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MEDICARE ADVANTAGE

AND THE FEDERAL BUDGET

HEARING

BEFORE THE

COMMITTEE ON THE BUDGET 

HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

HEARING HELD IN WASHINGTON, DC, JUNE 28, 2007

Serial No. 110–14

Printed for the use of the Committee on the Budget

(

Available on the Internet: 

http://www.gpoaccess.gov/congress/house/budget/index.html 

(II)

COMMITTEE ON THE BUDGET 

JOHN M. SPRATT, JR., South Carolina, Chairman 

ROSA L. DELAURO, Connecticut, 

CHET EDWARDS, Texas 

JIM COOPER, Tennessee 

THOMAS H. ALLEN, Maine 

ALLYSON Y. SCHWARTZ, Pennsylvania 

MARCY KAPTUR, Ohio 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

EARL BLUMENAUER, Oregon 

MARION BERRY, Arkansas 

ALLEN BOYD, Florida 

JAMES P. MCGOVERN, Massachusetts 

BETTY SUTTON, Ohio 

ROBERT E. ANDREWS, New Jersey 

ROBERT C. ‘‘BOBBY’’ SCOTT, Virginia 

BOB ETHERIDGE, North Carolina 

DARLENE HOOLEY, Oregon 

BRIAN BAIRD, Washington 

DENNIS MOORE, Kansas 

TIMOTHY H. BISHOP, New York 

GWEN MOORE, Wisconsin 

PAUL RYAN, Wisconsin, 

Ranking Minority Member 

J. GRESHAM BARRETT, South Carolina 

JO BONNER, Alabama 

SCOTT GARRETT, New Jersey 

MARIO DIAZ–BALART, Florida 

JEB HENSARLING, Texas 

DANIEL E. LUNGREN, California 

MICHAEL K. SIMPSON, Idaho 

PATRICK T. MCHENRY, North Carolina 

CONNIE MACK, Florida 

K. MICHAEL CONAWAY, Texas 

JOHN CAMPBELL, California 

PATRICK J. TIBERI, Ohio 

JON C. PORTER, Nevada 

RODNEY ALEXANDER, Louisiana 

ADRIAN SMITH, Nebraska 

[Vacancy] 

PROFESSIONAL STAFF

THOMAS S. KAHN, Staff Director and Chief Counsel 

JAMES T. BATES, Minority Chief of Staff 

(III)

C O N T E N T S

Page 

Hearing held in Washington, DC, June 28, 2007 ................................................. 1

Statement of: 

Hon. John M. Spratt, Jr., Chairman, House Committee on the Budget ..... 1

Hon. Paul Ryan, ranking minority member, House Committee on the 

Budget ............................................................................................................ 2

Peter R. Orszag, Director, Congressional Budget Office (CBO) ................... 4

Prepared statement of ............................................................................... 7

Mark E. Miller, Executive Director, Medicare Payment Advisory Commission ................................................................................................................. 30

Prepared statement of ............................................................................... 32

Mark McClellan, M.D., Ph.D., AIE Brookings ............................................... 75

Prepared statement of ............................................................................... 77

Hon. Barbara B. Kennelly, president and CEO, National Committee to 

Preserve Social Security and Medicare, former Member of Congress ...... 84

Prepared statement of ............................................................................... 86

Patricia Neuman, director of Medicare policy, the Henry J. Kaiser Family 

Foundation ..................................................................................................... 90

Prepared statement of ............................................................................... 94

Robert Wah, M.D., American Medical Association ........................................ 100

Catherine Schmitt, vice president, Federal programs, Blue Cross Blue 

Shield of Michigan ........................................................................................ 101

Prepared statement of ............................................................................... 103

Hon. Robert C. ‘‘Bobby’’ Scott, a Representative in Congress from the 

State of Virginia: 

Prepared statement of the American Federation of State, County 

and Municipal Employees (AFSCME) .................................................. 115

Ardis D. Hoven, M.D., American Medical Association, prepared statement 

of ..................................................................................................................... 123

Hon. James P. McGovern, a Representative in Congress from the State 

of Massachusetts, prepared statement of ................................................... 127

(1)

MEDICARE ADVANTAGE AND THE FEDERAL 

BUDGET 

THURSDAY, JUNE 28, 2007

HOUSE OF REPRESENTATIVES, COMMITTEE ON THE BUDGET, Washington, DC. 

The committee met, pursuant to call, at 10:10 a.m. in room 210, 

Cannon House Office Building, Hon. John Spratt [chairman of the 

committee] presiding. 

Present: Representatives Spratt, DeLauro, Edwards, Cooper, 

Schwartz, Doggett, Blumenauer, Berry, McGovern, Scott, 

Etheridge, Moore of Kansas, Bishop, Moore of Wisconsin, Ryan, 

Bonner, Hensarling, Lungren, Conaway, Tiberi, Porter, Alexander, 

and Smith. 

Chairman SPRATT. Good morning, and welcome to the House 

Budget Committee’s hearing on Medicare Advantage. We have an 

outstanding lineup of witnesses today. I am pleased that all of you 

could join us, and I appreciate your taking the time to testify. 

As the Budget Committee, we have a serious obligation to continually review the scarce resources available to the Federal Government and how those resources are allocated. We are here today to 

look at one particular program, the Medicare Advantage program, 

partly based upon the recent testimony of the Congressional Budget Office estimating that, if these plans providing for Medicare 

services were paid for at rates equivalent to fee-for-service Medicare, we could save nearly $150 billion over 10 years. 

Now, this is a program within Medicare, which everyone tells us 

faces insolvency sometime in the foreseeable future. When we see 

something that might save as much as $150 billion, it is our obligation to take a close and serious look at the alternatives. I would 

emphasize we are not here to demonize anybody. We are not here 

to claim that the insurance companies, HMOs, PPOs or whoever 

participates in these programs is making profits that are unconscionable or are not anything other than taking advantage of a government program which we put in place. We are going back and 

looking at the terms of that program and asking ourselves does it 

need to be adjusted for a number of different reasons, not the least 

of which is budget resources. 

The current payment structure was put in place in the 2003 

Medicare Modernization Act. Even Tom Scully, who was the former 

administrator of the Center on Medicare and Medicaid Services 

and who played a serious and significant role in the 2003 legislation, even he now says that there appears to be overfunding. In reference to the subsidies that insurance companies receive and who 

2

participate in Medicare Advantage, Tom Scully told the St. Petersburg Times at a recent conference that there has been a huge overfunding, and he also said, ‘‘Some of the excess payments exceed 

what was intended for sure, and I think Congress should take some 

of it away.’’ That was Tom Scully speaking. 

Private plans operating within Medicare Advantage are paid, on 

average, 12 percent more than the cost for regular fee-for-service 

Medicare. While it is true that some of that payment is returned 

to beneficiaries in the form of additional benefits, it is not exactly 

clear how much is, and there are, in any event, some significant 

additional issues at stake. 

First of all, there is the issue of equity. Should we be paying as 

much as 15-20 percent more for some beneficiaries than for other 

beneficiaries? Is that an equitable administration of this program 

which is supposed to provide, basically, equal benefits for every 

beneficiary? 

Secondly, what are the benefits of the Medicare Advantage plan? 

Are a plan’s participants achieving higher and healthier outcomes 

than other participants? We do not really know because we do not 

have the feedback of information that one would want in order to 

make an honest judgment of this system. 

Third, is it time to take a look at something that was put in 

place several years ago on the grounds that it needs adjustment at 

the present time? The whole point of providing private plans was 

that competition for enrollment would lead to better services, more 

choices, lower cost. Paying for these plans more than for fee-forservice permanently, forever, seems to defy that logic. 

The Medicare Payment Advisory Commission, or MedPAC, has 

argued that beneficiaries should have a choice of a private managed plan or a fee-for-service plan but that these plans should play 

on a level playing field in the competition for Medicare enrollees. 

We have got a significant number of witnesses today. We are 

going to start with Dr. Peter Orszag, who is the director of the 

Congressional Budget Office, and with Dr. Mark E. Miller, who is 

the executive director of the Medicare Payment Advisory Commission. 

I would like to note at this point that your testimony will be 

made part of the record, and you can both summarize it and take 

as much time as you need to explain it. If you wish, we have got 

the facilities here that are available to display any slides you have 

brought with you. 

Before proceeding with your testimony, however, let us hear from 

the Ranking Member, Mr. Ryan. 

Mr. RYAN. Thank you, Mr. Chairman. I want to thank you for 

holding today’s hearing. 

Also, I want to welcome our witnesses. And in particular, Dr. 

Orszag, I would like to welcome your two children, Leila and Joshua. It is nice to have them here with us today, and I hope they get 

some good coloring done during this hearing. At least I can see she 

is well on her way. 

This is an appropriate hearing. It is a timely hearing, too. We 

need to be discussing our Nation’s health care entitlements in the 

Federal budget. In particular, today’s hearing is appropriate on the 

Medicare Advantage program. 

3

Private health plans are not new to the Medicare program. They 

have been available since the early 1970s, and their goal then was 

the same as it is now, to offer beneficiaries choices that will improve their health and will reduce their out-of-pocket costs while 

saving Medicare money. 

Over the years, we realized that some seniors had more choices 

than others. We understood that rural populations were not as well 

served as urban, and that low-income beneficiaries had unique 

problems in need of specific solutions. So we made adjustments. 

The Balanced Budget Act of 1997 expanded the range of private 

Medicare plans available, and the Medicare Modernization Act of 

2003 created additional options, further strengthening the program. 

Today, 1 in 5 Medicare beneficiaries is enrolled in a Medicare 

Advantage plan, and a vast majority of them are receiving coverage, such as dental, vision, caps on out-of-pocket costs, that they 

would not have had otherwise. In addition, Medicare Advantage is 

saving beneficiaries and taxpayers money. Beneficiaries enrolled in 

a Medicare Advantage plan see an average savings of more than 

$1,000 a year. These plans also return an average of $3 billion annually to the U.S. Treasury. 

Now, all of that said, I appreciate any ideas on health care entitlement reform that my friends on either side of the aisle would 

bring to the table. We should take a hard look at whether all private plans are fulfilling the goals of the Medicare Advantage program and whether we can improve some areas of the program to 

save beneficiaries and taxpayers even more money. The unfunded liability of Medicare is currently standing at $32 

trillion over the next 75 years. That is the amount by which benefits promised by Medicare exceed the projected financial resources. 

This translates to more than $282,000 per household, and that figure is growing at an alarming rate. When Leila is 10 years old—

because I believe—no. She is 7 now, right? When she is 12 years 

old, that figure is going to get us to $54 trillion. So, if we do nothing for the next 5 years, the unfunded liability of Medicare will go 

from $32 trillion to $54 trillion. This is why some of us keep saying 

that the current path of Medicare is unsustainable. 

Yet no one is talking about cutting Medicare Advantage payments to make entitlements more sustainable or to reduce the deficit. And given that this is the Budget Committee, I think we ought 

to at least entertain the notion that if we are going to create savings in some program, we ought to actually save the money. 

To the contrary, the majority is talking about reducing these payments just to use that money for more entitlement spending in another part of the government. No matter where you stand on those 

issues, taking from one entitlement just to expand another one will 

not address any budgetary concerns. 

The recently passed budget, which is the incumbent budget resolution we are now operating on, does not offer any entitlement reforms, not for health care, not for anything else. So, not surprisingly, this subject became the primary focus of the committee’s 

Tuesday hearing on the Federal deficit and the debt. Once again, 

we were warned, this time by some of our Nation’s leading financial experts, that the chief threat to our Nation’s long-term fiscal 

4

and economic health is the unsustainable growth of our health care 

entitlements, with Medicare and Medicaid leading the way. In urging Congress to act, our witnesses argued that the benefits of doing 

what was needed would far outweigh the perceived short-term 

gains from putting it off, and I agree with that. 

Again, I want to thank the Chairman for calling today’s hearing. 

We have excellent witnesses, and I look forward to their testimony. 

I yield. 

Chairman SPRATT. I thank the gentleman. 

Let me say again that this is about entitlement reform. This is about savings which should equal as much as $150 billion were we 

to reduce Medicare Advantage payment rates to the rates that are 

paid for traditional fee-for-service Medicare, according to CBO. 

What we do with those funds would then be up to Congress’ determination. They could be used for SCHIP expansion, for example, or 

they could be applied to the reduction of the budget deficit, or both. 

In any event, this is about entitlement reform. It is certainly 

about the entitlement overview of a program that is costing a substantial sum of money. 

STATEMENTS OF PETER R. ORSZAG, DIRECTOR, CONGRESSIONAL BUDGET OFFICE; AND MARK E. MILLER, EXECUTIVE 

DIRECTOR, MEDICARE PAYMENT ADVISORY COMMISSION 

Chairman SPRATT. Dr. Orszag, we are glad to have you. We appreciate your testimony. As I said earlier, your full statement will 

be made part of the record, and you are free to summarize in any 

way you see fit. Thank you very much for coming. 

STATEMENT OF PETER R. ORSZAG 

Dr. ORSZAG. Thank you for having me back this morning. 

As you know, the central long-term fiscal challenge facing the 

Nation involves health care, and the focus of this morning’s hearing is Medicare Advantage. In addition to my written testimony on 

the topic, CBO is releasing an issue brief this morning on Medicare 

Advantage plans. My testimony makes four points. 

First, Medicare Advantage has been growing rapidly. Payments 

to Medicare Advantage plans increased from $36 billion in 2004 to 

an estimated $77 billion this year. Reflecting that cost growth, enrollment has been rising rapidly. 

As the first table shows, enrollment growth during 2006 amounted to almost 1.5 million beneficiaries. In 2007 alone, there has also 

been almost another 1 million beneficiaries added. Disproportionately, the growth has been occurring in a subcomponent of Medicare Advantage plans called ‘‘private fee-for-service plans,’’ which 

do not have as much case management and utilization management as the other types of Medicare Advantage plans—HMOs and 

PPOs in particular. It is striking that enrollment in private fee-forservice plans increased by over 700,000 beneficiaries during this 

year so far alone. 

The next figure shows that CBO projects continued rapid growth 

in Medicare Advantage, mostly due to private fee-for-service plans. 

In particular, CBO projects that private fee-for-service plans will 

reach 5 million members by 2017. As a result of that growth, Medicare Advantage enrollees are projected to rise from about 18 perVerDate 0ct 09 2002 16:07 Feb 19, 2008 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 J:\DOCS\HEARINGS\110TH\110-14\38252.TXT HBUD1 PsN: DICK
5

cent of all Medicare enrollment today to more than a quarter by 

2017. The result of such continued rapid growth—and I would note 

that it is possible that it will, under current law, be even more 

rapid than we currently project—would likely be a significant 

change in the fundamental nature of the Medicare program. 

The second point of my testimony is that Medicare’s payments 

for beneficiaries enrolled in Medicare Advantage plans are higher 

on average than what the program would spend if those beneficiaries were in the traditional fee-for-service program. In particular, the CBO estimates net payments to plans will be approximately 12 percent higher this year than per capita fee-for-service 

costs. The differential is more pronounced for private fee-for-service 

plans. I understand that some industry claims have suggested that 

these figures are significantly biased. Such claims are simply inaccurate. As a result of this cost differential, shifts in enrollment out 

of the fee-for-service program and into private plans increase net 

Medicare spending. The cost differential raises overall Medicare 

costs and, as a result, slightly increases Part B premiums and accelerates the date of exhaustion of the Part A trust fund. 

The third point of my testimony is that these additional costs to 

the government for Medicare Advantage plans subsidize additional 

benefits and reduce premiums for the beneficiaries who enroll in 

the Medicare Advantage plans. In particular, the payments that 

plans receive in excess of their bids for providing the service are 

required to be returned to beneficiaries as additional benefits or as 

a rebate of their Part B or Part D premiums. Those extra benefits 

and reduced premiums are a significant motivation for enrollees to 

join the plans. 

It is also noteworthy that, at least outside of private fee-for-service plans, many Medicare Advantage plans undertake various efforts at disease management, care coordination and preventative 

care. Thus, one possible benefit of the Medicare Advantage program is the higher quality of care beneficiaries may receive 

through these programs than they would receive in the Medicare 

fee-for-service program. The extent to which such services lead to 

improved health outcomes, however, is difficult to assess with the 

currently available data. 

Policymakers may, therefore, want to explore options for the expanded reporting of outcomes and other measures within the Medicare Advantage program. In particular, I would note private feefor-service plans are exempt from many of the reporting requirements that apply to other types of Medicare Advantage plans. 

My final point is that a number of policy options exist that would 

reduce spending on Medicare Advantage. For example, one policy 

would reduce the county level benchmarks under Medicare Advantage to the level of local per capita fee-for-service spending. 

Relative to spending under current law, as the next table shows, 

that policy would reduce spending by $54 billion over the next 5 

years and $150 billion over the next 10 years. Such policy changes 

would also reduce Part B premiums and improve the actuarial 

soundness of the Part A trust fund. 

Reducing benchmarks, however, would leave less money for 

health plans to offer reduced premiums or supplemental benefits. 

That change, in turn, would make the program less attractive to 

6

beneficiaries and lead some to return to the traditional fee-for-service program. 

Indeed, by CBO’s estimates, enacting that policy which I just 

mentioned would reduce enrollment in Medicare Advantage by 

about 6 million beneficiaries in 2012 relative to projected levels. 

That is a decline of about 50 percent, leaving total enrollment at 

a little over 6 million in that year, which is roughly 1.7 million enrollees fewer than today. 

Potential policy changes could also be limited to private fee-forservice plans. For example, limiting benchmarks to 100 percent of 

fee-for-service costs for private fee-for-service plans alone and 

maintaining current law benchmarks for other plans would reduce 

spending by about $14 billion over the next 5 years. Similarly, requiring private fee-for-service plans to negotiate their own terms 

with participating doctors rather than automatically gaining access 

to Medicare’s payment rates to doctors would save roughly $13 billion over the next 5 years. 

Each policy would also have some impact on enrollment, we estimate, roughly a reduction of 3 million beneficiaries in 2012 from 

either of those private fee-for-service plan options which I just 

mentioned. 

In conclusion, the Medicare Advantage program has been growing rapidly and is projected to continue to do so. Such growth 

under current policy increases net costs to Medicare. Policymakers 

evaluating options for reducing payments to Medicare Advantage 

plans need to weigh the cost savings against benefits that the plans 

provide in managing care, the effect on overall health care costs 

and the impact on beneficiaries. 

Finally, regardless of what happens to payments, expanded reporting on health outcomes may help policymakers better evaluate 

the overall effects and specific care management approaches of 

Medicare Advantage plans. 

Thank you very much. 

Chairman SPRATT. Thank you, Dr. Orszag. 

[The prepared statement of Peter R. Orszag follows:]

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Chairman SPRATT. Dr. Miller, the executive director of MedPAC, 

thank you for coming. And we would now like to hear your testiVerDate 0ct 09 2002 16:07 Feb 19, 2008 Jkt 000000 PO 00000 Frm 00033 Fmt 6633 Sfmt 6602 J:\DOCS\HEARINGS\110TH\110-14\38252.TXT HBUD1 PsN: DICK

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mony. We will make the full statement part of the record. You can 

summarize it as you see fit. 

STATEMENT OF MARK E. MILLER, EXECUTIVE DIRECTOR, 

MEDICARE PAYMENT ADVISORY COMMISSION 

Mr. MILLER. Chairman Spratt, Ranking Member Ryan and distinguished members of the committee, I appreciate your asking for 

MedPAC’s views on Medicare’s managed care payments. MedPAC 

is an independent congressional support agency created by the 

Congress to provide analysis and recommendations regarding 

Medicare policy. Much of our work focuses on payment issues, and 

I would stress that we make many payment recommendations on 

the fee-for-service side that involve reducing payments, much as 

the recommendations we are going to discuss today for managed 

care. 

In our recommendations, the Commission tries to assure that 

beneficiaries have access to quality care, to assure that tax dollars 

are well spent and to assure that payments to providers are fair 

and adequate. Furthermore, the Commission believes that all providers in Medicare, whether fee-for-service or managed care, should 

be under some degree of fiscal pressure, to motivate the continuous 

search for efficiency and quality improvement. The Commission is 

also acutely aware of the long-run sustainability problems facing 

Medicare. These problems are reviewed in my testimony, and I am 

sure Peter has gone through them with this committee many times. 

The Commission has long supported managed care plans as a 

choice in Medicare. Managed care plans have the potential to be efficient, and they have greater flexibility in innovating care delivery. 

Indeed, the original concept of the managed care plans was that 

they would be more efficient than fee-for-service and, through these 

efficiencies, offer extra benefits such as lower cost sharing, and 

that in turn would attract beneficiaries. 

Regarding payment, for many years the Commission has recommended that Medicare payments should be neutral to the beneficiary’s choice. We should not have payments that favor either feefor-service or managed care plans, and of course, as has been mentioned, they should encourage efficiency. The current Medicare 

managed care payment system is flawed. It is not neutral, and it 

does not encourage efficiency. It draws beneficiaries to enroll in 

managed care, and as Peter indicated, every beneficiary enrolled is 

an increased cost to the Medicare program. This is largely because 

the plans bid against legislatively set benchmarks that are, on average, 16 percent above traditional fee-for-service payments. These 

benchmarks vary across the country. They can be as high as 30 

and 40 percent above fee-for-service in the Continental U.S. 

The current bidding system, which I can explain in questions, results in payments that, on average, are 12 percent above traditional fee-for-service. Plans are required to use part of their total 

payment to give extra benefits to beneficiaries. And of course, this 

is attractive to beneficiaries, and there has been a large increase 

in plan offerings and enrollment. There are now an average of 20 

plan options offered per county, and enrollment is at 18 percent, 

the highest it has ever been in Medicare. 

31

Note that these extra benefits are paid for by taxpayers through 

the Part A trust fund and general revenues. Further note that it 

increases the Part B premium that is paid by all beneficiaries 

whether they are in managed care plans or not. It is also alarming 

to note that the most rapid growth is in the private fee-for-service 

plans. These plans operate largely like traditional fee-for-service. 

They do not put together networks of providers to manage care. 

They do not negotiate fees. In fact, they use the same fees as traditional fee-for-service, and they are highly inefficient based on the 

analysis that we have done. On average, Medicare pays them 9 

percent more than fee-for-service to deliver the traditional fee-forservice benefit, and then because of our current payment system, 

these plans, on average, are paid 19 percent more than fee-for-service after all is said and done. 

Furthermore, these plans have very few requirements. Peter referred to the fact that they have very minimal quality data reporting requirements, and there is less oversight exercised by the agency on these plans. The current Medicare managed care payment 

mechanism sends signals inviting and rewarding inefficient plans, 

and the private fee-for-service plans may be the most striking example of what is wrong with the system. 

As you know, the Commission has recommended reducing the 

benchmarks to pay managed care plans to 100 percent of fee-forservice. We acknowledge and realize that this creates concern that 

in some markets there will be fewer plan offerings and benefit 

packages will be less generous. Our most recent report explains 

some methods of transitioning to these lowered benchmarks. And 

we also note that there are plans that are efficient and that can 

provide additional benefits through those efficiencies, but we do 

recognize that there will be less plans and less generous offerings, 

as Peter indicated. 

In closing, I would make these points. The Commission supports 

the role of managed care plans in Medicare. There is evidence that 

plans, particularly certain types of plans, can be efficient, but the 

current system is costly and rewards inefficient plans. Reducing 

the benchmarks will have the effect of focusing our resources on 

plans that can provide extra benefits through savings and return 

to the original intent of the program. There will be resistance from 

plans enjoying the extra payments and from beneficiaries enjoying 

the extra benefits, but the problems will be more costly and more 

difficult to address given the current enrollment trends. 

I look forward to your questions. 

[The prepared statement of Mark E. Miller follows:]

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Chairman SPRATT. Let us explore for the record, first, exactly 

how the benchmarks are determined and why it is they differ from 

place to place and throughout the country, which is a great part 

of the source of inequity, or unevenness, in the payment scheme 

here. 

Dr. Orszag. 


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Dr. ORSZAG. Sure. The existing benchmarks come from or are 

sort of the legacy of congressional changes that were made at various different points in 1997 and in 2000 and as part of the Medicare Modernization Act. 

One of the things that happened was that Congress decided that 

there should be floors put in in particular counties, particularly 

and often disproportionately in rural areas, so that plans would 

have more ability to operate in those areas. 

So the result today is that you have the legacy of that history 

embedded in benchmarks which are then updated from year to 

year, basically, by the national average growth rate in Medicare 

costs. 

If Mark wants to add anything——

Chairman SPRATT. Is it correct to say that the benchmarks are 

set above FFS, fee-for-service? 

Dr. ORSZAG. Yes. 

Chairman SPRATT. In all cases? 

Dr. ORSZAG. Yes. 

Chairman SPRATT. So, to the extent that FFS already from county to county is uneven, the unevenness is exaggerated by adding 

benchmarks that differ from place to place on top of these uneven 

payments? 

Dr. ORSZAG. Not quite, because relative to local fee-for-service 

costs, the benchmarks tend to be higher in the low fee-for-service 

cost areas than in the high fee-for-service cost areas. 

Chairman SPRATT. Dr. Miller, would you like to comment on 

that? 

Mr. MILLER. There is nothing really to add, and this was addressed, I think, some by Mr. Ryan’s comments. 

I mean, the benchmarks were created because the business case 

for managed care to go to rural areas was difficult to make when 

you have sparse beneficiaries. Your marketing costs are higher, 

and it is harder to create networks. And I think the original intent 

was, ‘‘Well, if we put these higher payments in these areas, will we 

draw plans?’’ then you have got something of a ripple effect as 

other areas wanted to get the higher benchmarks and try and draw 

plans to those areas, and then you basically would have a legislative history, as Peter laid out. 

Chairman SPRATT. But the original idea was that more competition for enrollment would lead to better services, better choices, 

better outcomes, one would hope, and lower costs. 

Mr. MILLER. Yes, and I tried to address this a little bit in my 

5 minutes. 

I think the original intent of the managed care plan—and you 

know, I will actually take this opportunity to make this point. We 

are saying that the benchmarks should be tied to fee-for-service, 

and I want to be clear. We do not think that fee-for-service is a 

highly effective, well-functioning system. Much of the work that we 

engage in at MedPAC is directed towards trying to make that system more efficient and more effective. 

Chairman SPRATT. And this was one way that we sought to make 

it more efficient and more effective. 

Mr. MILLER. Exactly. So I think the original intent of managed 

care was that I could come in as a managed care plan and do better 

49

than this uncoordinated, duplicative system that does not focus on 

the patient. By managing care, putting together a network of providers who are oriented towards quality and lower resources, I will 

produce savings. Those savings, in turn, can be used to provide additional benefits. That was the original intent. 

Chairman SPRATT. To the extent that the objective was to 

produce savings or to create efficiency and lower costs, does it 

make sense to have this incremental payment for the Medicare Advantage plans permanently paying more than fee-for-service Medicare? If so, does the program, the system, ever realize the savings? 

Mr. MILLER. There are two comments from me on that. 

The Commission’s position is that the benchmarks need to come 

down to fee-for-service, and so our point is, no, they should not be 

above it. 

Secondly, the Commission—and again, I tried to reference this—

feels that all providers, not just managed care plans but that those 

on the fee-for-service side as well, should be under some degree of 

fiscal pressure so that they are always searching for efficiencies, 

improved quality. To the extent that any payment system—fee-forservice or managed care—does not put that kind of pressure on a 

provider, the Commission thinks it is not achieving the objectives 

in Medicare that it should be. 

Dr. ORSZAG. Mr. Spratt, if I could just add: From the perspective 

of the Federal budget, given the current law system of financing 

Medicare Advantage plans and in order for the current system to 

actually save money for Medicare, the efficiency improvements that 

Medicare Advantage plans would have to achieve relative to local 

fee-for-service are so large that they are implausible. 

So, in particular, Medicare Advantage plans would have to come 

in with bids that were on the order of magnitude of one half of 

local fee-for-service costs in order for the net costs to the Federal 

Government to be reduced as a result of Medicare Advantage 

plans. There are other dimensions along which you can evaluate 

Medicare Advantage in terms of quality of care, in terms of overall 

efficiency of the health care system, but for the Federal budget by 

itself, the result is that we are providing a benefit that raises net 

costs to a particular set of beneficiaries. 

Chairman SPRATT. Dr. Miller, let me ask you. 

Both of you mentioned the criticisms of your argument, that 

there is a differential here that is more than what was really intended. AHIP and the other insurance companies that are providers say that you have overestimated the differences between 

Medicare Advantage payments and fee-for-service medicine. 

Would you take those points one by one and defend, both of you, 

the analyses you have made? 

Dr. ORSZAG. Who would like to go first? All right. I will do it 

briefly. I think for us it is pretty straightforward. 

There are a variety of assertions that are made. You can see 

them there. The first is that the bottom part, actually, that Congress raised rural and urban floor rates above fee-for-service, is 

what we were just discussing, and it does not reflect the accuracy 

of our analysis. It reflects an underlying reality that one of the 

things going on here is that you had various kinds of statutory 

interventions. 

50

Chairman SPRATT. In other words, it is not, in fact, an additional 

cost, but it was one that was warranted from outside the program? 

Dr. ORSZAG. That does not affect the analytical integrity of the 

comparison that is being made. There are other assertions that are 

made, for example, that CBO’s numbers do not take into account 

the changes that were made with regard to the risk adjustment 

system or with regard to the physician payment fix. 

With regard to the risk adjustment system, that is not correct. 

CBO’s estimates reflect our March 2007 baseline, which incorporates the changes from the Deficit Reduction Act and the Tax Relief and Health Care Act. 

With regard to the doctors’ fix that was enacted, the SGR override, that override does not affect our numbers for 2008 forward, 

which is again the key thing for determining the budget numbers 

that I gave you. 

So, as we go down the list one by one of the assertions that are 

made, they are either just wrong or disingenuous. 

Chairman SPRATT. Dr. Miller. 

Mr. MILLER. I agree with that characterization. There are just a 

couple of things that I want to add. 

I mean this was used extensively in hearings and by the press 

to discredit our numbers, and I want to be really clear for the 

record that we stand by our numbers. We believe that the ‘‘112 percent’’ is correct, and I just want to add a couple of things to what 

Peter said. 

The basic argument on the budget neutrality adjustment, the assertion of the industry, is ‘‘do not do anything because, over time, 

my payments will come down.’’

Chairman SPRATT. Let me stop you here because this assumes a 

knowledge that a lot of us do not have. 

Mr. MILLER. Oh. 

Chairman SPRATT. You might start with the Deficit Reduction 

Act, risk adjustment of payments and things of that nature. 

Mr. MILLER. I am happy to hit it. I just did not want to take up 

a lot of your time, and I will keep this as brief as I can. So where 

this came from worked like this: 

Whenever you have enrollment in a managed care plan, you can 

get different types of patients or beneficiaries, say a very healthy 

65-year-old or somebody with multiple conditions and complications. And so what the payment system is designed to do is to adjust for the relative risk of a patient who gets enrolled. 

There was an implementation of a new risk adjustment system, 

and it would have had the effect of lowering overall payments for 

the industry as a whole because, on average, enrollment was tilted 

towards healthier beneficiaries. There was a decision made not to 

allow the payments to come down. 

You know, we analyze things like this, and we went through it 

and said, no, if the risk adjustment says that the beneficiaries are 

less sick or more healthy, the payments should come down. We 

made that recommendation. Congress took it up as part of the 

DRA. So, all things being equal, this might lower the payments. So 

the industry’s point is it is going to go down, do not take the benchmarks down. But there are also trends that are counteracting this. 

51

Enrollment is moving into high-payment areas, which has the effect of increasing payments over time. So our point is that this is 

not necessarily going to play out the way people thought it would, 

and I would offer one piece of evidence. We did the analysis on 

2006 data, and we got 12 percent above fee-for-service. The CBO 

folks did the analysis on 2007 data, so you would expect it to come 

down. It did not come down. They also arrived at 12 percent, and 

I think I am characterizing that fairly. 

Dr. ORSZAG. Yes. 

Mr. MILLER. I also want to say—is that what you needed before 

I go on? 

Chairman SPRATT. Absolutely. Go ahead. 

Mr. MILLER. Okay. All right. 

Chairman SPRATT. By ‘‘12 percent,’’ we are talking about 12 percent above fee-for-service? 

Mr. MILLER. Above fee-for-service, absolutely, this 1 percent underestimate from the change in the doc payment, that was taken 

into account in our number. 

I would also point to the floor. He is absolutely correct that that 

is a question: Does Congress want to put those floors in place? But 

we also think that that number on the table is wrong, that those 

floors account for much more of the overpayment than is represented on that chart. 

Chairman SPRATT. Thank you very much. 

One final question, Dr. Orszag. If we could, put back up in closing—not ‘‘closing’’ because others have questions, but just to wrap 

up with me—the chart estimating the cost differential over a period 

of 10 years equaling, eventually, $149 billion cumulative. Do we 

have that chart? 

Dr. ORSZAG. Yes, chart 3. Yes, that one. 

Chairman SPRATT. Would you walk us through that again? 

Dr. ORSZAG. Sure. 

What this shows you is you currently have this wide variety of 

benchmarks relative to fee-for-service costs. If you limited the 

benchmarks to different ratios relative to local fee-for-service, what 

would the reduction be compared to current law? 

So, if you said in every area the benchmark is no more than 100 

percent of local fee-for-service, the reduction in the budget savings 

basically over the next 5 years would be $54 billion, and over the 

next 10 years it would be $150 billion. 

What is noteworthy about this table is—and it is in addition to 

those sets of numbers—if you look down, other highlighted figures 

show you that even at ratios of 130, 140, and 150 percent limits, 

if you put in a 150 percent limit, you are still saving money, which 

tells you that there are some areas of the country in which the 

benchmarks are more than 50 percent above local fee-for-service 

costs, which was the purpose of highlighting that bottom row. 

Chairman SPRATT. Now, does this assume the expansion of enrollment in Medicare Advantage programs that you outlined earlier 

going to 26 percent? 

Dr. ORSZAG. These figures assume our baseline. And just to underscore what Dr. Miller said, one of the reasons that even with 

the phase-out of the ‘‘hold harmless’’ provisions on the risk adjustment that you still get numbers like this is that enrollment is 

52

growing very rapidly, and my other chart showed you disproportionately in private fee-for-service areas which tend to have higher 

ratios of benchmarks to fee-for-service costs than other types of 

Medicare Advantage plans. 

Chairman SPRATT. Okay. Thank you both very much. 

I have one question for the record, Dr. Miller, that the Energy 

and Commerce Committee has asked to submit: 

Has MedPAC looked into the physician access problems in the 

Northwest? If so, have you found that these problems are specifically related to Medicare patients or do they impact both Medicare 

and privately insured patients? 

Mr. MILLER. MedPAC does a couple of things—and I am going 

to answer your question—but we do an annual survey of beneficiary access across the country, and just recently we did a survey 

of physicians to look at access for Medicare beneficiaries. And we 

generally find across the country that access has remained stable 

and comparable to the privately insured. And I can go through 

more details if anyone cares. 

We do not have a strong ability to go in market by market, and 

we know that there are markets where there are concerns about 

access to physicians. However, other analysts—and I have in mind 

right at the moment Health Systems Change, the group that is run 

by Paul Ginsburg—have looked at some of this; and some of their 

conclusions were that markets like the ones you are talking about 

are really the effect of broader demographic changes. These markets are often experiencing very rapid increases in population. 

Sometimes it is retirees moving to the areas. And so the general 

access to physicians is compromised, not as a specific result of 

Medicare policy, but I want to underscore this is based on analysis 

that other organizations have done. We have not directly looked at 

that area of the country. 

Chairman SPRATT. Thank you very much. Others now may have 

questions. 

First, Mr. Ryan. 

Mr. RYAN. Thank you, Chairman. 

I remember this vividly. I serve on Ways and Means as well, and 

we went through all of this, back and forth, as to how to make 

these payments rates. If you remember from, you know, a 1997 

law, we had this Medicare Plus Choice program, and all of us probably had a county where plans came in, where people were pretty 

happy, payments changed; you had, you know, one county with this 

number and another county with that number, one State with this, 

one State with that. And then plans left, and our constituents were 

very upset. 

So we had this huge rocky road of private plans coming in and 

out because you had this uncertain payment system. So that was 

then. 

What we have now is—the idea was a more certain payment system. Then the rural Members of Congress—and this was a bipartisan thing. The Rural Health Care Coalition, I think it is called, 

really wanted to get these plans into the rural areas. And because 

I do not have my glasses, I could not see your second to the last 

chart, and we do not have a hard copy of it. 

53

So, really, Dr. Miller and Peter, because your numbers are very 

similar, I am trying to get a handle on how much of the 12 percent 

overpayment, or whatever we want to call this—12 percent additional—is attributable to the rural enhancements that were a conscious decision by Congress to enact. 

Mr. MILLER. I am not sure I am able to quantify that on the spot 

for you. I would say that it is a function of a couple of things. It 

is definitely true—and Peter made this point early on—that the 

benchmarks, the floor, are the results of the floors, and the floors 

and the benchmarks tended to be higher in rural areas. How much 

ends up being actually attributed to the rural areas is dependent 

on how much enrollment occurs in the rural areas and then how 

the plans bid relative to those benchmarks in rural areas. I cannot 

toss off a number. 

Mr. RYAN. It would be helpful to get that because that was a conscious decision by Congress in 2003, and I would just like to know 

what the price of that policy preference was with respect to these 

overpayments. 

Peter, did you want to add to that? 

Dr. ORSZAG. I would just add again, if you look at the benchmark 

relative to fee-for-service costs, in high-cost fee-for-service areas, 

that difference is about 4 percent. In low-cost fee-for-service areas, 

mostly because of the policy interventions that Congress adopted, 

it is 26 percent. 

Mr. RYAN. Oh, really? 

Dr. ORSZAG. So you can see that there are very significant differences in that differential across the country, and the low-cost 

areas have a higher differential, and actually we have data on 

where the low-cost areas are, so you can start to——

Mr. RYAN. That would be interesting to get a handle on, because 

then we would know what this conscious decision—and I think 

these numbers have exceeded what people expected, to be sure, but 

it would be interesting to know how much is attributable—thank 

you, I finally got a hard copy of this—how much would be attributable to that. 

Another question for both of you, but for particularly Dr. Miller. 

CMS has 22,000 employees who run Medicare and Medicaid. Last 

year, we provided CMS with $3.2 billion for their administrative 

costs to run these programs. The Medicare Advantage plans do not 

receive additional subsidies for administrative costs, and so they 

have to embed those administrative costs within their plan bids. 

When calculating these payment differentials between traditional 

Medicare and Medicare Advantage, does MedPAC, and CBO for 

that matter, include the CMS costs, administrative costs, so we 

sort of have an apples-to-apples comparison on that? 

Mr. MILLER. Yes, we do. 

Mr. RYAN. You do. 

You do as well? 

Dr. ORSZAG. Yes, and I would just note—I mean, to the extent 

that there are administrative cost differentials, that does not undermine the fact that these plans cost the government more than 

the traditional fee-for-service program. 

Mr. RYAN. Right. I am just trying to see if we have disaggregated 

these things. So to me that is pretty significant. 

54

What would be the difference between Medicare Advantage and 

fee-for-service if the traditional program—the government program—had disease management, coordinated care, mandatory 

quality reporting and improvement, and out-of-pocket caps, as are 

found in many Medicare Advantage plans? That is, how much 

would the difference be reduced if traditional Medicare did all of 

the things that Medicare Advantage does? 

The key thing I am trying to understand here is apples to apples. 

With Medicare Advantage, the beneficiary kind of gets it all in one 

plan, meaning they get their Medigap insurance or the equivalent 

of that. They get their Part D plan in all but the fee-for-service 

ones, and they get a part A and a Part B. So that is the one comprehensive plan. 

You know, what would be the cost differential if we assumed apples to apples over on the traditional program, including all of 

those other things—the supplementals, the part Ds and the As and 

the Bs? 

Mr. MILLER. All right. There are a couple of things that I think—

and actually, let me be very direct. 

I cannot quantify that, but I think there are some things that we 

should talk out in thinking about that. I mean, first of all, some 

of the argument of managed care plans are that they engage in 

these types of activities, because over the long haul, it is supposed 

to produce savings. So if you manage disease and you coordinate 

care, the whole idea is that, actually, costs would be lower over 

time. That is kind of what the business—that is kind of what the 

business model is about. 

The other thing I would say is that you are saying, at least on 

the quality front, well, what if fee-for-service were required to do 

this? More and more, fee-for-service providers are being required in 

Medicare to do it. For example, in hospitals, if they do not report—

I cannot remember whether it is 22 or 24 health/clinical process 

measures—their update is lowered by a certain percentage. So 

some of this is going on. Incidentally, our work——

Mr. RYAN. That cost is not being borne in the traditional fee-forservice program as we measure it to Medicare Advantage, though. 

I mean the 24 is a cost that is borne by the hospitals. 

Mr. MILLER. It is borne by the hospital, right; and just like we 

are saying that the quality metrics that the health plans have to 

provide are borne by the health plan, and that is part of their administrative structure. 

I am just trying to say that while it is not a uniform requirement 

in fee-for-service—and on that point, you are absolutely right—

more and more, there is a push to require quality reporting on the 

fee-for-service side, and as a Commission, we have been arguing 

strenuously that that needs to happen, which I know does not give 

you the quantitative answer that you want. 

One other thing I would say is that you are right, that a lot of 

plans have, say, out-of-pocket caps and that type of thing, catastrophic caps. But the other thing that is somewhat concerning 

about this is you can find also plans where we are paying this additional amount, and the beneficiary ends up, depending on their 

health path, being exposed to higher cost-sharing than they would 

actually experience under traditional fee-for-service. There is no 

55

guarantee that when you walk in with these plans, even with the 

higher payments, that you are, you know, protected—I am sorry—

from the additional out of pocket. I am sorry. 

Dr. ORSZAG. That is okay. I would just add two things quickly. 

One, it is clear that a lot of plans are doing a lot of these activities, and effectively we are sort of running a public experiment. We 

are providing them Federal Government money, and then the plans 

are going off and doing things, some of which may actually work. 

But we do not have sufficient reporting requirements, given the 

amount of Federal money that is going into these experiments, if 

you will, to see what works and what does not, and it seems like 

that may be something worth exploring. 

The second point I would note is the evidence that we do have 

that some of these programs—for example, the coordinated care 

demonstration project that was conducted under Medicare—actually reduce costs as opposed to improve quality still remains to be 

seen. The evidence from that demonstration project is suggesting 

that the programs, for example, on coordinating care do not, on net, 

reduce the cost of care delivered even when you have a nurse kind 

of centralizing your care and keeping track of things. So I would 

just sort of be waiting for more empirical data, which the plans, if 

they were required to report more, could basically serve as little 

laboratories for it. 

Mr. RYAN. That is kind of where we are with this. 

You know, the idea here is comprehensive care where you have 

your care coordinated within your plan, and you have the right 

kinds of incentives—disease management, you know, preventative 

medicine—and that, over time, this is good for the beneficiary and 

good for the taxpayer. The traditional program, you know, is sort 

of silos. You have got to go out and buy your supplemental; then 

you have to go out and buy your Part D; and then you have your 

Part B premiums and this and that. So it seems like we still have 

not gotten our quantitative tools available yet that will really give 

us a good measuring of this. 

One of the reasons I think you were selected to be the director 

of CBO, Peter, is you are an expert on health care, and this is an 

area where I think we all—and we are encouraged and are looking 

forward to the modeling that you are working on with respect to 

health care modeling. 

Give us an idea of where you think you are on better quantifying 

these things like disease management, preventative medicine and 

risk management. Where are we in getting a better idea on how 

to measure these things, which are kind of an intangible, but we 

know intuitively that these things are good things? How is it that 

we can get to the point as policymakers where we can make good 

judgments on good health care policy, and we can see the kinds of 

savings that we think we would get? 

Dr. ORSZAG. Well, first, let me just say there are many mornings 

when I wake up wondering precisely why I was selected to be the 

CBO director and why I thought that was a wise move. But in any 

case, let me just say that I think that there is progress being made, 

but there is substantially more that could be done. 

I think, perhaps, on Tuesday I mentioned vastly expanded comparative effectiveness research where you are examining outcomes 

56

and what works and what does not, provides a significant step forward that Congress could be exploring and expanding upon. 

With regard to CBO’s own internal efforts, we are increasingly 

moving towards becoming the Congressional Health Office, as you 

know——

Mr. RYAN. Right. 

Dr. ORSZAG [continuing]. And shifting staff into the area and 

doing more modeling. We are, though, dependent on in many cases 

the outside empirical knowledge, and we have not yet moved to a 

state of the world where there is enough data available at a finely 

disaggregated level to be examining all of the questions that need 

to be examined. 

So there is progress, but we are still pretty far from where we 

should be. 

Mr. RYAN. Dr. Miller. 

Mr. MILLER. Yes, if I could just say a couple of other things on 

this front, and I just want to reinforce a couple of points that were 

just made. 

You know, the notion of collecting quality data uniformly across 

plans—which does not happen—and uniformly between fee-forservice and managed care is part of what needs to happen here so 

that we know, and we have made recommendations along those 

lines. 

Another way to think about it is trying to have the payments 

vary to the plans—and by the way, we have made recommendations on the fee-for-service side—but to the plans based on their 

quality outcomes. If you want to pay a plan more, how about a plan 

that produces a higher quality outcome—and we have made recommendations along those lines—which then may also drive some 

evidence. If you find a plan with higher quality metrics and you are 

paying them more, you can look at what they are doing. 

Finally, I just want to also strongly make the point on the comparative effectiveness. We just in our recent report have made a 

recommendation to move forward on comparative effectiveness. 

And I just want to be sure that I endorse that, because I think that 

is a direction we need to go. 

Mr. RYAN. Great. Thank you. That is very helpful. Thank you 

very much. 

Chairman SPRATT. Mr. Edwards. 

Mr. EDWARDS. Thank you, Mr. Chairman. 

Mr. Chairman, under the Republican leadership in the House for 

the last 12 years, we have had a number of economic theories 

passed into law, and it is interesting to look at the difference between the theory and the reality. One theory was that we could 

pass trillion-dollar tax cuts, fight a war on terrorism, and balance 

the budget. That theory proved to be absolutely wrong, and we 

ended up turning the largest surpluses in American history into 

the largest deficits in American history. 

Then in 2003 at 3:00 o’clock in the morning, with 3 hours of armtwisting, after the vote should have ended—arm-twisting by Mr. 

DeLay—we passed into law the largest increase in entitlement 

spending for Medicare in the history of that program, based on the 

theory that tax subsidies for Medicare Advantage would somehow 

save taxpayers money. 

57

Then, I think, just a few minutes ago, I heard my colleague Mr. 

Ryan refer to Medicare Advantage—and I put this in direct 

quotes—‘‘while saving Medicare money and saving taxpayers’ 

money.’’ That was the theory in 2003 and apparently the theory 

this morning. 

Dr. Orszag, I want to ask you: On average—not theory, but fact. 

On average, how much extra tax-funded subsidy is there per Medicare recipient under Medicare Advantage versus fee-for-service per 

person on average? 

Dr. ORSZAG. Again, roughly, 12 percent. 

Mr. EDWARDS. How about dollars, actual tax dollars per person? 

An average, ballpark. 

Dr. ORSZAG. I am told about $1,000. 

Mr. EDWARDS. So $1,000 more cost per taxpayer in America 

today for every person who—under this theoretical program that 

was going to save taxpayers money, it is $1,000 per Medicare recipient as an extra cost to the taxpayer. 

How much is the total cost to taxpayers for the Medicare Advantage program as compared to the fee-for-service are we talking 

about in fiscal year 2007? 

Dr. ORSZAG. This year—I will give you the calendar year number. We can get the fiscal year number. The total payments are 

about $75 billion. I think I said $77 billion. 

Mr. EDWARDS. But the extra cost compared to if we had everyone 

under fee-for-service. What is the extra cost this year in fiscal year 

2007? 

Dr. ORSZAG. Something like $10 billion. 

Mr. EDWARDS. Somewhere around $10 billion. 

Am I correct that you both testified that over 5 years, Medicare Advantage is an additional $54 billion cost to taxpayers—is that 

correct—compared to fee-for-service? 

Dr. ORSZAG. That is correct. 

Mr. EDWARDS. Am I correct that the number—let me just get the 

facts on the table here. 

Are we correct that your testimony today says that, over 10 

years, Medicare Advantage will cost $149 billion more relative to 

if we had a fee-for-service for all Medicare recipients? Is that correct? 

Dr. ORSZAG. That is correct. 

Mr. EDWARDS. One hundred forty-nine billion dollars. 

So, rather than the theory of saving taxpayers money and, quote, 

‘‘saving Medicare money,’’ the data prove that it is actually costing 

more than $10 billion more to taxpayers this year, $149 billion over 

the next 10 years. 

Mr. RYAN. Would the gentleman yield for a friendly clarification? 

Mr. EDWARDS. In just a moment. If I can just finish. The gentleman has had two opportunities——

Mr. RYAN. Well, you invoked my speech. 

Mr. EDWARDS. All right. I would be glad to give you 30 seconds, 

and then I am going to continue. Yes. 

Mr. RYAN. What I was talking about in the $3 billion savings 

number is the bid system where 75 percent of the savings goes to 

the beneficiary, that was about $1,000 in benefit and premium reductions, and 25 percent goes to the taxpayer. That is the $3 billion 

58

figure I am saying. I am not suggesting that, net, the program is 

$3 billion lower. I am saying that the system——

Mr. EDWARDS. Okay. So, when you said ‘‘saving taxpayers 

money’’ in your testimony and ‘‘saving Medicare money,’’ you were 

talking about savings within one part of the program. 

Mr. RYAN. That is right. That is what I was talking about. When 

you are under the benchmark, the 25 percent goes to the taxpayer, 

and the 75 percent goes to the beneficiary. It is that part of——

Mr. EDWARDS. I understand that. So then you would agree with 

the data that has been presented here today that, overall, the plan 

that was passed in 2003—largely on a partisan basis—is costing 

taxpayers $1,000 per Medicare beneficiary more per person. 

Could I ask one other question? I do not know how you define 

it—‘‘administrative costs’’—and compare that in profits within the 

public versus private sector. 

Is there some kind of comparison—we are all together, on a bipartisan basis, looking for efficiencies. Can you tell me what the 

administrative costs are for the Medicare program fee-for-service 

versus the administrative costs for the Medicare Advantage program? Is it more efficient? Do we have lower administrative costs, 

including profits, under the private part of the system compared to 

the publicly managed part of the system? 

Mr. MILLER. I think—and I do not have a lot of precision on what 

the profit margins—in fact, I do not have any precision on the profit margins on the private side, but it is generally understood that 

the administrative costs—you know, overhead, marketing and profits in the managed care plans—are higher than the costs of administering the Medicare program. 

Mr. EDWARDS. Do you know how much higher? A ballpark, either 

in percentages or numbers? 

Mr. MILLER. I really do not. The plans submit bids, and I believe 

that there is data that it has on medical cost ratios that—or medical loss ratios that are submitted as part of the bid that CMS reviews, but that information is not publicly available. 

Mr. EDWARDS. Okay. I thank you. 

Chairman SPRATT. Mr. Hensarling. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

One, let me sincerely thank you for holding this hearing. As I see 

Dr. Orszag’s child over there, she looks roughly to be the age of my 

own daughter. And I have been very, very concerned about the impact that runaway entitlement spending is going to have on future 

generations, and I know we all care deeply about our children and 

our grandchildren. We just perceive their interests, obviously, in 

varied ways. 

So, since the budget that was passed out of this committee was 

stone-cold silent on the subject of doing anything to reform entitlement spending, I welcome this hearing, and I welcome the opportunity to learn more about the subject matter at hand. 

I must admit, in listening to my good friend from Texas here and 

his statement, I was interested to hear about the sensitivity on the 

vote for the prescription drug benefit in 2003, since yesterday we 

had a vote left open on the Udall amendment in order to persuade 

people to change their opinions. So I am glad to see that that continues. 

59

Ms. DELAURO. Five minutes versus 3 hours. 

Mr. HENSARLING. I am sorry. I thought the time was mine, Mr. 

Chairman. 

The purpose was the same. So, if there is a difference in the 

time, I am just appreciative of the sensitivity of my friends on the 

other side of the aisle. And although certainly this prescription 

drug benefit program is of massive cost for those who criticize it, 

I at least remember looking at the CBO scores at the time of the 

Democrat alternative, and was interested to discover that it cost 

even more. So I would invite my friend from Texas and other 

friends on the other side of the aisle to look into that. 

Dr. Orszag, the question that I have here for you—I understand 

there is insufficient data as of today, and I certainly am interested 

in receiving more information from you and Dr. Miller on perhaps 

legislative incentives to ensure that we have, I believe, uniformity 

and quality of data in order to judge some of these policy options, 

but at least in the time that I have been a Member of the House 

of Representatives, every medical professional with whom I speak 

all believe that the long-term solution to the health care crisis is 

to be found somewhere in preventative care and incentives for 

wellness, which, according to your testimony, is what we see in a 

number of the Medicare Advantage plans—disease management, 

care coordination and preventative care programs. At least to those 

who know more about the subject than I do, they claim that is the 

long-term solution. 

So, number one, is it a possibility that the program is working 

and we just do not understand it is working because we have insufficient data? I guess the other part of the question is: Could it be 

that we have a very good model, and we have just overpaid for the 

model? 

Dr. Orszag. 

Dr. ORSZAG. I am not going to comment on the structure. That 

is obviously up to you. Again, my job is just to tell you what the 

budgetary implications and other implications are without the normative term of ‘‘good’’ or ‘‘bad.’’

With regard to preventative medicine, I would say a couple of 

things. One is—and we could provide more information to you on 

this topic. I hold out a lot of hope for prevention and healthy living 

to ultimately improve health. The impact on health care costs, at 

least to date from existing programs, is much more ambiguous 

than we would like. In part, the reason is that you first need to 

have an intervention actually work for a particular subset of the 

population. Often when you are doing preventative medicine steps, 

you are finding things that require additional health care costs because you screen people for something and then realize they actually require something more, and that can offset it. Then you are 

often applying the screen or the test, or what have you, across a 

wide variety of the population, not just the subset of the population 

for which it will make a difference. And that entails cost, too. 

When you incorporate all of those effects, the evidence on preventative medicine’s actually reducing costs as opposed to improving quality is not as hard as we would like, and we are constantly 

looking for better information. 

60

So, again, I want to hold it out as a possibility and just say CBO 

is constantly monitoring developments. 

Mr. HENSARLING. If I could, also in your testimony you talk 

about, over long periods of time, cost growth per beneficiary in 

Medicare and Medicaid has tended to track cost trends in the private sector health market. When I looked at the size of Medicare, 

Medicaid, the VA health care system, isn’t this possibly a case 

where the tail is wagging the dog, that government is so involved 

in our health care system that they are driving the cost trend? 

Mr. ORSZAG. The point of that sentence was to say the two systems are so integrated it is not plausible to me that you are going 

to reduce Medicare and Medicaid costs sustainably over a long period of time unless you are affecting overall health care costs. 

And I would agree, in many situations the public programs are 

large enough to affect how medicine is practiced. So, for example 

in Medicare, moving to the DRG system, that is, a fixed payment 

per episode for inpatient hospitalizations, created incentives to 

shorten hospital stays for Medicare patients; it wound up shortening hospital stays not just for Medicaid patients, but for everyone 

because it affected how hospitals operated. 

Chairman SPRATT. Mr. Cooper. 

Mr. COOPER. I want to thank both witnesses for the excellent 

work of their groups, both CBO and MedPAC are essential for our 

understanding of these entitlement programs. 

I would like to focus first on Dr. Orszag’s slide No. 2, if that 

could be put up there. It seems like the core abuse are these private fee-for-service plans that receive the higher reimbursement, 

and in return, don’t really offer any of the managed care improvements that we thought we were paying for. 

So I would like to ask if we can quantify how much savings it 

would be if we eliminated the excess reimbursement for these private fee-for-service plans. 

Mr. ORSZAG. Yes. 

For example, if you took private fee-for-service plans and you 

paid them at 100 percent of local fee-for-service costs, we estimate 

that the budget savings over 5 years would be $14 billion and the 

budget savings over 10 years would be $43 billion. 

And as I mentioned in my oral, and it is also in my written testimony, one gets almost as much as those numbers by changing the 

way that private fee-for-service is allowed to operate and not allowing the so-called deeming provisions where private fee-for-service 

plans automatically get access to the payment rates that have already been negotiated by Medicare itself in the traditional fee-forservice part of the program. 

Mr. COOPER. So if we were to eliminate the worst abusers of the 

system, the savings would be a fraction of the overall savings that 

you have listed in your Chart 3? 

Mr. ORSZAG. That is correct. 

And part of the reason there again is, even though private feefor-service is growing really rapidly, it is still the case even in 

2017, under our projections, that HMO and PPO-type plans account for more people than private fee-for-service plans, even in 

2017, as I think you can see from the chart. 

61

Mr. COOPER. I was just looking at the chart. It looks like a larger 

piece of the puzzle than the numbers suggest. 

Mr. ORSZAG. Well, again, one way of—sorry, if you go back to that, again, if you are looking at, let’s call it—$43 billion compared 

to roughly $150 billion for the 10-year figures overall, is, you know, 

a little under a third. It is not that disproportionate from the relative enrollment rates. 

Mr. COOPER. Is there a way to distinguish between managed care 

Advantage plans that are appropriate and fee-for-service plans that 

are inappropriate? Do they declare themselves and say, hey, I am 

committing fraud on the system? I don’t think so. 

What other disguises could these private fee-for-service plans use 

in order to gain the extra reimbursement without doing the work? 

Mr. ORSZAG. Well, again, one of the things that is interesting 

about this option that I mentioned in my testimony: By taking 

away this deeming provision, by necessity, the private fee-for-service plans or whatever they would then be called would have to negotiate—basically create their own network. So they would effectively become something akin to a PPO-type of organization. 

So the distinction between private fee-for-service and other types 

of Medicare Advantage plans has a nontrivial amount to do with 

the fact that the private fee-for-service plans can just piggyback off 

of the rates that Medicare has already negotiated. 

Mr. COOPER. In earlier versions of Medicare managed care, we 

only reimbursed at roughly the level of 95 percent of fee-for-service. 

Mr. ORSZAG. Correct. 

Mr. COOPER. How much would the savings be if we took it back 

to that level? They would be larger than the numbers you have on 

the chart. 

Mr. ORSZAG. We have not estimated that, but we could provide 

an estimate of that for you. 

Mr. COOPER. That would be very helpful. 

You referred to the overall Medicare price structure, and that is 

on your Slide 4, which you did not use in your testimony. I think 

members of the committee should focus on that, if you would put 

up the slide. 

I think members should find this chart very instructive because 

some areas of the country are reimbursed at much higher levels 

than others. This isn’t a recent phenomenon. This has existed for 

the entire history of the Medicare program. This is fundamental to 

all the costs of the program, and if better health was correlated 

with higher reimbursement, that might not be a problem, but oftentimes it is an inverse correlation. 

The white areas on the chart with the lowest reimbursement 

have the healthiest populations. So that is a fundamental entitlement problem that this committee and others should be addressing. 

But obviously with our friend from Texas and Florida and other 

areas of the country that are the darker colored on the chart—and 

Tennessee is somewhat darkly colored—we have problems in adjusting this formula, the basic formula, to achieve better health 

outcomes for our people. 

Mr. ORSZAG. I think that the variation that you can see in this 

chart, which is very substantial and which does not—cannot be explained by the underlying riskiness of the patients in the different 

62

areas and which does not translate into better health outcomes in 

the darker regions than the lighter regions, presents the most substantial opportunity to reduce health care costs without harming 

health outcomes. It is, I think, very compelling evidence in favor 

of that perspective. 

So it is stunning that embedded in the long-term fiscal challenge 

facing the country is an opportunity like that one. 

Mr. COOPER. Let me say, ‘‘amen,’’ Mr. Chairman. 

Mr. MILLER. The only thing I would say, this is not a managed 

care point. At the Commission, we try to focus on—we do a lot of 

focus on fee-for-service, and we are trying to move the Medicare 

system to payment mechanisms that are sensitive to these differences that would reward those areas of the country that have 

high quality outcomes and low resource use under the fee-for-service system so that you would see some of this change and then 

would also make the case for—I have to raise these—take away the 

need to raise some of these floors on the managed care side. 

Chairman SPRATT. Mr. Conaway of Texas. 

Mr. CONAWAY. Thank you, Mr. Chairman. 

Dr. Miller, you have in your testimony, as well as in the written 

information, used the word ‘‘efficiency.’’ It seems to be related directly to cost. 

Can you flesh that out for me a little bit. 

Mr. MILLER. Efficiency—and you are correct, I have been using 

it in this instance to refer to cost. 

In a perfect world, and in most of our work, we use ‘‘efficiency’’ 

to refer to high quality, low cost. What I am specifically referring 

to when I say that is, in the bids that plans submit, they say how 

much they would charge or they want to be paid to deliver the traditional fee-for-service benefit. 

And, for example, in the private fee-for-service plans, the reason 

I said they are inefficient and definitely a cost concept—you are 

very clear on this—is because we have to pay so much more to 

them to deliver the traditional fee-for-service. So I think that was 

the point. 

Mr. CONAWAY. So you are not saying that the highest efficiency 

plan would be one that costs zero but provides the best care. I 

mean, that is irrational, the highest efficiency plan would be one 

that costs nothing, but provides the best care possible. 

Mr. MILLER. I would just say it a little bit differently. The highest quality with the lowest cost would be the best efficiency. 

Mr. CONAWAY. On Chart 2, it flattens out. There is a big jump. 

Can you tell us why that happened? And why does it go flat? 

Mr. ORSZAG. One of the explanations is that private fee-for-service plans currently have a variety of opportunities that could be 

taken advantage of in moving into various different areas, and we 

project that as they exhaust those easier opportunities, the growth 

tapers off. 

I would note, however, that I think there is significant potential 

for our projections to be too low on the projected growth, including 

especially in private fee-for-service plans. There is very significant 

potential for it to be higher than that. 

Mr. CONAWAY. My colleague from Tennessee said that dark blue 

area was fraud; is that right? 

63

Mr. ORSZAG. I am not going to use terms like that. 

Mr. CONAWAY. These are folks who are playing by the rules we 

put in place. We have got bad rules in place to allow them to manage or orchestrate their business models to take advantage of it; 

but under our current system, that is not fraud is it, Jim? 

Mr. COOPER. I think these plans acknowledge that they are not 

even intending to offer the additional services that would be offered 

by an HMO. 

Mr. CONAWAY. Fraud is a term of art that you as a lawyer understand, and it was subject to being reined in by existing issues. This chart, now, we talk about—this goes from the $32 trillion 

for today’s unfunded mandates to 54 trillion in 5 years. Most of our 

conversations talk about 30 or 40 years out. 

Either of you have recommendations that we could not let that 

happen over the next 5 years? 

Mr. ORSZAG. I will say the following, and I think this is obviously 

a much broader topic; but CBO is increasingly focusing on providing options for you that may help bend that curve. 

We do not—over the long term in terms of health care cost 

growth, we do not know enough today to know what would reliably 

help bend that curve, but there are several things that seem auspicious that need to be tried and could be tried and then examined, 

including on both the provider and the consumer side. 

On the provider side we are currently paying for Medicare on a 

fee-for-service basis. We don’t know whether we are always getting 

the highest value for that payment. Expanded comparative effectiveness research tied to changes in incentives for providers could 

help move towards a higher value-lower cost combination. 

On the consumer side, one of the striking things that has happened over the past three decades is, out-of-pocket expenses as a 

share of total health care spending have plummeted and they are 

now about 15 percent, under half of what they were a couple of 

decades ago. The evidence suggests that has driven up health care 

costs. So reversing that would also help to bring down health care 

costs. 

Mr. CONAWAY. Take one for the record, because I am going to 

run out of time before you can answer it; and that is, physician access across time as baby boomers qualify for Medicare, one of the 

concerns is, there are going to be fewer and fewer physicians available who will continue to leave their practices open. 

Can you get some information back to the committee about your 

projections, based on the number of folks in school, the doctors and 

all of that stuff—in terms of access when the baby boomer bulge 

hits the 65 bracket? 

Mr. ORSZAG. We know that the flow of people going through medical schools has been pretty flat and the share of general practitioners, in particular, coming out is down. 

Mr. CONAWAY. I yield back. 

Thank you, Mr. Chairman. 

Chairman SPRATT. Mrs. Schwartz. 

Ms. SCHWARTZ. I want to follow up on some of the other points 

that were made and see if we can—I will ask a few questions. 

You have made the point there are 35 million beneficiaries in 

fee-for-service Medicare, traditional Medicare, and about 8 million, 

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about 18 percent in this special managed—well, it has been called 

managed care, but Medicare Advantage. 

Isn’t it true that the greatest growth in this Medicare Advantage 

is actually in the private fee-for-service? 

Mr. ORSZAG. Even during this year, as one of my charts showed, 

that subcomponent of Medicare Advantage plans added more than 

700,000 beneficiaries. So they are growing; they started small, but 

relative to that small base, they are growing at a very rapid rate. 

Ms. SCHWARTZ. That is a group that is not claiming to do any 

managed care or coordinated care, but not only that, has the least 

oversight or the least rules and least accountability back to Medicare, to CMS, to be sure that they are giving anything extra to 

their beneficiaries. 

Is it true that we don’t know whether they are in fact providing 

either additional benefits or better outcomes? 

Mr. MILLER. I think there are a couple of things. 

They don’t have the same data requirements on quality of care. 

CMS is not—cannot do the same oversight to the bids that they 

submit. They don’t have to establish networks. And actually there 

is a provision in law that they are not allowed to link provider incentives to managing care. 

So—I mean, they are really structured not to be managed care 

plans and their reporting requirements are different. So it will be, 

as you say, hard to know what they are, but they are required by 

law to provide additional benefits. They do submit a bid. They say 

how much in the actuary value of the benefits that are provided. 

And so I believe benefits are being provided. 

Ms. SCHWARTZ. We just don’t know what they are. 

Mr. MILLER. They vary significantly across plans. You don’t necessarily know what is being used by beneficiaries. 

Ms. SCHWARTZ. Is it also true that the physicians—we have 

heard the physicians don’t know what they are going to be paid by 

these private fee-for-service plans, so when they accept a patient, 

they have no idea. 

Mr. MILLER. I think the phenomenon is more this: When the patient presents, the patient says I have a—the beneficiary has a private fee-for-service plan. At that point, the physician has to determine what this plan is paying, which is the private—which is the 

regular fee-for-service rate, and they may not know that and they 

have to sort of search and figure out whether they are going to accept the patient at that point. 

Ms. SCHWARTZ. A previous question asked about access for Medicare recipients and whether, in fact, we have enough physicians to 

provide and accept Medicare patients and accept the benefits. I 

think that is a concern for all of us. 

I assume what we are not getting is—we are paying for for these 

private fee-for-service plans; physicians don’t know what they are 

going to get reimbursed; patients—we don’t know, certainly, how 

much patients are getting—whether beneficiaries are getting more 

and whether, in fact, there are any better outcomes, and it is costing us all more money. 

Could you say also that the amount of money that we are spend- ing, that additional $1,000 a person, or the additional $10 billion 

a year, is really coming out of the pockets of other Medicare beneVerDate 0ct 09 2002 16:07 Feb 19, 2008 Jkt 000000 PO 00000 Frm 00068 Fmt 6633 Sfmt 6602 J:\DOCS\HEARINGS\110TH\110-14\38252.TXT HBUD1 PsN: DICK
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ficiaries? You pointed out that we really don’t have enough money 

today to pay—to meet all of our obligations under Medicare. We 

are now spending $10 billion more a year, $1,000 more per Medicare beneficiary, that in some ways is coming out of the pocket of 

the 80 percent of Medicare beneficiaries—in order to get a few 

beneficiaries who are the healthier and younger beneficiaries, potentially more benefits; and we are not even sure of that. 

Would that be the right framework for the way this is working? 

Mr. MILLER. We both have testified to the fact that all beneficiaries, the other 80 percent who are not enrolled in the plans, 

are paying a Part B premium—a higher Part B premium. 

A different way to say what you are saying is, in a sense, what 

we are watching here is, in this context of the sustainability issues 

that this committee is well aware of, we are watching a benefit expansion in progress. And it is not targeted; it is whoever presents 

at the plan. It is not——

Ms. SCHWARTZ. It is not targeted to the most elderly or sickest. 

Mr. MILLER. Or the lowest income. The benefits that are actually 

being offered through this expansion are determined by the specific 

plan, and as both of us have said, we don’t have a consistent data 

set to know what we are getting out of that. 

Ms. SCHWARTZ. So we are spending a whole lot more money, and 

we are not sure what we are getting. 

Thank you. 

Chairman SPRATT. Mr. Bonner. 

Mr. BONNER. I know this hearing was called to focus on Medicare 

Advantage. I want to ask one question that is germane to the hearing, but I want to take advantage of your broad expertise on health 

care. 

Consider the following statement: Government health plans aim 

to make sure that everyone who is eligible gets a benefit. Private 

health plans make sure that everyone who gets a benefit is eligible. 

Does that strike you as an accurate distinction? 

Mr. ORSZAG. I don’t necessarily have any objection to it. I think 

there are many dimensions along which public programs may vary 

from private insurance plans. 

Mr. BONNER. I don’t know if this hearing is being broadcast outside of the House, but in the event C-SPAN picks it up and someone is stumbling—by chance, they flip from Oprah to Judge Judy 

and they end up with the Budget Committee, they probably won’t 

stay for long, but I would like to broaden the question a little bit 

outside of just Medicare Advantage. 

I had a telephone town hall meeting night before last with about 

10,000 constituents from my district. I was surprised that many 

stayed on the line. And one of the questions that came to me, 

which I think is very appropriate is, why is our health care—Medicare and other, why is it so complicated, especially the reimbursement aspect of it; and does it have to be? 

Because at the end of the day, that is one of the challenges we 

have: How are we going to pay—I think most everyone, Democrat 

and Republican, would agree that we have got the best health care 

system in the world, or most of us believe that, but it is certainly 

not as accessible or as affordable to all Americans. 

66

Does it have to be this complicated? And is there a better way 

to do it? 

Mr. ORSZAG. I would just say that part of the complexity of our 

current system comes from choices that we have made, in particular, to have an employer-based health care system in which 

that is the primary mechanism for the nonelderly to obtain health 

insurance and then to layer on public programs around that system. 

There is a lot of fragmentation in our system, and one of that 

may have—that system may have benefits and costs. One of the 

costs is that it is more fragmented, and complexity is necessarily 

sort of part of that framework. 

Mr. MILLER. And I think on the public side, the programs in 

Medicare grew up based on the public—or, sorry, the private models. Many of them came on at different points in time; different 

benefits arrived at different points in time in the program, incremental changes where people who saw an inequity stepped in and 

said, I am going to make that change. And that compounds over 

time, and that is certainly why you have the complexity. 

We do think that there are better and, hopefully, clearer ways 

to reimburse, such as having the payments be sensitive to the quality outcomes in the use of services that we try to push. Hopefully, 

that is at least clearer incentive-wise. Whether it is less complex, 

you know, those raise issues about measures and mechanisms as 

well. 

Mr. BONNER. If someone from Arkansas or Ohio or Tennessee or 

Alabama or South Carolina has switched from Oprah to this hearing and is curious as to where we are going with this—I guess the 

other question I have got is, we have got a Presidential election 

coming up next year. Some of the candidates running for President 

are calling for some type of universal coverage for those who don’t 

have health insurance. 

Is there any reason to believe that, as expensive and as complicated as this current system is, if we were to have some type of 

universal health care plan to cover all Americans, that it would 

cost us less money than what we are currently arguing about that 

we are spending too much money on? 

Mr. ORSZAG. I guess I would just say that the net impact of just 

adding people who are currently uninsured into the insured population would be a net increase in costs. 

There may well be other changes that could be made to reduce 

costs. But the uninsured currently, on average, spend less even—

despite the fact that they often wind up in extremes with very 

high-cost situations, they often spend less than the insured. Adding 

them to the pool of the insured would on net increase costs. 

Chairman SPRATT. Mr. Doggett. 

Mr. DOGGETT. Thank you very much for your testimony. 

I would like to return to the comments to which our chairman 

referred at the opening. 

The official President Bush selected to run Medicare from 2001 

to 2003, Tom Scully, said of these Medicare Advantage plans, 

quote, ‘‘There has been huge overfunding,’’ and I ask you if you are 

able to quantify the amount of ‘‘overfunding,’’ to use his euphemistic term, that has occurred with Medicare Advantage. 

67

Mr. ORSZAG. Well, I guess you could do that historically or prospectively. One way of——

Mr. DOGGETT. I am asking, first, historically. Since this program 

was set up, do you have an estimate of how much overfunding 

there has been of Medicare Advantage? 

Mr. ORSZAG. I don’t believe we have done that analysis. 

Mr. DOGGETT. And looking at it prospectively, given the fact that 

even the Bush official who ran the program describes it as huge 

overfunding, what is a reasonable amount of savings? 

I realize it depends on the policy choices that are made, but what 

is a reasonable amount of savings to expect we might be able to 

achieve over a 5-year period? 

Mr. ORSZAG. Well, again, that depends on your policy intervention. If you reduce the payments to plans, the benchmarks in particular, to 100 percent of local fee-for-service costs, we estimate 

budget savings of $54 billion over 5 years. 

Mr. DOGGETT. $54 billion over 5 years. And there would be a variety of other choices that could be made that might be less than 

that, but that would be kind of the ceiling of reducing it to that 

level. 

Now, having created this huge amount of what his own officials 

call ‘‘overfunding’’ and what some of us would call ‘‘gross waste,’’ 

did President Bush, in his proposal to Congress this year, propose 

to achieve a dollar of savings from these Medicare Advantage 

plans? 

Mr. MILLER. I don’t believe——

Mr. DOGGETT. Not a dollar. Not a penny. 

Did the budget proposal that our Republican colleagues submitted to the Congress propose to save a dollar or a penny for 

Medicare Advantage? No. It did not. 

Did President Bush’s budget proposal propose to save, through 

its inaction, money by cutting the payments that physicians will receive on January 1st of next year? To be more specific, if nothing 

is done, will physicians next year face a cut in their reimbursement 

rates of about 10 percent? 

Mr. ORSZAG. Yes, sir. 

Mr. DOGGETT. And there is nothing in the President’s budget to 

stop—to fund any change in that? 

Mr. ORSZAG. I don’t believe that the President’s budget—I am 

just looking at that. 

Mr. DOGGETT. Not a penny, not a dollar taken away from these 

insurance companies that his own officials say have received huge 

overfunding where there has been gross waste and unnecessary 

spending, but a 10 percent cut to every physician who provides 

services to seniors and people with disabilities and relies on Medicare across this country. 

Now, I agree fully with the point Mr. Conaway made that this 

is not the result of fraud; and I also agree with my other Texas colleague that what it does result from is the clash between Republican theory and Republican reality. Let me give you—some might 

call it bad judgment. 

Let me give you one example of the way the waste and abuse—

the term we usually hear at election time in talking about the 

mythical welfare Cadillac. You could imagine what would happen, 

68

if you were talking about an extra $100 that one of these recipients 

got versus $100 million. Let me talk about $100 million example 

of what has actually occurred. 

The General Accountability Office determined this spring that 

Medicare, the Bush administration, paid out $100 million for benefits to insurance companies for poor and disabled seniors, when 

the—this was for retroactive coverage for 5 months. The only thing 

is, they never required the insurance companies to tell the seniors 

and the disabled people that they were entitled to any coverage, 

and they didn’t get around to telling anyone to change their practices until March of this year. 

The General Accountability Office estimates $100 million of 

money paid out to these Medicare Advantage plans, to these insurance companies, for which little or no service was rendered. And 

that is the kind of example of mismanagement of this program 

which goes right back to its origin of favoring, as you put it so well, 

Mr. Edwards, the conflict between theory, between ideology and between reality. 

And we are paying a big price for it. 

Mr. ORSZAG. Could I offer one small clarification? 

The President’s budget did not directly make any changes to 

Medicare Advantage plans, but because of the other changes that 

you mentioned—for example, the update factors, et cetera—there 

would be implications for the benchmarks that Medicare Advantage plans payments are based off of and, therefore, some implications for Medicare Advantage plans. 

Chairman SPRATT. Thank you. 

Mr. Tiberi. 

Mr. TIBERI. Thank you. 

Dr. Miller, speaking of realities, let me try to get you to answer 

a question here. In my district, I was visited by a nonprofit hospital 

that set up a Medicare Advantage program. And they have seen an 

incredible boom in that program, just incredible growth in enrollment. And part of that enrollment, a large part of that enrollment 

actually they have seen is in an urban area of my district—a number of African Americans have enrolled in their program and have 

been very pleased with the program, which goes along with something I think you said earlier about growth in the Medicare Advantage program; they’ve seen incredible growth, people choosing to go 

into the program. 

And I met with some of the African American leaders in that 

part of my community, and they are very happy with that nonprofit 

hospital’s Medicare Advantage program. 

Why do you think there has been so much growth in the Medicare Advantage program since its inception? Why are seniors 

switching to it? 

Mr. MILLER. I think that at least part of the reason is that because of these payments, plans are able to offer additional benefits. 

We talk about benefits, and benefits can mean lower out-of-pocket. 

And so I think that that, plus the benefits that Medicare doesn’t 

offer, is very attractive to a beneficiary. And that is urban, rural, 

you know, high income, low income; any beneficiary would find additional benefits on top of traditional Medicare attractive and——

69

Mr. TIBERI. The CMS study that you provided that said there 

was a 12 percent gap, or differential, between Medicare Advantage——

Mr. MILLER. That is analysis that both of our shops have done. 

Mr. TIBERI [continuing]. If you factored in those ‘‘extra benefits’’ 

you just talked about, whether it is disease management, whatever 

it might be, that attracts people to Medicare Advantage from their 

own personal experiences, if you factored that in, could that be part 

of the 12 percent? 

Mr. ORSZAG. That is what the 12 percent is supposed to be. 

DCMN NORMAN 

Mr. MILLER. Absolutely. It is supposed to be that, and I want to 

clarify something, though. 

You know, this kind of gets missed in the debate occasionally. 

People often come back and say, but I know it is more payment but 

people are getting extra benefits so that is a good thing. And I 

think there is some of that. But remember, each one of these benefits is a fully loaded benefit. They don’t administer themselves. 

So those dollars, the plan gets paid what they bid. They retain 

that part of the additional payment that they use for additional 

benefits. But part of those dollars go to admin, marketing, and 

profit. And so each one of those dollars doesn’t necessarily travel 

to the beneficiary in terms of the benefit. 

But having said that, and as Peter just said, yes, part of it are 

those additional benefits. 

Mr. TIBERI. How do you factor in when a nonprofit Medicare Advantage program tells me there are larger upfront costs to implementing this program that will see a decrease over time to Medicare? 

Mr. ORSZAG. Could I comment on that? 

In order to get a decrease in Medicare costs, okay, you can evaluate this along other dimensions. But a decrease in Medicare costs, 

given the current structure of the payment systems, one would 

need the bids that the plans are submitting to be roughly one half 

of local fee-for-service costs in order for the net payment from the 

Federal Government to be lower than it would be for someone in 

traditional fee-for-service. That seems to me implausible. 

So there may be some potential longer-term effects or some systemwide effects, but from the narrow perspective of the Federal 

budget, the story that the plans will develop enough internal efficiencies to actually generate a net reduction in budget outlays for 

the Federal Government, given the current structure, seems very 

difficult to see. 

Mr. MILLER. To add to the implausibility part, what you are basically saying is that the beneficiaries will have more benefits, the 

current payments don’t put pressure——

Mr. TIBERI. I understand. I am running out of time. 

How do you mirror or how do you merge both of you gentlemen’s 

concern about the cost of Medicare Advantage? Because I know 

where you both are, versus, at least in my district, constituents 

who have long complained about Medicare fee-for-service, including 

my mom and dad, long complained about it with an incredible liking of Medicare Advantage and what Medicare Advantage is providing them. How do you mirror those two things? 

70

Mr. ORSZAG. I want to just clarify. I hope I am not betraying concern. I am just trying to communicate our analysis to you. 

I think the real question that one needs to ask is I have no doubt 

that many Medicare Advantage beneficiaries enjoy or like the plans 

that they are in. Those plans do cost the Federal Government more 

than traditional fee-for-service, and so there is this question of 

there is a subset of beneficiaries who are getting expanded benefits 

and reduced premiums that are being financed by the rest of the 

beneficiaries and by taxpayers. And that is a trade-off that, you 

know, is for you to evaluate. 

Mr. MILLER. I agree with all of that. I would go at the question 

a little bit differently. 

First of all, I believe that there are plans who can provide additional benefits through their efficiencies. And in fact, you know, 

one way to look at this is that if I am an HMO and I have to create 

a network and report quality data, and then the private fee-forservice plan shows up and it doesn’t have to do any of that, it is 

like I have been working to dig out these efficiencies in order to 

offer these benefits, and this other competitor has a much easier 

time of it. 

So my first answer is I believe this model has the potential, and 

there actually are plans who can do it; maybe not as generous as 

when there is a subsidy present, but can still do it. 

Then on the fee-for-service side, which you are absolutely right 

about, it is a system that is in need of repair. I will say we have 

made recommendations, which I won’t go through now, but to 

make the payments reward high quality and low utilization so that 

the same kinds of incentives are being driven on that side as well. 

Chairman SPRATT. Let me tell everyone that we have about 13 

votes coming up at 1 o’clock. So what I would like to do is try to 

finish this up as soon around 12 o’clock as possible, then move to 

the second panel. 

I would ask our remaining members to limit their questions to 

3 minutes, if you could. I will recognize you first for the additional 

panel. Won’t apply to Mr. Blumenauer, since I am sure he has got 

more to ask. But it is simply precatory. If you can do it, fine. 

Mr. BLUMENAUER. I come at this from a slightly different perspective. 

I voted against both Medicare prescription drug programs because I didn’t think that they were focused and thought they were 

too expensive. But I represent a State that I think has the highest 

market penetration, and I think I have the legislative district that 

probably has more in the State. I think it is over 50 percent in the 

places that I represent. 

Part of it gets to what Mr. Cooper was talking about a moment 

ago. In fact, I look around the room and other than the Texans, we 

are all States where our people are paying the same Medicare 

taxes as everybody else in the country and they are getting back 

a much reduced amount. We are being penalized—some of us are 

being penalized for being low-cost States. 

Mr. Ryan, I think you are the only State on the list here of anybody represented that is actually getting back less in the fee-forservice. 

71

So I am having people that are being driven to these programs 

because we have such a low reimbursement rate that physicians 

are feeling very uncomfortable with it. 

And I get a little nervous when I hear people talking about substituting the average benchmark fee-for-service, just sort of plugging that in, when we have wild areas of differential in terms of 

the local costs. 

What would be the impact if we substituted the average fee-forservice nationally for everybody? You have got a range here where 

people in Louisiana are getting $950 a month, on average. Why 

should—if we are going to drive the market for efficiencies and if 

we really care about entitlements, if we care about entitlements, 

why don’t we do something that starts driving average reimbursement towards a national level that is lower, rather than keep piling 

it on the expensive States because—and where I disagree with Mr. 

Barrett, there is no evidence that we have the best health care system in the world; if we had lower child mortality; if we lived long. 

We are right in the middle of the pack. 

So can we kind of not come back here and whack low-cost States, 

Arkansas, North Carolina, Tennessee, Kansas, Wisconsin? If we 

are going to be adjusting Medicare Advantage, why can’t we just 

come back and do a little adjustment with the national average, 

which would seem to be to be much more fair, and then see what 

the market can do? 

Mr. MILLER. I am not sure I follow your point on the national 

average, but I do want to say something about what you have said. 

I absolutely——

Mr. BLUMENAUER. Let me clarify it, because I think it is important. 

You are talking about the local average benchmark and so ad- justing, you would adjust the $950 that Louisianians get and then 

you are trying to whack Oregonians at 750 when we are only getting 582 right now. So why not whack everybody the same? 

Mr. MILLER. When we have talked about transitions to the 

benchmarks, there are different ways that you can do this, and 

there are different ways that you can achieve the 100 percent of 

the—of fee-for-service across the country. 

And so ideas like that and options like that are possibilities, and 

we do talk about them. 

And I also want to address your underlying concern because I 

think your point is really well taken. 

Peter put the map up showing the dramatic geographic variations. 

We are well aware of these things, and I don’t think this fits entirely in a managed care issue. We have fee-for-service inequities 

across the countries that our payment systems continue to perpetuate, and we have made recommendations that would drive fee-forservice dollars into areas that have low utilization and high quality. If that is your area, you would benefit from that. 

Mr. BLUMENAUER. But why couldn’t—it is going to take a while 

to get to where you are going. 

Mr. MILLER. I have acknowledged the other point. 

Mr. BLUMENAUER. Why isn’t the simplest way to start moving towards equity and efficiency to just benchmark the average fee-forVerDate 0ct 09 2002 16:07 Feb 19, 2008 Jkt 000000 PO 00000 Frm 00075 Fmt 6633 Sfmt 6602 J:\DOCS\HEARINGS\110TH\110-14\38252.TXT HBUD1 PsN: DICK
72

service and make that the cost for Medicare Advantage and get us 

moving in both areas? 

Mr. MILLER. Because part of the response, I think, is also these 

underlying differences in the country should probably be addressed 

as well; as Peter said, they represent an opportunity for the entire 

health care—or at least all of Medicare to run in a much more efficient way. 

Mr. BLUMENAUER. Can we have a number from you about what 

it would be if we benchmarked to the national average, what the 

savings would be for fee-for-service? 

Mr. ORSZAG. I believe we can do that. 

Chairman SPRATT. If we could get that, we would like it for the 

record. But let’s move on. 

Mr. Moore, Dennis Moore. 

Mr. MOORE OF KANSAS. We are getting the number that was just 

asked for; is that correct? 

Mr. ORSZAG. We will do that. 

Let me note, one of the things about putting in a national average given these patterns without affecting these underlying patterns is that, of course, you would create a strong incentive for 

Medicare Advantage plans to enter into the lower-cost areas and 

drive enrollment growth there, which I am not saying is a good or 

bad thing but, I am saying is a consequence. 

And the result would be that if you are paying the national average in those lower-cost areas, that does drive—given this underlying existing pattern of enrollment and costs, does drive up cost 

for the system. 

In other words, if what you did was—you only moved the lighter 

regions towards the average and didn’t do anything else, you wind 

up raising cost. 

Mr. BLUMENAUER. But you are driving the darker regions down. 

Mr. ORSZAG. Right. But part of the response will depend on exactly the distribution of beneficiaries and the response of the plans 

to that kind of incentive. I can’t give you an answer right now, but 

I will get back to you with one. 

Mr. MOORE OF KANSAS. The number of enrollment, persons enrolled in traditional Medicare, is about 35 million nationwide. 

The number of enrollees in traditional Medicare is about 35 million nationwide; is that correct? 

Mr. ORSZAG. That is approximately correct. 

Mr. MOORE OF KANSAS. And the number in Medicare Advantage 

is about 8.7 million; is that correct? 

Mr. MILLER. That is right. 

Mr. MOORE OF KANSAS. And the cost of the Medicare Advantage 

far exceeds the cost per person of traditional Medicare, correct? 

Mr. ORSZAG. Correct. 

Mr. MOORE OF KANSAS. And how much is that cost per person 

in excess? 

Mr. ORSZAG. As we said earlier, something like $1,000 per beneficiary. 

Mr. MOORE OF KANSAS. Who do you suspect would object if we 

were to say we are going to have everybody enrolled in traditional 

Medicare and discontinue Medicare Advantage? 

73

Mr. ORSZAG. Well, obviously, the people who are beneficiaries 

today under Medicare Advantage would, by observation, prefer that 

to traditional fee-for-service. So they presumably would object. 

Mr. MOORE OF KANSAS. But there is, I think, general consensus 

here that a lot of money is being wasted; not fraud, but wasted on 

this Medicare Advantage program. 

Mr. ORSZAG. I would say that the program is increasing Federal 

costs. 

Mr. MILLER. I think it is a judgment of what you call ‘‘waste,’’ 

and I think the objections would come from the beneficiaries enrolled, the plans that are providing the service. And I would say 

as an organization, we think there should be an option. So we don’t 

think that—we are not saying that the managed care option should 

be eliminated. 

Mr. MOORE OF KANSAS. All right. Thank you. 

Chairman SPRATT. Mr. Etheridge. 

Mr. ETHERIDGE. Thank you, Mr. Chairman, and let me thank 

you both for staying. 

Let me follow up on that question just a minute, if I may, because I think that is the heart of it. 

If Congress put Medicare Advantage on a level financial playing 

field with fee-for-service as MedPAC recommends, what will happened to Medicare Advantage’s market? Will Medicare Advantage 

plans and the extra benefits they provide disappear? Do you think 

it will? Or will beneficiaries still have the opportunity to receive 

some extra benefits? 

As has been stated here this morning, or alluded to, that there 

would still be some money within that system, and how can we 

minimize the disruption of how—to the Medicare Advantage enrollees if the plan should disappear. 

Mr. ORSZAG. Let me say first, under our estimates, moving to 

100 percent of local fee-for-service would not eliminate the Medicare Advantage program. It would in 2012 reduce enrollment by 

about half. So there would still be roughly 6 million or so beneficiaries in Medicare Advantage plans. And the reason, presumably, 

that they were in those plans is that somehow the plans offered 

some combination of supplemental benefits or reduced premiums to 

them that made it attractive for them to be in that plan, as opposed to traditional fee-for-service, despite the fact that the benchmarks were set at 100 percent of local fee-for-service. 

Mr. MILLER. And just to back right into that, too. I mean, in our 

analysis that we present in the June chapter, we have evidence 

that we think that certain plan types, on average, the HMO plans, 

deliver the traditional fee-for-service benefit at below what the traditional fee-for-service benefit costs Medicare. That represents the 

opportunity for the plan to provide additional benefits, and that is 

why I think you still would see enrollment in these plans and still 

have some additional benefits, but not as many plans as now and 

not as generous a benefit package as you are seeing now. 

I want to acknowledge that. 

Mr. ETHERIDGE. So in effect what you are saying is we would 

start to level the playing field. 

74

Mr. MILLER. The payments would level—you would level the 

playing field between fee-for-service payments and the managed 

care payments, yes. 

Mr. ETHERIDGE. Thank you. I yield back. 

Chairman SPRATT. Mr. Berry. 

Mr. BERRY. Thank you, Mr. Chairman. I think that it should be 

said that this Medicare Advantage part of the Medicare Modernization Act of 2003 was written by 

the insurance companies. And I served on that conference committee; and the insurance companies—it turned out just exactly 

just like they wanted it to, and we should not be surprised at the 

result. 

Having said that, my question is, and it was mentioned earlier, 

I think by the Ranking Member, that there is some advantage to 

having all of your coverage in one place, with one Medicare Advantage plan, where you get your drug plan and all of that. 

Have you done any analysis of the cost of whether or not we 

could lower the cost of the Part D program if we had Medicare, 

offer a Medicare-only plan as part of the A and B and make it a 

Medicare Part D, where one card served all of those purposes, and 

negotiated the prices for the people that would receive the medicine? 

Mr. ORSZAG. There would be a variety of ways of doing that. 

CBO has spoken, I guess at some length, about the role of the 

Medicare program, or the Secretary of HHS, in obtaining price discounts, for example, within Part D. 

But the details matter here. It depends on exactly how it is 

structured. 

I would also note with regard to benefits from that integration 

within Medicare Advantage plans that you referred to, again we 

need more data. CBO has been asking for and I would welcome evidence from the Medicare Advantage plans on the degree to which 

that integration is actually generating internal efficiencies and cost 

savings. 

Mr. BERRY. Thank you, Mr. Chairman. I yield back. 

Chairman SPRATT. Thank you. 

Thank you for your excellent testimony and for the fine work 

each of you does at your respective agencies, CBO and MedPAC. 

We very much appreciate your service and your contribution made 

today in understanding this complex problem. 

Thank you. 

We now have the second panel, which consists of Dr. Mark 

McClellan, former director of CMS, now at AIE Brookings; Barbara 

Kennelly, who is the chief executive officer of the National Committee to Preserve Social Security and a former Member of the 

House; Patricia Newman who is the director of Medicare Policy, the 

Henry J. Kaiser Family Foundation; Ardis Hoven of the AMA, the 

American Medical Association; and Catherine Schmitt of Blue 

Cross Blue Shield of Michigan. 

75

STATEMENTS OF MARK McCLELLAN, M.D., AIE BROOKINGS; 

BARBARA KENNELLY, CHIEF EXECUTIVE OFFICER OF THE 

NATIONAL COMMITTEE TO PRESERVE SOCIAL SECURITY, 

AND FORMER MEMBER OF CONGRESS; PATRICIA NEUMAN, 

DIRECTOR OF MEDICARE POLICY, THE HENRY J. KAISER 

FAMILY FOUNDATION; ARDIS HOVEN OF THE AMERICAN 

MEDICAL ASSOCIATION; AND CATHERINE SCHMITT, BLUE 

CROSS/BLUE SHIELD OF MICHIGAN 

Chairman SPRATT. Dr. McClellan, do you have a time constraint? 

Mr. MCCLELLAN. I do, but I will push it back. 

Chairman SPRATT. Some time the bell is going to ring around 1 

o’clock. 

I tell you what we will do. To accommodate your situation, we 

will let you go first. Thank you for coming. We look forward to your 

testimony, and I will say to all of the witnesses, the statements you 

filed will be made part of the record, and you can summarize them 

as you see fit. 

Thank you very much again, and Dr. McClellan. 

STATEMENT OF MARK McCLELLAN, M.D. 

Dr. MCCLELLAN. Mr. Chairman, thank you very much, Mr. Ranking Member, for the opportunity to be here. It is a real privilege 

to be back with many of you on this important issue of Medicare 

Advantage and the Federal budget. 

As you know, how Medicare pays for health care not only has important implications for the Federal budget, it has a major impact 

on how quickly and how effectively we can create a health care system that fulfills the promise of modern medicine: more prevention, 

better health at the lowest possible cost. 

In fulfilling this goal, Medicare Advantage Health plans pay a 

critical role. They bring greater value to our overall health care 

system in terms of enabling beneficiaries to get more up-to-date, 

higher quality care at a lower total cost. They are achieving higher 

rates of use of preventative services, they are providing greater access to care coordination services, improving compliance to prevent 

complications of chronic diseases, keeping beneficiaries healthier. 

This adds up, as we talked about earlier today, to $86 a month 

in savings for beneficiaries. That is more than $1,000 a year. And 

it is particularly important for beneficiaries with limited means 

who have no options, who aren’t eligible for Medicaid, who don’t 

have employer-provided retiree coverage, and who are facing outof-pocket costs that exceed $3,000 a year. 

As Ken Thorpe at Emory University and other experts have 

noted, the average savings from the Medicare Advantage plans exceed reasonable estimates of the higher Government payments. 

There are also a number of reasons why the payment differences 

that we have been discussing today for most Medicare Advantage 

plans may not be as large in 2008 and beyond as the recent CBO, 

MedPAC, and other estimates would suggest, or at least why 

these—the reasons for the differences may change. 

These estimates only look at Part A and Part B costs in Medicare, not the Part D drug costs. And Part D costs are much less 

expensive in Medicare Advantage and these differences seem to be 

increasing over time. 

76

Also, I am not sure that all of these estimates fully incorporate 

traditional Medicare administrative costs, including the higher cost 

of preventing fraud and abuse, because of the very detailed administration of the program. Many of these estimates are based off 

what are called APCC costs which include most of the costs within 

a particular county of the Medicare benefits themselves, but not 

some of these other administrative costs that I mentioned. 

Also the estimates, looking forward, tend to understate the expenses in traditional Medicare that will be associated with physician payments. As we talked about this, we are scheduled for a 10 

percent reduction next year. If Congress acts to address that—and 

they should to provide adequate access for seniors—then the payments in fee-for-service will be higher relative to Medicare Advantage and that is not taken account of yet in the projection. 

Also, the budget neutrality phase-out which was mentioned before is going to be a less important component of payment differences going forward. And, finally, there are a lot of studies that 

health economists have done showing there are spillover effects of 

health plans that provide coordinated care on the rest of the health 

care system, and in particular on Medicare fee-for-service, by promoting preventative care, by promoting care coordination that 

make it easier for providers to change their practice in that direction overall, leading to health care savings as well. 

So if you add all of this up, what looks like is going to happen 

in the years ahead is that the main factor accounting for payment 

differences in 2008 and beyond will be the higher payments in 

counties that historically have had low access to coordinated care 

and innovative benefits, that have had lower fee-for-service costs 

and were the subject of explicit decisions by Congress—not in the 

Medicare Modernization Act but in the Balanced Budget Act of 

1997, BIPA 2000 and beyond, bipartisan decisions by Congress to 

increase payments to Medicare Advantage plans to improve access 

to these kinds of coordinated care benefits and more extensive benefit plans. 

So reducing Medicare Advantage payments further than what is 

already scheduled to happen in the next couple of years—and the 

payment updates for Medicare Advantage are going to be well 

below the rate of medical inflation next year, just like they were 

this year—may go too far to restrict access to savings and, importantly, to up-to-date health benefits that keep beneficiaries 

healthier and enable them to survive their chronic diseases more 

effectively. 

It would leave many beneficiaries not only with much higher outof-pocket costs but also with no better alternative to either traditional Medicare, with all of its gaps, or to having to sign up for a 

very inefficient Medigap plan where beneficiaries pay much more 

in premiums than they get out in benefits. 

Seniors, I think, deserve better than that. They deserve more upto-date options than that, and so policy reforms to address this 

looming Federal entitlement crisis should not start with shifting 

costs from the Federal Government to Medicare beneficiaries, who 

disproportionately have limited means and don’t have access to 

Medicaid or employer or retiree coverage. Those are the people who 

primarily enroll in Medicare Advantage. 

77

Now, while finding ways to reduce costs and improve value in 

the overall health care system is very important, so, obviously, is 

finding ways to reduce Medicare spending growth. The best policy 

reforms will cause both Medicare expenditures and total health 

care expenditures to go down without compromising beneficiary 

health. And while some of the proposed payment reductions from 

Medicare Advantage don’t meet that test, there are promising approaches to improve the performance of Medicare Advantage and 

also of traditional fee-for-service Medicare. 

Effective marketing and oversight, improving the availability of 

information on planned quality and costs, including better measures for traditional fee-for-service Medicare and Medigap as well, 

and providing more support to beneficiaries to use this information 

to make informed decisions about their coverage and their care can 

all help. 

In addition, adjusting the rules affecting the private fee-for-service plans has been the subject of so much discussion this morning 

to limit the use of physician deeming, perhaps after an initial startup period or when a range of options of plans that do not significantly restrict access if treatments are available in an area, that 

can achieve significant savings, according to Peter Orszag’s testimony just a little while ago. 

Similarly, there are many opportunities to improve the efficiency 

of payments in fee-for-service Medicare you have all already discussed this morning. All of these steps can help achieve greater 

savings in Medicare with budgetary reductions, without raising 

beneficiary costs substantially. 

The best solution to Medicare’s financing problems isn’t to take 

away innovative coverage options and to shift costs to beneficiaries, 

particularly those with limited means who are struggling with outof-pocket costs today. 

The main opportunities for improving care, as Representative 

Cooper pointed out, is the huge overuse, underuse, and misuse of 

treatments that is occurring around the country in the Medicare 

program overall today. 

As Peter Orszag said, this is the most substantial opportunity to 

reduce health care costs without compromising quality. 

So there are better ways to address the long-term sustainability 

of the Medicare program, or at least better places to start, while 

promoting more efficient health care. And I look forward to supporting this committee’s continuing efforts to achieve this absolutely critical public health goal. 

Thank you very much, Mr. Chairman. 

Chairman SPRATT. Thank you very much. 

[The prepared statement of Mark McClellan follows:]

PREPARED STATEMENT OF MARK MCCLELLAN, M.D., PH.D., AIE BROOKINGS

Chairman Spratt, Ranking Member Ryan, and distinguished members of the 

Committee, thank you for the opportunity to testify today on Medicare Advantage 

and the Federal Budget. 

My testimony makes a number of points. First, Medicare Advantage (MA) health 

plans play a critical role in bringing greater value to our overall health care system, 

in terms of enabling beneficiaries to get more up-to-date, higher-quality care at a 

lower cost. Second, policy reforms to address the looming Federal government entitlement crisis should not start with shifting costs from the Federal government to 

Medicare beneficiaries with limited means, and they should seek to avoid reducing 

78

access to benefits like preventive services, more comprehensive drug coverage, and 

care coordination services that both reduce costly complications and help beneficiaries lead healthier lives. In fact, such changes may meet the definition of reduced efficiency, properly defined from the standpoint of the overall value of the 

care provided in our health care system. Third, any differential payments for most 

types of MA plans may well be smaller in 2008 and beyond than some recent estimates based on 2007 data would suggest. As a result of recent changes in law and 

regulation, MA plans overall will have relatively modest payment increases in 2008 

and possibly in subsequent years. Remaining differences in payment rates are largely the direct result of bipartisan Congressional action to address concerns about reduced access to up-to-date coverage options in rural and certain urban areas. Thus, 

any changes should be approached cautiously. Fourth, while the MA program is a 

key element in achieving the overall policy goal of improving the quality and efficiency of Medicare and our health care system, there are some important opportunities to improve it and help reduce Federal costs. 

THE VALUE OF THE MEDICARE ADVANTAGE PROGRAM

Before discussing the efficiency of Medicare Advantage plans, I would like to start 

with a comment on the importance of considering value—which is the way economists define efficiency—in the context of our health care system. Economic efficiency 

is not simply reducing costs to the government. For example, consider two kinds of 

health care coverage. One kind generally pays for complications of health problems 

after they happen, but limits coverage of preventive care, services to help people 

with chronic disease stay well, and other benefits that improve health, resulting in 

higher costs to patients. The other kind of coverage is more in line with 21st-century 

health care: it provides more personalized medical services, such as helping people 

understand their risk factors, comply with drug therapies and other treatments to 

prevent complications, avoid duplicative services, and as a result it achieves better 

health outcomes. Even if these two kinds of coverage cost the same amount to the 

government, they are by no means equally efficient. Because the latter type of coverage achieves better quality for the same amount of government payment—because 

it delivers greater value—it is the more efficient approach. In fact, even if the more 

up-to-date coverage were somewhat more costly, because it delivers better health, 

it may still be the more efficient plan. Moreover, economic efficiency cannot be determined simply by looking at costs to the government. Efficiency depends on overall 

costs, including costs paid by beneficiaries as well as the government. Coverage that 

shifts costs to beneficiaries without lowering overall costs—or perhaps increasing 

them—does not increase efficiency. 

If we want to achieve a high-value, efficient health care system, then Federal policies must encourage high-value health care. With this background in mind, I would 

like to describe how the Medicare Advantage program overall is performing. 

Overall, compared to fee-for-service Medicare, beneficiaries in Medicare Advantage plans have much lower out-of-pocket costs; they receive significantly more preventive benefits, drug coverage, and services to help them better manage their 

chronic diseases; they have very high satisfaction rates; and in most cases, their 

overall care costs (Medicare plus beneficiary) are lower. 

For example, Medicare Advantage beneficiaries receive preventive services like 

mammograms, colorectal cancer screening, prostate screening, and immunizations 

at significantly higher rates than beneficiaries in traditional fee-for-service (FFS) 

Medicare. In addition, compared to other Medicare beneficiaries without supplemental ‘‘Medigap’’ coverage, MA beneficiaries are only one-third as likely (6 percent 

versus 17 percent) to report delaying the use of needed care due to cost.1

MA beneficiaries also receive higher quality of care in many areas; for example, 

a study in the Journal of the American Medical Association found that beneficiaries 

in MA plans received higher quality of care than beneficiaries in traditional FFS 

Medicare in five of seven HEDIS quality measures studied.2 Quality is reflected in 

overall high beneficiary satisfaction rates with their coverage: Consumer Assessment of Health Plans Surveys (CAHPS) generally rate MA plans highest among a 

range of types of health plans.3

These quality of care results are the consequence of how most MA plans provide 

coverage. Plans receive a single, risk-adjusted payment from Medicare, and they 

compete to attract and keep beneficiaries by using this subsidy to provide the most 

attractive benefits at the lowest overall cost. In contrast, in traditional FFS Medicare, benefits are determined by statute and cannot easily include many innovative 

approaches to benefit design, provider payment, care coordination services, and personalized support for beneficiaries. Through MA plans, beneficiaries across the country have access to plans with lower or zero copays for preventive services; they have 

79

widespread access to wellness programs; they have access to dental and vision services that not only reduce costs but also help beneficiaries live better and improve 

their overall health. 

Importantly, MA plans are also providing drug coverage that is more extensive 

and much less costly than in traditional FFS Medicare. This difference in generosity 

and cost, which increased between 2006 and 2007 and may continue to increase in 

the future, is likely the result of several factors. First, most MA plans can manage 

the use of prescription drugs more effectively, as part of their efforts to support the 

overall coordination of care for a patient’s health. Second, higher compliance with 

drugs has been shown to reduce other health care costs,4 and because MA plans 

have incentives to keep overall costs down that do not exist in traditional FFS, they 

can capture the savings in hospital, physician, and other costs from the greater compliance that comes with more comprehensive drug coverage. Again, this is a more 

efficient approach to health care coverage. 

Finally, most MA plans provide much more support for patients with chronic diseases than is available in traditional FFS Medicare. This is critically important, 

since the vast majority of costs in Medicare—and most of the cost growth in Medicare—relates to treating the complications of a limited number of serious chronic 

diseases. Our health care system has huge and persisting quality gaps in the prevention and treatment of chronic diseases. There is no population in this country 

that needs such personalized services to improve coordination and prevent complications from chronic diseases more than Medicare beneficiaries. 

All of these features—better preventive care, lower out-of-pocket costs, better drug 

coverage, better support for quality care for chronic diseases—are signs of more efficient health care. Not surprisingly, they add up to very large savings for beneficiaries—on average, out-of-pocket costs are $86 a month less in MA, compared to 

traditional FFS Medicare with Medigap (counting beneficiary premiums) or no supplemental coverage. That’s more than $1000 a year in savings. This is why a recent 

analysis by Adam Atherly and Ken Thorpe of Emory University concluded that even 

though MA payments increase Medicare costs, ‘‘the size of the increase in costs will 

be less than the value of the supplemental benefits provided to beneficiaries’’—that 

is, overall costs to beneficiaries and the Federal government are lower in the MA 

plans.5 (Similarly, according to MedPAC testimony before the Ways and Means 

Committee in May, average bids across all Medicare Advantage plans for Part A 

and B services are lower than the average cost of traditional FFS Medicare6—and 

when Part D benefits are included, the cost differences are larger.) 

To achieve the goal of reducing overall health care costs while improving quality—

that is, to improve efficiency from the standpoint of our overall health care system, 

and to spend beneficiary as well as tax dollars more effectively—Medicare Advantage is providing very important options to Medicare beneficiaries. 

ESTIMATED PAYMENT DIFFERENCES BETWEEN MA AND TRADITIONAL MEDICARE, AND

IMPLICATIONS FOR PAYMENT REFORMS

While finding ways to reduce costs and improve value of the overall health care 

system is very important, so is finding ways to reduce Medicare spending growth. 

The best policy reforms will cause both Medicare expenditures and total health care 

expenditures to go down, without compromising beneficiary health. With all the 

overuse, underuse, and misuse of medical care in our health care system, there are 

plenty of opportunities to do this. But reductions in MA payment rates would not 

do it: they reduce Medicare spending by reducing the benefits and the beneficiary 

savings just described. So an important question is: what is the likely impact of reducing MA payments? 

As a preliminary step, it’s important to review what the overall Medicare payment 

differences are between MA plans and traditional Medicare. There are some reasons 

why the 12 percent estimate of cost differences from CBO and MedPAC may not 

be indicative the payment differences in 2008 and beyond, and thus the impact of 

payment reforms to ‘‘equalize’’ payments, especially for the coordinated care plans 

(HMOs and PPOs) that continue to make up the vast majority of MA enrollment. 

First, the estimated payment differences do not include a number of factors that affect the overall cost comparisons: 

• The analyses generally focus on Part A and B benefits only.7 But MA plans are 

providing Part D coverage at substantially lower costs than in traditional Medicare, 

for the reasons described above, and these cost differences are increasing. As a result, MA plans are likely to exert a growing impact on holding down the Part D 

‘‘benchmark’’ and thus holding down Part D costs for the entire Medicare program. 

Accounting for the complete costs of A, B, and D benefits results in a significantly 

smaller difference in total Medicare costs. 

80

• The analyses include the administrative costs of MA plans (these costs, along 

with care coordination and other patient management costs, are included in the MA 

bids) but the administrative costs (including the administrative costs to combat 

fraud and abuse) of traditional FFS Medicare are not included. These costs likely 

amount to 2 percent or more in additional traditional FFS costs. • The forecasts of spending differences and savings for 2008 and beyond do not 

account for the artificially low forecasts for physician spending in traditional Medicare. The large spending reductions required under current law, including a 10 percent cut in payment rates for 2008, are not sustainable. Physicians cannot provide 

adequate services for beneficiaries with these payment reductions. When Congress 

addresses the physician payment reduction for 2008, payments in traditional Medicare will go up significantly, and would not be accounted for in the MA rates until 

2009 (by which time Congress may have enacted another one-year physician payment ‘‘fix’’ that increases traditional FFS costs again). • An important source of additional payments to MA plans right now, the socalled ‘‘budget neutrality’’ adjustment to the risk-adjusted payments to MA plans, 

is being phased out. Other things equal, it will be substantially smaller in 2008 and 

beyond, particularly if MA plans continue to increase their efforts to design benefits 

that attract chronically ill beneficiaries. 

In addition to these four factors, some reports have also pointed out other potential factors that may incrementally affect the estimated differences, such as costs 

not included in the county ‘‘AAPCC’’ amounts behind the traditional FFS payment 

estimates, and the way that payments for medical education are counted.8

From the standpoint of overall health care efficiency, another important factor to 

consider in evaluating the cost impact of the MA program is known as the ‘‘spillover 

effect’’ of a growing presence of plans that emphasize prevention and coordinated 

care. As every health care provider knows, how traditional Medicare pays is an important influence on how overall health care is delivered. For example, when providers are paid more when patients have more duplicative tests and more preventable complications—as is the case in fee-for-service payment systems—it is more 

challenging to take steps like adopting health IT or reorganizing practices in other 

ways to deliver care more efficiently. In reviewing a broad range of studies of the 

impact of managed care plans on overall health care spending in different regions 

of the country, Laurence Baker of Stanford University concluded that ‘‘despite some, 

generally early, studies that do not find strong effects, this literature as a whole 

suggests that managed care is capable of having broad influences on the health care 

delivery system, and that these effects have been in the direction of driving down 

health care costs. Some of this evidence, particularly that focused on traditional 

Medicare enrollees, clearly indicates the ability of managed care activity to influence 

spending patterns for patients well outside the boundaries of managed care plans.’’ 9

Thus, increasing access to coordinated care plans through higher payments is an important policy lever for the Federal government to help influence the overall efficiency of the health care system, with potentially important ‘‘external’’ efficiency 

benefits in traditional FFS Medicare and even beyond the Medicare program. 

Similarly, the estimate of a $2 higher Part B beneficiary premium resulting from 

MA payments is offset by the lower average Part D premiums resulting from MA 

plans. Indeed, reducing enrollment in MA plans would exacerbate another kind of 

inefficency that increases overall Medicare spending and total beneficiary premiums. 

Most beneficiaries in traditional Medicare are also enrolled in ‘‘Medigap’’ supplemental coverage. This coverage, particularly the individual Medigap plans, is quite 

inefficient: not only does it have a high ‘‘load factor’’—meaning beneficiaries have 

to pay much more in premiums than they get out in benefits—but the Medigap options are also designed in a way that encourages ‘‘first dollar’’ coverage that, according to the CMS Actuaries and CBO analysts, adds billions to Medicare costs each 

year.10 Such Medigap plans not only promote inefficient spending; Medigap premiums have been rising rapidly, and are much higher than Part B and Part D premiums combined. Yet except for MA plans, the Medicare program gives beneficiaries 

in traditional FFS Medicare few options besides this costly and inefficient approach 

for lowering their out-of-pocket medical costs and protecting themselves against devastatingly high expenditures. 

Finally, the principal MA payment policy associated with this year’s increase in 

CBO’s forecast of cost savings from revising MA payment rates is the higher payment rates in rural and urban ‘‘floor’’ counties. These payment rates were the result 

of explicit, bipartisan policy decisions in several Medicare laws preceding the Medicare Modernization Act. The stated goal of the Congress in creating and increasing 

the floor county payment rates was to promote access to more comprehensive health 

plan choices, and a broader range of choices, in areas that might not otherwise have 

MA plan availability. With the competitive reforms enacted in the MMA, these law 

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changes are finally having that effect: for the first time ever, virtually all Medicare 

beneficiaries have a choice of health plans, including HMO and/or PPO plans and 

private FFS plans, and access to other options like MSA plans is increasing as well. 

REDUCTIONS IN MA PAYMENT RATES WILL INCREASE BENEFICIARY COSTS AND REDUCE

THE OVERALL EFFICIENCY OF THE HEALTH CARE SYSTEM

Reductions in payments to the MA plans would increase beneficiary health care 

costs, reduce the overall availability and use of preventive services and care coordination services in Medicare (and likely in the overall health care system), and reduce many aspects of the quality of care received by millions of Medicare beneficiaries. According to estimates by Adam Atherly and Ken Thorpe,11 these impacts 

may be large: limiting MA payment increases to 1 percent would increase MA beneficiary costs by $412 by 2009, and approximately 1.8 million beneficiaries would lose 

HMO/PPO coverage and face out-of-pocket cost increases of $825 per year. In considering these impact analyses, it is important to note that statutory and regulatory 

changes in MA payment rates are already holding down MA payment increases. For 

2007, the relatively small payment increases accounted for a negligible share of the 

increase in the Part B premium, and for 2008, plan payment increases will generally be well under the rate of overall medical inflation and Medicare FFS spending 

growth. 

Moreover, the beneficiaries who enroll in Medicare Advantage plans are those who 

most need lower-cost, efficient coverage options. According to another analysis by 

Ken Thorpe,12 as well as other studies, MA enrollees are more likely to have limited 

means (i.e., incomes under $20,000 to $30,000), are much less likely to have employer-provided supplemental coverage, and are more likely to be racial and ethnic 

minorities. For these beneficiaries, the alternative choices of the gaps and financial 

exposure of traditional FFS Medicare alone or of the high costs of traditional Medicare plus Medigap are not good choices. 

If our nation is going to close the huge gap in prevention and in quality of care 

for chronic diseases, it is essential that we promote access to coverage like that 

available in most MA plans, which emphasizes preventing illness in the first place, 

avoiding preventable complications of chronic diseases, and using health services 

more efficiently. As Administrator of CMS, I was a strong supporter of greater prevention and greater focus on prevention and improving care for chronic diseases 

within the traditional Medicare program as well. Over the past several years, CMS 

has implemented many steps in traditional FFS Medicare to improve quality and 

efficiency. These steps include a major ‘‘My Health, My Medicare’’ prevention initiative to encourage beneficiaries take advantage of the expanded coverage of preventive services, the Medicare Health Support program to pilot the availability of disease and care management programs in traditional FFS Medicare, and initial steps 

toward providing better information on quality and efficiency and paying more for 

better care not just more care, to encourage better health and greater efficiency. But 

progress has been slow, because it is challenging to encourage the kinds of care coordination and integration that promote quality and efficiency, and that get the 

right care to the right patient at the right time, in a FFS payment system. In contrast, as described above, most MA plans have clearly demonstrated the capacity to 

achieve higher levels of quality without increasing overall health care costs, and in 

many cases reducing overall costs. 

I am particularly concerned that, in the current policy debate about MA plans, 

there has been little discussion of alternative policies that can improve prevention, 

care coordination, and overall health care costs and that could achieve similar savings for Medicare beneficiaries. For example, some have proposed using MA payment reductions to ‘‘pay for’’ increased Part B payments to physicians. If Congress 

took this step, Medicare beneficiaries would face a ‘‘double hit’’ on their out-of-pocket costs, first from their loss of MA benefits and savings and second from the higher 

copays and premiums for Part B services. Medicare physician payment needs to be 

addressed, but there are better alternatives than taking away benefits and savings 

from seniors, particularly the many beneficiaries with limited means who can least 

afford this kind of Medicare reform. 

PRIVATE FEE-FOR-SERVICE PLANS

Understandably, Members of the Committee and many other Members of Congress have been particularly concerned about trends in private fee-for-service 

(PFFS) enrollment. PFFS plans were created by Congress in the Balanced Budget 

Act of 1997 to fulfill an important role: giving beneficiaries access to coverage that 

would not impose substantial utilization review or other regulatory restrictions on 

access to care. PFFS plans are the least efficient kind of MA plans and they are 

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now growing rapidly, spurred by selectively entering ‘‘floor’’ counties with very favorable reimbursement rates and offering essentially the same fee-for-service payment schedule as traditional Medicare, plus some additional benefits and cost sharing reductions. Some of these plans have claimed that they are implementing a 

multi-year strategy to serve beneficiaries effectively in areas that previously have 

not had much if any private plan participation. That is, when they have started enrolling beneficiaries, they look very similar to traditional FFS Medicare; but over 

time, they expect to build beneficiary familiarity, provider networks, and other features that will enable them to increase the quality and efficiency of care. Other 

plans appear simply to be mimicking traditional FFS Medicare with some additional 

cost savings, which does not create the same kind of quality improvements and overall efficiency gains as other types of MA plans and is not what extra Federal spending should be supporting in the years ahead. 

Some policy reforms have been discussed which might address concerns about the 

impact of PFFS growth on program efficiency without eliminating access to this option, and reduce Medicare costs without undermining the positive features of the 

MA program. One step, which CMS has already initiated, is aggressive enforcement 

of proper marketing practices. Satisfaction rates overall in MA remain high, but 

keeping them high will require ongoing, effective Federal oversight and responses 

to beneficiary complaints, especially when patterns of abuse are apparent. The AMA 

and other physician organizations have also criticized the availability of ‘‘physician 

deeming’’ to PFFS plans. While new PFFS plans may need this authority to establish a market presence and ‘‘get off the ground’’ with beneficiaries and health care 

providers, the long-term use of deeming authority may not be necessary for a wellrun PFFS plan. To address this, deeming authority for a PFFS plan might end after 

an initial plan startup period, perhaps several years, or after a substantial presence 

of PFFS, PPO, MSA, and other plans that do not impose strict utilization management techniques has been established in an area. Similarly, PFFS plans might be 

required to establish contracts with providers and post the resulting provider lists 

after a reasonable time period. Finally, PFFS plans might be required to undertake 

steps that go beyond simply replicating traditional FFS benefits with lower costsharing, such as providing wellness services or support services for beneficiaries 

with chronic diseases. Properly implemented, steps like these would help avoid excess Medicare costs and assure that PFFS plans are both available to beneficiaries 

who want them and are a good investment for the Federal government. 

SPECIAL NEEDS PLANS

Another rapidly growing component of the MA program is Special Needs Plans 

(SNPs), which are MA plans that target beneficiaries with particular, distinctive 

health needs that offer services tailored to those needs. Today, the largest number 

of such plans are designed for ‘‘dual eligible’’ Medicare-Medicaid beneficiaries, who 

have much to gain from care coordination services. However, plans for beneficiaries 

with institutional levels of care needs and for beneficiaries with particular kinds of 

chronic diseases are also growing rapidly; for example, 23 organizations are offering 

83 chronic-disease SNPs this year. 

Clearly, these plans create important opportunities to customize services, improve 

care, and reduce costs for beneficiaries who have the most to gain from such services. SNPs for dual-eligible and institutionalized patients have enabled beneficiaries 

to simplify their medication regimens and avoid costly, preventable hospitalizations, 

while reducing costs and improving quality in state Medicaid programs. Chroniccare SNPs help beneficiaries with chronic illnesses manage their conditions more effectively, through more generous drug coverage and assistance with medication compliance, diet and behavior changes, information technology (IT) support for care coordination, and other steps intended to prevent costly complications and disease progression. None of these benefits and services is available in traditional FFS Medicare, and many states have turned to SNPs to provide these services to their dually 

eligible beneficiaries. By focusing on high-cost, complex patients, SNPs show that—

with proper payment incentives and oversight that promotes effective competition 

to serve even the most vulnerable Medicare beneficiaries—the traditional criticism 

that private plans only want healthy patients is being turned on its head. Because 

the beneficiaries served by these plans account for a large share of Medicare spending, the SNP program can have an important impact on the overall quality and efficiency of Medicare and our health care system’s ability to serve those who need the 

most help. 

While the initial experience with SNPs has had many positive features, indicating 

that the program should be reauthorized, the proliferation of a diverse range of SNP 

plans is beginning to provide a richer basis for evaluating the SNP program and 

83

improving it. For example, CMS is working with outside expert groups to develop 

improved performance measures for the various types of SNPs. In addition, some 

SNPs may be targeting conditions like high cholesterol that, by themselves, may not 

represent a truly distinct cluster of patient health needs where specialized benefits 

and management can achieve significant improvements in quality and efficiency. 

And some of these plans may not offer many specialized, targeted services compared 

to typical MA plans that must market and provide appropriate services for the general Medicare population. CMS or Congress should consider minimum standards for 

the conditions and types of beneficiaries treated by SNP plans. In particular, the 

plans should be targeted to beneficiaries where distinctive, complex health care 

needs create a real opportunity to achieve significant overall cost savings and quality improvement, and the plans should be expected to provide significant specialized 

benefits and services. Conditions like congestive heart failure, diabetes, chronic lung 

disease, HIV/AIDS, and certain cancers, as well as high-cost combinations of such 

conditions, are examples of clinical areas where targeted, specialized services and 

expertise are likely to be appropriate. 

CONCLUSION

Mr. Chairman, Mr. Ranking Member, and Distinguished Members, we are living 

in era when the opportunities for preventing diseases and their complications have 

never been greater, and at the same time, when the challenge of promoting effective 

and efficient use of all of the increasingly diverse and sophisticated treatments 

available has never been greater. Increasingly, efficient health care is about prevention, personalization, and coordination of services around the needs of each individual patient. How we pay for health care has an important impact on how quickly 

and effectively we can create a health care system that fulfills the promise of modern medicine at the lowest possible overall cost. With Americans generally and 

Medicare beneficiaries in particular getting only about half of the preventive care 

they need, and with poor care coordination and preventable complications accounting for more and more spending in the Medicare program, it is more urgent than 

ever for Medicare payment policies to promote high-value, personalized care. To 

achieve a high-value health care system—the most important kind of ‘‘efficiency’’ in 

health care—Congress should continue to support the Medicare Advantage program, 

which is our best, proven avenue for improving prevention and chronic disease management in Medicare. 

At the same time, there are promising approaches to improve the performance of 

Medicare Advantage, and of traditional FFS Medicare as well. Effective marketing 

enforcement and oversight, improving the availability of information on plan quality 

and costs (including better measures for traditional FFS Medicare and Medigap, as 

well as all types of MA plans, to help beneficiaries make more informed choices 

about their coverage), providing more support for beneficiaries to use this information to make informed decisions about their coverage and their care, and adjusting 

the rules affecting PFFS plans and SNPs are all examples of such policies. Similarly, there are many opportunities to improve the efficiency of payments in traditional FFS Medicare. All of these steps can help achieve greater efficiency in Medicare, leading to budgetary savings without raising beneficiary costs substantially. 

The best solution to Medicare’s financing problems isn’t to take away innovative 

coverage options and shift costs to beneficiaries—particularly those with limited 

means who are struggling with out-of-pocket costs today. There are better ways to 

address the long-term sustainability of the Medicare program while promoting more 

efficient health care, and I look forward to supporting the Committee’s efforts to 

achieve this critical public health and fiscal goal. 

ENDNOTES

1 Centers for Medicare and Medicaid Services, Overview of the Medicare Advantage Program, 

May 2007. 2 Jencks, SF, et al., Journal of the American Medical Association, 289: 305-312, Jan. 15, 2003. 

3 CMS, op. cit. 

4Sokol, MC, McGuigan, KA, Verbugge, RR, Epstein, RS. Impact of Medication Adherence on 

Hospitalization Risk and Healthcare Cost. Medical Care 2005; 43: 521-530. 5 Atherly, A, and Thorpe, KE, The Impact of Reductions in Medicare Advantage Funding on 

Beneficiaries. Atlanta, GA: Emory University Rollins School of Public Health, April 2007. 6Miller M, Private Fee-for-Service Plans in Medicare Advantage. Statement on behalf of 

MedPAC before the Subcommittee on Health, Committee on Ways and Means, U.S. House of 

Representatives, May 22, 2007. 7MedPAC, Medicare Advantage Benchmarks and Payments Compared with Average Medicare 

Fee-for-Service Spending, June 2006. 

84

8See, e.g., the detailed report in Centers for Medicare and Medicaid Services, Medicare Advantage in 2007. Baltimore, MD: May 2007, http://www.cms.hhs.gov/

MCRAdvPartDEnrolData/Downloads/MedicareAdvantageIn2007.zip. 9 Baker L, ‘‘Managed Care Spillover Effects,’’ Annual Review of Public Health 24: 435-56, 

2003. 10 According to CBO’s Budget Options (February 2007), replacing the current first-dollar 

Medigap coverage options with supplemental coverage that required limited cost sharing (with 

an out-of-pocket spending limit) to levels more like that seen in MA plans would save over $14 

billion. 11Thorpe, op. cit 12 Atherly, A, and Thorpe. KE, Value of Medicare Advantage to Low-Income and Minority 

Medicare Beneficiaries. Atlanta, GA: Emory University Rollins School of Public Health, 2005.

Chairman SPRATT. Before turning to Barbara Kennelly, let me 

recognize Dr. Robert M. Wah who is taking the place of Ardis 

Hoven of the American Medical Association. I am sorry for the initial mistake I made. 

Ms. Kennelly, you are welcome any time. Good to see you again. 

Thank you for coming to testify. 

STATEMENT OF BARBARA KENNELLY 

Ms. KENNELLY. Thank you, Chairman Spratt, and thank you 

Ranking Member, Mr. Ryan. And thank you members of the committee for inviting me to testify today on this important issue of 

the impact of Medicare Advantage overpayments on the Medicare 

program. 

As President of the National Committee to Preserve Social Security and Medicare, I represent 4 million members and supporters 

who are vitally committed to the preservation of Social Security 

and Medicare, programs that are crucial to our Nation’s retirement 

security. 

Mr. Chairman, while the groups like us, like the National Committee, were concentrating on stopping the privatization of Social 

Security, Medicare was already undergoing a transformation into a 

privatized program, thanks to the Medicare Modernization Act. 

I listened very carefully to Dr. Orszag this morning and Dr. Miller, and I certainly appreciate what they were saying: that there 

are managed care plans that before this bill was passed, did a very 

good job and will continue to do a very good job. In fact, people on 

this panel represent some of those proposals. 

But I truly feel that the way the bill was designed that it is truly 

a—it is looking right at the heart of Medicare—to do away with 

Medicare as we know it. In fact, I will go so far as to say this 

morning that it was designed to accomplish the goal expressed by 

our former Speaker, Mr. Gingrich, to lure seniors voluntarily out 

of Medicare so that it would eventually—Medicare would eventually wither on the vine. 

Now, I know much time has been spent debating the long-term 

affordability of both Social Security and Medicare. In fact, the administration has people on the Hill almost weekly telling us that 

we can’t afford these entitlements. We can’t afford Medicare. And 

this committee has spent—and I know how much time it has spent, 

considering these situations and looking at Medicare very seriously, and they certainly will do that again next year because of 

the 45 percent trigger. 

We know that many of Medicare’s costs are not unique to Medicare. They reflect the same factors that are causing skyrocketing 

increases in health care costs for the under-65 population. Many 

85

experts continue to struggle with ways to solve these problems. But 

unlike these complex technical challenges, overpayments to Medicare Advantage plans are much more straightforward. They are 

also one cost that you can control. 

Congress created the expanded subsidies in the MMA. Congress 

can vote to eliminate them or at least reduce them to a certain extent. 

I cannot overstate the damage these Medicare Advantage overpayments will cause to the traditional Medicare program if they 

are not addressed. 

Ultimately, overpaying Medicare Advantage plans will shatter 

the risk pool that made Medicare work. Medicare Advantage plans 

tend to attract healthier seniors because of their benefits. 

As more of these seniors are lured out of the traditional Medicare, they leave behind the frailest and most vulnerable to pay 

higher and higher premiums. Also, as Medicare Advantage enrollments grow, so do taxpayer subsidies. Over time, this cycle will 

cause Medicare to become unaffordable for both taxpayers and 

beneficiaries. Eventually, political support for the program will 

shift. 

Today’s social insurance concept of shared risk will be replaced 

by the ownership society, a concept of individual risk, a concept 

that has been already pushed very hard by our President, and 

hand-in-hand with individual risk will come an individual payment 

system called vouchers. 

We know that vouchers save money for healthy beneficiaries and 

shift the burden of health care to the frailest and sickest among us, 

and they also provide no containment for health care costs. Eventually, we will find ourselves in a world much like it was before 

Medicare was created, and health care will be unaffordable for the 

average senior. 

At a time when our Nation is struggling with how to create affordable health care coverage for all Americans, it is simply incomprehensible to me why we would destroy the one affordable, universal health care system that already exists, known as Medicare. 

Now, I know that you will hear arguments that the Medicare Advantage overpayments are necessary to provide improved health 

care services to groups such as those with multiple and chronic 

conditions, minorities, those living in rural areas, and the poor. 

Of course, we do not always know whether the Medicare Advantage plans actually provide significant benefits to these groups because of lack of reporting and claims of proprietary information, 

but if Congress believes higher payments are needed to improve 

the health of beneficiaries in these groups, it would be much more 

simple and it certainly would be less expensive to increase resources targeted to the groups that we are talking about by expanding and improving low-income programs. 

Mr. Chairman, the vast majority of Medicare beneficiaries remain in the traditional program. You may not hear their voices as 

loudly as you hear the insurance industry’s, but believe me when 

I tell you they will be seriously hurt if Congress does not eliminate 

Medicare Advantage subsidies. The decision you make this year 

will be impacting on the people of this country for decades to come. 

86

Thank you for inviting me here today, and thank you very much 

for listening to me, and I look forward to working with you. 

[The prepared statement of Barbara Kennelly follows:]

PREPARED STATEMENT OF HON. BARBARA B. KENNELLY, PRESIDENT AND CEO, NATIONAL COMMITTEE TO PRESERVE SOCIAL SECURITY AND MEDICARE, FORMER MEMBER OF CONGRESS

Mr. Chairman and Members of the Committee: Thank you for inviting me to testify this morning on the important issue of the impact of Medicare Advantage overpayments on the Medicare program. As President of the National Committee to Preserve Social Security and Medicare, I represent 4 million members and supporters 

who are vitally committed to the preservation of Social Security and Medicare—programs that are critical to our nation’s retirement security. 

The National Committee advocated in favor of adding a prescription drug benefit 

to the Medicare program for many years. We shared many seniors’ expectations that 

a drug benefit would take the form of a simple expansion of the traditional Medicare 

program. Providing prescription drug coverage through traditional Medicare would 

have given beneficiaries a simple, standardized benefit, and allowed the federal government to leverage the purchasing power of millions of beneficiaries to lower drug 

prices. 

As you know, this benefit structure is not what seniors received. The current 

Medicare Part D benefit is complicated, confusing and fragmented, and whatever 

competition exists between private plans has not been sufficient to slow the continued upward spiral of prescription drug prices. Because the drug benefit is provided 

entirely through private plans, it also represents the first major step toward the full 

privatization of the Medicare program. 

The Medicare Modernization Act (MMA) is not only a mechanism for enacting a 

drug program that provides considerable financial benefit to the drug and insurance 

industries. For many, offering seniors prescription drug coverage for the first time 

was the ‘‘sweetener’’ intended to mask the taste of the medicine of privatization. As 

it has turned out, the drug benefit itself was a bitter pill for many seniors. But for 

the designers of the MMA, it was conceived as a way to smooth the passage of massive long-term changes leading to the privatization of the Medicare program. This 

was done despite the success and popularity of the traditional fee-for-service Medicare program, and despite the failure of past privatization efforts such as 

Medicare+Choice. 

Mr. Chairman, the Medicare Modernization Act is a weapon aimed at the heart 

of the traditional Medicare program. It was designed to accomplish the goal expressed by former Speaker Newt Gingrich—to lure seniors voluntarily out of Medicare so that it would eventually wither on the vine. The overpayments to Medicare 

Advantage plans that you are exploring today represent one of the tools by which 

to achieve this end. 

The National Committee believes that privatizing Medicare is just as likely to ultimately destroy the health care safety net for seniors as privatizing Social Security 

is to dismantle the foundation of retirees’ income security. Through much hard work 

and education, groups such as ours have been able to temporarily halt the march 

of Social Security privatization. Unfortunately, we were not similarly successful 

with Medicare, so our efforts must be concentrated on reversing the most egregious 

provisions of the Medicare Modernization Act. 

Privatization in the MMA takes a number of forms. First, there is the privatized 

nature of the drug benefit itself, which is only available through private plans and 

not through traditional Medicare. In addition, the MMA provided massive subsidies 

to the private sector, most of them in the form of the overpayments to private Medicare Advantage plans that the Committee is exploring today. Finally, we would note 

some of the lesser understood elements of privatization such as the 45% limit on 

federal funding, the privatization demonstration project known as the ‘‘comparative 

cost adjustment demonstration project’’ or ‘‘premium support’’, and the new provision means-testing the Medicare Part B program for the first time in the history 

of Medicare. All of these provisions collectively undermine the traditional Medicare 

program. 

Private health plans, now called Medicare Advantage plans, were first allowed to 

participate in Medicare because some policymakers believed they could provide better services at a lower cost than traditional Medicare. In fact, because it was anticipated private plans would be so efficient, the government initially paid them 5 percent less for each beneficiary they enrolled than it would have cost to cover that 

same beneficiary in traditional Medicare. 

87

In 25 years time, the powerful health insurance industry lobby has been extremely successful in turning this rationalization on its head. Instead of paying private plans less to reflect the efficiencies they argued would save the government 

money, Medicare now pays them significantly more than it would cost to cover the 

same beneficiaries through traditional fee-for-service Medicare. In fact, today the 

government pays an average of 12 percent more to cover a beneficiary in a private 

Medicare Advantage plan than it would cost to cover that same beneficiary in traditional Medicare. And some types of private plans can receive much larger payments. 

For example, Private Fee-For-Service plans are paid about 19 percent more than 

traditional Medicare and plans in some localities are paid 50 percent more than traditional Medicare. In simple dollar terms, Medicare pays about $1,000 more a year 

to cover a beneficiary in a private plan than it would cost to provide care to that 

same beneficiary under traditional Medicare. 

All beneficiaries, whether they enroll in a private plan or not, subsidize payments 

to private companies by paying higher Part B premiums. Today, these premiums are 

almost $50 per year higher per couple than they should be because of overpayments 

to private plans. This number will clearly continue to grow exponentially in future 

years. These increases are in addition to the record-setting increases in Part B premiums beneficiaries have already experienced—and which are expected to continue—as a result of increases in the cost of health care. 

In addition to adding costs for individual beneficiaries, overpayments to Medicare 

Advantage plans result in higher costs to the federal government. Medicare’s Actuaries estimate that eliminating these overpayments would add two years of solvency 

to Medicare’s hospital insurance trust fund. These additional costs are absorbed by 

the Medicare program at a time when health care costs are growing dramatically, 

both for the federal government and for beneficiaries. In fact, President Bush and 

some others have insisted that the federal government cannot afford to continue 

supporting entitlement programs such as Medicare over the long-term. President 

Bush has included deep cuts to Medicare in his past two budgets, and many of his 

supporters in Congress have pushed to include sizeable Medicare cuts in the budget 

process this year. In addition, the automatic triggering mechanism included in the 

Medicare Modernization Act of 2003 has initiated a process designed to result in significant cuts in Medicare as early as 2009. 

Many of the causes of increased Medicare costs are difficult to tackle—they reflect 

the same factors that have resulted in skyrocketing increases in health care costs 

for the under-65 population that have proven so intractable. Many experts continue 

to struggle with ways to solve this problem. 

But I can point out one cost reduction that is obvious and can be addressed by 

this Congress quite simply—the overpayments to Medicare Advantage plans. Overpaying private plans adds to the cost of the Medicare program for both beneficiaries 

and for taxpayers. Unlike the more complex challenges of curbing the overall growth 

of health care, it is the one cost that is easiest to control. Congress created the expanded subsidies in the Medicare Modernization Act. Congress can vote to eliminate 

them. 

The National Committee believes that Medicare should equalize payments between the traditional program and private plans. We support the Medicare Payment 

Advisory Commission’s (MedPAC) recommendation of financial neutrality between 

payments in the traditional fee-for-service program and payments to private plans. 

Equalized payments would level the playing field and remove private plans’ unfair 

advantage in attracting beneficiaries. 

Continuing to overpay private insurance companies to provide services that could 

be more affordably and efficiently provided by the traditional Medicare program is 

unconscionable. According to the Congressional Budget Office (CBO), leveling the 

playing field could save taxpayers $149 billion over the next ten years. Congress 

should remove these unwarranted subsidies and use a portion of the savings to improve benefits for low-income Medicare beneficiaries. 

I cannot overstate the damage these Medicare Advantage overpayments will cause 

to the traditional Medicare program if they are not eliminated. Medicare Advantage 

plans tend to attract healthier seniors because of their benefit structures. As more 

of these seniors are lured out of traditional Medicare, overpayments to the private 

plans will continue to grow dramatically. That will result in even higher costs for 

taxpayers, and increasing premiums paid by those remaining in the traditional program. Over time, this cycle of higher payments and growing costs will simply become unaffordable—for both taxpayers and beneficiaries. 

Ultimately, this cycle will shatter the risk pool that makes Medicare work. Increasing numbers of healthier seniors will abandon traditional Medicare for the private sector, leaving the frailest and most vulnerable to pay the price not only for 

their own care, but also for the growing subsidies to the private plans. Over time, 

88

political support for the program will shift. Today’s social insurance concept of 

shared risk will be replaced by the ownership society’s concept of individual risk. 

And hand-in-hand with individual risk will come an individualized payment system 

such as vouchers. 

Vouchers save money for healthy beneficiaries and shift the burden of health care 

to the frailest and sickest among us. They shift risk from shared pools to individuals. And they provide no containment for health care costs. Eventually we will find 

ourselves in a world much like that before Medicare was created, and health care 

will be unaffordable for the average senior. At a time when our nation is struggling 

with how to create affordable, universal health care coverage for our workers and 

their families, it is simply incomprehensible to me why we would destroy the one 

affordable, universal health care system that already exists in Medicare. 

You will hear arguments that the Medicare Advantage overpayments are necessary to provide improved health care services to groups such as beneficiaries with 

multiple, chronic conditions, minorities, those living in rural areas or the poor. Of 

course, we don’t really know whether Medicare Advantage plans actually provide 

any significant benefits to these groups because of the lack of reporting and claims 

of proprietary information. What we do know is that the numbers the insurance industry is using about the impact of Medicare Advantage plans on these vulnerable 

groups are misleading. We also know that private industry is insisting on being 

overpaid to provide these services—clear proof that this is not the most efficient way 

to deliver benefits. 

If Congress believes higher payments are needed to improve the health of beneficiaries in these groups, it would be much simpler and less expensive to increase 

resources targeted to the groups directly, by expanding low-income programs. Instead of giving private plans extra money and simply hoping some if it finds its way 

to these vulnerable populations, Congress should improve the Medicare Savings Programs or the low-income prescription drug subsidy. 

Mr. Chairman, the vast majority of Medicare beneficiaries remain in the traditional program. You may not hear their voices as loudly as you do the insurance 

industry’s but believe me when I tell you they will be seriously hurt if Congress does 

not eliminate Medicare Advantage subsidies immediately. The decisions you make 

this year will impact the Medicare program for decades to come. 

BACKGROUND

Overpayments to private plans increase Part B premiums for all Medicare beneficiaries. The Medicare program finances overpayments to private plans with money 

collected by general revenues and beneficiary premiums. MedPAC has estimated 

that every Medicare beneficiary pays $24 a year in higher Part B premiums just 

to fund excess payments to private plans. In other words, the majority of Medicare 

beneficiaries—the 81 percent of beneficiaries choosing to remain in traditional Medicare—are paying to subsidize the private plans that provide benefits to the remaining 19 percent of beneficiaries. Because subsidies are projected to continue rising, 

all Medicare beneficiaries can expect to pay dramatically higher premiums in the 

future, and can expect increasing portions of those premiums to be diverted to private plan subsidies. 

Eliminating overpayments would save billions of dollars and improve Medicare’s 

financial outlook. The Congressional Budget Office (CBO) projects that Medicare 

will pay $75 billion to private plans in 2007 and $1.31 trillion to private plans over 

the next ten years. Federal spending on Medicare Advantage plans will continue to 

grow as more beneficiaries are lured out of traditional Medicare as a result of the 

excessive payments made to private plans. According to CBO, paying private plans 

at the same rate as traditional Medicare would save $54 billion over the next five 

years and $149 billion over the next ten years. Not only would eliminating these 

large overpayments save billions of dollars, it would also add two years of solvency 

to Medicare’s hospital insurance trust fund. 

Overpayments are used to improve insurance industry profits and are not completely passed along to beneficiaries. When Congress approved the system which 

overpays private plans, policymakers intended that the excess payments be returned 

to beneficiaries in the form of additional benefits or reduced cost-sharing. It is not 

at all clear to what extent this is occurring. Private plans are subject to few public 

reporting requirements, so it has been extremely difficult to determine what percentage of the overpayments has inflated the profit margins of the private insurance 

companies offering the plans, or has been used for marketing, rather than being returned to beneficiaries. In the case of Private Fee-For-Service plans, MedPAC found 

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rollees. The remainder of the payment is used to finance the administrative costs, 

marketing, and profits of private plans. 

Overpayments are driving unscrupulous agents and private plans to use aggressive sales tactics and misrepresentations to sell their products to beneficiaries. A recent survey of state insurance departments found that 39 of 43 states had received 

complaints about misrepresentations and inappropriate marketing practices of 

Medicare Advantage plans. In most cases, these practices led to Medicare beneficiaries enrolling in a private plan without adequate understanding of the plan or 

their ability to stay in traditional Medicare. The inflated payments to private plans 

allow them to offer exceedingly large commissions to agents who enroll beneficiaries 

into Medicare Advantage plans, regardless of whether the plan meets their needs. 

To receive their commissions, some insurance agents have engaged in fraudulent activities including: forging signatures on enrollment documents; mass enrollments 

and door-to-door sales at senior centers, nursing homes, or assisted living facilities; 

and enrolling beneficiaries with dementia into inappropriate plans. Removing overpayments, increasing oversight and regulation, and limiting large commissions 

would help to prevent beneficiaries from falling victim to unethical and illegal sales 

tactics. 

Eliminating overpayments would not adversely affect low-income and minority 

beneficiaries. Contrary to insurance industry claims, private plans do not attract a 

disproportionate number of low-income and minority beneficiaries. A recent analysis 

by the Center on Budget and Policy Priorities found that these Medicare beneficiaries are far more likely to receive supplemental coverage through Medicaid than 

to be enrolled in Medicare Advantage. The Center found that nearly half (48 percent) of all Medicare beneficiaries with incomes under $10,000 receive Medicaid, 

compared to only 10 percent who are enrolled in private plans. Similarly, they found 

that most Asian American Medicare beneficiaries (58 percent), and a plurality of African American (30 percent) and Hispanic beneficiaries (34 percent) receive Medicaid, compared to the 14 percent of Asian Americans, 13 percent of African Americans, and 25 percent of Hispanics enrolled in private plans. If Congress believes 

higher payments are needed to improve the health of beneficiaries in these groups, 

it would be much simpler and less expensive to increase federal resources targeted 

to these groups directly by expanding low-income programs. Instead of giving private plans extra money and simply hoping some of the funds find their way to these 

vulnerable populations, Congress could improve the Medicare Savings Programs or 

the low-income prescription drug subsidy. 

Eliminating overpayments would not adversely affect beneficiaries living in rural 

areas or inner cities. Proponents of private plans have argued that beneficiaries living in areas that are difficult or expensive to serve need an expanded and overpaid 

Medicare Advantage program to continue receiving services. In fact, in many rural 

and low-income inner cities exactly the opposite is true: the expansion of bloated 

private plans accelerates the deterioration of traditional fee-for-service providers, 

and undermines the ability of hospitals and other providers to continue operating. 

Medicare payments to hospitals, doctors and other providers who care for beneficiaries in traditional Medicare today are partly based on geographic differences in 

the cost of providing health care. If Congress believes even higher payments are 

necessary to ensure beneficiaries in some parts of the country receive adequate services, it would be much more efficient to modify Medicare’s geographic cost adjustment or provide additional payments to areas where Medicare providers are particularly scarce or have costlier expenses. This way plans in counties with greater need 

could receive higher payments without harming the traditional Medicare system in 

those areas or the beneficiaries who chose to remain in it. 

Despite receiving inflated payments, Medicare Advantage plans can provide inferior health coverage compared to traditional Medicare. Private plans do not necessarily provide benefits that are fully equivalent to traditional Medicare. They are 

required to cover everything that Medicare covers, but they do not have to cover 

every benefit in the same way. For example, private plans may create financial barriers to care by imposing higher cost-sharing requirements for benefits such as home 

health services, hospitalization, skilled nursing facilities, inpatient mental health 

services, and durable medical equipment that protect the sickest and most vulnerable beneficiaries. In many cases, beneficiaries are lured into the private plans 

based on improved coverage of relatively inexpensive services such as expanded dental or vision care, only to discover after it is too late that their plans shift significantly more of the higher costs of major illnesses onto their shoulders. Preventing 

private plans from imposing greater cost-sharing requirements than traditional 

Medicare would better protect beneficiaries from high out-of-pocket costs. 

Failure to rein in overpayments to private plans will lead to the privatization of 

Medicare. Continuing to dole out excessive and unwarranted payments to private 

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plans will undermine traditional Medicare. Private plans use these overpayments to 

offer additional benefits like gym memberships that attract healthier enrollees. 

They can also discourage sicker beneficiaries from joining their plan by charging 

higher cost-sharing for hospitalization and home health benefits. Eventually, Medicare’s risk pool will be shattered as those with greater health care needs remain 

in the traditional program, paying increased taxes and higher Part B premiums to 

subsidize overpayments to private plans. Eliminating overpayments would allow 

traditional Medicare to provide efficient and affordable health coverage to all beneficiaries for generations to come. 

NATIONAL COMMITTEE POSITION

Medicare should equalize payments between the traditional program and private 

plans. The nonpartisan Medicare Payment Advisory Commission (MedPAC) has recommended that Medicare pay the same amount regardless of whether a beneficiary 

enrolls in traditional Medicare or Medicare Advantage. Instead of being paid up to 

50 percent more than traditional Medicare, private plans should be paid at a rate 

equal to the costs of traditional Medicare in every part of country. Equalized payments would level the playing field and remove private plan’s unfair advantage in 

attracting beneficiaries. 

Savings from eliminating overpayments should be used to help low-income Medicare beneficiaries. The most cost-effective and efficient way to help low-income and 

minority beneficiaries is to use a portion of the savings collected from eliminating 

Medicare Advantage overpayments to strengthen the Medicare Savings Programs 

and improve Medicare Part D’s Low-Income Subsidy program. 

Private plans should be prohibited from charging higher out-of-pocket costs for 

benefits than traditional Medicare. It is particularly egregious for private plans to 

receive excess payments while providing lesser coverage. To better protect Medicare 

Advantage beneficiaries from high out-of-pocket costs, policymakers should prevent 

private plans from imposing higher cost-sharing requirements than traditional 

Medicare. 

Traditional Medicare is an option that must be preserved. The vast majority (81 

percent) of Medicare beneficiaries choose to remain in the traditional program. The 

special treatment of Medicare Advantage plans allows them to receive higher payments than traditional Medicare and allows them to impose higher cost-sharing on 

beneficiaries. This treatment is particularly unwarranted because there is no available data to suggest that private health plans deliver any better health outcomes 

than traditional Medicare. If Medicare continues to fund large overpayments to private plans, the program will face growing fiscal pressure to cut benefits or increase 

beneficiary cost-sharing. 

Thank you for inviting me to testify today, Mr. Chairman. I look forward to working with you and the other members of this Committee to reverse the privatization 

of Medicare that has been imposed through the Medicare Modernization Act. Eliminating overpayments to Medicare Advantage Plans is the first important step toward achieving that goal.

Chairman SPRATT. Thank you very much for your excellent statement. 

Dr. Neuman. 

STATEMENT OF PATRICIA NEUMAN, SC.D. 

Ms. NEUMAN. Thank you, Chairman Spratt, Mr. Ryan, and distinguished members of the committee. It is an honor to be here to 

talk about the Medicare Advantage program. I am Patricia 

Neuman. I am a Vice President of the Kaiser Family Foundation. 

The proliferation of private health plans under Medicare is fundamentally changing the coverage landscape for the 44 million people on Medicare. 

If I could have slide 1. Enrollment in Medicare Advantage plans 

is at an all-time high and is projected to rise rapidly, as you have 

heard already this morning. 

Slide 2. Enrollment today is highly concentrated among a small 

number of organizations. UnitedHealth leads other firms, covering 

1 in 6 Medicare Advantage enrollees nationwide. Together, 

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UnitedHealth, the Blue Cross/Blue Shield affiliates, Humana, and 

Kaiser Permanente account for more than half of the total enrollment today. 

Medicare Advantage has emerged as a front burner issue for 

many reasons, not the least of which is that MedPAC, the Congressional Budget Office, and the HHS Office of the Actuary report that 

the shift in beneficiaries from traditional Medicare to Medicare Advantage plans has the effect of increasing Medicare spending. 

Recent discussions have focused on whether Medicare Advantage 

plans serve a disproportionate share of people who are among the 

most vulnerable on Medicare, focusing on income, race and ethnicity, and rural locations. 

Our analysis of the most recent data available from the Center 

for Medicare and Medicaid Services finds first, if I could have slide 

5, Medicare Advantage enrollees are neither disproportionately 

low-income nor high-income. Roughly the same share of beneficiaries in traditional Medicare and in Medicare Advantage plans, 

about half, live on incomes below $20,000. This is not surprising. 

The Medicare Advantage program was not designed as a program 

for people with low incomes. 

For these beneficiaries—and if I could have slide 6—Medicaid 

has been and continues to be the primary source of supplemental 

assistance. So the extra benefits that you have heard about today, 

this morning, do not just go to those with modest incomes. They 

are distributed to people with low incomes and higher incomes who 

are in Medicare Advantage plans. 

Second, slide 7, enrollment rates are actually similar for white 

and African American people on Medicare. Thirteen percent of 

white and 15 percent of black beneficiaries were enrolled in the 

Medicare Advantage plan, again using the most recent data we 

have available, which is 2005. Rates are higher among Hispanic 

beneficiaries at 25 percent, and that is because they tend to live 

in areas of the country, like Florida and California, with a relatively high concentration of Medicare Advantage plans. Clearly, as 

you can see, the majority of all beneficiaries, regardless of race or 

ethnicity, are in traditional Medicare. 

Third, just 7 percent of all beneficiaries living in rural areas are 

now on a Medicare Advantage plan although access to Medicare 

Advantage plans has clearly increased in rural areas over the past 

few years. 

Fourth, slide 9, Medicare Advantage enrollees tend to be 

healthier than their counterparts in traditional Medicare, and you 

can see this is true across a number of measures—looking at selfassessed health status, looking at the rates of people who are 

under 65 with permanent disabilities in Medicare Advantage plans 

and the percent living in institutions. 

Now, while Medicare Advantage enrollees are generally healthier 

than those in traditional Medicare, 24 percent do say their health 

status is fair or poor, and a concern for this group is likely to be 

the adequacy of their plan’s coverage and the out-of-pocket costs 

associated with their medical care. Out-of-pocket costs depend on 

many factors, including an individual’s medical needs and the particular plan they choose. On the one hand, as you have heard this 

morning, Medicare Advantage plans often waive deductibles. They 

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reduce cost-sharing requirements. They offer additional benefits 

and sometimes include a valuable stop-loss limit on catastrophic 

spending. On the other hand, some Medicare Advantage plans impose daily hospital copays, daily copays for home health visits and 

daily copayments for the first several days in a skilled nursing facility, unlike traditional Medicare. Of course, extra benefits help to 

reduce out-of-pocket costs for many beneficiaries in Medicare Advantage plans. Yet, even with these extra benefits, some enrollees 

could end up paying more in a Medicare Advantage plan than they 

would pay under traditional Medicare, and that probably sounds a 

little counterintuitive to you. 

If you would look at slide 10, my written testimony illustrates 

how a hypothetical senior using inpatient and post-acute care could 

end up with higher out-of-pocket costs under a Medicare Advantage 

plan than under traditional Medicare. 

In Oakland, for example, our illustrative senior could spend be- tween about $2,500 and $5,200 under an Advantage plan and 

about $3,000 in traditional Medicare. She would definitely spend 

less in five of the Medicare Advantage plans than under traditional 

Medicare but more, and in some cases substantially more, under 

the majority of Medicare plans in her areas. 

For seniors living on fixed incomes, the difference between the highest and the lowest plans, $2,700 in this example, is not trivial. 

In the current system, it is clearly up to the individual beneficiary, 

the senior, to choose which plan is going to end up saving them the 

most money, and given the number of plans that are in their area 

and the wide variety of benefits, that can sometimes be a tall 

order. 

The current payment system translates into extra benefits for up 

to 1 in 5 beneficiaries in Medicare Advantage, and some of these 

benefits, as we have noted, are highly valued, but the allocation of 

resources raises questions about whether Medicare is distributing 

benefits equitably across the entire population, including the 4 out 

of 5 beneficiaries who are in traditional Medicare. 

A second equity issue relates to financing. The current payment 

system results in higher part B premiums paid by beneficiaries to 

help fund higher payments to Medicare Advantage plans. This is 

according to the HHS Office of the Actuary. As a result, the majority of beneficiaries who are in traditional Medicare are asked to 

pay higher monthly premiums to help support this system for 

Medicare Advantage plans, but of course they do not receive the 

extra benefits that are provided to the enrollees of Advantage 

plans. 

A third issue concerns future generations. Again, according to 

the Office of the Actuary, the current payment system cuts short 

by 2 years the life of the part A trust fund, potentially affecting 

coverage for future generations of beneficiaries who are looking forward to having Medicare and its benefits when they retire. 

In summary, Mr. Chairman, Medicare Advantage plans do play 

an important role as an alternative to traditional Medicare. However, the on-budget costs associated with the current payment policies coupled with rapid enrollment growth in relatively high-payment areas underscore a number of important policy considerations. Clearly, critical questions relate to whether the positive atVerDate 0ct 09 2002 16:07 Feb 19, 2008 Jkt 000000 PO 00000 Frm 00096 Fmt 6633 Sfmt 6602 J:\DOCS\HEARINGS\110TH\110-14\38252.TXT HBUD1 PsN: DICK
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tributes of the Medicare Advantage program are balanced by the 

higher costs associated with the current payment system and 

whether the current payment system is affordable for beneficiaries 

and taxpayers in light of the long-term fiscal challenges facing 

Medicare and in light of competing national priorities. 

Thank you very much, and I look forward to your questions. 

[The prepared statement of Patricia Neuman follows:]

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Chairman SPRATT. Thank you, and thank you in particular for 

the points you have made. 

Dr. Wah. 


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STATEMENT OF ROBERT M. WAH, M.D. 

Dr. WAH. Thank you, Chairman Spratt, Mr. Ryan, and members 

of the committee. Thank you for inviting the AMA to speak with 

you regarding the impact of the Medicare Advantage program on 

Medicare’s financial viability and the delivery of quality care for 

Medicare patients. I am Robert Wah. I am a practicing physician 

and a member of the Board of Trustees of the American Medical 

Association. 

The AMA supports competition in the Medicare program. Real 

competition would increase patient choice and Medicare’s financial 

sustainability. Seniors should be able to choose from Medicare options based on their health care needs and with accurate information on each option. The AMA staunchly supports fiscal neutrality 

between Medicare Advantage plans and regular Medicare. 

Currently, there is not fiscal neutrality between them because 

the government provides Medicare Advantage plans, as we heard 

this morning, with an average 12 percent subsidy per enrollee. Instead of making Medicare more sustainable as the baby boom generation reaches the age of Medicare eligibility, this subsidy will 

have the opposite effect. The Medicare actuary has stated—and we 

have heard it again this morning—that the Medicare Advantage 

subsidies will shorten the solvency of the hospital insurance trust 

fund. However, adopting fiscal neutrality between Medicare Advantage and regular Medicare would extend that insolvency date by 

about 2 years. The Medicare Advantage add-ons averages almost $1,000 per 

Medicare Advantage enrollee, and the CBO reports this amount is 

only expected to climb. So Medicare Advantage costs taxpayers 

more. In addition, all seniors, not just those in Medicare Advantage, are paying about $2 a month in higher premiums to help fund 

these subsidies. 

There are real trade-offs involved in public policy choices that 

face Congress today. The government here is providing billions of 

dollars in subsidies to Medicare Advantage plans that only serve 

1 in 5 beneficiaries. At the same time, physicians in the regular 

Medicare plan, which serves 80 percent of seniors and disabled 

beneficiaries, are facing a 10 percent cut. There are also questions 

about the access to health care provided by Medicare Advantage. 

Patients and physicians are being shortchanged by a significant 

number of Medicare Advantage plans that are luring their enrollees in with false promises, then skimping on coverage and payments and using the subsidies primarily to increase profits. 

The picture painted by responses of an AMA survey of our physicians who have treated Medicare Advantage patients is startling. 

An overwhelming number of physicians—8 out of 10—reported that 

their patients have difficulty understanding how Medicare Advantage plans work. As for the physicians who deal with multiple 

health plans every day, 6 out of 10 of those physicians reported 

that they also have a hard time understanding how Medicare Advantage plans work. Clear information on the plans is scarce and 

often inaccessible to both patients and their physicians. About half 

of the physicians reported that Medicare Advantage plans have denied services that are typically covered by regular Medicare, and 

half also indicated that they have received payments from MediVerDate 0ct 09 2002 16:07 Feb 19, 2008 Jkt 000000 PO 00000 Frm 00104 Fmt 6633 Sfmt 6602 J:\DOCS\HEARINGS\110TH\110-14\38252.TXT HBUD1 PsN: DICK
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care Advantage plans that were lower than regular Medicare. 

These survey results corroborate reports by the Medicare Rights 

Center, the State insurance commissioners and others. 

Furthermore, all Medicare Advantage beneficiaries—minority, 

low-income and rural beneficiaries—face the same problems. For 

example, the National Rural Health Association reported that 

Medicare Advantage private fee-for-service plans often pay rural 

health clinics at a rate far below regular Medicare rates and, quote, 

‘‘have the potential to destabilize the existing rural safety net.’’ So 

the government is paying more for Medicare Advantage plans, but 

there is mounting evidence that these subsidies in many cases are 

not buying better health care coverage for our patients and for your 

constituents. 

Until Medicare Advantage is placed on equal footing with regular 

Medicare, the market distortions will continue to encourage inefficient behavior by Medicare Advantage plans. Patients and physicians will face additional financial risks. The delivery of health 

care will be compromised, and taxpayers will pay more and get 

less. Clearly, these Medicare Advantage subsidies do not advantage 

patients or physicians. 

The AMA looks forward to working with the committee to 

achieve our shared goals of strengthening the Medicare program 

and providing quality care to patients. 

Thank you for the opportunity to be here today. 

Chairman SPRATT. Thank you for coming and testifying. 

Now, Ms. Schmitt, we left you a little piece of the table back 

there. Can you pull the microphone up? That is good. Thank you 

for coming. We look forward to your testimony. 

STATEMENT OF CATHERINE SCHMITT 

Ms. SCHMITT. Thank you, Mr. Chairman, Representative Ryan, 

and members of the committee. My name is Catherine Schmitt, 

and I am Vice President of Federal Programs at Blue Cross and 

Blue Shield of Michigan. I appreciate the opportunity to testify on 

the Medicare Advantage program. 

Blue Cross/Blue Shield of Michigan is a nonprofit health plan 

that serves nearly 5 million members, of which 440,000 are Medicare beneficiaries. We offer government contracted MA, private feefor-service, part D, and supplemental products in every county in 

Michigan. My testimony today focuses on the importance of the private fee-for-service option in meeting the needs of employer and 

union retirees. 

We believe that it is critical to preserve the viability of the private fee-for-service option because it is the only Medicare Advantage product available today for bringing uniform integrated health 

benefits to the retirees of major employers and unions nationwide. 

This option allows employers to provide nationwide retiree health 

care plans that are identical to the benefit programs they offer for 

their other group members, incorporating the same care management features through a single plan. There are three key reasons 

why it is important to preserve this product. 

First, care coordination. There is a common misperception that 

these plans cannot provide any advantages with regard to improving member health. In fact, this is one of the key reasons why emVerDate 0ct 09 2002 16:07 Feb 19, 2008 Jkt 000000 PO 00000 Frm 00105 Fmt 6633 Sfmt 6602 J:\DOCS\HEARINGS\110TH\110-14\38252.TXT HBUD1 PsN: DICK
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ployers are interested in this product. Our plans offer care coordination and management for diseases that commonly afflict the elderly through an integrated benefit package. For example, we provide access to 24x7 nurse consultants, personal health care coaches 

for chronic conditions, as well as complex case management programs. 

The second key reason is that these products provide access in 

rural areas. For the first time, all Medicare beneficiaries have access to private Medicare plans. 

Third, private fee-for-service plans offer members enhanced benefits. In addition to filling gaps in traditional Medicare, with these 

benefits customized, care management plans can be developed for 

the most complex cases. The comprehensive benefits offered by MA 

plans are very important to lower income individuals who make too 

much to qualify for Medicaid but who cannot afford Medigap. 

I would also like to address some of the criticisms of private feefor-service plans, starting with the most discerning, unscrupulous 

and even fraudulent sales tactics. I can only imagine the trauma 

to victimized beneficiaries. We commend CMS for taking decisive 

actions to strengthening the enforcement of marketing standards to 

address these problems. We have a zero tolerance policy for agents 

who do not follow the rules, but please note that these sales problems are not an issue with employer and union accounts. 

Some have questioned the care management exemption private 

fee-for-service plans have from requirements that do apply to 

HMOs and to PPOs. We believe that private fee-for-service plans 

should be required to report quality data to enable Medicare beneficiaries to make informed health plan choices. Plans should be required to establish chronic care improvement programs with participation voluntary by members. 

Others have indicated a lack of provider acceptance and satisfaction as an issue. Our experience has been that, through education 

on both the provider fee-for-service option and how, in fact, one I.D. 

card and a single check from one payor benefits the provider, there 

has been generally very widespread acceptance. These are also advantages to the beneficiaries. 

Another concern identified by MedPAC is that the average payments for private fee-for-service plans are 19 percent more than 

traditional Medicare compared to 12 percent more for all MA plans. 

Our actuaries have found that payments for our employer and 

union products are not higher than the average. For groups, all retirees, regardless of the county-specific reimbursement, are enrolled. Many of the members are in urban areas, but the very reason that the program works for employers is that retirees in rural 

areas also have access to care. I urge you to reject further cuts in 

funding for this program. 

Congress improved payments under the Medicare Modernization 

Act to ensure broader access in rural areas and to stabilize the program. Achievement of these goals will pave the way for following 

the industry movement towards more integration and coordination 

of care in order to improve quality and member health outcomes. 

Yet, every time the Federal Government makes a significant investment in these programs in a meaningful way, the funding is 

threatened, and the momentum is lost. 

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I can assure you that members whose care we are coordinating 

would have been far less likely to participate with an unknown 

care management vendor than with the local Blue plan that has 

been their health carrier their entire lives. They know the Blues 

when they call. The $6.5 billion in cuts already enacted under the Deficit Reduction Act has resulted in MA rates that are rising significantly 

below the growth in medical costs. If Congress cuts MA funding, 

the private fee-for-service product is unlikely to remain a sustainable product in many areas. The result may well be that most, if 

not all, of the 1.3 million enrollees in this product will have a disruption in care, lose access to the enhanced benefit, and lose the 

opportunity for care coordination. 

What would the loss of the private fee-for-service mean for beneficiaries? It will mean that beneficiaries who do not qualify for 

Medicaid and who cannot afford a Medigap policy will be left without supplemental coverage. It will mean that employers and unions 

will be forced to make hard choices about reducing benefits, and it 

will mean that beneficiaries lose confidence in Congress, CMS and 

their health plans to ensure continuity of care and to help them 

maintain predictable coverage and premiums. 

Thank you for considering my perspective on the MA program 

and the private fee-for-service option. 

[The prepared statement of Catherine Schmitt follows:]

PREPARED STATEMENT OF CATHERINE SCHMITT, VICE PRESIDENT, FEDERAL

PROGRAMS, BLUE CROSS BLUE SHIELD OF MICHIGAN

I. INTRODUCTION

Mr. Chairman, Representative Ryan, and members of the committee, my name is 

Catherine Schmitt and I am Vice President of Federal Programs at Blue Cross and 

Blue Shield of Michigan. I appreciate this opportunity to testify on the Medicare Advantage program. 

Blue Cross and Blue Shield of Michigan (BCBSM) is a non-profit health plan that 

serves nearly five million members, of which 440,000 are enrolled in government 

contracted Medicare or supplemental programs. Nearly 70 years ago, Blue Cross 

Blue Shield of Michigan started with a purpose to provide people with the security 

of knowing they have health care when they need it. Today, we’re accomplishing 

that mission in many ways, including offering access to health care coverage for everyone, regardless of circumstances, as the insurer of last resort. 

Blue Cross Blue Shield of Michigan is committed to offering Medicare products 

that meet the needs of the individual members, employers and unions that we serve. 

We offer a range of plans to Medicare beneficiaries in every county of the State of 

Michigan, including Medicare Advantage (MA) Private Fee-For-Service (PFFS) 

plans, Medicare Part D coverage, and supplemental coverage. The BCBSM enterprise also offers a MA HMO product in counties where an adequate network could 

be developed. Our Medicare Advantage plans play an important role in providing 

comprehensive, coordinated benefits for seniors and disabled members who might 

not otherwise have affordable options for supplemental benefits. 

In my testimony today, I will provide an overview of the importance of Medicare 

Advantage with a primary focus on the role of the PFFS plan in meeting the needs 

of Medicare eligible beneficiaries who are retirees of employers and unions. We believe that it is critical to preserve the PFFS option because it is the only product 

available today for bringing integrated health benefits to the retirees of employers 

and unions nationwide under Medicare Advantage. 

II. WHY DID BCBSM OFFER A PRIVATE FEE-FOR-SERVICE PLAN?

BCBSM has traditionally served the Medicare population through Medicare supplemental plans, or Medigap. However, with the passage of the Medicare Modernization Act (MMA), which addressed inadequate payment levels in Michigan that 

had made Medicare+Choice plans unsustainable, we saw an opportunity to make 

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comprehensive coverage through Medicare Advantage and Part D plans available to 

our customers. 

We chose the private fee-for-service plan for a number of reasons. In the individual market, we needed a less costly alternative to Medigap, which had become 

too expensive for many of our customers. Even with a dedicated contracting team, 

network health plans take years to develop as health care providers will not contract initially for the Medicare allowable amounts. They want higher payments and 

re-contracting would have taken considerable lead time. So, we found ourselves with 

Medicare members who have been with Blue Cross and Blue Shield their whole life 

and we wanted to continue to serve them if they were interested in Medicare Advantage. 

At the same time, employers were asking for alternatives to their current arrangements which supplement Medicare but do not coordinate care or focus on 

health improvement. Our employer and union customers needed a solution for serving retirees all over the country and using a state-wide PPO would leave no choices 

for the group with retirees residing in different parts of the country like Arizona, 

California, Florida and New Mexico. Due to a combination of regulations that prevent PPOs and HMOs from offering coverage to retirees outside of their state and 

the lack of nationwide acceptance by providers to participate in networks for Medicare Advantage products, PFFS is the only option available for serving these members. 

Medicare Advantage private fee-for-service plans allow our employers to provide 

retiree health care plans identical to the benefit programs they offer active and nonMedicare eligible retirees nationwide incorporating the same care management features such as care coordination and disease management programs through a single 

Plan, eliminating the need to stitch together multiple HMOs or PPOs that would 

cover only a portion of their retirees nationwide. 

I would like to share with you an example of our largest group account enrolled 

in PFFS and explain why this coverage is so valuable to them. The Michigan Public 

School Employees Retirement System (MPSERS) implemented a Medicare Part D 

Prescription Drug Plan in 2006 and a Medicare Advantage private fee-for-service 

plan in 2007 in order to lower health care costs and improve health care management and outcomes for their Medicare eligible retirees. 

There are more than 115,000 MPSERS members in the Medicare Advantage private fee-for-service plan. Many include lower-income retired clerical staff, bus drivers, janitors and cafeteria workers. Medicare Advantage provided MPSERS with an 

opportunity to reduce the System’s cost and integrate coordinated medical and drug 

management programs. This option also allows them to manage health care costs 

without reducing school programs for the students. 

III. THE IMPORTANCE OF MAINTAINING MEDICARE ADVANTAGE

I would like to stress three reasons why it is important for Congress to maintain 

funding for the Medicare Advantage program and preserve the private fee-for-service product: enhanced benefits and cost savings for beneficiaries, opportunities for 

care coordination, and providing access in rural areas. 

ENHANCED BENEFITS AND COST SAVINGS FOR BENEFICIARIES

Medicare Advantage plans provide beneficiaries with substantial protection from 

the high cost-sharing in traditional Medicare plus additional benefits not offered 

under Medicare. According to CMS, Medicare beneficiaries receive an average additional value of $86 per month—or $1,032 per year—from enrolling in an MA Plan. 

The majority of that value comes from reduced out-of pocket costs because plans 

generally fill deductibles and co-payments in original Medicare and provide protection against catastrophic costs. 

Our PFFS plans offer members benefits that are more generous than Medicare 

alone, especially in the group market. We estimate that the value of benefits offered 

among our plans is 21-33 percent more generous than original Medicare. This is because our employer and union accounts generally want to offer their retirees the 

same benefits they provide to their active workers and are willing to subsidize the 

group product. We also offer individual products with an actuarial value of up to 

27 percent more than traditional Medicare. 

Our lowest cost plan (with premiums of $0-$61 per month depending on one’s 

area) offers a number of additional benefits not available in traditional Medicare. 

This plan has an annual out-of-pocket limit of $5,000 that offers the peace of mind 

that an unexpected illness won’t result in bankruptcy. This is a benefit that is not 

available in traditional Medicare as FFS cost sharing on one significant hospital or 

skilled nursing admission can easily exceed $5000. Our plan has a $20 copay for 

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doctor visits instead of the 20% coinsurance in FFS Medicare. In order to foster good 

preventive care, our plan has no cost sharing for services such as bone mass measurement, mammograms, prostate and colorectal cancer screenings and immunizations. We also provide much more generous benefits for inpatient and outpatient 

mental health care. 

Another advantage is that MA plans have flexibility to offer innovative benefits 

that are not permitted under the Medicare program and that better meet the needs 

and preferences of beneficiaries. For example, we can offer the member the option 

of obtaining care in the setting of their choice following a hospitalization, when traditional Medicare might only have provided the payment for care in a skilled nursing facility. 

All of our individual plans are comprehensive MA-PD plans and groups can select 

either an MA-PD plan or an MA plan with the Retiree Drug Subsidy. In either case, 

we can provide comprehensive, fully integrated programs. Additionally, members 

like the fact that, as Medicare Advantage members, they can continue to carry a 

single Blue card for their Medicare A and B benefits, supplemental and drug coverage. 

If Congress cuts MA funding, plans will be forced to increase cost-sharing for 

these services, cut benefits, or increase premiums. This will most affect those seniors who are living on lower-to-modest incomes who may lack affordable alternatives. The average premium for Medigap Plan C in Michigan is $2,355 annually 

(or nearly $200 a month) and the average premium for Medigap Plan C nationally 

is $1,766 annually (nearly $150 a month). These premiums may be out of the reach 

of many seniors who have purchased Medicare Advantage products. 

CARE COORDINATION

Medicare Advantage holds promise for meeting one of the biggest challenges facing Medicare: coordinating care for those with chronic illnesses. Today, 82% of Medicare beneficiaries have at least one chronic condition, with 65% having multiple 

chronic conditions. However, according to a report by the Institute of Medicine, FFS 

Medicare does little to encourage coordinated, preventive and primary care that 

could produce better outcomes for beneficiaries. 

Medicare Advantage plans can play a critical role in addressing this challenge 

through offering care coordination and management for diseases that commonly afflict the elderly through an integrated benefit package. Employers are turning to 

our PFFS product because they can provide the same care coordination programs 

that are available to their active and non-Medicare eligible retirees. The importance 

of the integrated benefits available under Medicare Advantage plans cannot be understated. With a Medicare supplemental plan, inadequate and untimely claim information does not allow for meaningful coordination. By the time information is received, it may be too long after a major event to reach out to a member, their family 

or providers. 

Our Medicare Advantage members benefit from a variety of voluntary, patientcentered programs designed to improve their health through our 

BlueHealthConnection(r) program. BlueHealthConnection provides a spectrum of 

wellness, disease and symptom management, and case management opportunities 

for PFFS Medicare Advantage beneficiaries to take an active role in improving their 

health. 

For example, we provide access to personal health care coaches to assist members 

in the management of chronic conditions, such as asthma, diabetes, coronary artery 

disease, congestive heart failure, chronic obstructive pulmonary disorder, cancer, benign uterine conditions, and back pain. The program is focused on building self-reliance and seeks to inform members by providing a range of information, transferring 

skills, building confidence, and enabling members to take action to improve their 

health. 

We also provide access to a case management program that focuses on members 

with multiple co-morbidities, those who are the most difficult to care for. These initiatives provide telephonic and face-to-face assessments, develop collaborative care 

plans with both physicians and members, and use evidence-based guidelines to 

measure success. Through this program, we also provide telemonitoring devices to 

assist health care professionals in the management of complex conditions, such as 

congestive heart failure. 

We believe that programs offered by the plan a member has selected, such as 

BCBSM, and is familiar with, will be far more successful than efforts by other thirdparty companies contracted by CMS where the beneficiary does not know or trust 

the party contacting them about their health care needs. 

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ACCESS FOR RURAL BENEFICIARIES

Historically, the existence of private plan options in rural America has been virtually non-existent with the benefits of private plans only available to beneficiaries 

in urban cities. Congress sought to reverse this trend by raising rates in rural areas 

over the past decade. The intent was to increase payments so plans could operate 

more viably in rural America so that all Medicare beneficiaries would have access 

to a private plan option. 

Network-based products are difficult to construct in rural areas with sparse populations and limited provider availability. In rural areas of the country, where traditional Medicare rates are very low, providers often refuse to join a plan’s network 

unless reimbursement from the plan far exceeds what the Medicare rate would be. 

Unless plans can meet the network adequacy requirements of CMS, they will not 

be approved to participate in the MA program. 

Due to the availability of PFFS plans in 2007, for the first time all Medicare beneficiaries in the country have the choice of a private Medicare plan option: a significant increase from 2004 when one-quarter of beneficiaries did not have that option. 

Between 2005 and 2006, enrollment in PFFS plans by rural beneficiaries accounted 

for 39 percent of total MA enrollment growth. 

If Congress equalizes MA and traditional Medicare payments, this would have a 

disproportionate impact on rural areas by eliminating the increased payments in 

rural areas. Some rural states would have no access to MA options at all if these 

cuts were enacted. 

IV. RESPONDING TO CRITICISMS OF MEDICARE ADVANTAGE PLANS

A number of criticisms have been raised regarding the Medicare Advantage program over the last few months. I would like to respond to several of the issues you 

may hear today. • Comprehensiveness of coverage relative to traditional Medicare. Some have argued that MA plans modify benefits in traditional Medicare and create financial 

barriers for high cost beneficiaries. We use the flexibility we have to tailor our plans 

to meet the preferences of our members for predictable cost-sharing, protection from 

catastrophic expenses, and benefits not covered under FFS Medicare. MA plans return an additional $6.8 billion dollars in supplemental benefits, according to CMS. 

Those who consume more services will generally benefit more from the financial protections in our MA plans. 

A recent analysis published in Health Affairs found that the average out-of-pocket cost for all MA plans was $268 (Gold, 2007). Average out-of-pocket costs for members in poor health were estimated at $1,656 for all MA plans. The Blue Cross and 

Blue Shield Association applied the same methodology to spending under traditional 

Medicare with prescription drug plan coverage and found the costs for those in poor 

health was $5,408—more than three times the estimate for all MA plans in the 

Health Affairs article. 

While it may be theoretically possible to choose selected services for which an individual could pay more under an MA plan, this would generally not be the case 

if one looked at the total distribution of claims for an individual over an entire year 

that includes all doctor, hospital and other services. Thus, I would caution against 

looking at outliers and focus instead on the vast majority of beneficiaries who see 

better value under MA. • Specific issues with private fee-for-service plans. Over the past couple of 

months, a number of criticisms have been leveled against PFFS plans. Some of 

these concerns involve legitimate issues that industry and regulators are working 

to address to ensure confidence in this product. My message is simple: let’s stop vilifying PFFS plans and instead focus on correcting the legitimate issues and improving the program. 

The most troubling concerns leveled against PFFS plans involve instances of unscrupulous and even fraudulent sales tactics involving sales of individual PFFS 

plans. Some of the incidents were appalling and should never have happened. CMS 

has acted decisively to strengthen enforcement of marketing standards to address 

these problems. We continue to strengthen our agent training requirements and 

have a zero tolerance policy for agents that do not follow the rules. Our complaint 

ratio regarding agents is less than 1 for every 2,000 enrollees. It is important to 

note that these sales problems simply are not an issue with employer and union accounts. Group PFFS products do not involve the use of agents or brokers for individual sales to their members. Employers and unions work with us to ensure that 

retirees understand these products. 

Some have questioned the value of PFFS plans, given the exemptions that they 

have from certain requirements that apply to Medicare HMOs and PPOs. Some of 

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the current PFFS exemptions make sense, given the very different nature of PFFS 

plans as compared to HMO and PPO plans. However, we recommend ending three 

exemptions to inject more accountability and provide increased value to beneficiaries. We should require PFFS plans to report quality data, establish chronic 

care improvement programs (which would remain voluntary on the part of beneficiaries), and allow CMS to review PFFS bids. 

Some have also raised questions about provider acceptance of PFFS plans. The 

PFFS product is unique in that it does not require use of a defined network of providers like a PPO or HMO. While this enables us to serve retirees in every area 

of the country, it also means that there is no guarantee that a given provider will 

see a patient. Our rate of provider acceptance is very high. We respond to these incidents by working to educate providers on the benefits of participation, including receipt of a single payment from the health plan for all services rather than waiting 

for transfer, processing and payment of the supplemental claim after the Medicare 

claim is paid. We have found that physician offices we contact almost always decide 

to accept our PFFS patients once they understand our products. When a provider 

still refuses to participate, we make every effort to locate an alternative provider 

for the member. • Risk selection in MA and the traditional program. Some have suggested that 

MA plans are eroding the risk pool in traditional Medicare by attracting healthier 

seniors through benefit design. While there may have been some evidence of this 

in the early years of this program, the reality today is that health plan enrollees 

have similar health status to the overall Medicare population. MA payments are 

also fully risk adjusted which removes any incentive to enroll healthy beneficiaries. 

Risk adjustment pays plans more for enrolling sicker individuals and less for 

healthy ones, providing an incentive to enroll the sickest beneficiaries and manage 

their care appropriately. Moreover, there is significant growth in MA Special Needs 

Plans that are specifically designed to allow a plan to enroll those who are institutionalized or have specific chronic conditions. These tend to be the sickest and most 

costly beneficiaries in Medicare. • Arguments that MA plans are ‘‘overpaid’’. One concern leveled at MA plans is 

that their average payments are 12% more than claims costs under traditional 

Medicare (19% more for PFFS plans) according to MedPAC. In reality, comparing 

MA and FFS costs is an apples to oranges comparison that fails to take into account 

the significant differences between the two programs. Traditional Medicare pays 

claims for an uncoordinated package of benefits that includes high beneficiary costsharing. Medicare Advantage plans provide a more comprehensive package of benefits with care coordination, disease management, quality accountability, and usually 

with integrated drug coverage. 

The question that continues to go unanswered in the current Congressional debate is what type of Medicare program do we want over the long-term? On an industry-wide basis, there is a clear movement toward more integration and coordination 

of care in order to improve quality and member health outcomes. Yet every time 

the federal government invests in these programs for Medicare in a meaningful way 

the funding is threatened. 

Congress has already cut MA base funding by $6.5 billion in the Deficit Reduction 

Act (cuts that will be phased in through 2010). This is having an impact on our payments in Michigan, which are rising at a rate that is below growth in medical costs, 

which over time will result in increased year-to-year costs or reduced benefits for 

our members. 

This is exactly what happened in the years prior to the MMA, when 

Medicare+Choice became unsustainable in many counties after years of medical cost 

increases outstripped growth in plan payments. The result was widespread loss of 

coverage for Medicare beneficiaries. Congress should not backtrack on its promise 

of broader access to health plan options for beneficiaries. 

If Congress adopts MedPAC’s recommendations for cutting MA funding, the PFFS 

product is unlikely to be viable in many states. The result may well be that most, 

if not all, of the 1.3 million enrollees in this product will lose access to the enhanced 

benefits and opportunities for care coordination that come with these products. According to a study by Professors Ken Thorpe and Adam Atherly at Emory University, adopting MedPAC’s recommendations could result in 3 million people losing 

their MA coverage, including more than 180,000 in Michigan. 

What would the loss of the PFFS option mean for Michigan? It will mean that 

many Medicare beneficiaries who make too much to qualify for Medicaid, but cannot 

afford a Medigap policy, will be left without an option for obtaining affordable supplemental coverage. It will mean the loss of care coordination and health improvement opportunities. It will mean that employers and unions struggling to maintain 

retiree benefits in light of new accounting rules will be forced to make hard choices 

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about reducing or even eliminating retiree benefits. It will mean more confusion for 

beneficiaries who will lose trust in Congress, CMS and plan sponsors. 

V. CONCLUSION

Thank you for considering my perspectives on the Medicare Advantage program. 

I appreciate this opportunity to testify about the importance of the private fee-forservice product. Medicare beneficiaries need stable options for supplemental benefits 

and PFFS plans are a major source of that coverage in many areas of the country. 

We urge the committee to ensure the continued viability of this product and to support adequate funding for the Medicare Advantage program.

Chairman SPRATT. Thank you very much for participating and 

for the contribution you have made. We greatly appreciate it. I 

have one question in the interest of allowing others to ask questions. 

One question, Dr. McClellan. Your predecessor, Tom Scully—

maybe he was caught off guard—said there has been huge overfunding in this program and Congress ought to take some of it 

back. 

Would you agree that, when you created it, you did not foresee 

excess payments to this extent and that your objective originally 

was more competition, better services, better plans, and lower costs 

as well and at least that part of the quest in creating these plans 

has not been achieved and should be reconsidered? 

Dr. MCCLELLAN. Well, Mr. Chairman, Tom says a lot of things, 

and I think if we put it in a little bit broader context and, if you 

look at my written testimony, I did talk about some ways to reduce 

the costs both in the Medicare Advantage program and, more generally, in Medicare without starting by taking away benefits from 

people who do not have any good alternatives, and my own preference would be to try to take steps like many of the members here 

have discussed—to address the overuse and underuse and misuse 

of treatments, to promote more prevention, to promote better quality of care for chronic diseases. We do a lousy job overall in many 

respects in this country, and we do a not very good job in the traditional Medicare program of providing support for efforts to get better quality care at a lower cost. 

I also made the point in my testimony that, while it is important 

to get budget costs down, it is also important to get overall health 

care costs down. If we are just shifting costs from the Federal Government to beneficiaries, disproportionately with limited means, 

who have no better alternatives than a traditional Medicare plan 

with many gaps in it or a Medigap insurance plan that is very costly and very inefficient, well, I think we can do better than that. 

So that is why, hopefully, just as the payment reforms that got 

us to this point had a lot of bipartisan support, looking ahead, it 

is those floor county payment rates, those higher payment rates for 

private plans in counties with low fee-for-service costs that did not 

historically have access to these plans, and there is bipartisan effort that——

Chairman SPRATT. In setting up the original benchmarks, you 

were giving incentives to certain areas, in sparsely populated 

areas, for example, where it was difficult to build a comprehensive 

medical care network, but did you intend that to be a permanent 

and even widening differential? 

Dr. MCCLELLAN. I think the goal ought to be getting overall costs 

in our health care system down while improving quality. There are 

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plenty of opportunities to do that. Some of those opportunities involve reforms in the Medicare Advantage plans like the ones that 

I talked about in my testimony. I do not think I would start by cutting payments that are going to have a direct effect on reduced access to up-to-date benefits like prevention, like better care for 

chronic diseases for seniors with limited incomes. 

Chairman SPRATT. Mr. Ryan. 

Mr. RYAN. Thank you, and I will try and be brief as well because 

I want to get to everybody before votes happen. 

This is a strange conversation because, every time we have this 

conversation, we just think about it within the context of just this 

program, just Medicare, and we simply cannot ignore the underlying premise of the issue, which is health care inflation, itself, is 

running at about triple the rate of regular inflation. 

Mr. Blumenauer expressed a lot of the frustration that a lot of 

us have from these lower cost States. You know, we always point 

to Louisiana—I guess they must be the highest cost—and it is important that we address the root cause of health care inflation first 

and foremost. 

Also, as we take a look at, you know, payments and things like 

this, how do we get best practices out there? How do we get transparency in the metrics on cost and quality and best practices so 

that providers—hospitals and doctors—gravitate towards those 

norms and get to those best practices so that we can wrench out 

those inefficiencies, those overpayments so that the Louisiana 

model where the quality is no better than, say, it is in Wisconsin—

I think, statistically speaking, it is not as good; the cost inefficiencies are there. So we have to go at that which is outside of Medicare, and that is probably more important than anything we could 

do to save money for the taxpayer here. 

Dr. McClellan, you just ran this agency until recently, so I want 

to direct most of my questions to you. You know, we can come 

through all of these different statistical contortions. We can say it 

is 12 percent over. It may be. I just do not know. When you take 

a look at the fact that the doc fix is not put on that baseline—and 

that is $22 billion just this year to stop the doctors from getting 

cut, which we should do, what would be the 10-year cost of freezing 

the doc payment, and preventing the cuts would be far, far more 

than the $150 billion we would save from freezing, you know, the 

private fee-for-service or all of the Medicare Advantage plans at 

100 percent of fee-for-service. 

So, when we see the fact that there are just glaring anomalies 

or glaring missing links in these statistics, we need to proceed with 

caution on this, and the reason we need to proceed with caution is 

I think it is important we go toward a comprehensive care model 

where we know intuitively that getting people into preventative 

medicine, getting people into disease management, continuation of 

care, and comprehensive care, we know it works. The problem is 

we do not have the statistics, the models, the measuring sticks to 

prove that it works, and the problem with legislating—and we do 

this in Ways and Means every day—is the only numbers we can 

use are what the scorekeepers give us. So, therefore, we legislate 

based on the stuff we get on paper from CBO and Joint Tax regardless of whether it is really good policy or not. Regardless of whether 

110

or not we really think it is going to save money in the long run 

or not, that is what we do. 

So, Dr. McClellan, you have been on all sides of this issue. Where 

are we missing in this conversation? What are the key elements we 

need to bring into this conversation so that we get to this $32 trillion unfunded liability and make sure we are not overpaying for 

things that a taxpayer should not be overpaying for? 

Dr. MCCLELLAN. Congressman Ryan, I think you start by asking 

the question of: 

Are the policy reforms that we are considering going to get at 

those underlying fundamental drivers of low-quality and high-excess cost in our health care system? 

There are things that can be done in both traditional Medicare 

and in supporting a Medicare Advantage program more effectively 

to drive out inefficient practices to do something about these huge 

variations in costs across areas. Unfortunately, I do not think the 

solution is simply cutting the Medicare Advantage payment rates 

across the board. That is going to result in more beneficiaries ending up in the traditional fee-for-service plan, which is an incredibly 

important plan that most seniors depend on and that we need to 

keep strengthening. 

In fact, a lot of the attention in the last few years has been on 

these competitive reforms, and we have put a lot of effort into 

strengthening traditional Medicare as well: bringing in more preventative benefits and making seniors aware of them, trying to 

take steps to not simply pay more for more care but pay more for 

better care and better results and better use of preventative services and better outcomes for patients with chronic diseases. 

So I would start with the reforms that help accomplish that goal, 

and while there are some changes in Medicare Advantage that can 

move in that direction, the Medicare Advantage program itself has 

taken some important steps to make available preventative care 

and disease management and all of the kinds of services that you 

were just describing for beneficiaries who otherwise would have no 

access to those kinds of services. More and more people in the 

Medicare program with chronic diseases who are frail are enrolling 

in Medicare Advantage plans, including special needs plans, that 

turn the criticism of attracting only healthier beneficiaries on its 

head. These are plans that only enroll people with institutional levels of care or who are also in Medicaid or who have serious chronic 

diseases, and they are offering a lot of this kind of support to help 

reduce those overall variations in quality and those missed opportunities to improve care while keeping costs down. 

Mr. RYAN. Yes, that is my concern that we are going to cut off 

our noses and spite our face, because we can get a good score from 

CBO that says ‘‘you are going to save this much if you do that’’ 

without thinking into terms the comprehension of care that is beginning to evolve, without integrating these benefits and 

incentivizing preventative medicine and disease management. We 

know that most of the costs in Medicare and in health care itself 

are chronic care, when a person is in the hospital, in-patient stuff. 

If we can keep them out of the hospital and keep them off of the 

operating table, we are going to improve their lives and save taxpayer money and society money. 

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So when we sort of arbitrarily use statistics that are not comprehensive, you know, I worry that we are going to go down the 

wrong path and send people into plans that just do not give them 

that kind of preventative medicine, that kind of disease management, and so that is just something where I think we need to proceed with caution as we move down this road. 

I thank the chairman for his indulgence, and I yield. 

Chairman SPRATT. Mr. Scott. 

Mr. SCOTT. Thank you, Mr. Chairman. 

I appreciate all of our witnesses being with us today. 

There is one question that I thought I heard that had occurred 

to me when the previous panel was testifying that I did not get a 

chance to ask, and that is they said if the Advantage plans could 

use the Medicare provider reimbursement rate, that they could 

save money. Did I hear that right? Do the Medicare Advantage programs reimburse physicians at the same rate that Medicare reimburses them at? 

Dr. MCCLELLAN. I think it may have been around the discussion 

with the private fee-for-service plans which have this authority, as 

I mentioned, called ‘‘physician deeming,’’ where basically if the physician sees the patient and could have found out about the plan’s 

terms, then the plan can bill that physician at the traditional 

Medicare rate, and that has been a source of some confusion, and 

it is an area where you all may look at potential changes, but as 

a general matter the Medicare Advantage plans do not use the—

at least the HMO plans and the PPO plans and so forth, do not 

use the traditional Medicare rates. In fact, they have often very different benefit designs with things like pay for performance and 

wellness benefits and things like that. 

Mr. SCOTT. Do they get paid more or less than Medicare? 

Dr. MCCLELLAN. I think they get paid differently. You heard 

from Dr. Wah. In some areas for some services physicians get paid 

less, but many plans have started care coordination programs, 

medical home pay-for-performance models where they pay physicians significantly more for providing better care and for preventing complications of diseases. 

Mr. SCOTT. Could you provide these medical delivery options 

without privatization? 

Dr. MCCLELLAN. Well, I hope so. Over the last few years, we took 

a lot of steps in traditional Medicare to create care management 

programs and things like that. Peter Orszag mentioned earlier the 

Medicare Health Support program, which was a pilot effort to bring 

disease management services into traditional Medicare. 

Mr. SCOTT. Well, we are spending $150 billion to get these options available to people. Could we do it cheaper if Medicare just 

did it? 

Dr. MCCLELLAN. Well, the challenge in traditional Medicare is 

that it is hard to put an emphasis on keeping people well and coordinating care in a purely fee-for-service payment system where, 

you know, the doctors and providers——

Mr. SCOTT. The question is could we have the different delivery 

options under Medicare without privatization and without the subsidies? 

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Dr. MCCLELLAN. I think the others may have different views, but 

my own view is that we ought to try as hard as we can to put the 

emphasis on prevention and better quality through the Medicare 

Advantage program and also to try as hard as we can through the 

fee-for-service program, but the fee-for-service program does 

present some different challenges in promoting coordination and integration——

Mr. SCOTT. You are comparing apples and oranges. 

What I am suggesting is what is the barrier to Medicare’s running a prevention-type service rather than just a fee-for-service 

program, and we are spending $150 billion to get these services. 

For the same amount of money, could the beneficiaries of Medicare 

get the same benefit if Medicare did it rather than through somebody else? 

Ms. KENNELLY. Yes, Congressman, you could. I think that is the 

point. 

Mr. SCOTT. Are we getting $150 billion worth? 

Ms. KENNELLY. You are getting many more people involved in 

spending those dollars. The problem with—Mark and I have talked 

about this many times. We talk about improving the traditional 

Medicare program. You can only spend a dollar once, and if you put 

all of the available dollars into the Medicare Advantage program, 

all of these wonderful things we could do in the traditional program will not be done. 

Mr. SCOTT. The problem is that, with Medicare, you do not have 

all of the commissions, fees, profits, advertising, and everything 

else, and the money would go just to the service. 

Dr. Neuman. 

Ms. NEUMAN. Yes, that is right. I mean it could well be that the 

private fee-for-service plans—now, while all of them do not provide 

care coordination and they are not required to provide care coordination, maybe there are some lessons that can be learned from 

those plans that do that could be applied to traditional Medicare 

so that traditional Medicare has the benefit of care coordination 

models to the extent that they seem to be working. 

You know, I just want to amplify the broader issue here of the 

question that you face of whether you want to invest resources to 

provide preventative benefits and care management to the minority 

of people on Medicare who are choosing Medicare Advantage plans, 

really leaving the majority, the 4 out of 5, without the same set of 

benefits, and many of these people are low-income, have modest incomes, and are paying higher premiums as a result of the system. 

Mr. SCOTT. Well, the choice is whether we could do—you have 

got $150 billion leaving the system, and whether you could get that 

done within the system for $150 billion is the question. 

Dr. WAH. Yes. I think the other speakers pointed out that not 

every dollar is traveling to the beneficiary here. There is load, 

there is admin, there is marketing, and there is profit involved, 

and that is one of the things we are talking about. If there were 

a more level playing field here between Medicare Advantage and 

regular Medicare, the competitive marketplace would drive those 

players to squeeze those loads down, but right now they are able 

to just load them on without the competitive forces to drive them 

down. 

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Dr. MCCLELLAN. If I could make two more points on this. 

One is that, if you look at the total savings that beneficiaries in 

Medicare Advantage are getting, they exceed these total overall 

payments. Why? Because in a coordinated care program, it is easier 

to target the beneficiaries, to target the benefits of people who need 

them the most. It is hard to do in a fee-for-service system. 

Second, I think your emphasis on finding ways to spend dollars 

better and maybe more dollars in fee-for-service on prevention and 

care coordination is great. Unfortunately, there has been very little 

discussion of that around this Medicare Advantage payment reform 

debate. Most of the money in the proposals would go to things like 

paying more for physician services in the existing program. That 

is a very important goal, but it amounts to a double hit on beneficiaries in terms of increased payments, and it does not, by itself, 

do anything about these variations in practices or about the problems with access to preventative and coordinated care benefits. 

Mr. SCOTT. Mr. Chairman, can I ask one other question that they 

could respond to in writing? Because I know my time is up. 

Chairman SPRATT. Sure. 

Mr. SCOTT. That is that I understand that the risk pool in the 

Advantage plans is healthier than the others. How does that calculate into all of this? Because that should be where they get their 

profits from, not from the subsidies. If I could get that in writing 

because I am way over my time, I would appreciate it, Mr. Chairman. 

Chairman SPRATT. If those of you who are able to respond to that 

question would supply us an answer for the record, we would appreciate it. 

Now, Mr. Cooper. 

Mr. COOPER. Thank you, Mr. Chairman. 

I know time is limited, so I just wanted to stress one point. I 

thought it was the most interesting thing in any of the testimony 

we received, and that is Dr. McClellan is opening a new front in 

the debate on how to improve health insurance. These are his comments, and let me quote. 

‘‘most beneficiaries in traditional Medicare are also enrolled in 

Medigap supplemental coverage. This coverage, particularly the individual Medigap plans, is quite inefficient. Not only does it have 

a high load factor, meaning that beneficiaries have to pay much 

more in premiums than they get out in benefits, but the Medigap 

options are also designed in a way that encourages first dollar coverage that, according to CMS actuaries and CBO analysis, adds billions of Medicare costs each year. Such Medigap plans not only promote inefficient spending, but Medigap premiums have been rising 

rapidly and are much higher than part B and part D premiums 

combined.’’

That is the most direct frontal attack on Medigap coverage I 

have ever seen or read. I congratulate you, personally. I was curious if you did anything about this while you were CMS Director. 

Dr. MCCLELLAN. We did, and thank you for highlighting that 

point. 

With the Medicare Modernization Act, some other Medigap plans 

became available that did have more reasonable copay limits and 

designs, but the way that Medigap is set up—I think it is implicit 

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in your comment—is that seniors often have very little alternative 

between the traditional Medicare program with all of its gaps and 

going into a Medigap plan that might provide first dollar coverage, 

and seniors are risk-adverse. They do not like to be looking at a 

lot of potentially unlimited out-of-pocket spending. That is what 

you get in the traditional Medicare plan. So because they have no 

better alternative, they will spend hundreds of dollars a month out 

of their limited incomes to get into these plans that are costing a 

lot more than they are paying out and that are promoting this kind 

of inefficient delivery of health care that you were talking about. 

So we took some limited steps, but the Medigap plans are there by 

statutory design. It would take legislation to change that. 

Mr. COOPER. Did the administration propose any fundamental 

adjustment of the Medicare-Medigap coverage while you were at 

CMS? 

Dr. MCCLELLAN. I believe they have proposed—there were a lot 

of proposals in the past, but I believe in the past the administration has proposed reforms in Medigap coverage to get rid of or at 

least require higher payments for those who sign up for the first 

dollar plans and to try to encourage the availability of some reasonable plans that provide real protection but that do it at a lower 

cost. 

Dr. WAH. Could I just add also, though, that sometimes these 

Medicare Advantage plans are, in fact, billed as a replacement for 

a regular Medicare plus a Medigap plan, and there is so much variation in the Medicare Advantage plans. For instance, the Blue 

Cross private fee-for-service in South Carolina, for instance, provides no more coverage for drugs or for home care than if you had 

Medigap and regular Medicare. In fact, it provides less. So it looks 

attractive for some features of the Medicare Advantage plan, but 

in fact if you get really sick, when the high-dollar amounts start 

kicking in, it actually pays less, and so I just want to make sure 

it is clear that Medigap plus regular Medicare, as we have said, is 

not always optimal. These Medicare Advantage plans are not always a perfect replacement for those either. 

Ms. SCHMITT. What we find is that what beneficiaries particularly like is where you can give them fixed cost-sharing because 

they want to know that, instead of having some percentage of 

something that is going to cost them, if they know that they are 

selecting this plan and know that they have a set stop-loss and an 

office visit is going to cost them $10, they consider that a strong 

advantage because their costs are then predictable. 

Mr. COOPER. Ms. Schmitt, in your testimony, you also decry 

fraudulent marketing practices that are employed on behalf of 

some private fee-for-service Medicare Advantage plans. 

I thank the Chair. I see that my time has expired. 

Mr. SCOTT. Mr. Chairman. 

Chairman SPRATT. Mr. Scott. 

Mr. SCOTT. Could I ask unanimous consent that a statement 

from AFSCME be entered into the record of the hearing? 

Chairman SPRATT. Without objection. 

Mr. SCOTT. Thank you. 

[The information follows:]

115

PREPARED STATEMENT OF THE AMERICAN FEDERATION OF STATE, COUNTY AND

MUNICIPAL EMPLOYEES (AFSCME) 

The American Federation of State, County and Municipal Employees (AFSCME) 

represents 1.4 million employees who work for federal, state, and local governments, 

health care institutions and non-profit agencies, and an additional 230,000 retiree 

members. AFSCME and its members are proud of labor’s historic role in the creation of Medicare and we remain strong defenders of the Medicare program from 

those who would undermine its foundations. 

When President Johnson signed Medicare into law on July 30, 1965, he spoke of 

the profound promise of Medicare to our nation and its citizens: 

‘‘No longer will older Americans be denied the healing miracle of modern medicine. No longer will illness crush and destroy the savings that they have so carefully 

put away over a lifetime so that they might enjoy dignity in their later years. No 

longer will young families see their own incomes, and their own hopes, eaten away 

simply because they are carrying out their deep moral obligations to their parents, 

and to their uncles, and their aunts. 

And no longer will this Nation refuse the hand of justice to those who have given 

a lifetime of service and wisdom and labor to the progress of this progressive country.’’

For today’s 42 million Medicare beneficiaries and our nation, the need for Medicare to remain a sanctuary against financial ruin caused by the vicissitudes of illness and disability rings as true in 2007 as it did nearly 42 years ago. 

Today, the financial security of Medicare is threatened by the drive to privatize 

the program. Overpayments to Medicare Advantage plans are causing a shift of 

beneficiaries out of the more efficient government-administered program into more 

costly private plans. Overpayments to these private plans may make them highly 

profitable, but they also have a deleterious impact on the federal budget, the Medicare program and the Medicare benificiaries. 

OVERPAYMENTS TO PRIVATE MEDICARE ADVANTAGE PLANS THREATEN MEDICARE’S

FINANCIAL SOLVENCY

When Congress opened up Medicare to private plans, it was based on the claim 

that the private health insurance industry would be more efficient, provide more coordinated care for seniors and the disabled, and do so with less cost to the taxpayers 

and beneficiaries than the traditional Medicare program. The promises of efficiencies and lower costs have been illusory; Medicare now pays private Medicare Advantage plans more than it would cost to cover the same beneficiaries through the 

traditional Medicare program. According to the Medicare Payment Advisory Commission (MedPAC), these private plans are paid an average of 12 percent, or $1,000 

per year, more to cover a Medicare beneficiary than the cost of traditional Medicare 

to cover the same beneficiary. Private Medicare Advantage fee-for-service plans are 

paid on average 19 percent more than the traditional Medicare fee-for service program. 

Overpayments to the private insurance industry are worsening Medicare’s financial health. Enrollment in the private plans is growing rapidly and enrollment is 

growing the fastest among plans receiving the largest overpayments. Over the next 

10 years, these overpayments to insurance companies will cost an additional $160 

billion. These overpayments shave two years off the financial solvency of Medicare’s 

hospital insurance trust fund. The ballooning growth in overpayments to private 

plans will drive premiums even higher for beneficiaries, erode Medicare’s financial 

solvency and ultimately force major changes in the Medicare program, including 

substantial cuts in benefits. If left unchecked these overpayments will ultimately 

lead our nation backwards to a time when seniors were one illness away from poverty and were denied reasonable and necessary medical care because they could not 

afford to pay doctors or hospitals. 

OVERPAYMENTS TO PRIVATE MEDICARE ADVANTAGE PLANS ARE INCREASING STATE

MEDICAID COSTS

The overpayments to private plans come out of the Medicare hospital trust fund, 

Part B premiums and general revenues. Medicaid, which is jointly funded by states 

and the federal government, subsidizes Part B premiums for low-income Medicare 

beneficiaries. Because the overpayments push Part B premiums higher, states are 

forced to pay more for Part B premiums to subsidize these overpayments to private 

plans. Nationally, states and the federal government will be forced to pay an extra 

$168 million in FY 2007 in Part B monthly premiums for all low-income Medicare 

beneficiaries as result of the overpayments to private Medicare plans. Attached is 

116

a table showing the additional cost to Medicaid, by state, to subsidize overpayments 

to private Medicare plans. 

ALL MEDICARE BENEFICIARIES ARE ALREADY PAYING MORE

Because Medicare Advantage overpayments drive up premiums paid by Medicare 

beneficiaries, all seniors, not just those in the private plans, are paying more now. 

In 2007, each beneficiary in traditional Medicare paid an extra $24 per year for the 

Part B premium to subsidize the overpayments to the private plans. 

MEDICARE DISADVANTAGE PLANS

Advocates for Medicare beneficiaries, beneficiaries and state insurance commissioners have been reporting that private plans have used abusive, misleading and 

fraudulent sales tactics to shift seniors out of Medicare and into their private insurance policies. The billions and billions in extra costs coming out of the pockets of 

taxpayers, states and beneficiaries to fund overpayments to Medicare Advantage 

plans explains the gold rush fever of health insurance companies to sign up seniors, 

even if it means these companies step far over the line in their sales and marketing 

practices. With 27 percent of all Medicare beneficiaries having cognitive or mental 

impairments, these elderly and disabled beneficiaries are a vulnerable target of abusive, confusing, misleading and fraudulent sales tactics. According to press reports, 

beneficiaries are told that ‘‘Medicare is going private’’ or that they will lose their 

Medicare or Medicaid unless they sign up for a particular plan. Insurance company 

agents show beneficiaries business cards which suggest that they are from Medicare, Social Security, or other trusted government agencies. Many beneficiaries do 

not realize that when they sign up for Medicare Advantage plans they will lose their 

Medicare coverage and terminate or jeopardize eligibility for existing retiree or 

Medicare supplemental plans. 

Once beneficiaries are in private Medicare Advantage plans they may be forced 

to pay higher co-payments than they would under traditional Medicare. Traditional 

Medicare does not require any co-payments for home health care services but many 

Medicare Advantage plans do. Many plans have higher out-of-pocket costs for hospitalization, chemotherapy, and services needed for those who are chronically ill. 

Medicare Advantage beneficiaries also find they have fewer rights than traditional 

Medicare beneficiaries when things go wrong with their health insurance. 

The dizzying array of complex benefits packages and out-of-pocket rules vary from 

plan to plan and can change every year in a Medicare Advantage plan. While current law requires these plans to offer at least the actuarial equivalent level of benefits as provided in traditional Medicare, plans can and do change their benefit and 

cost-sharing rules to keep the healthiest, and least costly, beneficiaries in their 

plans. MedPAC reports that Medicare Advantage plans are enrolling beneficiaries 

who are healthier than average. By targeting healthier beneficiaries through marketing or winnowing out sicker, and more costly, beneficiaries through increased 

costs and changes in benefits, Medicare Advantage plans raise their own profit margins at the expense of beneficiaries and the Medicare program. 

It is not at all clear that the additional payments made to Medicare Advantage 

plans are indeed being returned to beneficiaries in the form of additional benefits 

or reduced cost-sharing. With little accountability and reporting requirements it has 

been extremely difficult to identify what percentage of the overpayments are being 

used to boost profits of the private insurance companies, to pay insurance commissions, marketing or administrative costs, rather than improve benefits. 

Medicare Advantage fee-for-service plans are the least efficient private plans and 

receive the highest overpayments from Medicare. Because these types of private 

plans are exempt from most quality measurements, taxpayers have no assurance 

that these excessively costly plans are truly protecting the health of beneficiaries. 

For example, these plans are not required to coordinate care of enrollees with complex or serious medical conditions. These plans are not required to work with community and social service programs to ensure continuity of care and integration of 

services. 

In sum, taxpayers have little to no assurance that the billons in extra payments 

to private insurance companies are actually providing meaningful benefits to the 

sickest and frailest beneficiaries. It would be more accurate to call many of these 

private insurance plans Medicare Disadvantage Plans. 

CONGRESS MUST STOP THE INSURANCE INDUSTRY’S FLEECING OF MEDICARE

Overpayments to insurance companies prime the Medicare privatization pump 

and put the security of the Medicare program at risk. Congress must act to secure 

Medicare by reining in the runaway overpayments to Medicare Advantage plans. 

117

Recalibrating Medicare Advantage overpayments will improve the efficiency of the 

program, reduce incentives for abusive tactics and strengthen the financial health 

of Medicare. The savings realized from reducing these escalating overpayments can 

be used to improve the prescription drug benefit, improve health services for lowand moderate-income beneficiaries, prevent a cut in the Medicare reimbursement to 

physicians and help pay to cover more children under the State Children’s Health 

Insurance Program (SCHIP). Congress must act now to stop the insurance industry’s fleecing of Medicare. 

AMOUNT OF EXTRA PART B MONTHLY PREMIUMS MEDICAID MUST PAY IN 2007 AS A

RESULT OF OVERPAYMENTS TO MEDICARE ADVANTAGE PRIVATE PLANS

(Based upon CMS Part A and Part B state buy-in data for April 2007 billing cycle)

Alabama .................................................................................................. $4,291,296

Alaska ..................................................................................................... $283,032

Arizona ................................................................................................... $2,878,824

Arkansas ................................................................................................. $2,367,336

California ................................................................................................ $25,669,416

Colorado .................................................................................................. $1,618,200

Connecticut ............................................................................................. $1,624,440

Delaware ................................................................................................. $474,456

District of Columbia .............................................................................. $375,744

Florida .................................................................................................... $11,185,992

Georgia ................................................................................................... $5,217,192

Hawaii .................................................................................................... $619,752

Idaho ....................................................................................................... $618,360

Illinois ..................................................................................................... $5,327,688

Indiana ................................................................................................... $2,871,144

Iowa ........................................................................................................ $1,569,024

Kansas .................................................................................................... $1,220,520

Kentucky ................................................................................................ $3,276,744

Louisiana ................................................................................................ $3,349,296

Maine ...................................................................................................... $1,353,312

Maryland ................................................................................................ $2,035,992

Massachusetts ........................................................................................ $4,549,560

Michigan ................................................................................................. $4,423,368

Minnesota ............................................................................................... $1,984,248

Mississippi .............................................................................................. $3,275,712

Missouri .................................................................................................. $2,720,832

Montana .................................................................................................. $369,504

Nebraska ................................................................................................ $613,296

Nevada .................................................................................................... $712,824

New Hampshire ..................................................................................... $316,992

New Jersey ............................................................................................. $4,071,888

New Mexico ............................................................................................ $1,280,256

New York ................................................................................................ $11,919,048

North Carolina ....................................................................................... $6,238,728

North Dakota ......................................................................................... $180,072

Ohio ......................................................................................................... $5,570,664

Oklahoma ............................................................................................... $1,970,544

Oregon .................................................................................................... $1,785,216

Pennsylvania .......................................................................................... $6,365,112

Rhode Island .......................................................................................... $655,080

South Carolina ....................................................................................... $2,974,632

South Dakota ......................................................................................... $367,824

Tennessee ............................................................................................... $5,549,664

Texas ....................................................................................................... $11,299,296

Utah ........................................................................................................ $588,312

Vermont .................................................................................................. $516,000

Virginia ................................................................................................... $3,349,392

Washington ............................................................................................ $2,913,624

West Virginia ......................................................................................... $1,398,744

Wisconsin ................................................................................................ $2,090,064

Wyoming ................................................................................................. $193,392

Chairman SPRATT. Mr. Doggett. 

Mr. DOGGETT. Thank you. 

118

Dr. Wah, I certainly agree with your concluding comment in your 

earlier testimony that what we have here is a pay-more-and-getless system. 

As it relates to the health of your patients, did I understand your 

testimony to be that there is mounting evidence that this excessive 

payment to Medicare Advantage is not producing better health care 

outcomes? 

Dr. WAH. Well, I think that there are concerns. 

For instance, like I mentioned, the Rural Health Association 

noted that because of the lower payment rates that the safety net 

for rural health care is likely to be put at risk because of that. I 

would be happy to, in written testimony, provide more detail about 

actual outcomes as I do not have those details in front of me, but 

there is a concern that—and it is partly because of the confusion 

of just this blizzard of different terms and conditions that are out 

there in the Medicare Advantage programs. They have all of the 

shortcomings of the commercial products that are out there, and 

physicians and patients are literally just besieged by these little 

fine print details that make it very hard to understand what they 

are signing up for or what they are being involved in, and so that 

can lead to patients who think they signed up for something good, 

and then the fine print comes around at the end and gets them because it turns out, like I said before, they actually do not get coverage for home health care when they get really sick. If they get 

cancer, their chemotherapy drugs are only covered up to 80 percent, and they have to come up with the other 20 percent. They did 

not read that fine print. They read that, oh, they get dental; they 

get vision, all of the things that were in bold print that sounded 

really good. 

So it is hard to articulate or to actually quantify whether the 

health is better or worse because of that, but I am concerned that 

they end up paying more overall because of these expenses that 

they did not see in the fine print. 

Mr. DOGGETT. Exactly, and I note in your written testimony—

and I welcome any supplementation that you might want to do—

that you report or say that there has been rampant Medicare Advantage plan marketing abuse reported by physicians all over the 

country and that there is mounting evidence that the billions of 

dollars poured into Medicare Advantage are not buying better 

health coverage. 

Let me ask you: If we continue pouring the money there and we 

cut physician reimbursement by 10 percent as a New Year’s Day 

present to seniors and to individuals with disabilities across this 

country, what will the impact be? 

Dr. WAH. Well, I appreciate your bringing this up, and I appreciate Mr. Ryan’s saying the Medicare physician payment problem 

does need to be fixed. I think, obviously, we are concerned about 

that. In polling our physicians, a high percentage—60 to 80 percent—will find it very difficult to continue to care for their existing 

Medicare patients, but more importantly, it is going to be financially very difficult for them to accept new patients, and I think 

there have been numerous studies that have shown that new patients coming into the Medicare system are having a great deal of 

difficulty finding physicians to take care of them because it is just 

119

fiscally difficult for them to accept new patients at this time, and 

with these impending cuts that we have talked about coming in 

2008, that will only get much worse in terms of patients being able 

to find the care they need, and that is our concern, is making sure 

that the patients can get the care they need that is out there. 

Mr. DOGGETT. Well, thank you very much for your comments. 

Ms. Kennelly, I appreciate so much your efforts overall to prevent those who are determined to let Medicare wither on the vine, 

and that was not a very hidden agenda in promoting this form of 

the prescription drug plan. Just as there is a limited amount of 

money to decide how much is wasted in Medicare Advantage and 

how much is available to meet the cost of health care provided by 

physicians and other health care providers, there is also a question 

about what our priorities will be in monies available to the poorest 

of our seniors, and I know some of these insurance companies have 

been rounding up poor people to say how much they will be disadvantaged if the insurance companies do not get the advantage in 

Medicare Advantage. I believe Dr. Neuman’s testimony pointed to 

some of that. 

Wouldn’t we be better off if we used some of the money that we 

can save in these excessive payments to address the Medicare savings program and the prescription coverage now, the improvements 

in extra help in the legislation that I know you have endorsed and 

that I have offered? 

Ms. KENNELLY. Absolutely, Congressman. Yes, you are absolutely 

right about the Medicare savings program. It is perfectly set up 

just for this, and we absolutely should have more subsidy for the 

part D prescription drug, but I sit here, and it washes over me, my 

history. 

I was born and brought up in Hartford, Connecticut, and then I 

represented Hartford, Connecticut in the Congress, the capital, the 

insurance capital of the world. 

And I just ask you Congressmen that are here to remember, that 

before 1965 there was no Medicare, and then all of a sudden it was 

realized, if you put all of the people over 65 in a pool, it works, and 

they will be covered, and since 1965, the demographic for those 

people who are 65 and over, having health insurance is the highest. 

Before 1965, it was the lowest. So I know absolutely that we should 

have managed plans, and we should have competition, but what 

has happened in the 2003 bill—and you know, Mark, and I know, 

and we know people who saw the prescription part D as a sweetener, and these are things that they wanted to do over the years. 

It is a philosophical thing, but I just absolutely urge you do not just 

look at the arcane things that we talk about today. Look at the traditional program. Any country like the United States has to have 

that program. Then go on and have the competition. But these robust, absolutely almost unbelievable subsidies, with the deficit situation we have today, we are just going down a road where we will 

not have Medicare, and I will tell you that one of your predecessors, Bruce Platek, he taught me a lot about insurance, and he 

said, ‘‘Barbara, as long as those insurance companies have subsidies, they will play the game, but as soon as they do not have 

subsidies, for those over 65, they will not,’’ and we should remember that. 

120

Mr. DOGGETT. Thank you. 

Thank you, Mr. Chairman. 

Chairman SPRATT. Thank you. 

Mr. Berry. 

Mr. BERRY. Ms. Neuman, do you have something you wanted to 

say? 

Ms. NEUMAN. Thank you so much. 

I wanted to respond to Mr. Doggett a little bit on the question 

about ways to help low-income beneficiaries because, if you look 

back on one of the slides I presented, there are more than 1 million 

Medicare beneficiaries with incomes below $10,000 who have no 

supplemental insurance. They do not have Medicaid; they are not 

in the Medicare Advantage plans. 

One of the options for assisting these beneficiaries is to, one, inform them and get them covered under the programs that are out 

there, but many people may not qualify for these programs because 

the asset requirements, the asset tests, have not been indexed over 

time, and so people may have very low incomes, but they could 

have $6,000 in life savings and not get help with their Medicare 

premiums and cost-sharings. So there are other strategies the committee could consider if the goal were to improve coverage for people with very low incomes. 

Mr. DOGGETT. Thank you. 

Mr. BERRY. Thank you, Mr. Chairman. 

My question is for Ms. Schmitt. I believe you mentioned, when 

you have unscrupulous marketing abuse and things like that, that 

CMS is doing a good job of regulating that. 

Ms. SCHMITT. I indicated that they have added some new requirements as of the last week or two. 

Mr. BERRY. The reason I raise that is I thought that maybe you 

were getting something in Michigan that we surely are not getting 

in Arkansas. They are completely without any kind of oversight at 

all, and even when we repeatedly report the same companies doing 

the same abusive things to senior citizens who basically have no 

way to protect themselves, over and over again, they do nothing, 

and I thought maybe you had found a way to get CMS off the dime 

and make them actually do something. We are completely frustrated with CMS at the moment. 

Ms. SCHMITT. Well, actually, there are requirements that we 

oversee the agents and make sure that they follow all of the policies. 

Mr. BERRY. And maybe you do that, but I assure you that there 

are insurance companies that do not, and I was trying to find an 

easy way to accomplish this. What we are looking at is having the 

State Insurance Commission have oversight responsibility over 

those companies because right now there is nobody who has the authority to regulate them but CMS, and they are not doing it. 

Ms. SCHMITT. I would expect that CMS’ requiring that they cease 

selling and marketing their programs until they begin this oversight is probably going to have some response from those places. 

Mr. BERRY. Has CMS done that? 

Ms. SCHMITT. Yes. 

Mr. BERRY. Okay. I had not realized that. I think some of those 

companies that they told to cease, there are still some of them out 

121

there, some companies that should have been on that list that were 

not. 

Ms. SCHMITT. I cannot respond to that. 

Mr. BERRY. Right, I am sure you cannot. 

Ms. SCHMITT. May I make a comment on a couple of other things 

that have been said? 

Mr. BERRY. Yes, ma’am. 

Ms. SCHMITT. Okay. One thing is there was a question of whether or not CMS could do the same type of care management. I think 

one of the big components is having all of the data in order to be 

able to look at a person’s drug coverage and their medical, and I 

think the entities that are in the best position to do that is an 

MAPD plan that has all of the data in order to do that. 

There was also a comment about rural health clinics, and under 

Medicare private fee-for-service, you are required to pay the exact 

same amount as traditional Medicare. So these clinics should either 

be receiving the exact amount as traditional Medicare or they have 

agreed to and have contracted with these plans. So I am not exactly sure what it is that they are not receiving the plan on. 

Lack of education. Certainly, any new program takes a while for 

people to become familiar with that, and when I say ‘‘people,’’ I am 

referring to both the providers and the beneficiaries, but I think we 

have certainly gone out of our way to have that type of education, 

and I think that the knowledge in that is going to continue to grow 

so that many of those issues will be eliminated fairly quickly. 

So thank you. 

Dr. WAH. Can I just add to that? 

You were talking about the marketing practices and the really 

egregious things have been pointed out. I think that is just the tip 

of the iceberg. Below that is this myriad of different terms and conditions that people are trying to sort through, and you know, we 

talk about the really egregious things, and we see the headlines in 

that, but the really day-to-day problem is a patient will think, looking at the big print, like I said before, that this is an appealing program, and then one of the things it will say is this is a fee-for-service, a private fee-for-service; you can go see anybody because it is 

a fee-for-service system, and then they will find out that their physician is not part of that, and they can no longer see their physician without being charged out-of-network charges, and so they end 

up having to change physicians because their current physician 

does not accept their, quote/unquote, private fee-for-service plan. 

So there are a lot of things below the surface that these egregious things are just beginning to show, but there is much more 

below the surface that we are not seeing. I just wanted to point 

that out. 

Mr. BERRY. When those things happen, they come to us, and we 

are beginning to see an awful lot of that, too, and I do not know 

if you would agree, but there is what I consider to be massive confusion between the part D plans and the Medicare Advantage plans 

and managed care plans and fee-for-service plans and traditional 

Medicare. Traditional Medicare is one of the few things that pretty 

well everybody understood and knew where they stood with it, 

knew what it did and what it did not do. With all of these other 

things that have been added through the private sector, as much 

122

as I am able to determine, great confusion has come about because 

every plan is different. In fact, some plans change almost on a 

monthly basis. 

So we have created a situation which, quite honestly, I cannot 

keep up with. We run into situations like that in our office that 

will just make you want to cry. In fact, some of our caseworkers 

in the district office, you go in there sometimes, you want to take 

them for treatment because they are so frustrated with trying to 

work these constituents through these problems, and then you call 

CMS, and you know, you just might as well be calling the railroad 

station, which actually does not exist in my State. 

If you disagree with that, I would sure like to know about it, but 

whatever we do—and we can talk about how much it costs and all 

of that. Whatever we do, there has got to be a better way than 

what we are doing right now. 

Dr. WAH. Yes, sir. I agree. I mean, like I said, the frustration you 

are seeing with your patients and your constituents is exactly what 

our physicians and our patients are seeing out there as well, and 

that is why, to see that in a plan where you are already pouring 

extra money into the system, you have got to wonder where all of 

that extra money is going. 

Mr. BERRY. I am convinced that the insurance companies wrote 

this stuff, and this is the way they intended it to be. They didn’t 

want people to be able to understand it very well. That is why they 

shouldn’t write laws. That should be left up to the Congress. 

Ms. SCHMITT. We brought up a large group this year. It is the 

Michigan public school retirees, cafeteria workers, janitors, as well 

as the teachers, and our experience was that we set up a separate 

phone bank for people when this program first went up, and when 

they called and said their physician would not see them, we made 

an outreach to the physician’s office and very frequently, you are 

correct in that physicians did not even—some of them didn’t even 

know that private fee-for-service existed or thought it was the same 

as an HMO or PPO. 

So we went through the education process with the physicians 

and most of—the vast majority, once they understood it, there was 

acceptance. There were some that would not, at which point we 

then made outreach to other physicians in the area and did what 

we could and probably 99 point some percent, we were able to locate alternative providers for the members. 

Mr. BERRY. Well, I applaud that, but I am here to tell you that 

doesn’t happen very many places. I would say places where that 

happens are a lot less than the places where it does. And like I say 

and it comes back to us, and it comes back to the providers. And 

that is fine. That is my job, and I don’t mind dealing with it at all, 

but the problem that is hard to deal with is the fact that these people are not getting the care that they think they have paid for, and 

it is because they have largely been deceived by hotdog salesmen 

somewhere. And I wish that wasn’t the case. 

I know we have already had a discussion about whether or not—

that was that argument, a while ago—fraud, whether this was 

fraud or not. If it’s not fraud, I don’t ever want to run into fraud 

because it is as close as you can get without being there. 

123

But—and I do—I applaud you and your company for doing good, 

and I hope you all keep doing it. 

Thank you. 

Mr. SPRATT. Thank you. Let me thank each of our witnesses for 

bringing us the knowledge and perspective you provided on what 

is a very complex but vitally important matter. We appreciate your 

participation. Thank you very much. 

I would ask unanimous consent that members who did not have 

the opportunity to ask questions of our witnesses be given 7 days 

to submit questions for the record. 

Without objection, so ordered. 

[The prepared statement of Ardis Hoven follows:]

PREPARED STATEMENT OF ARDIS D. HOVEN, M.D., AMERICAN MEDICAL ASSOCIATION

The American Medical Association (AMA) appreciates the opportunity to provide 

our views regarding Medicare Advantage (MA) plans and their impact on the Federal Budget. We commend Chairman Spratt and the Members of the Budget Committee for your leadership in recognizing the need to examine the impact of the MA 

plans on Medicare patients and the long-term financial viability of the Medicare 

program. 

The AMA supports providing Medicare beneficiaries with coverage options so that 

they are able to select the health insurance plan that is tailored to meet their specific needs. The MA option was originally conceived as a strategy to promote efficiency, provide enhanced patient care through care coordination, and promote private competition. MA plans were also devised to increase diverse plan offerings that 

would dovetail with the varied needs of beneficiaries. The AMA has been and continues to be a strong proponent of greater competition in the Medicare program to 

help strengthen patient choice and the program’s long-term financial sustainability. 

However, seniors’ choices should be based on their health care needs and not influenced by preferential government subsidies to highly profitable insurance companies. The average reimbursement to MA plans—112 percent of regular Medicare expenditures—has created significant market distortions and undermined competition 

by providing large subsidies to the MA plans at the expense of regular Medicare. 

SUBSTANTIAL SUBSIDIES TO MA PLANS

The Congressional Budget Office (CBO) estimates that Medicare spending would 

be reduced by $65 billion from 2008-2012 if the MA benchmarks were decreased to 

the Medicare fee-for-service level. CBO estimates that 21 percent of MA spending 

goes to private plans that receive between 120 percent and more than 150 percent 

of regular Medicare rates. The large disparity in payment between MA plans and 

regular Medicare is a particularly troubling development because it is difficult to detect enough additional meaningful benefits to patients to justify these enormous 

government subsidies. In fact, there is mounting evidence that a significant number 

of MA plans are luring their enrollees with false promises, skimping on benefits and 

reimbursement, and using their government subsidies primarily to increase profits 

for their shareholders. 

There are real tradeoffs involved in the public policy choices that Congress currently faces. An average 12 percent add-on payment is being provided to plans in 

which only 19 percent of Medicare beneficiaries are enrolled, while the physicians 

who care for all Medicare beneficiaries face a 10 percent cut next year. The Medicare Payment Advisory Commission (MedPAC) estimates that all seniors, not just 

those in MA plans, are paying two dollars a month in higher premiums to help fund 

the subsidies being paid to managed care companies. The CBO and the Medicare 

Actuary have noted that Medicare cost growth, which was already a cause of major 

concern, is now projected to rise even more rapidly due to its projections of increasing enrollment in MA plans. The Medicare Actuary also has stated that overpayments to MA plans shorten the solvency of the Part A Trust Fund and concluded 

that setting the benchmarks for MA plans at the regular Medicare fee-for-service 

level would extend the insolvency date by about two years. In other words, instead 

of making Medicare more sustainable as the baby-boom generation reaches the age 

of Medicare eligibility, the MA subsidies are having the opposite effect. The additional payment to MA plans averages about $1,000 per beneficiary and the CBO reports that the MA overpayment per beneficiary is only expected to climb. 

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In addition to subsidizing MA plans by paying more per enrollee in MA than for 

beneficiaries in regular Medicare, Congress established a further MA subsidy 

through the creation of the MA preferred provider organization (PPO) stabilization 

fund (the fund). The fund was designed to provide additional financial incentives to 

insurance companies that offer regional PPO plans in areas where regional PPOs 

would not have otherwise been established. (This additional subsidy was not necessary to encourage regional PPO participation given that there were such plans in 

21 of the 26 regions in 2006.) Originally, $10 billion was placed in the fund, but 

Congress has already reduced the fund by $6.5 billion. If this fund were completely 

eliminated, the CBO estimates that it would save $3.5 billion over a ten year period. 

Furthermore, the CBO Budget options provided to Congress show that MA plans receive an additional financial subsidy through a duplicate payment to MA plans for 

Indirect Medical Education (IME). (The MA benchmarks include an IME payment 

even though these payments are already made directly to teaching hospitals that 

treat MA beneficiaries.) The CBO estimates that if the IME payments were removed 

from MA payments, approximately $12.9 billion would be saved over ten years. 

The AMA joins other health care stakeholders, including the AARP and the Medicare Rights Center, as staunch supporters of financial neutrality between the regular Medicare program and the MA program. The AMA urges Congress to adopt the 

MedPAC recommendation that ‘‘the Medicare program should pay the same amount, 

adjusting for the risk status of each beneficiary, regardless of which Medicare option 

a beneficiary chooses.’’ We concur with MedPAC’s goal of ‘‘having Medicare payments cover the costs that efficient providers incur in furnishing care to beneficiaries, while ensuring that providers are paid fairly and beneficiaries have access 

to the care they need.’’

MEDICARE FFS REMAINS THE PRIMARY MEDICARE OPTION AND IT MUST BE SOLIDIFIED

AND IMPROVED

Although many physicians provide health care to MA patients, they have many 

more patients—81 percent—who are in regular Medicare. Huge subsidies are being 

paid to MA plans that serve 19 percent of Medicare beneficiaries, while physicians 

who take care of all senior and disabled patients face cuts of 10 percent in 2008 

and about 40 percent over the next decade. 

If Congress does not take action to provide Medicare physician payment updates 

that keep up with practice cost increases, then physicians will not be able to sustain 

their practices, resulting in significant access problems for all Medicare patients, not 

just those in regular Medicare. In a recent AMA survey of 8,955 physicians, 60 percent reported that they plan to limit the number of new Medicare patients they 

treat if payment rates are cut 10 percent in 2008. Only 17 percent of the surveyed 

physicians said that the MA subsidy should continue, while most of the remaining 

respondents said the subsidy would be better spent on preventing physician pay 

cuts and/or helping all low-income patients with their out-of-pocket costs, not just 

those in MA plans. These survey results demonstrate that there is a tradeoff in a 

tight budget environment between adequate payment updates for physicians and 

government subsidies for health insurance plans. 

AMA SURVEYED PHYSICIANS AND PATIENTS REPORT PROBLEMS WITH MA PLANS

Adding to these concerns, there is mounting evidence that calls into serious question whether the extra billions of dollars being poured into MA are buying better 

health care coverage for seniors. An April 2007 report from the Medicare Rights 

Center grouped problems with MA plans coverage into nine different categories: 

• Care can cost more than it would under original Medicare; 

• Private plans are not stable; 

• Getting emergency or urgent care is difficult; 

• Continuity of care is broken; 

• Members have to follow plan rules to get covered care; 

• Choice of doctor, hospital and other providers is restricted; 

• Getting care away from home is difficult; 

• Promised extra benefits can be very limited; and, 

• People with both Medicare and Medicaid can encounter higher costs. 

A recurring theme throughout this report and its major conclusion is that, ‘‘[e]ven 

with enhanced payments, private health plans often fail to deliver coverage that a 

patient could obtain from Original Medicare.’’

In March 2007, AMA surveyed 2,202 physicians about their experience with MA 

plans. The findings corroborated that patients and their physicians are being shortchanged by MA plans. About half of the physicians who had patients in MA reported that they have experienced denial of services that are typically covered in 

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the regular Medicare program. In addition, about half responded that they have received payments from the MA plans that were below the regular Medicare rate. 

Contrary to industry claims that MA plans provide more benefits to patients, physicians are telling us that their patients who have enrolled in MA plans may be getting even fewer benefits than they receive in regular Medicare. 

The AMA survey results also lend credence to the reports from beneficiary advocates that marketing by MA plan representatives is often confusing to beneficiaries 

or misleading. An overwhelming number of physicians—eight out of ten—who treated MA plan patients stated that their patients have difficulty understanding how 

the MA plan works. Choice is an important element of a market-driven health care 

system, but patients must have accurate information if they are to make decisions 

that best meet their health care needs. MA plans have failed in their obligation to 

provide patients accurate information in an accessible and comprehensible fashion. 

This failure has real consequences for seniors who may have their health care services interrupted or incur significant unanticipated costs when they are least able to 

afford it. 

Good information about MA plans is also inaccessible to physicians. Six out of ten 

physicians reported that they have had difficulty understanding how the MA plans 

work. This problem is particularly pronounced for PFFS plans. In the AMA survey, 

over half of the physicians treating PFFS patients stated that they did not have access to or knowledge of the PFFS plans’ Terms and Conditions, even though ready 

access to plans’ Terms and Conditions is a cornerstone of the PFFS plan design. It 

should be no surprise that patients have had difficulty finding physicians who will 

accept PFFS plans, despite the promises made by sales representatives that patients would be able to go to any doctor. The recent action by CMS and several 

health plans to suspend marketing of PFFS plans underscores the validity of these 

complaints. Before the suspension can be lifted, plans will need to have a provider 

outreach and education program in place to ensure that physicians have reasonable 

access to the plan Terms and Conditions of payment, and that provider relations 

staff are readily accessible to assist physicians with questions concerning the plan. 

Physicians report a number of additional problems with MA plans, including having to overcome additional financial and administrative burdens when accepting MA 

beneficiaries. Nearly six out of ten physicians indicated that they had experienced 

excessive hold times when attempting to contact MA plans. The same number reported that MA plans have requested excessive or additional documentation for payment of claims. Finally, about a third report that MA plans have used proprietary 

claims editing software to down code or bundle claims—administrative billing practices that Medicare has not approved for use in regular Medicare. These responses 

demonstrate that MA plans have not enhanced, but instead have hampered operational efficiency on the front lines of health care delivery in physician offices, to 

the detriment of physicians and their patients. 

Surveyed physicians also reported that they have had experience with their patients being switched to a MA plan from regular Medicare without the beneficiary’s 

knowledge, very restrictive formularies with MA prescription drug plans, and customer service outsourced to a foreign country. 

MINORITY AND RURAL PATIENTS

Although the insurance industry has issued reports touting the benefits of the MA 

program to minority and rural beneficiaries, an even-handed look at the data and 

related analysis paints a different picture. The Center for Budget and Policy Priorities (CBPP) pointed out that Medicaid, not MA, is the main form of supplemental 

coverage for low-income and minority Medicare beneficiaries. It noted that 58 percent of Asian Americans, 30 percent of African Americans, and 34 percent of Hispanics receive supplemental coverage through Medicaid. In addition, the CBPP analyzed the data offered by America’s Health Insurance Plans (AHIP) in a report outlining the benefits of MA. The CBPP concluded based on the AHIP data that lowincome and minority beneficiaries participate in MA plans less than other Medicare 

beneficiaries. In 2004, the Center for Policy Analysis and Research of the Congressional Black Caucus Foundation reported that the ‘‘unprecedented amount of financial assistance’’ to MA plans will divert ‘‘precious resources away’’ from regular 

Medicare. Even then the CBC Foundation argued that ‘‘unfair subsidies and other 

advantages’’ provided to MA plans should be eliminated ‘‘so that traditional Medicare can compete on a level basis.’’

Another AHIP report concluded that the supplemental coverage offered by 

Medigap plans is ‘‘particularly important to low- and moderate-income beneficiaries, 

especially those living in rural areas.’’ As PFFS plans are the most common MA 

plan for patients in rural areas—the patients who are most reliant on Medigap for 

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their supplemental coverage according to AHIP—it is important to note that 

Medigap plans are not allowed to provide coverage for MA services. In some cases, 

therefore, MA plans may actually put patients at higher risk for out-of-pocket costs 

than they would face if they had remained in the regular Medicare program and 

kept their Medigap policy. 

Some of the services where these extra costs are especially problematic are cancer 

care, home health care, and other services provided to patients with potentially terminal diseases. For example, for a low-income cancer patient with Medicare coverage and a Medigap supplemental policy, Medicare would pay 80 percent of their 

chemotherapy costs and Medigap would pay the remaining 20 percent. However, 

many MA plans do not provide more than the 80 percent coverage of chemotherapy 

drug costs that is provided in the regular Medicare program and, because these patients are not allowed to purchase Medigap policies, cancer patients in these plans 

must pay the 20 percent coinsurance out of their own pockets. 

The National Rural Health Association (NHRA) testified to the House Ways and 

Means Health Subcommittee that while currently only 5.6 percent of rural Medicare 

beneficiaries have joined a MA plan, left on its current course MA has the ‘‘potential 

to destabilize the existing rural safety net.’’ For example, NHRA stated that there 

was an open question as to whether MA plans will honor existing rural add-on payments that safety net providers receive under regular Medicare. Related to the foregoing, a Texas nurse wrote to the AMA about her experience as the practice manager of a rural health clinic (RHC). She stated that the RHC received a per visit 

rate from regular Medicare of $68.13—this amount covers everything provided by 

the RHC and all codes. However, an administrative and financial nightmare has ensued because while MA plans have informed patients that they can see any physician in the clinic, some of the plans have been unwilling to pay the RHC at the 

higher rates that it is entitled to receive because it serves a rural community. In 

fact, the nurse manager wrote that one MA plan is paying a rate that is less than 

half the clinic’s RHC rate under regular Medicare. Far from increasing access to 

rural beneficiaries, MA plans could well result in fewer rural physicians being able 

to accept Medicare patients. 

MA PLANS HAVE INCREASED COSTS TO ALL BENEFICIARIES

MA has resulted in higher premiums across the board for all beneficiaries. 

MedPAC has estimated that on average every Medicare beneficiary pays approximately two dollars per month extra to finance the higher MA payments that only 

benefit 19 percent of beneficiaries. For example, only 8 percent of Medicare beneficiaries in South Carolina are enrolled in Medicare Advantage plans, but all seniors 

in South Carolina are paying higher Medicare premiums every month so that the 

government can provide subsidies to health plans that serve only 8 percent of the 

state’s Medicare beneficiaries. This is true across the country—a majority of Medicare beneficiaries in all states are forced to pay higher premiums to fund overpayments to plans that enroll a select subset of beneficiaries. 

MA MARKETING ABUSES

There have been rampant MA plan marketing abuses reported by physicians and 

other health care stakeholders. In testimony to the Senate’s Special Committee on 

Aging, Wisconsin Insurance Commissioner Sean Dilweg reported that, in a survey 

by the National Association of Insurance Commissioners, 37 out of 43 states reported receiving complaints about inappropriate or confusing marketing practices 

leading Medicare beneficiaries to enroll in a Medicare Advantage plan without adequately understanding their choice to remain in regular Medicare or without adequate understanding of the consequences of their decision. 

Many reports of marketing abuses focus on PFFS plans, including a common practice of signing up patients for plans that end up costing the beneficiary more in outof-pocket expenses and misleading patients regarding which physicians accept the 

PFFS plans. Reportedly, many PFFS plans market themselves as providing patients 

the ’’freedom’’ to choose any provider that accepts Medicare. As a result, regular 

Medicare patients sign-up for PFFS with the expectation that they will be able to 

continue receiving their health care from the same physician they have always had. 

Although CMS allows patients who have been misled to drop the PFFS plan and 

re-enroll in regular Medicare and supplemental Medigap plans, this is a difficult, 

time-consuming process and can impact the delivery of health care services. In addition, once patients willingly drop supplemental Medigap, they are not able to obtain 

that supplemental coverage if they elect to re-enroll in regular Medicare until and 

unless they demonstrate that they meet a host of criteria. Even after meeting these 

requirements the Medigap plan may have less favorable terms. Previously, neither 

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Congress nor CMS have addressed these patient burdens. These abuses have both 

short-term and long-term consequences to patients. We hope that the recently announced voluntary effort to suspend PFFS plan marketing will lead to more responsible behavior in the future. 

MA PLANS HAVE GENERATED LARGE PROFITS FOR PRIVATE INSURANCE COMPANIES

When Congress set up the payment system for MA plans, it may have intended 

for the extra payments to support health care services. In the AMA physician survey 

and reports by patient advocates, MA plans are not delivering on this promise. The 

subsidies to MA plans are substantial, create market distortions by creating a preferred government Medicare option, and are inefficient. Who then benefits from the 

subsidies? As of November 2006, the MA market was dominated by four firms that 

accounted for 58 percent of all MA enrollment. There have been reports that private 

insurance companies have reaped substantial profits from the Medicare program. 

For example, in February 2007 the Associated Press reported that one of the companies ‘‘fourth-quarter profit more than doubled on the strength of its burgeoning 

Medicare business’’ and the company had ‘‘a record year in revenue and profit.’’ Recently, Goldman Sachs reported that the same company ‘‘will earn 66 percent of its 

net income from Medicare Advantage this year * * * which comes to between $670 

million and $705 million.’’

Until MA plans are placed on equal footing with regular Medicare, the market 

distortions will continue to encourage inefficient behavior by MA plans, patients and 

physicians will face added financial risks, delivery of health care will be compromised, and taxpayers will pay more (seemingly for less). Clearly, the status quo 

does not advantage patients and physicians. 

The AMA appreciates the opportunity to provide our views to the Budget Committee concerning MA and the Budget. We look forward to working with the Committee and Congress to preserve patient access to high quality, cost-effective health 

care and to find solutions to address the long-term financial sustainability of the 

Medicare program.

[The prepared statement of Mr. McGovern follows:]

PREPARED STATEMENT OF HON. JAMES P. MCGOVERN, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF MASSACHUSETTS

Mr. Chairman: About one million people of Massachusetts are enrolled in Medicare. Of these, about 16.7% are enrolled in Medicare Advantage plans—or 168,000 

Massachusetts seniors. 

838,000 are enrolled in traditional Medicare programs—or 84%. 

This is very similar to the national average (80/20 split of traditional Medicare/

Medicare Advantage). 

I believe there are a few ‘‘bottom line’’ problems with Medicare Advantage. 

As members of the Budget Committee, we need to be good stewards of how our 

federal dollars are dedicated and spent. 

We need to be promoting economic efficiency——

The most cost-effective health care——

And accountability. 

Medicare Advantage appears to be failing us on all three of these priorities. 

It fails the efficiency test—because the additional benefits it allegedly provides for 

about 16-20 percent of Medicare seniors are being paid for—literally subsidized—

by the 80 percent of the elderly who are enrolled in traditional Medicare programs. 

It fails the cost-effective test because it’s already costing about $1,000 more per 

beneficiary than traditional Medicare. 

And it doesn’t even pass the sniff test on accountability because the insurance 

companies won’t tell us how much they’re skimming off the top of Medicare Advantage as profit; and they don’t have to comply with any of the reporting, monitoring, 

data collection, or quality measures required of all other Medicare plans. 

Finally, CBO projects that Medicare Advantage has actually moved up by two 

whole years the date when Medicare will reach insolvency! 

Mr. Chairman, I ask you, what’s wrong with this picture? Everything! 

We could save about $140-to-$150 billion over the next 10 years, either by returning all beneficiaries to traditional Medicare programs—or by leveling the playing 

field and equalizing the payment structure between all Medicare program choices, 

including Medicare Advantage. 

Those funds could ensure that our hospital and physician reimbursements were 

adequately adjusted; and that health insurance coverage could be provided to all of 

America’s children; with tens of billions of taxpayer dollars to spare. 

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And if private plans that now make up Medicare Advantage withdraw from the 

program because they don’t want to operate on a level playing field—well, that’s just 

fine with me. The efficient programs will remain—the inefficient and corrupt will 

withdraw. It’s called market efficiency—something I know my Republican colleagues 

stand fully behind. 

I don’t have a question—I just wanted to state my concerns on behalf of the seniors of Massachusetts—especially when we’re struggling in Massachusetts to implement our own health-care-for-all state plan. 

I’d like to associate myself with much of the testimony provided to us today and 

the previous statements of my Democratic colleagues. 

We have to be better stewards of our federal dollars than this. 

Medicare is supposed to be a not-for-profit, federally-provided health care program 

where every American senior is part of the risk pool that allows all of our seniors 

to receive basic, quality medical care and health insurance. 

Medicare Advantage is a wrecking ball undermining the basic structure of Medicare. 

We have to do better.

[Whereupon, at 1:15 p.m., the committee was adjourned.]

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