pay 100 percent of

your costs for a while, even if eventually qualify for further protection, you still would have had that period in which you paid 100

percent of the costs.

Senator ROCKEFELLER. About 25 percent.

Ms. MOON. Yes, about 25 percent.

Senator ROCKEFELLER. As I indicated when I gave my cheerful

opening statement that I am very concerned that West Virginians

have equal benefits to all of the seniors across the country, I am

disturbed, obviously, then that what we are going to be considering

and voting on next week, if PPOs receive a higher benefit, which

I indicated—well, I called it bribery—equals the entire amount we

gave to all the States in fiscal relief, or perhaps $5 billion more

than that, does that mean there will be an unequal benefit in the

PPO option as compared to the traditional Medicare that there

could be?
54

Ms. MOON. I assume that is what it would lead to, or else higher

profits for the PPOs, or else in a less efficient system.

Senator ROCKEFELLER. And is it also true, just so I can get my

questions in, that this plan, to the extent that any of us understand it, that the PPOs can use that extra money for whatever they

want and that therefore they can obviously use that to produce a

better benefit?

Ms. MOON. Well, like you, Senator, I have only seen a two-page

summary, so I do not know what that means.

Senator ROCKEFELLER. But that is a possibility, is it not?

Ms. MOON. It is a possibility.

Senator ROCKEFELLER. If my supposition is correct that there are

no restrictions on how they can use that money.

Ms. MOON. I assume that is a possibility, yes.

Senator ROCKEFELLER. Yes.

Another fundamental problem, is is there a national premium. I

do not think there is. That means if there is no guarantee that

West Virginians will pay the same premium as seniors in California and New York, I am going to be very angry and very disturbed. I think it is a major problem, as I understand the structure

and the two or three pages that we are dealing with.

So how do I explain to seniors in my State that, because very few

private plans will want to come to West Virginia, and none exist

there now, that they will have to pay a higher premium than people in other States? Why should I explain that to them as being

in their interests? How can I?

Ms. MOON. The problems of geography are always problems in

Medicare reform. When you make it very visible by allowing things

like premiums to vary, you will have a lot of unhappy beneficiaries.

Legitimately, they will ask why they should pay more.

It is also likely to be the case that in some places where people

would expect they would have low premiums, because there are

multiple plans, that they will still be high and expensive because

there is some variation in use as well. One would hope that they

would be low in West Virginia, but I think you have no assurance

of that.

Senator ROCKEFELLER. And so, Marilyn, once again, I call upon

your expertise. Is it your understanding that, under this proposal,

there can be national variation in premiums?

Ms. MOON. That is my understanding.

Senator ROCKEFELLER. Variation is not precluded from happening.

Ms. MOON. My understanding is that plans would be given a subsidy, but they would be allowed to charge the premiums that they

think they need to offer benefits.

Senator ROCKEFELLER. And if that is the answer then, what does

that mean for rural beneficiaries like the folks in my State? What

are they likely to lose in terms of benefits and cost?

Ms. MOON. I think that it is very difficult to know, because it

would depend upon how the subsidies that go to the plans vary by

geography and vary by the risk and problems that people have who

will be purchasing those plans.

The difficulty of adjusting what you are going to pay for a prescription drug subsidy, depending upon whether you are talking
55

about an 85-year-old lady with four chronic conditions versus a 70-

year-old lady who is running marathons, has eluded many researchers for a long time. So, I think it is going to be a problem.

Senator ROCKEFELLER. Thank you.

Senator BAUCUS. I thank everybody. What struck me in this

hearing, I think it has been a very, very good one. There have been

a lot of good questions asked and a lot of good answers. Slightly

different points of view, but not dramatically. It is part of, without

being too corny, the American process. It is the legislative process

here.

I thank you all for participating. You have been very, very helpful, and particularly, I think, the good questions asked by various

Senators. This is just one step of many that we will be undertaking

to try to find the best way to get a prescription drug for seniors.

I just want to thank you all so very much for being part of it.

I am quite certain that there will be many further discussions

among us and others as we proceed. Thank you very much.

The hearing is adjourned.

[Whereupon, at 12:47 p.m. the hearing was concluded.]

(57)

A P P E N D I X

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

PREPARED STATEMENT OF HON. MAX BAUCUS

Thank you very much, Mr. Chairman. As always, I appreciate your leadership of

this Committee, and your willingness to work with me. I would also like to thank

others on the Committee for their longstanding work on Medicare. In particular, I

want to thank Senators Breaux, Snowe, Hatch, and Jeffords for their work over the

years.

Some may take issue with the speed of our deliberations. While I do not agree

with them in all respects, I will say this: I firmly believe that we should not proceed

until we have a cost estimate of the plan from the Congressional Budget Office. And

if we do not have those numbers, I will urge the Chairman not to proceed.

But we are at an important point. Sometimes, there comes a time when you have

to fish or cut bait. We have $400 billion on the table, specifically earmarked for

Medicare reform and a prescription drug benefit. We have been at this point before

and let it pass us by.

Yes, it would be nice to have more funds available for this policy. And yes, a richer benefit would be more desirable. But the question is: Will we let the opportunity

to use these funds pass us by again? I don’t think so. This time, it’s going to be

different. This year, I believe the stars are aligned. Chairman Grassley and I have

put together a solid framework that I believe will help seniors across the country.

It’s not a perfect package. Nothing ever is. Sure, there are provisions that I would

have liked to see in the bill. And others I might not have included. But I think it’s

a good bill. A good start toward helping seniors get the prescription drug coverage

they need. And getting everything you want is not what Congress is about. None

of us can pass a bill by ourselves. The bill we will pass will be a product of many

different opinions and many different points of view. Too often lately, it feels as

though people don’t even want to try to work together. But by not working together,

the only people we’d be hurting would be the ones we were elected to serve.

The framework that Senator Grassley and I outlined publicly yesterday would establish a voluntary drug benefit under a new Part D of Medicare. If a senior decides

to join a private managed care or preferred provider plan, then the prescription

drug benefit would be rolled into that plan. If a senior decides to stay in traditional

fee-for-service Medicare then the senior would receive drug benefits through a

stand-alone plan. But the value of, and subsidy toward, the prescription drug benefit would be equal for seniors who move into private plans or who stay in fee-forservice.

Unlike the President’s plan, this proposal does not force seniors—90 percent of

whom are in traditional Medicare—into a private plan that they neither want or

need. This is especially important to rural states like Montana, where most seniors

don’t have the option of moving into a private plan, because those plans don’t exist.

That leads me to my next point. Under our proposal, Chairman Grassley and I

have included a strong government fallback. Seniors must have access to at least

TWO private plans for a prescription drug benefit, or the government will provide

a fallback plan. If there is not true competition, then traditional Medicare would

provide a fallback.

We’ve also focused on making sure the drug program is accessible and affordable

for our low income seniors. Low-income seniors would pay no more than minimal

cost sharing at all levels of spending. We have done much to eliminate what people

call the ‘‘donut’’ of high copayments for low income seniors.

I have a good feeling about the progress we’ve made. We’re on the right track.

The proposal Chairman Grassley and I are working on is still very much dependent
58

on the CBO score, which we expect to receive Sunday. I anticipate that changes may

need to be made, but we’re in a good position.

I’d like to thank Chairman Grassley for seizing this opportunity to work together.

And I’d like to extend an invitation to all of my Finance Committee colleagues. I

ask them to join us and work together to develop this Medicare prescription drug

bill.

I believe that it’s time to take advantage of the opportunity that’s available to us

and pass a good bill. It’s time to help our seniors.

PREPARED STATEMENT OF HON. JIM BUNNING

The Medicare bill will be the most important bill Congress considers this year.

Seniors have waited too long for this benefit, and we have a responsibility to our

constituents to pass a bill this year. We have $400 billion set aside, and we should create the best benefit possible

with that money.

I am particularly concerned about the benefit we provide to low-income seniors.

These are the people under 135% to 150% of poverty.

These are the people who really struggle to afford their drugs, and these are the

people we should be most concerned about helping.

One hundred percent of poverty means that an individual’s income is about

$8,980, and a couple’s income is $12,120. AT 135%, an individual makes about

$12,123 and a couple makes about $16,362.

These aren’t rich people by any stretch of the imagination.

Personally, I don’t see a reason why rich seniors like Warren Buffett—or many

of us sitting around this table—should get a drug benefit at all.

I also think it is very important for low-income seniors to receive good assistance

between the time when Congress passes this bill and when the program can be implemented in 2006.

I feel very strongly that we should provide as much of a subsidy as possible to

low-income seniors during those first two years. I believe that $600 a year for two

years is a good start in that direction.

The amount of money for a low-income subsidy is minuscule compared to the overall costs of prescription drugs, and it is the right thing to do.

PREPARED STATEMENT OF WALTON FRANCIS

In my dual careers and capacities as a consumer advocate and advisor on how

to choose the best health insurance plan,1 and policy analyst advising on government policy options and reforms, I have long argued that the FEHBP is a highly

promising model for Medicare reform. This testimony addresses the myths and realities of that comparison. It is based on, and expands, testimony I provided to the

Special Committee on Aging of the United States Senate on May 6, 2003.2 I address

specifically some of the design issues facing this Committee as it prepares a bill for

submission to the Senate.

A careful student of both the FEHBP and Medicare programs opened several

years ago that ‘‘the FEHBP has outperformed Medicare every which way—in containment of costs both to consumers and the government, in benefit and product innovation and modernization, and in consumer satisfaction.’’3 I agree. In this testimony I provide data that will support these conclusions and also dispel misconceptions about the FEHBP.

Careful analysis of these issues is particularly important because in recent years

there has been a steady growth in misrepresentation of the FEHBP’s performance,

directly or by implication, from defenders of the statist Medicare model. For example, a recent analysis is described in its abstract as an answer to those who ‘‘seek

to remake the federal health insurance program for the elderly . . . on the model

of the . . . Federal Employees Health Benefits Program. This paper . . . rebuts

those arguments by showing that Medicare beneficiaries are more satisfied with,

have better access to, and have greater confidence about their access to health care,

and they report having fewer financial problems as a result of medical bills’’ than

those enrolled in private employer plans.4 The body of the analysis, and the survey

data themselves (discussed below) do not support the claims in the Abstract. Another analysis says that ‘‘FEHBP has done . . . slightly worse than Medicare, on

average, [in controlling costs] since 1996.’’5 The selection of 1996 as a base year

leads to a conclusion contradicting the author’s own analysis in a prior report showing that the FEHBP outperformed Medicare very substantially from 1992 to 1997.6
59

This same author persistently states that there are only 6 plans available to all Federal employees and retirees when there are in fact 12 plans available to all, and

15 to 20 available to most?7

Benefits. Medicare serves as a lifeline to the elderly of America. Its coverage of

hospital and doctor costs is vital to the economic well being and survival of millions.

Yet, Medicare is infamous for its obsolete, vintage 1960 design. It does not provide

a catastrophic ceiling on costs even for those costs it covers. It does not cover prescription drugs (except in rare instances). It does not cover many preventive services. It does not cover dental services. By failing to cover health care costs incurred

abroad (except in Canada and Mexico), it forces the elderly either to forgo retirement travel outside of North America or to obtain other coverage. Indeed, so deficient is Medicare coverage that over ninety percent of its enrollees purchase supplementary insurance, or have it purchased for them.8

None of these deficiencies affect the FEHBP. That program was also created vintage 1960, but it has painlessly evolved over time through the competitive, consumer-driven process that is its central feature. The Medicare plan can be rated for

its benefit coverage in 2003, compared to average FEHBP plans. For a retired person without dual coverage I obtain the following results (these data include dental

costs and exclude premiums) using the methodology of CHECKBOOK’s Guide to

Health Plans for Federal employees:

These cost comparisons demonstrate that FEHBP retirement benefit coverage

is far superior to Medicare’s. There is another significant dimension of benefit superiority. In both programs

the great majority of common hospital and physician procedures are covered routinely. However, at the margin Medicare coverage choices are dictated either by

statutory law or by administrative law dictated through the Medicare coverage processes. Although there is some variation by area because of carrier discretion, this

tends to be minimal. Further, all Medicare HMOs are required to offer benefit coverage identical to that in traditional Medicare. In the FEHBP, in contrast, coverage

choices are made by individual plans. This means that consumers can seek out

plans that have better coverage for particular services of importance to them. Acupuncture, cardiac rehabilitation, expensive dental procedures, and other services are

usually available, at a price, in some available plan. Medically proven procedures,

such as pancreas-only transplants, and the latest advances in pacemakers, are covered in all or almost all FEHBP plans, but are often covered by Medicare only after

years of delay, if ever. And FEHBP plans are free to, and often do, cover services

that they would not ordinarily cover at all if these are approved as part of a case

management package tailored to a particular enrollee’s needs.

FEHBP benefits have improved markedly over time. During the ten year

period ending in 1992, out-of-pocket costs in the FEHBP for a market basket of hospital, medical, drug, and dental costs decreased from about 32 percent of total per

enrollee costs to about 20 percent of total costs.9 This improvement resulted from

benefit improvements in both fee-for-service and HMO plans, and from a significant

shift in enrollment from the former (higher cost) to the latter (lower cost). Both

sources of improvement have largely halted in the last decade, primarily because

of rising prescription drug costs and increases in copayments aimed at restraining
60

these. Furthermore, copayments play a significant role in restraining FEHBP costs,

and plans have very little room left for copayment reduction without facing untenable cost and premium increases. Finally, as plans approach complete coverage, the

margin for further improvements necessarily decreases. However, no such improvement has ever occurred in Medicare, whose benefits have, on a market basket basis,

deteriorated over this entire period.

Provider Choice and Access. Medicare is, in a sense, one of the relatively few remaining fee-for-service (FFS) medical plans in America. Most private plans either

limit provider choices substantially or, as is quite common, provide differential cost

sharing depending on whether or not the provider is ‘‘preferred’’. Of course, Medicare is not really fee-for-service since it regulates prices and, indeed, makes it illegal

for providers to negotiate higher prices with enrollees and still obtain any reimbursement.10 The FEHBP national plans almost all allow enrollees to go ‘‘out of

plan’’ and pay only one fourth of a reasonable charge above that level. These plans’

reimbursements are more favorable for ‘‘preferred’’ physicians, but some payment is

available whether the physician has any arrangement of any kind with the insurance company. At worst, the patient pays the bill and then gets reimbursed directly

from the insurance company. Every Federal retiree can join a dozen health

plans that reimburse him for most of his costs for virtually any physician

who accepts private patients at all. More physicians are available through

the FEHBP than through Medicare.

The Medicare Payment Advisory Commission conducts surveys of physicians and

in its most recent report found that physicians are significantly less willing to accept Medicare patients than private plan patients.11 Specifically, in 2002 over 99

percent of physicians accepted private FFS and PPO patients, but only 96 percent

accepted Medicare patients. This is a seemingly small difference but if it is your doctor, or the best specialist in town, who will not accept you, it can have a major effect

on your health care. And until recently enacted payment increases, it appeared that

the proportion of physicians unwilling to accept Medicare patients was about to rise

substantially.

In this context, the FEHBP has a significant advantage over Medicare because

of its multiplicity of plans. Every Federal employee or retiree, no matter

where he or she lives, anywhere in America or anywhere in the world, has

no fewer than twelve plan options from which to choose in 2003. (This includes both ‘‘high’’ and ‘‘standard’’ options offered by the same carrier, since these

options always differ significantly in both benefits and premium.)

Federal retirees in areas covered by participating HMOs have additional plans

from which to choose. Thus, while a retiree in North Dakota or Wyoming may ‘‘only’’

have twelve plan choices, a retiree living in or near medium and large size cities

in almost all states will typically have several more plan options. In the larger metropolitan areas, where the great majority of both Medicare and FEHBP retirees reside, there are often about 20 plan choices available to Federal retirees.

Rural Access. Of particular concern to rural Americans is the absence of plan

choices in the areas in which they live. One recent analysis by the Rural Policy Research Institute (RUPRI) shows that . under Medicare+Choice, only 7 percent of

rural counties offer Medicare beneficiaries any choice of plan beyond traditional

Medicare.12 In contrast, using an overly conservative methodology that significantly

understates choice in the FEHBP (by using enrollment levels rather than actual

plan availability), the RUPRI study finds that 87 percent of rural counties enroll

Federal employees and retirees in 6 or more plans, and 98 percent in 3 or more

plans.

Another study attempts to minimize the FEHBP’s strong rural access by claiming

that ‘‘unless participants in more isolated areas are willing to travel long distances

or pay extra amounts for care, they may find that only one or two plans offer meaningful access to services.’’13 This analysis focuses on Lebanon, Kansas, and states

that only 2 plans (actually, 4 plans because the analyst erroneously ignores dual

plan options) offer preferred primary care providers within 25 miles. This is true.

But three of the dismissed FEHBP plans (including NALC and the two Mail Handlers plans) use the FirstHealth network and offer 694 preferred physicians and

clinics within 50 miles, a seemingly large total for a town that is not within one

hundred miles of a metropolitan area. Further, why should these and other plans

be dismissed cavalierly when they in fact will pay 70 or 75 percent of the charge

for ANY physician in or near Lebanon simply because this requires participants to

‘‘pay extra amounts for care’’ compared to the less costly preferred provider rate?

Why is 75 percent reimbursement of reasonable physician charges characterized as

less than ‘‘meaningful access’’ to services?

Regardless of how one characterizes access in Lebanon, Kansas, a proper comparison would cover far more rural areas. After all, preferred provider networks vary
61

from place to place and any one network is not equally comprehensive everywhere.

Furthermore, the fundamental access problem for rural Americans encompasses not

just primary care, but also specialist care and hospitals. One of the interesting areas

in the RUPRI analysis is Kenedy County in southwest Texas. This county has fewer

than 500 residents. RUPRI scores it as one of the 2 percent most underserved areas

in the FEHBP because Federal employees and annuitants among these residents

have signed up for no more than two plans.14 Residents of Sarita, the primary town

in this county, have no physicians or hospitals that are preferred providers within

20 miles under the FirstHealth network. But Kenedy County is only one county removed from Corpus Christi. Using a 50 mile radius search that reaches that metropolitan area, Sarita residents have 13 hospitals and 694 physicians and clinics available under the supposedly inferior FirstHealth network.15

FirstHealth may not be quite as comprehensive as Blue Cross or some of the other

FEHBP networks. But it does contract as preferred providers with over 4,000 hospitals and almost 400,000 ambulatory providers. With this kind of reach, it obviously provides substantial preferred provider access to virtually all rural residents

of the United States. The same can be said for all of the provider networks used

by the national FEHBP plans.

Benefit Innovation. The importance of plan choices, of course, goes far beyond

serving patient needs for provider choice and benefit options. The fundamental

model of the FEHBP, like most services in our economy, relies on competition in

attracting consumers as the driving force for both quality improvements and restraint of costs. For example, plans are free to add, drop, increase, or decrease

deductibles. These are not trivial decisions. Deductibles have substantial effects on

consumer acceptance, on premiums, and on health care utilization. Plans that strike

the right balance do best over time. The fact that wide variations in deductibles persist over time suggests that there is more than one ‘‘right’’ model.

In fact, most plan benefits are quite stable. Deductibles are not frequently

changed. But some benefits do change rapidly in most plans. Notable for experimentation and change are plan payments for prescription drugs. Ten or fifteen years

ago, most plans either charged a nominal copayment or a modest coinsurance percentage for all drugs. Enrollees were free to go to the drug store of their choice. Mail

order and formularies were almost nonexistent. In the last decade, with ever increasing spending on drugs—reflecting mainly new drugs with major new therapeutic benefits—plans have vigorously changed their approaches. Today, most plans

have a six-tier benefit structure for drugs. There is one set of copayments for mail

order, and another somewhat higher set for using preferred pharmacies. Generic

drugs cost the enrollee the lowest copayment, preferred name brand drugs on the

formulary somewhat more, and other name brand drugs the most. One can only

imagine the political turmoil and potential for unnecessarily costly or constraining

decisions were price controls and formularies to be proposed as features of a Medicare drug benefit. (Perhaps one had better say: just look at the last several years

of political paralysis!) And it is inconceivable that such a benefit, once enacted into

law under the standard Medicare approach, would receive the kind of nimble evolutionary adjustments used in the FEHBP as plans jockey for the best mix of generosity and cost control to attract customers.

Current FEHBP drug benefit structures place both the burden and the opportunity for decision making on the enrollee. They encourage frugality, but allow for

medical necessity. They have evolved virtually without political controversy or legislative or bureaucratic fiat. And these approaches to benefit design have been proven

to keep down drug spending and save both the payer and the enrollees a great deal

in premium costs.16 Based on RAND research, I estimate that the annual savings

to the FEHBP from current tiered payment systems is somewhere around $500 million annually, about 2 or 3 percent of program-wide premium costs, shared by the

government and enrollees.17 Additional savings from the use of Pharmacy Benefit

Managers may equal or exceed those from tiered copayments.1 Adoption and continuing reform of prescription drug and other benefits in the FEHBP has

been politically and programmatically painless, while saving billions of dollars over time.

Open Season is the annual opportunity for Federal employees and annuitants to

‘‘vote with their feet’’ by switching plans. Although only about 5 percent elect to

change plans each year, this provides relentless and continuing pressure on all

plans to adapt and improve services while controlling costs. In contrast, most private employers frequently attempt to lower costs by changing their single plan from

one insurance company to another. This imposes major disruptions on their employees, who are forced to change physicians when involuntarily transferred from Plan

A to Plan B. Paradoxically, the seemingly radical FEHBP system of continuous competition is in far more stable. This stability benefits enrollees not only directly and
62

immediately, but over time, since plans retain incentives to invest in preventive care

today to avoid higher expense years down the road.

Consumer Satisfaction. Consumer satisfaction is very difficult to measure fairly,

and there may be no studies that directly compare Medicare to the FEHBP using

elderly persons as the sample universe. However, we have some important information. OPM has innovated in the use of quality information in the FEHBP program,

and led the way to adoption of participant surveys. By providing this information

to enrollees, OPM has significantly aided them in plan selection. These surveys

focus mainly on specific dimensions of plan performance, such as getting needed

care, how well doctors communicate, and claims processing, but also measure overall

satisfaction. The most recent survey information shows that on a scale of 1 to 10,

about 79 percent of FFS and PPO enrollees and 63 percent of HMO enrollees rate

their plans 8 or higher.18

We also have information from the annual Open Season, in which enrollees decide

whether to stay in their plan or ‘‘vote with their feet’’ by moving to another plan.

Each year, fewer than 10 percent of employees and fewer than 5 percent of retirees

elect to switch plans. The overall level of enrollee satisfaction with the

FEHBP is clearly very high. A recent Commonwealth Fund Survey of Health Insurance did compare Medicare

and private insurance.19 It found that 85 percent of Medicare elderly rated their

plan as good, very good, or excellent. In contrast, ‘‘only’’ 81 percent of those privately

insured and of working age rated their plans as highly. However, these results really prove nothing. It is well known that plan satisfaction increases with age of respondent. Younger enrollees are far more critical. This largely explains the differential between FFS and PPO ratings in the FEHBP, since the HMOs disproportionately attract younger enrollees. HMOs enroll 40 percent of Federal employees but

only 10 percent of retirees. In the Commonwealth survey, an 81 percent favorable

rating by those aged 19 to 64, compared to 85 percent favorable among those aged

65 or more, arguably shows that private health plans would actually be rated

by consumers far higher than Medicare if available equally to each age

group. Finally, the reported results failed to distinguish between the elderly enrolled in Medicare alone, without any supplementary benefits, and the roughly nine

out of ten who have supplemental plans including, among others, retirees simultaneously enrolled in the Medicare and the FEHBP (an extraordinarily rich benefit

combination). Thus, the results say nothing at all about satisfaction with traditional

Medicare standing alone. Indeed, the survey shows that the Medicare disabled, a

younger group much less likely to have a supplemental benefit, give Medicare only

a 66 percent favorable rating. Thus, among the respondents who are below age 65,

Medicare scores far worse than private plans.

Another recent survey, sponsored by the American Association of Health Plans offers additional evidence on seniors’ views of health plans.20 This survey, whose respondents were exclusively elderly, found that 72 percent of seniors enrolled in traditional Medicare believed that a choice of plans was important (among M+C enrollees, this percentage rose to 88 percent). On a variety of measures of plan satisfaction, enrollees in traditional Medicare and M+C showed essentially identical satisfaction levels. For example, 82 percent of the former and 79 percent of the latter

were very or somewhat satisfied with the benefits they received. One would expect

this result since the overwhelming majority of the former group has supplemental

benefits and presumably responded on the basis of their total benefit package. Just

as for the Commonwealth survey, one can reasonably assume that those enrolled

in traditional Medicare alone and without either supplemental benefits or an M+C

option would have registered far lower satisfaction levels.

Guaranteed Benefits. The FEHBP and Medicare programs differ fundamentally in

several ways, one of which is the difference between a ‘‘premium support’’ as opposed to ‘‘defined benefit’’ structure. An HARP study argues that the Medicare approach is better because the benefits are ‘‘entitlements’’ that are ‘‘protected’’ because

defined in law.21 This line of argument is fundamentally flawed in three ways.

First, statutorily defined benefits can be taken away whether or not defined as

legal entitlements. The Medicare deductible used to be defined by law at $50 but

is now $100. The Congress once enacted prescription drug benefits and then repealed them. Indeed, the Congress amends the Medicare statute every year. As the

program steadily progresses toward insolvency, maintenance of current benefit levels hardly seems assured. Relatedly, the FEHBP is just as much an ‘‘entitlement’’

as Medicare. It is simply handled a different way. The FEHBP premium level is

‘‘protected’’ by being defined in law and the ‘‘entitlement’’ formula that defines the premium level provides a substantially better level of insurance

benefits than Medicare. The entitlement says, in essence, that the government

pays 75 percent of the average cost of plans that enrollees voluntarily choose. In-
63

deed unlike Medicare the FEHBP statute has never been amended to reduce enrollee benefits.

Second, FEHBP benefits have been superior to those of Medicare for decades. The

‘‘defined benefit’’ turns out to be no more than a guarantee for a second rate product, and the allegedly weaker ‘‘premium support’’ guarantee has proven a superior

guarantor of benefits by actual experience.

Third, both premiums and benefits can be guaranteed in statute without using

the ‘‘enumerate every benefit in excruciating micro-managed detail’’ approach used

by Medicare. Enrollees can be guaranteed by law an actuarially reasonable value

of benefits, both overall and in broad categories such as hospital or drugs. Within

such a constraint(s), plans can make the decisions as to which deductibles (if any)

to use, where to set deductible levels, where to set copayment and coinsurance levels, whether or not to tier benefits, which treatments to accept as medically proven,

where to set the catastrophic guarantee level, etc. In fact, this is essentially the way

that OPM operates the FEHBP. The FEHBP statute could be amended to make the

actuarial fairness and soundness tests explicit guarantees better than those of Medicare, without changing the program in any way. The ‘‘premium support’’ model

used by the FEHBP has proven to be both better and safer as an entitlement than the ‘‘defined benefit’’ Medicare model. Consumer Understanding. It has often been alleged that consumers, particularly

elderly consumers, cannot handle the complications of a competitive plan system.

After all, it is claimed (and true) that many consumers do not understand traditional Medicare itself.22 While by definition choice certainly is more complicated

than no choice, there is no evidence that consumer choice poses any more of a problem for health insurance than for any other product or service. The elderly choose

their own doctors, their own automobiles, their own foods, and their own living arrangements. Any or all of these are as or more complicated than health insurance.

Bizarrely, discussions of this topic often contain no, or minimal, references to the

rich informational resources available to one and half million Federal retirees.23

Furthermore, criticisms of plan choice implicitly assume that traditional Medicare

poses little or no information burden. In fact, traditional Medicare creates difficult

informational problems and choices.24 For example, most persons, upon turning age

65, have a choice among various Medigap plans, yet receive little or no information

from Medicare or any other source as to the value of such plans individually or compared to one another. Low income beneficiaries may be eligible for Medicare supplementation and premium payments, yet are rarely informed of these benefits and

if they attempt to explore them are faced with the daunting welfare bureaucracies

that administer Medicaid. Hundreds of thousands of older workers are not even eligible for Medicare but do not know it (these are, typically, state employees hired

before 1986).25 Errors in Medicare decision making expose the elderly to financially

disastrous mistakes. So serious are these problems that one analyst calls for new

informational campaigns and for reforming State application processes. Without

waiting to reform Medicare, we should ‘‘act now to fix the programs that we already

have in place’’.26 In contrast, the FEHBP program poses few ‘‘gotchas’’ and is essentially free of complex decision issues. The worst potential financial error arises from

the requirement that enrollees participate continuously in the program for five

years before retirement to retain benefits after retirement. The most complex decision is the choice at age 65 as to whether or not to enroll in Medicare Part B to

supplement the FEHBP benefit. (It turns out that Medicare Part B is a bad financial buy for Federal retirees turning age 65, but one virtually forced on them by unnecessary financial penalties and the uncertainty of future political decisions.27 In

the FEHBP, unlike traditional Medicare, errors in plan enrollment decisions and

changing circumstances can be remedied or accommodated each year in the annual

Open Season.

To be sure, Federal employees and retirees are on average better educated than

Medicare beneficiaries. Working Americans, on average, are better educated than

the elderly and far less likely to suffer mental impairments. But no system of

choices in our society, whether choices of friends, spouses, foods, automobiles, or

anything else depends on every single consumer being smart and well informed. As

the inevitable errors occur, we accept that as the price of individual autonomy in

decision making.

Most fundamentally, criticisms of choice based on decision complexity create a ridiculous standard. How many consumers of any age or educational level understand

the innate workings of automobiles—the physics of and technology used in engine,

transmission, braking, and other systems? Yet, somehow, through magazine ratings,

recommendations of friends, test drives, modest government oversight and regulation, past experience, and above all the pressures of a competitive market place, the

elderly are overwhelmingly able to select and use cars that are effective, durable,
64

safe, comfortable, and economical. Should we ban competition in the automobile industry because some consumers are ignorant or uninformed or even incapable of understanding certain complexities and a few make bad choices? And why stop at

automobiles? The entire economy rests on consumers making choices among tens of

thousands of competing goods and services, choices that are analytically complex beyond even the abilities of Consumer Reports to simplify in its relative handful of

comparative analyses. Somehow, despite all these complexities, it is seemingly only

health insurance that is held forth by critics as the one service that will overwhelm

cognitive abilities, and choice among plans as the one decision that consumers cannot be trusted to make.

Competitive choice among health plans is certainly facilitated by careful oversight

and information dissemination. OPM has proven to be effective in these matters,

and the private market has provided additional information that consumers and

those family and friends who advise them can use effectively. See the latest

CHECKBOOK’s Guide to Health Plans (www.retireehealthplans.org), and the OPM

Web site (www.opm.gov/insure/health) for thorough and user friendly displays of

information. These formal and organized information sources, of course, are not

those that most consumers primarily rely on. Instead, they use their own experience, and the experience of friends and neighbors, and above all the market driven

menu of good options they face, to make annual decisions among plans. Since most

FEHBP plans are excellent choices, overwhelmingly satisfying enrollee preferences

for benefits, provider choices, responsiveness, and cost, 95 percent or so make the

simplest possible choice each year: remaining in the same plan. To be sure, the elderly do not have coworkers to advise them on plan selection, in contrast to Federal

employees.28 But seniors have information networks of their own, including an extensive system of counselors located in Area Aging Agencies.

Confusion in choosing among competing products has simply not been a problem

for the millions of Federal annuitants who, over the years, have benefited from their

plan selection decisions. Should Medicare be reformed into a pro-consumer

choice system, assuring adequate information will not be difficult if the

OPM approach is emulated, and the private sector encouraged to supplement government information. Adverse Selection. Some argue that any form of multiple plan choice will necessarily lead to destructive risk selection and unpredictable exit and entrance of

plans—the dreaded ‘‘death spiral.’’ Certainly the FEHBP has no system of any kind

for managing risk selection.29 In contrast, Medicare ceaselessly searches for improved methods of fine-tuning its risk management features. Reform of the AAPCC

(Adjusted Average Per Capita Cost) system was delayed for a decade or more because no one could devise a perfect system. The long delayed reform failed again

to correct the fundamental problem that well managed health care does not in fact

cost half again more in Miami than in Des Moines, or in Prince Georges County

than in Fairfax County among the Washington suburbs.

There is even a respectable argument that some risk selection is desirable. For

example, if people with dental problems tend to join plans with better dental benefits, willingly paying the full marginal cost of their decision, what ethical or managerial principle is violated?

The FEHBP has survived for four decades with no management of risk selection

other than the stability inherently produced by its insurance subsidy. A recent study

by eminent economists concluded that the program has almost no measurable adverse risk selection.30 An amateur study, more critical, nonetheless concluded that

‘‘FEHBP’s stability may amount to stable biased selection’’.31 Whatever circumstances may lead to the ‘‘death spiral’’, they do not obtain in a plan choice program designed along the lines of the FEHBP. Amusingly, program critics like to cite

the single example of the departure of the Aetna FFS plan from the program in

1990. The fact is that Aetna was dropping all of its FFS products at that time, and

found its increasingly marginal FEHBP position a handy excuse to drop out of the

program.

The Medicare+Choice Experience. Some claim that because Medicare+Choice has

had a rocky start, and failed to reduce overall Medicare costs, consumer choice has

been tried and has failed. However, under the reimbursement formula used in that

program, relying on the fundamentally flawed AAPCC estimates of geographic variability in health costs, and tied to the yo-yo of annual changes in Medicare spending

levels, Medicare+Choice never had a chance to perform properly.32 Indeed, an important and mostly ignored research study has demonstrated that geographic variations in managed health care costs are minimal, rarely exceeding a 10 percent variation above or below the national average anywhere in the country.33 A well designed defined contribution program using rolling averages or all-plan averages and

minimal geographic adjustments (if any) would have functioned far better. In addi-
65

tion, a set of draconian and unreasonable mandates made participation expensive

and burdensome for any FFS or PPO plan, and for most HMOs. One regulatory

mandate, for language interpreter services paid by each plan, is arguably illegal in

at least three different ways.34 Incredibly, despite these problems Medicare+Choice

still manages to attract about 150 plans and almost 5 million enrollees, about 1 in

8 Medicare clients.

Regulatory mandates, unreliable funding levels, constant change, unrealistic government expectations, and other rocky issues have led to perhaps the most fundamental problem of M+C. Health plans do not regard Medicare (both CMS and the

Congress) as a good business partner. Even the promise of substantial additional

business has proven a weak incentive in the face of the underlying distrust, distrust

based on a well known track record.

A program that made it financially infeasible for HMOs in most of the Midwest

to participate, and that has even forced Kaiser plans to withdraw, is a fundamentally flawed program. Furthermore, the OPM/plan relationship is one of steady cooperation and predictable behavior. The FEHBP shows far better ways than

Medicare+Choice to implement effective plan choice.

Cost Control. The last comprehensive examination of cost control found, surprisingly, that the FEHBP had actually controlled costs slightly better than Medicare.35

My updated analysis now shows that the two programs roughly tie when costs are

looked at without regard to benefit changes. However, when benefit improvements

are taken into account, the FEHBP maintains its superiority in cost control.

Each program has good years and bad years, and these do not correspond in any

simple way. By careful selection of base year, it is easy to ‘‘prove’’ that one program

outperforms the other. And depending on whether the comparison covers one, three,

five, or ten years, the answer is very different. To get around these problems, one

good method is to use multiple rolling averages covering 10 years. This shows long

term performance without the noise that affects shorter comparisons. One needs

multiple ten year comparisons because the latestone can be (and usually is) unduly

influenced by a particular good or bad base year in one program or the other. The

table below shows the latest results, all taken from publicly available budgetary

data covering 28 years (the raw data are appended at the end of this testimony).
66

Another way to view relative performance over time is to chart the average cost

per enrollee, using the same data quoted above. As shown below, the FEHBP and

Medicare both started and ended at almost exactly the same levels over the 28 year

period. However, during this period the FEHBP was consistently below the Medicare level, often by substantial amounts, and hence cumulatively saved substantial

amounts compared to what it would have spent had its trajectory matched Medicare’s. This comparison does not include adjustments for improvements in FEHBP

benefits over time.

The data end in FY 2003 because the budgetary projections for 2004 are unreliable for both programs. However, Medicare’s chief actuary has recently announced

that there is an unexpected increase of 12% in Medicare Part B costs for 2004.

Using later estimates for both programs, the FEHBP would likely have outperformed Medicare in the cumulative comparison. In summary, the FEHBP and

Medicare programs have virtually identical records over time on keeping

cost increases down, despite substantial and costly benefit improvements

in the FEHBP. Put another way, were benefit improvements used to adjust

cost figures, the FEHBP unambiguously outperforms Medicare in cost control. In recent years, however, Medicare has had an advantage and the future performance of these programs is almost impossible to predict. One substantial problem

facing the FEHBP is that with recent increases in government cost sharing, enrollees pay only about 17 percent of premium costs, and incentives to attenuate cost

and premium differences are greatly attenuated from those of past years.36

It should not really be surprising that the records are broadly similar, since both

programs operate in the context of the American health care system, with the same

underlying structure of hospitals, doctors, costs, technological changes, and a myriad

of other commonalities.

However, viewed another way, there is a surprise. The Medicare Administrator

operates a system of price controls. As the Congress has so amply demonstrated in

its recent flip flop attempts to set physician, hospital, and Medicare+Choice reimbursements at the ‘‘right’’ levels, determined in large part by the decibel level of the
67

political outcry, price controls can be set arbitrarily within a fairly broad range.

Thus, Medicare could outperform the FEHBP in reducing premium costs through

cutbacks in provider prices and income, through benefit reductions, and through

other government-mandated reductions. Health care resources, both human and

bricks and mortar, are not in the short run perfectly mobile. Thus, the Medicare

budget is set ultimately by what the political system tolerates, not by the market

or any objective method.

There is also the pertinent question of how Medicare compares to the private sector’s cost control experience generally. One recent study claims that ‘‘Medicare can

be counted on to control per enrollee spending growth over time, more than private

insurers can’’.37 This study relies on a comparison of Medicare and private insurance payment data derived from National Health Accounts data provided by the

agency that administers Medicare. The data purport to show that since the

mid1980s Medicare has consistently outperformed the private sector in controlling

spending on comparable services (e.g., excluding prescription drugs because these

are not covered by Medicare). Another analysis uses the National Health Account

data together with data from the National Medical Care Expenditure Survey

(MEPS) and other sources to demonstrate that when cost increases are adjusted for

benefit improvements, the private sector at large has outperformed Medicare over

the last 30 years.38 In other words, whether looking at private spending in

general, or the FEHBP in particular, benefit-adjusted private sector costs

have increased less than Medicare costs over most or all of the life of the

Medicare program. In the case of the FEHBP, its cost growth is so superior that

it ties or slightly out performs Medicare even without adjusting for benefit improvement over time.

This cost control performance has come despite (or because of) higher administrative costs for the FEHBP, despite paying physicians and other providers more than

Medicare,39 and despite the near absence of direct managerial controls. One reason,

of course, is that Medicare lurches from one crisis to another as both consumers and

providers find ways to game the system. In the FEHBP, plans ceaselessly find ways

to speedily control unnecessary spending, relying on a wide range of techniques.

OPM can urge plans to adopt useful innovations by simple letter requests,

unencumbered by the Federal Register process used by CMS, which on average requires years from inception to final publication of binding rules. For example, it took

years of regulatory indecision, and ultimately an Act of Congress, to stop Medicare

payment for unnecessarily expense seat lift chairs, once routinely prescribed by doctors for patients who saw beautiful and expense lounge chairs advertised on television as covered by Medicare. In the FEHBP, OPM was not involved, and plans

simply refused to pay for anything other than the most austere models of seat lifts,

relying on ‘‘reasonableness’’ clauses in their policies.

Approaches to Medicare Reform. I have attempted to address each of the major

areas in which fundamentally different approaches to health insurance programs

can be compared. On each dimension of performance, the FEHBP is arguably at

least equal, and usually superior, to Medicare as currently constructed. This doesn’t

lead to any simple conclusion as how best to reform Medicare. The issues are many

and complicated. And it certainly does not mean that the FEHBP program is perfect—it has many important problems. Several of these, to which I hope this Committee can attend, are embodied in the Medicare statute. There is a senseless and

costly restriction in Medicare law prohibiting FEHBP plans (and no other employer

plans) from paying Part B premiums. That restriction costs both Medicare and the

FEHBP a good deal of money because it forces plans to offer unusually high benefit

wraparounds rather than offer lower premiums, which leads to unconstrained utilization incentives. A second problem is the needless 10 percent a year penalty imposed on late enrollment in Medicare Part B. This penalty is imposed even if the

enrollee is covered by comprehensive insurance and the possibility of adverse selection is remote. Lifting this restriction for those covered by comprehensive plans

would induce more elderly to remain in employer sponsored retirement plans, thereby directly reducing Medicare costs.40

My testimony is not intended to suggest a blueprint for actual Medicare

reform. Obviously, the FEHBP model cannot and should not be adopted in

every detail or even every major feature. Many carefully analyzed decisions would have to be reached to make an FEHBP-like system a viable

Medicare model. However, certain pitfalls and solutions are obvious.

1. Above all, the FEHBP is a good business partner. The rules of the game are

few, robust, and rarely changed. In sharp contrast, the next wrenching Medicare reversal is rarely farther away than the next Congressional session. To succeed, Medicare reform must provide for reasonable assurance of stable and growing payment

rates, stability of plan participation (no risk of being evicted from the program if
68

a plan’s premiums go up just slightly ‘‘too much’’ next year), freedom from both costly mandates and nuisance regulations, and other significant changes from current

practice.

2. The FEHBP provides a reasonable and predictable level of financing to health

plans. Again in sharp contrast, Medicare+Choice has been greatly hampered by its

reliance on the annual level of spending in traditional Medicare, and the reliance

on the absurd assumption that widely varying levels of per capita health care

spending from county to county are even an imperfect proxy to the costs of delivering managed health care. Unfortunately, reliance on competitive bidding in any

form is likely to introduce unpredictable results, with plan participation varying unpredictably depending on the annual bidding decisions of other plans. Surely a better approach can be devised, such as a government payment level based on a rolling

average of prior costs in traditional Medicare, and allowing plans to charge whatever premium they must in order to cover their costs while attracting enrollees.

Ideally, such a payment would be level, or nearly so, throughout the country.

3. The FEHBP lets plans decide benefit and coverage details, and Medicare should

as well. Many otherwise astute students of reform have suggested that competing

plans should have identical benefits, specified in detail by the government.41 However seemingly attractive this idea may be in terms of simplifying decisions for enrollees, it would be a fatal mistake. It would transform what would otherwise be

private decisions on a myriad of benefit details into government decisions on the details of the uniform benefit structure, just as under traditional Medicare. Because

those government decisions would be made through bureaucratic processes and

often on political grounds, rather than through evolving consumer choices and plan

responses, the essential mechanisms of timely benefit innovations and cost control

would be destroyed. Requiring all plans to adhere to government-specified benefit

details would be roughly comparable to requiring all automobile manufacturers to

follow uniform ‘‘one size fits all’’ government specifications as to size, seats, horsepower, cup holders, paint colors, and all the other myriad features that today distinguish one model of car from another. There are obvious alternatives to detailed benefit specification, such as providing benefits that, in total, meet an actuarial test.42

This test should be applied to core benefits, not just extra benefits. No plan should

have to meet the precise parameters of Medicare Parts A and B for hospital and

outpatient services, when these are so often unnecessarily costly, limiting, or arbitrary.

Benefit standardization would also be unnecessary for consumers. As discussed

previously, there is no persuasive evidence that product standardization is any more

necessary for understanding health plans than for any other service or product in

the economy.

4. Service areas and preferred provider depth within them should be flexible.

Some have suggested that plans be required to have identical service areas specified

by the government.43 The rationales are that if every plan has an identical service

area specified by the government, it will not be able to cherry pick the healthiest,

that rural areas will be better served, and that employee choice will be simplified.

These are purely hypothetical advantages, and the latter fails even the laugh test.

Modern Internet technology allows every single enrollee to receive or create plan

comparisons based on his or her zip code, without regard to what other areas the

plans cover. The CHECKBOOK and OPM web sites for Federal employee plan

choices organize and present plan comparisons by geographic area. Furthermore, in

the real world plans serve, and enrollees live in, reasonably well defined areas. Anyone can understand that plan A covers all of New Jersey, plan B all of New York

and New Jersey, and plan C the metro New York area in those states and in Connecticut. The cherry picking argument deals with a nonexistent problem that has

never emerged in the history of the FEHBP.

Uniform boundaries could create an administrative disaster, and would certainly

preclude the participation of many and perhaps most HMO plans and other small

plans specializing in particular areas. In effect, the government would be telling

Kaiser and every other HMO that it has to cover a named multi-state area (perhaps

defined in terms of the existing 10 Federal regions), even if Kaiser cannot and will

not build or find a network of that size or covering those precise areas. These problems might be less if uniform areas were applied only to PPOs rather than HMOs.

However, even here problems could abound if plans were not allowed to provide

service outside these areas, or were forced to expand networks in unnatural ways.

Thus, the government would presumably require West coast plans to cover Alaska

and Hawaii, require plans based in Hawaii to cover the West coast, and ditto for

Puerto Rico and the mid-atlantic region. A Pittsburgh plan in the mid-atlantic region might be forbidden from covering Ohio residents, just down the Ohio river, because they would be located in the mid-western region. Even the Blue Cross system,
69

with its ever-evolving boundaries, might have to restructure its service areas

throughout the nation to meet the Medicare boundaries.

These are not hypothetical issues. The government sponsored system for organ allocation, the Organ Procurement and Transplantation Network, is plagued with

problems created by its system of geographic regions. As an example, patients on

waiting lists in the Omaha metropolitan area who live on the Iowa side of the Missouri River are forced to travel to distant Iowa cities to obtain organs, simply because Nebraska and Iowa fall in different regions in the OPTN system. The Medicare Prospective Payment system has extensive problems in determining boundaries

among reimbursement areas. No system of service or payment limiting geographic

boundaries can avoid anomalies like these. Moving the boundary from one place to

another simply moves the locus of error and controversy. Allowing for exceptions

(e.g., Puerto Rico plans can appeal to Medicare not to have to cover the mainland)

simply creates another burdensome bureaucratic process and would ultimately lead

to a tangled mess.

Nor are geographic restrictions needed to promote rural access. Nothing in either

logic or FEHBP experience suggests that every single plan need provide the same

depth of provider networks in every geographic subunit. The robust FEHBP performance in Lebanon, Kansas, and Sarita, Texas, shows that there is no compelling

reason why every plan in any area has to offer equally broad provider networks to

assure good rural access. In most remote areas several plans will offer good provider

panels, even if all do not. And why wouldn’t plans, anticipating some out of plan

use, generally provide for FFS benefits along with preferred provider benefits, as in

the FEHBP? Most importantly, requiring every plan to offer equal access will restrict the number of plans willing to offer services in a given area, and reduce the

ability of plans to manage their networks efficiently. In other words, a requirement for ‘‘one size fits all’’ minimum standards for geographic coverage and

access could deprive, not foster, enrollee choice of plans and providers,

while driving costs borne by enrollees higher than necessary. These arguments are not meant to suggest that geography play no role in reform,

but that any provisions need to be carefully crafted to assure that they do not create

more problems than they solve.

5. Surely participating plans should be exempt from state mandates, as are the

national plans in the FEHBP. The FEHBP also limits state regulation of HMO benefits to those of the home state, not every state in which the HMO operates. Thus,

the Kaiser plan of the mid-Atlantic enrolls Federal members from six jurisdictions,

but must meet only Maryland, not Delaware, DC, Virginia, Pennsylvania, or West

Virginia mandates.

6. Obviously, Medicare reform must meet short and long run budgetary objectives.

Painful compromises on generosity of benefits are necessary. But if cost constraints

force an unduly parsimonious approach to design of the reform package, along with

‘‘hole in the doughnut’’ prescription drug benefits, the entire purpose of reform may

be jeopardized. Highly constrained and geographically bounded competitive bidding

systems may have the unintended result of zero cost, simply because no sensible

health plan will want to participate. In this regard, there is a player in the Medicare reform game who is rarely discussed: the large employers of America. These

firms and governmental units will reap windfall reductions in post-retirement

health insurance costs with the introduction of prescription drug coverage into traditional Medicare. There are ways to make that windfall smaller. For example, the

tax deductibility of health insurance contributions to these firms could be conditioned on at least partial maintenance of effort for retirees, with the firms essentially being obliged to bear part of the cost of premium supplements for both old

and new Medicare plans. Further, there are the aged themselves. In a program

whose long term insolvency looms ever closer, increasing the proportion of costs

borne by the elderly from its current small fraction seems obviously desirable, however much the elderly might prefer a free ride on taxes paid by working Americans.

Moreover, the higher the nominal premium borne by the elderly, the higher the

level of subsidy that large employers will find themselves forced to bear in subsidizing that premium. Low income elderly without retirement benefits from former

employers can and should be protected through premium subsidies, either by improving current arrangements under Medicaid or through direct discounts based on

prior year tax returns.

In this regard, I note that the original FEHBP model had employees and retirees

bear 40 percent of premium costs, and that over time this inadvertently (due to a

drafting error in the statute) decreased to about 28 percent. Recently added tax

preferences have reduced the effective employee share to about 20 percent, but retirees still pay on average about 28 percent. In sharp contrast, the elderly pay rather

less than 10 percent of the premium-equivalent cost of Medicare. Working age tax-
70

payers at all income levels, and to a lesser extent elderly and affluent taxpayers,

pay the rest. The generosity of the FEHBP lies in its dynamic revision of the reimbursable cost basis for premiums, using an all plan average of current and projected

costs, rather than in the percentage of premium that it pays.

7. As a final suggestion, why not allow the national FEHBP plans themselves to

compete for Medicare business under a reform system? These plans could readily

segregate finances and enrollment information for the two enrollee groups. Of

course, they would not compete if they had to comply with cumbersome rules that

would affect their benefits and coverages, their provider networks, their administrative costs, their ability to participate over an extended period of time without eviction from the program, or their autonomy under the FEHBP. Whether or not you

adopt this somewhat whimsical idea; if the system that this Committee ultimately

chooses would not readily accommodate participation by these plans, then I suspect

it will fail.

Conclusion. A fundamental issue should be prominent in deciding among reform

options and alternatives. The Medicare program is overwhelmingly statist. Medicare

uses political fiat, price controls, and centralized bureaucratic processes to try and

regulate an infinitely complicated trillion dollar health care market. Every decision

that Medicare makes is necessarily a compromise that is wrong, often deeply wrong,

for large numbers of enrollees and providers. Medicare is like a government designed automobile (actually, we have had two of these: the jeep and the Humvee).

Designed by committee, changed too late, final details set by legislative or bureaucratic fiat, based on the principal that ‘‘one size fits all’’ and the corollary ethical

proposition that every one should get an identical benefit because anything else is

‘‘unfair’’, Medicare lurches along like a grounded Dumbo the elephant. Like the jeep

and the Humvee, it fits very few as well as the plan (or auto) they would choose

for themselves, if offered a choice.

In contrast, the FEHBP uses the mildest forms of government direction and oversight to allow the forces of choice and competition to determine health plan costs,

benefits, provider choice, administrative convenience, and a host of details. As a

final example, every single FEHBP plan covers health care anywhere in the world

(HMOs offer care anywhere outside the plan area for emergencies). Why is this? Because very few consumers would voluntarily enroll in a plan that didn’t offer this

feature, even if they had no travel plans. If this feature cost a great deal, some

plans would decline to offer it to their members, seeking to attract the ‘‘stay at

home’’ group. The fact that hundreds of health plans do not act this way demonstrates that the extra costs of this feature are small. Why then does Medicare not

offer this benefit? And why do most of government prescribed and designed Medigap

plans not offer this benefit?

Obviously coverage abroad is a far less important issue than prescription drug

coverage and many others (though not less important to former immigrants who

wish to live in retirement in their lands of origin, without giving up their health

insurance or being forced to buy an exorbitantly expensive Medigap supplement).

But a program run on the bureaucratic regulatory model necessarily fails to deal

optimally with many problems both large and small. Indeed, we all know that the

chief impediment to a Medicare drug benefit is that the Medicare program is a price

control program run along draconian lines not seen elsewhere in most of the American economy since World War II. Price controls are anathema not only to the pharmaceutical industry, but also to all of us who expect that cures for Alzheimer’s disease (and many others) are likely only from a profit-driven industry free to charge

‘‘high prices’’ without government price controls.

The choice before the Congress ultimately is between these two models—consumer

choice or detailed legislative and bureaucratic control of benefits and prices. The

Food Stamp program has long demonstrated that it is possible to have a government entitlement that leaves purchasing decisions almost entirely with consumers

rather than legislators or bureaucrats. By good fortune we have as a health insurance example the successful performance of the consumer choice model in meeting

the needs of 9 million Federal employees, retirees, and family members. Surely we

can use that model to aid in reforming the Medicare program.
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RESPONSES TO QUESTIONS FROM SENATOR FRIST

Question. In her testimony, Dr. Moon states that ‘‘price competition only arises

when products are very similar, so that consumers can compare prices.’’ Yet, Mr.

Francis notes in his testimony that flexibility in FEHBP has been a clear advantage

for consumers. The competitive FEHBP—which provides much greater flexibility for

private sector health plans to shape benefit packages in response to consumer pressure than the more rigid Medicare program, and to more rapidly cover breakthrough

medical devices and prescription drugs—has done a very good job of using a competitive model to both improve quality and hold costs in check over time. In fact,

Mr. Francis, you say in your written testimony that ‘‘FEHBP benefits have been superior to those of Medicare for decades. The ‘defined benefit’ [of Medicare] turns out

to be no more than a guarantee for a second rate product.’’

Could you please comment, and respond to Dr. Moon’s assertion?

Answer. In a modern market economy, it is rare for products sold to consumers

to be identical. For example, there are literally hundreds of models of automobiles

for sale, each varying in dozens and dozens of features and characteristics. Consumers Union and automobile magazines often compare cars on a dozen or more of
74

these characteristics, selected as just the most important. Yet no one would doubt

that automobiles compete on price, or that consumers compare price. They compare

price, quality, and features simultaneously. If they can compare automobiles on

these complex variables, they can certainly compare health insurance policies, which

are much simpler products. In the FEHBP, as in the automobile market, inferior

products as judged by consumers lose market share over time, and in some cases

withdraw from the market. It is precisely because the elderly have no effective

choice other than the ‘‘one size fits all’’ Medicare program that it is able to survive

with inferior benefits.

Question. Mr. Francis, Dr. Moon and other commentators have written analyses

in the past few years indicating that Medicare has done a better job than private

health insurance plans in reducing growth in the cost of health care and health coverage. In fact, Dr. Moon repeats some of that analysis in her testimony today (page

4). However, these analyses are either (1) misleading; or (2) not applicable to the

proposed reforms to Medicare we are considering. The real comparison here is not

between Medicare and private insurance costs, but between Medicare and other

competitive public programs built on a model of public-private cooperation—such as

FEHBP and the California Public Employee’s and Retiree’s Program (CalPERS).

In fact, the information that I have been able to review shows that over the past

two decades (from 1984–2002), Medicare spending has grown at about the same, or

somewhat faster, than FEHBP and CalPERS. • Medicare: 7.0% per year • FEHBP: 7.1% per year • CalPERS: 6.5% per year

And, as we all know, Medicare does not cover drugs or other benefits typically

covered by FEHBP and CalPERS. In fact, because Medicare has been insulated from

consumer preferences (in favor of politicians’ and regulators’ preferences), the

CalPERS and FEHBP benefits are typically much more generous. When drug spending is removed from the calculations, in fact, Medicare is somewhat LESS competitive with the two other programs. • FEHBP without drugs: 6.8% per year • CalPERS without drugs: 6.3% per year

Mr. Francis, your testimony supports this analysis, and also makes clear that

FEHBP has ensured lower out of pocket costs and greater benefits over time. Can

you comment?

Answer. I cannot agree more. There are different ways of comparing the programs, and no one has yet performed the ‘‘final word’’ comparison, but it simply cannot be disputed that FEHBP, without the benefit of government price controls, and

with the disadvantage of paying for ever more costly prescription drugs, at least

equals and probably exceeds Medicare’s cost control performance over time. In his

testimony, Tom Scully gave several examples involving billions of dollars in Medicare spending due to the inflexibility and complications of trying to restrain costs

through direct government price controls. The HHS Inspector General’s Office has

long argued that waste in the Medicare program is in the tens of billions of dollars

annually (these reports often use ‘‘fraud’’ in the title but the costliest examples involve waste, not fraud). Overpayments for drugs, excessive ‘‘outlier’’ hospital payments, and innumerable other examples of waste simply don’t occur in the FEHBP

on anything like the Medicare scale, or anything like the time consuming legislative

and regulatory processes necessary for Medicare to reform. It is because the FEHBP

plans can avoid these and other problems through nimble, consumer friendly management, that the program so consistently outperforms Medicare.

Question. As a physician, choice of provider is critically important and must be

ensured in any new program.

Mr. Francis, your testimony is striking to me in several respects. First, you point

out that EVERY SINGLE federal employee in EVERY SINGLE area of the country

has a choice of at least 12 private health plans and that almost all of these ‘‘private

fee-for-service’’ or PPO plans have substantial choice of doctor. You also cite physician surveys showing that (in part because of unrealistically low reimbursement)

‘‘physicians are significantly LESS willing to accept Medicare patients than private

plan patients.’’

If the Medicare system changed gradually over time to look more like FEHBP,

in your opinion would seniors have greater access to health providers of their

choice?

You say that FEHBP provides ‘‘strong rural access.’’ How has FEHBP been able

to assure stable, comprehensive, and relatively affordable private coverage for decades—even in rural areas of the country—while Medicare has failed?

Answer. Under a reformed Medicare offering a choice of plans, I think that some

consumers would gain provider choice, some would retain roughly existing levels of
75

choice, and some—perhaps most—would voluntarily accept reduced choices in order

to save premium and coinsurance costs. That would be a great tradeoff to offer seniors because there is no evidence to suggest that the widest possible choice is necessary either to assure access or to meet consumer needs for high quality physicians. Furthermore, even Medicare cannot provide the widest possible choice since

many of the best physicians will not accept Medicare patients and the more that

Medicare tries to restrain costs by reducing reimbursement, the worse this problem

will be.

The FEHBP serves enrollees scattered throughout the United States (and even

abroad), such as rural postal carriers and retirees. The plans serve these rural areas

in two ways. First, they let their enrollees voluntarily go to any provider, but restrict reimbursement to a reasonable level so that the enrollee has to pay any excess

cost. Second, they offer a better deal for using preferred providers who work with

the plans to restrain cost growth. Savings accrue both from the volume discount

that preferred providers get and from their attempts to curb unnecessary utilization.

These approaches work just as well in rural areas as in urban areas, if not better.

The plans have a strong marketing incentive to attract as many enrollees as possible, and need to maintain good national reputations. Furthermore, because rural

areas on average have somewhat lower costs than urban areas, plans want to attract lower cost rural enrollees to keep overall costs and premiums down. For all

these reasons, plans make sure that their rural networks are strong and consumer

responsive.

PREPARED STATEMENT OF HON. CHARLES E. GRASSLEY

Exploring ways to improve Medicare is a familiar activity for this committee. In

fact, since 1999, the Finance Committee has held 29 hearings on Medicare, and

seven of those have dealt specifically with Medicare prescription drugs. So we ask

the question—why are we having yet another hearing on Medicare? Next week this

committee will be doing something historic. We will be marking up legislation to

create a prescription drug benefit within Medicare. Last year, the committee process

was bypassed completely. We debated prescription drug legislation on the floor of

the Senate without the due consideration of the Finance Committee. But this is a

different year.

With an eye toward mark-up next week, several members requested today’s hearing to further examine various policy options. Many look to the Federal Employees’

Health Benefit Program as a model for Medicare. Federal employees all over the

country, even in rural states like mine, have a choice of private health plans. Many

of these plans are preferred provider organizations or PPOs. With the quality and

innovation that PPOs offer, many believe the Medicare program could be strengthened and improved by developing such an option for Medicare beneficiaries.

The health policy experts we have here today will be able to shed some light on

what these PPOs are all about, how they work, and how they could be used to delivery better health care for our seniors.

Our first witness will be Mr. Tom Scully, Administrator of the Centers for Medicare and Medicaid Services. He will be followed by our second panel which includes

Mr. Walton Francis, an author and independent consultant, and Ms. Marilyn Moon

from the Urban Institute. All three have been deeply involved in health policy analysis, research and administration for many years and we are fortunate they can join

us today.

PREPARED STATEMENT OF MARILYN MOON

Mr. Chairman and members of the Committee: Thank you for inviting me here

today to testify on the important question of how to improve the Medicare program.

Normally when I provide testimony on Medicare I focus on the impacts on beneficiaries and how to improve the program so as to fairly meet its goals. And indeed,

that will be a major focus of this written statement. However, I also feel compelled

to begin with a number of comments that reflect my training as a traditional economist. I am concerned that in the name of ‘‘cost savings’’ and ‘‘efficiency,’’ a number

of changes in Medicare are being proposed that violate basic economic principles.

If competition is to be promoted and relied upon to generate greater efficiency,

a number of conditions should be met. The success of any ‘‘competition-based’’ reform plan will depend on how the following issues are addressed.

First, the playing field must be level. How can we test whether private plans

are a better deal for beneficiaries than traditional Medicare if the legislation pro-
76

vides extra subsidies or benefits to these private plans? If private plans are more

efficient as claimed, then the best test is to let the market work.

Second, price competition only arises when products are very similar so

that consumers can compare prices. If, in the case of prescription drugs, for example, the cost sharing structure and the formulary (i.e. what drugs will be covered

under what conditions) vary, it will become very difficult for consumers to make

good choices. In the case of preferred provider organizations, choices are even more

difficult because of the broad range of ways in which coverage can vary. How does

a consumer trade off hospital co-payments with varying drug benefits with limited

access to providers, for example?

A third and related issue is that reliable information is needed when plans

vary in coverage and access to care. But, at present, much of the information

claiming that PPOs allow access to any doctor or hospital is misleading. Only innetwork providers likely will be available at reasonable rates. A number of studies

point out how limited some of the FEHBP networks can be. Further, even savvy

consumers cannot find out what it will cost them to go out-of-network. These are

details, but essential to making good choices.

Fourth, if we expect consumers to plan for their expenses and be good budgeters,

a drug plan that contains a ‘‘gap’’ or ‘‘donut hole’’ makes no sense. If the government contribution is high for the first part of the year when a consumer is purchasing drugs, he or she is likely to come to expect that. But the dirty little secret

of a gap is that, for a person with expenditures of, say, $5000 per year, the plan

would contribute to costs from February to September, but then stop paying any of

the drug costs come October. There will be a lot of confused and angry consumers

in line at their local pharmacies in the fall.

Fifth, any plan reforming Medicare needs to contend with the potential

for ‘‘market failure.’’ When conditions, such as lack of knowledge by consumers,

competitive advantages by some suppliers over others, incentives for risk selection

that can be only poorly addressed, or the presence of social goals that the market

is not designed to meet exist, don’t expect markets to work well. The social goals

will not be achieved, and there may be little efficiency or cost savings arising from

the market.

As someone concerned about social goals, the rest of my testimony attempts to explain why I have concerns about the details that seem to be part of the proposal

the Senate will be debating, and, on a broader scale, about the optimism that a private sector approach can make a serious dent in the issues facing Medicare now and

in the future. Finally, on a practical level, more attention needs to be placed on improving the traditional program that now serves nearly nine out of every ten beneficiaries and will continue to have a disproportionate number of enrollees. Stoop loss

protections and incentives for care coordination ought not be limited to PPOs.

Difficult challenges arise in deciding how to reform Medicare to meet future demands that an aging population and rising health care costs inevitably will place

on the system. Costs to society for the health care of older and disabled Americans

will rise over time, both in dollars and as a share of our economy. Market forces

do not represent the magic bullet that will solve all of Medicare’s problems. Nonetheless, much of the debate on Medicare’s future has focused on broad restructuring

proposals. This restructuring would rely upon contracting with private insurance

plans, which would compete for enrollees. In addition, a drug benefit, representing

an important promise made to beneficiaries, is also a critical part of the debate.

These changes could profoundly affect Medicare’s future, but as yet there are few

details on which to base an informed debate. I attempt to raise here a number of

issues that ought to be carefully considered before making a massive change in this

program. The second half of my testimony focuses on broader philosophical issues

regarding changes in Medicare.

CONCERNS ABOUT THE DETAILS KNOWN SO FAR

The initial summary released about the Senate Finance plan indicates that a

number of improvements have been made over the earlier approach outlined by the

Administration. Providing the same actuarially equivalent drug benefits to all Medicare beneficiaries regardless of what plan they choose is a major advance in fairness. And the low income protections have been expanded over what has been proposed in the past. Nonetheless, a number of elements remain troublesome. The following is a list of such issues, not intended to be exhaustive, but rather illustrative

of the care that is needed before putting together any final legislation. Each of these

issues ought to be discussed at considerable length and supplemented with details

not available at this time.
77

• Low income beneficiaries. Treating low income Medicare beneficiaries who

are also participating in the Medicaid program exclusively through the meanstested Medicaid program would make them ‘‘second class citizens.’’ One of Medicare’s enormous strengths is its universal treatment. The 17 percent of beneficiaries who are dually eligible should be at the top of the list of concerns for

reform and not shunted to the bottom.

• Who is considered in need of special help. While the suggested drug benefit

offers substantially better drug benefit for those who it would cover, the level

of income necessary to obtain protection is very low. At 150 percent of poverty,

a drug cost of even $2000 can be catastrophic. But that is where this plan’s help

for those with low income would end. As Table 1 indicates, drug costs for someone with modest incomes but above the protected level would quickly become

exorbitant even if that person bought into the drug benefit.

• The ‘‘gap’’ or ‘‘donut hole’’ in the drug benefit generates major problems.

It is hard to understand and reduces protection just at the time when many of

those who are most in need are expecting some relief. That is, persons with

chronic conditions are likely to have drug expenses in the range of $3,000 to

$5,000. Many take several drugs every day, each of which can cost $1,000 or

more per year. This is where the growth in spending is occurring and it is these

drugs that may ultimately help to lower health care costs in the future. From

the early numbers released on the benefit’s structure, persons with spending between $5,000 and $5,500 would have to pay over two thirds of the costs of their

drugs. This is a greater share than someone with $2000 in expenditures has to

pay, for example. A flat percentage contribution up to a catastrophic limit would

be a fairer, simpler, and more honest way to structure a benefit. The basic problem is that $400 billion is not enough to provide a well-designed prescription

drug benefit.

• Disadvantages of a standalone drug benefit. Beneficiaries in traditional

Medicare will be put at a particular disadvantage by the having to purchase a

standalone drug benefit. For a number of reasons, separating that benefit from

the rest of Medicare will make it a less efficient and hence more costly benefit.

If the actuarial value is the same as that for integrated plans, traditional Medicare beneficiaries may be put at a disadvantage since more of the costs will go

to administration than if it were coordinated with Medicare. And if plans are

allowed to tinker with the deductibles, the formularies and other aspects of the

benefit, it will be very difficult for beneficiaries to know what they are getting.

• The Fallback Drug Benefit. The convoluted means for assuring a drug benefit to those in traditional Medicare means that individuals cannot count on a

stable and viable benefit over time. If they must change plans frequently and

occasionally rely on a fallback system, beneficiaries may find themselves having

to shift drugs as the formularies and other details of plans change. More stability is needed. Why not simply offer a fallback benefit through Medicare as

a standard option available to everyone? If private plans prove themselves, then

beneficiaries may not use the government option. If private plans cannot compete effectively, why should special efforts be made to prop them up?

• Subsidies to private plans. Finally, why offer a 2 percent increase in payments to PPOs? Let private plans prove themselves as markets are meant to

do without special treatment for one player or another. If any special treatment

is to be given, it ought to be directed where the most vulnerable beneficiaries

choose to enroll. For the foreseeable future, that is likely to be traditional Medicare. And this is particularly troublesome in an environment where the drug

benefit is poorly designed because of the limits on what the Congress is willing

to spend. A 2 percent payment add-on for PPOs, for example, would amount to

an extra $153 per enrollee in 2006. And if 20 percent of Medicare beneficiaries

move to such plans, that will require a commitment of resources sufficient to

otherwise reduce the monthly premium for all beneficiaries for a drug benefit

by $5 per month, for example.

MEDICARE VS. THE PRIVATE SECTOR

Looking back over the period from 1970 to 2000, Medicare’s cost-containment performance has been better than that of private insurance. Starting in the 1970s,

Medicare and private insurance plans initially grew very much in tandem, showing

few discernible differences. By the 1980s, per capita spending had more than doubled in both sectors for comparable services. But Medicare became more cost-conscious than private health insurance in the 1980s, and cost containment efforts, particularly through hospital payment reforms, began to pay off. From about 1984

through 1988, Medicare’s per capita costs grew much more slowly than those in the
78

private sector. Thus, its base relative to the private sector contracted and a gap in

the two growth lines shown in Figure 1 opened up.

This gap in overall growth in Medicare’s favor stayed relatively constant until the

mid 1990s when private insurers began to take seriously the rising costs of health

insurance. At that time, growth in the cost of private insurance moderated in a

fashion similar to Medicare’s slower growth in the 1980s. Thus, it can be argued

that the private sector was playing ‘‘catch up’’ to Medicare in achieving cost containment. Private insurance narrowed the difference with Medicare in the 1990s, but

as of 2000, there was still a considerable way for the private sector to go before its

cost growth would match Medicare’s achievement of lower overall growth.

Moreover, since 1988, information on private insurance indicates substantial increases in costs being passed on to consumers. Premiums charged to employees for

policies, for example, have risen twice as fast as premiums in Medicare. Deductibles

and other cost sharing have also risen rapidly over time in the private insurance

market.

WILL RELYING ON PRIVATE PLANS INHERENTLY LEAD TO SAVINGS FOR MEDICARE?

Some supporters of a private approach seem to assume that private plans inherently offer advantages that traditional Medicare cannot achieve. But there is no

magic bullet to holding the line on the growth in health care spending. Per capita

spending rises because of the growth in use of services, higher prices, or a combination of the two. Medicare’s price clout is well known and documented.

So what about use of services? Studies of managed care have concluded that most

of them saved money by obtaining price discounts for services and not by changing

the practice of health care. Reining in use of services represents a major challenge

for private insurance as well as Medicare in the future, and it is not clear whether

the public or private sector is better equipped to do this. The newest type of plans

suggested as an improvement for Medicare beneficiaries, preferred provider organizations (PPOs), generally obtain their savings by paying very little for any patient

who goes outside the network to get care. Thus, their strategy is often one of cost

shifting onto beneficiaries. This may hold down PPO premiums, but from society’s

standpoint, does little to help with reducing health care costs.

Private insurers are interested in satisfying their own customers and generating

profits for stockholders. When the financial incentives they face are very broad (such

as receiving capitated payments), private insurers respond as good business entities

should. They seek the easiest ways of holding down costs in the provision of services. This indeed is what competition is all about. Cream skimming of the market

serves these goals very well: Medicare overpays, and plans can both make the

healthier beneficiaries they enroll very satisfied while making good profits. The

problem is that this response is not good for limiting overall costs to either the federal government or to society as a whole. Thus, care needs to be taken to use the

market when we understand and approve of the direction that competition will take

health care delivery.

In addition, private insurers will almost surely have higher administrative overhead costs than does Medicare. Insurers need to advertise and promote their plans.

They would face a smaller risk pool that may require them to make more conservative decisions regarding reserves and other protections against losses over time.

These plans expect to return a profit to shareholders. All of these factors cumulate

and work against private companies performing better than Medicare.

Finally, it is important to note that few private insurance companies escape problems of complexity and bureaucracy. Many patients, both young and old, find the

requirements of their plans to obtain approval before getting some services, to determine which doctors and hospitals are in network and which are not, to understand

the bills when they come due months later, and to use the appeals process to be

cumbersome, complex and overly bureaucratic. Thus, problems with the complexity

of our current health care system are by no means inherent only to government.

So examining reform from the context of Medicare beneficiaries should consider

whether more reliance on private plans will only complicate and confuse beneficiaries further. An assumption is often made that using private plans to provide

services will ease the government’s oversight burdens, but at what expense to beneficiaries?

USING COMPETITION TO GENERATE SAVINGS

Reform options such as the premium support approach seek savings not only by

relying on private plans but also on competition among those plans. Often this includes allowing the premiums paid by beneficiaries to vary such that those choosing

higher cost plans pay substantially higher premiums. The theory is that bene-
79

ficiaries will become more price conscious and choose lower cost plans. This in turn

will reward those private insurers able to hold down costs. And there is some evidence from the federal employees system and the CalPERS system in California

that this has disciplined the insurance market to some degree in the 1990s. But the

experiences in the last few years lend considerable doubt to that enthusiasm.

Studies that have focused on retirees, moreover, show much less sensitivity to

price differences among older Americans. Older persons may be less willing to

change doctors and learn new insurance rules in order to save a few dollars each

month. Thus, what is not known is how well this will work for Medicare beneficiaries.

For example, for a competitive approach to work, at least some beneficiaries must

be willing to shift plans each year (and to change providers and learn new rules)

in order to reward the more efficient plans. Without that shifting, savings will not

occur. In addition, there is the question of how private insurers will respond. (If new

enrollees go into such plans each year, some savings will be achieved, but these are

the least costly beneficiaries, and may lead to further problems as discussed below.)

Will they seek to improve service or instead focus on marketing and other techniques to attract a desirable, healthy patient base? It simply isn’t known if the competition will really do what it is supposed to do. In fact, undesirable outcomes may

be as common as desirable ones.

New approaches to the delivery of health care under Medicare may generate a

whole new set of problems, including problems in areas where Medicare is now

working well. For example, shifting across plans is not necessarily good for patients;

it is not only disruptive, it can raise costs of care. Studies have shown that having

one physician over a long period of time reduces costs of care. And if it is only the

healthier beneficiaries who choose to switch plans, the sickest and most vulnerable

beneficiaries may end up being concentrated in plans that become increasingly expensive over time. The case of retirees left in the federal employees high-option Blue

Cross plan and in a study of retirees in California suggest that even when plans

become very expensive, beneficiaries may be fearful of switching and end up substantially disadvantaged.

Private plans should not be expected to meet larger social goals such as making

sure that the sickest beneficiaries get high quality care if the financial incentives

do not lead to such behavior. To the extent that such goals remain important, reforms in Medicare will have to incorporate additional protections to balance these

concerns as described below.

WHAT IT IS CRUCIAL TO RETAIN FROM MEDICARE

The reason to ‘‘save’’ Medicare is to retain for future generations the qualities of

the program that are valued by Americans and that have served them well over the

past 37 years. This means that any reform proposal ought to be judged on principles

that go well beyond the savings that they might generate for the federal government.

I stress three crucial principles that are integrally related to Medicare’s role as

a social insurance program:

• The universal nature of the program and its consequent redistributive function.

• The pooling of risks that Medicare has achieved to share the burdens across

sick and healthy.

• The role of government in protecting the rights of beneficiaries—often referred

to as its entitlement nature.

Although there are clearly other goals for and contributions of Medicare, these

three are part of its essential core. Traditional Medicare, designed as a social insurance program, has done well in meeting these goals. What about options relying

more on the private sector?

Universality and Redistribution

An essential characteristic of social insurance that Americans have long accepted

is the sense that once the criterion for eligibility of contributing to the program has

been met, that benefits will be available to all beneficiaries. One of Medicare’s great

strengths has been providing much improved access to health care. Before Medicare’s passage, many elderly persons could not afford insurance, and others who

could not obtain it were denied coverage as poor risks. That changed in 1966 and

had a profound impact on the lives of millions of seniors. The desegregation of many

hospitals occurred under Medicare’s watch. And although there is substantial variation in the ability of beneficiaries to supplement Medicare’s basic benefits, basic

care is available to all who carry a Medicare card. Hospitals, physicians, and other

providers largely accept the card without question.
80

Once on Medicare, enrollees no longer have to fear that illness or high medical

expenses could lead to the loss of coverage—a problem that still happens too often

in the private sector. This assurance is an extremely important benefit to many

older Americans and persons with disabilities. Developing a major health problem

is not grounds for losing the card; in fact, in the case of the disabled, it is grounds

for coverage. This is vastly different than the philosophy of the private sector towards health coverage. Even though many private insurers are willing and able to

care for Medicare patients, the easiest way to stay in business as an insurer is to

seek out the healthy and avoid the sick. And in a market system, once that becomes

the dominant approach, even insurers who would like to treat sicker patients are

penalized by the market if they do so. This can clearly be seen in the poor performance of the individual health insurance market in meeting the needs of persons in

their early 60s.

Will reforms that lead to a greater reliance on the market still retain the emphasis on equal access to care and plans? For example, differential premiums could undermine some of the redistributive nature of the program that assures even low-income beneficiaries access to high quality care and responsive providers. Support for

a market approach that moves away from a ‘‘one-size-fits-all’’ approach is a prescription for risk selection problems.

Perhaps of greatest concern is whether the dual eligibles who receive both Medicare and Medicaid continue to be treated as full Medicare beneficiaries. If, as some

documents have indicated, the primary responsibility for these individuals will fall

to Medicaid, the principle of universality will be undermined, and the most vulnerable seniors and persons with disabilities will be disenfranchised. States vary in

their generosity and interest in this population. Further, people move in and out

of Medicaid over time. How would they be treated by Medicare in those instances?

The Pooling Of Risks

One of Medicare’s important features is the achievement of a pooling of risks

among the healthy and sick covered by the program. Even among the oldest of beneficiaries, there is a broad continuum across individuals’ needs for care. Although

some of this distribution is totally unpredictable (because even people who have historically had few health problems can be stricken with catastrophic health expenses), a large portion of seniors and disabled persons have chronic problems

known to be costly to treat. If these individuals can be identified and segregated,

the costs of their care can expand beyond the ability of even well-off individuals to

pay over time.

A major impetus for Medicare was the need to protect the most vulnerable. That’s

why the program focused exclusively on the old in 1965 and then added the disabled

in 1972. About one in every three Medicare beneficiaries has severe mental or physical health problems. In contrast, the healthy and relatively well-off (with incomes

over $32,000 per year for singles and $40,000 per year for couples) make up less

than 10 percent of the Medicare population. Consequently, anything that puts the

sickest at greater risk relative to the healthy is out of sync with this basic tenet

of Medicare. A key test of any reform should be who it best serves.

If the advantages of one large risk pool (such as the traditional Medicare program) are eliminated, other means will have to be found to make sure that insurers

cannot find ways to serve only the healthy population. Although this very difficult

challenge has been studied extensively; as yet no satisfactory risk adjustor has been

developed. What has been developed to a finer degree, however, are marketing tools

and mechanisms to select risks. High-quality plans that attract people with extensive health care needs are likely to be more expensive than plans that focus on serving the relatively healthy. If risk adjustors are never powerful enough to eliminate

these distinctions and level the playing field, then those with health problems, who

also disproportionately have lower incomes, would have to pay the highest prices

under many reform schemes.

On the other hand, it does not seem to be wise policy in a period of resource scarcity to pay private plans more than is available to traditional Medicare to participate. Some outlier payment or risk adjustment might be used to help encourage

plans to come into the program, but a flat, across-the-board payment addition is unsound policy and unfair to those remaining in traditional Medicare.

The Role of Government

Related to the two above principles is the role that government has played in protecting beneficiaries. In traditional Medicare, this has meant having rules that

apply consistently to individuals and assure that everyone in the program access to

care. It has sometimes fallen short in terms of the variations that occur around the

country in benefits, in part because of interpretation of coverage decisions but also
81

because of differences in the practice of medicine. For example, rates of hospitalization, frequency of operations such as hysterectomies, and access to new tests and

procedures vary widely by residence, race and other characteristics. But in general,

Medicare has to meet substantial standards and accountability that protect its beneficiaries.

If the day-to-day provision of care is left to the oversight of private insurers, what

will be the impact on beneficiaries? It is not clear whether the government will be

able to provide sufficient oversight to protect beneficiaries and assure them of access

to high-quality care. If an independent board—which is part of many restructuring

proposals—is established to negotiate with plans and oversee their performance, to

whom will it be accountable? Further, what provisions will be in place to step in

when plans fail to meet requirements or who leave an area abruptly? What recourse

will patients have when they are denied care? The need for this oversight will likely

add to administrative costs; if not, beneficiaries will suffer. At present Medicare

pays only 30 cents per beneficiary annually for the state counseling programs to answer questions from beneficiaries. That already inadequate budget needs to be expanded by a factor of ten or more in the type of environment anticipated.

ASSESSING THE PROMISED ADVANTAGES OF PRIVATE SECTOR APPROACHES

A number of advantages in addition to holding the line on costs are also often

put forth to generate support for this type of approach. A private approach has the

potential to reduce the role in government of ‘‘micromanaging’’ health care, often expressed as no more price fixing by government and greater flexibility for innovation

and change in coverage of benefits. But even more frequently, this approach is emphasized as a means for moving away from a ‘‘one size fits all’’ approach to insurance. In practice, however, some of these claims are likely to interfere with the functioning of effective competition aimed at holding down the costs of care. Tradeoffs

will undoubtedly need to be made.

Choice

While choice and avoidance of uniformity is an appealing promise, it is important

to examine exactly what that means. Many people have made the point that most

beneficiaries want choice of providers of care—doctors and hospitals. They care

much less about whether it is Aetna or Cigna that provides the insurance. (Actually,

that may turn out to be quite shortsighted if plans vary in terms of the details of

operations, such as how much they will pay for services when someone goes out of

network. But those considerations are hard to build into a choice model since even

aggressive consumers find it difficult to obtain such information.)

But the appeal for choice of plan is usually made on the argument that people

will be able to get only the coverage they want and need, even if they have to pay

a little more. The difficulty is that without standardization of the most important

benefits, such choice will lead to risk selection. Young healthy 65 year olds will pass

on home health coverage, for example, in exchange for other benefits or a lower premium. But until risk adjusters get much better (if ever), standardization is important. Moreover, to get plans to compete on price, consumers must be able to compare

plans—another strong argument for standardization. It is not possible to realistically expect both variation in options and health competition.

Flexibility, Innovation and Oversight

One of the advantages touted for private plans is their ability to be flexible and

even arbitrary in making decisions. This allows private insurers to respond more

quickly than a large government program can and to intervene where insurers believe too much care is being delivered. But what looks like cost-effectiveness activities from an insurer’s perspective may be seen by a beneficiary as the loss of potentially essential care. Which is more alarming: too much care or care denied that cannot be corrected later? Some of the ‘‘inefficiencies’’ in the health care system may

be viewed as a reasonable response to uncertainty when the costs of doing too little

can be very high indeed. This arbitrariness also means that providers can be

dropped from a plan with little notice, potentially adding to disruptions for beneficiaries.

The need for strong government oversight will not go away under a private plan

approach unless there are to be few beneficiary protections. Many insurers do not

have a good track record in this area, for example. Patient problems and complaints

under the Medicare+Choice option underscore the need to offer appeals rights, oversight and sometimes direct intervention in order to protect beneficiaries. For example, at present when plans are found to be inappropriately denying care to beneficiaries, the corrections are done on a case-by-case basis even after the same plan

in the same area has been told multiple times to cover a particular service. If pri-
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vate plans are to be even more widespread, this will require a great deal of attention and effort.

Considerable investment in information and education would be needed—spending that goes well beyond what Congress has been willing to commit thus far. Information about plans should not be left solely to the responsibility of the plans themselves.

Unfortunately, there are too few examples of truly innovative new techniques, organizational strategies or other contributions from private plan competition. Many

managed care plans, for example, have relied on price discounts and do not even

have the data and administrative mechanisms to attempt any care coordination.

And preferred provider organizations—the newest private form to be hailed as an

improvement—rely not only on price discounts but on passing off very high costs

to beneficiaries who choose to go out of network for their care. Here the misconception is that you can see any care provider you wish. That’s true for those with substantial resources but not for the vast majority of Medicare beneficiaries who have

only modest incomes. And as the recent CMS report suggests, the main mechanism

PPOs have to control use of services is to drop providers deemed to be ordering too

many services. At best, this is a crude adjustment device.

If innovation is a major reason for relying on private plans, it may make most

sense to provide incentives for plans to specialize and take on those with high risks

or particular conditions. This is where innovation is needed and where care coordination potentially offers the greatest payoffs.

Avoiding Price Setting

Moving away from traditional Medicare will not eliminate the issue of administered prices in health care. There is no free market where doctors and plans negotiate openly on rates. In fact, many private plans use at least some aspect of Medicare payment systems in setting their rates. In a world of many private insurers,

the likely result is hundreds of administered prices being set for each service by

each plan.

In an industry like health care where there are many examples of ‘‘market failure’’ (because of concentrated power, lack of good information and knowledge, product differentiation), the workings of supply and demand can lead to perverse results.

For example, competing hospitals in a given area result in over-capacity as each

hospital tries to have all the latest equipment to attract doctors and patients. As

already mentioned, plans will tend to compete to attract healthy patients rather

than to develop the best management and care coordination protocols. And yes,

price setting is and will continue to be a part of the private insurance world as well

as within Medicare.

CHANGES TO IMPROVE MEDICARE

Making changes to Medicare that can improve its viability both in terms of its

costs and in how well it serves older and disabled beneficiaries should certainly be

pursued. Further, it makes little sense to look for a solution that takes policy makers permanently out of Medicare’s future. The flux and complexity of our healthcare

system will necessitate continuing attention to this program. At present a number

of areas in Medicare need attention. No reform plan can be considered adequate if

it ignores traditional Medicare.

What are the tradeoffs from increasingly relying on private plans to serve Medicare beneficiaries? The modest gains in lower costs that are likely to come from

some increased competition and from the flexibility that the private sector enjoys

could be more than offset by the loss of social insurance protection. The effort necessary to create in a private plan environment all the protections needed to compensate for moving away from traditional Medicare will be very challenging and

cannot promise success. For example, even after six years, many of the provisions

in the Balanced Budget Act of 1997 that would be essential in any further moves

to emphasize private insurance—generating new ways of paying private plans, improving risk adjustment, and developing information for beneficiaries, for example—

still need a lot of work.

In addition, it is not clear that there is a full appreciation by policymakers or the

public at large of all the consequences of a competitive market. Choice among competing plans and the discipline that such competition can bring to prices and innovation are often stressed as potential advantages of relying on private plans for

serving the Medicare population. But if there is to be choice and competition, some

plans will not do well in a particular market, and as a result they will leave. In

fact, if no plans ever left, that would likely be a sign that competition was not working well. But plan withdrawals will result in disruptions and complaints by beneficiaries—much like those that have occurred with the withdrawals from
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Medicare+Choice. Beneficiaries must then find another private plan or return to traditional Medicare. They may have to choose new doctors and learn new rules. This

situation has led to politically charged discussions about payment levels in the program even though that is only one of many factors that may cause plans to withdraw. Thus, not only will beneficiaries be unhappy, but there may be strong political

pressure to keep federal payments higher than a well functioning market would require.

What I would prefer to see instead is emphasis on improvements in both the private plan options and the traditional Medicare program, basically retaining the current structure in which traditional Medicare is the primary option. Rather than focusing on restructuring Medicare to emphasize private insurance, I would place the

emphasis on innovations necessary for improvements in health care delivery regardless of setting.

Critics of Medicare rightly point out that the inadequacy of its benefit package

has led to the development of a variety of supplemental insurance arrangements

which in turn create an inefficient system in which most beneficiaries rely on two

sources of insurance to meet their needs. It is sometimes argued that improvements

in coverage can only occur in combination with structural reform. And some advocates of a private approach to insurance go further, suggesting that the structural

reform itself will naturally produce such benefit improvements. This implicitly holds

the debate on improved benefits hostage to accepting other unrelated changes. That

logic actually should run in the other direction. It is not reasonable to expect any

number of other changes to work without first offering a more comprehensive benefit package for Medicare. In that way, payments made to private plans can improve, allowing them to better coordinate care. And the fee for service system will

also be able to change in ways that might encourage better care delivery. For example, it is not reasonable to ask patients to participate in a program to reduce hypertension (which can save costs over the long run) without covering the prescription

drugs that are likely to be an essential part of that effort. In addition, a better benefit package will also allow at least some beneficiaries to forego the purchase of inefficient private supplemental insurance. That itself should be a goal of reform.

In addition, better norms and standards of care are needed if we are to provide

quality of care protections to all Americans. Investment in outcomes research, disease management and other techniques that could lead to improvements in treatment of patients will require a substantial public commitment. This cannot be done

as well in a proprietary, for-profit environment where dissemination of new ways

of coordinating care may not be shared.

Private plans can play an important role and may develop some innovations on

their own, but in much the same way that we view basic research on medicine as

requiring a public component, innovations in health delivery also need such support.

Further, innovations in treatment and coordination of care should focus on those

with substantial health problems—exactly the population that many private plans

seek to avoid. Some private plans might be willing to specialize in individuals with

specific needs, but this is not going to happen if the environment is one emphasizing

price competition and with barely adequate risk adjustors. Innovative plans would

likely suffer in that environment. This is where I recommend work to enhance the

effectiveness of private plans. Further, Finally, the default plan—where those who

do not or cannot choose or who find a hostile environment in the world of competition—must, at least for the time being, be traditional Medicare. Thus, there needs

to be a strong commitment to maintaining a traditional Medicare program while

seeking to define the appropriate role for alternative options.

A good area to begin improvements in knowledge about the effectiveness of medical care would be with prescription drugs. Realistically, any prescription drug benefit will require efforts to hold down costs over time. Part of that effort needs to

be based on evidence of the comparative effectiveness of various drugs, for example.

Establishing rules for coverage of drugs should reflect good medical evidence and

not just on which manufacturer offers the best discounts. Undertaking these studies

and evaluations represents a public good and needs to be funded on that basis.

Within the fee-for-service environment, it would be helpful to energize both patients and physicians in helping to coordinate care. Patients need information and

support as well as incentives to become involved. Many caring physicians, who have

often resented the low pay in fee for service and the lack of control in managed care,

would likely welcome the ability to spend more time with their patients. One simple

way to do this would be to give beneficiaries a certificate that spells out the care

consultation benefits to which they are entitled and allow them to designate a physician who will provide those services. In that way, both the patient and the physician

(who would get an additional payment for the annual or biannual services) would

know what they are expected to provide and could likely reduce confusion and un-
84

necessary duplication of services that go on in a fee for service environment. This

change should be just one of many in seeking to improve care coordination.

Additional flexibility to CMS to manage and develop payment initiatives aimed

at using competition where appropriate also could result in long term cost savings

and serve patients well. In the areas of durable medical equipment and perhaps

even some testing and laboratory services, contracting could be used to obtain favorable prices.

These are only a few examples of changes, none of which promise to be the magic

bullet, but which could aid the Medicare program over time.

RESPONSES TO QUESTIONS FROM SENATOR GRASSLEY

Question. In her testimony, Dr. Moon states that ‘‘price competition only arises

when products are very similar, so that consumers can compare prices.’’ Yet, Mr.

Francis notes in his testimony that flexibility in FEHBP has been a clear advantage

for consumers. The competitive FEHBP—which provides much greater flexibility for

private sector health plans to shape benefit packages in response to consumer pressure than the more rigid Medicare program, and to more rapidly cover breakthrough

medical devices and prescription drugs—has done a very good job of using a competitive model to both improve quality and hold costs in check over time. In fact,

Mr. Francis, you say in your written testimony that ‘‘FEHBP benefits have been superior to those of Medicare for decades. The ‘defined benefit’ [of Medicare] turns out

to be no more than a guarantee for a second rate product.’’

Could you please comment, and respond to Mr. Francis’s assertion?

Answer. It is important to separate the issue of the generosity of the benefit package and whether there is viable price competition across plans. When consumers

cannot readily compare benefits and evaluate their differences, they may not reward

the lowest price or most efficient plans by switching to them. They may choose instead on other bases. Since choice and competition is presented as a way to substantially hold down costs, it is important to decide how best to achieve that goal. My

point is that allowing a lot of differences in benefits is incompatible with that goal.

The FEHBP benefits are superior to those in Medicare because the Congress has

explicitly chosen not to expand the Medicare benefit package. To determine whether

FEHBP has been able to expand benefits at a low cost would require it to be examined explicitly during times in which the benefits were broadened. One would have
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to go back further in time than most analyses have done to determine this. Moreover, in the last few years, beneficiaries have been asked to pay more cost sharing

in FEHBP while it has remained more stable in Medicare. That would need to be

factored in as well.

Question. Mr. Francis, Dr. Moon and other commentators have written analyses

in the past few years indicating that Medicare has done a better job than private

health insurance plans in reducing growth in the cost of health care and health coverage. In fact, Dr. Moon repeats some of that analysis in her testimony today (page

4). However, these analyses are either (1) misleading; or (2) not applicable to the

proposed reforms to Medicare we are considering. The real comparison here is not

between Medicare and private insurance costs, but between Medicare and other

competitive public programs built on a model of public-private cooperation—such as

FEHBP and the California Public Employee’s and Retiree’s Program (CalPERS).

In fact, the information that I have been able to review shows that over the past

two decades (from 1984–2002), Medicare spending has grown at about the same, or

somewhat faster, than FEHBP and CalPERS. • Medicare: 7.0% per year • FEHBP: 7.1% per year • CalPERS: 6.5% per year

And, as we all know, Medicare does not cover drugs or other benefits typically

covered by FEHBP and CalPERS. In fact, because Medicare has been insulated from

consumer preferences (in favor of politicians’ and regulators’ preferences), the

CalPERS and FEHBP benefits are typically much more generous. When drug spending is removed from the calculations, in fact, Medicare is somewhat LESS competitive with the two other programs. • FEHBP without drugs: 6.8% per year • CalPERS: 6.5% per year

Dr. Moon, your testimony supports this analysis, and also makes clear that

FEHBP has ensured lower out of pocket costs and greater benefits over time. Can

you comment?

Answer. The benefit packages in FEHBP and CalPERS have not become substantially more generous over this period. They have long included more than Medicare

does. Thus, growth rates don’t tell us much at this point. Also, the emphasis on

managed care and now the increase in consumer cost sharing represent deterioration in the FEHBP and CalPERS benefit packages over time.

In earlier work I have undertaken on Medicare, I note that adoption of new technology and the aging of the population should, all other things held constant, cause

Medicare to grow faster than insurance for younger persons. My conclusion is that

it is difficult to find convincing evidence that Medicare is substantially less efficient

than these other approaches and that we should not overstate what savings are possible.

Question. As a physician, choice of provider is critically important and must be

ensured in any new program.

If the Medicare system changed gradually over time to work more like FEHBP,

in your opinion, would seniors have greater access to health providers of their

choice?

You say that FEHBP provides ‘‘strong rural access.’’ How has FEHBP been able

to assure stable, comprehensive, and relatively affordable private coverage for decades—even in rural areas of the country—while Medicare has failed?

Answer. It is important to consider in-network vs. out-of-network choices to be

able to understand what is likely to be available to people in rural areas over time.

Again, I believe that it is worth trying a PPO approach, but not at the expense of

the traditional Medicare program which has provided itself for this vulnerable population.

PREPARED STATEMENT OF HON. THOMAS A. SCULLY

Chairman Grassley, Senator Baucus, distinguished Committee members, thank

you for inviting me to discuss strengthening and improving the Medicare program.

President Bush believes Medicare is the binding commitment of our society to our

most vulnerable citizens and that this commitment to the American people should

be kept. To this end, the President is urging Congress to provide more choices and

better benefits to Medicare beneficiaries bringing Medicare into the 21st Century.

In strengthening and improving what is now a $277 billion program, we need to

combine what we know are the strengths of the Medicare program with the best

of the current private health insurance market and the Federal government’s experience in running the largest employer-sponsored health insurance program. As suc-
86

cessful as the Medicare program has been, it has not kept pace with decades of dramatic improvements in health care. As a result, Medicare beneficiaries today lack

many of the options and benefit coverage available to millions of other Americans.

When it was created in 1965, Medicare was modeled after the Blue Cross and

Blue Shield coverage existing at that time when health care didn’t offer preventive

care or catastrophic care and usually did not include a prescription drug benefit.

Times and Blue Cross plans have changed, but Medicare has not changed with

them. Not only must Medicare include the benefits we have all come to expect, but

we should give Medicare beneficiaries the same options that Americans under age

65 enjoy. If we were creating the Medicare program today, we would model it after

what consumers are receiving in today’s health care marketplace: more choices and

better benefits. Enrollees can now receive care at reduced cost from networks of preferred providers and obtain prescription drug coverage.

Medicare, as a national program with payment practices and provider participation rules determined mainly by statute, does not negotiate rates, but fixes prices

to all providers, regardless of price, volume, or quality. Whether, and on what basis

to treat providers differently is a complicated issue that often requires an intimate

knowledge of local market conditions. A national program cannot make these local

market-level distinctions, which is another reason Medicare needs improvement.

The opportunity to make these changes to strengthen and improve Medicare is

now. With health care costs rising and the Baby Boom generation nearing retirement, Medicare faces serious long-term financial challenges. According to the most

recent Medicare Trustees report, the cost of care continues to increase. For example,

Medicare expenditures for inpatient hospital care increased by almost 10 percent in

2002 and Medicare Part B spending increased by over 9 percent; home health went

up about 8 percent. Not only is it important to offer modern, innovative health care

choices for seniors, but to do so in a way that is fiscally responsible.

We must update the program’s structure to make the best use of our modern

health care delivery methods to maximize the benefits for current and future participants including access to prescription drug coverage. The President has committed up to $400 billion over the next ten years in his FY 2004 budget to pay for

strengthening and improving Medicare, and has offered a framework that will give

all Medicare beneficiaries access to:

• Prescription drug coverage that enables seniors and people with disabilities

to get the medicines they need;

• More choices of more health care plans—just like Members of Congress

and other federal employees enjoy today through the FEHBP;

• Continued choice of doctors and hospitals for the treatment and care they

need;

• No cost-sharing for preventive services such as screenings for cancer, diabetes and osteoporosis; and,

• Protection from high out-of-pocket costs—Often available in plans, but not

available to Medicare beneficiaries.

THE IMPACT OF PPOS

One option that achieves these principles are Preferred Provider Organizations

(PPOs). PPOs are a growing form of health insurance and are now the most popular

type of coverage in the private insurance market, covering 52 percent of the employer group market today. Together with the very similar Point of Service (POS)

model that covers 18 percent of enrollees, 70 percent of insured Americans are in

these ‘‘hybrid’’ plans. In contrast, traditional fee-for-service (FFS) plans represent

only 5 percent of the private insurance market; however 87 percent of Medicare enrollees are in traditional FFS.

PPOs give beneficiaries a wide choice of providers, allowing them to stay within

the PPO network for maximum cost savings or go outside the network to any doctor

or hospital, if they desire. Moreover, they may include greater coverage of preventive care services as well as better coordination of health care services. Additionally,

the PPO design is flexible enough to work well in both cities and rural areas. In

particular, the vast majority of hospitals operating in rural counties—including

counties where there is only one hospital—have Blue Cross contracts that are almost always part of a PPO, according to a May 2003 report by CMS’ actuary.

Applying the principles outlined in the President’s Framework, CMS’ actuaries estimated that the average cost in competitive private plans, including PPOs, would

be less over the 10-year period than the corresponding cost in traditional Medicare.

These savings are expected to grow over time, primarily because beneficiaries enrolling in PPOs would have the option to switch to less expensive plans to reduce their
87

monthly premiums, and because the cost growth rates for PPOs are expected to be

slightly less, on average, than increases in Medicare fee-for-service costs.

Our actuaries’ estimate was derived from data that PPOs provided regarding

CMS’ PPO demonstration. These data suggest that the most efficient plans have the

potential to deliver the same benefits for an average of 2.3 percent less than the

cost of fee-for-service Medicare. PPO-style health plans have the potential to control

costs as well as or slightly better than traditional Medicare over time; however, any

potential savings or costs strongly depend on the proposal itself. For example, the

potential for savings in Medicare depends greatly on whether:

• Beneficiaries are given the option to choose the most efficient plans and save

money on their premiums;

• The bidding process accepts only a limited number of PPOs per region, so that

plans bid aggressively and capture a large market share within that region;

and,

• The contracts contain a risk-sharing arrangement, whereby the plans and the

government share in any savings or cost overruns beyond specified levels.

The private marketplace has developed an efficient and effective model of health

plan that meets the needs of enrollees and purchasers as well as providers, in specific local markets. Likewise, the President’s framework utilizes the PPO model in

order to:

• Cover a wide geographic area, giving those in rural areas new options;

• Offer enrollees a choice of providers at a reasonable cost;

• Include drug coverage;

• Engage providers in quality improvement activities

• Engage enrollees in activities to improve quality such as disease management;

and

• Encourage providing innovative benefits to enrollees, such as health education

and smoking cessation.

The President’s proposed model would rely on regional PPO health plans and

have the same types of features. What consumers value most—options—would be

the hallmark of the proposed Medicare model. Beneficiaries would be able to choose

among the current traditional fee-for-service Medicare, the new enhanced fee-forservice/PPO with an enhanced benefit package, as well as MedicareAdvantage, with

a tighter network for greater savings.

CONCLUSION

The President’s approach for Medicare reform was designed to gradually incorporate the benefits of competition in the provision of Medicare health services.

Today all doctors, hospitals, and health providers are paid federally fixed prices for

their services. Injecting a modest incentive for performance based on price and quality will lower cost, improve quality, and enhance the performance of Medicare for

many beneficiaries. The current health care market has evolved by responding to

individuals’ desires for provider choice, providing access to state-of-the-art treatment, and offering high quality care. The President’s plan is based on combining

the best of Medicare—a community-rated social insurance health plan—with the option chosen by approximately 130 million Americans, the flexible PPO benefit model.

Improvements to Medicare, however, should not force changes on today’s seniors

who are satisfied with the current system. They must be able to keep exactly what

they have. But seniors who want more benefit options should be able to select better

plans—or keep the one they were happy with at age 64.

We want to work together with you to enact significant Medicare legislation this

year, and we are encouraged by the bipartisan progress that is already being made.

America’s seniors and people with disabilities need a drug benefit, and they need

modern benefit options in Medicare. America needs a 21st century Medicare plan

that provides better coverage, including access to prescription drugs. This is the

year to get it done. Thank you for the opportunity to discuss this very important

topic with you today. I hope that I have been able to express the Administration’s

dedication to strengthening Medicare as well as our commitment to work with you

to do so. I look forward to answering your questions.

Enclosure.
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RESPONSES TO QUESTIONS FROM SENATOR GRASSLEY

Question 1. Medicare currently provides the same benefit package for beneficiaries

throughout the United States, regardless of the area in which they reside. Beneficiaries living in Puerto Rico are eligible to receive the same benefits as bene-
89

ficiaries who live in any other U.S. jurisdiction. In turn, the beneficiaries in Puerto

Rico pay the same Part B premiums, and employers and workers in Puerto Rico pay

the same payroll taxes to the federal government.

How would a new Medicare prescription drug program continue to ensure that

equal benefits are provided to eligible U.S. citizens residing in Puerto Rico, and in

particular, how would it meet the needs of Puerto Rico’s low-income beneficiaries?

Answer. Both the House and Senate bills make the new Part D drug benefit available to all Medicare beneficiaries regardless of where they live. There are definitional differences between the House and Senate language that may impact Puerto

Rico, however. S. 1 requires that beneficiaries must be enrolled in Part A and Part

B to be eligible for the new drug benefit, while H.R. 1 requires that the beneficiary

only be enrolled in one part of Medicare. Since Puerto Rico residents have a special

exemption from automatic enrollment in Part B (found in Section 1837(f)(3) of the

Social Security Act) there are many Puerto Rico residents among the approximately

2.3 million Medicare enrollees who have Part A coverage only. Many residents of

Puerto Rico and the other territories, particularly those with low incomes, cannot

afford to pay Medicare premiums and cost sharing. Additionally, while State Medicaid programs on the mainland are required to pay some or all of the costs of Medicare premiums and cost sharing for certain low-income Medicare beneficiaries

(QMBs, SLMBs, and QIs), these provisions are optional for the territories (under

section 1905((p)(4) of the Social Security Act).

While both the House and Senate bills exclude residents of the territories from

the Part D subsidies available to certain low-income Medicare beneficiaries residing

in the 50 States and Washington, D.C., the bills do provide for assistance to these

beneficiaries. Specifically, both bills provide a special, capped amount of funds to

territories that choose to establish a new plan to provide covered outpatient drugs

through their Medicaid programs to low-income Medicare beneficiaries (The House

bill does not further define the target population group; the Senate bill indicates

they would be individuals with incomes below 160 percent of the Federal poverty

level, the highest income category allowed under the comparable provisions applicable to States for subsidy eligible individuals). The House bill provides $25 million

for FY 2006, adjusted in future years by the increase in average per capita Part D

spending. The Senate bill provides $37.5 million for FY 2006, then $50 million for

FY 2007, adjusted in future years as in the House bill. In both bills, the funds would

be divided among the territories in the same proportion as their current share of

capped Federal Medicaid funding. These provisions would not provide identical

treatment for residents of Puerto Rico and the other territories, compared with

mainland residents, but they generally would be consistent with current Medicaid

provisions for the territories.

Question 2a. CBO vs. Administration Assumptions on the Costs of PPOs—

In developing a legislative proposal, we have had numerous conversations with

both the Administration and CBO regarding the cost of introducing a new Preferred

Provider Organization (PPO) option to Medicare beneficiaries—which we will call

Medicare Advantage. In these conversations it has become somewhat apparent that

CMS actuaries and CBO staff take a somewhat different perspective on the potential costs, savings, and efficiencies of these plans. In fact, CBO assumes that PPOs

pay providers more than Medicare pays providers for individual services; they also

assume that PPOs have higher administrative costs.

If providers payments are higher in private plans, and private plans spend more

on administrative costs than CMS does, why do your actuaries assume that PPOs

would be able to provide the same benefits that the Federal Government provides

through the traditional Medicare fee-for-service plan for approximately the same

costs?

Answer. As outlined in a recent CMS issue paper, the CMS Office of the Actuary

believes, based on data from the PPO demonstration program in Medicare+Choice,

that a great many PPO plans will be able to negotiate payment rates that are at

or below Medicare’s rates. In addition, PPOs are expected to control utilization better than traditional Medicare, which has a large effect on the total cost of the benefit. These two saving factors, even with the higher administrative costs, are what

cause CMS actuaries to predict that PPO plans could cost about as much as traditional Medicare and even achieve a modest savings for the program over time. It

is important to note that the actuaries believe there is great uncertainty about these

estimates, because no such regional PPO market exists today, so any differences between CMS actuaries and the Congressional Budget Office reflect the results of honest attempts to model the question. Also, the actuaries stress that their predictions

are highly sensitive to the details of the market and bidding structure for the PPO

plans’ details that will be shaped in pending legislation.
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Question 2b. Doesn’t practical experience with large public programs that rely

heavily on a partnership with private health plans to deliver benefits—such as

FEHBP and CalPERS—suggest that even with higher provider payments, private

plans are more efficient in delivering higher quality care at lower costs?

Answer. CMS analysis of FEHBP, CalPers and Traditional Medicare suggests that

these three systems have roughly comparable performance in containing costs over

the long term. Growth in health care costs is largely driven by new and changing

technology, including new prescription drugs—factors that impact all three systems.

In addition, each system tends to adopt the others’ good ideas over time, as evidenced by the fact that many private insurers adopted the prospective payment system for hospital stays developed by HCFA for Medicare in the early 1980s.

Question 3a. Ensuring Choice in Rural Areas—

Medicare has offered beneficiaries managed care plans to beneficiaries for several

years through the Medicare+Choice program. Yet beneficiaries and plan experience

with Medicare+Choice has been mixed. Those who have access to an affordable

Medicare+Choice plan have very high satisfaction with their plan. Yet many seniors,

particularly in rural areas, aren’t offered a Medicare+Choice plan. And those who

at one time had access to a plan have lost access due to increasing premiums or

the discontinuation of a plan altogether. In fact, 91 percent of rural counties have

no Medicare+Choice options. But in FEHBP, 87 percent of rural communities have

6 or more plans available.

I represent a state that has a number of Medicare+Choice plans, but they aren’t

available in all parts of the state to all seniors. How do we ensure that we set up

a new option that will be available to all seniors, especially those in rural areas?

Answer. Ensuring access to all seniors, especially those in rural areas, is precisely

why the Administration adopted the regional PPO model in its Framework to Modernize and Improve Medicare. By linking together cities and rural areas in one regional service area, the PPO model strives to give all beneficiaries options for their

Medicare coverage. The PPO model is flexible enough to work throughout a region.

It can function more like an exclusive network in areas where there is provider competition and more like a fee-for-service payer in areas with fewer providers. The evidence for this is clear, as enrollees in the Federal Employees Health Benefits Program (FEHBP) all have access to multiple plans, many of which use a PPO model;

and most every hospital in the country, including those in rural areas, have Blue

Cross contracts.

Question 3b. I know first hand the importance of the bond between a patient and

their physician. How do we ensure that relationship is not undermined as we structure a new PPO option?

Answer. PPO plans are one of the most loosely managed forms of managed care,

so they do not routinely impose the kinds of treatment reviews common to HMOs

that some have felt interfered with the doctor-patient relationship. PPO utilization

management is typically limited to physician profiling in which a doctor’s practice

patterns are looked at statistically and the most inefficient providers are removed

from the PPO network—and disease management programs, whereby patients with

multiple chronic conditions receive additional coordination help to make sure they

receive the most complete and costeffective care.
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1 Ernst and Griddle, J Am Pharm Assoc. 2001;41:192–9

COMMUNICATIONS

STATEMENT OF THE AMERICAN PHARMACISTS ASSOCIATION

The American Pharmacists Association (APhA) appreciates the opportunity to provide our perspective on the critically important topic of reforming Medicare to provide beneficiaries with a benefit that meets current medical standards. APhA,

founded in 1852 as the American Pharmaceutical Association, represents more than

50,000 practicing pharmacists, pharmaceutical scientists, student pharmacists and

pharmacy technicians. APhA is the nation’s first-established and largest national association representing pharmacists in the U.S.

Clearly, an essential element of quality medical care is the provision and use of

medication therapy. Prescription medications have become one of our health care

system’s most valuable tools. Providing a prescription drug benefit to the Medicare

population not only would strengthen the program but also takes an important step

towards preventing the long-term human and financial costs associated with untreated disease. But prescription medications are only valuable if they are used correctly and appropriately. Misuse of medications is costly, both in health terms and

actual dollars. A study of the costs associated with the misuse of medications1 found

that the cost of drug-related morbidity and mortality exceeded $177.4 billion in

2000—more than double the costs associated with drug-related problems in 1995.

As medication experts, pharmacists are best equipped to partner with patients and

prescribers to help ensure that medications do what they are supposed to do—such

as cure an infection or help manage a chronic illness.

Pharmacists are integral in the health care team’s efforts to make sure that patients are making the best use of their medications. As medication experts, pharmacists improve each patient’s medication use, work to ensure that patients receive

safe and effective medications, and are integral to helping achieve positive health

outcomes. To support pharmacists’ efforts to manage patient’s medication therapy,

four components are essential to provide a quality alit pharmacy benefit to patients.

A Pharmacy Benefit for Medicare Beneficiaries must:

Provide Real Coverage, not just Discounts: Patients must have real access to

coverage of their prescription drugs, not simply minimal discounts at the pharmacy counter. Discounts that fail to yield a significant reduction in out-of-pocket

costs continue to deny beneficiaries access to valuable therapy.

Provide Coverage for Medication Therapy Management Services: Medications

are safe and effective when used appropriately. Inappropriate medication use

leads to hospitalizations, higher costs, and wasted Medicare money spent on

drugs which are not used or used incorrectly. Medication Therapy Management

Programs would target seniors at high risk for potential medication-related

problems, such as those with chronic conditions—asthma, hypertension, and diabetes—and those taking multiple medications. Medicare prescription drug coverage must include payment for these pharmacist-provided services to help patients appropriately utilize their medications and therefore, improve patient

health outcomes and quality of care.

Ensure Patient Access: Patients must have access to their preferred pharmacy

and pharmacist and any qualified pharmacy must be allowed to participate in

the program. Patients should not be forced—through economic disadvantages—

to choose one pharmacy provider over another. Policies that make it more difficult or costly for a senior to use their choice of provider do not present a true

choice to the senior. Incorporate Administrative Standards: A quality prescription drug benefit means not only access to the drug product and medication

therapy management services—it also means consumers have access to a benefit that is efficient and free of bureaucratic ‘‘red tape’’. Standards such as a
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uniform prescription drug card for all beneficiaries and coverage policies that

allow consumers to easily enroll and access their benefit should be part of any

prescription drug coverage offered to Medicare beneficiaries. Plan administrators should be required to use on-line, real-time claims adjudication systems to

enhance the efficiency of providing pharmacy services to seniors. Moreover, entities should be required to use the latest available technologies to pay pharmacies promptly and efficiently.

With regards to the ever important issue of financing, any new Medicare pharmacy benefit should support—not undermine—the highly-efficient medication services delivery infrastructure, which also provides primary health care services in

many underserved communities. Proposals that find most of their ‘‘savings’’ from

simply reducing the pharmacy’s payment will be short lived, and may yield substantial harm to the health care system. To remain viable, community health care providers, such as pharmacists, require compensation to cover the costs of providing the

prescription product, dispensing the prescription, assuring safe and appropriate use

of medications, appropriate overhead costs, and a reasonable profit. Leaving open

the possibility for pharmacy benefit managers to unilaterally dictate the terms of

pharmacy reimbursement is unfair. Pharmacies and pharmacists are willing to participate within appropriate parameters to make certain that all patients receive the

care they need, but they should not have to shoulder the majority of the burden of

these ‘‘savings’’.

APhA appreciates the efforts of the Committee to provide beneficiaries a more robust Medicare benefit that reflects current standards of medical practice. APhA

members support a Medicare pharmacy benefit that provides patients with true coverage of medication costs and access to valuable pharmacist services. We would welcome the opportunity to further discuss components of a Medicare pharmacy benefit.

STATEMENT OF THE LONG TERM CARE PHARMACY ALLIANCE

The Long Term Care Pharmacy Alliance is submitting this statement for the

record of the Senate Finance Committee’s June 6, 2003 hearing on Medicare reform.

We appreciate the Committee’s leadership in considering issues related to the creation of a new Medicare prescription drug benefit, and we would like to take this

opportunity to highlight the special pharmacy needs of the nation’s frail elderly residing in nursing facilities. We want to work constructively with you to ensure the

continued provision of quality services to these particularly vulnerable seniors.

While most Medicare beneficiaries are able to walk into pharmacies to pick up

their prescriptions or to receive vials of pills through the mail, a sizable percentage

of beneficiaries cannot do so and need special services that retail and mail order

pharmacies do not provide. Nursing home residents have specific diseases and multiple comorbidities that require specialized pharmacy care. Without such treatment,

we cannot expect positive therapeutic outcomes for these patients. Failure to take

into consideration the special pharmacy needs of the frail and institutionalized elderly will lead to a marked increase in medication errors and other adverse events.

Pharmacy benefit managers and insurance companies are not equipped to administer a Medicare drug benefit to this vulnerable population, because they lack the

necessary experience, infrastructure and expertise. By contrast, members of the

Long Term Care Pharmacy Alliance are the nation’s major operators of pharmacies

that serve the frail and institutionalized elderly, and they specialize in serving the

needs of patients in long-term care settings.

LTCPA members’ patients are elderly, frail, chronically ill, and can no longer care

for themselves. They require a level of pharmacy care that goes well beyond what

the typical retail or mail order pharmacy provides to its customers. To meet these

needs, long-term pharmacies provide specialized packaging, 24-hour delivery, intravenous and infusion therapy services, geriatric-specific formularies, clinical consultation and other services that are indispensable in the long-term care environment.

Without ensuring that nursing-home residents and other patients with special

needs can receive these specialized pharmacy services, a Medicare prescription drug

benefit could actually endanger the health of beneficiaries residing in nursing facilities. We look forward to working with you on a specific proposal to ensure appropriate coverage of pharmaceutical services for Medicare beneficiaries who reside in

nursing homes.
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1 ASHP Consumer Survey, ‘‘Medication Use Among Older Americans’’, 2001.

2 Ernst FR, Grizzle, AJ. Drug-Related Morbidity and Mortality: Updating the Cost-of-Illness

Model. Journal of the American Pharmaceutical Association. 2001: Mar-Apr; 41(2):192–199.

STATEMENT OF THE PHARMACIST PROVIDER COALITION

The Pharmacist Provider Coalition is pleased to submit this statement for the

record of the Finance Committee’s hearing on strengthening and improving the

Medicare program.

The Pharmacist Provider Coalition is composed of six national pharmacy organizations, which represent pharmacists working in all sectors of pharmacy practice.

The coalition partners joined forces to educate Members of Congress and the public

about the role pharmacists play in the safe and effective use of medications and to

provide patients access to pharmacist medication therapy management services

under the Medicare program. Our membership consists of the following groups: the

Academy of Managed Care Pharmacy, American College of Clinical Pharmacy,

American Pharmacists Association, American Society of Consultant Pharmacists,

American Society of Health System Pharmacists, and the College of Psychiatric and

Neurologic Pharmacists.

Problem: Ineffective Patient Care—Avoidable Medication-Related Complications

On average, persons aged 65 and older take 5 or more medications each day.1 The

high utilization rate of medications is particularly common in patients who have one

or more chronic conditions that call for medication therapy as the primary form of

treatment. These medications are often prescribed by several different physicians

for concurrent chronic and acute conditions. The cumulative effect of these elements

places patients at high-risk for medication-related complications.

Medication-related complications represent up to 11.5% of all hospitalizations. Recently published research indicates that medication-related problems cost the U.S.

health care system as much as $177 billion each year.2 A substantial portion of this

expense is preventable through medication management services provided by pharmacists collaborating with physicians.

Solution: Pharmacists’ Medication Therapy Management Services

Pharmacists’ medication therapy management services help to eliminate unnecessary or counterproductive treatments, assure that patients are receiving the most

appropriate drug therapy for their medical conditions, and help patients adhere to

what often are complicated medication regimens. As medication experts, pharmacists can identify and prevent duplicate medications, drugs that cancel each other

out, or combinations that can damage hearts or kidneys. Pharmacists may also find

that a newer multi-action drug may be exchanged for two older drugs or an alternative drug may be substituted for another therapy that causes side effects and results in the patient either taking additional medication or stopping their medication—the result of which may lead to their medical condition worsening. Drug interactions, adverse effects, and low patient adherence with prescribed therapies are

costly and preventable medical complications of usual care.

The specialized training pharmacists have in medication therapy management

has been demonstrated repeatedly to improve the quality of care patients receive

and to control health care costs associated with medication-related complications. As

the Institute of Medicine report To Err is Human: Building a Safer Health System

stated: ‘‘Because of the immense variety and complexity of medications now available, it is impossible for nurses and doctors to keep up with all of the information

required for safe medication use. The pharmacist has become an essential resource

. . . and thus access to his or her expertise must be possible at all times.’’

Current Medicare payment policies are woefully outdated and fail to recognize

pharmacists’ services. This restricts the patient’s ability to access pharmacists’ services. To ensure access, Medicare statutes must be updated to explicitly recognize

services provided by pharmacists just as services provided by nurse practitioners,

physician assistants, registered dieticians and other non-physician providers have

been recognized in recent years.

Conclusion:

Pharmacists’ medication therapy management services can and will make a real

difference in the lives of patients with chronic conditions. This is a logical and very

affordable step towards eliminating barriers to chronic care management and establishing the essential infrastructure of a Medicare prescription drug benefit. The Coalition strongly encourages the Committee to pass legislation to provide patients’ access to pharmacists’ provided medication therapy management services.
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Thank you for the opportunity to present the views of pharmacists who care for

Medicare patients on a daily basis.

STATEMENT OF THE PREFERRED PROVIDER ORGANIZATIONS (PPOS)

Preferred Provider Organizations (PPOs) are a form of fee-for-service health insurance coverage whereby enrollees can go to any health care provider who will be

reimbursed for the services furnished. PPOs are a growing form of health insurance

and are now the most popular type of coverage in the private insurance market.

This paper lays out the facts about PPOs and the prospects for them to deliver benefits to seniors and the disabled while controlling costs and enhancing quality.

• PPOs are the most popular form of health insurance in the employer group

market today, covering 52 percent of enrollees. Together with the very similar

Point of Service (POS) model that covers 18 percent of enrollees, 70 percent of

insured Americans are in these ‘‘hybrid’’ plans. Traditional fee-for-service (FFS)

plans represent only 5 percent of the market. By contrast, 87 percent of Medicare enrollees are in traditional FFS.

• PPOs give beneficiaries a wide choice of providers, allowing them to stay within

the PPO network for maximum cost savings or go outside the network if they

desire. Moreover, benefit enhancements include greater coverage of preventive

care as well as coordination of health care services.

• The PPO design is flexible enough to work well in both cities and rural areas.

Applying the principles outlined in the Administration’s Framework to improve

the Medicare program, the CMS actuaries estimated that the average cost in competitive private plans, including PPOs, would be less over the 10-year period than

the corresponding cost in traditional Medicare. These savings would continue to

grow over time. In addition, beneficiaries would receive better and more enhanced

services including full coverage for preventive care. The cost reduction trend in

PPOs results primarily from two factors. First, over time, beneficiaries enrolling in

PPOs would tend to switch from more expensive plans to less expensive ones because, over time, they would have the option to reduce their monthly premiums.

And second, the cost growth rates for PPOs are expected to be slightly less, on average, than increases in Medicare fee-for-service costs.

The actuaries’ estimate was derived from data that PPOs provided in solicitations

for CMS’ PPO demonstration. These data suggest that the most efficient plans have

the potential to beat Medicare’s costs by an average of 2.3 percent. Not all PPO

plans in the demonstration are that efficient, however, which is why the specific design features matter greatly. The potential for savings in Medicare depends critically on whether:

• Beneficiaries are given the option to choose the most efficient plans and save

money on their premiums;

• The bidding process accepts only a limited number of PPOs per region, so that

plans bid aggressively and capture a large market share within that region;

and,

• The contracts contain a risk-sharing arrangement, whereby the plans and the

government share in any savings or cost overruns beyond specified levels.

Again, this allows plans to bid more aggressively.
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1Kaiser Family Foundation/HRET, 2002.

2Kaiser/Hewitt, December 2002

PPOs have been a growing form of health insurance and are now the most popular type of coverage in the private market. Among individuals with employer group

coverage, 52 percent are enrollees of PPOs and 18 percent are in the very similar

POS plans as of 2002.1 For example, the most popular plan for Federal employees

covered through the Federal Employees Health Benefits Program (FEHBP) is the

Blue Cross and Blue Shield PPO, available throughout the nation: 51 % of those

covered by FEHBP in 2002 were enrollees of the BCBS PPO. Of large employers,

78% offer a PPO option to pre-65 retirees.2 As a result, PPOs are very familiar entities in the marketplace, and today’s workers will age into Medicare with experience

with PPO coverage.

In PPOs, enrollees can go to any provider and receive reimbursement for the services they receive. This is also true of traditional fee-for-service indemnity plans, but

the critical distinction is that PPOs have networks. W hat at the enrollee must pay

for services depends on whether the provider is a preferred provider (i.e., a provider

that is part of the network), or a non-preferred provider. Generally, enrollees face

higher out-of-pocket costs if they see a non-preferred provider. There may also be

certain rules that apply when the enrollee uses a non-preferred provider: for example, the insurance company may require prior authorization for a hospital stay if

a non-preferred hospital is used, but there would be no such requirement if a preferred provider is used.

Preferred providers enter into contractual arrangements with the PPO insurer to

accept agreed upon payment levels, with the enrollee’s financial obligation often limited to a fixed co-payment (after a deductible) or a fixed coinsurance amount in relation to the agreed-upon fee. Within a PPO, providers (both preferred and non-preferred) are generally paid on a fee-for-service basis for their services. As part of the

agreement between an insurer and the preferred providers of a PPO, the preferred

providers may also agree to other contractual provisions, including, for example, filing claims on behalf of enrollees, and participating in quality improvement projects.
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When a non-preferred provider is used, the reimbursement generally is similar to

a traditional indemnity plan. The non-preferred provider receives payment from the

insurance company at a specified level determined by the insurer, and the enrollee

is responsible for the remainder of the bill.

The popularity of PPOs is a factor in their ability to attract providers to join the

PPO network. Because enrollees have financial incentives to use preferred providers, they can expect to see a higher volume of insured patients as compared to

non-preferred providers (depending on local market circumstances).

HOW PREFERRED PROVIDER ORGANIZATIONS WILL HELP MEDICARE BENEFICIARIES

The President’s approach for Medicare is based in the health care market of

today, with insurance coverage that most insured Americans under age 65 have and

want to retain. The U.S. health care system has evolved to where it currently is

by responding to individuals’ desire for provider choice, access to state-of-the-art

treatment, and high quality. Good private health insurance provides a comprehensive integrated package that includes prescription drugs, preventive services, and

protection against catastrophic expenses. The private market uses a model that can

adapt more quickly to local conditions and respond to the needs of consumers and

health care providers.

Medicare’s History

The design of the Medicare program was based on the private system of health

insurance prevalent in 1965—both in terms of the benefit package and how the program was to be administered. The administration of the program has always been

through the private sector, by the use of contractors such as Blue Cross plans and

other insurers that became the ‘‘Intermediaries’’ and ‘‘Carriers’’ that would work directly with providers (with only minor exceptions of providers being paid directly by

the government). The prevalent model of health plan coverage in 1965 was fee-forservice indemnity coverage, whereby an insurance company (largely Blue Cross and

Blue Shield plans) picked up a portion of the costs of any covered services submitted

by any licensed provider. Similarly, the Medicare program was designed as an ‘‘any

willing provider’’ program, whereby all providers could bill for their services (if they

were licensed and met conditions of participation); the program would pay all or a

portion of the charged amount; and Medicare would not interfere with the practice

of medicine. At the same time, in 1965 Medicare recognized the existence of private

health plans with limited provider networks (prepaid health plans) that were allowed to participate in the program under alternative payment arrangements. Medicare was designed as a national program, but from the beginning of the program

it was recognized that the program should reflect the regional nature of health

care—for example, Carriers would be regional Carriers, and coverage decisions could

vary by region.

Thirty-Eight Years of Change in the Health Insurance Market

Since 1965, the private sector has witnessed major changes in the structure of

health care insurance with regard to the benefit package, how services are obtained

and paid for, the relationship between providers and insurers, and the role that insured individuals play in health care decisions.

The benefit package

In the private sector today, prescription drugs generally are covered, and preventive services are promoted. In addition, insurers now use a single policy structure

for hospital, doctor, and other coverage (with a single deductible) and typically include protection against catastrophic costs. Some of these features have their origins

in the coverage offered by HMOs, which traditionally emphasizes preventive services and generally cover drugs. HMOs cover drugs for various reasons: drugs form

a part of integrated care and drugs may substitute for more costly care. Moreover,

HMOs can afford to cover drugs because they are more cost efficient than indemnity

plans. Drug coverage allows HMOs to compete with indemnity plans, since enrollees

can obtain better coverage in exchange for exclusively using a network of providers.

Now, essentially all private sector plans have incorporated drugs and extensive preventive care into their benefit packages.

How services are obtained and paid for; the relationship between plans and

providers

Under traditional indemnity insurance, all providers in the same class (within a

geographic area) are treated equally in terms of payment—there is no negotiation

over price, volume or quality. In the current environment in the private sector,

health plans have recognized that not all providers merit equal treatment and that
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3 3 National plans in FEHB are really a collection of regional plans that deal with the federal

government through their common agent or association.

financial incentives are a powerful tool to achieve better outcomes. Today, insurers

actively negotiate payment arrangements with providers and provide financial incentives to providers to improve the quality and efficiency of care. This is done

through a range of payment and contracting arrangements, such as establishing

preferred networks of providers, incorporating bonuses as part of the payment structure, or—something that is becoming less common—by putting providers at risk for

services (provider capitation). The nature of these arrangements changes over time

and varies significantly by geographic area, with private health plans responding to

market conditions in a given area or adjusting to new circumstances (e.g., consumer

preferences) that can change in a short time.

Medicare, as a national program with payment practices and provider participation rules determined mainly by statute, does not negotiate rates, but fixes prices

to all providers, regardless of price, volume or quality. It has no flexibility to respond to local market conditions and to rapid changes in the health care system.

A national program can only use very blunt tools to address differences among markets. Ironically, it is Medicare claims data that have shown just how much variation

there is in health care costs across the country, and which formed the basis of extensive research showing that higher health care expenditures do not yield better outcomes—that is, that the health care system can be much more efficient than it currently is without sacrificing the quality of care. Medicare as a national ‘‘any willing

provider’’ program is required to provide equal payment to all providers, even if this

approach hampers the program’s overall goals. When Medicare has been able to

make distinctions among providers—e.g., in the Centers of Excellence demonstrations—the results have been improved outcomes at lower program costs.

Whether, and on what basis, to treat providers differently is a complicated issue

that often requires an intimate knowledge of local market conditions. A national

program cannot make these local market-level distinctions. For example, if the current situation of physicians opting out of Medicare or choosing not to take new

Medicare patients has arisen because of low payment and the problem is only seen

in certain geographic areas, Medicare has no way of quickly making an adjustment

to physician payments that is limited only to certain geographic areas. Private

health plans respond to such issues on a routine basis, as they negotiate and renegotiate contracts from one year to the next or respond to service access issues at

any point in time.

The role that insured individuals play in health care decisions

Health plans encourage the use of preventive services by eliminating cost sharing

(as Medicare has done, but only for a very limited set of services). Health plans encourage the use of particular providers or services by having differential payment

structures depending on the type of provider used (preferred versus non-preferred,

for example, or hospital inpatient versus outpatient setting). Private health plans

also provide services such as disease management programs, telephone nurse advisers, health education, and smoking cessation programs that enable enrollees to

maintain and improve their health status. While health plans design their products

to meet the needs of their customers, enrollees also have a significant ‘‘voice’’ in the

structure of the health care system when there is competition among health plans.

At the interplan market level, individuals play a role because they are the buyers

of health care (either directly or through a sponsoring organization, such as an employer).

REGIONAL PPO PLANS: THE BEST FIT TO THE MARKETPLACE

In order to succeed in a competitive market, to ensure the most efficient product,

to respond to the demands of consumers, and to understand the dynamics of a local

market, an organization must have a local market presence. Although many health

plans are chain organizations operating in multiple markets, such organizations are

usually not nationally administered plans, and many provide significant autonomy

to the regional plans under the umbrella of the larger organization. Most health

plans continue to be regional in nature, with a strong presence in particular States

or geographic areas. While the federal employees health benefits program (FEHBP)

has been able to operate a nationally 3 and locally designed competitive model, the

size of the Medicare population and its geographic dispersion are such that there

are not a sufficient number of health plans available to competitively function under

a nationally based model for Medicare.
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A health plan must also meet the demands of purchasers that are looking to insure a specific population. Many employers have employees and retirees that live

in a wide geographic area, including rural areas. Health plans that provide coverage

for such employers cover all employees, regardless of where they live. The vast majority of hospitals operating in rural counties—including counties where there is

only one hospital—have Blue Cross contracts that are almost always part of a PPO.

Contracting with a PPO makes economic sense for rural providers. Such contracts

provide a stable, reliable source of revenue from an insured population in the areas

of the country that have higher rates of uninsured individuals. If large numbers of

Medicare beneficiaries enroll in the new PPO plans Medicare will offer, both incentives will operate to make rural providers more likely to contract with PPOs: the

population is already a primary source of revenue for the providers, which they

would like to retain, and the individuals will continue to be insured individuals offering a reliable, stable source of revenue. It is a simple fact that virtually all rural

hospitals in truly rural states, from North Dakota to Wyoming to New Mexico, have

contracts with their Blue Cross plans.

In looking at other successful models, the military’s TRICARE program relies on

a design of regionally based plans. A similar regional design provides an approach

in which the Medicare population is divided into reasonably sized groups. In fact,

the current program is administered through a regional design. Using the competitive design features found in FEHBP and other employer sponsored health insurance programs, combined with the regional model of TRICARE (but using the current Medicare based ten regions), produces a program that delivers the best features

found in the market place today.

The private marketplace has gravitated towards a particular model of health plan

that meets the needs of enrollees and purchasers as well as providers. A regional

PPO model:

• Covers a wide geographic area, including rural areas;

• Offers enrollees a choice of providers at a reasonable cost;

• Includes drug coverage;

• Engages providers and enrollees in quality improvement activities; and,

• Offers innovative benefits to its enrollees.

The proposed model for Enhanced Medicare would have the same features and

would rely on regional PPO health plans. What consumers most value—options—

would be the hallmark of the proposed Medicare model. Beneficiaries would be able

to choose among the current traditional fee-for-service Medicare, the new enhanced

fee-for-service/PPO with an enhanced benefit package, as well as the choice of the

current types of Medicare+Choice plans.

The new fee-for-service/PPO approach would offer beneficiaries a choice of multiple PPO plans in a geographic area, and within each PPO, all beneficiaries would

have an enhanced benefit package and full choice of providers in every city and

county in the nation.
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PPO COSTS RELATIVE TO MEDICARE: DESIGN MATTERS

PPO-style health plans have the potential to control costs as well as or slightly

better than traditional Medicare over time, according to analysis done by the CMS

Office of the Actuary. It is important to remember, however, that any potential savings or costs depend critically on the proposal itself. Program design matters. The

bidding process, risk sharing arrangements and beneficiary incentives all combine

to determine whether a PPO option saves a modest amount or costs significantly

more. This section outlines some of the data that CMS actuaries used to model a

regional PPO offering, as well as the design features and plan practices that affect

the cost estimates.

How CMS Office of the Actuary Scored a Regional PPO Approach

Under the principles of the Administration’s Framework to improve Medicare, the

CMS actuaries estimated that the average cost for beneficiaries in competitive private plans, including PPOs, would be less over the 10-year period than the corresponding cost under traditional Medicare. These savings would continue to grow

over time. The cost reduction trend in PPOs results primarily from two factors.

First, over time, beneficiaries enrolling in PPOs will tend to switch from more expensive plans to less expensive ones, because unlike today, they can reduce their

monthly premiums. And second, the cost growth rates for PPOs are expected to be

slightly less, on average, than increases in Medicare fee-for-service costs. Both of

these factors, and others affecting the estimates, are explained in greater detail

below.

What the Data Show

EFFICIENCY—CMS actuaries analyzed the ACR data submitted by plans for

the CMS PPO demonstration. The analysis was limited to large PPOs covering a

fairly wide geographic area. Efficiency ratios, defined as costs for PPO demonstration plans relative to traditional Medicare, were calculated for each PPO plan. Chart

1, below, summarizes these ratios for the 24 PPO submissions. As indicated, the

most efficient plan expected to incur per-enrollee costs that were about 5.7 percent

lower than the corresponding costs under FFS Medicare. At the opposite extreme,

the least efficient plan would cost nearly 11 percent more than FFS. (Note that in

the Framework, beneficiaries will have the incentive to choose the most efficient

plan and save money on their premiums. In addition, those choices are expected to

encourage plans to bid more aggressively over time. Also note that in the demonstration, plans receive the higher of 99 percent of the AAPCC rate or the

Medicare+Choice rate—and had an incentive to report higher costs.)
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4Overall, the 24 PPO demonstration plans had an average cost level that was 1.0 percent

higher than Medicare FFS and 6.1 percent higher than Medicare+Choice HMOs in 2003. For

comparison, for Medicare-eligible beneficiaries in the Federal Employees Health Benefit Program, PPO costs are about 11 percent greater than HMO costs. Such costs are for benefits supplemental to Medicare and reflect the substantially richer coverage provided by the PPOs in

comparison to the HMOs under FEHBP.

The demonstration plans were then divided into three groups—the most efficient

plans, average efficiency plans, and inefficient plans. Each group covers one-third

of the total projected enrollment in the PPO demo. Chart 1 also indicates these

groupings. The weighted average cost for the most efficient PPO group was 2.3 percent lower than FFS. The average efficiency group was 0.7 percent higher than FFS,

and the least efficient group was 4.6 percent higher, on average.4 The actuaries assumed that these expected efficiency ratios from the PPO demonstration plans

would be representative of the three winning PPO bids in each region under the Administration’s Framework.

ELEMENTS OF OVERALL EFFICIENCY—Chart 2 (below) shows the components of these overall cost/savings expectations. These components are drawn from

the data submitted by the PPO demonstration applicants, together with additional

data collected in conversations with each plan’s actuaries. These data generally

showed that PPOs expected to negotiate prices that were 0 to 5 percent better than

FFS prices and that they could achieve savings of another 2 to 5 percent through

utilization management. However, on the cost side, their administrative expenses

were in the 8 percent to 13 percent range, compared with 2 percent or less for FFS

Medicare. The most efficient PPO in Chart 2 (plan one at left) expected to pay prices

that were 9.5 percent lower than FFS, to achieve another 4.75 percent savings

through utilization management, but to have administrative costs (including marketing expenses and profit) that were 8.1 percent higher than FFS. Collectively,

these factors result in the most efficient plan expecting overall net savings of 5.7

percent mentioned previously. Conversely, the least efficient PPO in the sample expected to pay prices that were 0.2 percent higher than FFS, to achieve no savings

through utilization management, and to incur an administrative loss ratio nearly 11

percent higher than FFS. Again, with the way premiums are set, beneficiaries will

have the incentive to choose the more efficient plans and reduce their own monthly

premiums.
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5TRICARE provides health insurance coverage for military service retirees and families of active military personnel. It operates in 12 multi-state regions, covering roughly 4 million participants, and awards the coverage contract for each region to a single winning contractor.

The price, utilization, and administrative cost factors described above merit additional discussion. First, questions have been raised as to whether PPOs can negotiate better prices than the Medicare FFS prices imposed on providers by law. Studies by the Medicare Payment Advisory Commission (MedPAC) have consistently indicated that Medicare payment rates to physicians and hospitals are significantly

lower than the average for other payers. The results of these studies appear to contradict the expectations of the demonstration PPOs that they could establish the

same or lower payment rates as Medicare FFS. Pending further investigation, the

CMS actuaries continue to believe that the performance expectations of actual

PPOs—which were willing to risk their organizations’ financial well-being—are the

best indicator of price levels under a Medicare PPO option.

Additional support for this assumption is suggested by the experience with the

Federal TRICARE program 5 and the Medicare+Choice program. Consulting actuaries working with TRICARE have indicated that the winning contractors have negotiated payment rates that are lower than Medicare’s. Similarly, there is substantial anecdotal evidence that HMOs under Medicare+Choice have often negotiated

payment rates below FFS levels. However, the ability of health plans to negotiate

bottom dollar prices can be hindered by extreme levels of provider consolidation.

Virtually all of the hospitals on Long Island, New York, for example, have aggregated into just two groups and have refused to participate in any M+C plan’s network. In this way, they can force the HMOs to pay the ‘‘out-of-network’’ default

Medicare FFS prices, rather than the lower prices previously negotiated by the

HMOs. Similarly, TRICARE encountered problems in North Carolina with consolidation of physician practices. It is difficult to judge at this time whether further provider consolidation will reverse past plan successes in negotiating prices, or whether

antitrust considerations will limit the extreme levels of consolidation that have

started to appear.

Regarding the potential savings from utilization management, PPOs can affect

utilization in several ways. Many PPOs review the practice patterns of physicians

and advise them if they find an unusually high incidence of services, excessive hospitalizations, or unnecessary use of very expensive procedures. In extreme cases,

physicians may be dropped from the plan’s provider network.
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6Some proposals have considered limiting PPO marketing costs and/or placing an overall cap

on administrative expenses.

Administrative costs for private, state, and many other federal health plans will

generally be significantly greater than for Medicare FFS. It is unrealistic to expect

that plans could beat Medicare on this front. Traditional Medicare operates with an

enormous economy of scale, it is non-profit, has negligible marketing costs and zero

risk-management costs such as the cost of reinsurance, and it performs only very

minimal reviews of service use. Private plans, conversely, are much smaller and

typically incur these other categories of costs. As noted above, the large PPOs that

expressed interest in the CMS demonstration had expected administrative loss ratios (ALRs) in the range of 8 to 13 percent. By comparison, ALRs for the national

PPOs in the Federal Employees Health Benefits Program range from 6 to 8 percent.

This lower level reflects a greater economy of scale, due to their size, and also the

fact that FEHBP plans are not reimbursed for marketing costs. Adjusting for typical

levels of marketing costs and profits, the FEHBP ALRs are still somewhat lower

than the PPO demonstration plans. In estimating the financial impact of Medicare

PPO options, the actuaries have used the PPO demonstration data, without adjustment.6

Mapping the Data to a Regional Bidding Model

As noted above, the actuaries assumed that the weighted average efficiency ratios

calculated for the three groups of PPO demonstration plans would be representative

of the three winning PPO bids in each region. Consequently, they estimated that

the lowest of the three winning PPO bids in each region would initially be 2.3 percent below FFS costs, the middle bid would be 0.7 percent above FFS, and the high

bid would be 4.6 percent more than FFS. The actuaries did not make the more aggressive assumption that the winning bidders would look like the three most efficient plans on the far left of Chart 1. They chose a more conservative assumption

knowing that the PPOs that were willing to participate in the demonstration are

already a select group, probably more efficient than the typical PPO, as evidenced

by the fact that they were willing to participate in the demonstration at specified

payment rates.

CBO has questioned this assumption on the grounds that the demonstration plans

tend to be in areas with relatively high fee-for-service costs and that these plans’

experience might not be matched in other parts of the country. This is a legitimate

concern. However, to help evaluate this possibility, Chart 3 compares (i) the net cost

or savings for each of the 24 PPO applicants, to (ii) the level of Medicare+Choice

enrollment prevailing in the PPOs’ service areas. If the demonstration plans are

‘‘cherry picking’’ areas based on the capitation rates offered, then one would expect

PPOs to fare best where the payment rates are the most attractive compared to plan

costs—that is, the areas where M+C plans are most likely to participate under current law. As indicated in Chart 3, there is no apparent relationship between these

two factors. In fact, examples of the lowest and highest cost PPOs can be found in

low-penetration areas of the country as well as high-penetration areas. Similarly,

each of the separate price, utilization-management, and administrative loss ratio

factors showed no pattern by M+C penetration rate.
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There is reason to believe that a well-structured PPO bidding system could attract

greater efficiency from plans. Other evidence suggests that the administrative loss

ratios for the PPO demonstration plans may not be especially efficient. The CMS

actuaries consulted with other actuarial experts in PPO plans, who stated that it

is possible that the ‘‘lowest bid’’ plans under a truly competitive system could have

better efficiency than we assumed based on the demonstration plans.

In the view of the CMS actuaries, these issues tend to counterbalance the CBO

concern that the demonstration data could not be replicated elsewhere in the U.S.

Accordingly, the actuaries believe it is reasonable to model the competitive impact

of a three-winning-bidder approach by using the three groups of PPO demonstration

plans. They recognize the desirability of reducing the uncertainty of this critical assumption through further analysis and additional data.

Design Matters

An important element underlying the potential for savings through competition

involves the ‘‘dynamics’’ of plan choice by beneficiaries. In both the Administration’s Framework and some recent legislative proposals, beneficiaries who enroll in

a more efficient plan can reduce their premiums by 75 percent of the cost difference.

Conversely, beneficiaries selecting higher-cost plans must pay all of the additional

cost. This provision gives beneficiaries a significant financial incentive to enroll in

more efficient plans. Based on assumptions outlined in the Administration’s Framework, the migration of beneficiaries to more efficient plans would affect the ‘‘benchmark’’ for payments to plans, adding further to the plans’ incentive for efficiency

and contributing to additional savings. The benchmark would be based on the

weighted average bid of the winning PPOs. As beneficiaries enroll in the less expensive plans over time, the weights will shift toward these plans, thereby lowering the

benchmark. Other things being equal, a lower benchmark reduces the government

share of total plan costs and a higher benchmark increases it. This effect would not

occur in proposals that would establish a benchmark independently of the PPO bids.

Another factor in determining PPOs’ costs is whether or not there is any type of

risk-sharing arrangement. Most of the plans in the PPO demonstration had a risksharing arrangement whereby the plans and the government share in any savings

or cost overruns beyond specified levels. Without such arrangements, plans generally bid more conservatively (higher) by increasing their ‘‘risk premium,’’ the extra

charge needed to cover the possibility of a greater financial loss. The actuaries estimated a small, net increase in PPO costs if there is no risk-sharing mechanism.
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7 Input price indices reflect changes in the prices paid by providers for the goods and services

they purchase in order to provide health care services. Wages and salaries paid to employees

are a major component of these input prices.

Risk sharing is also likely to increase the number of PPOs that would bid to participate in a Medicare PPO option. In the early days of TRICARE, for example, the

risk-sharing arrangements were not adequately specified, and two large PPOs

dropped out of the bidding due to concern over risk levels. The more plans that participate in the bidding, the more competitive the process will be.

Finally, the number of PPO plans that are allowed to participate in the program also affects the potential for cost savings. If all PPO plans wishing to participate were permitted to do so, then the potential savings could be substantially affected. First, with a limited number of winning bidders, plans have a strong incentive to maximize their efficiency and to bid aggressively. This incentive would be

greatly reduced if all plans can participate. In addition, with unlimited plan entry,

it is possible that no plans would be able to capture enough market share to take

advantage of economies of scale. This could also affect a plan’s decision on whether

or not it would be worthwhile to participate at all.

Other Factors

In addition to the factors that are PPO specific, there are two additional sources

of potential savings in a competitive environment. First, private plans are expected

to react more quickly than Medicare to changes in provider strategies. Some providers find new creative ways to receive higher Medicare payments, some of which

are legitimate and some of which may not be (for example, over $2 billion in inappropriate hospital outlier payments in 2002 alone). In calendar year 2002, Medicare

expenditures for a number of service categories increased at unusually rapid rates,

including 20 percent for durable medical equipment, 24 percent for hospice care, and

14 percent for home health services. Within the DME increase, expenditures for

powered wheelchairs grew by 54 percent and have averaged growth of over 40 percent for the last five years. Although CMS will identify and respond to trends in

high growth areas, private plans are able to react more quickly to address over-utilization. The actuaries estimate that this factor would result in a slightly lower level

of costs, on average, for privately administered plans.

The second factor is productivity. With the exception of payments to physicians

and ESRD facilities, by law Medicare payment updates to providers are based on

‘‘input price’’ increases.7 If providers are able to be more productive, they won’t need

to increase their charges by as much as the increase in the price of their inputs.

Current literature suggests that hospitals are experiencing productivity increases of

0.4 percent to 0.5 percent per year. Although the actuaries recognize that some providers, such as skilled nursing facilities and home health agencies, are too labor intensive to be able to achieve these gains, private plans should be able to negotiate

payment increases that are slightly less than the input price updates paid by traditional Medicare.

Lessons for Legislation

As cautioned previously, the financial impact of any Medicare PPO option would

depend critically on the specific provisions of the proposal. The Administration’s

Framework was designed in ways intended to optimize the potential benefit of increased competition in the provision of Medicare health services. For proposals of

this type, the actuaries estimated a modest degree of savings compared to current

law, based on the data, assumptions, and methods described in this note. There is

still substantial uncertainty inherent in estimating the impact of major changes to

the Medicare program, for which there is relatively limited data. Policy makers

should be aware of this uncertainty and recognize that actual future experience

could differ significantly from estimates.
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STATEMENT OF KATHY SZEMERSKY

A TRIBUTE TO THE MEMORY OF MY MOTHER ON MOTHER’S DAY 2003

I just returned from my mother’s grave today. I cleaned the winter debris from

her grave and honored her with a single red rose laid at her headstone. It was her

favorite flower. I now have to wonder now if she knows? Do you have a mother, father, sister, brother, aunt, uncle or grandparent in a US nursing home ? Are you

a committed caregiver and advocate for your infirm, frail, sick, elderly or disabled

relative? Are you aware of what they are experiencing on a day to day basis? Then

read on.

As many of you may know this also National Nursing Home Week. While I find

that these two occasions of special observance contradict one another in the most

ironic way, it is the most appropriate time to share the story of my mother’s suffering and death, in a rogue Michigan nursing home and hospice. My mother’s death

may have been inevitable, but her suffering was barbaric. The nursing home care

was tolerable and on occasion ‘‘acceptable’’ until it was purchased by new owners

late spring summer 2000. The quality of care plummeted from both the nursing
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home and hospice about the same time. I was so busy feeding , bathing, changing,

laundering, housekeeping, monitoring medical needs and grooming my mother that

I failed to see all of the warning signs. Nursing homes and hospices, as I found out

much later, have a type of ‘‘joint operating’’ agreement. And some hospices, according to a report by the General Accounting Office of the US Government, make their

profits from withholding services from terminal patients in nursing homes.

My mother emigrated to the United States from Central Europe in the late 1950’s,

with a young daughter. She later became a US citizen. My mother was to serve as

primary caregiver for a crippled brother. She did this for 16 years and raised the

daughter without the luxury of the English language or a vehicle. She cooked,

cleaned, gardened and shopped. She provided 24 hour nursing care, in the home,

when her brother became terminal and comatose following a major stroke. He died

peacefully in his own bed without a single bruise, malnutrition, dehydration nor

bedsores.

My 89-year-old mother died on Thanksgiving Day, November 2000. In my opinion,

experiences, and observations, she died as a combination result of advanced age,

suspected but undiagnosed diagnosed cancer, dementia, severe depression, malnutrition, dehydration, general neglect and abuse. Nurses notes document that my mother, 4 days before death, semi-comatose, moaning in pain had no ROXANOL pain

medication. 7 days before death, a hospice CENA ripped her right calf open transferring her from bed to wheelchair, while semi-comatose. On the day of death, my

mother had a necrotic hip-sacrum bedsore, stage 3, approximately 7 inches diameter, among several others. In the last 8 months of her life, on most visits I found

her saturated in either urine, feces or both.

My mother was a robust, feisty, independent, strong-willed and determined

woman. This all changed in an instant following a fall at the nursing home, where

2 days later it was determined that she suffered a broken hip and required hip-replacement surgery. She was mad as ‘‘Hell’’, but recovered to the point of being able

to walk very short distances. But her appetite did not recover. I was then given a

choice of traditional cancer therapy or hospice. In shock and disbelief, I reached out

to Citizen’s for Better Care, a Michigan advocacy group. They declined citing assisting with hospice is not part of their mandate. I subsequently chose a hospice with

wide name recognition. It is the most regrettable decision I have ever made. My

mother suffered tremendously with the hip fracture, surgery and struggle to walk

again. I wanted her final months, weeks, days and hours to be as comfortable as

humanly possible. Quite to the contrary, her ‘‘caregivers’’ failed to spend the extended time required by a very ill individual to feed and drink, they failed to change

bedsore dressings as required, they failed to provide adequate pain medication to

a terminal patient, they failed to keep patient clean and dry to not exacerbate hipsacrum bedsores, and failed to provide and apply other medical supplies.

As a legal guardian, primary caregiver and daughter, I attended care conferences,

every 3 months, in an attempt to ensure proper medical and overall care. When care

was appropriate, I responded by an appropriate letter of thanks, but I wrote several

letters of complaint to the nursing home administrator and hospice regarding inadequate, substandard care. Not a single letter was ever responded to. These formal

letters of complaint were always follow-ups to personal verbal ones. I was overwhelmed between the stress, anxiety and worry about my mother’s well-being and

dealing with the nursing home and hospice. I struggled with the mental anguish

of should I move my mother to another facility and deal with the devils I did not

know versus the devils I knew. Consequently, both the nursing home and hospice

had ample opportunity to do as they wished, since I reside outside US. This did not

compromise my visits, which were at least weekly or more. So where did I go wrong?

I still had faith in the human spirit of 2 institutions, where profit, deceit and greed

prevails.

I now know the hospice choice should never have been like what my mother experienced. Hospice is intended to be the compassionate medical and spiritual care for

the terminally ill. The patient’s terminal disease is not treated, but it is my understanding that every human effort is to be made to ensure a pain free quality of life.

In my opinion, with photographs to support this, the nursing home failed to provide

even the most basic humane care and the hospice was not far behind. Hospice RN

failed to attend my dying mother. (Hospice does not provide on site support on National Holidays.)

After my mother’s death, I dealt with the shock, sorrow and grief. But, I soon realized that the circumstances of my mother’s suffering and death were not normal,

as hospice explained. I then began my quest to find answers. Sadly, my efforts to

find justice for my mother, over the past 2 years have proved to be a nightmare.

I learned elder neglect and abuse is a disgraceful reality in the United States. Many

of the agencies entrusted to monitor and regulate the care of the elderly and infirm,
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more oft than not, turn a blind eye. It is a fact that 1/3 of all US nursing homes

have been cited for substandard care, neglect and/or abuse.

I have sent letters of complaint to 5 US Senators, 16 Mich. Congressman, 1 State

Senator, 2 State Representatives, HCFA, US-GAO, US Attorney, Medicare Trust Solutions, Mich. Attorney General, Mich. Fraud Control Unit, Mich. Dept. of Health,

(Nursing Homes, Nursing Home Administrator, Hospice &, Nursing Board divisions), Office of Inspector General, Centers for Medicare & Medicaid, Wayne County

Sheriff’s Office, JCAHO, Mich. Peer Review Org., local and national hospice organizations. I have also sent letters of complaint to advocacy groups including Mich.

LTC Ombudsman, Mich. Campaign for Quality Care, Citizens for Better Care, Elder

Justice Coalition, Judicial Watch, and AARP. Thus, 2 years and approximately 150

letters later, what have I accomplished? 1 US Congressman and 1 Mich. State Rep.

has responded in a sympathetic manner. The vast majority of offices, agencies (some

of whom are former nursing home employees) and individuals listed above have ignored, declined or denied my complaints.

The State of Michigan has substantiated: 1) Hospice CENA negligence resulting

in patient injury, 2) Inadequate Hospice CENA support and 3) No Volunteer Hospice to aid patient required by law. The State of Michigan refused to investigate the

nursing home, inaccurately citing statue of limitations. The State and Centers for

Medicare & Medicaid has refused to accept any family proof of elder neglect, regarding allegations made. So, what does this mean? The nursing home has not been held

accountable and the hospice needs only to provide a revised patient care plan.

It is my hope that this will encourage many of you to speak out for humane elder

care. Even in difficult times, when you fight back, you assert your independence,

win the occasional fight, and slow down the other side. Resistance represents a crucial step in keeping certain ideals alive. What we do or fail to do now will create

the future standard of elder care that we will ultimately experience. Finally, we are

building monuments to our mothers every day. The way we live determines how tall

they will be.
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